Market Failures in Real-Time Metering

Policies to promote real-time metering (RTM) require more than showing benefits from more timely responses to variations in cost. They require positive externalities to imply that too few meters would be installed through private transactions. RTM presents no systematic externalities when utilities must serve peak period users, and may present negative externalities under some conditions. Positive externalities are likely when electricity is rationed through blackouts. RTM may or may not increase welfare when peak period wholesale markets are not competitive; a prohibition on RTM might be appropriate in such situations even if metering itself were costless.     

Auditing in the Presence of Outside Sources of Information

We examine how an auditor's ability to terminate a multi-period client relationship provides the auditor with a real option whose value depends on the nature of informational asymmetry between the incumbent and other potential auditors. In particular, we isolate conditions under which the auditor's private and public sources of information behave as complements rather than substitutes. In such circumstances, increasing the likelihood of publicly provided information induces the auditor to expend more (rather than less)resources in private information gathering activities.     

Form, function, and finance: architecture and finance theory

At least at first glance, a bank’s customers ought to be concerned with only one thing—the price they must pay for the services they receive. Architecture beyond the merely functional ought to have no role, especially not in the modern global economy in which increasingly automated financial intermediation of all sorts appears to be approaching the ideals of pure competition and perfect efficiency. Even in these financially sophisticated times, however, symbols matter, and the message communicated by these symbols is one which cannot be communicated in any other way. It is necessary for a financial institution, and perhaps even the financial system itself, to have a strong visual presence. There is a visceral appeal of an architecturally distinguished building to the senses that speaks to us in a way that the cerebral appeal of pure information cannot.     

Editor's Introduction: Symposium on Free-Market Competitive Goals and Antitrust Policies

Review of Industrial Organization -     

Optimal investment with fixed financing costs

Models with a premium on external finance produce counterfactual predictions about liquidity management. We address this shortcoming by introducing a fixed cost of increasing external finance into an otherwise standard investment/financing problem. This additional financial friction is well-motivated by case studies and our analysis shows that it generates more realistic predictions about liquidity management: firms hold external finance and idle cash simultaneously, and may invest an additional dollar of cash flow in liquidity rather than repaying external funds or investing in productive capital. In addition to better fitting the stylized facts about the time-series and cross-sectional pattern of liquidity holding, these results may help shed light on the fragility of estimates of investment–cash flow sensitivities.     

The Cost of Capital of Cross‐listed Firms

This paper analyses the cost of capital of firms with foreign equity listings. Our purpose is to shed light on the question whether international and domestic asset pricing models yield a different estimate of the cost of capital for cross‐listed stocks. We distinguish between (i) the multifactor ICAPM of Solnik (1979) and Sercu (1980) including both the global market portfolio and exchange rate risk premia and (ii) the single factor domestic CAPM. We test for the significance of the cost of capital differential in a sample of 336 cross‐listed stocks from nine countries in the period 1980–99. Our hypothesis is that the cost of capital differential is substantial for firms with international listings, as these are often large multinationals with a strong international orientation. We find that the asset pricing models yield a significantly different estimate of the cost of capital for only 12% of the cross‐listed companies. The size of the cost of capital differential is around 50 basis points for the US, 80 basis points for the UK and 100 basis points for France.     

National Income Accounting and Public Policy

Modern national income accounting was designed in the early 20th century for the purpose of providing improved indicators about the performance of the economy so that government policy makers could better control the economy. The way that performance is measured affects the types of policies used to try to accomplish policy goals. Two attributes of national income accounting are analyzed for their effects on economic policy. First, government production is included in the national income accounts at cost, rather than at market value as private sector output is measured. This biases policy toward a larger public sector. Second, output is measured as a homogeneous dollar amount. This biases policy toward focusing on increasing quantities of inputs and outputs in the production process, rather than on innovation and entrepreneurship, which are the true engines of economic progress. Economic policy could be improved by focusing less on national income as an indicator of policy, and more on the underlying processes that foster economic progress.