This paper examines the effect of drug prohibition on the black market prices of cocaine and heroin. The paper examines the ratio of retail to farmgate price for cocaine, heroin, and several legal goods, and it compares legal versus black market prices for cocaine and heroin. The results suggest that cocaine and heroin are substantially more expensive than they would be in a legalized market, but to a lesser degree than suggested in previous research.

In a sample of 2,794 initial public offerings (IPOs), we test three potential explanations for the existence of IPO lockups: lockups serve as (i) a signal of firm quality, (ii) a commitment device to alleviate moral hazard problems, or (iii) a mechanism for underwriters to extract additional compensation from the issuing firm. Our results support the commitment hypothesis. Insiders of firms that are associated with greater potential for moral hazard lockup their shares for a longer period of time. Insiders of firms that have experienced larger excess returns, are backed by venture capitalists, or go public with high-quality underwriters are more likely to be released from the lockup restrictions.

We use data on life insurance contracts to study the properties of long-term contracts in a world where buyers cannot commit to a contract. The data are especially suited to test a theory of dynamic contracting since they include information on the entire profile of future premiums. All the patterns in the data fit the theoretical predictions of a model with symmetric learning and one-sided commitment à la Harris and Holmstom. The lack of commitment by consumers shapes contracts in the way predicted by the theory: all contracts involve front-loading (prepayment) of premiums. Front-loading generates a partial lock-in of consumers; more front-loading is associated with lower lapsation. Moreover, contracts that are more front-loaded have a lower present value of premiums over the period of coverage. This is consistent with the idea that front-loading enhances consumer commitment and that more front-loaded contracts retain better risk pools.

This paper studies the effects of discretionary fiscal policy on output volatility and economic growth. Using data for 91 countries, we isolate three empirical regularities: (1) governments that use fiscal policy aggressively induce significant macroeconomic instability; (2) the volatility of output caused by discretionary fiscal policy lowers economic growth by more than 0.8 percentage points for every percentage point increase in volatility; (3) prudent use of fiscal policy is explained to a large extent by the presence of political constraints and other political and institutional variables. The evidence in the paper supports arguments for constraining discretion by imposing institutional restrictions on governments as a way to reduce output volatility and increase the rate of economic growth.

This paper investigates whether and how individual managers affect corporate behavior and performance. We construct a manager-firm matched panel data set which enables us to track the top managers across different firms over time. We find that manager fixed effects matter for a wide range of corporate decisions. A significant extent of the heterogeneity in investment, financial, and organizational practices of firms can be explained by the presence of manager fixed effects. We identify specific patterns in managerial decision-making that appear to indicate general differences in "style" across managers. Moreover, we show that management style is significantly related to manager fixed effects in performance and that managers with higher performance fixed effects receive higher compensation and are more likely to be found in better governed firms. In a final step, we tie back these findings to observable managerial characteristics. We find that executives from earlier birth cohorts appear on average to be more conservative; on the other hand, managers who hold an MBA degree seem to follow on average more aggressive strategies.

Indjejikian and Nanda (J. Accounting and Economics 27 (1999) 177) establish that “lack of commitment” results in an expected economic loss, relative to a long-term full-commitment contract, if there is inter-period correlation of performance measures. They attribute this loss to a “ratchet effect”. We demonstrate the following. First, their proposed equilibrium is not sustained unless there is some form of limited commitment. Second, these limited commitment assumptions need not induce a “ratchet effect”. Third, the “ratchet effect” is neither necessary nor sufficient for an expected economic loss to occur—the loss is due to the principal's inability to commit ex ante to the second-period incentive rate.

Measured by the ratio of trade to output, the period 1870–1913 marked the birth of the first era of trade globalization and the period 1914–1939 its death. What caused the boom and bust? We use an augmented gravity model to examine the gold standard, tariffs, and transport costs as determinants of trade. Until 1913 the rise of the gold standard and the fall in transport costs were the main trade-creating forces. As of 1929 the reversal was driven by higher transport costs. In the 1930s the final collapse of the gold standard drove trade volumes even lower.

The paper examines the determinants and performance consequences of equity grants to senior-level executives, lower-level managers, and non-exempt employees of “new economy” firms. We find that the determinants of equity grants are significantly different in new versus old economy firms. We also find that employee retention objectives, which new economy firms rank as the most important goal of their equity grant programs, have a significant impact on new hire grants, but not subsequent grants. Our exploratory performance tests indicate that lower than expected grants and/or existing holdings of options are associated with poorer performance in subsequent years.

We present a microstructure model of competition for order flow between exchanges based on liquidity provision. We find that neither a pure limit order market (PLM) nor a hybrid specialist/limit order market (HM) structure is competition-proof. A PLM can always be supported in equilibrium as the dominant market (i.e., where the hybrid limit book is empty), but an HM can also be supported, for some market parameterizations, as the dominant market. We also show the possible coexistence of competing markets. Order preferencing—that is, decisions about where orders are routed when investors are indifferent—is a key determinant of market viability. Welfare comparisons show that competition between exchanges can increase as well as reduce the cost of liquidity.