Interbranch cooperation and the shadow of the future

Prisoners’ Dilemma (PD) experiments confirm and extend Axelrod’s (The evolution of cooperation. Basic Books, New York, 1984) Shadow of the Future hypothesis: subjects cooperate in infinitely repeated PD, but they also cooperate until near the end in finitely repeated PD. So the extended hypothesis is that cooperation depends on the probability of continued play. Observational tests of this hypothesis, or even applications, have been rare at best. Here we not only apply but test it for interbranch cooperation under separated-powers constitutions, specifically those of the American states, using the end of governors’ final terms as end points and the rate of overridden vetoes as the extreme case of a breakdown in interbranch cooperation. Controlling for a variety of factors, including divided government, we find support for the hypothesis, whose explanation of interbranch interaction fills a gap left open by Madison’s Federalist 51: how republican government can control itself when what is needed is “energy” more than safeguards.     

Bank‐Owned Life Insurance and Bank Risk

The use of bank‐owned life insurance (BOLI) has more than tripled since 2001 and has caught the attention of the Office of the Comptroller of the Currency. I find increases in BOLI lead to higher levels of liquidity risk, credit risk, and interest rate risk. Robustness tests confirm these results and suggest over‐ and underinvestment in BOLI and use of BOLI as a tax shelter contribute to risk increases. Results indicate that the concerns expressed by regulators are warranted, and suggest insurance may not always have the intended effect of reducing firm risk because of unintended consequences or misuse.     

Information acquisition and institutions: An organizational perspective

Using a World Bank survey of Chinese firms, I construct a set of measures to capture the extent to which a firm involves outsiders in information acquisition. I find that firms that outsource more are not more likely to involve outsiders in acquiring information. Weakening contracting institutions raises the difficulty of safeguarding information leakage, more so when a firm involves outsiders in information acquisition than when no outsiders are involved. I test this prediction and find that firms under weaker contracting institutions are significantly less likely to involve outsiders in information acquisition.     

Estimating continuous-time stochastic volatility models of the short-term interest rate: a comparison of the generalized method of moments and the Kalman filter

This paper examines a model of short-term interest rates that incorporates stochastic volatility as an independent latent factor into the popular continuous-time mean-reverting model of Chan et al. (J Financ 47:1209–1227, 1992). I demonstrate that this two-factor specification can be efficiently estimated within a generalized method of moments (GMM) framework using a judicious choice of moment conditions. The GMM procedure is compared to a Kalman filter estimation approach. Empirical estimation is implemented on US Treasury bill yields using both techniques. A Monte Carlo study of the finite sample performance of the estimators shows that GMM produces more heavily biased estimates than does the Kalman filter, and with generally larger mean squared errors.     

Literacy traps: Society-wide education and individual skill premia

Using a model of an O-ring production function, the present paper demonstrates how certain communities can get caught in a low-literacy trap in which each individual finds that it is not worthwhile investing in higher skills because others are not high-skilled. The model sheds light on educational policy. It is shown that policy for promoting human capital has to take the form of a mechanism for solving the coordination failure in people's choice of educational strategy.     

An examination of the empirical derivatives of the favourite-longshot bias in racetrack betting

Market efficiency dictates it equally profitable to bet on any racing participant, including the favourite or longshot. However, a well-documented anomaly is that racetrack bettors tend to overbet longshots and underbet favourites. This study presents and tests two theoretical explanations for this favourite-longshot bias. The unparalleled richness of the data allows the exploration of how the bias changes with several key variables. This study finds the most popular current explanation for the bias, the risk preference model, cannot explain the data as well as an information-based model, in which the bias depends on bet complexity and the information possessed by bettors.     

A test of the auditor reliability framework using lenders’ judgments

Taylor et al. (2003) challenged the longstanding notion that independence is the capstone of the audit profession by proposing a conceptual framework that emphasizes reliability, rather than independence, as the professional endgame for auditors. Although the reliability framework has attracted attention from policymakers, it has not been tested empirically in an audit context to assess its validity from a user’s perspective. The objective of this study is to test the auditor reliability framework and its formative ethical constructs (i.e., integrity, expertise, independence, objectivity, and reliability) with a sample of 168 commercial lenders. We also extend the reliability framework to examine the extent that perceived auditor reliability affects lenders’ judgments of financial reporting reliability and default risk in a hypothetical lending scenario. Finally, we evaluate the extent that lenders’ judgments are affected by auditor provision of nonaudit bookkeeping and payroll services to a prospective borrower in violation of current independence rules. The results provide strong empirical support for the relations predicted in the reliability framework. Structural equation model results indicate that auditor integrity is the foundation of the framework, directly affecting lenders’ assessments of auditor expertise, independence, objectivity, and reliability. Further, although integrity and objectivity directly affect perceived auditor reliability, independence and expertise only affects reliability indirectly through its impact on objectivity. Finally, we find that lenders perceive no decrease in auditor objectivity or reliability when existing independence rules are violated by combining audit services with nonaudit services for prospective borrowers.     

Risk and intertemporal substitution: Livestock portfolios and off-take among Kenyan pastoralists

Most decisions involve variability in two dimensions: uncertainty across states of nature and fluctuations over time. The stakes involved in tradeoffs between these variability dimensions are especially high for the poor who have difficulty managing and recovering from shocks. We assume Epstein and Zin recursive preferences and estimate risk aversion and intertemporal substitution as distinct preferences using data from Kenyan herders. Results suggest that the assumption implicit in additive expected utility models that relative risk aversion (RRA) is the inverse of the elasticity of intertemporal substitution (EIS) is flawed. Specifically, our RRA and EIS estimates are consistent with a preference for the early resolution of uncertainty, which we believe is driven importantly by the instrumental value of early uncertainty resolution. This same preference pattern is consistent with asset smoothing in response to a dynamic asset threshold.     

Managing the environmental and cultural impacts of tourism and leisure development

It is claimed that the state of development of tourism management as a discipline may be related to the claims of the tourist industry as a pressure group and the lack of adequate academic attention to the economic disbenefits and the environmental and sociocultural costs-benefits of tourism. This article sets out to redress the balance by proposing a social-theory base for tourism.