Three essays in international finance

Executive Summary The first essay of this dissertation investigates whether greater exchange rate uncertainty (i.e., variation over time in the exchange rate) fosters or depresses the foreign investment of multinational firms. In addition to the direct capital financing it supplies, foreign investment can be a source of valuable technology and know-how, which can have substantial positive effects on a host country's economic growth. Thus, it is critically important for policy makers and central bankers, among others, to understand how multinationals base their investment decisions on the characteristics of foreign exchange markets. In this essay, I first develop a theoretical framework to improve our knowledge regarding how the aggregate level of foreign investment responds to exchange rate uncertainty when an economy consists of many firms, each of which is making decisions. The analysis predicts a U-shaped effect of exchange rate uncertainty on the total level of foreign investment of the economy. That is, the effect is negative for low levels of uncertainty and positive for higher levels of uncertainty. This pattern emerges because the relationship between exchange rate volatility and 'the probability of investment is negative for firms with low productivity at home (i.e., firms that find it profitable to invest abroad) and the relationship is positive for firms with high productivity at home (i.e., firms that prefer exporting their product). This finding stands in sharp contrast to predictions in the existing literature that consider a single firm's decision to invest in a unique project. The main contribution of this research is to show that the aggregation over many firms produces a U-shaped pattern between exchange rate uncertainty and the probability of investment. Using data from industrialized countries for the period of 1982-2002, this essay offers a comprehensive empirical analysis that provides evidence in support of the theoretical prediction. In the second essay, I aim to explain the time variation in sovereign credit risk, which captures the risk that a government may be unable to repay its debt. The importance of correctly evaluating such a risk is illustrated by the central role of sovereign debt in previous international lending crises. In addition, sovereign debt is the largest asset class in emerging markets. In this essay, I provide a pricing formula for the evaluation of sovereign credit risk in which the decision to default on sovereign debt is made by the government. The pricing formula explains the variation across time in daily credit spreads - a widely used measure of credit risk - to a degree not offered by existing theoretical and empirical models. I use information on a country's stock market to compute the prevailing sovereign credit spread in that country. The pricing formula explains a substantial fraction of the time variation in daily credit spread changes for Brazil, Mexico, Peru, and Russia for the 1998-2008 period, particularly during the recent subprime crisis. I also show that when a government incentive to default is allowed to depend on current economic conditions, one can best explain the level of credit spreads, especially during the recent period of financial distress. In the third essay, I show that the risk of sovereign default abroad can produce adverse consequences for the U.S. equity market through a decrease in returns and an increase in volatility. The risk of sovereign default, which is no longer limited to emerging economies, has recently become a major concern for financial markets. While sovereign debt plays an increasing role in today's financial environment, the effects of sovereign credit risk on the U.S. financial markets have been largely ignored in the literature. In this essay, I develop a theoretical framework that explores how the risk of sovereign default abroad helps explain the level and the volatility of U.S. equity returns. The intuition for this effect is that negative economic shocks deteriorate the fiscal situation of foreign governments, thereby increasing the risk of a sovereign default that would trigger a local contraction in economic growth. The increased risk of an economic slowdown abroad amplifies the direct effect of these shocks on the level and the volatility of equity returns in the U.S. through two channels. The first channel involves a decrease in the future earnings of U.S. exporters resulting from unfavorable adjustments to the exchange rate. The second channel involves investors' incentives to rebalance their portfolios toward safer assets, which depresses U.S. equity prices. An empirical estimation of the model with monthly data for the 1994-2008 period provides evidence that the risk of sovereign default abroad generates a strong leverage effect during economic downturns, which helps to substantially explain the level and the volatility of U.S. equity returns.

Topics in public finance: social security and taxation

Summary The field of public finance focuses on the spending and taxing activities of governments and their influence on the allocation of resources and distribution of income. This work covers in three parts different topics related to public finance which are currently widely discussed in media and politics. The first two parts deal with issues on social security, which is in general one of the biggest spending shares of governments. The third part looks at the main income source of governments by analyzing the perceived value of tax competition. Part one deals with the current problem of increased early retirement by focusing on Switzerland as a special case. Early retirement is predominantly considered to be the result of incentives set by social security and the tax system. But the Swiss example demonstrates that the incidence of early retirement has dramatically increased even in the absence of institutional changes. We argue that the wealth effect also plays an important role in the retirement decision for middle and high income earners. An actuarially fair, but mandatory funded system with a relatively high replacement rate may thus contribute to a low labor market participation rate of elderly workers. We provide evidence using a unique dataset on individual retirement decisions in Swiss pension funds, allowing us to perfectly control for pension scheme details. Our findings suggest that affordability is a key determinant in the retirement decisions. The higher the accumulated pension capital, the earlier men, and to a smaller extent women, tend to leave the workforce. The fact that early retirement has become much more prevalent in the last 15 years is a further indicator of the importance of a wealth effect, as the maturing of the Swiss mandatory funded pension system over that period has led to an increase in the effective replacement rates for middle and high income earners. Part two covers the theoretical side of social security. Theories analyzing optimal social security benefits provide important qualitative results, by mainly using one general type of an economy. Economies are however very diverse concerning numerous aspects, one of the most important being the wealth level. This can lead to significant quantitative benefit differences that imply differences in replacement rates and levels of labor supply. We focus on several aspects related to this fact. In a within cohort social security model, we introduce disability insurance with an imperfect screening mechanism. We then vary the wealth level of the model economy and analyze how the optimal social security benefit structure or equivalently, the optimal replacement rates, changes depending on the wealth level of the economy, and if the introduction of disability insurance into a social security system is preferable for all economies. Second, the screening mechanism of disability insurance and the threshold level at which people are defined as disabled can differ. For economies with different wealth levels, we determine for different thresholds the screening level that maximizes social welfare. Finally, part three turns to the income of governments, by adding an element to the controversy on tax competition versus tax harmonization.2 Inter-jurisdictional tax competition can generate at least two potential benefits or costs: On a public level, tax competition may result in a lower or higher efficiency in the production of public services. But there is also a more private benefit in the form of an option for individuals to move to a community with a lower tax rate in the future. To explore the value citizens attach to tax competition we analyze a unique popular vote for a complete tax harmonization between communities in the third largest Swiss canton, Vaud. Although a majority of voters would have seemingly benefited from replacing the current tax rate by a revenue-neutral average tax rate, the proposal was rejected by a large margin. Our estimates suggest that the estimated combined perceived benefit from tax competition is in the range of 10%.

Institutional regimes for sustainable collective housing stocks

The influence of public policy, property rights and contracts on the sustainability of residential buildings remains largely unknown. This research will use the analytical framework of the housing institutional regime to study the sustainability over time of the housing stock. We aim to produce an inventory of the housing institutional regime in Switzerland, a comparison with the German and Catalan regimes, and policy suggestions to achieve a better sustainability of the housing stock.

Essays in banking and corporate finance

Abstract This paper presents a model of executive compensation in which the executive is risk-averse and has specific knowledge -knowledge about the optimal actions to take that is costly to transfer to the principal. The model generates predictions that are consistent with the available evidence and provides a rationale for a number of unresolved puzzles in executive compensation. Notably, we find that relative performance evaluation is optimal only if the quality of specific knowledge is low. We also show (1) why some common risk components are not filtered out of executives' pay, (2) why performance is more likely to be evaluated relative to aggregate market movements than relative to industry movements, and (3) why executives with higher perceived abilities are given stronger incentives. Finally, we demonstrate that the relation between risk and incentives may be positive or negative, depending on the quality of the executive's specific knowledge.

Three essays in dynamic corporate finance

Summary Throughout my thesis, I elaborate on how real and financing frictions affect corporate decision making under uncertainty, and I explore how firms time their investment and financing decisions given such frictions. While the macroeconomics literature has focused on the impact of real frictions on investment decisions assuming all equity financed firms, the financial economics literature has mainly focused on the study of financing frictions. My thesis therefore assesses the join interaction of real and financing frictions in firms' dynamic investment and financing decisions. My work provides a rationale for the documented poor empirical performance of neoclassical investment models based on the joint effect of real and financing frictions on investment. A major observation relies in how the infrequency of corporate decisions may affect standard empirical tests. My thesis suggests that the book to market sorts commonly used in the empirical asset pricing literature have economic content, as they control for the lumpiness in firms' optimal investment policies. My work also elaborates on the effects of asymmetric information and strategic interaction on firms' investment and financing decisions. I study how firms time their decision to raise public equity when outside investors lack information about their future investment prospects. I derive areal-options model that predicts either cold or hot markets for new stock issues conditional on adverse selection, and I provide a rational approach to study jointly the market timing of corporate decisions and announcement effects in stock returns. My doctoral dissertation therefore contributes to our understanding of how under real and financing frictions may bias standard empirical tests, elaborates on how adverse selection may induce hot and cold markets in new issues' markets, and suggests how the underlying economic behaviour of firms may induce alternative patterns in stock prices.

Of housing and politics : mapping political opportunities for mobilising in Bangalore, India

Quelles sont les conditions pour l'émergence d'une mobilisation sociale en faveur du logement convenable dans la métropole de Bangalore (Inde)? Cette question, qui est au coeur de cette thèse, est particulièrement pertinente dans le contexte d'une ville où 1,7 million de personnes, soit un cinquième de la population, vit dans des bidonvilles. L'absence d'un mouvement mettant en cause l'échec des politiques publiques du logement est intéressante dans la mesure où l'Inde a hérité un système de gouvernance colonial et d'une tradition de mouvements sociaux. Pour répondre à ce questionnement, un cadre théorique issu de la littérature sur les mouvements sociaux est développé. Il s'articule autour des liens entre les opportunités politiques au niveau macro et les répertoires d'action des organisations de mouvement social (OMS) au niveau méso, de la tension entre la formalité de la loi et des politiques publiques et l'informalité des circuits d'échange, de la corruption et du clientélisme, et enfin, se focalise sur les systèmes de discours de caste et de la citoyenneté et de leur concrétisation dans des systèmes d'organisations et de réseaux sociaux. Ce cadre théorique permet d'étudier empiriquement la question à travers quatre OMS dans la ville de Bangalore. Les résultats mettent en avant l'existence de mécanismes complexes. Les opportunités politiques formelles n'étant ouvertes que sur le plan rhétorique, elles ne peuvent être véritablement utilisées que par des moyens légaux ou contentieux, ce qui nécessite des compétences sociales dont la plupart des habitants des bidonvilles sont dépourvus. L'inadéquation entre les ressources à disposition pour les logements sociaux et les besoins très importants des pauvres, donne un poids politique considérable aux acteurs en charge de l'attribution de ces ressources rares. Cet état de fait a des répercussions sur la politique électorale. Les habitants des bidonvilles représentant un poids électoral important, ils sont mobilisés à travers de pratiques clientélistes. La corruption et le clientélisme se nourrissent mutuellement pour maintenir une certaine dépendance des habitants. Les OMS qui développent un répertoire discursif remettant en cause le système de caste et qui encouragent une conscience citoyenne, se sont avérées les plus durables pour résister à la cooptation des forces politiques. Cette recherche empirique met en lumière l'inadéquation entre les prescriptions formelles dans le domaine de la gouvernance des besoins humains, tels que le logement, et les pratiques réelles sur le terrain. Cette recherche appelle à réfléchir au-delà de la diffusion du discours sur la « bonne gouvernance » vers des formes de « gouvernance vernaculaire » qui prendrait au sérieux l'informalité en développant une compréhension des avantages à court terme pour les personnes marginalisées dans la ville et les effets à long terme sur la pratique démocratique. - What are the conditions for the emergence of a social movement on the issue of adequate housing in the metropolitan city of Bangalore (India)? This question is at the heart of this dissertation and is particularly pertinent against the background that an estimated 1.7 million or about 20% of the city's population lives in slums. The absence of a movement addressing the failure of public housing policy despite India having inherited colonial systems of governance and traditions of movement is noteworthy. Answers are sought within a theoretical framework stemming from social movement theories that incorporates three linkages articulating around: Macro-level political opportunities and meso-level action repertoires of social movement organisations (SMOs), tensions between the formality of law, policy and the informality of exchange circuits of corruption and clientelism and finally around systems of discourses of caste and citizenship and their instantiation in concrete systems of social organisations and networks. This thesis is empirically investigated through a qualitative case study research design involving four sampled social movement organisations. The results bring complex mechanisms to the fore. Formal political opportunities are only rhetorically open and have to be cracked through legal weaponry or contentious escalation, which requires considerable social skills that slum-dwellers often lack. The inadequacy between the few housing resources and the vast number of slum-dwellers transform housing benefits and urban service provisions into political currency. Such a state of affairs has serious repercussions on conditions for mobilisation. They become imbricated with electoral logic, in which slum-dwellers represent large vote-banks and where corruption and clientelism feed each other to maintain a certain dependency of the poor. SMOs deploying a discursive repertoire that questioned the caste system and encouraged a pursuit of citizenship proved to be the most sustainable to resist co-option from political forces. This empirical investigation brings to light the mismatch between the formal prescriptions in the domain of the governance of basic human needs such as housing and the real practices on the ground. This research calls to reflect beyond the inadequacy of the diffused « good governance » discourse towards forms of « vernacular governance » that take informality seriously in understanding the short-term benefits for the marginalised in the city and the long-term effects on democratic practice.

La Suisse et l'Afrique du Sud, 1945-1990 : commerce, finance et achats d'or durant l'apartheid

Ce travail se concentre sur le rôle des échanges commerciaux, des mouvements de capitaux et du négoce de l'or dans les relations entre la Suisse et l'Afrique du Sud de 1945 à 1990, sans faire l'impasse sur les dimensions politiques et sociales et sur le contexte international, dont l'influence sur les liens économiques bilatéraux est significative. Ce constat est d'autant plus pertinent en ce qui concerne les rapports avec un Etat engagé dans une politique basée sur la discrimination et l'oppression raciales, politique qui sera l'objet, dès la fin des années 1940 de critiques reposant sur les droits de l'homme et l'anticolonialisme. D'abord cantonnées au sein de l'Assemblée générale de l'ONU, ces attaques contre la politique de l'apartheid seront relayées, dès le début des années 1960, par des associations antiracistes dans le monde entier, et évolueront, tardivement, vers une politique étatique de sanctions économiques internationales, prises à grande échelle dès le milieu des années 1980. Dans ce contexte, il apparaît que les facteurs principalement d'ordre économique mais également fondés sur une proximité idéologique ayant conduit à l'établissement, dès la fin des années 1940, d'un «climat de confiance »réciproque entre les milieux industriels et bancaires helvétiques et l'establishment blanc sud-africain, aient été suffisamment solides pour perdurer jusqu'à la fin de l'apartheid. De plus, le développement des liens d'affaires entre les deux pays a été favorisé par la politique du gouvernement helvétique vis-à-vis du régime de Pretoria. En effet, si la Suisse officielle «condamne moralement» l'apartheid, elle se montrera inflexible dans son refus d'appliquer des mesures économiques contraignantes. Ce travail vise en premier lieu à améliorer la compréhension du rôle des grandes banques suisses dans la commercialisation de l'or sud-africain et, plus largement, dans l'évolution du marché international du métal jaune. L'intérêt scientifique de creuser ce domaine peut être résumé en trois points. Premièrement, ce champ a été peu approfondi dans l'historiographie sur les rapports économiques entre la Suisse et l'Afrique du Sud, bien que le négoce de l'or représente un élément crucial dans le renforcement des liens d'affaires entre les deux pays et qu'il ait été grandement facilité par la politique des autorités helvétiques en matière d'or. De plus, la volonté des grandes banques suisses d'obtenir un arrangement privilégié pour la commercialisation de l'or sud-africain constitue également un élément explicatif de l'intérêt accru de la place financière helvétique à investir en Afrique du Sud dès la fin du Second Conflit mondial. En fait, exportations de capitaux et négoce de l'or sont intrinsèquement liés. Si la place financière helvétique s'est profilée dès la fin de la Première Guerre mondiale comme un centre de premier ordre, il semble - et cela constitue le deuxième intérêt d'approfondir la thématique du négoce de l'or - que les établissements bancaires suisses estimaient que leur compétitivité en tant que place financière internationale serait consolidée grâce au contrôle de la commercialisation du métal jaune du premier producteur mondial. Et, selon l'hypothèse développée dans ce travail, le commerce de l'or a effectivement joué un rôle significatif dans le développement spectaculaire de la place financière suisse durant les soixante dernières années. Troisièmement, la bataille qui se joue autour du contrôle du commerce de l'or sud-africain dès les années 1950 donne un éclairage original à l'analyse historique de la rivalité entre les places financières londonienne et suisse, un aspect encore largement inexploré dans les relations économiques entre la Grande-Bretagne et la Suisse.

Comparison of two strategies to prevent varicella outbreaks in housing facilities for asylum seekers.

BACKGROUND: The proportion of adults with positive varicella serology is lower in populations from tropical countries. Therefore immigrants to countries with a temperate climate are at risk of acquiring varicella infection during adulthood. METHODS: We tested two different strategies to prevent varicella outbreaks in housing facilities for asylum seekers arriving in the Canton of Vaud, Switzerland. The first strategy consisted of a rapid response with isolation of the affected individuals and vaccination of the susceptible contacts. The second strategy consisted of a general vaccination upon arrival of all asylum seekers aged 15-39 years with no history of chickenpox. RESULTS: From May 2008 to January 2009 we applied the rapid response strategy. Eight hundred and fifty-eight asylum seekers arrived in the Canton and an attack rate of 2.8% (seven cases among 248 exposed asylum seekers) was observed. The mean cost was US$ 31.35 per asylum seeker. The general vaccination strategy was applied from February 2009 to May 2010, a period during which 966 asylum seekers were registered. This second strategy completely prevented any outbreak at a mean cost of US$ 83.85 per asylum seeker. CONCLUSIONS: Of the two analyzed interventions to prevent varicella outbreaks in housing facilities for asylum seekers, the general vaccination strategy was more effective, more sustainable, and ethically preferable, although more costly.