Testing for weak identification in possibly nonlinear models

In this paper we propose a chi-square test for identification. Our proposed test statistic is based on the distance between two shrinkage extremum estimators. The two estimators converge in probability to the same limit when identification is strong, and their asymptotic distributions are different when identification is weak. The proposed test is consistent not only for the alternative hypothesis of no identification but also for the alternative of weak identification, which is confirmed by our Monte Carlo results. We apply the proposed technique to test whether the structural parameters of a representative Taylor-rule monetary policy reaction function are identified.     

Increasing returns and aggregate production efficiency by a monopoly

This paper considers an economy where there are many firms with increasing-returns-to-scale technologies and attempts to derive sufficient conditions ensuring that monopoly achieves aggregate production efficiency. In a setting of one output and many inputs, we obtain such sufficient conditions which can be interpreted as a nondecreasing generalized average productivity of inputs for each firm. We also show that a special class of generalized Cobb-Douglas production functions has such a property that monopoly always achieves aggregate production efficiency.     

Corporate restructuring in Japan: Who monitors the monitor?

Peek and Rosengren [Peek, J., Rosengren, E., 2005. Unnatural selection: Perverse incentives and the misallocation of credit in Japan. American Economic Review 95, 1144–1166] showed that, when the bubble economy era ended, regulatory forbearance and perverse incentives allowed Japanese banks to engage extensively in evergreening. This is the first comprehensive study to empirically analyze the economics of private debt restructurings of financially distressed companies in Japan, where the corporate monitoring mechanism is not market based but large-stakeholder based – typically, banks and affiliated companies. These stakeholders are expected to efficiently resolve potential bankruptcy or collapse with better information resulting from long-term relationships with the distressed firms. Our study, however, finds that private restructurings led by them failed because of delays in implementing fundamental solutions. Forbearance in addressing the needs of distressed firms demonstrates the weakness of such stakeholders in instituting discipline, hence the need for a system to “monitor the monitor”.     

On the Cost Structure of the Japanese Property-Casualty Insurance Industry

This article tests economies of scale and economies of scope for the property‐casualty insurance companies in Japan. We fit a composite cost function to a set of Japanese firms over the period from 1980 to 1995 and employ an error components model. Our main findings are as follows. First, statistically significant economies of scale are observed in both Japanese firms and foreign firms operating in Japan. Second, economies of scope are also statistically significant for Japanese firms and most of the foreign insurers between the “third sector” products and the rest of the property‐casualty insurance lines.     

Post-restructuring performance in Japan

Peek and Rosengren (2005) showed that after the end of the bubble economy era in Japan, regulatory forbearance and perverse incentives allowed Japanese banks to engage extensively in “evergreening”. Inoue et al. (2008) also showed that, compared to out-of-court settlements in the United States, agreements on out-of-court restructuring are attained more easily in Japan. However, widespread forbearance by banks and affiliated companies in addressing the needs of distressed firms indicated a serious weakness of banks and affiliated companies in instituting discipline. This is the first empirical study to examine the performance of Japanese firms that experienced out-of-court restructuring in Japan from January 1990, when the bubble economy burst, to March 2005, when the Koizumi Cabinet declared the bad debt problems of major firms to be resolved. Our results show that important biases permitted deeply unprofitable firms to survive in Japan. This finding is similar to research by Hotchkiss (1995), who analyzed post-restructuring performance in the United States. We also find that out-of-court restructurings of troubled firms in Japan were less effective in improving profitability than restructurings under Chapter 11 in the United States. However, we find that restructurings associated with new capital injections and new outside management are more likely to lead to genuine improvement in financial performance.     

Endogenous timing in a mixed duopoly: price competition with managerial delegation

We introduce a managerial delegation contract into the mixed duopoly model and examine its influence on price setting in a mixed duopoly in the context of the endogenous‐timing problem. We obtain the result that owners of a public and a private firm prefer to delay the setting of the prices of their products as much as possible. Thus, in equilibrium, the firms choose their prices simultaneously in the latter stage of the game. This is in contrast to the findings of the entrepreneurial case, according to which firms choose prices simultaneously in the former stage. Copyright © 2009 John Wiley & Sons, Ltd.     

The effect of changes in Japanese consolidation policy on analyst forecast error

Our broad research objective is to investigate whether convergence towards international standards improves the decision usefulness of information. Recent changes in Japanese consolidated reporting practices to better align with international standards provide an excellent setting to investigate this research objective. Specifically, we examine the effect of changes in Japanese consolidation policy on financial analysts’ perceptions of the persistence of subsidiary earnings. Previous research provides evidence that, prior to the change in consolidation policy, consolidated financial information was not used efficiently in the Japanese capital market. Prior research finds a positive relation between subsidiary earnings and future stock returns in Japan, indicating that investors underestimate the persistence of subsidiary earnings. Consistent with prior research using stock returns, we find that financial analysts also underestimate the persistence of subsidiary earnings in Japan. We document a significant positive relation between subsidiary earnings and future forecast errors of consolidated earnings. However, following the changes in consolidation policy in Japan, we find that financial analysts no longer underestimate the persistence of subsidiary earnings. Changes in Japanese consolidation policy in conformance with international standards increase decision usefulness by improving the ability of financial analysts to predict overall firm performance. One limitation of our research design relates to the adoption of mandated accounting policy changes by all sample firms in the same calendar time. This makes it difficult to control for the impact of correlated omitted variables. While this concern can never be completely eliminated, we provide additional tests that examine sample partitions by firm size and industry. These additional tests support the primary findings that Japan’s efforts to converge consolidation rules with international standards have improved analysts’ consolidated earnings forecasts.     

Interior Optimal Chaos with Arbitrarily Low Discount Rates

In this study, we demonstrate, for an arbitrarily small discount rate, the existence of a topologically chaotic policy function that lies in the interior of the technology set in a two-sector model with smooth production and utility functions. For this purpose, we adopt CES production functions and a utility function with a constant elasticity of intertemporal substitution. The two-sector model with those functions always has a policy function lying in the interior of the technology set (interior policy function). The existence of a scramble set of a policy function may be proved even in the case in which the discount rate is arbitrarily small.
JEL Classification Number: 041.     

Homoclinic bifurcation and global indeterminacy of equilibrium in a two-sector endogenous growth model

This paper considers an endogenous growth model that belongs to the same family as the Lucas model. In the Lucas model an external effect appears in the physical-goods sector, whereas in our model, it appears in the educational sector. In our model, this external effect yields multiple balanced growth paths. Our model undergoes a homoclinic bifurcation and exhibits global indeterminacy of equilibrium.