This paper resolves the disagreement between Longstaff et al. [2001. Journal of Finance Economics 62, 39–66] and Andersen and Andreasen [2001. Journal of Financial Economics 62, 3–37] over the effectiveness of the common business practice of using best-fit single-factor term structure models to deduce exercise strategies of Bermudan swaptions. I examine the cost of using recalibrated single-factor models to determine the exercise strategy for Bermudan swaptions in a multifactor world. I show that single-factor exercise strategies applied in a multifactor world only give rise to economically insignificant losses. Furthermore, I find that the conditional model risk as defined in Longstaff et al. [2001. Journal of Finance Economics 62, 39–66] is statistically insignificant given the number of observations. Additional tests using the Primal–Dual algorithm of Andersen and Broadie [2004. Management Science 50(9)] indicate that losses found in Longstaff et al. [2001. Journal of Finance Economics 62, 39–66] cannot, as claimed, be ascribed to the number of factors.

How does impatience affect job search? More impatient workers search less intensively and set a lower reservation wage. The effect on the exit rate from unemployment is unclear. In this paper we show that, if agents have exponential time preferences, the reservation wage effect dominates for sufficiently patient individuals, so increases in impatience lead to higher exit rates. The opposite is true for agents with hyperbolic time preferences: more impatient workers search less and exit unemployment later. Using two large longitudinal data sets, we find that various measures of impatience are negatively correlated with search effort and the exit rate from unemployment, and are orthogonal to reservation wages. Overall, impatience has a large effect on job search outcomes in the direction predicted by the hyperbolic discounting model.

I show that when an issuer has superior information about the value of its assets, it is better off selling assets separately rather than as a pool due to the information destruction effect of pooling. If, however, the issuer can create a derivative security that is collateralized by the assets, pooling and “tranching” may be optimal. If the residual risk of each asset is not highly correlated, tranching allows the issuer to exploit the risk diversification effect of pooling to create a low-risk and highly liquid security. In contrast, for an uninformed seller, pure pooling reduces underpricing and is preferred to separate asset sales. These results lead to a dynamic model of financial intermediation: originators sell pools of assets, some of which are purchased by informed intermediaries who then further pool and tranche them. Pooling and tranching allow intermediaries to leverage their capital more efficiently, enhancing the returns to their private information.

Relicensing requirements for professionals who move across borders are widespread. In this article, we measure the effects of occupational licensing by exploiting an immigrant physician retraining assignment rule. Instrumental variables and quantile treatment effects estimates indicate large returns to acquiring an occupational license and negative selection into licensing status. We also develop a model of optimal license acquisition that, together with the empirical results, suggests that stricter relicensing requirements may lead not only to practitioner rents but also to lower average quality of service in the market for physicians.

We study the determinants of the location of subcontracted activity in a general equilibrium model of outsourcing and trade. We model outsourcing as an activity that requires search for a partner and relationship-specific investments that are governed by incomplete contracts. The extent of international outsourcing depends inter alia on the thickness of the domestic and foreign market for input suppliers, the relative cost of searching in each market, the relative cost of customizing inputs and the nature of the contracting environment in each country.

We investigate the use of a warrant‐pricing approach to incorporate employee stock options (ESOs) into equity valuation and to account for the dilutive effect of ESOs in the valuation of option grants for financial reporting purposes. Our valuation approach accounts for the jointly determined nature of ESO and shareholder values. The empirical results show that our stock price estimate exhibits lower prediction errors and higher explanatory powers for actual share price than does the traditional stock price estimate. We use our valuation approach to assess the implications of dilution on the fair‐value estimates of ESO grants. We find that the fair value is overstated by 6% if we ignore the dilutive feature of ESOs. Furthermore, this bias is larger for firms that are heavy users of ESOs, small, and R&D intensive, and for firms that have a broad‐based ESO compensation plan.

This article uses unique data from the London Stock Exchange to examine how trader anonymity and market liquidity affect dealers' decisions about where to place interdealer trades. During our sample period, dealers could trade with each other in the direct, nonanonymous public market or use one of four anonymous brokered trading systems. Surprisingly, we find that adverse selection is less prevalent in the anonymous brokered markets. We show that this pattern can be explained by the way dealers “price” the adverse selection risk inherent in trading with other dealers. We also relate our findings to recent changes in dealer markets.

The purpose of this study is to investigate whether and how shareholder‐level taxes affect earnings response coefficients (ERCs). Our tests indicate that when the tax rate on dividends increases, ERCs decrease for firms with high levels of dividend yield and whose marginal investor is likely to be an individual. For firms with high levels of share repurchase yield and whose marginal investor is likely to be an individual, an increase in dividend tax rate has no discernible effect on ERCs. These results are consistent with the notion that the tax penalty on dividends, relative to capital gains, reduces the earnings‐return relation.

This paper investigates breaks in the variability and comovement of output, consumption, and investment in the G-7 economies. In contrast with most other papers on comovement, we test for changes in comovement, allowing for breaks in mean and variance. Despite claims that rising integration among these economies has increased output correlations among them, we find no clear evidence of an increase in correlation of growth rates of output, consumption, or investment. This finding is true even for the United States and Canada, which have seen a tremendous increase in bilateral trade shares, and for the euro-area members of the G-7.

We examine how political, institutional, and economic factors are related to a country’s decision to privatize state-owned banks. Using a panel of 101 countries from 1982 to 2000, we find that political factors significantly affect the likelihood of bank privatization only in developing countries. Specifically, in non-OECD countries, bank privatization is more likely the more accountable the government is to its people. In contrast, none of our political variables affects the bank privatization decision in developed countries. Economic factors (such as the quality of the nation’s banking sector) are significant determinants of bank privatization in both OECD and non-OECD nations.