Codes of Best Practice in competitive markets for managers

We study the corporate governance of firms in environments where possibly heterogeneous shareholders compete for possibly heterogeneous managers. A firm, formed by a shareholder and a manager, can sign either an incentive contract or a contract including a Code of Best Practice. A Code allows for better management control, but makes it hard for managers to react quickly when market conditions change. Codes tend to be adopted in markets with low volatility and in environments where managers obtain low levels of benefits. The firms with the best projects tend to adopt a Code when managers are not too heterogeneous, while the best managers tend to be hired through incentive contracts when the projects are similar. Although the matching between shareholders and managers is often positively assortative, shareholders with the best projects might be willing to renounce hiring the best managers; instead, signing contracts including Codes with lower-ability managers.     

Common agency lobbying over coalitions and policy

This paper presents a theory of common agency lobbying in which policy-interested lobbies can first influence the choice of a proto-coalition and then influence the legislative bargaining over policy within that coalition. The equilibrium policy in the legislative bargaining stage maximizes the aggregate policy utility of the coalition members and the lobbies, but lobbying can also lead to the preservation of the status quo and lobby-induced gridlock. When the status quo does not persist, the policy outcome is largely determined by the selection of a coalition, since legislative bargaining under unanimity within the coalition leads to a coalition-efficient policy regardless of the identity of the proposer. An example is presented to identify the types of equilibria and provide a full characterization of an equilibrium.     

Competition for attention in the Information (overload) Age

The Information Age has a surfeit of information received relative to what is processed. We model multiple sectors competing for consumer attention, with competition in price within each sector. Sector advertising levels follow a constant elasticity of substitution (CES) form, and within‐sector prices are dispersed with a truncated Pareto distribution. The “information hump” shows highest ad levels for intermediate attention levels. Overall, advertising is excessive, although the allocation across sectors is optimal. The blame for information overload falls most on product categories with low information transmission costs and low profits.     

Tax avoidance versus tax evasion: on some determinants of the shadow economy

In this paper we investigate how the possibility of (legal) tax avoidance affects the extent of (illegal) tax evasion and hence the shadow economy. We formulate a theoretical microeconomic model of household behavior in which households can participate in the official and in the shadow economy. Using comparative statics, we show that the complexity of the tax system affects participation in the shadow economy negatively, i.e. a more complex tax system with more possibilities of legal tax avoidance implies, ceteris paribus, a smaller labor supply in the shadow economy. In addition, we show that a reduction in the maximum admissible number of working hours in the official economy increases the labor supply in the shadow economy.     

The fundamental theorem of asset pricing under transaction costs

This paper proves the fundamental theorem of asset pricing with transaction costs, when bid and ask prices follow locally bounded càdlàg (right-continuous, left-limited) processes. The robust no free lunch with vanishing risk condition (RNFLVR) for simple strategies is equivalent to the existence of a strictly consistent price system (SCPS). This result relies on a new notion of admissibility, which reflects future liquidation opportunities. The RNFLVR condition implies that admissible strategies are predictable processes of finite variation. The Appendix develops an extension of the familiar Stieltjes integral for càdlàg integrands and finite-variation integrators, which is central to modelling transaction costs with discontinuous prices.     

Forward rate models with linear volatilities

The existence of solutions to the Heath?CJarrow?CMorton equation of the bond market with linear volatility and general Lévy random factor is studied. Conditions for the existence and non-existence of solutions in the class of bounded fields are presented. For the existence of solutions, the Lévy process should necessarily be without a Gaussian part and without negative jumps. If this is the case, then necessary and sufficient conditions for the existence are formulated either in terms of the behavior of the Lévy measure of the noise near the origin or the behavior of the Laplace exponent of the noise at infinity.     

Fair Value and Risk Profile for Presale Contracts of Condominiums

Developers usually presell new condominiums, requiring purchasers to make down payments on a contract that allows them to purchase, at a fixed price, the finished condominiums on a later date. This presale contract is akin to a financial call option sold by the builder to the purchaser of the condo. In this paper, we value the presale contract from both the purchaser’s and the developer’s points of view. We examine the influence of various opt-out clauses, different interest rates and other factors on the value of presale contracts. We discuss the extent of risk sharing between the purchasers and the developers according to varying levels of down payments. We conclude that developers enjoy a reduction in risk without a corresponding reduction in expected profits by holding a presale.     

Financialization as a strategy of workplace control in professional service firms

Recently, there has been an increased focus on finance as a form of control in corporations. In this paper, we explore financialization as an employee control strategy in a Big Four accountancy firm, and more specifically how it affects the everyday lives of the professionals within the firm. We found financialization involved attempts to transform employees working lives into an investment activity where work was experienced as ‘billable hours’ that are ‘invested’ in the hope of a high future pay-off. Employees sought to increase the value of their investment by skilful manipulation. If wisely managed, this investment could yield significant benefits in the future. We argue that financialization involves active employee participation and is a way of binding other forms of control together.     

The Stochastic Seasonal Behaviour of Natural Gas Prices

Previous studies have explored the seasonal behaviour of commodity prices as a deterministic factor. This paper goes further by proposing a general (n+2m)‐factor model for the stochastic behaviour of commodity prices, which nests the deterministic seasonal model by Sorensen (2002) . We consider seasonality as a stochastic factor, with n non‐seasonal and m seasonal factors. The non‐seasonal factors are as defined in Schwartz (1997) , Schwartz and Smith (2000) and Cortazar and Schwartz (2003) . The seasonal factors are trigonometric components generated by stochastic processes. The model has been applied to the Henry Hub natural gas futures contracts listed by NYMEX. We find that models allowing for stochastic seasonality outperform standard models with deterministic seasonality. We obtain similar results with other energy commodities. Moreover, we find that stochastic seasonality implies that the volatility of futures returns follows a seasonal pattern. This result has important implications in terms of option pricing.