More on Middlemen: Equilibrium Entry and Efficiency in Intermediated Markets

This paper generalizes Rubinstein and Wolinsky's (1987) model of middlemen (intermediation) by incorporating production and search costs, plus more general matching and bargaining. This allows us to study many new issues, including entry, efficiency, and dynamics. In the benchmark model, equilibrium exists uniquely and involves production and intermediation for some parameters but not others. Sometimes intermediation is essential: the market operates if and only if middlemen are active. If bargaining powers are set correctly equilibrium is efficient; if not there can be too much or too little economic activity. This is novel, compared to the original Rubinstein–Wolinsky model, where equilibrium is always efficient.     

Productivity dynamics and the cleansing effect of two recessions: Evidence from the manufacturing sector in Korea

In general, recessions provoke the exit of a greater number of firms from the market. Less productive firms are more likely to exit and release their former resources to the remaining, more productive firms. The present study investigates two recessions in Korea: the Asian financial crisis and the global financial crisis. The main objective of the present study is to analyse the process of creative destruction in a recession, specifically the cleansing effect. We measured total factor productivity using micro‐level manufacturing plant data from 1993 to 2013. We decomposed the source of the changes in total factor productivity to measure the cleansing effect in two large recessions. During the first recession in the 1990s, there was no evidence to support a cleansing effect hypothesis. In contrast, during the second recession in the 2000s, there was evidence of a cleansing effect. In addition, we found differences in market selection criteria in the two recessions; by the second crisis, the market selection criteria had changed to enable a more conducive environment for the creative destruction process.     

Tax Rate Harmonization,Renegotiation, and Asymmetric Tax Competition for Profits with Repeated Interaction

This paper analyzes a model of corporate tax competition with repeated interaction and with strategic use of profit shifting within multinationals. We show that international tax coordination is more likely to prevail if the degree of asymmetry in terms of productivity differences between countries is smaller, or if concealment costs of profit shifting are larger when the tax authorities adopt grim‐trigger strategies. Allowing for renegotiation in the tax harmonization process requires more patient tax authorities to implement tax harmonization as a weakly renegotiation‐proof equilibrium. In this case, we find somewhat paradoxical situations where higher costs of profit shifting make tax harmonization less sustainable.     

How credible is the North Korean threat?

We perform event analysis on particular episodes of tension in the Korean peninsula between 2000 and 2008, and investigate the effect of the events on South Korean financial markets (stock markets, bond yield spreads and the exchange rate) given that South Korea would be the first affected by a military aggression from North Korea. Surprisingly, in nearly all cases, these events, which have often been dramatized in the world media, have no significant impact on either of these variables or only a very small one. We also find no significant impact of events on listed firms that would a priori be likely to suffer from increased tension between the two Koreas. Since financial markets often contain better predictions than expert opinions or surveys, these results strongly suggest that the North Korean threat is non‐credible.     

Dissecting Exchange Rates and Fundamentals in the Modern Floating Era: The Role of Permanent and Transitory Shocks

In this paper, we apply a permanent–transitory decomposition method to analyze the link between nominal exchange rates and fundamentals in the modern floating era. The results suggest that transitory shocks dominate nominal exchange rate fluctuations, while permanent shocks dominate the variations in fundamentals. Therefore, the findings suggest that the nominal exchange rate should not be approximated by a pure random walk. Moreover, we find that unobserved fundamentals in the Taylor rule model can explain the transitory components in exchange rates.     

IMMIGRANT RELATIVE WAGES AT THE GREAT RECESSION: EVIDENCE WITH MATCHED EMPLOYER‐EMPLOYEE DATA FOR SPAIN

The article examines relative wages of immigrants in Spain, with a particular focus on the impact of the Great Recession. The empirical analysis is restricted to men and is based on matched employer‐employee microdata and the decomposition techniques of Juhn et al. (1991, 1993) and Fortin et al. (2011). Our results show that the significant native‐immigrant wage gap that exists both in terms of average wages and of differentials along the wage distribution is essentially explained by differences in the endowments of observed characteristics so that, in general, immigrants tend to receive a similar wage treatment than Spaniards with analogous observed attributes. On the other hand, the Great Recession has had a noticeable impact on the relative wages of immigrants, given that the significant increase of the native‐immigrant wage gap observed during the previous expansionary period was mitigated during the economic downturn due to composition effects arising from the severe employment destruction pattern.     

TRADE AND DIVERGENCE IN EDUCATION SYSTEMS

This article presents a theory on the endogenous choice of education policy and the two‐way causal relationship between trade and education systems. A country's education system determines its talent distribution and comparative advantage; the possibility of trade by raising the returns to the sector of comparative advantage in turn induces countries to further differentiate their education systems and reinforces the initial pattern of comparative advantage. Specifically, the Nash equilibrium choice of education systems by two countries interacting strategically are necessarily more divergent than their autarky choices, and yet less than what is socially optimal for the world.     

Does the Quality of Corporate Governance Affect Firm Valuation and Risk? Evidence from a Corporate Governance Scorecard in Hong Kong*

Using Hong Kong firm data, we construct an index of corporate governance during 2002–2005, which scores the corporate governance practices of listed companies from the public shareholders' perspective based on the Organization for Economic Corporation and Development Principles of Corporate Governance. The findings show that family firms and firms with concentrated ownership structures are associated with bad corporate governance. The evidence also shows that these firms improve their corporate governance practices slower than their peers. Overall, the quality of corporate governance is very significant in explaining future company stock returns and risk. Good corporate governance is associated with both higher stock returns and with lower risk. Improvements in corporate governance are associated with significantly higher stock returns and lower company risk.