This paper investigates the relation between the form of compensation and the manager's decision horizon. It finds that while all-cash contracts induce managers to underinvest in the long term, all-stock contracts induce overinvestment in the long term. It shows that compensation contracts consisting of both cash and restricted stock can produce efficient investment, thereby providing a rationale for the existence of both cash and stock incentive schemes in executive compensation packages. This explains why the adoption of either type of incentive scheme results in a positive stock price reaction. In addition, the paper derives the following testable hypotheses: i) the proportion of the stock compensation is decreasing in the precision of the manager's ability and increasing in the precision of the firm's cash flows; ii) firms compensate their managers with proportionately more stock in profitable years and proportionately more cash in leaner years; and iii) the greater the growth opportunities, the higher the proportion of stock compensation.

The tradeoff between an insurer's or medical provider's incentives to select good risks and to produce efficiently is governed by the supply-price analog to the demand-price tradeoff between moral hazard and risk aversion. Under a variety of models the optimum supply price is a mixture of capitation and fee-for-service payments. Empirical literature shows that pure capitation payment leaves strong incentives for selection that are acted upon. The presence of contracting costs in a Rothschild-Stiglitz model means a limited pooling equilibrium can exist and that poor risks will not be at their preferred outcome.

Walter Nonneman, Patrick Vanhoudt; A Further Augmentation of the Solow Model and the Empirics of Economic Growth for OECD Countries*, The Quarterly Journal of E

This paper examines the strategic role of high levels of debt and bankruptcy threats in deterring entry into monopolistic markets. In the context of an infinite horizon entry game, we show that if a potential entrant has access to debt financing with limited liability, the unique sub-game perfect equilibrium involves the entrant successfully issuing a high level of debt, entering the market and being met with cooperation. If, in addition to the entrant, the incumbent also has access to debt with limited liability, it will be highly levered and will completely pre-empt any entry in equilibrium. Finally, if the incumbent faces a variety of potential entrants with differing abilities to capture market shares, its optimal capital structure will help pre-empt the entry of the tougher entrants, while allowing the weaker ones to share the market. The results of extreme leverage are also shown to hold in an alternative formulation analyzed by Kreps and Wilson (1982) and Milgrom and Roberts (1982), and thus are robust to model specifications. The empirical implications and possible application to high leverage industries are briefly discussed.

In this study we specify a simple earnings model, present managerial discretion hypotheses from existing literature, and assume efficient markets in order to evaluate five discretionary-accrual models. The five discretionary accrual models are the same as those evaluated in Dechow, Sloan, and Sweeney [1995]. The models are Healy [1985]; DeAngelo [1986]; Jones [1991]; Jones as modified in Dechow, Sloan, and Sweeney [1995]; and the industry model proposed by Dechow and Sloan [1991]. We specify three managerial discretion hypotheses. First, under the performance measure hypothesis, discretionary accruals help managers produce a reliable and more timely measure of firm performance (i.e., earnings) than using nondiscretionary accruals alone. Second, the opportunistic accrual management hypothesis is that discretionary accruals are employed to hide poor performance or postpone a portion of unusually good current earnings to future years. Finally, discretionary accruals are noise in earnings. This is the noise hypothesis. Our contribution is to make the joint hypotheses explicit and generate explicit predictions about the relative variability of earnings components,

[We use a cost of carry model with nonzero transaction costs to motivate estimation of a nonlinear dynamic relationship between the S&P 500 futures and cash indexes. Discontinuous arbitrage suggests that a threshold error correction mechanism may characterize many aspects of the relationship between the futures and cash indexes. We use minute-by-minute data on the S&P 500 futures and cash indexes. The results indicate that nonlinear dynamics are important and related to arbitrage, and suggest that arbitrage is associated with more rapid convergence of the basis to the cost of carry than would be indicated by a linear model.]

While the pillar of the World Trade Organization' (WTO) with respect to trade in goods, services, and intellectual property is nondiscrimination, the cornerstone of trading is discrimination.2 There has been a proliferation of trading in recent years. Twenty-nine new have been notified to the General Agreement on Tariffs and Trade (GATT) and the WTO since 1992: 27 on merchandise trade and two on trade in services. This is almost half the number of still in existence and notified to GATT prior to 1992. All but three WTO members are parties to at least one agreement, and some are parties to many more. It is therefore not surprising that there is renewed interest in whether compete with, or complement, the multilateral trading system.4 While there may be no clear answer, it cannot be denied that recent developments have major implications for the rules-based multilateral trading system. One such development is that tariff preferences have or will become relatively unimportant in many trading agreements. The reasons for this include the high proportion of trade outside many preferential agreements, the limits to the coverage of the tariff preferences themselves, the high share of post-Uruguay Round tariffs that will be bound at zero, and the low level of most-favorednation (MFN) tariffs faced by non-preferencereceiving countries. This development is accompanied by the fact that the scope of application of many has extended well beyond tariff preferences to disciplines that were traditionally the domain of GATT or may in the future be dealt with by the WTO. The European Union (EU) provides a good example.' Despite the numerous countries receiving tariff preferences, its largest trading partners are outside the network of these agreements. In fact, 45 percent of EU imports originate in non-preference-receiving countries (e.g., 17 percent in the United States and 10 percent in Japan). While tariff preferences are of considerable potential importance, with the implementation of Uruguay Round commitments, 51 percent of the value of imports from non-preference-receiving countries will enter the EU under bound duty-free tariff rates. Further, the trade-weighted tariff average on manufactured imports from these countries will be 3.1 percent.6 * Development Division, World Trade Organization, Geneva, Switzerland. Helpful comments from Maria Pillinini of the WTO are gratefully acknowledged, as are those of Richard Snape of Monash University and Industries Commission, Australia. The views expressed in this article are those of the author and not the organization for which he works. 'The WTO came into existence on 1 January 1995 to, inter alia, facilitate the administration of the WTO that emerged from the Uruguay Round, one of which is the revised 1947 General Agreement on Tariffs and Trade (i.e., GATT 1994b). 2 Unless otherwise specified, the term regional trading agreements refers to both customs unions and free-trade areas for trade in goods. The extent of discrimination in is related to the ease of accession of non parties and the openness of the in general. 'The three are Japan, Korea, and Hong Kong. There were 128 Members of GATT, and following the completion of domestic ratification and WTO accession procedures, there will be approximately 160 members of the WTO in the next few years. There are presently 120 members. 4 There are many excellent contributions to this debate; see, for example, Richard Snape, et al. (1993), Jagdish Bhagwati (1995), and WTO (1995). 'Trade between the 15 members of the EU accounts for 60 percent of total EU trade. The EU offers contractual preferences to 26 countries under free-trade, association, or cooperation agreements, and to 70 countries under the Lom6 Convention. It offers noncontractual preferences to 145 countries under the Generalized System of Preferences (GSP). 6 While tariffs on agricultural products are generally higher than those on manufactured goods, the agricultural sector is typically dealt with outside EU preferential agreements.