Should the manufacturer of a product be held legally responsible when a consumer, while using the product, harms someone else? We show that if consumers have deep pockets, then manufacturer liability is not desirable. If homogeneous consumers have limited assets, then the best rule is “residual-manufacturer liability” where the manufacturer pays the shortfall in damages not paid by the consumer. Residual-manufacturer liability distorts the market quantity when consumers' willingness to pay is correlated with their propensity to cause harm. It distorts product safety when consumers differ in their wealth levels. In both cases, consumer-only liability may be preferred.

Lockups are agreements made by insiders of stock-issuing firms to abstain from selling shares for a specified period of time after the issue. Brav and Gompers (2003) suggest that lockups are a bonding solution to a moral hazard problem and not a signaling solution to an adverse selection problem. We challenge this conclusion theoretically and empirically. In our model, insiders of good firms signal by putting and keeping (locking up) their money where their mouths are. Our model yields two comparative statics: lockups should be shorter when a firm is i) more transparent and/or ii) more risky. Using a sample of 4,013 initial public offerings and 3,279 seasoned equity offerings between 1988 and 1999, we find empirical support for our theoretical predictions.

This paper develops a model of the lender of last resort (LOLR) from a Central Bank (CB) viewpoint. The model in a static setting suggests that the CB would only rescue banks which are above a threshold size, consistent with the insight of “too big to fail”. In a dynamic setting, CB’s optimal policy in liquidity support depends on the trade off between contagion and moral hazard effects. Our results show that contagion is the key factor affecting CB’s incentives in providing LOLR and they also provide a rationalization for “constructive ambiguity”.

An unanswered question in the debate on public-sector inefficiency is whether reforms other than government divestiture can effectively substitute for privatization. Using a 1981–1995 panel data set of all public and private manufacturing establishments in Indonesia, we analyze whether public-sector inefficiency is primarily due to agency-type problems or to the environment in which public-sector enterprises (PSEs) operate, as measured by the soft budget constraint and the degree of internal and external competition. The results, obtained from fixed-effects specifications, provide support for both models. Ownership matters because, for a given level of government financing or competition, PSEs perform worse than their private-sector counterparts. The environment matters because only PSEs which received government financing or those shielded from import competition or foreign ownership performed worse than private enterprises. The results suggest that the efficiency of PSEs can be increased through privatization, through manipulation of the environment, or through a combination of both approaches.

Data on corporate governance and disclosure practices reveal wide within‐country variation that decreases with the strength of investors' legal protection. A simple model identifies three firm attributes related to that variation: investment opportunities, external financing, and ownership structure. Using firm‐level governance and transparency data from 27 countries, we find that all three firm attributes are related to the quality of governance and disclosure practices, and firms with higher governance and transparency rankings are valued higher in stock markets. All relations are stronger in less investor‐friendly countries, demonstrating that firms adapt to poor legal environments to establish efficient governance practices.

the 1970s there was no organized effort to keep Kiss, or other immigrant-headed bands such as Abba or the Village People, out of the United States.) In a similar fashion, pressure from U.S. farmers and other employers may account for why it is that each year 300,000 illegal immigrants succeed in entering and finding work in the United States (Passel, Capps, and Fix 2004). For any presidential administration, globalization is likely to be a tricky subject. The gains from international economic integration are spread among a diffuse group of consumers, while the losses are concentrated in specific industries and regions. Into the debate, economists can interject dispassionate analysis of the costs and benefits associated with cross-border flows of goods, capital, and labor. On immigration and trade, the ERP gets many things right, but it falters when discussing the distributional consequences of globalization. This may be driven in part by the report's predictable but still discomforting tendency to cheerlead for the president's policy proposals. In the end, we are left with a discussion of globalization's consequences that is less balanced and complete than one might have hoped. REFERENCES

The Journal of Economic Literature (JEL) regularly reviews books of interest to the economics profession. The Economic Report of the President (ERP) falls under that purview and beginning this year, the JEL will be reviewing the ERP. Toward that end, I have asked a handful of very prominent economists to review the 2005 ERP. Reviewers were chosen to reflect expertise on what I guessed would be key issues. Reviewers were given the following instructions: The ERP in principle should provide an accurate assessment of the consensus professional views of economists on any given issue, based on the research to date. Does the discussion in the ERP in fact accurately summarize what we as economists know? Reviewers were given free rein over what material they would review in the ERP but were urged to focus on their areas of particular expertise. In the reviews that follow, Joel Slemrod reviews the discussion of tax reform. Joe Farrell reviews the ERP's chapter titled “Innovation and the Information Economy.” Gordon Hanson reviews the chapters on international trade and on immigration. Robert Hall reviews the discussion of the adverse macroeconomic impact of rising oil prices while Jonathan Gruber reviews the ERP chapter titled “Expanding Individual Choice and Control.” Many thanks to the reviewers for the quick turnaround.

We examine the impact of asset liquidation value on debt contracting using a unique set of commercial property loan contracts. We employ commercial zoning regulation to capture the flexibility of a property's permitted uses as a measure of an asset's redeploy ability or value in its next best use. Within a census tract, more redeployable assets receive larger loans with longer maturities and durations, lower interest rates, and fewer creditors, controlling for the property's type, sale price, and earnings-to-price ratio. These results are consistent with incomplete contracting and transaction cost theories of liquidation value and financial structure.