Knowledge that Transforms

Exchange-Rate Regimes and International Trade: Evidence from the Classical Gold Standard Era by J. Ernesto López-Córdova and Christopher M. Meissner. Published in volume 93, issue 1, pages 344-353 of American Economic Review, March 2003

Measuring Unilateral Market Power in Wholesale Electricity Markets: The California Market, 1998-2000 by Frank A. Wolak. Published in volume 93, issue 2, pages 425-430 of American Economic Review, May 2003

This paper explores the general-equilibrium impact of social security portfolio diversification into private securities, either through the trust fund or private accounts. The analysis depends critically on heterogeneities in saving, production, assets, and taxes. Limited diversification weakly increases interest rates, reduces the expected return on short-term investment (and the equity premium), decreases safe investment, increases risky investment, and increases a suitably weighted social welfare function. However, the effects on aggregate investment, long-term capital values, and the utility of young savers hinges on assumptions about technology. Aggregate investment and long-term asset values can move in opposite directions.

Using a comprehensive data set of Portuguese manufacturing firms, we show that the firm size distribution is significantly right-skewed, evolving over time toward a lognormal distribution. We also show that selection accounts for very little of this evolution. Instead, we propose a simple theory based on financing constraints. A calibrated version of our model does a good job at explaining the evolution of the firm size distribution.

In 1914, an accounting professor named Arthur Andersen founded a public accounting practice that became the world’s largest professional-services firm. For years preceding the Enron debacle and Andersen’s collapse, the firm had struggled to create incentives within the organization for partners to provide high-quality service, develop and sell new services, and meet the compensation expectations of various factions of partners. A years-long dispute over the division of profits between the firm’s consulting and accounting arms led to the 1998 separation of the consulting practice from the audit and tax practices. The rise, break-up and fall of Andersen underlines the importance of questions concerning incentive structures within public accounting firms in particular, and partnerships of professionals in general. This paper offers a perspective on partner compensation schemes and the accounting information systems that support them.

The consequences of bank distress for the economy during the Depression remain an area of unresolved controversy. Since John M. Keynes (1931) and Irving Fisher (1933), macroeconomists have argued that bank distress magnified the extent of the economic decline during the Depression. As the intermediaries controlling money and credit, banks were in a special position to transmit their distress to other sectors. But the mechanism through which banking distress mattered for the economy has been hotly contested.

We find that institutional ownership concentration is positively related to the pay‐for‐performance sensitivity of executive compensation and negatively related to the level of compensation, even after controlling for firm size, industry, investment opportunities, and performance. These results suggest that the institutions serve a monitoring role in mitigating the agency problem between shareholders and managers. Additionally, we find that clientele effects exist among institutions for firms with certain compensation structures, suggesting that institutions also influence compensation structures through their preferences.