Affirmative action under Executive Order 11246 ranks among the most controversial of domestic federal policies. This study asks whether affirmative action has been successful in promoting the employment of minorities and females. It compares the change in demographics between 1974 and 1980 at more than sixty-eight thousand establishments, and finds that both minority and female employment have increased faster at establishments subject to affirmative action. Compliance reviews, while not well targeted are also found to have been effective.

Dealers enter nonbinding expressions of interest during the Nasdaq preopening to promote price discovery and ease stock inventory management when the market opens. But does this practice of “indicating ahead” constitute best execution for an individual customer? Arguments in favor of the practice rely on the notion that best execution is a general condition as opposed to a concept applicable on a trade-by-trade basis. Some customers must sacrifice in individual instances to improve the functioning of the overall market. But the practice of indicating ahead violates the dealer agent's duty of loyalty to her individual customer. Moreover, the dealer's financial self-interest is best served by indicating ahead. Journal of Economic Literature Classification Numbers: G10, G18, K22.

The standard Principal–Agent (PA) model assumes that the principal can control the agent's consumption profile. In an intertemporal setting, however, Rogerson (1985, Econometrica53, 69–76) shows that given the optimal PA contract, the agent has an unmet precautionary demand for savings. Thus the standard PA model is invalid if the agent has access to credit markets. In this paper we generalize the standard PA model to allow for saving and borrowing by the agent. We show that the impact of such access critically depends upon the treatment of default. If default is not permitted, efficiency is strictly reduced by the introduction of credit markets, and the equilibrium level of borrowing or saving is indeterminate in the model. If default is allowed, however, the optimal contract depends upon the level of bankruptcy protection in the economy, which is described by a minimum level of wage income. We show that there is an optimal intermediate range of bankruptcy protection. Within this range, allowing default increases efficiency in the economy relative to the case of no default. Also, the model predicts specific levels of consumer debt, interest rates, and default rates as functions of the level of bankruptcy protection level. Journal of Economic Literature Classification Numbers: D80, G21, G28, J30.

This paper analyzes the role of financial intermediaries as marketmakers in the market for interest rate swaps. We argue that intermediaries which hold large nontraded portfolios of swaps are efficient alternatives to direct hedging by counterparties in publicly traded cash and futures instruments. The efficiency afforded by the swap marketmaker derives from reduction in transactions costs, diversification of basis risk, and reduced agency costs of debt. The analysis provides an explanation for the existence and success of the swaps market as a means for spreading risk and for its dominance by large financial institutions.

We analyze an experiment conducted by a large U.S. bank that offered consumers achoice between two credit card contracts, one with an annual fee but a lowerinterest rate and one with no annual fee but a higher interest rate. We findthat on average consumers chose the credit contract that minimized their costs.A substantial fraction of consumers (about 40%) still chose the suboptimalcontract. Nonetheless, the probability of choosing the suboptimal contractdeclines with the dollar magnitude of the potential error, and consumers withlarger errors are more likely to subsequently switch to the optimalcontract.

Prior literature shows that implied volatility spreads between call and put options are positively related to future underlying stock returns. In this paper, however, we demonstrate that the volatility spreads are negatively related to future out-of-the-money call option returns. Using unique data on option volumes, we reconcile the two pieces of evidence by showing that option demand by sophisticated, firm investors drives the positive stock return predictability based on volatility spreads, while demand by less sophisticated, customer investors drives the negative call option return predictability. Overall, our evidence suggests that volatility spreads contain information about both firm fundamentals and option mispricing.

We estimate probabilities of bankruptcy for 5784 industrial firms in the period 1988–2002 in a model where common equity is viewed as a down-and-out barrier option on the firm's assets. Asset values and volatilities as well as firm-specific bankruptcy barriers are simultaneously backed out from the prices of traded equity. Implied barriers are significantly positive and monotonic in the firm's leverage and asset volatility. Our default probabilities display better calibration and discriminatory power than the ones inferred in a standard Black and Scholes [Black, F., Scholes, M., 1973. The pricing of options and corporate liabilities. J. Pol. Econ. 81, 637–659]/Merton [Merton, R.C., 1974. On the pricing of corporate debt: the risk structure of interest rates. J. Finance 29, 449–470] and KMV frameworks. However, accounting-based measures such as Altman Z- and Z″-scores outperform structural models in 1-year-ahead bankruptcy predictions, but lose relevance as the forecast horizon is extended.