Knowledge that Transforms

In this paper, we use a unique long-run dataset of regulatory constraints on capital account openness to explain stock market correlations. Since stock returns themselves are highly volatile, any examination of what drives correlations needs to focus on long runs of data. This is particularly true since some of the short-term changes in co-movements appear to reverse themselves (Delroy Hunter 2005). We argue that changes in the co-movement of indices have not been random. Rather, they are mainly driven by greater freedom to move funds from one country to another. In related work, Geert Bekaert and Campbell Harvey (2000) show that equity correlations increase after liberalization of capital markets, using a number of case studies from emerging countries. We examine this pattern systematically for the last century, and find it to be most pronounced in the recent past. We compare the importance of capital account openness with one main alternative explanation, the growing synchronization of economic fundamentals. We conclude that greater openness has been the single most important cause of growing correlations during the last quarter of a century, though increasingly correlated economic fundamentals also matter. In the conclusion, we offer some thoughts on why the effects of greater openness appear to be so much stronger today than they were during the last era of globalization before 1914.(This abstract was borrowed from another version of this item.)

We propose a theory of the global production process that focuses on tradeable tasks, and use it to study how falling costs of offshoring affect factor prices in the source country. We identify a productivity effect of task trade that benefits the factor whose tasks are more easily moved offshore. In the light of this effect, reductions in the cost of trading tasks can generate shared gains for all domestic factors, in contrast to the distributional conflict that typically results from reductions in the cost of trading goods.

Economists have long argued that a strong linkage between compensation and performance is essential for resolving the agency problem created by the separation of ownership and control. In particular Michael C. Jensen and Kevin J. Murphy (1990) were very influential in giving impetus to the view that such incentives were in need of strengthening. Compared to accounting benchmarks, the stock price is more forward looking, and it is responsive to all value-relevant information, including informal and unverifiable items of news. This makes stock and/or option awards an important part of optimal incentives, and constitutes a primary reason for seeking a public listing, as argued by Bengt Holmstrom and Jean Tirole (1993). Until recently, however, theories of optimal executive compensation have generally ignored the possibility that the stock price can be manipulated or falsified. It is becoming increasingly clear that this is an important issue. In a spate of recent scandals, companies have misled the investing public by vastly overstating their profitability and prospects, and substantive restatements of company accounts have become increasingly commonplace. A growing body of empirical evidence suggests that executive pay in its current form may be at least in part responsible. Recent studies finding a link between unusual movements in performance measures (such as accounting yardsticks and publicly disclosed price-sensitive information) and compensation include Daniel Bergstresser and Thomas Philippon (2006), Natasha Burns and Simi Kedia (2006), and Peng and Roell (forthcoming). Thus, the benefits of stock-based incentives should be weighed against their side effects. This paper models optimal executive compensation in a setting where managers are in a position to influence the public perception of Manipulation and Equity-Based Compensation

This laboratory experiment explores the extent to which impersonal exchange emerges from personal exchange with opportunities for long-distance trade. We design a three-commodity production and exchange economy in which agents in three geographically separated villages must develop multilateral exchange networks to import a good only available abroad. For treatments, we induce two distinct institutional histories to investigate how past experience with property rights affects the evolution of specialization and exchange. We find that a history of unenforced property rights hinders our subjects' ability to develop the requisite personal social arrangements to support specialization and effectively exploit impersonal long-distance trade.

This paper presents a political economy theory of fiscal policy. Policy choices are made by a legislature that can raise revenues via an income tax and by borrowing. Revenues can be used to finance a public good, whose value is stochastic, and pork-barrel spending. Policymaking cycles between a “business- as-usual” regime in which legislators bargain over pork, and a “responsible policymaking” regime in which policies maximize the collective good. Transitions between regimes are brought about by shocks in the value of the public good. Equilibrium tax rates are too high, public good provision is too low, and debt levels are too high.

This paper examines outside director compensation for a sample of 237 Fortune 500 firms over the 1998–2004 period. We document a trend towards fixed-value equity compensation and away from cash only and fixed-number equity compensation. Adjustments to director compensation are consistent with firms targeting a market level of compensation, and firms that deviate from their market wage symmetrically adjust compensation back toward the market level. We also document the relation between changes in compensation and changes in equity values, and find that upward adjustments begin sooner than downward adjustments. When equity values rise, we find virtually no immediate offset to director compensation. However, when equity values fall, fixed-number equity compensation is adjusted in the same period (by awarding more shares or options) to offset the loss of income by almost one-third. Thus, the magnitude of adjustments towards the market wage level is symmetric, but the timing is not.

A key issue in monetary policymaking is the appropriate division of labor between the profes? sional staff of the central bank and the appointed policymakers. Lars E. O. Svensson (1999) argues that the appropriate role of a policymaking group, such as the Federal Open Market Com? mittee (FOMC) in the United States, is to make judgments about social welfare, taking as given the likely outcomes of different policies as esti? mated by the staff. In this division, the staff is relied upon to assess current and prospective economic conditions and to forecast the effects of different policies. Policymakers' only role is to decide which of the various options should be chosen.

Recent years have seen substantial prog? ress in our understanding of pricing decisions at the micro level. Access to large-scale data sources on prices of individual products has given us rich information on how frequently prices change, by what magnitude, and how the aggregation of price changes in individual firms maps into aggregate inflation (see, among many others, Mark Bils and Peter J. Klenow 2005). These facts about price movements are a key input in recent quantitative models of the aggre? gate effects of nominal rigidities (e.g., Mikhail Golosov and Robert E. Lucas 2007). In this paper, we use both the new facts and the new quantitative models to revisit an old question, namely, that of quantifying the welfare benefits of low inflation. Our model includes two

Building on previous work by Schelling and Crawford, we study a model of bilateral bargaining in which negotiators can make binding commitments at a low positive cost c. Most of our results concern outcomes that survive iterated strict dominance. If commitment attempts never fail, there are three such outcomes. In two of them, all the surplus goes to one player. In the third, there is a high probability of conflict. If commitment attempts succeed with probability q < 1, the unique outcome that survives iterated strict dominance entails conflict with probability q2. When c = 0, analogous results hold if the requirement of iterated strict dominance is replaced by iterated weak dominance.