Equity Control of Multinational Firms: Effects on Resource Allocation and National Welfare

In this paper, we re-examine the effects of equity control of multinational firms on resource allocation and national welfare in a model with rural–urban migration and urban unemployment. A large number of recipient (host) countries are developing countries with dual economies. We indicate, among other things, that a restriction on multinational investment may lower the unemployment rate and increase the total employment in the host country. Furthermore, we find that the restriction on multinational investment raises the national welfare in the host economy if the tariff imposed on imports is sufficiently large and the difference between domestic and foreign capital rental is sufficiently small.     

Advertising and Competition for Market Share between a New Good Producer and a Remanufacturer

We study the strategic interaction between a new good producer and a remanufacturer who use advertising campaigns to compete for a dominant share of the market for a certain good. Each firm chooses one of three possible strategies for running its advertising campaign. The two rival firms care only about capturing a dominant share of the relevant market. Hence, if a firm expects to capture dominant market share with probability p ∈ [0, 1], then its payoff in the game we study is also p. Our analysis leads to four results. First, we provide the normal form representation of the game between the new good producer and the remanufacturer. Second, we specify the game in matrix form. Third, we indicate what happens at each stage of the elimination of strictly dominated strategies. Finally, we show that the iterated elimination of strictly dominated strategies yields a clear and unique prediction about the outcome of the advertising game.     

On the loss structure of federal reserve forecasts of output growth

Utilizing recent techniques with comparable private forecasts as benchmarks, we test the rationality of the Federal Reserve forecasts of growth under flexible loss. Our findings for 1984–2006 indicate that these forecasts are rational (efficient) and directionally accurate under symmetric loss and are thus of value when similar cost is assigned to both incorrect upward and downward predictions. Over-predictions (under-predictions) are costly when the Fed responds by implementing an unnecessary contractionary (expansionary) monetary policy and thus causes lower growth (higher inflation). Symmetric loss thus indicates that the Fed is equally concerned about both low growth and high inflation. Further results reveal that the private sector closely replicates the Federal Reserve forecasts released to the public with a five-year lag, suggesting that one can utilize the readily available private data as proxies for the not-yet-released Federal Reserve forecasts.     

Reform,informal sector,and extortion

Informal economy involving unrecorded, unregistered, extra‐legal activities employs majority of the work force in the developing world. Such extra‐legal existence of informal production is facilitated through extortion by agents of political forces in power. Also, extortion activities themselves constitute an informal segment. Full‐scale general equilibrium consequences of such institutions are rarely discussed in the literature. We develop a well‐specified general equilibrium model to explore the possible consequences of reform. Economic reform may have an expansionary effect on the number of extortionists. Depending on capital mobility and factor intensity assumptions informal output and informal wage may increase.     

The Impact of Risk-Based Premiums on FDIC-Insured Institutions

This paper examines the effect of a series of announcements leading to the approval of risk-based deposit insurance premiums on returns to stockholders of commercial banks. Utilizing risk-weighted capital ratios and measures of overall risk, we group banks according to one of the nine-tier insurance categories subsequently defined by the FDIC. During the period in which the new insurance system was considered and approved, we found that stockholders of well-capitalized, healthy banks experienced wealth changes significantly different from those experienced by less than well-capitalized, less than healthy banks. Although many argued the premium range in the initial insurance schedule was insufficient, the results show that this initial risk-basing marked an important change in the relative burdens imposed by FDIC insurance.     

Single‐loop project controls: Reigning paradigms or straitjackets?

This article reports on the results from an ongoing research program to study the role mental models play in project decision making. Project management belongs to the class of multiloop nonlinear feedback systems, but most managers do not see it that way. Our experimental results suggest that managers adopt simplistic single‐loop views of causality, ignore multiple feedback interactions, and are insensitive to nonlinearities. Specifically, the article examines single‐loop models of project planning and control, discusses their limitations, and proposes tools to address them.     

Information acquisition,foreign bank entry,and credit allocation

This paper presents a theoretical framework to understand the impact of foreign bank entry on the access to and the price of credit for different types of firms. A major point of departure from the previous literature is that incumbents’ information about firms is endogenous in the model; previous screenings and lending relations of incumbents determine which type(s) of firms they can identify. I show that incumbents’ information is negatively correlated with the quality of borrowers. Moreover, although a priori entrants have a comparative advantage in lending to transparent firms, previous lending relations of incumbents might reverse this relation. In particular, given that transparent firms are the only type screened before the entry and therefore they are the only type distinguishable by incumbents, entrants might have a comparative advantage in lending to opaque firms. The analysis provides new insights into the inconclusive evidence of the literature regarding entrants’ credit allocation.     

Foreign capital, unemployment and national welfare

We consider a situation where foreign capital is allowed to flow only into the export-processing zone of an economy characterized by unemployment and pursuing protectionary policy. We derive conditions under which growth induced by an increase in the flow of foreign capital will be immiserizing. The results are derived when foreign capital does not directly flow into the protected sector but alters the composition of outputs in the other traded sectors through inter-sectoral reallocation of other resources.     

The rates of return on investment in education in Michigan

Atlantic Economic Journal -