Incentives and standards in agency contracts

This paper studies the structure of state-contingent contracts in the presence of moral hazard and multitasking. Necessary and sufficient conditions for the presence of multitasking to lead to fixed payments instead of incentive schemes are identified. It is shown that the primary determinant of whether multitasking leads to higher or lower powered incentives is the role that noncontractible outputs play in helping the agent deal with the production risk associated with the observable and contractible outputs. When the noncontractible outputs are risk substitutes and are socially undesirable, standards are never optimal. If the noncontractible outputs are socially desirable, standards are never optimal if the noncontractible outputs play a risk-complementary role.

Do external funds yield lower returns? Recent evidence from East Asian economies

One of the central explanations of the recent Asian Crisis has been the problem of moral hazard as the source of over-investment and excessive external borrowing. There is however rather limited firm-level empirical evidence to characterise inefficient use of internal and external finances. Using a large firm-level panel data-set from four badly affected Asian countries, this paper compares the rates of return to various internal and external funds among firms with low and high debt financing (relative to equity) among financially constrained and other firms. Selectivity-corrected estimates obtained from random effects panel data model do suggest evidence of significantly lower rates of return to long-term debt, even among firms relying more on debt relative to equity in our sample. There is also evidence that average effective interest rates often significantly exceeded the average returns to long-term debt in the sample countries in the pre-crisis period. © 2006 Elsevier Inc. All rights reserved.

On the opportunism-independent theory of the firm

Previous developments in the opportunism-independent theory of the firm are either restricted to special cases or are derived from the capabilities or resource-based perspective. However, a more general opportunism-independent approach can be developed, based on the work of Demsetz and Coase, which is nevertheless contractual in nature. This depends on 'direction', that is, deriving economic value by permitting one set of actors to direct the activities of another, and of non-human factors of production. Direction helps to explain not only firm boundaries and organisation, but also the existence of firms, without appealing to opportunism or moral hazard. The paper also considers the extent to which it is meaningful to speak of 'contractual' theories in the absence of opportunism, and whether this analysis can be extended beyond the employment contract to encompass ownership of assets by the firm. © The Author 2005. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved.

Információs paradoxon a vállalkozások hitelezésében nem fizető vevő esetén (An innovation paradox in enterprise financing where buyers fail to pay)

Cikkünkben a vállalkozók külső finanszírozásának modelljét terjesztjük ki arra az - irodalom által eddig nem tárgyalt - esetre, amikor a vállalkozónak van nem fizető vevője. Szerződéselméleti megközelítésünkben a vállalkozó hitelképességére vonatkozó információ aszimmetrikus a tranzakcióban részt vevő felek között, s ez morális kockázatnak ad teret. Megfigyelhető, hogy ilyenkor a pontosan fizető vevők számára is hitelszűke lép fel. A vállalkozó és a finanszírozó közötti optimális szerződés nem fizető vevő hatására további hitelszűkösséget generál. Két esetet vizsgálunk: az egyikben a vállalkozó információs előnyben van a vevő nemfizetésére vonatkozóan, a másikban nincs ilyen előny. A két modellváltozat alapján információs paradoxon jellemzi a kialakuló finanszírozási helyzetet: a vállalkozó kisebb összegű hitelhez jut az említett információs előnye esetén, mint amikor közte és a finanszírozó között szimmetrikus az információ. A modell azt a - magyar kis- és középvállalkozóknál látott - jelenséget írja le, amikor nem transzparens a szállító-vevő viszonya, és a finanszírozó bank e miatt az információs hátrány miatt kevesebb hitelt nyújt kis- és középvállalati ügyfeleinek. _____ The model of external financing of the firm is extended here to cases where there may be defaults on account receivables. Information asymmetry between entrepreneur and lender on a firm's creditworthiness leads to moral hazard and credit rationing, even in the absence of default risk. The authors show an optimal debt contract that formulates the situation, and focus on two cases: where the entrepreneur has an information advantage on defaults on receivables, and where the information is symmetric. A comparison of these cases revealed a paradoxical knowledge issue in external financing: a better informed entrepreneur may be able to afford a smaller financing ability. The model describes a frequent phenomenon in small businesses, when the relationship between buyer and seller lacks transparency, and lenders offer lower amount of lending to small and medium-sized enterprises.

Agency theory problems behind the fall of shopping centers

The present article assesses agency theory related problems contributing to the fall of shopping centers. The negative effects of the financial and economic downturn started in 2008 were accentuated in emerging markets like Romania. Several shopping centers were closed or sold through bankruptcy proceedings or forced execution. These failed shopping centers, 10 in number, were selected in order to assess agency theory problems contributing to the failure of shopping centers; as research method qualitative multiple cases-studies is used. Results suggest, that in all of the cases the risk adverse behavior of the External Investor- Principal, lead to risk sharing problems and subsequently to the fall of the shopping centers. In some of the cases Moral Hazard (lack of Developer-Agent’s know-how and experience) as well as Adverse Selection problems could be identified. The novelty of the topic for the shopping center industry and the empirical evidences confer a significant academic and practical value to the present article.

The Soft Budget Constraint. An introductory study to volume IV of the Life’s Work series

The author’s ideas on the soft budget constraint (SBC) were first expressed in 1976. Much progress has been made in understanding the problem over the ensuing four decades. The study takes issue with those who confine the concept to the process of bailing out loss-making socialist firms. It shows how the syndrome can appear in various organizations and forms in many spheres of the economy and points to the various means available for financial rescue. Single bailouts do not as such generate the SBC syndrome. It develops where the SBC becomes built into expectations. Special heed is paid to features generated by the syndrome in rescuer and rescuee organizations. The study reports on the spread of the syndrome in various periods of the socialist and the capitalist system, in various sectors. The author expresses his views on normative questions and on therapies against the harmful effects. He deals first with actual practice, then places the theory of the SBC in the sphere of ideas and models, showing how it relates to other theoretical trends, including institutional and behavioural economics and theories of moral hazard and inconsistency in time. He shows how far the intellectual apparatus of the SBC has spread in theoretical literature and where it has reached in the process of “canonization” by the economics profession. Finally, he reviews the main research tasks ahead.

Essays on international lending and increasing returns to scale

Standard economic theory suggests that capital should flow from rich countries to poor countries. However, capital has predominantly flowed to rich countries. The three essays in this dissertation attempt to explain this phenomenon. The first two essays suggest theoretical explanations for why capital has not flowed to the poor countries. The third essay empirically tests the theoretical explanations.^ The first essay examines the effects of increasing returns to scale on international lending and borrowing with moral hazard. Introducing increasing returns in a two-country general equilibrium model yields possible multiple equilibria and helps explain the possibility of capital flows from a poor to a rich country. I find that a borrowing country may need to borrow sufficient amounts internationally to reach a minimum investment threshold in order to invest domestically.^ The second essay examines how a poor country may invest in sectors with low productivity because of sovereign risk, and how collateral differences across sectors may exacerbate the problem. I model sovereign borrowing with a two-sector economy: one sector with increasing returns to scale (IRS) and one sector with diminishing returns to scale (DRS). Countries with incomes below a threshold will only invest in the DRS sector, and countries with incomes above a threshold will invest mostly in the IRS sector. The results help explain the existence of a bimodal world income distribution.^ The third essay empirically tests the explanations for why capital has not flowed from the rich to the poor countries, with a focus on institutions and initial capital. I find that institutional variables are a very important factor, but in contrast to other studies, I show that institutions do not account for the Lucas Paradox. Evidence of increasing returns still exists, even when controlling for institutions and other variables. In addition, I find that the determinants of capital flows may depend on whether a country is rich or poor.^

The Affordable Care Act and the Transformation of US Health Care

The neoliberal period was accompanied by a momentous transformation within the US health care system.  As the result of a number of political and historical dynamics, the healthcare law signed by President Barack Obama in 2010 ‑the Affordable Care Act (ACA)‑ drew less on universal models from abroad than it did on earlier conservative healthcare reform proposals. This was in part the result of the influence of powerful corporate healthcare interests. While the ACA expands healthcare coverage, it does so incompletely and unevenly, with persistent uninsurance and disparities in access based on insurance status. Additionally, the law accommodates an overall shift towards a consumerist model of care characterized by high cost sharing at time of use. Finally, the law encourages the further consolidation of the healthcare sector, for instance into units named “Accountable Care Organizations” that closely resemble the health maintenance organizations favored by managed care advocates. The overall effect has been to maintain a fragmented system that is neither equitable nor efficient. A single payer universal system would, in contrast, help transform healthcare into a social right.

An Empirical Analysis of Continuing Improvements Following the Implementation of a Performance-Based Compensation Plan

Performance improvements subsequent to the implementation of a pay-for-performance plan can result because more productive employees self-select into the firm (selection effect) and/or because employees allocate effort to become more effective (effort effect). We analyze individual performance data for 3,776 sales employees of a retail firm to evaluate these alternative sources of continuing performance improvement. The incentive plan helps the firm attract and retain more productive sales employees, and motivates these employees to further improve their productivity. In contrast, the less productive sales employees’ performance declines before they leave the firm.

Essays on Corruption and Enforcement

Thesis (Ph.D.)--University of Washington, 2016-08

Three Essays in Empirical Asset Pricing

The financial crisis of 2007-2008 led to extraordinary government intervention in firms and markets. The scope and depth of government action rivaled that of the Great Depression. Many traded markets experienced dramatic declines in liquidity leading to the existence of conditions normally assumed to be promptly removed via the actions of profit seeking arbitrageurs. These extreme events motivate the three essays in this work. The first essay seeks and fails to find evidence of investor behavior consistent with the broad 'Too Big To Fail' policies enacted during the crisis by government agents. Only in limited circumstances, where government guarantees such as deposit insurance or U.S. Treasury lending lines already existed, did investors impart a premium to the debt security prices of firms under stress. The second essay introduces the Inflation Indexed Swap Basis (IIS Basis) in examining the large differences between cash and derivative markets based upon future U.S. inflation as measured by the Consumer Price Index (CPI). It reports the consistent positive value of this measure as well as the very large positive values it reached in the fourth quarter of 2008 after Lehman Brothers went bankrupt. It concludes that the IIS Basis continues to exist due to limitations in market liquidity and hedging alternatives. The third essay explores the methodology of performing debt based event studies utilizing credit default swaps (CDS). It provides practical implementation advice to researchers to address limited source data and/or small target firm sample size.

Essays on the Effects of Social Insurance for Disability

This dissertation examines how social insurance, family support and work capacity enhance individuals' economic well-being following significant health and income shocks. I first examine the extent to which the liquidity-enhancing effects of Worker's Compensation (WC) benefits outweigh the moral hazard costs. Analyzing administrative data from Oregon, I estimate a hazard model exploiting variation in the timing and size of a retroactive lump-sum WC payment to decompose the elasticity of claim duration with respect to benefits into the elasticity with respect to an increase in cash on hand, and a decrease in the opportunity cost of missing work. I find that the liquidity effect accounts for 60 to 65 percent of the increase in claim duration among lower-wage workers, but less than half of the increase for higher earners. Using the framework from Chetty (2008), I conclude that the insurance value of WC exceeds the distortionary cost, and increasing the benefit level could increase social welfare. Next, I investigate how government-provided disability insurance (DI) interacts with private transfers to disabled individuals from their grown children. Using the Health and Retirement Study, I estimate a fixed effects, difference in differences regression to compare transfers between DI recipients and two control groups: rejected applicants and a reweighted sample of disabled non-applicants. I find that DI reduces the probability of receiving a transfer by no more than 3 percentage points, or 10 percent. Additional analysis reveals that DI could increase the probability of receiving a transfer in cases where children had limited prior information about the disability, suggesting that DI could send a welfare-improving information signal. Finally, Zachary Morris and I examine how a functional assessment could complement medical evaluations in determining eligibility for disability benefits and in targeting return to work interventions. We analyze claimants' self-reported functional capacity in a survey of current DI beneficiaries to estimate the share of disability claimants able to do work-related activity. We estimate that 13 percent of current DI beneficiaries are capable of work-related activity. Furthermore, other characteristics of these higher-functioning beneficiaries are positively correlated with employment, making them an appropriate target for return to work interventions.

Essays on Market Frictions and Securitization

This dissertation provides a novel theory of securitization based on intermediaries minimizing the moral hazard that insiders can misuse assets held on-balance sheet. The model predicts how intermediaries finance different assets. Under deposit funding, the moral hazard is greatest for low-risk assets that yield sizable returns in bad states of nature; under securitization, it is greatest for high-risk assets that require high guarantees and large reserves. Intermediaries thus securitize low-risk assets. In an extension, I identify a novel channel through which government bailouts exacerbate the moral hazard and reduce total investment irrespective of the funding mode. This adverse effect is stronger under deposit funding, implying that intermediaries finance more risky assets off-balance sheet. The dissertation discusses the implications of different forms of guarantees. With explicit guarantees, banks securitize assets with either low information-intensity or low risk. By contrast, with implicit guarantees, banks only securitize assets with high information-intensity and low risk. Two extensions to the benchmark static and dynamic models are discussed. First, an extension to the static model studies the optimality of tranching versus securitization with guarantees. Tranching eliminates agency costs but worsens adverse selection, while securitization with guarantees does the opposite. When the quality of underlying assets in a certain security market is sufficiently heterogeneous, and when the highest quality assets are perceived to be sufficiently safe, securitization with guarantees dominates tranching. Second, in an extension to the dynamic setting, the moral hazard of misusing assets held on-balance sheet naturally gives rise to the moral hazard of weak ex-post monitoring in securitization. The use of guarantees reduces the dependence of banks' ex-post payoffs on monitoring efforts, thereby weakening monitoring incentives. The incentive to monitor under securitization with implicit guarantees is the weakest among all funding modes, as implicit guarantees allow banks to renege on their monitoring promises without being declared bankrupt and punished.

VOX POPULI: THREE ESSAYS ON THE USE OF SOCIAL MEDIA FOR VALUE CREATION IN SERVICES

Prior research shows that electronic word of mouth (eWOM) wields considerable influence over consumer behavior. However, as the volume and variety of eWOM grows, firms are faced with challenges in analyzing and responding to this information. In this dissertation, I argue that to meet the new challenges and opportunities posed by the expansion of eWOM and to more accurately measure its impacts on firms and consumers, we need to revisit our methodologies for extracting insights from eWOM. This dissertation consists of three essays that further our understanding of the value of social media analytics, especially with respect to eWOM. In the first essay, I use machine learning techniques to extract semantic structure from online reviews. These semantic dimensions describe the experiences of consumers in the service industry more accurately than traditional numerical variables. To demonstrate the value of these dimensions, I show that they can be used to substantially improve the accuracy of econometric models of firm survival. In the second essay, I explore the effects on eWOM of online deals, such as those offered by Groupon, the value of which to both consumers and merchants is controversial. Through a combination of Bayesian econometric models and controlled lab experiments, I examine the conditions under which online deals affect online reviews and provide strategies to mitigate the potential negative eWOM effects resulting from online deals. In the third essay, I focus on how eWOM can be incorporated into efforts to reduce foodborne illness, a major public health concern. I demonstrate how machine learning techniques can be used to monitor hygiene in restaurants through crowd-sourced online reviews. I am able to identify instances of moral hazard within the hygiene inspection scheme used in New York City by leveraging a dictionary specifically crafted for this purpose. To the extent that online reviews provide some visibility into the hygiene practices of restaurants, I show how losses from information asymmetry may be partially mitigated in this context. Taken together, this dissertation contributes by revisiting and refining the use of eWOM in the service sector through a combination of machine learning and econometric methodologies.

Cálculo de constantes ópticas de películas delgadas de Cu3BiS3 a través del método de Wolfe

Se calculó la obtención de las constantes ópticas usando el método de Wolfe. Dichas contantes: coeficiente de absorción (α), índice de refracción (n) y espesor de una película delgada (d ), son de importancia en el proceso de caracterización óptica del material. Se realizó una comparación del método del Wolfe con el método empleado por R. Swanepoel. Se desarrolló un modelo de programación no lineal con restricciones, de manera que fue posible estimar las constantes ópticas de películas delgadas semiconductoras, a partir únicamente, de datos de transmisión conocidos. Se presentó una solución al modelo de programación no lineal para programación cuadrática. Se demostró la confiabilidad del método propuesto, obteniendo valores de α = 10378.34 cm−1, n = 2.4595, d =989.71 nm y Eg = 1.39 Ev, a través de experimentos numéricos con datos de medidas de transmitancia espectral en películas delgadas de Cu3BiS3.