Two-Stage Acquisitions, Free-Riding, and Corporate Control

This study examines two-stage acquisitions, focusing upon first- and second-stage excess returns for both acquired and acquiring firms, and analyzing the relation between acquisition returns and ownership interest. The evidence suggests that target firm shareholders do not free-ride. Evidence is also provided indicating that premiums are paid by the majority holder to acquire a remaining minority interest.     

Efficiency wages and income taxes

The paper was written during a visit at the Ludwig-Maximilian-University of Munich in the summer of 1988. The hospitality of this institution, as well as the financial support from a Ruhrgas Scholarship under the West German Norwegian Scholarship Scheme, is gratefully acknowledged. Participants at various seminars have given useful comments and criticism. I am also grateful to two anonymous referees for their comments to an earlier version of the paper.     

Global monetary policy under a dollar standard

This paper derives an optimal monetary policy in a world with a dollar standard, defined as an environment in which all traded goods prices are set in US dollars, so that exchange rate pass-through into the US price level is zero. We show that the US is essentially indifferent to exchange rate volatility, while the rest of the world places a high weight on exchange rate volatility. In a Nash equilibrium of the monetary policy game, US preferences dominate; the equilibrium is identical to one where the US alone chooses world monetary policy. Despite this, we find surprisingly that the US loses from the dollar's role as an international currency, since the absence of exchange rate pass-through leads to inefficient expenditure allocations within the US. Finally, we derive the conditions for a dollar standard to exist.     

Japan's Security Policy in East Asia

Japan's strategic thinking has been driven by three main factors: a fear of isolation, calculation of the geopolitical strength of China (and to a lesser extent, Korea), and accommodation to the prevailing international power structure. During the Cold War Japan aligned with Washington, but maintained sufficient distance to explore a mutually beneficial relationship with China based on Japan's dominant economic position. As Chinese power has grown and Japan's own economic tools for statecraft have slowed, Tokyo has moved closer to the United States to balance Chinese power. Japan has also had to seek new ways to shape the security environment in Asia, turning to multilateral diplomacy such as the Changmai Initiative. Where Japan's diplomacy in Asia in the 1980s and 1990s emphasized Japan's unique ability to champion "Asian" values with the West, increasingly Tokyo has emphasized its unique ability to champion universal values of democracy and rule of law in Asia. This theme has been used by conservative governments to improve Japan's brand over China, but also builds on a tradition of Japanese diplomatic efforts to take a lead in rule-making in the region. Prime Minister Koizumi's assertive foreign policy helped to reinvigorate Japan's international position, but he moved from the traditional three part formulation of Japan's orientation – the U.S. alliance, the UN system and Asia – to a simpler two part formulation of "the U.S.-Japan alliance and international cooperation." The lack of focus on Asia has contributed to growing tensions with South Korea and China over history issues, even as Japan's global and broader regional standing has increased according to most opinion polls. These regional challenges will continue to confront future Prime Ministers well past Koizumi.     

UK Executive Bonuses and Transparency — A Research Note

High levels of executive pay in the USA and the UK have attracted journalistic and academic criticism to the effect that they constitute rent extraction by self‐interested executives rather than rewards for raising shareholder returns. The focus of most criticism has been on salary, severance payments and various long‐term incentives (particularly share options). However, executive bonuses have attracted little attention and have been only lightly regulated. This raises important questions. Has lighter regulation been associated with significant levels of rent extraction through bonuses, that is, a weak relation between bonus pay and shareholder returns? Have more transparent performance conditions attached to bonuses strengthened the relation, making rent extraction more difficult, or have they acted as camouflage for rent extraction, associated with higher bonus pay but lower pay‐performance responsiveness? Are measures of CEO power associated with larger bonuses? This empirical note provides the first, preliminary answers to these questions.     

Smoothly mixing regressions

This paper extends the conventional Bayesian mixture of normals model by permitting state probabilities to depend on observed covariates. The dependence is captured by a simple multinomial probit model. A conventional and rapidly mixing MCMC algorithm provides access to the posterior distribution at modest computational cost. This model is competitive with existing econometric models, as documented in the paper's illustrations. The first illustration studies quantiles of the distribution of earnings of men conditional on age and education, and shows that smoothly mixing regressions are an attractive alternative to nonBayesian quantile regression. The second illustration models serial dependence in the S&P 500 return, and shows that the model compares favorably with ARCH models using out of sample likelihood criteria.     

Willingness to Pay and the Cost of Commitment: An Empirical Specification and Test

In a static setting, willingness to pay for an environmental improvement is equal to compensating variation. In a dynamic setting, however, willingness to pay may also contain a commitment cost. In this paper we incorporate the dynamic nature of the value formation process into a stated preference study designed to test whether there is an important dynamic component (commitment cost) in stated preference values. The results clearly indicate that stated preference values can contain commitment costs and that these can be quite large: respondents offered the opportunity to delay their purchasing decisions until more information became available were willing to pay significantly less for improved water quality than those facing a now-or-never decision. These results have important consequences for the design and interpretation of stated preference data.     

Asset specificity and economic organization

This paper examines the optimization problem of firm and market organization in which both production cost and transaction cost differences are expressed as a function of asset specificity. In general, markets enjoy advantages by aggregating the demands of many buyers, thereby realizing economies of scale or scope. Such production cost savings need to be assessed in relation to the transaction cost advantages that internal organization sometimes enjoys over markets in adapting to changed circumstances. As it turns out, both production cost economies and the transaction cost differences between firm and market organization vary systematically with the characteristics of the investments. This paper employs a unified framework to assess the choice of organization form. The condition of asset specificity is featured.