Misspecified Recovery

Asset prices contain information about the probability distribution of future states and the stochastic discounting of those states as used by investors. To better understand the challenge in distinguishing investors' beliefs from risk‐adjusted discounting, we use Perron–Frobenius Theory to isolate a positive martingale component of the stochastic discount factor process. This component recovers a probability measure that absorbs long‐term risk adjustments. When the martingale is not degenerate, surmising that this recovered probability captures investors' beliefs distorts inference about risk‐return tradeoffs. Stochastic discount factors in many structural models of asset prices have empirically relevant martingale components.     

Sequencing,timing and filling rates of recruitment channels

This paper analyses the recruitment process by which employers adjust their search strategies. The focus is, in particular, on the sequence and timing of recruitment channels. Two search strategies are identified. One strategy is to advertise a vacancy, and to form a pool of candidates by activating subsequent recruitment channels such that candidates are added to the pool. An alternative strategy used by employers is to start searching via informal channels, consider applicants at arrival and continue their search along a new recruitment channel if no suitable candidates show up. Results suggest that when informal personal contacts are available to the employer, this ‘switching of channel’ strategy is preferred. Moreover, the results of this paper are consistent with the view that informal search methods are potentially more efficient than using an advertisement and forming a pool of applicants, in particular when vital positions in firms have to be filled.     

Shorting in Speculative Markets

In models of trading with heterogeneous beliefs following Harrison-Kreps, short selling is prohibited and agents face constant marginal costs-of-carry. The resale option guarantees that prices exceed buy-and-hold prices and the difference is identified as a bubble. We propose a model where risk-neutral agents face asymmetric increasing marginal costs on long and short positions. Here, agents also value an option to delay, and a Hamilton-Jacobi-Bellman equation quantifies the influence of costs on prices. An unexpected decrease in shorting costs may deflate a bubble, linking financial innovations that facilitated shorting of mortgage-backed securities to the collapse of prices.     

Yesterday's Heroes: Compensation and Risk at Financial Firms

Many believe that compensation, misaligned from shareholders’ value due to managerial entrenchment, caused financial firms to take risks before the financial crisis of 2008. We argue that, even in a classical principal‐agent setting without entrenchment and with exogenous firm risk, riskier firms may offer higher total pay as compensation for the extra risk in equity stakes borne by risk‐averse managers. Using long lags of stock price risk to capture exogenous firm risk, we confirm our conjecture and show that riskier firms are also more productive and more likely to be held by institutional investors, who are most able to influence compensation.     

The Marshall Plan and the Spanish postwar economy: a welfare loss analysis1

This article uses historical fact as a natural experiment to measure a country's welfare loss from shifting from an allowed to a restricted trade situation, based on international trade theory. A welfare loss of 8 per cent of GDP is found. The evolution of domestic import and export prices in Spain in 1940–58 fits international trade theory assumptions. The main years of autarky are not those commonly considered, but 1947–55, marked by the exclusion of Spain from the Marshall Plan and the Madrid Treaty between Franco's regime and the US. The upper‐bound welfare loss for 1947–55 is 26 per cent of GDP.     

STRATEGIC INFORMATION DISCLOSURE AND COMPETITION FOR AN IMPERFECTLY PROTECTED INNOVATION*

The imperfect appropriability of revenues from innovation affects the incentives of firms to invest, and to disclose information about their innovative productivity. It creates a free‐rider effect in the competition for the innovation that countervails the familiar business‐stealing effect. Moreover, it affects the disclosure incentives such that full disclosure emerges for extreme revenue spillovers (e.g., full protection and no protection of intellectual property), but either partial disclosure or full concealment emerges for intermediate spillovers. I analyze the implications of imperfect appropriability and strategic disclosure for the firms' profits and the probability of innovation.     

INSIDE THE IMPOSSIBLE TRIANGLE: MONETARY POLICY AUTONOMY IN A CREDIBLE TARGET ZONE

This paper examines the trade-off between exchange rate stability and monetary autonomy for a target zone. Using the guilder-mark target zone in the pre-Economic and Monetary Union period as a case study, we empirically estimate how much policy discretion the Dutch central bank still enjoyed and how much had been ceded to the German central bank. The sum of these two measures is an estimate of the policy autonomy under a free float. We find that the narrow guilder-mark target zone still permitted a modest degree of policy independence. This result suggests that intermediate exchange rate regimes may offer an attractive trade-off compared to the corner solutions (free float and monetary union), which is consistent with the "fear of floating" phenomenon. ( JEL E52, F33, F41, F42)     

The Local Aggregate Effects of Minimum Wage Increases

Using variation in minimum wages across cities and controlling for differences in business-cycle factors and long-run local economic trends, we find that following minimum wage increases, both, prices and nominal spending rise modestly. These gains are larger for certain subcategories of goods such as food away from home and in locations where low-wage workers account for a larger share of employment. Further, minimum wage increases are associated with reduced total debt among households with low credit scores, higher auto debt, and increased access to credit.     

Social Welfare Analysis in a Financial Economy with Risk Regulation

In the last years, regulating agencies of many countries in the world have adopted VaR‐based risk regulation to control market risk of financial institutions. This paper investigates the consequences of such kind of regulation to social welfare and soundness of financial institutions through an equilibrium model. We show that the optimum level of regulation for each financial institution (the level that maximizes its utility) depends on its appetite for risk and that some of them can perform better in a regulated economy. In addition, another important result asserts that under certain market conditions the financial fragility of an institution can be greater in a regulated economy than in an unregulated one.