Why do firms allow their executives to accept outside directorships? Are firms acting in the best interests of their shareholders by allowing them to do so? We develop a theoretical model where accepting an outside directorship alters the CEO's effect on the value of the home firm. Our model illustrates that executives will choose to spend more time on external directorships than is optimal for the home firm. Our theoretical model is consistent with other recent empirical finance research on the effects of external directorships.

I worked as a consultant in the Financial Stability Department (FSD) of the Bank of England for several years (2002–2004). In this paper I reflect on issues relating to the work of such an FSD, starting with the difficulty of defining or measuring ‘financial stability’. Stress tests are commonly used, but, for an FSD, should relate to the system as a whole, not just to individual institutions. FSDs need to assess the probability, virulence and speed of occurrence of potential shocks. There is a need to develop appropriate analytical models. The focus on capital adequacy has diverted attention from concern about having sufficient liquidity.

Since the seminal work of Krugman, product variety has played a central role in models of trade and growth. In spite ofthe general use oflove-of-variety models, there has been no systematic study of how the import of new varieties has contributed to national welfare gains in the United States. In this paper we show that the unmeasured growth in product variety from U. S. imports has been an important source of gains from trade over the last three decades (1972–2001). Using extremely disaggregated data, we show that the number of imported product varieties has increased by a factor of three. We also estimate the elasticities of substitution for each available category at the same level of aggregation, and describe their behavior across time and SITC industries. Using these estimates, we develop an exact aggregate price index and find that the upward bias in the conventional import price index over this time period was 28 percent or 1.2 percentage points per year. We estimate the value to U. S. consumers of the expanded import varieties between 1972 and 2001 to be 2.6 percent of GDP.

We present an equilibrium theory of the organization of work in an economy where knowledge is an essential input in production and agents are heterogeneous in skill. Agents organize production by matching with others in knowledge hierarchies designed to use and communicate their knowledge efficiently. Relative to autarky, organization leads to larger cross-sectional differences in knowledge and wages: low skill workers learn and earn relatively less. We show that improvements in the technology to acquire knowledge lead to opposite implications on wage inequality and organization than reductions in communication costs.

Financial service providers have increasingly offered customers new remote access to such services, with Internet banking being the latest example. While Internet banking has been available for years, the early adoption by customers of this technology was disappointing to most. This paper examines the demand for remote access to banking accounts by consumers and finds that when the technology is new, the traditional risk return models including variables allowing for heterogeneous risk add power in modeling the adoption decision. Perceived risks in Internet banking are seen to be responsible for some of the hesitation to adopt. Ironically, older consumers are found to be less likely to adopt Internet banking regardless of their risk tolerances. However, younger consumers are found to be early adopters only when they have relatively high levels of risk tolerance.

In many countries throughout the world, regulators are struggling to determine whether and how to introduce competition into regulated industries. This essay examines the complexities involved in the liberalization process. While stressing the importance of case-specific analyses, this essay distinguishes liberalization policies that generally are procompetitive from corresponding anticompetitive liberalization policies.

Identification of dynamic nonlinear panel data models is an important and delicate problem in econometrics. In this paper we provide insights that shed light on the identification of parameters of some commonly used models. Using these insights, we are able to show through simple calculations that point identification often fails in these models. On the other hand, these calculations also suggest that the model restricts the parameter to lie in a region that is very small in many cases, and the failure of point identification may, therefore, be of little practical importance in those cases. Although the emphasis is on identification, our techniques are constructive in that they can easily form the basis for consistent estimates of the identified sets.

I am delighted to be able to present this lecture before so many people. I’m also very happy when I get to work with models inhabited by many people. That is the key to the framework for which Ed Prescott and I were cited by the Nobel Committee: Individuals are introduced explicitly in the models. Their decision problems are fully dynamic—they are forward looking. That is one of the prerequisites for what we ultimately seek, which is a framework we can use to evaluate economic policy. The eminent researcher and 1995 Nobel laureate in economics, Bob Lucas, from whom I have learned a great deal, wrote: “One of the functions of theoretical economics is to provide fully articulated, artificial economic systems that can serve as laboratories in which policies that would be prohibitively expensive to experiment with in actual economies can be tested out at much lower cost ... (Lucas, 1980, p. 696). Our task, as I see it ... is to write a FORTRAN program that will accept specific economic policy rules as ‘input’ and will generate as ‘output’ statistics describing the operating characteristics of time series we care about, which are predicted to result from these policies” (pp. 709–10). The desired environments to which Lucas refers would make use of information on “individual responses [that] can be documented relatively cheaply ... by means of ... censuses, panels [and] other surveys ...” (p. 710). Lucas seems to suggest that economic researchers place people in desired model environments and record how they behave under alternative policy rules. In practice, that is easier said than done. The key tool macroeconomists use is the computational experiment. With its help, the researcher performs exactly what I just described—places the model’s people in the desired environment and records their behavior. But the purpose of the computational experiment is broader than only to evaluate policy rules. The computational experiment is useful for answering a host of quantitative questions, that is, those for which we seek numerical answers. When evaluating government policy, the policy is stated in the form of a rule that specifies how the government will behave—what action to take under various contingencies—today and in the indefinite future. That is one reason it would be so difficult and prohibitively expensive to perform the alternative Lucas mentions, namely, to test the policies in actual economies.