We analyze a model where investors use a credit rating to decide whether to finance a firm. The rating quality depends on unobservable effort exerted by a credit rating agency (CRA). We study optimal compensation schemes for the CRA when a planner, the firm, or investors order the rating. Rating errors are larger when the firm orders it than when investors do (and both produce larger errors than is socially optimal). Investors overuse ratings relative to the firm or planner. A trade-off in providing time-consistent incentives embedded in the optimal compensation structure makes the CRA slow to acknowledge mistakes.

This paper analyzes dynamics of production and inventories at the General Motors Corporation during the 1920's and 1930's. We begin by examining anecdotal evidence on the nature of the production control system in force during that period. Motivated by that evidence, we then extend the conventional linear-quadratic model of production behavior to take account of annual shutdown. Finally, we apply the modified model to newly available data on monthly unit production, sales, and inventories during 1924-1940. GM appears to have been aiming to maintain a targeted level of inventory relative to expected sales and, secondarily, to smooth production.

Recent models of firm investment decisions stressing informational imperfections in capital markets provide a foundation for interpreting evidence that movements in internal finance can predict investment spending, even after one controls for measures of firms' investment opportunities. While such evidence is suggestive, it is often open to other interpretations. We examine these models using data on equipment investment in the U.S. agricultural sector. This sector is particularly interesting because it has experienced large fluctuations in net worth and the profitability of investment, and reasonable measures of net worth can be constructed. Our findings provide support for a class of "internal funds" models of investment under asymmetric information.

I argue that merger policy needs to be driven by different considerations in Europe, Japan and the United States. In Europe the main challenge is to set up a system so that efficient consolidation can occur once the single currency is established. In Japan the policy ought to be directed towards trying to attract foreign institutions to acquire under-capitalized domestic institutions. Japan does not seem to be taking this route. In the US consolidation it is already occurring and the current policy should be continued.

We analyze a model where investors use a credit rating to decide whether to finance a firm. The rating quality depends on unobservable effort exerted by a credit rating agency (CRA). We study optimal compensation schemes for the CRA when a planner, the firm, or investors order the rating. Rating errors are larger when the firm orders it than when investors do (and both produce larger errors than is socially optimal). Investors overuse ratings relative to the firm or planner. A trade-off in providing time-consistent incentives embedded in the optimal compensation structure makes the CRA slow to acknowledge mistakes.

This paper shows that in several U.S. manufacturing industries, the seasonal variability of production and inventories varies with the state of the business cycle. We present a simple model which implies that if firms reduce the seasonal variability of their production as the economy strengthens, and they either hold constant or increase the stock of inventories they bring into the high-production seasons of the year, then they must be facing upward-sloping and convex marginal cost curves. We conclude that firms in a number of industries face upward-sloping and convex marginal-production-cost curves.

In this paper, we use the relative moments in bank loans and commercial paper to provide evidence on the existence of a loan-supply channel of monetary-policy transmission. We find that tighter monetary policy leads to a shift in firms' mix of external financing: commercial paper issuance rises while bank loans fall. This suggests that contractionary policy can indeed reduce loan supply. Furthermore, such shifts in loan supply seem to affect investment, even controlling for interest rates and output.