CREATING VALUE IN THE OIL INDUSTRY

In contrast with current thinking that conglomerates are inefficient, this article begins by presenting arguments in favor of the size and structure of the large integrated oil companies, also known as "the supermajors." Among the advantages are tax efficiency, information flow, political and technological know-how, broad supplier and customer relationships, scale economies, cross-business economies of scope, brand power, and the ability to coordinate strategic initiatives across businesses. These advantages all translate into a lower cost of capital.
One problem, however, is that this lower cost of capital does not seem to be reflected in the target returns on capital currently set by the supermajors. Observing that the financial goal of a corporation is to maximize not its return on capital but rather the net present value of expected future cash flows and earnings, the authors argue that the majors need to make two major changes to current practice. First, their investment hurdle rates should be reduced from their current level of 14–15% to the weighted average cost of capital, which is estimated to run about 8–9%. Second, the actual returns on capital reported in published accounts are largely meaningless; and when evaluating new investments and existing operations alike, the companies must find an annual performance measure that better reflects the economic realities of the business. This paper recommends use of a performance measurement framework based on economic profit that should serve two critical purposes: it will encourage managers to undertake all value-increasing projects (not just those that will maintain or increase reported return on capital), and it will help the companies communicate their strategy and results to the investment community.     

Corporate financial structure and the funding of private pension plans

One strand of the literature on the employment contract focuses on the role of the contract in the efficient sharing of risk between capitalists and workers. One way capitalists can shift risk to workers is to provide part of workers' remuneration in the form of an unfunded, deferred pension. Since bonds, in the event of bankruptcy or voluntary termination, are typically senior to unfunded pension liabilities, capitalists can also affect their risk by altering the firm's debt-to-equity ratio. These observations suggest that corporate financial structure and the employment contract are interdependent. The paper has two major goals. The first is to take a step towards integrating the theory of corporate financial structure with that of the employment contract. The second is to investigate possible consequences of legislation which regulates the funding of private pensions.     

Housing vacancies,thin markets,and idiosyncratic tastes

This paper presents a model with rental housing vacancies in equilibrium. Because of the indivisibility and multi-dimensional heterogeneity of housing units, the housing market is thin. As a result, a typical household entering the market is willing to pay a premium for its most-preferred over its second most-preferred available (vacant) unit. This confers monopoly power on landlords, which they exploit by setting rents above costs. Free entry and exit force profits to zero, with vacancies as the equilibrating mechanism. A nice feature of the model is that housing vacancies are socially useful in expanding the choice set of entering households, though there is no presumption that the market vacancy rate is socially optimal. Thin markets are modeled by assuming an idiosyncratic component to households' tastes over housing units.The positive and normative properties of the basic model, which assumes costless search, are investigated. Then the model is extended to treat costly search. Finally, directions in which the model could usefully be extended are discussed.     

A simple urban growth model with durable housing

In the last decade the static theory of residential urban location and land use has been extensively developed. The theory has generated many useful insights, but because it ignores growth and the durability of housing and urban infrastructure there are many urban phenomena it cannot explain. In this paper a simple urban growth model with durable housing, in which all builders have perfect foresight, is presented. The discussion focuses on the qualitative differences between the economics of this model, the static class of models, and a class of dynamic models in which myopic expectations are assumed.     

Financing Capacity in the Bottleneck Model

It is well known that, for a congestible facility with constant long-run average cost, the revenue from the unconstrained optimal congestion charge (set so that each individual faces the marginal (social) cost of a use) exactly covers the cost of optimal capacity. In the context of Vickrey′s bottleneck model of morning rush-hour auto congestion, this paper investigates under what circumstances the first-best pricing and investment rules apply when both the time variation of the congestion charge is constrained and users differ in unobservable characteristics so that the same congestion charge must be applied to heterogeneous users.     

Optimal fiscal policy for a state or local government

State and local government services are enjoyed by, and taxes borne by, two groups, residents and non-residents. This paper addresses the question: if state and local governments maximize their residents' welfare, and cannot distinguish between individual residents and non-residents but know the aggregate characteristics of the two groups, what set of taxes (subsidies) and public goods should they choose? Some of the results obtained are: (i) even when all commodities are taxable and equity is ignored, the existence of non-resident consumption makes uniform taxation non-optimal; (ii) in some cases, whether a commodity should be taxed or subsidized is independent of its own-price elasticity; (iii) central cities may be subsidized by suburban residents; and (iv) the ability of state and local governments to redistribute is inversely proportional to the openness of the economy.