Market Power,Efficiency and the Dispersion of Systematic Risk

A number of studies have used the Capital Asset Pricing Model (CAPM) to integrate product market and financial theories of the firm. We reexamine the relationship between product market structure and systematic risk at the firm and industry level. We show that theory yields no testable implications at the firm level. We show, however, that there is a relationship between the intraindustry dispersion of systematic risk and industry concentration which depends on the causes and consequences of concentration. Estimates of the relationship between the intraindustry variance of and concentration for a 1987 cross-section of U.S. industries suggest that concentration allows larger firms to exercise market power.     

The IPO market as a screening device and the going public decision: evidence from acquisitions of privately and publicly held firms

The main purpose of this paper is using a unique data set from IPO filings to study the IPO market as a screening device and the going public decision. We find that private firms that are less likely to have the option to access public equity markets receive 54 cents for each dollar they expected to raise in an IPO, whereas firms that are more likely to have the option to go public but sell privately sell at $1.11 for each dollar they expected to receive at the IPO. This result suggests that the lower valuation for firms sold in private markets compared to firms sold in public markets can be at least partially explained by the lower relative bargaining power of private firms. However, owners that took their firms public before selling received, on average, 40% larger payoffs than owners that had the option to go public but decided to sell privately. The results in this study indicate that these differences in valuation are not fully explained by existing theoretical models on the decision to sell privately or in two stages.     

Changing American earnings distributions: One-half century of experience

Empirical Economics - Recent increases in earnings inequality have been described as “enormous.” Is it that we are experiencing a unique shift toward greater inequality or are we...     

The Reasonable Person Negligence Standard and Liability Insurance

We show that, under the reasonable person negligence rule, heterogeneity of potential injurers can be sufficient to create a demand for liability insurance. Potential injurers with a low probability of accidents or a high cost of exercising care have optimal levels of care that are below the negligence standard. For these groups, it may be less costly to be negligent and purchase insurance than to comply with the negligence standard. We show that the availability of insurance is socially desirable.     

Consumer risk perceptions and information in insurance markets with adverse selection

Standard models of adverse selection in insurance markets assume policyholders know their loss distributions. This study examines the nature of equilibrium and the equilibrium value of information in competitive insurance markets where consumers lack complete information regarding their loss probabilities. We show that additional private information is privately and socially valuable. When the equilibrium policies separate types, policyholders can deduce the underlying probabilities from the contracts, so it is information on risk type, rather than loss probability per se, that is valuable. We show that the equilibrium is “as if” policyholders were endowed with complete knowledge if, and only if, information is noiseless and costless. If information is noisy, the equilibrium depends on policyholders' prior beliefs and the amount of noise in the information they acquire.     

The Effect of Time-on-Market and Location on Search Costs and Anchoring: The Case of Single-Family Properties

Regarding single-family residential properties purchased for investment (non-owner occupied) we examine whether out-of-state buyers pay more than in-state buyers. We focus on the effects of search costs and anchoring. We use data on 2,828 Las Vegas non-owner occupied (investor) residences, 40% of which are purchased by non-local investors. We find that the location of the property affects the empirical results. Specifically, search cost and anchoring effects that appear significant when the location of the property is ignored disappear when location is introduced as an independent variable.

Detours and frolics on the Internet: Employer liability and management control of cybertorts

Most employers are aware of their legal right to monitor employees' computer activities, and they are increasingly doing so. Yet, few of those who do monitor are aware that exercising this right may impose a legal duty to monitor prudently in order to protect third parties and to report criminal activity to the appropriate authorities. This paper briefly examines employers' legal right to monitor their employees' computer activities. Our subsequent analysis of the ruling in Doe v. XYC Corp. [Doe v XYC Corp., 382 N.J. Super. 122, 887 A.2d 1156 (2005)]. illustrates that those businesses that do assert their rights to monitor may assume a duty to report child pornography to the authorities, as well as a duty of reasonable care when reacting to their employees engaging in so-called cybertorts. We discuss how this ruling may extend the doctrines of ‘detours’ and ‘frolics’ into cyberspace. We also discuss the potential for employers' liability for other cybercrimes and cybertorts committed by their employees. We conclude by examining the contours of computer monitoring policies that effectively serve employers' risk management objectives without unduly invading employees' privacy, and the likely consequences of failing to achieve such a balance.     

The Property/Liability Insurance Cycle: A Comparison of Alternative Models

The objective of this paper is to compare alternative models of insurance pricing as theories of the property-liability underwriting cycle. The existing literature has focused on comparing two models, the financial pricing and capacity constraint models. However, these are not the only relevant models. We show that six alternative models imply the same general form of the pricing equation. We apply the model to data on stock property-liability insurers for the period 1935-1997. We find that the actuarial model and the capacity constraint hypothesis are the only theoretical models that are consistent with the data.     

Adverse Selection With Frequency and Severity Risk: Alternative Risk‐Sharing Provisions

The analysis considers an insurance market with adverse selection where individuals' loss distributions may differ with respect to both the frequency and severity of loss. We show that the combination of deductibles and coinsurance can be used to sort rationed policyholders. Because of their screening properties, coinsurance and deductibles may both be equilibrium forms of risk sharing for a particular insurer facing asymmetric information, with different rationed consumers choosing different risk‐sharing provisions.