The Executive Committee voted at its January 2009 meeting to establish a new Committee on Government Relations. The Committee was authorized to establish a Washington office for the Association and to hire a part time Washington representative. Katharine Abraham (University of Maryland) was appointed chair of the new committee. The other members are Angus Deaton (AEA president and Princeton), Catherine Eckel (University of Texas–Dallas), Robert Hall (AEA president-elect and Stanford), Robert Moffitt (Johns Hopkins), Charles Plott (California Institute of Technology), Richard Schmalensee (MIT), Charles Schultze (Brookings Institution), and James Smith (Rand Corporation). Rebecca Blank (formerly of the Brookings Institution) served as a member of the Committee until she was confirmed as Undersecretary of Commerce in June 2009. The Committee’s first tasks were to develop a mission statement for the new Washington office and a description of the duties to be performed by the Association’s Washington representative. Both were approved by the Executive Committee at its April 2009 meeting and are posted to the Committee’s new Web site; for reference, copies are attached to this report. The Washington representative is charged primarily with developing information about legislation, regulations and agency decisions pertinent to the scientific interests of the AEA and, working closely with the Committee on Government Relations, to keep members of the Association informed about these developments. On occasion, the Washington representative may be asked to provide informational materials to congressional staff, Members of Congress and Executive Branch officials, but under no circumstances will s/he express any view or take any position in an official capacity that might be construed as partisan. The Washington representative position was advertised in the spring. Roughly 40 applications were received, and a hiring subcommittee interviewed the top few applicants in mid June. Based on the report of the interviewing subcommittee, the full Committee’s consensus choice to fill the position was longtime National Science Foundation program officer Dan Newlon, who retired from the NSF in August. Newlon accepted the offer of a halftime position and began work October 1. A blast e-mail that went out to AEA members in October announced the formation of the Committee and Dan’s appointment as the AEA’s new Washington representative. Dan’s appointment also is noted on the Committee’s Web site. Dan is a very capable person who has the additional advantages of being well known to economists and very familiar with the concerns of the economics profession. We are delighted he has agreed to take on this new role. Since October 1, Newlon has been meeting with representatives of various organizations whose interests overlap with those of the AEA. The Committee has met by phone with Newlon roughly once every two weeks. Much of the time during those meetings has been devoted to defining more clearly the role of the committee and the Washington representative. The Committee has authorized Newlon to move forward with several activities:

A firm's decision to contract out for business support services may be influenced by the wage and benefit savings it could realize, the volatility of its output demand, and the availability of specialized skills possessed by the outside contractor. Analysis of newly available establishment-level data shows that all three of these factors help to explain observed contracting behavior. The reported empirical findings are relevant both for understanding the recent growth in business support service contracting and for understanding firms' relationships with their own employees.

We analytically compare two dominant methodologies for the construction of an ESG factor: the time-series (ratings used to sort stocks) and cross-sectional (ratings used to weight stocks) approaches. Differences in ESG rating and exposure to other firm characteristics imply an ex ante expected return spread between the two factors. We construct a cross-sectional factor (i) featuring a targeted rating, thus allowing comparability with other factors, (ii) neutralizing exposure to other firm characteristics, and (iii) not harming diversification through stock screening. Using ratings from several data vendors, we document strong variations of the factor alpha in the time series and across vendors. The conditional alpha is negatively related to the level of media attention for ESG and positively related to variations in media attention.

We examine the issue of pricing forward futures and option contracts written on the Consumer Price Index (CPI), the change of which is a measure of inflation affecting the economy. Traditional approaches postulate an exogenous process for the price level and then derive CPI derivatives prices by standard arbitrage arguments. By contrast, we build the general equilibrium of a continuous time monetary economy that is affected by both real and nominal shocks. The price level and thus the inflation rate are found endogenously and solutions for the prices of CPI derivatives are obtained, which are in closed form in a specialized version of the economy.

We derive the general equilibrium short-term real and nominal interest rates in a monetary economy affected by technological and monetary shocks and where the price level dynamics is endogenous. Assuming fairly general processes for technology and money supply, we show that an inherent feature of our equilibrium is that any real variable dynamics, in particular that of the short-term real interest rate, is driven by both monetary and real factors. This money non-neutrality is generic, as it does not stem from any friction such as price stickiness, or from a particular utility function. Non-neutrality obtains because the ex ante cost of real money holdings is random due to inflation uncertainty. We then analyze in depth a specialized version of this economy in which the state variables follow square root processes, and the representative investor has a log separable utility function. The short-term nominal rate dynamics we obtain encompasses most of the dynamics present in the literature, from Vasicek and CIR to recent quadratic and, more generally, non-linear interest rate models. Moreover, our results pave the way to several new nominal term structures.

We consider an international economy where the purchasing power parity (PPP) is violated and financial asset returns and exchange rates follow, in real terms, general diffusion processes driven by K state variables. A country-specific representative individual trades on available assets to maximize the expected utility of her final consumption. Her optimal strategy is shown to contain, in addition to the usual speculative component, only two hedging components, however large is K. The first one is associated with domestic interest rate risk and the second one with the risk brought about by the co-movements of the interest rates and the market prices of risk. The implementation of the strategy thus is much easier than with the traditional Merton decomposition, as it involves estimating the characteristics of the yield curve and the market prices of risk only, rather than those of numerous (and a priori unknown) state variables. In view of the necessity for optimizing agents to account for the (partial) asset return predictability that derives from the investors’ hedging demands at equilibrium, our result significantly lessens the difficulty of achieving the optimal portfolio strategy. The second hedging term turns out to depend on interest rate differentials across countries and to encompass hedging against PPP deviations. Therefore, in contrast with previous models that obtained a (direct) currency risk hedging component in a rather ad hoc manner, our decomposition leads to optimal (indirect) currency risk hedging in a natural and general way. It also provides new insights as to the pricing of foreign exchange risk at equilibrium.

Edgeworth's conjecture that as the number of traders in an exchange economy increases the core approaches the set of competitive equilibria has been formalized both as a theorem about a sequence of finite economies, and as a theorem about an economy having an infinite number of agents. This paper, using nonstandard analysis, provides a synthesis of these two approaches. It is shown that the core and the set of competitive equilibria are equivalent within a non-standard exchange economy. This theorem implies a asymptotic theorem concerning the core and competitive equilibria of sequences of finite economies. (Из Ebsco)

As demonstrated by Boyce and Kalotay (1979) and Brick and Ravid (1985), the use of long-term debt may be preferred because of tax-related advantages. Brick and Ravid show that if there exists a tax advantage to debt and nonstochastic interest rates, long-term debt will increase the present value of the tax benefits of debt if the term structure of interest rates, adjusted for risk of default, is increasing. A decreasing term structure, on the other hand, calls for short-term debt. The present paper extends the tax-induced argument of Brick and Ravid to allow for the presence of stochastic interest rates. Once interest rates are uncertain, pricing even under risk neutrality becomes a complex issue. We analyze the debt maturity decision under two competing pricing equations: the return to maturity expectations hypothesis and the local expectations hypothesis. (This terminology is used in Cox, Ingersoll, and Ross (1981) and Campbell (1986).) Under uncertainty, a debt capacity factor will create an additional incentive to issue long-term debt. Our other results may be interpreted to indicate that if the term premium, the difference between the implied forward interest rate and the future expected spot rate, is positive (sufficiently negative) then long-term (short-term) debt maturity strategy is optimal.