A model of asymmetric asset value information and nonverifiability of liquidation motives is developed to examine the optimal design and governance of asset-backed securities. Because of adverse selection risk, the liquidation option of whole loan sale results in external price discounting of composite cash flows. The alternative liquidation option of senior/subordinated security design is shown to dominate whole loan sale, since cash flow splitting allows the issuer to internalize some or all of the lemons-related liquidation costs. Security subordination levels must increase relative to full information levels, however, to protect uninformed outside investors. Pool diversification and loan bundling are shown to be packaging strategies that can soften the lemons-related subordination effect and therefore increase liquidation proceeds. With respect to security governance, we show that it is the junior securityholder who should control the debt renegotiation process with pooled debt structures. Better asset value information and a first loss position are the reasons for junior securityholder control in our model. Numerous empirical implications of the model are also identified and discussed.Journal of Economic LiteratureClassification Numbers: D46, D81, D82, G13, G21, G24, G32, G33.

To create value and reduce agency costs, firms adopt available organizational structures that match their attributes. This paper studies the characteristics of firms that choose to become master limited partnerships (MLPs). The MLP sample is dominated by firms in low-growth industries that have highly focused operations and superior profitability compared to their industry peers. After becoming an MLP, sample firms reduce capital expenditures and increase cash distributions, taking advantage of their focus, profitability, and status as non-taxable entities. A subsample of MLPs subsequently change back to corporate form. After becoming corporations, these firms reverse course by cutting cash distributions and increasing capital spending. This cycle demonstrates how firms restructure to adopt organizational forms that best fit their needs.

Early economic models assumed that the maximizing behavior of individual actors was the primary determinant of political as well as market outcomes. This approach revolved several long-standing puzzles in political science, but created new anomalies in place of the old: why do citizens vote in large elections? Why are democratic legislatures as stable as they are? Partly in response to these anomalies, the emphasis has shifted from the study of self-interested choice, to the study of constraints on self-interested choice. This has opened new doors for the study of bureaucracies, parties, and other fundamental political institutions.

The Tax Reform Act of 1986 constituted the most sweeping postwar change in the U.S. federal income tax. This paper considers what the Act accomplished and its implications for future tax policy. After a review of the Act itself, and why it happened, we consider the evidence of the Act's impact on economic activity and how this evidence squares with initial predictions. Where appropriate, we draw out how consideration of the impact of TRA86 has contributed to the development of the methodology of economic analysis. We conclude with an overall evaluation of the Act.

This paper provides evidence on whether managers can reduce stockholder litigation costs by disclosing adverse earnings news ‘early’. Inconsistent with this idea, I find that voluntary disclosures occur more frequently in quarters that result in litigation than in quarters that do not. However, this result occurs because managers' incentives to predisclose earnings news increase as the news becomes more adverse, presumably because this reduces the cost of resolving litigation that inevitably follows in bad news quarters. After controlling for these incentives using estimated stockholder damages, I find some evidence that more timely disclosure is associated with lower settlement amounts.

A general equilibrium search framework is used to examine the role of gender differences in labor market behavior patterns (e.g., quit rates for personal reasons) in determining gender wage differentials. For samples of high school and college graduates from the National Longitudinal Survey of Youth (NLSY), these behavioral patterns are found to be significantly different across the sexes and account for 20%–30% of the wage differentials. In particular, they play a key role in explaining the male‐female wage differential that remains after controlling for the gender composition across occupations.

A central question in labor economics and macroeconomics is whether the textbook competitive model provides an adequate representation of the labor market. Using longitudinal data on companies and establishments, this article suggests that it may not. As predicted by rent-sharing models of the labor market, changes in profitability are shown to feed through into long-run changes in wages. These are not temporary wage effects and are not driven by the unionized workplaces in the data. The article's estimates imply that, for rent-sharing reasons alone, Lester's "range" of wages is approximately 16%.

This study examines how high school employment affects future economic attainment. There is no indication that light to moderate job commitments ever have a detrimental effect; instead, hours worked during the senior grade are positively correlated with future earnings, fringe benefits, and occupational status. These gains occur even though employed seniors attain slightly less education than their counterparts. The results are robust across a variety of specifications and suggest that student employment increases net investments in human capital particularly toward the end of high school and for females.

This study examines the effect of specialization at the different stages of an audit workpaper review. Auditing literature advises focusing each review level on specific kinds of errors (i.e., seniors on mechanical errors and managers on conceptual errors), rather than having seniors and managers perform successive all‐encompassing reviews. However, surveys of review practice suggest that all‐encompassing reviews are common. To determine whether specialization at different levels of review improves reviewers' overall effectiveness, this study has 35 managers and 39 seniors actually perform a review of a realistic set of workpapers. Half the subjects performed specialized reviews, whereas the other half performed all‐encompassing reviews. Overall accuracy rates in our study are consistent with prior research. In addition, the combined reviews of seniors and managers are more effective than those of either seniors or managers separately, demonstrating the benefits of hierarchical review. However, specialized review leads reviewers to be significantly less accurate than reviewers performing all‐encompassing reviews. The results suggest specialization will not automatically improve review effectiveness, and that accounting firms may need to re‐evaluate their review guidance and professional training on workpaper reviews.