This paper studies the assignment of people to projects over time in a model with private information. The combination of risk neutrality with incomplete contracts that restrict the ability of an agent to report on interim states is a force for long-term assignments. More generally, however, rotating agents can be valuable because it conceals information from agents, which mitigates incentive constraints. With complete contracts that communicate interim states, rotation allows for even more concealment possibilities and better-targeted incentives. Furthermore, it allows for the reporting of interim shocks at no cost to the principal. Properties of the production technology are also shown to matter. Substitutability of intertemporal effort is a force for long-term assignments, while coordination with Nash equilibrium strategies is a force for job rotation.

It is often the case in default modeling that the need arises to calibrate a model to some prior probability of default. In many situations, a researcher may not know the true prior default rate for the population because the data set at hand is itself incomplete, either with respect to default identification (hidden defaults) or default under reporting. In situations where a researcher has access to two incomplete default data sets, for example in the case of two banks that have merged, it is possible to infer the number of “missing” defaults, which we demonstrate in this short note. We discuss an approach to estimating this quantity and show an example in which we infer the number of missing defaults in the combined legacy databases of the former Moody’s Risk Management Services and the former KMV Corporation. While calibration is one application of this approach, the method is a general one that can be applied in other settings as well.

We present strong evidence that option trading volume contains information about future stock prices. Taking advantage of a unique data set, we construct put-call ratios from option volume initiated by buyers to open new positions. Stocks with low put-call ratios outperform stocks with high put-call ratios by more than 40 basis points on the next day and more than 1% over the next week. Partitioning our option signals into components that are publicly and nonpublicly observable, we find that the economic source of this predictability is nonpublic information possessed by option traders rather than market inefficiency. We also find greater predictability for stocks with higher concentrations of informed traders and from option contracts with greater leverage.

This article proposes a new dynamic design for auctioning multiple heterogeneous commodities. An auctioneer wishes to allocate K types of commodities among n bidders. The auctioneer announces a vector of current prices, bidders report quantities demanded at these prices, and the auctioneer adjusts the prices. Units are credited to bidders at the current prices as their opponents' demands decline, and the process continues until every commodity market clears. Bidders, rather than being assumed to behave as price-takers, are permitted to strategically exercise their market power. Nevertheless, the proposed auction yields Walrasian equilibrium prices and, as from a Vickrey-Clarke-Groves mechanism, an efficient allocation.

This paper develops a simple duopoly model in which investments in R&D and patents are inputs in the production of firm rents. Patents are necessary to appropriate the returns to the firm?s own R&D, but patents also create potential claims against the rents of rival firms. Analysis of the model reveals a general necessary condition for the existence of a positive correlation between the firm?s R&D intensity and the number of patents it obtains. When that condition is violated, changes in exogenous parameters that induce an increase in firms? patenting can also induce a decline in R&D intensity. Such a negative relationship is more likely when (1) there is sufficient overlap in firms? technologies so that each firm?s inventions are likely to infringe the patents of another firm, (2) firms are sufficiently R&D intensive, and (3) patents are cheap relative to both the cost of R&D and the value of final output. (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.)

This paper examines the link between capital market governance (CMG) and several key measures of market performance. Using detailed data from individual stock exchanges, we develop a composite CMG index that captures three dimensions of security laws: the degree of earnings opacity, the enforcement of insider laws, and the effect of removing short-selling restrictions. We find that improvements in the CMG index are associated with decreases in the cost-of-equity capital (both implied and realized), increases in market liquidity (trading volume, market depth, and U.S. foreign investments), and increases in market pricing efficiency (reduced price synchronicity and IPO underpricing). The results are quite consistent across individual components of CMG and over alternative market performance measures.

This paper presents a new approach to estimation and inference in panel data models with a general multifactor error structure. The unobserved factors and the individual-specific errors are allowed to follow arbitrary stationary processes, and the number of unobserved factors need not be estimated. The basic idea is to filter the individual-specific regressors by means of cross-section averages such that asymptotically as the cross-section dimension (N) tends to infinity, the differential effects of unobserved common factors are eliminated. The estimation procedure has the advantage that it can be computed by least squares applied to auxiliary regressions where the observed regressors are augmented with cross-sectional averages of the dependent variable and the individual-specific regressors. A number of estimators (referred to as common correlated effects (CCE) estimators) are proposed and their asymptotic distributions are derived. The small sample properties of mean group and pooled CCE estimators are investigated by Monte Carlo experiments, showing that the CCE estimators have satisfactory small sample properties even under a substantial degree of heterogeneity and dynamics, and for relatively small values of N and T.

Foreclosure laws govern the rights of borrowers and lenders when borrowers default on mortgages.Many states protect borrowers by imposing restrictions on the foreclosure process; these restrictions, in turn, impose large costs on lenders.Lenders may respond to these higher costs by reducing loan supply; borrowers may respond to the protections imbedded in these laws by demanding larger mortgages.I examine empirically the effect of the laws on equilibrium loan size.I exploit the rich geographic information available in the 1994 and 1995 Home Mortgage Disclosure Act data to compare mortgage applications for properties located in census tracts that border each other, yet are located in different states.Using semiparametric estimation methods, I find that defaulter-friendly foreclosure laws are correlated with a four percent to six percent decrease in loan size.This result suggests that defaulter-friendly foreclosure laws impose costs on borrowers at the time of loan origination.

Foreclosure laws govern the rights of borrowers and lenders when borrowers default on mortgages. In states with laws favoring the borrower, the supply of mortgage credit may decrease because lenders face higher costs. To examine the laws' effects, I compare approved mortgage applications in census tracts that border each other but are located in different states. Using a regression-discontinuity design and semiparametric estimation methods, I find that loan sizes are 3% to 7% smaller in defaulter-friendly states; this result suggests that defaulter-friendly laws impose material costs on borrowers at the time of loan origination.

Miller (1977) hypothesizes that dispersion of investor opinion in the presence of short-sale constraints leads to stock price overvaluation. However, previous empirical tests of Miller's hypothesis examine the valuation effects of only one of these two necessary conditions. We examine the valuation effects of the interaction between differences of opinion and shortsale constraints. We find robust evidence of significant overvaluation for stocks that are subject to both conditions simultaneously. Stocks are not systematically overvalued when either one of these two conditions is not met.