This paper demonstrates the strong linkages that exist between currency risk, represented by inflation risk and exchange rate changes, and relative price risk. These linkages affect the optional quantities of forward exchange contracts, nominal debt, and fixed price sales (purchase) contracts to use in hedging against these risks. It is shown that the existence of as many hedging mechanisms as there are forms of price risk allows for the precise targeting of specific price risks with specific hedging instruments. Moreover, even though each hedging mechanism specializes in protecting against a particular form of price risk, the optimal quantitiy of each influences and is influenced by the optimal quantities of the others.

A social choice procedure is developed for selecting an alternative from a finite set on the basis of paired-comparison voting. Ballot data are used to construct a lottery on the alternatives that is socially as preferred as every other lottery. The constructed lottery is then used to select a winner. An axiomatization of social preferences among lotteries that justifies the procedure is included. The procedure will always select a consensus majority alternative when one exists, and it will never select an alternative that is Pareto dominated by another alternative.

This paper models and characterizes investment incentive problems associated with debt financing. The decision problem of residual claimants is explicity formulated and their investment policies are characterized. The paper also analyzes the use of conversion features and warrants to control distortionary incentives. These claims reverse the convex shape of levered equity over the upper range of the firm's earnings, and this mitigates the incentive to take risk. It is shown that, under certain conditions, such claims can be constructed to restore net present value maximizing incentives and simultaneously meet the financing requirements of the firm.

C. Edward Arrington, William Hillison, Robert E. Jensen, An Application of Analytical Hierarchy Process to Model Expert Judgments on Analytical Review Procedures, Journal of Accounting Research, Vol. 22, No. 1 (Spring, 1984), pp. 298-312

[The lecture investigates some consequences of a frequently observed phenomenon: There are once and for all costs of switching from one good to one of its substitutes. The decision to substitute then is an investment decision. Such substitution costs, in conjunction with problems of oppportunism, have frequently been seen as a reason for vertical integration. Reputation for a fair treatment of customers may enable suppliers to maintain market relations for goods involving substitution costs. A model looks at "competitive distance" between two goods with substitution costs. If future tastes are uncertain the model shows that with low rates of discount or high rates of market growth competitive distance declines as substitution costs rise. It is also shown that competitive distance rises with a rising rate of discount. Given the effectiveness of the reputation mechanism, numerical analysis shows that competitive distance is smaller in most cases with substitution costs than without substitution costs.]

This paper considers a firm that must issue common stock to raise cash to undertake a valuable investment opportunity. Management is assumed to know more about the firm's value than potential investors. Investors interpret the firm's actions rationally. An equilibrium model of the issue-invest decision is developed under these assumptions. The model shows that firms may refuse to issue stock, and therefore may pass up valuable investment opportunities. The model suggests explanations for several aspects of corporate financing behavior, including the tendency to rely on internal sources of funds, and to prefer debt to equity if external financing is required. Extensions and applications of the model are discussed.

The resolution of any bargaining conflict depends crucially on the relative urgency of the agents to reach agreement and the information each agent has about the others' preferences. This paper explores, within the context of an infinite-horizon bargaining model with two-sided uncertainty, how timing and information affect the rational behaviour of agents when commitment is not possible. Since the bargainers are uncertain about whether trade is desirable, they must communicate some of their private information before an agreement can be reached. This need for learning, due to incomplete information about preferences, results in bargaining inefficiencies: trade often occurs after costly delay. Thus, the model provides an explanation for the inefficient bargaining behaviour that appears to occur often in practice.

In this paper, we present the primal characterizations of the technologies that are consistent with capital aggregation. These characterizations are dual to the profit function restrictions obtained by Gorman and complete the closed-form production function restrictions obtained by Fisher. We use the result to solve a problem recently posed by Fisher. In addition, we pose and solve a natural extension of the usual capital aggregation problem.

Recent statistics indicate that more than one-third of all new marriages will end in divorce. This evidence suggests that even the most happily couples may be wise to view their lifetime choices within a framework that recognizes that periodically each selects one of two strategies: married or not married. When both select the married strategy, the couple remain married. If either party (or both) elect the not-married strategy, the outcome will be divorce. Election of the not-married strategy thus creates a twoperiod world in which each party is married in the first period and divorced in the second. When a marriage dissolves, the couple divides all marital property either by mutual consent or according to the division rules imposed upon them by the state in which they reside. The law separately defines both marital property and the formula used to divide the property. This paper focuses on the interaction of the two variables, specifically, the effect of the state's division rule on the savings-consumption decisions of a divorcing couple.' Savings are of interest because they represent the couple's marital assets; the division rule is important because the amount each party receives at divorce affects the postmarriage economic well-being of each. The analysis can improve our understanding of the economic behavior of couples and will provide insight into the effect of divorce law on family savings patterns. Since law views divorcing spouses as adversaries, the analysis of marital savings and the resulting property division is carried out in a noncooperative game framework in which couples facing divorce each protect their self-interest by maximizing separate lifetime utility functions.2 Three noncooperative games are discussed: Cournot, Stackelberg, and Nash bargaining.