The Impact of Regulation on Input Substitution and Operating Cost

We investigate the impact of rate-of-return regulation on the substitutability between pairs of inputs, where substitutability is measured using Morishima elasticities of substitution (MES), and on operating cost. Theory does not provide a qualitative characterization of the impact of regulation on input substitutability, although it does provide a basis for speculation. We test our speculation using a 1977-87 panel of 20 U.S. interstate natural gas pipelines that were subject to rate-of-return regulation during the period. We find that regulation increased the MES of each rate base input for the non-rate base input and reduced the MES between the two rate base inputs and of the nonrate base input for each rate base input. We also find that the regulatory distortion of input substitutability led to an increase in operating cost of 16%, on average, across all companies and through all years in the sample.     

Global Influences on U.S. Auto Innovation

There is a growing interest in the role that patents in one country have on product innovation in other countries. This paper contributes to the existing literature by using a firm fixed-effects model to investigate the connection between industry innovation (specifically that of the U.S. automobile industry) and a variety of micro and macroeconomic factors. Knowledge spillovers between countries are modeled using data from the Patent and Trademark Office, Census Bureau, and COMPUSTAT. The results indicate that German innovations affect U.S. firms differently from Japanese innovations: Japanese patents have a larger negative influence on U.S. auto manufacturers' patenting behavior.     

Capital Structure and Corporate Control: The Effect of Antitakeover Statutes on Firm Leverage

We find that firms protected by "second generation" state antitakeover laws substantially reduce their use of debt, and that unprotected firms do the reverse. This result supports recent models in which the threat of hostile takeover motivates managers to take on debt they would otherwise avoid. An implication is that legal barriers to takeovers may increase corporate slack.     

Systematic and Liquidity Risk in Subprime-Mortgage Backed Securities

The misevaluation of risk in securitized financial products is central to understanding the Financial Crisis of 2007–2008. This paper characterizes the evolution of factors affecting collateralized debt obligations (CDOs) based on subprime mortgages. A key feature of subprime-mortgage backed indices is that they are distinct in their vintage of issuance. Using a latent factor framework that incorporates this vintage effect, we show the increasing importance of a common factor on more senior tranches during the crisis. We examine this common factor and its relationship with spreads. We estimate the effects of the financial crisis on the common factor.     

Myopic Corporate Behaviour with Optimal Management Incentives

Existing models in which stock markets lead to corporate 'short-termism' rely on an exogenously imposed objective for top managers. This paper endogenizes both managers' concern for short-term stock prices and the resulting distortions. We show that when the manager can trade on her own account on the stock market in a way that is observable to market participants but which is not verifiable in court, shareholders will choose an incentive contract which induces a bias towards short-term returns. Consistent with recent evidence, the short-term bias is greater when the optimal contract provides low-powered management incentives.     

Migration and Land Rental as Responses to Income Shocks in Rural China

Using longitudinal household survey data from rural China and an identification strategy based on observed rainfall realizations, we are able to test household responses to idiosyncratic and covariate income shocks. We find that negative idiosyncratic income shocks increase migration and elicit household out rental of land. The effect of covariate income shocks is generally dependent on both the timing and the nature of the shock. Our results suggest that rainfall deficiencies during paddy maturing or harvesting seasons reduce the number of migrants by raising the marginal value product of farm labour, thereby increasing the opportunity costs associated with migration.     

Local compensation payments for agri-environmental externalities: a panel data analysis of bargaining outcomes

We analyse local compensation payments made to farmers for providinglandscape amenities in Alpine tourist communities. These paymentsresult from political bargaining at the municipal level. Paneldata estimation shows that the probability of introducing compensationpayments depends positively on the benefits of landscape amenities.Although no impact of service provision cost is found, transactioncosts at different levels of the bargaining process reduce theprobability of payments. Compensation payments mainly occurin communities where the provision of agricultural landscapeservices is perceived as relatively low and the diversity ofthe countryside seems to be endangered. We argue that municipalcompensation payments are an important supplement to nationaland European Union policy measures in support of less-favouredareas.