Although bargaining is common in markets for heterogeneous goods, it has largely been ignored in the hedonic literature. In a break from that tradition, we establish sufficient conditions that permit one to identify the effect of buyer and seller bargaining on hedonic models. Our model is estimated using a previously overlooked feature of the American Housing Survey that permits us to observe characteristics of both buyers and sellers. Results suggest that household wealth, gender, and other demographic traits influence bargaining power. In addition, variation in bargaining power arising from the presence of school-age children accounts for anomalous seasonal patterns reported in various widely cited indices of quality-adjusted house prices.

This paper proposes and develops a novel, simple, widely applicable numerical approach for option pricing based on quadrature methods. Though in some ways similar to lattice or finite-difference schemes, it possesses exceptional accuracy and speed. Discretely monitored options are valued with only one timestep between observations, and nodes can be perfectly placed in relation to discontinuities. Convergence is improved greatly; in the extrapolated scheme, a doubling of points can reduce error by a factor of 256. Complex problems (e.g., fixed-strike lookback discrete barrier options) can be evaluated accurately and orders of magnitude faster than by existing methods.

This paper develops a correlated probit model to describe dichotomous choices that may contain a public-goods component or some other forms of interdependency. The key contribution of the paper is to formulate tests for interdependent behavior among agents. In particular, we examine the decisions by nations whether or not to ratify the Montreal Protocol on Substances that Deplete the Ozone Layer. Specifically, we reject free riding as a motive for not ratifying the Protocol, and we find little evidence that individual nations were influenced by the behavior of their largest trading partners. Hence, the data suggest that, with respect to the Montreal Protocol, most nations acted without regard for the actions of other nations.

Stock-Market Participation, Intertemporal Substitution, and Risk-Aversion by Annette Vissing-Jørgensen and Orazio P. Attanasio. Published in volume 93, issue 2, pages 383-391 of American Economic Review, May 2003

Explaining patterns of asset ownership is a central goal of both organizational economics and industrial organization. We develop a model of asset ownership in trucking, which we test by examining how the adoption of different classes of on-board computers (OBCs) between 1987 and 1997 influenced whether shippers use their own trucks for hauls or contract with for-hire carriers. We find that OBCs' incentive-improving features pushed hauls toward private carriage, but their resource-allocation-improving features pushed them toward for-hire carriage. We conclude that ownership patterns in trucking reflect the importance of both incomplete contracts and of job design and measurement issues.

We examine Korean chaebols to determine the costs and benefits associated with the operation of a diversified business group. We find that chaebol-affiliated firms suffer a value loss relative to non-affiliated firms. We observe that this value loss holds even after controlling for the relatedness of the diversification present within the chaebol. To identify the causes of this value loss, we obtain evidence suggesting that chaebol firms: (1) pursue profit stability rather than profit maximization, (2) over-invest in low performing industries, and (3) cross-subsidize the weaker members of their group. We do find however that chaebol firms possess greater debt capacity and consequently enjoy lower tax burdens. Nevertheless, because chaebols suffer an overall loss in value, we conclude that the costs associated with chaebol membership exceed its benefits.

Employee stock options (ESO’s) are a ubiquitous form of compensation in corporate America. By the late 1990’s, ESO’s outstanding at large corporations averaged 7 percent of total outstanding shares, with top executives holding approximately one-third of total ESO’s (John Core and Guay, 2001). Empirical evidence suggests that firms use ESO’s to align employees’ and shareholders’ interests, attract and retain employees, and compensate employees for their labor while simultaneously raising capital from employees (Core and Guay, 1999, 2001; Kevin J. Murphy, 1999). There is currently an intense debate nationally and internationally among standard-setters, politicians, investors, corporate executives, and academics about whether to require corporations to deduct the estimated value of ESO grants as a business expense in reported income. Existing accounting standards require firms to expense most forms of pay, such as salaries, cash bonuses, and the value of stock grants, but allow firms to choose whether to expense the value of ESO grants. Until very recently, nearly all firms chose not to expense ESO’s. However, firms that do not expense ESO’s must publicly disclose in the financial statement footnotes what reported income would have been if the ESO’s were expensed. In a recent sample of large growth firms, Christine Botosan and Marlene Plumlee (2001) find that mandatory expensing of ESO’s would have resulted in a 14-percent median reduction in firms’ earnings per share. Firms are also required to disclose details of top-executive ESO compensation in the annual proxy statement. Underlying the ESO debate is the concern that the choice among alternative financialaccounting treatments have real economic consequences. A large literature beginning with Ross Watts and Jerold Zimmerman (1978) provides evidence that accounting choice can impose economic costs on firms when contracts (e.g., debt and executive compensation contracts) or influential external parties (e.g., tax authorities) rely on reported accounting numbers (see Thomas Fields et al. [2001] for a survey of this literature). Accounting choice can also have economic consequences if investors fixate on particular numbers, such as reported earnings, resulting in security mispricing and misallocation of capital. Proponents of mandatory expensing argue that ESO’s reflect a cost of acquiring employee labor, and that expensing ESO’s conveys this information to outsiders consistently with other labor costs. Some argue that the absence of ESO expense results in stock mispricings, because investors fixate on reported earnings and fail to understand or utilize supplemental footnote disclosures about the true economic cost of ESO grants. Others argue that, when investors and boards of directors fixate on accounting earnings, the absence of ESO expense exacerbates ineffective corporate governance and allows management to use ESO’s to extract excessive compensation. Proponents of this view argue that expensing ESO’s will reign in management compensation by putting it under a brighter light. Opponents of expensing ESO’s argue that deducting the cost of ESO’s from earnings conveys an impression of weaker financial results to investors and, under the assumption that investors fixate on reported earnings, could raise the firms’ cost of financing and stifle corporate investment and innovation. There is also a concern that external parties, such as taxing authorities, might use changes in financial-accounting treatment as a cue to alter regulatory and tax policy.

A wealth transfer from bondholders to stockholders is one of several hypotheses used to explain stockholder gains on the announcement of a spin‐off. However, previous empirical research has not found systematic evidence supporting the wealth expropriation hypothesis. Using a larger sample with comprehensive bond data, we find evidence consistent with wealth expropriation. Bondholders, on average, suffer a significant negative abnormal return during the month of the spin‐off announcement. However, even accounting for the loss to the bondholders, the aggregate value of the publicly traded debt and equity increases on a spin‐off announcement, suggesting that the wealth expropriation hypothesis is not a complete explanation of the stockholder gains. In explaining the magnitude of the losses to bondholders, we find they are a function of the loss in collateral in the spun‐off subsidiary and the level of financial risk of the parent firm. Consistent with a loss to bondholders, firms are more likely to have their credit rating downgraded than upgraded after a spin‐off. Additionally, consistent with the wealth transfer hypothesis, losses to bondholders tend to be more severe, the larger the gains to shareholders.

Empirical accounting research provides surprisingly little evidence on whether accounting earnings numbers capture cross-sectional differences in risk that are associated with cross-sectional differences in share prices. We address two questions regarding the risk-relevance of accounting numbers: (1) Are accounting-related risk measures (i.e., the systematic risk and total volatility in a firm's time-series of residual return on equity) associated with the market's assessment and pricing of equity risk? (2) If so, then are these accounting-related risk measures incrementally associated with the market's assessment and pricing of equity risk beyond other observable factors, such as those in the Fama and French (1992) three-factor model? We develop an accounting-fundamentals-based measure of the market's pricing of risk—the difference between actual share price and a residual income valuation model estimate of share value using risk-free rates of return. Our results show that both systematic risk and total volatility in residual return on equity partially explain this pricing differential, and that the explanatory power of total volatility is incremental to the Fama and French (1992) factors—market beta, firm size, and the market-to-book ratio.

Using three major U.K. pension reforms as natural experiments we investigate the relationship between pension saving and discretionary private savings. Unlike most differences-in-differences approaches which rely on average differences between control and treatment group, we use economic theory to model the response of each individual household. The empirical analysis, based on the Family Expenditure Survey, uses both time-series and cross-sectional variation to identify the behavioral response. The earnings-related tier of the pension scheme is found to have a negative impact on private savings with relatively high substitution elasticities; the impact of the flat-rate tier is not significantly different from zero.