THE REVENUE‐SHARING RULE FOR INTERCONNECTION CHARGES*

In this paper we explore the economic principle behind the revenue‐sharing rule for interconnection charges. Our main finding is that symmetric firms can collude by splitting the revenues equally. We further characterize the optimal revenue‐sharing ratio and discuss the relationship between optimal ratio and the optimal access price. We also show that the revenue‐sharing rule can have the perverse effect of inducing a firm to raise its own costs in order to gain a higher share of revenues.     

The Default Premium and Corporate Bond Experience

The development of organized markets for speculative-grade corporate debt has provided financial researchers with an opportunity to examine the pricing of default risk. By incorporating previous work on the default experience of low-rated corporate debt, this paper presents an introduction to risk-neutral models of risky-bond pricing and uses these to examine the relationship between the default premium embodied in bond yields and actual default rates. The contribution of macroeconomic information to the default premium is also examined. The author finds that holders of low-grade bonds have, on average, been compensated for losses due to default.     

Indirect Incentives of Hedge Fund Managers

Indirect incentives exist in the money management industry when good current performance increases future inflows of capital, leading to higher future fees. For the average hedge fund, indirect incentives are at least 1.4 times as large as direct incentives from incentive fees and managers’ personal stakes in the fund. Combining direct and indirect incentives, manager wealth increases by at least $0.39 for a $1 increase in investor wealth. Younger and more scalable hedge funds have stronger flow‐performance relations, leading to stronger indirect incentives. These results have a number of implications for our understanding of incentives in the asset management industry.     

HUMAN CAPITAL INEQUALITY AND THE KUZNETS CURVE

This paper develops a Mincerian measure of human capital distribution and applies it to evaluate national and global human capital inequality and compare them with education inequality measures. It is shown that using education inequality as a proxy of human capital inequality is problematic due to the nonmonotonic relationship between them. We find that the inconsistent evidence on education and human capital Kuznets curves in the literature is due to the use of different inequality measures. In particular, human capital Kuznets curves are evident when relative inequality measures are used, whereas education Kuznets curves are found when absolute inequality measures are used. It is also observed that while global education inequality has been declining over the past four decades, global human capital inequality remains largely steady, as the decrease in between‐country human capital inequality is largely balanced by the increase in within‐country human capital inequality.     

Price Discovery Processes

This paper analyzes two price discovery processes: OLS learning from public information and a Bayesian learning made feasible by futures markets. The former tends to produce cobweb behaviour. In the latter, there is no cobweb, there is a faster convergence to Muth Rational Expectations, and the forecast errors are positively serially correlated The evidence drawn from the Sydney Futures Exchange is consistent with the Bayesian learning process.     

Do Private Firms Invest Differently than Public Firms? Taking Cues from the Natural Gas Industry

We study how listing status affects investment behavior. Theory offers competing hypotheses on how listing‐related frictions affect investment decisions. We use detailed data on 74,670 individual projects in the U.S. natural gas industry to show that private firms respond less than public firms to changes in investment opportunities. Private firms adjust drilling activity for low capital‐intensity investments. However, they do not increase drilling in response to new capital‐intensive growth opportunities. Instead, they sell these projects to public firms. Our evidence suggests that differences in access to external capital are important in explaining the investment behavior of public and private firms.