The petrochemical industry employs assets subject to temporal and site specificity. The OPEC oil price shocks of the 1970s made it difficult to write contracts covering business dealings in the industry. I use this production and economic setting as a natural experiment to test transaction cost theory. In support of the theory, I find that input price uncertainty in the 1970s positively affected the extent of vertical integration by firms into input stages. Moreover, the positive reaction of vertical integration to price uncertainty mainly occurs in transactions subject to asset specificity. I also examine price controls and market power as alternative explanations for vertical integration in the industry, but fail to find support for these hypotheses.

This paper analyses the effects of growth on long-run unemployment using a search model of equilibrium unemployment where growth arises explicitly from the introduction of new technologies that require labour reallocation for their implementation. The analysis uncovers and compares between two competing effects of growth on unemployment. The first is a capitalisation effect, whereby an increase in growth raises the capitalised returns from creating jobs and consequently reduces the equilibrium rate of unemployment. The second is a creative destruction effect whereby an increase in growth reduces the duration of a job match, thereby raising the equilibrium level of unemployment both directly, by raising the job separation rate, and indirectly, by discouraging the creation of job vacancies.

The rapid expansion of organized equity exchanges in both emerging and developed markets has prompted policymakers to raise important questions about their macroeconomic impact, yet the need to focus on recent data poses implementation difficulties for econometric studies of dynamic interactions between stock markets and economic performance in individual countries. This paper overcomes some of these difficulties by applying recent developments in the analysis of panels with a small time dimension to estimate vector autoregressions for a set of 47 countries with annual data for 1980–1995. After describing recent theories on the role of stock markets in growth and considering a pure cross-sectional empirical approach, our panel VARs show leading roles for stock market liquidity and the intensity of activity in traditional financial intermediaries on per capita output. The findings underscore the potential gains associated with developing deep and liquid financial markets in an increasingly global economy.

This paper argues that the presence of both profit-based and stock price-based components in compensation contracts provides senior managers the incentive to optimally allocate effort to both implementing previously devised strategies that provide current profits and to formulating new strategies that create shareholder value. If managers are concerned about their reputation and if outcomes of strategy implementation are more informative about their ability than outcomes of strategy formulation, compensation based only on profit will incent managers to boost their reputation by over-allocating effort to strategy implementation. To restore the balance the contract needs to contain some stock-based compensation.

We construct a degree-of-total-leverage framework to test whether and how shifts in product mix affect earnings volatility at 472 U.S. commercial banks between 1988 and 1995. Our framework, which accounts for cost and revenue synergies not captured in most previous studies, conceptually links earnings volatility to revenue volatility, expense fixity, and product mix. We find that replacing traditional lending activities with fee-based activities—an ongoing trend that may be strengthened by recent financial modernization—is associated with both higher revenue volatility and higher total leverage, which in this framework implies higher earnings volatility. Journal of Economic Literature Classification Numbers: G21, G32, D24.

This paper presents a rationale for divestiture consistent with one of the reasons frequently cited by divesting firms, namely, that the firm is undervalued and splitting the firm into its component businesses will make it easier for the market to value the components accurately. When firms are undervalued due to unobservability of divisional cash flows, they may resort to divestiture to raise capital while overvalued firms will use external equity. Diversification thus might result in costly future divestiture. Firms trade off this expected cost of diversification against the benefit of higher levels of cheaper internal capital in deciding the scope of the firm. Journal of Economic Literature Classification Numbers: D82, G34, L22.