We study a dynamic game in which all players initially possess the same information and coordinate on a high level of activity. Eventually, players with a long string of bad experiences become inactive. This prospect can cause a coordination avalanche in which all activity in the population stops. Coordination avalanches are part of Pareto-efficient equilibria; they can occur at any point in the game; their occurrence does not depend on the true state of nature; and allowing players to exchange information may merely hasten their onset. We present applications to search markets, organizational meltdown, and inefficient computer upgrades.

The U.S. labor market has recently experienced two dramatic trends: a falling male-female pay gap and a rising level of labor-market inequality. After decades of near-constancy at about 60 percent, the ratio of women's to men's pay has risen steadily since the late 1970's. At the same time, there were substantial increases in overall wage inequality for both men and women (Lawrence F. Katz and Kevin M. Murphy, 1992; Blau and Kahn, 1993). Wage inequality rose both within and between education and experience groups, and this has been interpreted as reflecting primarily higher returns to both measured and unmeasured labor-market skills (Katz and Murphy, 1992; Chinhui Juhn et al., 1993). This paper addresses the connection between these two important developments. When analyzing gender differentials in pay, economists commonly focus on malefemale differences in skills and on differences in the treatment of equally qualified men and women (i.e., discrimination). Both of these may be considered gender-specific factors influencing the pay gap. Research on these gender-specific factors suggests that women tend to be less skilled than men, on average, and to be located in lower-paying industries and occupations. This in turn suggests that overall wage structure can also have an important effect on the gender pay gap. (Wage structure describes the array of prices set for various labor-market skills, measured and unmeasured, and the rents received for employment in particular sectors of the economy.) For example, since women on average have less experience than men, an increase in the return to experience (as in fact occurred over the 1970s and 1980s) would cause the gender pay gap to rise, even if women's relative level of experience and their gender-specific treatment by employers remained the same. Similarly, an increase in the returns to employment in male occupations and industries would widen the gender differential, all else equal. In earlier work, we found overall wage inequality to be very important in explaining international differences in the gender pay gap (Blau and Kahn, 1992, 1994). In particular, we addressed a paradox. On the one hand, U.S. women compare favorably to those in other countries in terms of their relative qualifications and occupational status. Further, the United States has had a longer and often stronger commitment to equal pay and equal employment policies than most other industrialized countries. Yet the gender pay gap in the United States is larger than in most of these countries. An important part of the explanation for this pattern is the high level of wage inequality (i.e., high returns to skill) in the United States, which puts an exceptionally large penalty on being below average in the wage distribution. Our results suggest that the U.S. gap would be similar to that in countries like Sweden or Australia (the countries with the smallest gaps) if the United States had their level of wage inequality. The implication of our earlier research on international differences in the gender gap is that in recent years American women have been swimming upstream in a labor market that was growing increasingly unfavorable to low-wage workers. In the face of this rising inequality, women's relative skills and treatment have to improve merely for the pay gap to remain constant; still larger gains are necessary for it to be reduced. * Blau: Institute of Labor and Industrial Relations, University of Illinois, Champaign, IL 61820, and NBER; Kahn: Institute of Labor and Industrial Relations, University of Illinois. We thank Claudia Goldin and participants at the NBER Labor Studies meeting and the University of Illinois and Cornell Labor Economics Workshops for helpful comments, and Jennifer Berdahl for excellent research assistance. Portions of this work were completed while the authors were visiting fellows at the Australian National University, Canberra.

This paper examines the welfare effects of futures price limits under a simple form of market incompleteness. When prices become volatile, shocks to liquidity and fundamentals may occur between the time investors decide to trade and the time their orders are executed. This gives rise to implementation risk that cannot be transferred with contingent claims. The authors show that price limits partially insure implementation risk. When price fluctuations are driven by news about fundamentals, judiciously chosen price limits can be (ex ante) Pareto superior to unconstrained trade. When liquidity shocks are large, price limits benefit hedgers but harm some speculators.

Results from the Iowa Political Stock Market are analyzed to ascertain how well markets work as aggregators of information. The authors find that the market worked extremely well, dominating opinion polls in forecasting the outcome of the 1988 presidential election, even though traders in the market exhibited substantial amounts of judgment biases. Their explanation is that judgment bias refers to average behavior, while in markets it is marginal traders who influence price. They present evidence that in this market a sufficient number of traders were free of judgment bias so that the market was able to work well.

This paper describes an environment in which government-issued currency is dominated in rate of return and in which there obtains a Modigliani-Miller theorem for government open market operations. Earlier Modigliani-Miller theorems for government finance have been stated for environments in which government-issued currency is not dominated in rate of return in equilibrium. Since government-issued currency is widely observed to be dominated in return, it is useful to study how Modigliani-Miller theorems hinge on absence of rate of return dominance.

This paper explores the rationales offered by participants for the accounting and management control practices in which they are involved. An analysis of these rationales emphasis four characteristics of current practices. Firstly, financial planning and control systems do not appear to be a dominant mode of organisational control for the organisation investigated, physical production planning appearing to be more important. Secondly, the parts of the whole organisation appear to be only loosely coupled, thereby insulating the various parts from each other, and from pressures for change. Thirdly, in such a context, accounting and information generally may be managed either (or both) to enhance ambiguity or to provide legitimacy in (and about) the organisation. The paper concludes, fourthly, by noting the pressures for change which appear to operate through the finance function, thereby enhancing that function's organisational role. The observations and analysis of the paper are based on an in-depth observational study of an Area (i.e. geographical division) of the National Coal Board, in the U.K., and on a detailed study of that organisation's history and environment.

Few studies have examined the reputational damage of environmental and social (E&S) scandals ex-post. Using an international sample of mergers and acquisitions (M&A) across 18 countries, we examine whether heightened E&S risks arising from acquirers’ E&S incidents affect the cost of acquisition. We find that the severity of the incident increases acquisition premium and this effect is explained by incident acquirers compensating target shareholders for heightened reputation risks, rather than seeking to repair their reputation through the acquisition. At the country level, incident acquirers in countries with stronger E&S standards and policies also experience higher premium. Further analysis shows that E&S incidents reduce shareholder value upon the announcement of an M&A and increase the time taken for M&A completion. Firms are less likely to make acquisitions after experiencing an E&S incident, but this decision depends on the cost of delay. Finally, we show that the adverse impact on acquisitions dissipates after six months.

We document the impact of having a risk committee (RC) and a chief risk officer (CRO) on bank risk using the passage of the Dodd Frank Act as a natural experiment. The Act requires bank holding companies with over 10B of assets to have an RC to oversee risk management, while those with over 50B of assets are additionally required to have a CRO. We use difference-in-difference and regression discontinuity approaches to estimate the change in risk following RC and CRO adoption. Overall, we find no evidence that the RC or CRO have a causal impact on bank risk.

Using Roberts (2015) loan-level data from 2000 to 2011, we find that the inception of CDS trading on reference firms’ debt is associated with a decreased number and lower probability of amendments, restatements, and rollovers to existing lenders of bank loans. Reference firms are also less likely to terminate loans prematurely or refinance with different lenders after the inception of CDS trading and tend to exhibit longer loan maturities. Our evidence is consistent with the empty creditor problem arising from CDS trading and the resulting decrease in the negotiation power of borrowers. Our research contributes to understanding how financial innovations alter bank-lending relationships.

We develop a method to estimate which side will win a civil war using data from international financial markets. The key insight we deliver is that, for typical sovereign debt contracts, the probability of debt repayment will equal the probability of victory in a civil war. We test our predictor for standard outcomes in civil wars, including when the incumbent government loses (the Chinese Nationalists), when a new government is installed by a foreign power and decides to repudiate debt (the restoration of Ferdinand VII of Spain), and when there is a secession (the U.S. Confederacy). For China, markets were predicting a Communist victory three years before it happened. For the U.S., markets never gave the South much more than a 40 percent chance of maintaining the Confederacy. For Spain, markets considered the restoration of Ferdinand VII as likely (probabilities above 50%) as soon as France declared its intention to send military forces to the area.