Recent Developments in the Theory of the Firm

Abstract
This article reviews recent literature on the theory of the firm. The issues addressed include the role and determinants of the size of firms, the financial structure and organisation of labour in firms, and the policy implications of this research .     

hayek's economics

The dispersal of information in the economy is the key to Hayek's analysis of economic planning, the trade cycle and entrepreneurship. Gerald Steele, a lecturer at Lancaster University, explores Hayek's analysis. The function of the market is to coordinate this dispersed information.     

The Relation between Market Values,Earnings Forecasts,and Reported Earnings*

Recently, much of the research into the relation between market values and accounting numbers has used, or at least made reference to, the residual income model (RIM). Two basic types of empirical research have developed. The “historical” type explores the relation between market values and reported accounting numbers, often using the linear dynamics in Ohlson 1995 and Feltham and Ohlson 1995 and 1996. The “forecast” type explores the relation between market value and the present value of the book value of equity, a truncated sequence of residual income forecasts, and an estimate of the terminal value at the truncation date. The analysis in this paper integrates these two approaches. We expand the Feltham and Ohlson 1996 model by including one‐ and two‐period‐ahead residual income forecasts to infer “other” information regarding future revenues from past investments and future growth opportunities. This approach results in a model in which the difference between market value and book value of equity is a function of current residual income, one‐ and two‐period‐ahead residual income, current capital investment, and start‐of‐period operating assets. The existence of both persistence in revenues from current and prior investments and growth in future positive net present value investment opportunities leads us to hypothesize a negative coefficient on the one‐period‐ahead residual income forecast and a positive coefficient on the two‐period‐ahead residual income forecast. Our empirical results strongly support our hypotheses with respect to the forecast coefficients.     

Protection for sale with imperfect rent capturing

Abstract .  Grossman and Helpman (1994) explain tariffs as the outcome of a lobbying process. In most empirical implementations of this framework protection is instead measured using non-tariff barriers. Since tariffs allow the government to fully capture the rents from protection, while non-tariff barriers do not, the existing parameter estimates of the protection for sale model are likely to be biased. To address this problem, we augment the framework by considering instruments that allow partial capturing. Our specification is supported by the data, where we find that only 72–75% of the rent from protection is appropriated by the government.     

Triangulation: Validity and empirically-based hypothesis construction

The essay focuses on the opportunities and strengths of a multi-method approach, widely called methodological triangulation, in which different investigative methods are applied to one research object. In practice, this can be realized with the coupling of quantitative structural data concerning the life course and the interpretation and evaluation of life course data collected with qualitative methods. This approach is examined in order to shed light on the problem that research findings often show different phenomena and not the different aspects of one phenomenon. The discussion of the relationships of the findings to one another (congruent, complementary or divergent) shows that in this context a multi-method approach can nevertheless be used to increase validity and to test hypotheses. Further, its particular strengths are the empirically induced modification of existing models and theories, as well as the development of new explanations.     

Political feasibility of structural adjustment in africa: an application of SAM mixed multipliers

The implementation of structural adjustment programs (SAPs) has often been undermined by opposition from politically powerful groups who are favored by existing policies. To assess the political sustainability of SAPs this paper uses social accounting matrices for three African countries to model the income effects of stylized SAPs on different socioeconomic groups. The analysis reveals wide variation in the likelihood for typical SAPs to be acceptable to political elites while generating growth in the rest of the economy. The presence of a rural elite or strong farm-nonfarm linkages can enhance the political sustainability of SAPs.     

Optimal new-product pricing in regulated industries

Intertemporal pricing issues faced by regulated monopolists in market settings characterized by high rates of innovation have received little attention in the regulatory economics literature. Most analyses of regulatory pricing have focused on monopolies characterized by a stable multiple-good product set. In a regulated industry characterized by technological change in the form of new products and services (such as telecommunications), optimal pricing decisions may also reflect intertemporal market and production factors. In this paper, two such intertemporal factors are modeled: learning curve effects on the firm's cost function, and customer demonstration effects on the demand side of the market. Inclusion of these factors leads to an intertemporal pricing rule that may conflict with the standard regulatory practice whereby each product or service must recoup its own resource costs period by period. Our results suggest that this regulatory practice can result in efficiency losses, since it results in a rate of technological diffusion that is too low.     

Gestaltung der Abschlussprüferhaftung – Implikationen theoretischer Modelle

Business scandals such as Enron, WorldCom or Parmalat have sparked intense discussions on the quality of corporate governance as well as the trustworthiness of statutory auditors. It is therefore no surprise that regulators have issued a large number of new regulations concerning auditing. The civil liability of external auditors has not changed in Germany, but such changes have already been announced by the German government. An increase in the existing liability cap in cases of negligent misconduct and extended third-party liability are planned. As a consequence, the results of analytical research on this topic are highly relevant. This paper summarises and comments on prior analytical research, in particular its assumptions and results, and focuses on important elements for the design of a liability regime. To this end, the paper addresses the questions of joint–and-several vs. proportionate liability rules, negligent vs. strict liability regimes, the extent of third party liability, and limited vs. unlimited liability.