Abstract:
We use 6-digit bilateral trade data to document the effect of WTO/GATT membership on the extensive and intensive product margins of trade.We construct gravity equations for the two product margins where the specifications of these gravity equations are motivated by the Melitz-Chaney model. The empirical results show that standard gravity variables provide good explanatory power for bilateral trade on both margins. Importantly, we show that the impact of the WTO is concentrated almost exclusively on the extensive product margin of trade, i.e. trade in goods that were not previously traded. In our preferred specification, WTO membership increases the extensive margin of exports by 31%. At the same time, WTO membership has a negligible or even a negative impact on the intensive margin (the volume of already-traded goods).

Abstract:
We relate market stress to asset pricing by analyzing a large and systematic discrepancy among off-the-run Treasury securities: during the crisis, bonds traded far below otherwise identical notes, over five percent below at the peak, and orders of magnitude below what we find concurrent special repo rates to explain. This low lending revenue from holding the note begs the question why its current holders would not trade it for cheaper yet identical cash flows. To answer this question we look at the relative liquidity of the securities and the cross section of investors. New data on Treasury security trading find the notes more liquid than the bonds, and insurers’ transactions reveal that their note demand grows with their need for liquidity.

Abstract:
Recruitment into underground criminal and terrorist organizations is rendered difficult by the absence of formal institutions to protect agreements of non‐defection by entrants. Threats of violence, and punishments by informal norms are also difficult when defectors can vanish into anonymity in a large population. Ex-ante means of Spencian costly signaling allows prospective entrants to build trust to enter rebel organizations like the Maoists in India. Based on field interviews in forests and tribal villages in south India, it is discovered that costly to mimic signals play an important role in the recruitment of Maoists. It is also discovered that “bridge‐burning”, i.e., behavior that reduces alternative options of livelihood, and behavior that increases asset specificity of candidates, increases trustworthiness of prospective entrants.

Abstract:
This paper develops a theory of firm boundaries in knowledge-intensive firms as distinct from those in physical-asset-intensive firms. Since knowledge assets are non-rival in nature, owners cannot withdraw access to the asset ex-post once they have provided it ex-ante. Therefore, unlike physical-asset-intensive firms, where only the owner can hold up the user, the user of a knowledge asset can hold up the owner as well. We model these distinctions by endogenously specifying the joint profit and outside options and show that the incentive effects of ownership and, thereby, optimal ownership of knowledge assets differs substantially from those of physical assets

Abstract:
We examine world stock market comovement using data from 23 developed and 10 emerging market countries. We use a generalized factor model framework that allows for country, regional, and world factors. We show that the commonly used World Fama French (W-FF) factor model with world value-weighted portfolios as a proxy for global factors, is biased in calculating comovement. We develop an alternate approach, the Weighted-Generalized Canonical Correlation (W-GCC) method, to determine the factor model and classify the factors into world factors and regional/country-specific factors. Simulation studies show that our methodology is able to accurately identify the world and country-specific factors and is robust to varying market capitalizations, varying regions, and when the world factor is weak in some countries. Unlike the W-FF model, the W-GCC does not exhibit biases with respect to small and large stock portfolios, large capitalization countries, or over represented world regions. We test for changes in comovement over a 30-year period from 1981 to 2010 -- a period that has witnessed major changes in international trade institutions, capital market regulations, and the advent of the Internet era -- allowing for a structural change driven by world events. We find that stock price comovements is stable through the mid 1990s and then starts increasing from the mid 1990s through 2010. The bias in the W-FF model is however less important in recent times as world comovement has soared to over 70%. Finally, we separately examine the comovement of the Chinese A and Chinese B stock markets as they have different investor bases. The Chinese B stock market shows a dramatic increase in comovement over the time period but not the Chinese A stock market, suggesting that comovement is more likely driven by investment cash flows.

Abstract:
We study a worker's incentive to acquire costly skills when skills cannot be verified by a third party and thus cannot be contracted on. A firm's promise to reward the worker for skills is split into two parts: a promise to promote the worker for skills (promotion promise) and a promise to pay higher wages for a promotion (wage promise). Promoting a worker based on general skills, conveys information to a less informed labor market, bidding up wages. So the general skill helps the firm keep its wage promise. Promoting a worker based on firm specific skills, increases output without increasing wages offered by a labor market. So the firm specific skill helps the firm keep its promotion promise. To keep both promises, workers are promoted only when they acquire both types of skills, which in turn leads to multiskilling. Because promotions selectively reveal information about the general skill to the labor market, firms also earn a return on general training. This helps explain why many companies pay for training to develop general skills that workers need in higher level jobs.

Abstract:
The retirement security landscape has changed drastically for most workers over the last thirty years – except for public school teachers and other state and local government employees. Many private-sector employers have stopped offering traditional retirement plans, while most state and local employees remain covered by defined benefit (DB) pension plans. Research shows that DB plans have had strong effects on worker retention in the private sector, as workers delayed retirement until they cash in on large pension wealth accruals late in their careers and then retire abruptly. We explore these effects for teachers, using data that includes measures of teacher qualifications and job satisfaction. We find that dissatisfied teachers respond much more to pension incentives than satisfied teachers do, first delaying retirement while pension wealth is still accumulating and then retiring abruptly

Abstract:
Does corporate lobbying simply add value by allowing firms to communicate expert information to policy makers, or does it also add value by facilitating potentially illegal quid pro quo arrangements, where lawmakers receive private benefits in exchange for favorable policy decisions? Using the corruption scandal involving the top Washington D.C. lobbyist Jack Abramoff as an exogenous negative shock to the ability of firms to lobby, we examine whether lobbying and illegal lobbying practices in particular, affect the market value of firms. The results suggest that firms that lobby more experience a significant decrease in market value following the guilty plea by Mr. Abramoff to bribery and corruption. A firm that spent $100,000 more on lobbying prior to the event year experiences an average decrease of $1.4 million in value in a 3-day event window around the guilty plea. To examine whether corrupt lobbying adds value, we use corporate social responsibility rankings to capture a firm’s propensity to engage in corrupt practices, and find that lobbying firms with a bad reputation experience a greater decrease in value following the scandal. We also find that legislation aimed at curbing corrupt lobbying practices significantly reduces firm value. A firm that spent $100,000 more on lobbying prior to the event year, experiences an average decrease of $0.84 million in value in a 3-day event window around the passage of the anti-corruption law. Our results indicate that lobbying creates shareholder value, and that part of this value can be attributed to corrupt lobbying practices.

Abstract:
Consumers, investors and other decision makers often rely on an expert to help choose among different actions that may also benefit the expert. To gain insight into such situations, we develop and test a model of an expert who recommends one of two actions to a decision maker who has the option to take neither action. For instance, a salesperson recommends one of two products to a customer who may purchase neither, or a consultant recommends one of two projects to a client who may pursue neither. Several phenomena previously identified in the theoretical literature on recommendations through costless, unverifiable "cheap talk" are captured together in this simple model. First, recommendations are "persuasive" in that recommending either action benefits the expert by reducing the probability that the decision maker takes neither action. Second, if the expert's incentives are biased toward one action then a recommendation for the more incentivized action is "discounted" and is less persuasive. Third, such discounting implies that if the expert's incentives are not transparent then an unbiased expert has a "political correctness" incentive to recommend the opposite action as a biased expert, so lack of transparency undermines the credibility of both biased and unbiased experts. Finally, if the decision maker is more easily pushed toward one action due to prior beliefs then the expert "panders" to the decision maker by sometimes recommending that action even when it is the worse action. These comparative static results are robust to the expert having a preference against lying. Experimental tests conducted with business students find that subject behavior is consistent with the comparative static predictions of the model, except that decision makers do not always anticipate that lack of transparency gives even unbiased experts an incentive to lie. The results suggest that full disclosure of expert incentives is even more important to successful communication than theory implies.

Abstract:
Using new data we investigate open-market repurchase execution of S&P 500 firms. We find that smaller firms repurchase less frequently than larger firms, and at prices which are significantly lower than average market prices. Their repurchase activity is followed by a positive and significant abnormal return which lasts up to three months after the repurchase. These findings do not hold for large S&P 500 firms. Consistent with these findings, we show that the market response to the disclosure of actual repurchase data is positive and significant only for small firms, and that insider trading is positively related to actual repurchases

Abstract:
To our knowledge, ours is the first study to offer non-experimental evidence on the effects of pay inequality on agent actions. We study how pay inequalities affect (i) the likelihood that an individual non-CEO manager (VP) will voluntarily resign, and (ii) a firm’s rate of VP turnover. We consider pay inequalities that a VP faces relative to (i) the CEO in her own firm, (ii) other VPs in the firm, and (iii) VPs in benchmark firms. We use a unique hand-collected dataset of over 1,000 voluntary managerial resignations and find that pay inequality is an important determinant of managerial turnover. We find that managers are more likely to resign when their pay relative to their peers in the firm and outside the firm is lower; and firms with greater levels of internal pay inequality and greater pay inequality relative to benchmark firms experience higher VP turnover.

Abstract:
This paper explores commonalities across asset-pricing anomalies. In particular, we assess implications of financial distress for the profitability of anomaly-based trading strategies. Strategies based on price momentum, earnings momentum, credit risk, dispersion, idiosyncratic volatility, and capital investments derive their profitability from taking short positions in high credit risk firms that experience deteriorating credit conditions. Such distressed firms are highly illiquid and hard to short sell, which could establish nontrivial hurdles for exploiting anomalies in real time. The value effect emerges from taking long positions in high credit risk firms that survive financial distress and subsequently realize high returns. The accruals anomaly is an exception - it is robust amongst high and low credit risk firms as well as during periods of deteriorating, stable, and improving credit conditions

Abstract:
Cities are often modeled as thick and fluid environments in which individuals have better access to markets, public goods and services, and more diverse social networks. However, rapid urbanization in developing countries has created “mega cities” that cover large geographic areas and often have poor public transportation, segregated housing, and uneven provision of public goods. Does spatial and social distance within such cities affect the economic mobility and well-being of the urban poor? In this paper, we exploit a relocation program in a large Indian city, which used a lottery to select which households would be offered the opportunity to purchase a subsidized home in a relatively distant, residential complex, to examine how spatial and social distance shape networks and household ability to use networks for risk-sharing and collective action. We find that winners of the housing lottery are more spatially isolated from centers of economic activity and public services approximately 14 years after the relocation. Winners have more occupational ties but fewer caste/religious ties within neighborhoods compared to non-winners, and winners report greater collective action but less social insurance. We interpret this pattern as a change in the shape of networks, reducing costs for local cooperation, but increasing the correlation of risk within networks

Abstract:
This paper identifies the effect of corporate networks on firms’ financial investment and executive pay decisions. Corporate networks arise through board interlocks, which provide a frequent and important channel for non-market interactions amongst firms. Using panel data for all publicly traded companies in India I estimate peer effects in firm policies, defining each firm’s reference group as the set of all other firms with whom it shares one or more directors. Identification of dynamic network peer effects, which derive from endogenous associations, is achieved by exploiting natural breaks in network evolution that exogenously change the composition of peers. These breaks occur as a result of local network shocks – death or retirement of shared directors – that are stochastic and external to the network formation process. I find significant network peer effects that are positively associated with firms’ investment strategy and executive compensation.I also explore heterogeneity in peer effects by distinguishing between network peers who belong to the same industry from those that do not, and find a greater effect of across-industry network peers.

Abstract:
This paper examines whether a worker's wage is based in part on information about the performance of her personal contacts. Embedding a sibling model into an employer learning framework, I develop a theory of labor markets with symmetric but imperfect information among employers in which workers are organized into disjoint social groups and workers in the same reference group have correlated abilities. I study wage determination under two alternative belief formation processes: individual learning, under which employers observe only a worker's own schooling and performance, and social learning, under which employers also observe those of her personal contacts. Using data on the AFQT scores of siblings in the NLSY79, I test for a form of statistical nepotism in which a sibling's performance is priced into a worker's wage. If learning is social, then an older sibling's test score should typically have a larger adjusted impact on a younger sibling's log wage than vice versa. By contrast, if learning is individual, then no such asymmetry should be present. The empirical findings provide strong support for the central prediction of the social learning model. Furthermore, I perform several exercises to identify social learning as the leading explanation for the main results, largely ruling out other potential factors, such as asymmetric skill formation, human capital transfers, and role model effects.

Abstract:
Various theoretical models assume that information seeking behavior of investors has an impact on prices. However, it is very difficult to empirically test this, since the actual information acquisition process of the investors is unobservable. Using a unique data set from Google Trends, I construct a search index and use it to proxy for the information seeking behavior of retail investors. I find that abnormal search index predicts future buying pressure on the stock of a company. The portfolio with the highest increase in the search index has positive and significant alphas. The search index also predicts earnings surprises and is associated with the pre-earnings announcement drift. My results are robust to alternative specifications of CAR windows, past returns, news coverage, information available to investors prior to the release of earnings numbers, and the information environment surrounding the earnings announcements. Overall, my results are in line with the hypothesis that retail investors’ trades have information content relevant to stock prices.

Abstract:
Limit order revisions, which involve decisions about when and how to modify or cancel prevailing limit orders, account for a significant proportion of limit order activity in exchanges around the world. This paper examines the determinants of traders' decisions to revise orders, and the profitability of traders' order revision strategies using a unique dataset which provides complete information on trades, orders, trader identification codes, and trader categories. The analysis provides three important results. One, informed traders and traders who function as voluntary market makers revise orders most intensely. Two, along with changes in market prices and other market conditions, changes in traders' inventories, including inventories of correlated stocks, influence order revision strategies. Three, informed traders reduce the execution costs of their order portfolios through active order revisions; the benefit is especially pronounced on earnings announcement days, when the value of private information is high. That traders employ revisions to mitigate their order submission, inventory, and adverse selection risks indicates that order revisions are a valuable feature of the rapidly proliferating electronic limit order markets.

Abstract:
This paper investigates whether managers’ discretionary spending for political purposes enhances shareholder value. I exploit exogenous shocks to campaign finance regimes, in particular the McConnell v. FEC Supreme Court decision of 2003, to show that on average, restrictions on firms’ abilities to contribute to national political parties reduce shareholder value by $10.28 million to $87.67 million. Overall, the results suggest that political contributions are value-enhancing investment projects, and restrictions on managers’ discretionary spending for political purposes are detrimental to shareholder value.

Abstract:
The defining figure of neoclassical economic theory, the homo oeconomicus, has long been challenged by both experimental economics and social psychology. People are, as we now know from many experimental studies on dictator games, ultimatum games or public good games, not own-payoff maximising egoists, but compassionate social beings who care about fairness and the well-being of others. However, the focus on kind behaviour in the literature may be inappropriately one-sided. In a series of experiments presented here we ask whether there is also adark side of human behaviour. We show that nastiness, which we define as a genuine pleasure derived from lowering the well-being of others, is a common trait in humans. We explore strategic situations in which spite and nastiness can result in disastrous outcomes, and which institutional arrangements exacerbate or harness the effects of nastiness.

Abstract:
If a government has ability and willingness to redistribute the surplus created by an external investor, why do we still observe resistance to such investment, sometimes in the form of destruction of productive assets? We explain such surplus destruction as a credible signal sent to the government by an affected group of its low valuation of investment. The information-constrained government values such a signal and uses it to implement a better redistribution scheme: thus resistance can be interpreted as a demand for redistribution. The extent of destruction is decreasing in the extent that the government cares for the affected group. While resistance has an informational value, it has two distinct costs: it directly reduces surplus and also reduces the investor’s incentives to create surplus. The government uses a tax/subsidy on the investment to maximize weighted social surplus, and we show that the possibility of destruction may force the government to be too soft in its negotiation with the investor. A protection for the investor either legal (banning signaling) or financial (compensation for losses incurred due to resistance) can improve the society’s welfare

Abstract:
We present an asymmetric information model to examine private placements issued to owner-managers. Our main conclusion is that allowing private placements to insiders can mit- igate, if not eliminate, the underinvestment problem. Our model predicts that announcement period returns for private placements should be: (1) positive; (2) dependent on regulatory constraints that determine the issue price; (3) positively related to volatility; (4) negatively related to leverage; (5) negatively related to owner-managers’ shareholdings (6) inversely re- lated to proxies of manipulation; and (7) negatively related to illiquidity. We empirically test our model’s predictions, along with others from literature, on a sample of private placements issued in the Indian capital markets during 2001-09 and report empirical evidence largely consistent with the model.

Abstract:
Should embankments be used to control floods? This is a question of great importance in the eastern Gangetic plain where embankment breaches cause severe flood damage every year, and huge damages due to major breaches every few years. Critics of the embankment policy have called for a strategy of living with floods by building dispersed infrastructure to cope with floods. However, no cost-benefit analysis of alternative strategies is available.This paper makes a first pass at evaluating embankments. Using two years or more of data from 504 households in 28 villages in the floodplain of the Kosi river in north Bihar, I compare agricultural output, wage incomes, unemployment, and other indicators of well-being between villages subject to flooding from rivers and villages not subject to such flooding. I find that, for the most part, villages subject to river flooding are no worse off than villages not subject to such flooding. Thus, the evidence provides no support for the embankment strategy.

Abstract:
Public policy in modern Indian features affirmative action—policies intended to reduce persistent inequality stemming from a centuries-old caste structure. We study the effects of one such affirmative action program. Specifically, we examine the consequences of an admissions policy to engineering colleges that fixes percentage quotas, common across 214 colleges, for each of six disadvantaged castes. We have obtained access to exceptionally rich data for study of this affirmative action program—data that include the test scores that were used to administer admissions decision rules, as well as detailed independent ability metrics that did not influence admissions decisions. Our analysis indicates that for targeted students the program has significant and substantial positive effects both on college attendance and first-year academic achievement.

Abstract:
Economic performance of the illegal immigrants is a central issue in the debate over illegal immigration. In this paper I estimate the wage gain from legalization of a previously illegal immigrant in the U.S. I use propensity score matching and data from New Immigrant Survey 2003. The wages of legal immigrants provide a valid control for the wages of illegal immigrants. Since the wages of the treatment and the control group both before and after the legal permanent residency are available, Difference-in-Difference matching estimators are implemented to account for potential (time invariant) unobserved heterogeneity. Estimates suggest a wage gain of 19% to 32% from legalization of previously illegal immigrants. Finally I discuss potential policy implications of this result

Abstract:
This paper analyses whether in developing countries mass education is the key or a highly well educated elite should be more beneficial for growth. Using the Indian census data as a benchmark and enrollment rates of different levels of schooling we compute annual attainment levels for a panel of 16 Indian states from 1961 to 2001.Results show that one standard deviation increment in the share of population with tertiary education is 3 times more beneficial for growth than a one standard deviation increment in literacy. Using simulations we consider two alternate policies: one that doubles the increments to the literacy rates (relative to its baseline rate of increase)and another that doubles the annual increments to the share of adult population with tertiary education. We show that at the end of 35 years, the state following the latter policy has a per capita GDP 1.5 time more than the state that emphasizes the former.

Abstract:
Using a unique dataset we provide new evidence on the impact on client fund performance of cross trading related conflicts of interest (CINT)experienced by mutual fund advisers. Our results suggest that the cross trading practices of advisers impose a significant performance penalty on their client funds. A portfolio of funds managed by advisers in the top CINT quintile significantly underperforms the portfolio of funds managed by advisers in the bottom CINT quintile by 0.83% per year, over the period 1995-2007. We evaluate the response of investor flows to different CINT measures and document that flows are generally insensitive to them. We also show that the incentives of advisers to engage in cross trading are directly related to their opportunities for generating revenues from trading operations, and that adviser governance plays an important monitoring role for cross trading. Our results highlight the need for heightened awareness among investors and regulators of the potential costs associated with these transactions.

Abstract:
We look for necessary properties of shareholder-value maximizing corporate boards when shareholders face a trade-o¤ between improving information sharing between the board and management and reducing distortions in decision-making arising out of managerial agency. We draw a distinction between the alignment of preferences of the board with management (which a¤ects information ‡ows) and the allocation of authority to the board or management (which a¤ects ex-post decisions). We show that it is in general suboptimal to allocate authority to management. Authority should be held by a supervisory board that may be imperfectly aligned with both shareholders and management. Indeed, even when management has captured all au- thority and the board only has an advisory role, the optimal board may be designed to withold information from management. An optimal advisory board must however be su¢ ciently aligned with management in order to create ex-post consensus and ensure authority is irrelevant. Given optimal board alignment, the value of the board’s authority equals the cost of requiring consen- sus. Shareholders may hold ultimate decision-making authority within an optimal supervisory board without any loss in welfare and in many cases this is strictly optimal.

Abstract:
This paper modeled the dynamic inter-relationships between average salary, bonus, and stock options granted to top executives of 700 U.S. firms in 1996-2005 using a merged ExecuComp and Compustat database. Comprehensive models were also estimated for firms’ share repurchases and research and development and investment expenditures, taking into account simultaneity and distributional misspecification issues. Simple autoregressive models showed that while salaries increased steadily, time profiles of bonus and stock options were complex. Second, firms’ total assets, intangible assets, market-to-book value, and share repurchases were positively associated with the values of stock options granted. Third, stock options exercised in the previous year were significant predictors of share repurchases indicating that firms avoided dilution of earnings per share. Fourth, share repurchases were negatively associated with expenditures on research and development and short-term investments. From a policy standpoint, the results suggest that high levels of stock options granted to executives and share repurchases by U.S. firms are unlikely to have beneficial effects for raising future productivity.

Abstract:
Using a linear principal agent model with endogenous status concerns, the paper shows that it is individually rational for agents in a rm to develop and exhibit status concerns vis-a-vis each other. Workers are, by their choices of status concerns, able to transfer surplus from the the rm to themselves. Further, relative concerns are shaped by the relative strengths and weaknesses of the workers in the rm. Finally, and surprisingly, a rm's prot is reduced (relative to the benchmark moral-hazard model) by workers who exhibit such \endogenous" relative concerns.

Abstract:
Indian immigrants in the United States and other wealthy countries are successful in entrepreneurship. Using Census data from the three largest developed countries receiving Indian immigrants in the world -- the United States, United Kingdom and Canada -- we examine the performance of Indian entrepreneurs and explanations for their success. We find that business income of Indian entrepreneurs in the United States is substantially higher than the national average and is higher than any other immigrant group. Approximately half of the average difference in income between Indian entrepreneurs and the national average is explained by their high levels of education while industry differences explain an additional 10 percent. In Canada, Indian entrepreneurs have average earnings slightly below the national average but they are more likely to hire employees, as are their counterparts in the United States and United Kingdom. The Indian educational advantage is smaller in Canada and the United Kingdom contributing less to their entrepreneurial success. Keywords: entrepreneurship, immigration, Indian migrants

Abstract:
Prior work that has examined flight-to-quality (FTQ) influences on stock returns has primarily focused on the stock market at the aggregate level. We present the cross-sectional evidence on this issue over the 1986 to 2008 period, coinciding with availability of the Volatility Index (VIX) from the Chicago Board Option Exchange. We create different disaggregate stock portfolios comprised of individual stocks with different values for their market-betas, their betas with respect to the change in stock market risk, their total volatility, their illiquidity, and their market capitalization. We compare the cross-sectional variation in these disaggregate portfolios during the times of extreme VIX-changes with that during more `normal' times. We examine the cross-sectional variation in terms of the: (a) differences in contemporaneous mean portfolio returns, (b) differences in the subsequent mean portfolio returns, and (c) differences in subsequent comovement with T-bonds. We find that the larger and the more-liquid stocks exhibit greater responsiveness to the extreme VIX-changes. Our findings suggest that FTQ influences the prices of larger and more liquid stocks relatively more, presumably because: (1) larger stocks comprise the substantial majority of the market's capitalization and, thus, take the brunt of stock-bond asset class FTQ effects, and (2) larger, more liquid stocks are less expensive to trade in stressful times.

Abstract:
International migrants have unique opportunities to form business networks in their home countries and in their countries of origin. Several studies have shown that migration flows increase bilateral trade and investment flows between countries. This takes place through two channels - first, the migrants have a taste for the consumption goods from their home countries and second, the migrants create networks that transmit information. The latter reflects the potential of diaspora networks in reducing information barriers and search costs in international trade. This paper disentangles the two effects in order to quantify the information effect of migration. Further, this paper addresses the issue of direction of causality between migration and trade. The study uses a panel data set of bilateral migration stocks with origins in over 200 countries migrating into 30 OECD countries between the years 1990 and 2000. A corresponding panel data set is constructed that classifies bilateral trade data into intermediate and final goods and then sub-classifies each of these categories into homogeneous and differentiated goods. I use this data set to distinguish between the ‘taste for home goods effect’ and ‘information effect’ of migration. I show that the migrants’ role in exchange of information through business networks does lead to a significant increase in bilateral trade among countries. Moreover, I find that this effect is greatest in the trade of differentiated goods and that the highly educated migrants are most effective in business networking. Migrants also play a crucial role in the flow of foreign direct investment between different countries. Finally, this paper constructs an instrumental variable based on citizenship laws of the countries of destination. I use this instrument to demonstrate that migration can potentially lead to an increase in the flows of commodities and capital.

Abstract:
This paper combines unique survey and experimental data to examine the determinants of self-selection into vocational training programs. Women residing in selected slums in New Delhi, India were invited to apply for a 6-month long free training program in stitching and tailoring. A random subset of applicants and non-applicants were invited to participate in a set of behavioral experiments and in a detailed socio-economic survey. We find that applicants and non-applicants differ both in terms of observables (captured using survey data) and also in terms of a number of intrinsic traits (captured via the behavioral experiments). Overall our results suggest that there is valuable information to be gained by dissecting the black box of unobservables using behavioral experiments.

Abstract:
Most discussions of reform focus on economic policy. However, economic policy is based on a legal environment and without an efficient legal environment, growth cannot move to a higher trajectory. Within the legal environment, there are issues of harmonizing statutes, eliminating old statutes, introducing new ones where gaps exist, reducing compliance costs, making administrative law flexible and improving the speed of dispute resolution. These have not received the attention they deserve. The paper will describe these issues in general first, and then illustrate specific problems within the labour law segment, the last often simplistically identified with changes in the Industrial Disputes Act alone.

Abstract:
The key idea explored in this paper is that private establishments take both the location and income mix of people into account while making strategic decisions like entry and the price and quality of their products and services. We develop a model that integrates consumers' income distribution with the spatial distribution of their location and look at the consequence of an increase in income inequality on the welfare of the poor. We find an inverted-U shaped relationship between income inequality and the welfare of the poor: if we compare a cross-section of societies, the poor community as a whole is initially better-off living in relatively richer societies, but, beyond a point, the aggregate consumer surplus of the poor starts declining as the society becomes richer. Interestingly the same inverted-U shaped relationship is also observed between income inequality and market access of the poor. There exist multiple equilibria: a bad equilibrium where all the poor are excluded exists simultaneously with a good equilibrium where at least some poor (if not all of them) get served by the market. We have isolated the higher income gap between the rich and poor as the key factor that exposes the poor to this complete exclusion possibility. Finally we compare a mixed-income economy where rich and poor live side by side with a single-income economy inhabited only by a single income group and show that poor are better-off staying in the mixed-income economy as long as the poor income is below a feasibility threshold.

Abstract:
Using a sample of firms accused of corporate wrongdoing between 1996 and 2006, we find that CEO structural ower is positively related to the ikelihood of committing wrongdoing and egatively related to the likelihood of etection. CEO power is measured by the abnormal fraction of top executives hired or promoted during the incumbent CEO’s tenure. This measure is positively related to the number of executives charged in litigation, suggesting that some wrongdoing requires team work and CEO power facilitates it. In industries where the wrongdoing involves teamwork and coordinated action (e.g., banking and securities fraud), the positive relation with wrongdoing and the negative relation with detection are particularly strong. These results cannot be explained by excessive incentive compensation and are robust to alternate specifications of CEO power. CEO power is not always bad news, however. In some sectors, CEO power appears to reduce the incidence of wrongdoing and increase the likelihood of its detection. The evidence suggests that regulators, investors, and auditors should pay close attention to CEO power and the industry type in assessing the likelihood of wrongdoing and its detection.

Abstract:
Do employment protection laws hinder privatization? Using privatization deals in fourteen European countries from 1977-2003 and within-country variation in employment protection laws, we find that stringent employment protection laws significantly deter privatization. The fear of job cuts apparently leads organized labor in the state-owned enterprises to vehemently oppose privatization. We find that stringent employment protection laws inhibit privatization disproportionately more in industries that are less productive and require lower level of job skill, consistent with the fear of retrenchment being greater in the less-productive and low-skilled sectors. We also find that stringent employment protection laws inhibit privatization disproportionately more in unionized industries, consistent with the fact that workers in these industries exert considerable political pressure. To obtain these results exploiting inter-industry differences, we use industry-level measures for the United States as an instrument to alleviate potential endogeneity concerns. We employ panel regressions that include fixed effects to control for unobserved factors at the country, industry and year levels. We also examine specifications including country-specific and industry-specific trends to account for spurious correlations stemming from such trends in privatization and in enacting employment protection laws. Our results are also robust to controlling for endogenous changes in employment protection laws due to: (i) changes in a country’s government, specifically its left-of-center political stance; (ii) trade liberalization; and (iii) country-level economic growth.

Abstract:
Beginning with Anderson, Banker, and Janakiraman (2003), a rapidly growing literature attributes the short-run asymmetric cost response to activity changes (i.e., sticky costs) as resulting from managerial choices. We show that fixed costs induce non-stationarity in the elasticity of Sales, General and Administrative costs, affecting the interpretation of estimates from the standard specification used in the literature. We develop suggestions for how future research might control for the effects of cost structure. Empirically, we find that cost structure confounds results usually interpreted as reflecting short-run managerial actions. Further, after adjusting for the effects of fixed costs, we find that the results are unstable across alternate sub-samples.

Abstract:
Does the financial industry expend money and influence to shape financial regulation and make its own rules? This paper explores the political economy factors underlying the alleged failure of financial regulation to prevent the financial crisis of 2007-08. We construct a detailed dataset that documents the politically targeted activities of the financial sector from 1999 to 2006, which includes the bills targeted, votes by politicians in favor/against the bills, lobbying expenditures and campaign contributions by firms that lobbied for these bills, and measures of network connections of lobbyists and firm executives with politicians. We find that the probability of a bill advocating regulations and rules less favorable to the financial industry being passed was lower than that of a bill promoting deregulation. Furthermore, lobbying expenditures by the financial industry were directly associated with how politicians voted on the key bills that preceded the crisis. Finally, whether a lobbyist worked for a politician and whether a politician worked in the financial industry in the past influence the vote in favor of lax regulation. These results give support to the notion that political influence of the financial elite has influence in shaping the regulatory landscape.

Abstract:
This study investigates the influence of information asymmetry on the cross-sectional variation of volume-return relation in the context of Australian stock market. In particular, this paper extends current research by incorporating informed traders’ trade-size preference as well as its impact on the relation between information asymmetry and volume-return dynamics into analysis. After classifying trading volume according to the size of trade, we find that the dynamic volume-return relation within medium-size trades has the most significant response to the degree of information asymmetry. Our findings are consistent with the notion that informed traders concentrate in the trades of medium-size. JEL classifications: G10, G20, G24 Keywords: Trade-size, Information Asymmetry, Volume, Return

Abstract:
We model a firm whose owner benefits from its reputation for producing high quality goods. The firm's manager, however, benefits from diverting resources that are necessary to sustain high quality production for personal consumption. The owner can use compensation to incentivize the manager or reform the firm's organisational structure to constrain the manager. Under the optimal compensation scheme, the owner can ensure that the manager will choose to produce high quality goods for a limited period of time. The manager diverts resources and jeopardizes the firm's reputation for the remainder of the firm' life. Organizational structure reform, unlike incentive compensation cannot guarantee high quality production. The owner may reform the organization multiple times. In some instances she may choose to preempt the manager and reform the organization while the firm still has a reputation for high quality goods. Typically, however, unlike incentive compensation, the owner will choose to reform the organization after the firm's reputation is threatened because it has sold consumers low quality goods.

Abstract:
We show that long run consumption risk models studied in the literature imply that log price dividend ratios (P/D ratios) of stocks have a strict factor structure; that the factors predict the growth in aggregate consumption and dividends as well as track consumption growth volatility; and that the expected excess return on any financial asset is a linear function of its covariance with aggregate consumption growth, the log P/D ratio factors and the log P/D ratio factor innovations. Factor analysis of the log P/D ratios of the 25 Fama-French size and book to market ratio sorted portfolios for the period 1943-2008 reveals two significant factors. The first factor tracks the volatility of aggregate consumption growth and the second predicts the growth of aggregate dividends and real time measures of aggregate consumption. The log P/D ratio factors are able to explain not only the cross section of excess returns of the 25 Fama-French portfolios, but also those of portfolios formed on the basis of long term reversal, short term reversal and the earnings to price ratio.

Abstract:
We develop a model in which financial sector bailout and sovereign credit risk are intimately linked. The bailout ameliorates the under-investment problem of the financial sector. However, as the bailout is ultimately funded through taxation of the future profits of the non-financial sectors, it weakens their incentives to invest. This can adversely affect the sovereign's own credit risk which severely limits the size of the efficient bailout. In the short-run, the bailout is funded through issuance of government bonds, which erodes the value of existing bonds, including those held by the financial sector and potentially creates a ``crisis spiral". The model provides testable implications concerning the relation between the credit risk of the sovereign and its financial sector before the crisis, around the bailout announcement, and post-bailout. We provide supporting empirical evidence using data from the credit default swaps (CDS) market around the bailouts and bank stress tests conducted during the financial and sovereign crises of 2007-10.

Abstract:
We study the behavior of a publicly-owned firm in a hybrid market structure, i.e., monopolistic in the real sector and perfectly competitive in the financial sector. To that end, we present a model in which the shareholders' portfolio selection of assets and the decisions of the firm are jointly determined through the market process. Financial access is shown to reduce a monopolist's ability to exercise market power in the real sector because the perfectly competitive nature of the financial sector flows over to the real sector. Moreover, the ability to exercise market power in the real sector is reduced as financial participation increases. Consequently, more financial participation reduces welfare loss in the real sector as the monopolist behaves more like a perfectly competitive firm.

Abstract:
We define accounting systems as conditionally conservative (or liberal) if they produce finer information at lower (or higher) expected earning levels. We study the preference for differing levels of conservatism among decision-maker (DM)’s with varying risk aversion and prudence. Similar to risk aversion, prudence is a metric based on DM’s indirect utility; prudent DM’s save more as income becomes riskier. In a model of precautionary savings with information, we show that prudent DM’s (those with positive prudence measures) prefer more conservative accounting systems and that imprudent DM’s (those with negative prudence measures) prefer liberal accounting systems. We also show that conservative accounting may be preferred to a perfect (i.e., perfectly fine) information system if the signals are costly. We provide cases demonstrating the generality of our results, including examples where conservatism is preferred with increasing, constant and decreasing risk aversion.

Abstract:
The main objective of this paper is to study the empirical determinants of savings in India. The paper also provides longer term projections and possibly scenarios in which aging is expected to lower savings as the average propensity to save decreases. This paper focusses on the impact of the demographic dividend and other structural determinants (e.g., fiscal policy) on saving rates. The paper also attempts to shed light on the effect of public savings on private savings behavior and whether foreign savings are needed to finance existing infrastructure spending plans.

Abstract:
Though public infrastructure plays a critical role in attracting Foreign Direct Investment (FDI), identifying this effect remains a challenge largely due to the econometric challenges involved in cross-country analyses. In this paper, we identify this effect by employing a unique dataset of FDI at the district-level in India, which has become one of the largest destinations of FDI in recent years. Our identification strategy exploits cross-sectional variation in infrastructure and FDI flows among close to 600 districts in India. To ensure that the causality runs from the level of public infrastructure to FDI flows, we examine the effect of district-level infrastructure in 2001 on FDI flows into the district from 2002-07. We employ a two-pronged identification strategy. First, in panel regressions that include state fixed effects, we exploit variation among districts within a state and thereby control for state-level endogenous factors. Second, to account for agglomeration as well as cohort-level effects on FDI flows, we examine the effect on FDI flows into a district vis-à-vis that on its neighbouring districts. We show that the impact of public infrastructure on FDI inflow, though positive, is essentially non-linear. FDI inflows remain insensitive to infrastructure till a threshold level of infrastructure is reached; thereafter, FDI inflows increase steeply with an increase in infrastructure. Our findings can explain why: (i) marginal improvements in bottom-rung countries may fail to excite multinational enterprises to enter them; and (ii) the special economic zones approach has been so successful in countries like China and India. Our results have normative implications for policy makers in directing resources optimally to develop infrastructure with the intention of attracting FDI.

Abstract:
We examine whether market-wide investor sentiment influences the stock price sensitivity to firm-specific earnings news. Using the recently developed measure of investor sentiment by Baker and Wurgler (2006), we find that the prevailing sentiment sways stock price response to earnings news in the direction of the sentiment—stock price sensitivity to good earnings news increases with sentiment, whereas stock price sensitivity to bad earnings news decreases with sentiment. This influence of sentiment is especially pronounced for the earnings news of small stocks, young stocks, high volatility stocks, non-dividend-paying stocks, and stocks with extremely high and low market-to-book ratios.

Abstract:
This paper examines the effect of prior participation in early childhood developmental programs, considered endogenous,upon 7 – 19 years olds' school enrollment and grade progression in rural North India. It hopes both to extend to less developed countries recent influential research on the long-term benefits of early childhood interventions in the United States, and to make a case for the inclusion of such interventions amongst developing nations' policy initiatives toward expanding schooling. Analysis of data from the World Bank's 1997-98 Survey of Living Conditions in Uttar Pradesh and Bihar yields the findings that early childhood developmental program attendance at ages 0 – 6 raises the probability of school enrollment among average 7 – 19 year olds by 31 percentage points, and that this beneficial early experience also significantly hastens students' grade progression.

Abstract:
The implicit assumption in microfinance literature has been that offering the poor credit is the most efficient way to alleviate poverty. This paper examines the optimal design of group-lending microfinance institutions that offer both saving and borrowing opportunities. Offering saving opportunities leads to negative assortative matching within the group along wealth lines, i.e., there is significant wealth heterogeneity within the endogenously formed groups. Further, the paper shows that under reasonable assumptions, the microfinance institutions that offer both borrowing and saving opportunities could reach poorer individuals than institutions that only offer borrowing opportunities.

Abstract:
We decompose the Market-to-Book ratio into two additive component ratios: a Conservatism Correction factor and a Future-to-Book ratio. The Conservatism Correction factor exceeds the benchmark value of one whenever the accounting for past transactions has been subject to an (unconditional) conservatism bias. For the Future-to-Book ratio, the benchmark value is zero for firms that are not expected to make economic profits in the future. Our analysis derives a number of structural properties of the Conservatism Correction factor, including its sensitivity to growth in past investments, the percentage of investments in intangibles and the firm's cost of capital. The observed history of these variables allows us to infer the magnitude of a firm's Conservatism Correction factor, resulting in an average value for this factor that is about two-thirds of the overall Market-to-Book ratio. We test the hypothesized structural properties of the Conservatism Correction factor by forming an estimate of this variable which is obtained as the difference between the observed Market-to- Book ratio and an independent estimate of the Future-to-Book ratio.

Abstract:
This paper develops a theory of “infectious leverage” in financial markets in which the lender’s payoff depends heavily on the value of the collateral backing the loan. There are two main results. First, leverage is an “infectious” phenomenon in that high leverage among borrowers is positively correlated with high leverage among lenders. Both borrower and lender leverage are higher when house prices are higher. Second, a bank’s exposure to credit risk depends not only on its own leverage choice but also on the leverage decisions of other banks. The model has an overlapping-generations setting in which banks make one-period mortgage loans in the first period that are secured by houses as collateral and house prices are endogenously determined. The second-period prices of houses, and hence the values of collateral, depend on the supply of loans to the second-period homebuyers. Higher bank leverage increases the volatility of house prices in response to shocks to fundamental house values, and also leads to lower equilibrium house prices. Numerous additional results are derived, including the result that the dynamics of bank capital structure can generate house price cycles. Although the model is developed in the context of the housing market, it is applicable in any borrower-lender setting in which collateral values depend on the aggregate availability of credit, and credit risk in turn depends significantly on collateral values. Empirical and policy implications of the analysis are drawn out.

Abstract:
We examine the effects of local precipitation shocks on appropriation risk faced by women and disadvantaged minorities using annual data for 583 districts in India for the period 2001-2007. We use the annual fluctuations of rainfall from the long term mean to isolate the effects of rain shocks on crimes against women and scheduled caste minorities. We find that the below normal rainfall tends to increase reported dowry deaths. However, sexual harassment declines in bad shock years. Atrocities against scheduled caste increase with negative shocks (for both deficit and above normal rain). These patterns suggest that economic conditions generated by these weather shocks are the principal driving force behind these crimes. Our findings suggest that the increased appropriation risk faced by vulnerable population groups is a result of efforts to smooth consumption by those exposed to climate induced risks in the agricultural sector. We examine two mitigation strategies. Our results show that women's representation in national legislative bodies does not allay these risks. However, access to assured irrigation in terms of groundwater irrigation worsens the effects of below normal `dry' shocks, and mitigates the above normal `wet' shocks. These findings suggest that access to groundwater irrigation induces agricultural households to opt into risky agricultural practises which increase income volatility.

Abstract:
This paper uses Value Line forecasts to estimate and trace merger-related gains to their ultimate sources in efficiency improvements and enhanced market power. Sidestepping methodological issues that have hampered past attempts at assessing bank mergers, this approach yields estimates that indicate that, on average, megabank mergers generate gains that derive from cost efficiencies. With the removal of restrictions on bank expansion, these gains decline and previously observed efficiency gains give way to gains that arise at the expense of customers as the extent of geographic overlap between the merging banks increases. In mergers where the resulting size of the combination allows merging banks potential access to previously unavailable regulatory subsidies, gains are substantial and arise from projected revenue increases that are linked to increased risk taking.

Abstract:
We provide evidence for unexpected trading volumes and front running before block and bulk trades in National Stock Exchange of India during the period January 2004 to October 2008. Using the event study methodology, we also test for the price pressure and the information hypotheses. We find that size and liquidity of the firms play an important role in determining the impact of block and bulk trades on stock prices. Small and illiquid firms tend to have permanent impact on their share prices, thereby confirming the information hypotheses. On the other hand, large and liquid firms have temporary impact on their prices, confirming the price pressure hypotheses. Our analysis points towards the prevalence of circular trading in the Indian market, though does not confirm its presence. The study is significant for policy makers, regulators, exchanges, investors and the intermediaries and will have serious ramifications for those involved in activities like front running and circular trading.

Abstract:
Our main objective in this paper is to determine empirically the extent to which fixed-income investors are concerned about equity volatility and bond liquidity in corporate bond spreads. We extend Campbell and Taksler (2003) by conditioning for underlying bond liquidity, and exploring the relative contribution of idiosyncratic equity volatility and bond liquidity in the cross-sectional pricing of corporate bond spreads. Portfolio analysis and Fama-Macbeth regressions reveal that while both volatility and liquidity effects are significant, volatility (representing ex-ante credit shock) has the first-order impact, and liquidity (represented by bond characteristics and price impact measure) has the secondary impact on bond spreads. Conditional analysis further reveals that distressed bonds and distress regimes are both associated with significantly higher impact of credit and liquidity shocks. However, the relative impact of these shocks varies. Volatility effects are more prominent for distressed bonds and during high-distress regimes; liquidity effects are stronger for less distressed bonds and during low-distress regimes. Our findings also indicate that, unlike equity markets, idiosyncratic risk does not subsume the information in liquidity in explaining corporate bond spreads. Details of the paper available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1364303

Abstract:
In its complexity and its vulnerability to market volatility, the CPDO might be viewed as the poster child for the excesses of financial engineering in the credit market. This paper examines the CPDO as a case study in model risk in the rating of complex structured products. We demonstrate that the models used by S&P and Moody's would have assigned very low probability to the spread levels realised in the investment grade corporate credit default swap market in late 2007, even though these spread levels were comparable to those of 2002. The spread levels realised in the first quarter of 2008 would have been assigned negligibly small probabilities. Had the models put non-negligible likelihood on attaining these high spread levels, the CPDO notes could never have achieved investment grade status. We conclude with larger lessons for the rating of complex products and for modeling credit risk in general.

Abstract:
In this paper we estimate the benefits resulting from interconnecting the Italian electricity spot market. The market is currently divided into two geographic zones – North and South – with limited interzonal transmission capacity that often induces congestion, and hence potential inefficiency. By simulating a fully interconnected market, we predict that the total spot market expenditure would reduce substantially. Moreover, since savings do not increase linearly with the size of new transmission capacity, even a slight increment to transmission capacity is found to bring substantial benefits to end users. Finally, our analysis shows that the (partly State owned) dominant firm in the market is not maximizing short-term profits.

Abstract:
We examine the effect of introduction of reservations in formal sector jobs for a section of the population whose access is limited due to high training costs. Although reservations succeed in having a better representation of the disadvantaged group in the formal sector, it does not necessarily translates to higher incomes for the group as a whole when the number of formal sector jobs are few. The total number of job applicants as well as group incomes depend on the number of jobs and the extent of reservations. We look for empirical evidence from job reservations in India.

Abstract:
Consumers filing for personal bankruptcy have an attorney guiding them to choose between chapter 7 (liquidation) and chapter 13 (reorganization) and helping them to petition a judge to discharge their debt. In this paper, we empirically assess whether the role of race, gender or political ideology affects outcomes during this process. To do so, we use a unique dataset of 9,526 hand-collected, detailed bankruptcy petitions filed by debtors and their lawyers. We first investigate the determinants of a debtor's chapter choice, conditional on filing. We find that the likelihood of choosing chapter 13 is significantly driven by a debtor's asset- and debt size and type, wages, and homeownership. However, our results show that White attorneys are more likely to recommend chapter 13 to Hispanic debtors. We then investigate the role of race, gender or political ideology on the likelihood of a judge dismissing bankruptcy petitions, controlling for a debtor's financial factors, gender, and chapter choice. We find that White judges are 57% more likely to dismiss a petition of an African American debtor. More specifically, White-male-Democratic judges in Republican counties and White-female-Republican judges in Republican counties are 120% and 47%, respectively, more likely to dismiss the petition of an African American debtor.

Abstract:
This manuscript presents a structural model for measuring and managing the default risk in financial institutions. The structural model determines the minimum level of equity required to yield a maximum acceptable cumulative probability of default given a bank's existing liability structure. Our model is based on a modified version of the structural compound option model by Geske (1977). The model uses market information and integrates market dis-cipline into managing default risk and estimating bank capital requirements. The model overcomes one of the major pitfalls of current risk-based capital requirements: the lack of inclusion of the firm's liability structure. An appealing feature of our model is that it is particularly suited for estimating default risk in financial institutions that have complex liability structures. Our model builds in de-leveraging and endogenous default, thereby yielding more accurate estimates of default probability. We examine Lehman Brothers in the midst of the 2008 Financial Crisis and demonstrate how the model can be used by regulators as a dynamic tool to measure default risk, assess bank solvency, and in turn, to set appropriate credit-risk-based capital requirements.

Abstract:
Two central implications of the Expectations Hypothesis under rational expectations are inconsistent with yield curve data: (i) future expected long yields fall, instead of rising, when the yield spread rises, and (ii) long yields are excessively volatile with respect to short yields. I document these puzzles in the U.S. and the U.K. data, for different sub-samples, and for both real and nominal yields. I then propose a micro-founded optimization framework in which boundedly rational agents use adaptive learning to form expectations. The model is successful on both dimensions. First, the belief structure rationalizes the pattern of yields observed in the data so that the first puzzle does not arise with subjective instead of rational expectations. In particular, intertemporal income and substitution effects are amplified relative to the rational expectations case, causing expected long yields to rise when the yield spread falls. The second puzzle is partly accounted for by the extra volatility due to parameter uncertainty. These results suggest that it is the assumption of rational expectations that is at odds with the data, not the (subjective) Expectations Hypothesis. In addition, I find that: the model generates systematic forecast errors in yields and inflation that are consistent with survey data; higher yield volatilities during different monetary policy regimes match the data; and fiscal policy affects the yield spread because Ricardian Equivalence no longer holds.

Abstract:
This paper looks at portfolio selection by fund managers. A risk-averse manager dislikes volatility of income, which is directly related to the volatility of capital flows into the fund he manages. So the manager is averse to holding stocks that make fund flows more sensitive to performance, and hence, more volatile. This makes these stocks unpopular, and they consequently earn a premium in the cross-section when the manager is the marginal investor. In this paper we use mutual fund holdings information to identify stocks that have made funds that held them more performance sensitive than others, and show that (i) fund managers dislike holding these stocks, (ii) these stocks earn positive abnormal returns even after controlling for previously documented sources of risk, (iii) sensitive stocks did not earn any premium in the 1980s when the fund sector was not large enough to play the role of the marginal investor for pricing the cross-section, and (iv) even after 1990, the premium has increased with time as funds have captured a larger share of the market.

Abstract:
In this paper, we estimate default hazard functions that include standard variables along with borrowers sunk cost: i.e., down payment at loan origination. After testing large numbers of specifications, we find that after controlling for mark-to-market loan-to-value, initial combined loan to value remains an important predictor of default. We also find, contrary to xxx, that there is not a specific point at which one observes a discontinuous default probability, but that it is rather that default is smooth in mark-to-market LTV.

Abstract:
Abstract: New findings from plant-level surveys show trade liberalization has opposite effects on product variety and cost reduction within firms. I explain the tradeoff between firm investments in product variety and cost reduction with a monopolistic competition model of brand differentiation. Firms can make many different products within a brand. When a firm introduces a new product, it eats its own market shares of existing products more than market shares of other firms. Import competition induces firms to ease intra-firm cannibalization by narrowing product variety. Foreign market access allows firms to make products cheaply by investing in cost-reducing processes. These conflicting forces provide sharp predictions for the effects of trade liberalization on investments in product variety and production processes of firms. Examining Thai manufacturing firms, I show that intra-firm cannibalization is empirically relevant and trade liberalization has the predicted effects on product and process innovation during Thai tariff changes of 2003-2006. Thai tariff cuts reduce process innovation among exporters. Less export-oriented firms selling branded products increase product innovation while more export-oriented firms reduce product innovation in response to a Thai tariff cut. These results highlight the role of brand differentiation in unbundling the relationship between trade and innovation.

Abstract:
We examine whether limits to arbitrage explain the level of integration between a firm's equity and credit market, and find extensive support for the hypothesis. We find cross-sectional and time-series variation in equity-credit market pricing discrepancies is explained by variables associated with funding liquidity, market liquidity, and idiosyncratic risk. There is little to no evidence to support alternative hypotheses that tie pricing discrepancies to changes in volatility, changes in debt, or systematic liquidity of the credit market.

Abstract:
In this paper, we develop a model to show that laws inhibiting the common-law doctrine of “employment-at-will” have positive ex-ante effects by motivating firms and their employees to undertake value-maximizing innovative pursuits. In our model, wrongful discharge laws allow firms to credibly commit to not punish short-run failures of employees by increasing the costs incurred when firms arbitrarily discharge employees. Such ex-ante commitment encourages risk-averse employees, who would otherwise shun innovative pursuits, to exert greater effort in risky but potentially mould-breaking projects, and thereby spurs firm-level innovation. We also provide supporting empirical evidence. We employ the staggered adoption of wrongful discharge laws across U.S. states as a natural experiment. We conduct difference-in-difference tests to show that the passage of these common law exceptions to employment-at-will increased the number of patents filed by firms in the affected states, as well as citations to these patents. As evidence of the enhanced effort in innovation, we find similar increases for patents and citations per employee as well as per dollar of R&D expense.

Abstract:

Abstract:
We develop a framework to empirically examine how politicians with electoral pressures control bureaucrats with career concerns as well as the consequences for bureaucrats' career investments. Unique micro-level data on Indian bureaucrats support our key predictions. Politicians use frequent reassignments (transfers) across posts of varying importance to control bureaucrats. High-skilled bureaucrats face less frequent political transfers and lower variability in the importance of their posts. We find evidence of two alternative paths to career success: officers of higher initial ability are more likely to invest in skill, but caste affinity to the politician's party base also helps secure important positions.

Abstract:
Lenders will often restructure a loan rather than foreclose on a property because it is less value-destroying. A loan modification primarily entails a change in the loan rate, principal balance and/or remaining time to maturity; other loan features may be modifed too. We analyze optimal loan modification schemes in a stochastic home price environment. Lenders maximize their loan values by minimizing the value of the borrower's option to default on the loan. Depending on the level of interest rates and home price volatility, different prescriptions apply. We argue that, controlling for the borrower's ability to pay, loan modifications via rate reductions and maturity extensions are suboptimal, leading to dissipation in loan value to the lender, and resulting in a high probability of re-default by homeowners even after modification of their loans. In contrast, loan write-downs (the Principal Principle), not a favored recipe, and sometimes prohibited by covenants, are mostly optimal. A recent innovation, the shared appreciation mortgage, enhances the ability to pay, mitigates adverse selection against lenders, and reduces the present value of expected deadweight foreclosure costs.

Abstract:
Although empirical evidence is beginning to document that pay for performance plans for frontline employees have positive effort and selection effects, many firms are curtailing these plans. This paper reports on the financial impacts from the termination of a pay for performance plan at a retail establishment. Using monthly panel data spanning more than eight years for 15 outlets of a retailer, this study documents that sales and operating profits decrease after the incentive plan’s elimination. Analysis of individual employee sales data reveals that virtually all of the declining store level sales are due to selection effects.

Abstract:
The recent corporate governance scandals at the fourth largest software firm in India, Satyam Computers Limited, provide two clean and major corporate governance events, with effects on firms across the board in India (and possibly other emerging market countries). The first instance was a shock about board ineffectiveness on Dec 16, when Satyam’s board approved of an acquisition of two companies – one unlisted – where members of the Chairman’s family were the main entrepreneurs and had majority or complete shareholding; and the second, an accounting shock, occurred on January 7 when it was disclosed that the firm had been fudging its accounts for several years and its much-vaunted $1.2 billion cash holding was largely non-existent and the result of a long-drawn accounting fraud. We analyze the cross-sectional variation in the stock price reactions to these two corporate governance shocks for Indian companies. We relate the firm-specific abnormal returns on these two dates to different measures of corporate governance to find out the market perception of the validity of these measures. We show that with regard to board effectiveness, i) Board independence per se does not matter; but ii) The characteristics of the independent directors matter: companies with more independent directors do better and those with more entrenched board (proxied by mean tenure of independent directors) fare worse; iii) institutional holdings have a salutary effect, but only for foreign institutions; iv) board size has a quadratic relationship with board effectiveness and v) perhaps surprisingly; there is no evidence of a discount for company belonging to business groups. For the second episode, none of the board or audit committee related variables are significant, but audit quality indicators seem to matter. These findings help us identify what variables among those identified by prior research are actually taken into account by investors in an emerging market to assess the corporate governance levels of companies and to what extent they affect valuation.

Abstract:
We examine the relation between perceptions of institutional quality and governance, and trading costs and asymmetric information for NYSE-listed, non-U.S. firms. Consistent with studies that suggest that home-country institutions have lingering effects on cross-listed firms, we report that the liquidity of NYSE-listed, non-U.S. firms is related to the perceived institutional quality and governance of the firm’s home country. Cross-listed firms from countries perceived as having stronger (weaker) institutional quality and governance exhibit lower (higher) trading costs and less (more) asymmetric information. The enduring effect of home-country institutions extends to non-microstructure measures of information asymmetry, as we find that analyst coverage is positively related to perceived institutional quality and governance. Perception-based measures better explain differences in trading costs than quantitative measures of shareholder rights and earnings quality. Our results suggest that firms and investors may benefit from improvements in market participants’ perception of institutional quality in the form of lower transaction costs and improved liquidity.

Abstract:
Going public is an important milestone for a firm. There are significant benefits and costs associated with the decision of being listed. On one hand the firm can raise the required capital for investment and firm growth through the IPO, make the firm more visible, transfer the risk to shareholders, relax the borrowing constraints and be more competitive in the product market. On the other hand, going public is associated with significant amount of fixed and variable costs. The process and the uncertainty associated with raising equity are further complicated by the adverse selection problem associated with yet to be publicly observed innovations of the firm. The investors may feel that they have inferior information about the future prospects of the firm relative to the management which may lower their propensity to invest. The informational superiority of the firm leads to the standard lemons problem and it has to underprice the issue to give enough incentives to the investors to invest in the IPO. This is an indirect cost and lowers the IPO proceeds and adds to the listing cost. Facing these trade-offs the firm manger would want to time the IPO decision well which makes the decision process inherently dynamic in nature. In this paper we formulate a dynamic programming based structural model of the going public decision and estimate the hidden parameters using data from Indian IPOs.

Abstract:
The crisis of 2007-09 has been characterized by a sudden freeze in the market for short-term, secured borrowing. We present a model that can explain a sudden collapse in the amount that can be borrowed against finitely-lived assets with little credit risk. The borrowing in this model takes the form of a repurchase agreement (“repo") or asset-backed commercial paper that has to be rolled over several times before the underlying assets mature and their true value is revealed. In the event of default, the creditors can seize the collateral. We assume that there is a small cost of liquidating the assets. The debt capacity of the assets (the maximum amount that can be borrowed using the assets as collateral) depends on the information state of the economy. At each date, in general there is either “good news" (the information state improves), “bad news" (the information state gets worse), or “no news" (the information state remains the same). When rollover risk is high, because debt must be rolled over frequently, we show that the debt capacity is lower than the fundamental value of the asset and in extreme cases may be close to zero. This is true even if the fundamental value of the assets is high in all states. Thus, a small change in information, as measured by a change in the fundamental value, can lead to a “market freeze." Interpreted differently, the model explains why discounts in overnight repo borrowing, the so-called “haircuts," rose dramatically during the crisis for asset-backed securities with low credit risk once bad news about the underlying cash flows arrived.

Abstract:
We examine the relationship between portfolio manager ownership, closed-end fund premiums/discounts, and future returns. Using a sample of 592 closed-end funds, representing 95% of the entire industry, we find that fund manager ownership has a positive and economically significant impact on fund premiums and future fund performance measured using both NAV and price returns. Furthermore, a number of board level characteristics, including the fraction of independent directors and directors on the board with financial expertise, are related to premiums and returns. These findings add to our understanding of the closed-end fund discount puzzle and suggest that the disclosure of portfolio manager ownership is beneficial for investors.

Abstract:
A modified version of the partial equilibrium gravity model, originally proposed by Fukao et al. (2003), is employed to investigate the changing patterns of U.S. textile trade. We use the data on US Bilateral Manufacturing Imports and Exports by SIC4, which cover the period 1989 to 2001, to assess the impact of labor wages, tariffs, and exchange rates on the composition of U.S. textile imports before and after the creation of NAFTA. Unlike many previous studies, we also consider the effect of tariff removals under NAFTA on U.S. trade with non-NAFTA nations. The analysis is performed at the 2-digit industry level as well as the more disaggregated 4-digit sector level. We conclude that there is little evidence of trade diversion in textiles frequently attributed to NAFTA, while trade creation is clearly present. Furthermore, lower wages in some textile-exporting countries (e.g., countries in Asia) do not appear to significantly increase these countries’ share of U.S. textile imports at the expense of other trading partners. Variations in currency exchange rates and tariffs, on the other hand, have substantial effects on the composition of U.S. imports.

Abstract:
It is generally accepted that good product design is good business. However, it is unclear if design benefits impact key indicators of good business such as market-share and profit-margins, differently. Are hedonic design benefits more influencial on improving product choice (i.e., market share) and/or willingness to pay (i.e., profit-margins) than utilitarian design benefits, and if so why? This paper, (1) studies if customers’ likelihood of purchase and willingness to pay more for a product changes if it offers superior hedonic versus superior utilitarian benefits, and (2) explains the underlying reasons for the observed difference based on the theory of specific emotions. With the help of three experiments and a field study involving automobiles, cell phones, notebook computers, and wrist watches, we answer the following research questions: (1) do customers’ believe that a hedonically superior product will be priced higher by retailers over a product that offers superior utilitarian benefits or vice versa?, (2) do customers’ exhibit significant preference reversal in terms of choice probability versus willingness-to-pay levels involving products offering superior hedonic versus superior utilitarian benefits?, (3) is there a boundary condition when this preference reversal involving products with superior hedonic and superior utilitarian benefits disappears?, and (4) can we explain these findings using theory of specific emotions such as excitement, delight, confidence, and satisfaction? The primary theoretical insights this research provides are as follows: (1) customers believe that retailers are more likely to price products with superior hedonic benefits higher (1) than products with superior utilitarian benefits, (2) customers are more likely to purchase a product that offers superior utilitarian benefits over a product that offers superior hedonic benefits whereas they are willing to pay more for a hedonically superior product over a product that offers superior utilitarian benefits, (3) the phenomenon of preference reversal (i.e., report purchase preference for utilitarian product and willingness-to-pay more for hedonic product) disappears when customers are certain of their minimum utilitarian and hedonic needs and both products meet those minimum needs (i.e., under this condition, customers are more likely to choose as well as pay more for a hedonically superior product), and (4) customers who are willing to pay more for a hedonically superior product anticipate experiencing greater positive emotions of excitement and delight during consumption than those who choose a product with superior utilitarian design benefits. The results suggest that marketing managers and designers must emphasize greater hedonic design benefits to improve profit-margins and greater utilitarian design benefits to improve market-share for a new product. However, once the minimum utilitarian and hedonic needs of customers are met, product designers and marketers should focus on enhancing hedonic benefits to maximize both market-share and profit margins. In conclusion, the results suggest that design strategy can be leveraged to fulfill the financial goals of improving only market-share or improving only profit-margins, or improving both.

Abstract:
When viewed as expropriable, intangible assets, resources offer a double-edged sword. Since they are non-rival, sharing of resources can generate substantial benefits. Yet, since they are nonexcludable, such sharing induces the temptation to misappropriate the resource. This tension is acute when young, startup firms and their financiers possess complementary resources. This paper studies how the financing mode chosen by entrepreneurs and their financiers balances the tension between resource sharing and the temptation for resource misappropriation induced by such sharing. The model analyzes the financing choices that differ in their intensity of resource sharing — corporate venture capital, independent venture capital, and bank/ angel financing. The model predicts that financing choices involving more intense resource sharing predominate when (i) intellectual property protection is stronger; (ii) product market competition is lower; and (iii) when the resources are difficult to expropriate.

Abstract:
In this paper we discuss how several macroeconomic features of the 2001-2009 period may have resulted from a process in which financial markets were trying to allocate risk between heterogeneous agents when productive investment opportunities are scarce. We begin by showing how heterogeneity in terms of risk tolerance can cause financial markets to propagate transitory shocks and induce higher output volatility, albeit with a higher mean. We then show how this simple heterogeneous agent framework can explain an expansion driven by the growth in consumer debt, and why the equilibrium path of such an economy is likely fragile. In particular, we demonstrate that the emergence of a small amount of asymmetric information can make the economy susceptible to changes in expectations that can induce large reversals of financial flows, the freezing of assets and a recession that can persist despite high productivity.

Abstract:
This paper investigates whether aligning manager and owner incentives can improve the innovation performance of firms. We find that innovation magnitude, R&D and technology concentration have an inverted U-shape relationship with price pay sensitivity. These first increase with price pay sensitivity, and then decrease at very high levels of price pay sensitivity. However, the quadratic term occurs beyond the 95th percentile of the distribution, and thus for the majority of the sample greater sensitivity of managerial wealth to stock price changes encourages innovation & R&D, and makes firms concentrate on their core technology areas. Only patent quality has a positive linear relationship with pay sensitivity. We also find that more entrenched managers, as measured by increased stock holdings, have a negative impact on patenting and R&D investment. Short-term monetary incentives have no impact on the innovation strategy of a firm.

Abstract:
A selective overview of recent events highlighting the need for better data and modelling of house prices. The seminar will also address current best practice and its drawbacks, and some recent work on constructing better house price indices. The seminar will include an overview of some recent work on modelling housing markets.