Costly trade,managerial myopia,and long-term investment

The costly trade theory predicts that it is much more difficult to exploit long-term private information than short-term. Thus, there is less long-term information impounded in prices. The managerial myopia theory predicts that a variety of short-term pressures, including inadequate information on long-term projects, cause asymmetrically-informed corporate managers to underinvest in long-term projects. The introduction of long-term options called LEAPS provides a natural experiment to jointly test both theories, which are otherwise difficult to test. We conduct an event study around the introduction of LEAPS for a given stock and test whether corporate investment in long-term R&D/sales increases in the years following the introduction. We find that over a two year period of time LEAPS firms increase their R&D/sales between 23% and 28% ($125–$152 million annually) compared to matching non-LEAPS firms. The difference depends on the matching technique used. Two other proxies for long-term investment find similar increases. We find that the increase is positively related to LEAPS volume. We also find that the increase is larger in firms where R&D plays a larger and more strategic role. We test if a firm becomes less likely to beat analyst's quarterly earnings forecasts after LEAPS are introduced and find support for the hypothesis. These results provide both statistically and economically significant support for the costly trade and managerial myopia theories.     

The HAMP NPV Model: Development and Early Performance

The foreclosure crisis that began in 2008 triggered the need for new approaches to treat distressed mortgages. A key component of the Obama Administration's Home Affordable Modification Program (HAMP) was the development of a standardized Net Present Value (NPV) Model to identify troubled loans that were value‐enhancing candidates for payment‐reducing modifications. This article discusses the development of the HAMP NPV Model, 1 its purpose and some important constraints that dictated its structure and limitations. We describe the structure and the estimation of the model in detail. We also describe the responsiveness of the model to key characteristics, such as loan‐to‐value and credit score, as well as provide new evidence on the relationship between HAMP modification performance and key borrower and modification characteristics. The article concludes with a discussion of model limitations and the future role of systematic loan modification using NPV analysis.     

CREDIT RATING AND DEBT CRISES

We develop an equilibrium theory of credit rating in the presence of rollover risk. By influencing rational creditors, ratings affect sovereigns' probability of default, which in turn affects ratings. Our analysis reveals a pro‐cyclical impact of credit rating: In equilibrium the presence of a rating agency increases default risk when it is high and decreases default risk when it is low.     

Demand for a labor‐based drought insurance scheme in Ethiopia: a stated choice experiment approach

Index‐based weather insurance is increasingly used to manage weather‐related risks in smallholder agriculture. However, cash‐constrained smallholders often lack the resources to pay an insurance premium, which may undermine its wider adoption. This article investigates alternative insurance payment methods that may help to enhance the adoption of index‐based weather insurance. We use a choice experiment to elicit smallholders’ willingness to pay in cash or labor for index‐based weather insurance in four districts in the south‐central highlands of Ethiopia. The insurance schemes were created using a fractional factorial design with three factors: work, cash, and payout rate. We analyze the choice data using a random parameter mixed logit model. We find that the average participants need a subsidy to pay cash for insurance because their willingness to pay is less than the expected cost of the insurance. On average, they are willing to pay only 0.81 ETB (Ethiopian currency) to get an expected yearly payout of 1 ETB. However, most are willing to participate in work‐for‐insurance programs at lower daily wage rates than is common for other work programs in Ethiopia.     

Order dynamics: Recent evidence from the NYSE

We examine investor order choices using evidence from a recent period when the NYSE trades in decimals and allows automatic executions. We analyze the decision to submit or cancel an order or to take no action. For submitted orders, we distinguish order type (market vs. limit), order side (buy vs. sell), execution method (auction vs. automatic), and pricing aggressiveness. We find that the NYSE exhibits positive serial correlation in order type on an order-by-order basis, which suggests that follow-on order strategies dominate adverse selection or liquidity considerations at a moment in time. Aggregated levels of order flow also exhibit positive serial correlation in order type, but appear to be non-stationary processes. Overall, changes in aggregated order flow have an order-type serial correlation that is close to zero at short aggregation intervals, but becomes increasingly negative at longer intervals. This implies a liquidity exhaustion–replenishment cycle. We find that small orders routed to the NYSE's floor auction process are sensitive to the quoted spread, but that small orders routed to the automatic execution system are not. Thus, in addition to foregoing price improvement, traders selecting the speed of automatic executions on the NYSE do so with little regard for the quoted cost of immediacy. As quoted depth increases, traders respond by competing on price via limit orders that undercut existing bid and ask prices. Limit orders are more likely and market sells are less likely late in the trading day. These results are helpful in understanding the order arrival process at the NYSE and have potential applications in academics and industry for optimizing order submission strategies.     

Peasant household modelling: Farming systems evolution and sustainability in northern Zambia

Chitemene slash-and-burn cultivation continues to be a dominating cropping system in northern Zambia even after the introduction of modern technologies such as hybrid maize and fertilizer. The rationale of farming systems evolution in northern Zambia where labour markets have been absent or highly imperfect, has been analyzed by goal programming based on the theories of Chayanov (1966) and Nakajima (1986). Carrying capacity estimation is incorporated in the models and discussed in relation to the sustainability of land use systems in the area. The major changes in agricultural technologies in northern Zambia during this century has been the introduction of cassava, maize and fertilizer technologies. Cassava has had the most significant impact since the land could support much higher population densities and since the dependence on the chitemene system no longer was critical for the survival of peasants. By switching from finger-millet to cassava as the main staple the peasants could reduce their total labour recquirement to meet their basic food needs by as much as 40%. The results also show that the maize-fertilizer technology has been unable to replace the chitemene system because economic incentives to continue the system exist as long as there is suitable woodland available. Nevertheless, the introduction of the maize-fertilizer technology may have resulted in reduced chitemene cultivation. The rapid expansion of maize production in northern Zambia from the late 70s to the late 80s depended critically on the government policy of equity pricing and input subsidisation. The models predicted that the removal of fertilizer subsidies would result in a dramatic reduction in maize production.     

Insiders and outsiders in labour market models

The monopoly union model and the wage bargaining model are analysed in light of the distinction between insiders and outsiders. It is shown that a possible outcome of the wage bargaining is the wage level where all insiders keep their job, but no outsiders are taken on. In this situation, small variations in the bargaining situation of the union will not affect the wage and employment outcome. Furthermore, it may even be the case that the union does not wish a higher wage, because this would lead to lay-offs among the insiders. Thus, the monopoly union model and the bargaining model may yield the same wage and employment levels.This paper is part of the research project Wage Formation and Unemployment at SAF Center for Applied Research at the Department of Economics, University of Oslo. Comments from Michael Hoel, Andrew Oswald, Åsa Rosén, Asbjørn Rødseth and an anonymous referee on earlier drafts are gratefully acknowledged.     

Wage Drift and the Relevance of Centralised Wage Setting

The system of wage setting in the Nordic countries is often regarded as highly centralised, contributing to considerable real wage flexibility. This view has been questioned, as sizeable wage drift may offset the effect of central negotiations. This paper presents evidence from the four major Nordic countries, suggesting that there is little or no such offsetting effect. Yet, at central negotiations, the institutional system of wage formation may induce nominal rigidities that may prevent wage restraint when there is little room for money wage growth. Empirical evidence supports the existence of nominal rigidity.     

Cattle sharing and rental contracts in an Agrarian economy: evidence from Ethiopia

Empirical evidence on the role of cattle sharing and rental contracts in agrarian economies is limited. This article is an investigation of different types of cattle sharing and rental contracts producers in rural Ethiopia adopt. It also investigates why households in rural Ethiopia rely on these contracts that are vulnerable and therefore subject to potential moral hazard problems described in earlier literature. We apply random effect probit and control function econometric methods to household panel data collected in 2005 and 2007 from two agro‐ecological zones in Ethiopia. Controlling for the endogeneity of access to livestock credit, we find that contracts are spatially fragmented and better developed where population density is high and credit and insurance markets are poorly developed. We also find that contracts help cash poor and credit constrained households to improve their herd dynamics, to get access to nonlivestock resources (land, labor and cash) and share risks that could have been difficult without the contract. We show that contracts are rational responses of residents in rural communities characterized by imperfect credit and insurance services, since households with better access to credit are less likely to rely on contracts.