Measuring the impact of political risk on investment projects is one of the most vexing issues in international business. One popular approach is to assume that the sovereign yield spread captures political risk and to augment the project discount rate by this spread. We show that this approach is flawed. While the sovereign spread is influenced by political risk, it also reflects other risks that are likely included in the valuation analysis — leading to the double counting of risks. We propose to use “political risk spreads” to undo the double counting in the evaluation of international investment projects.

This paper examines heterogeneity in the responsiveness to default options in a large state retirement plan, focusing on individuals’ decision-making approaches as well as their economic and demographic characteristics. Analyses of a survey of plan participants show that procrastination and the need for cognitive closure are important determinants of the likelihood of default. This paper also explores an important implication of defaulting—individuals who default are significantly more likely to subsequently express a desire to enroll in a different plan. The desire to change plans is also correlated with numerous economic and decision-making characteristics, including procrastination.

This paper reports on the development and preliminary analysis of a unique data file that includes matched employee-employer data for a sample of illegal aliens and parallel data on the establishment and workforce for employers randomly selected from industry directories. It is shown how these data can be used to address substantive issues regarding the labor market adjustment and impact of illegal aliens through 2 examples analyses of wages and on-the-job training. In addition to the myriad of specific conclusions that have been developed from the methodological and data analyses 2 general conclusions emerge from this project. 1 is that the methodology is successful for investigating the labor market adjustment and impact of illegal aliens. More generally it demonstrates the feasibility of developing employee-employer matched data files for other demographic groups or the labor force as a whole. The other is that the illegal alien labor market appears to be well-functioning; i.e. it is competitive fluid and flexible and provides opportunities for economic advancement and job mobility even for low-skilled foreign-born workers in this country illegally. (authors)

We consider a problem where an uninformed principal makes a timing decision interacting with an informed but biased agent. Because time is irreversible, the direction of the bias crucially affects the agent's ability to credibly communicate information. When the agent favors late decision making, full information revelation often occurs. In this case, centralized decision making, where the principal retains authority and communicates with the agent, implements the optimal decision-making rule. When the agent favors early decision making, communication is partial, and the optimal decision-making rule is not implemented. Delegation adds value when the bias is for early decision making, but not for late decision making.

The question of the appropriate level of government to undertake income redistribution is receiving renewed attention from economists.' The standard argument about the issue might be summarized as follows: 1. Interstate migration of taxpayers and transfer recipients raises the cost to voters of income redistribution at the state level above the cost at the federal level. 2. Statewide redistribution confers spillover benefits to residents of other states. 3. Therefore, as compared with a national system, decentralized responsibility for income redistribution yields both less redistribution and less than the socially optimal amount of income redistribution. The purpose of this paper is only to question step 1 of the above argument; of course, readers who accept the assumptions of the standard argument may conclude that the possible weakening of step 1 of that argument reduces the likelihood that its conclusion holds. The paper argues that the cost of redistribution faced by state residents may, in fact, be lower at the state level than at the national level because their federal tax obligations fall as the state redistributes more income. Thus, part of the cost of redistribution at the state level can be exported to residents of other states. The state's federal tax bill falls when taxable incomes in the state are reduced by increased redistribution; deductibility of state taxes enhances this result but is not necessary for it. To demonstrate the proposition without adding unnecessary complication, a simple model of income redistribution is described in which governments at all levels use linear tax-transfer schedules to redistribute income. The single-government case is considered first, then two levels of government are introduced, and finally migration is allowed. It is shown that, without migration, state costs are never greater than national costs of redistribution as long as redistribution reduces total money income. When migration is allowed, the result depends on the elasticity of migration responses compared with the elasticity of labor supply responses.

In very large measure, issues of structure in metropolitan area governance can be characterized by a basic organization choice: consolidation or diversity. Along several dimensions, a basic policy variable is whether public decisions are to be made by a few large organizations or units of government, or many small ones. Two key dimensions are spatial and vertical organization. Spatial organization refers to the drawing of political boundary lines over urban space, dividing population groups into separate political constituencies. The

How few traders constitute a bargaining problem or, alternatively how many traders constitute a market? Intuitively, people who meet to trade face a bargaining problem if several of them, with opposing interests, can influence the outcome of trade through their behavior. Traders constitute a competitive market only if the effect of any trader on the outcome of trade is insignificant. Analysis of bargaining using noncooperative game theory has been a lively research topic over the past ten years, while the formalization of perfectly competitive markets using a continuum of traders is now several decades old. In this paper I discuss a line of research that studies the transition between these two theories; in particular, a result from Mark Satterthwaite's and my paper (1989b) is presented that shows how a bargaining problem is transformed into a market as the number of traders increases. Incomplete information is an essential feature of the model that I discuss. In order to explain how traders achieve a competitive equilibrium, it is standard to assume that all potential gains from trade are commonly known at the outset. In contrast, each trader in the model that I describe privately knows his own preferences. A second feature is that a market with any finite number of traders on each side is modeled, rather than one with a continuum of traders. These two features together make strategic behavior seem especially likely. Price-taking behavior is not an axiom here; instead, the objective is to prove that a trader's equilibrium behavior is to increasingly act as a price taker as a market grows in size, and that only a small number of traders is needed on each side to compel each trader to act in this way. Though the background of this research will be discussed later in more detail, it is basically motivated by the intuition most of us share that a market can work pretty well despite having a relatively small number of traders who strategically act on their private information. While the axioms of perfect competition are, of course, never satisfied in the real world, I believe that this theory provides insight not only into immense markets but also into smaller markets. The research that I describe is another attempt to substantiate this belief.

In the last fifteen years, our understanding of the behavior of households in both highand low-income countries has increased significantly. Econometric studies contributing to this body of knowledge, concerned with the determinants of such behavior as labor supply, fertility, health and food consumption, however, have generally taken the structure of the household as exogenously given. While some progress has been made concerning how changes in the legal structure alter patterns of family formation and breakup, the wide variety of family organizations observed across countries of the world or the evolution of family structure within countries cannot be readily explained by existing models. While some economists have suggested that organizations based on kinship can be understood in terms of transaction economies (Yoram Ben-Porath, 1980; Robert Pollak, 1985), there are now few precise implications of this approach, and little or no evidence of its usefulness for predicting or explaining the existence of any particular family structure in specific settings characterized by their natural endowments and/or legal structure. In this paper I discuss some recent studies of family and household organization in one specific context, rural India, that have sought to formulate a model of household structure based on the need for individuals in lowincome, private information settings to protect themselves against intertemporal fluctuations in resources arising from the natural vagaries of water supply. I also present some new evidence on the relationship between family arrangements and measured risk characteristics of the agricultural environment in these settings. While many economists have highlighted risk and information consideration in the study of such formal rural institutions as sharecropping, permanent servitude, and contractual interlinking, studies of these individual contractural arrangements have ignored the family itself as a risk-mitigating institution. Moreover, much of this literature has been solely concerned with ex ante measures to reduce risk-contractual instruments or production factors that reduce the effects of variability in the exogenous production input rainfall on income. Mechanisms serving to preserve consumption stability ex post in the face of variability in realized income have been neglected.

This paper analyzes the extent to which tax differences affect the use of trade credit. U.S.-owned affiliates in low-tax countries use trade credit to lend, whereas those in high-tax countries use trade credit to borrow: 10% lower local tax rates are associated with net trade credit positions that are 1.4% higher as a fraction of sales. The use of trade credit to get capital out of low-tax, low-return environments is also illustrated by the temporary repatriation tax holiday in 2005, which was used most intensively by affiliates with positive net trade credit positions.

Consistent with investors having limited attention, we posit that when faced with competing earnings announcements, investors behave as if they queue the announcements based on a firm or earnings announcement attribute. We focus on two potential queuing attributes: (1) firm visibility, and (2) the expected cost of processing the earnings announcements. We find no support for queuing based on the latter, but find a statistically significant and economically meaningful queuing effect based on firm visibility. Earnings announcements made by firms that are more visible than a given firm—but not by firms that are less visible—mitigate the announcement window market response to that firm's unexpected earnings, with a corresponding magnification in its post-earnings announcement drift. Further, the effects of visibility-based queuing are more pronounced for days with greater clustering of earnings announcements. Additional analysis suggests that individual investors—not institutional investors—drive the queuing effect.