A Pluralist Alternative: Mexican Women,Migration, and Regional Development

This works explores the current phenomenon of Mexican migration and its relation to the female head of household phenomenon of rural migrant communities from a pluralistic approach to economic development. This study emphasizes the role that women can play in the development of Mexican rural communities, a region where the impact of free market policies has exacerbated the historical conditions of poverty and marginalization, and consequently, the increase of migration to the United States. The impact of women, if given the opportunities, is crucial to enhance development in the region. Women must be empowered through the provision of employment and included in the economic policy agenda.     

Book Reviews

Official Reserves and Currency Management in Asia: Myth, Reality and the Future: Geneva Reports on the World Economy 7 by HANS GENBERG, ROBERT McCAULEY, YUNG CHUL PARK and AVINASH PERSAUD (London: Centre for Economic Policy Research, 2005), pp. 128, £25.00 paperback, ISBN 1 898128 90 1. Growth, Inequality and Poverty: Prospects for Pro‐Poor Economic Development by ANTHONY SHORROCKS and ROLPH VAN DER HOEVEN (eds.) (Oxford: Oxford University Press, 2005), pp. 283, paperback, ISBN 0 19 928824 2. Competition and Growth: Reconciling Theory and Evidence by PHILIPPE AGHION and RACHEL GRIFFITH (Cambridge, MA: MIT Press, 2005), pp. 104, £18.50 hardback, ISBN 0 262 01218 9. The World Trade Organization. A Very Short Introduction by AMRITA NARLIKAR (Oxford: Oxford University Press, 2005), pp. 175, £6.99, paperback, ISBN 0 19 280608 4.     

Portfolio Manager Compensation in the U.S. Mutual Fund Industry

We study compensation contracts of individual portfolio managers using hand‐collected data of over 4,500 U.S. mutual funds. Variations in the compensation structures are broadly consistent with an optimal contracting equilibrium. The likelihood of explicit performance‐based incentives is positively correlated with the intensity of agency conflicts, as proxied by the advisor's clientele dispersion, its affiliations in the financial industry, and its ownership structure. Investor sophistication and the threat of dismissal in outsourced funds serve as substitutes for explicit performance‐based incentives. Finally, we find little evidence of differences in future performance associated with any particular compensation arrangement.     

The Relation between Price and Performance in the Mutual Fund Industry

Gruber (1996) drew attention to the puzzle that investors buy actively managed equity mutual funds, even though on average such funds underperform index funds. We uncover another puzzling fact about the market for equity mutual funds: Funds with worse before-fee performance charge higher fees. This negative relation between fees and performance is robust and can be explained as the outcome of strategic fee-setting by mutual funds in the presence of investors with different degrees of sensitivity to performance. We also find some evidence that better fund governance may bring fees more in line with performance.     

Aggregate Earnings and Asset Prices

A principal-components analysis demonstrates that common earnings factors explain a substantial portion of firm-level earnings variation, implying earnings shocks have substantial systematic components and are not almost fully diversifiable as prior literature has concluded. Furthermore, the principal components of earnings and returns are highly correlated, implying aggregate earnings risks and return risks are related. In contrast to previous studies, the correlation we report between the systematic components of earnings and returns is stable over time. We also show that the earnings factors are priced, in the sense that the sensitivities of securities' returns to the earnings factors explain a significant portion of the cross-sectional variation in returns, even controlling for return risk. This suggests earnings performance is an underlying source of priced risk. Our evidence that the information sets of returns and earnings are jointly determined implies cash flow risk and return risk are not fully separable, and raises the possibility that it is the common variation of earnings and returns that is priced.     

Diagnostic Expectations and Credit Cycles

We present a model of credit cycles arising from diagnostic expectations—a belief formation mechanism based on Kahneman and Tversky's representativeness heuristic. Diagnostic expectations overweight future outcomes that become more likely in light of incoming data. The expectations formation rule is forward looking and depends on the underlying stochastic process, and thus is immune to the Lucas critique. Diagnostic expectations reconcile extrapolation and neglect of risk in a unified framework. In our model, credit spreads are excessively volatile, overreact to news, and are subject to predictable reversals. These dynamics can account for several features of credit cycles and macroeconomic volatility.     

Effort and Performance in Public Policy Contests

Government intervention often gives rise to contests in which the possible “prizes” are determined by the status quo and some new public policy proposal. In this paper we study a general class of such two‐player public policy contests and examine the effect of a change in the proposed policy, a change that may affect the payoffs of the two contestants, on their effort and performance. Our results extend the existing comparative statics studies that focus, in symmetric contests, on the effect of a change in the value of the prize or, in asymmetric contests, on the effect of one contestant's valuation of the prize. Our results hinge on a fundamental equation that specifies the equilibrium relationship between the strategic own‐stake effect and the strategic rival's‐stake effect. This fundamental equation clarifies the role of the three possible types of ability and stake asymmetry in determining the effect of payoff variations on the efforts and performance of the contestants.     

Dynamic Portfolio Selection by Augmenting the Asset Space

We present a novel approach to dynamic portfolio selection that is as easy to implement as the static Markowitz paradigm. We expand the set of assets to include mechanically managed portfolios and optimize statically in this extended asset space. We consider “conditional” portfolios, which invest in each asset an amount proportional to conditioning variables, and “timing” portfolios, which invest in each asset for a single period and in the risk‐free asset for all other periods. The static choice of these managed portfolios represents a dynamic strategy that closely approximates the optimal dynamic strategy for horizons up to 5 years.     

Why does the velocity of money move pro‐cyclically?

The velocity of money usually rises in expansions and falls in recessions This paper explains this pro‐cyclical movement of velocity using two ideas: (i) during business cycles the movement of investment and consumption of durable goods has a larger amplitude than consumption of non‐durable goods and services; (ii) the velocity associated with expenditure on investment and durable goods is much higher than the velocity associated with consumption of non‐durable goods and services, because the former expenditures are synchronized with the attainment of money by economic agents whereas the latter are not. In this setting, the rise in the weight of expenditure in durable goods relative to the weight of non‐durable goods and services, which occurs during expansions, generates an increase in the average velocity of circulation. The opposite happens during recessions and thus velocity moves pro‐cyclically.