Globally correlated nominal fluctuations

Fluctuations in nominal variables—aggregate price levels and nominal interest rates—are documented to be substantially more synchronized across countries at business cycle frequencies than fluctuations in real output. A transparent mechanism accounting for this striking feature of the nominal environment is described and quantitatively evaluated. It is based on the interaction between (small) cross-country spillovers of shocks, Taylor rules, and domestic no-arbitrage conditions. The mechanism is robust to various parameterizations and extensions aligning the model with other important aspects of domestic and international fluctuations. Furthermore, its key features are consistent with cross-country forecasts from Consensus survey.     

Approximation of forward curve models in commodity markets with arbitrage-free finite-dimensional models

In this paper, we show how to approximate Heath–Jarrow–Morton dynamics for the forward prices in commodity markets with arbitrage-free models which have a finite-dimensional state space. Moreover, we recover a closed-form representation of the forward price dynamics in the approximation models and derive the rate of convergence to the true dynamics uniformly over an interval of time to maturity under certain additional smoothness conditions. In the Markovian case, we can strengthen the convergence to be uniform over time as well. Our results are based on the construction of a convenient Riesz basis on the state space of the term structure dynamics.     

Disability Retirement in a Welfare State

The increasing number of disability pensioners may put a strain on the welfare state. In this paper, we try to assess the effect of financial incentives on disability entrance. A sample of Norwegians on long-term sick leave at the beginning of 1989 is examined as of the end of 1989, and the exit routes are studied in a multinomial logit model. The results indicate that the incentive effects of wages are larger than the disincentive effects of benefits. Furthermore, there is no evidence that having a "subjective" diagnosis affects the probability of becoming a disability pensioner.
JEL Classification : H 55; I 18; J 26     

Cluster emergence: combining pre-existing conditions and triggering factors

This article argues that the emergence of regional clusters relies on both necessary pre-existing conditions for cluster appearance in general and triggering factors that cause clusters to emerge in particular places. This approach is used to analyse two ‘critical cases’; the emergence of the synthetic-knowledge boat building industry in the Arendal area in Norway from the mid-1950s and the analytical-knowledge cancer medicine industry in Oslo around the year 2000. Although the industries and the contexts are otherwise very different, the framework turns out to be useful in interpreting the emergence of the two clusters. However, the specific pre-existing conditions and the triggering factors differ between the two cases. The Arendal boat building industry emerged through the combination of traditional boat building skills and exogenous knowledge of the use of new plastic material, while the Oslo cancer medicine industry built on indigenously-developed scientific knowledge. The framework is useful in putting anecdotal evidence of cluster emergence due to the efforts of entrepreneurs into a wider analytical framework of the preconditions necessary for entrepreneurs to succeed.     

Knowledge Intensive Business Services and Urban Industrial Development

This paper analyses the role of knowledge intensive business services (KIBS) as innovation agents for other firms and industries with empirical evidence from the capital region of Oslo, Norway. It focuses in particular on the role of two sectors (software industry and organisational consultants) in stimulating innovation and growth, showing that firms in the two KIBS sectors mainly provide products and services tailored to individual clients and have frequent face-to-face meetings, relationships that may stimulate innovation. Moreover, data reveal that Oslo firms are more frequent users of consultancy services than firms located outside urban areas, suggesting a gap between ‘insiders’ and ‘outsiders’.     

Merger negotiations and the toehold puzzle

The substantial control premium typically observed in corporate takeovers makes a compelling case for acquiring target shares (a toehold) in the market prior to launching a bid. Moreover, auction theory suggests that toehold bidding may yield a competitive advantage over rival bidders. Nevertheless, with a sample exceeding 10,000 initial control bids for US public targets, we show that toehold bidding has declined steadily since the early 1980s and is now surprisingly rare. At the same time, the average toehold is large when it occurs (20%), and toeholds are the norm in hostile bids. To explain these puzzling observations, we develop and test a two-stage takeover model where attempted merger negotiations are followed by open auction. With optimal bidding, a toehold imposes a cost on target management, causing some targets to (rationally) reject merger negotiations. Optimal toeholds are therefore either zero (to avoid rejection costs) or greater than a threshold (so that toehold benefits offset rejection costs). The toehold threshold estimate averages 9% across initial bidders, reflecting in part the bidder's opportunity loss of a merger termination agreement. In the presence of market liquidity costs, a threshold of this size may well induce a broad range of bidders to select zero toehold. As predicted, the probability of toehold bidding decreases, and the toehold size increases, with the threshold estimate. The model also predicts a relatively high frequency of toehold bidding in hostile bids, as observed. Overall, our test results are consistent with rational bidder behavior with respect to the toehold decision.     

Taxes and the global allocation of capital

Despite enormous growth in international capital flows, capital-output ratios continue to exhibit substantial heterogeneity across countries. We explore the possibility that taxes, particularly corporate taxes, are a significant source of this heterogeneity. The evidence is mixed. Tax rates computed from tax revenue are inversely correlated with capital-output ratios, as we might expect. However, effective tax rates constructed from official tax rates show little relation to capital—or to revenue-based tax measures. The stark difference between these two tax measures remains an open issue.     

Performance Pay and Adverse Selection*

It is well known in personnel economics that firms may improve the quality of their workforce by offering performance pay. We analyze an equilibrium model where worker productivity is private information and show that the firms’ gain from worker self‐selection may not be matched by a corresponding social gain. In particular, the equilibrium incentive contracts are excessively high‐powered, thereby inducing the more productive workers to exert too much effort and increasing agency costs stemming from the misallocation of effort.     

Does Poaching Distort Training?

We analyse the efficiency of the labour market outcome in a competitive search equilibrium model with endogenous turnover and endogenous general human capital formation. We show that search frictions do not distort training decisions if firms and their employees are able to coordinate efficiently, for instance, by using long-term contracts. In the absence of efficient coordination devices there is too much turnover and too little investment in general training. Nonetheless, the number of training firms and the amount of training provided are constrained optimal, and training subsidies therefore reduce welfare.