Knowledge flows and the geography of networks: A strategic model of small world formation

This paper aims to demonstrate that the strategic approach to link formation can generate networks that share some of the main structural properties of most real social networks. For this purpose, we introduce a spatialized variation of the Connections model [Jackson, M.O., Wolinsky, A., 1996. A strategic model of social and economic networks. Journal of Economic Theory 71, 44–74] to describe the strategic formation of links by agents who balance the benefits of forming links resulting from imperfect knowledge flows against their costs, which increase with geographic distance. We show, for intermediate levels of knowledge transferability, clustering occurs in geographical space and a few agents sustain distant connections. Such networks exhibit the small world property (high clustering and short average relational distances). When the costs of link formation are normally distributed across agents, asymmetric degree distributions are also obtained.     

On the incidence of commissions in auction markets

We analyze the welfare consequences of an increase in the commissions charged by intermediaries in auction markets. Commissions are similar to taxes imposed on buyers and sellers, and standard economics suggests that both sellers and buyers are made worse off by the tax. However, we show that when the buyers' participation constraint binds and when sellers set optimal reservation prices, the level of commissions correlates to participation and reservation prices in such a way that participating buyers strictly gain from higher commissions.     

Parallel Neutrality

This paper develops the notion of parallel-neutral technical change for inputs and outputs. It is shown that parallel-neutral technical change generalizes existing radial notions of neutral technical change. A taxonomy of the structural consequences of parallel-neutral technical change is developed.     

Attitudes Toward Catastrophe

In light of climate change and other global threats, policy commentators sometimes urge that society should be more concerned about catastrophes. This paper reflects on what society’s attitude toward low-probability, high-impact events is, or should be. We first argue that catastrophe risk can be conceived of as a spread in the distribution of losses. Based on this conception, we review studies from decision sciences, psychology, and behavioral economics that explore people’s attitudes toward various social risks. Contray to popular belief, we find more evidence against than in favor of catastrophe aversion—the preference for a mean-preserving contraction of the loss distribution—and discuss a number of possible behavioral explanations. Next, we turn to social choice theory and examine how various social welfare functions handle catastrophe risk. We explain why catastrophe aversion may be in conflict with equity concerns and other-regarding preferences. Finally, we discuss current approaches to evaluate and regulate catastrophe risk.     

Price Stability and the Case for Flexible Exchange Rates

We revisit Friedman’s case for flexible exchange rates in a small open economy with several distortions and rigidities and a variety of domestic and external shocks. We find that, for external shocks, the flexible exchange rate regime outperforms the fixed regime independent of the source of domestic nominal rigidities provided that the monetary authorities pursue a policy of strict inflation targeting. For domestic supply shocks, a joint policy of a flexible exchange rate and strict inflation targeting fares well when the main source of nominal rigidities is in the domestic goods markets, but not if rigidities arise in the labor markets.     

The Developmental Impact of Asian Drivers on Kenya with Emphasis on Textiles and Clothing Manufacturing

(1251) Paul Kamau with Dorothy McCormick and Nicolas Pinaud Kenya has enjoyed a relatively diversified economy (at least by SSA standards), with light manufacturing industries in particular playing a significant growing role. The rise of Asian competition (locally, regionally and on third‐country markets), partly due to the erosion of trade preferences for clothing and footwear, has raised fresh policy challenges. The specific relevance of the clothing industry in the analysis of China’s and India’s impact on Africa is manifold: this is a low‐skilled labour‐intensive industry, and hence an avenue for African economies’ diversification; the competition from Asian producers vis‐à‐vis the SSA clothing industry is felt at the local, regional and global level (on third‐country markets): it is therefore direct and indirect; also, the Asian Drivers’ impact on African clothing industries has both a trade and investment dimension while being competitive and complementary.     

Corporate diversification and firm value: a survey of recent literature

We survey the recent literature on corporate diversification. How does corporate diversification influence firm value? Does it create or destroy value? Until the beginning of this century, the predominant thinking among researchers and practitioners was that corporate diversification leads to an average discount on firm value; however, several studies cast doubt on the diversification discount. In the last decade, there has been no clear consensus as to whether there is a discount or even a premium on firm value. Recent literature concludes that the effect on value differs from firm to firm and that corporate diversification alone does not drive the discount or premium; rather, the effect is heterogeneous across certain industry settings, economic conditions, and governance structures.     

Are financial constraints of corporate activist investors perceived negatively?

This paper shows that financial constraints of corporate activist investors are negatively perceived by the market. By conducting an event study on a sample of 561 Schedule 13(D) filings disclosed by US corporations in the years 1996–2016, abnormal share price reactions in the [?10, \(+\)3] event window are about 10.8% lower for targets of financially constrained corporate investors. The average abnormal return for all targets is equal to 13.4%. This positive market response suggests that activism results in actual value improvement for the target. Yet, our analyses show that value improvements crucially depend on the investor’s access to external financing.