nep-sea New Economics Papers
on South East Asia
Issue of 2006‒09‒30
thirty-one papers chosen by
Kavita Iyengar
Asian Development Bank

  1. Growth with Equity in East Asia? By Jomo K.S.
  2. China’s Changing Economic Structures and Its Implications for Regional Patterns of Trade Production and Integration By Tan Kim Song; Khor Hoe Ee
  3. Taxation and the international strategy of Japanese multinational enterprises. By Céline Azémar; Gregory Corcos; Andrew Delios
  4. Direction-of-Change Forecasts for Asian Equity Markets Based on Conditional Variance, Skewness and Kurtosis Dynamics: Evidence from Hong Kong and Singapore By Peter F. Christoffersen; Francis X. Diebold; Roberto S. Mariano; Anthony S. Tay; Yiu Kuen Tse
  5. Sustainable External Debt Levels: Estimates for Selected Asian Countries By Roberto S. Mariano; Delano Villanueva
  6. Has the European ICT sector a chance to be competitive ? By Christian Genthon; Godefroy Dang Nguyen
  7. Supply shocks and currency crises : the policy dilemma reconsidered By García-Fronti, Javier; Miller, Marcus; Zhang, Lei
  8. Measuring the Pro-Poorness of Income Growth Within an Elasticity Framework By B. Essama-Nssah; Peter J. Lambert
  9. Non-market Leadership Experience and Labor Market Success: Evidence From Military Rank By Myoung-Jae Lee; Yip Chun Seng
  10. Retour sur la croissance rapide des pays d'Asie du Sud-Est dans les années 80-90 : une analyse statistique des similitudes et des différences entre l'Indonésie, la Malaisie, les Philippines et la Thaïlande By David Hoyrup
  11. Green Revolutions and Miracle Economies : Agricultural Innovation, Trade and Growth By Brishti Guha
  12. Price Control, Different Demands Between Countries, and Parallel Trade in Pharmaceuticals By Hai Zhong
  13. Future Job Prospects in Singapore By Hoon Hian Teck
  14. Comments on “A Selective Overview of Nonparametric Methods in Financial Econometrics” by Jianqing Fan By Peter C. B. Phillips; Jun Yu
  16. Creating First-Mover Advantages: The Case of Samsung Electronics By Jang-Sup SHIN; Sung-Won JANG
  17. Investing in Real Estate: Mortgage Financing Practices and Optimal Holding Period By Winston T.H. Koh; Edward H.K. Ng
  18. La Chine, un hégémon régional en Asie Orientale ? Une approche d'Economie Politique Internationale By Laëtitia Guilhot
  19. Household Demand, Network Externality Effects and Intertemporal Price Discrimination By Winston T.H. Koh
  20. Credit Cards: Facts and Theories By Carol C. Bertaut; Michael Haliassos
  21. Le rôle du Japon dans le processus de régionalisation en Asie By Ingrid France
  22. The Case of the Errant Executive : Management, Control and Firm Size in Corporate Cheating By Brishti Guha
  23. Honesty and Intermediation: Corporate Cheating, Auditor Involvement and the Implications for Development By Brishti Guha
  24. Games Suppliers and Producers Play : Upstream and Downstream Moral Hazard with Unverifiable Input Quality By Brishti Guha
  25. The Auditor and the Firm: A Simple Model of Corporate Cheating and Intermediation By Brishti Guha
  26. Some Patterns of Market Shares of Brands Within and Across Product Categories By Rajeev Kohli; Raaj Sah
  27. Corruption Across Countries and Regions: Some Consequences of Local Osmosis By Raaj Sah
  28. The Micro-foundations of Intertemporal Price Discrimination By Winston T.H. Koh
  29. Comment on “Realized Variance and Market Microstructure Noise” by Peter R. Hansen and Asger Lunde By Peter C. B. Phillips; Jun Yu
  30. A Structuralist Model of the Small Open Economy in the Short, Medium and Long Run By Hian Teck Hoon; Edmund S Phelps
  31. Future Targets and Multiple Equilibria By Ashok S Guha; Brishti Guha

  1. By: Jomo K.S.
    Abstract: Rapid growth and structural change have reduced poverty in East Asian economies. Income inequality has been low in Korea and Taiwan, but has risen in recent years with economic liberalization. In the Southeast Asian economies of Thailand, Malaysia and Indonesia, poverty has declined, while income inequality trends have varied, rising most clearly in Thailand. With its strengthened (private) property rights, market liberalization and sustained rapid growth, China has also experienced increased inequality despite considerable poverty reduction. Hence, the common claim of egalitarian growth in East Asia may have been exaggerated, especially since the 1990s.
    Keywords: East Asia, China, Indonesia, Malaysia, Korea, Taiwan, Thailand, inequality, poverty
    JEL: D31 D63 F02
    Date: 2006–09
  2. By: Tan Kim Song (School of Economics and Social Sciences, Singapore Management University); Khor Hoe Ee (Monetary Authority of Singapore)
    Abstract: There is tremendous momentum for economic and financial integration in East Asia today. Partly inspired by the formation of the European Union and partly as a response to the 1997/98 Asia financial crisis, many East Asian countries are showing greater commitment to regional economic cooperation. A number of bilateral free trade agreements (FTAs) have either been concluded or are being negotiated.1 At a less formal level, the ASEAN+3 grouping has brought the whole region together in regular consultations over trade, investment, as well as monetary and exchange rate policy matters.
    Date: 2005–11
  3. By: Céline Azémar; Gregory Corcos; Andrew Delios
    Abstract: This paper analyzes the effect of statutory tax rates on the location of Japanese capital in emerging countries. Considering the fact that the difference between Japan and foreign tax rates can engender transfer pricing manipulation to diminish tax liabilities, and that some firms are more able to manipulate transfer pricing, such as wholly-owned ventures and high technology affiliates, we investigate the sensitivity of Japanese capital to foreign tax rates by distinguishing wholly-owned ventures from joint-ventures and high R&D affiliates from low R&D affiliates. Based on country, parent firm and sector characteristics an investment equation is estimated on a sample of 3774 Japanese affiliates in 49 emerging countries. We obtain a greater semi-elasticity between investment and the statutory tax rate for wholly-owned affiliates and R&D intensive parents. We interpret these results as indirect evidence for abusive transfer pricing to be one of the determinants of FDI flows.
    Date: 2006
  4. By: Peter F. Christoffersen (McGill University and CIRANO); Francis X. Diebold (University of Pennsylvania and NBER); Roberto S. Mariano (School of Economics and Social Sciences, Singapore Management University); Anthony S. Tay (School of Economics and Social Sciences, Singapore Management University); Yiu Kuen Tse (School of Economics and Social Sciences, Singapore Management University)
    Abstract: Recent theoretical work has revealed a direct connection between asset return volatility forecastability and asset return sign forecastability. This suggests that the pervasive volatility forecastability in equity returns could, via induced sign forecastability, be used to produce direction-ofchange forecasts useful for market timing. We attempt to do so in the context of two key Asian equity markets, with some success, as assessed by formal probability forecast scoring rules such as the Brier score. An important ingredient is our conditioning not only on conditional variance information, but also conditional skewness and kurtosis information, when forming direction-of-change forecasts.
    Keywords: Volatility, variance, skewness, kurtosis, market timing, asset management, asset allocation, portfolio management.
    JEL: G10 G12
    Date: 2004–07
  5. By: Roberto S. Mariano (School of Economics and Social Sciences, Singapore Management University); Delano Villanueva (School of Economics and Social Sciences, Singapore Management University)
    Abstract: High ratios of external debt to GDP in selected Asian countries have contributed to the initiation, propagation, and severity of the financial and economic crises in recent years, reflecting runaway fiscal deficits and excessive foreign borrowing by the private sector. Applying the formal framework proposed by Villanueva (2003) to a selected group of Asian countries, the research estimates the external debt thresholds beyond which further debt accumulation will have negative effects on growth and will become unsustainable. The framework is an extension of the standard neoclassical growth model that incorporates global capital markets. ‘Sustainability’ is measured in terms of the steady-state ratio of the stock of external debt to GDP, as functions of real world interest rates, risk spreads and their responsiveness to external debt burdens and market perceptions of country risk, marginal propensities to save out of national disposable income and foreign borrowing, rates of technical change, and parameters of the production function. The major policy implications are that in the long run, fiscal consolidation and the promotion of private saving are critical, and that reliance on foreign saving in a globalized financial world has limits, particularly when the risk spreads are positively correlated with rising external debt levels.
    Date: 2005–03
  6. By: Christian Genthon (LEPII - Laboratoire d'Economie de la Production et de l'Intégration Internationale - [CNRS : FRE2664] - [Université Pierre Mendès-France - Grenoble II]); Godefroy Dang Nguyen
    Abstract: The ICT sector is featured by technical progress, convergence and systems integration. This leads to risks of monopolization regimes at the core with higher competition regimes at the periphery. Moreover, some specific component of the system may be essential for its evolution. In particular, networking to some extent creates the system, while software (notably operating systems) is the “glue” which holds it together. In this context, the European ICT industry is potentially smashed between the cost advantages of Asian countries such as China, and the inventiveness and dynamism of the US industry. The way out of this difficult situation is to create in Europe the conditions of restoring knowledge accumulation. By concentrating on an ambitious project of open source software production in embarked and domestic systems, Europe could reach several objectives: to make freely accessible an essential facility of networks, to stimulate competition, to help reaching the Lisbon objectives and to restore the European competitiveness in ICT.
    Keywords: information and communications technologies ; industrial policy ; competition regimes ; knowledge based society ; open source
    Date: 2006–09–19
  7. By: García-Fronti, Javier (University of Warwick and CSGR, University of Warwick); Miller, Marcus (University of Warwick, Centre for Economic Policy Research and CSGR, University of Warwick); Zhang, Lei (University of Warwick and CSGR, University of Warwick)
    Abstract: The stylised facts of currency crises in emerging markets include output contraction coming hard on the heels of devaluation, with a prominent role for the adverse balance-sheet effects of liability dollarisation. In the light of the South East Asian experience, we propose an eclectic blend of the supply-side account of Aghion, Bacchetta and Banerjee (2000) with a demand recession triggered by balance sheet effects (Krugman, 1999). This sharpens the dilemma facing the monetary authorities - how to defend the currency without depressing the economy. But, with credible commitment or complementary policy actions, excessive output losses can, in principle, be avoided.
    Keywords: Supply and demand shocks ; financial crises ; contractionary devaluation ; Keynesian recession
    JEL: E12 E4 E51 F34 G18
    Date: 2006
  8. By: B. Essama-Nssah (World Bank Poverty Reduction Group); Peter J. Lambert (University of Oregon Economics Department)
    Abstract: Poverty reduction has become a fundamental objective of development, and therefore a metric for assessing the effectiveness of various interventions. Economic growth can be a powerful instrument of income poverty reduction. This creates a need for meaningful ways of assessing the poverty impact of growth. This paper follows the elasticity approach to propose a measure of pro-poorness defined as a weighted average of the deviation of a growth pattern from the benchmark case. The measure can help assess pro-poorness both in terms of aggregate poverty measures which are members of the additively separable class, and at percentiles. It also lends itself to a decomposition procedure, whereby the overall pattern of income growth can be unbundled, and the contributions of income components to overall pro-poorness identified. An application to data for Indonesia in the 1990s reveals that the amount of poverty reduction achieved over that period remains far below what would have been achieved under distributional neutrality. This conclusion is robust to the choice of a poverty measure among members of the additively separable class, and can be tracked back to changes in expenditure components.
    Keywords: poverty, growth, pro-poorness, social evaluation JEL classifications :
    JEL: I32 D63 R11
    Date: 2006–09–10
  9. By: Myoung-Jae Lee (School of Economics and Social Sciences, Singapore Management University); Yip Chun Seng (School of Economics and Social Sciences, Singapore Management University)
    Abstract: There has been much recent interest in the effects of pre and non-market skills on future labor market outcomes. This paper examines one such effect: the effect on future wages of military leadership experience among "Vietnam generation" American men. We study rank, not just veteran status. We argue that rank is a good measure of pre-market leadership skills because of the clear military hierarchy and the primarily youth experience of Vietnam service. Two sources of selection bias are accounted for: non-random military entry and eventual rank attained. We apply a modified 2-stage parametric sample selection method. The rank premia on future wages are estimated using the parametric selection corrections and a propensity score matching with two indices. We find evidence of a leadership premium, but not a veterans'premium. It is the rank that matters. If one joins the military believing that military service commands a future wage premium, he had better become an NCO or an officer.
    JEL: J24 J10
    Date: 2005–05
  10. By: David Hoyrup (LEPII - Laboratoire d'Economie de la Production et de l'Intégration Internationale - [CNRS : FRE2664] - [Université Pierre Mendès-France - Grenoble II])
    Abstract: Cette communication cherche à mesurer statistiquement les similitudes et les différences dans les évolutions économiques enregistrées au cours des années de croissance rapide (1986-1996) dans les pays d'Asie du Sud-Est. L'objectif est de vérifier dans quelle mesure l'Indonésie, la Malaisie, les Philippines et la Thaïlande (souvent regroupés sous l'appellation ASEAN-4 ou NPI 2) constituent un groupe de pays homogène. Si tel était le cas, on pourrait par la suite procéder à une analyse des fondements institutionnels communs qui sont à l'origine de ces performances remarquables. On utilise pour cela les données de la Banque Mondiale (cadrage macroéconomique) et du CEPII (modalités d'insertion dans le commerce mondial), afin de procéder à une analyse en composante principale, qui permet de représenter graphiquement ces différences et similitudes entre pays. Les résultats confirment que la Malaisie, la Thaïlande et dans une moindre mesure, l'Indonésie, ont effectivement connu des trajectoires nationales de développement relativement similaires, tandis que les Philippines se distinguent largement des trois autres pays. Les recherches sur les fondements institutionnels du "miracle asiatique" devraient donc porter sur les trois premiers pays cités, et mettre de côté le cas des Philippines.
    Keywords: croissance économique ; nouveaux pays industriels ; performance économique ; développement économique ; commerce international ; Indonésie ; Malaisie ; Philippines ; Thailande
    Date: 2006–09–22
  11. By: Brishti Guha (School of Economics and Social Sciences, Singapore Management University)
    Abstract: The purpose of this paper is to develop a simple model of an economy in which growth is driven by a combination of exogenous technical change in agriculture as well as by a rising world demand for labor-intensive manufactured exports. We explore the relative roles of agricultural innovation and rising export demand in a model with two traded industrial goods and a non-traded agricultural good, food. When the non-traded sector uses a specific factor, we show that technical change in agriculture may be the key to sustained factor accumulation in industry, in particular driving intersectoral labor migration. A key assumption is a less than unitary price elasticity of demand for food. Our results could form a crucial link in capturing the story of labor-abundant economies which experienced structural transformation and growth through labor-intensive manufactured exports, without prior technology breakthroughs in industry. They contribute to explaining the massive growth in factor accumulation which shows up in some growth accounting studies : they may also imply that some of the contribution of “technical progress” is mistakenly attributed solely to factor accumulation.
    Keywords: Structural change, agricultural productivity, labor migration, terms of trade.
    JEL: O3 O4 F1
    Date: 2005–09
  12. By: Hai Zhong (University of Western Ontario)
    Abstract: In recent years, there are growing concerns on the issue of parallel trade on pharmaceuticals. It is an existing issue in the European Union and an emerging issue in North America and Asia. In this paper, a model is developed to explore the following issues in the presence of parallel trade: 1) the change of firm's profits; 2) drug price, supply and social welfare in the importing country; 3) drug price, supply and social welfare in the exporting country. The possible policy reactions of the government in the two countries are also discussed. By relaxing some assumptions, I extend the existing studies to a more general situation.
    Date: 2006
  13. By: Hoon Hian Teck (School of Economics and Social Sciences, Singapore Management University)
    Abstract: What forces have shaped our nation’s employment and remuneration record so far? Where is Singapore’s unemployment rate headed? What should policy-makers do about it? These are the questions tackled in this paper. It is shown that based on our historical experience, it would be necessary to achieve an annual real GDP growth rate of 7.1 percent in order to keep the unemployment rate unchanged. Moreover, a one-percentage point shortfall of the real GDP growth rate below 7.1 percent in any given year results in a rise in the unemployment rate of 0.12 percentage points over the previous year. Consequently, if the economy is able to generate at most 5 percent real GDP annual growth rate (the high end of the range of official medium-term projections of our economy’s growth rate, which is 3 to 5 percent), it would seem that the unemployment rate is set to rise from its current level based upon the historical relationship. Is there any reason, however, to believe that the Okun’s Law relationship for a fast-developing country like ours might be expected to change once we have reached the status of a mature economy as we now have become? After all, in a mature economy like the US, the critical real GDP growth rate required to keep the unemployment rate steady is only 3 percent. It is likely that the Okun’s Law relationship would indeed shift as the economy matures. As workers adjust their expectations to the reality that the economy has reached a new lower growth regime and they incorporate their revised growth expectations in their wage bargaining, the unemployment rate can remain steady despite slower growth. This steady structural rate of unemployment is, however, likely to be higher than in the past. In response to the worsened medium to long term outlook for the labor market, one is tempted to ask: Can anything be done by policy-makers to reduce the equilibrium rate of unemployment? I believe that reaching out for a weaker Singapore dollar in order to boost international competitiveness, and so to boost aggregate demand and hence employment, or reaching out for budgetary deficits as a direct means to boost aggregate demand is unlikely to have a lasting effect on the structural rate of unemployment. Instead that it would be better to consider policies aimed directly at influencing equilibrium unemployment. One proposal is to introduce an employment subsidy scheme aimed particularly at low-skilled workers, which has the effect of increasing job creation directly. Increased effort to create a business-friendly environment to encourage new start-ups by ensuring minimal red tape and enabling relatively easy financing for them will also work to increase the pace of job creation. Finally, the work of the Workforce Development Agency aimed at retraining low-skilled and older workers to meet the skills demand of new jobs and then matching them to firms offering the job vacancies should help somewhat in bringing down the structural rate of unemployment as our small geographical area works to our advantage when it comes to job-matching.
    Date: 2005–01
  14. By: Peter C. B. Phillips (Yale University); Jun Yu (School of Economics and Social Sciences, Singapore Management University)
    Abstract: Our comments on Fan’s paper will concentrate on two issues that relate in important ways to the paper’s focus on misspecification and discretization bias and the role of nonparametric methods in empirical finance.
    Date: 2005–04
  15. By: Macho-Stadler; Licun Xue
    Abstract: Although global free trade is efficient, each country’s benefit from free trade depends on the path that leads to the global free trade agreement. Using a dynamic model of trading bloc formation, we show that when global free trade is reached gradually, the countries that are initially excluded gain less than the rest and may be even made worse-off by the final free trade agreement, compared with the initial state of no trading blocs.
    JEL: C71 C72 F13
    Date: 2006–09
  16. By: Jang-Sup SHIN (Department of Economics, National University of Singapore); Sung-Won JANG (Samsung Economic Research Institute)
    Abstract: This paper analyzes the sources of first-mover advantages by examining the case of Samsung Electronics, a firm which has maintained and strengthened the technological leadership in the DRAM industry since 1992. The focus is on endogeneity of first-mover advantages under changing technological and competitive environments, part of which are also shaped by the technology leader. The paper also discusses general implications of this case study for strategy and organization for innovation.
    Keywords: First-mover advantages, innovation, firm growth, Samsung Electronics, semiconductors
  17. By: Winston T.H. Koh (School of Economics and Social Sciences, Singapore Management University); Edward H.K. Ng (National University of Singapore)
    Abstract: Real estate investments are typically characterized by high degrees of leverage and long loan tenures. In perfect capital markets, leverage has no impact on the investment decision apart from tax considerations. However, the mortgage financing market is imperfect in many countries. In the presence of market imperfections, an optimal holding period exists for real property investments. We provide a simple rule to calculate the optimal holding period is to compare the required rate of return with the leveraged rate of return on equity.
    Keywords: mortgage financing, real estate, financial leverage, optimal holding period
    JEL: G11
    Date: 2005–02
  18. By: Laëtitia Guilhot (LEPII - Laboratoire d'Economie de la Production et de l'Intégration Internationale - [CNRS : FRE2664] - [Université Pierre Mendès-France - Grenoble II])
    Abstract: L'objet de cette contribution est double. Elle vise tout d'abord à présenter l'évolution du rôle de la Chine dans le processus de régionalisation asiatique, notamment en analysant le poids et l'impact de cette insertion dans le volume des échanges et des flux d'IDE intra-régionaux. L'essor de la Chine dans cette région pose ensuite la question de l'hégémon régional. Le Japon, autre économie incontournable de la zone, ne peut être écarté de cette étude. Ces deux pays peuvent tous deux prétendre au statut d'hégémon régional. Mais après une évaluation de leurs capacités, ni la Chine, ni le Japon ne possèdent toutes les caractéristiques nécessaires à ce rôle. Seuls les attributs de la Chine conjugués à ceux du Japon permettraient de donner naissance à un tandem moteur "théorique" pertinent, capable d'organiser la zone.
    Keywords: régionalisation ; échange commercial ; investissement direct ; investissement étranger ; économie politique internationale ; hégémonie ; chine ; Asie ; Japon
    Date: 2006–09–25
  19. By: Winston T.H. Koh (School of Economics and Social Sciences, Singapore Management University)
    Abstract: This paper examines the optimality of intertemporal price discrimination when network externality effects are present in the consumption of a durable good. We conduct our study in two settings. In a model with two household types, utilities are dependent on the cumulative proportion of households that have purchased the durable good. Next, in a model with a continuum of household types, we extend the analysis to the case where households consume both a durable good and a stream of non-durable goods. We show that in both settings, the presence of network externalities facilitates a sales strategy with intertemporal price discrimination.
    Keywords: intertemporal price discrimination, durable good, household demand, network externality
    JEL: D40
    Date: 2005–03
  20. By: Carol C. Bertaut (Board of Governors of the Federal Reserve System); Michael Haliassos (University of Frankfurt and CFS)
    Abstract: We use data from several waves of the Survey of Consumer Finances to document credit and debit card ownership and use across US demographic groups. We then present recent theoretical and empirical contributions to the study of credit and debit card behavior. Utilization rates of credit lines and portfolios of card holders present several puzzles. Credit line increases initiated by banks lead households to restore previous utilization rates. High-interest credit card debt co-exists with substantial holdings of low-interest liquid assets and with accumulation of retirement assets. Although available evidence disputes ignorance of credit card terms by card holders, credit card rates do not respond to competition. There is a rising trend in bankruptcy and delinquency, partly attributable to an increased tendency of households to declare bankruptcy associated with reduced social stigma, ease of procedures, and financial incentives. Co-existence of credit card debt with retirement assets can be explained through self-control hyperbolic discounting. Strategic default motives contribute partly to observed co-existence of credit card debt with low-interest liquid assets. A framework of “accountant-shopper” households, in which a rational accountant tries to control an impulsive shopper, seems consistent with both types of co-existence and with observed utilization of credit lines.
    Keywords: Credit Cards, Debit Cards, Revolving Debt, Consumer Credit, Portfolios
    JEL: G11 E21
    Date: 2006–09–19
  21. By: Ingrid France (LEPII - Laboratoire d'Economie de la Production et de l'Intégration Internationale - [CNRS : FRE2664] - [Université Pierre Mendès-France - Grenoble II])
    Abstract: La crise asiatique de la fin des années 1990 a suscité des questionnements quant à l'évolution des modalités du processus de régionalisation à l'oeuvre. Dans les années 1980 et 1990, la structuration d'une zone régionale en Asie a été marquée par l'influence du Japon comme capitalisme dominant. Cependant, la longue dépression de l'économie japonaise, alors que la Chine monte en puissance, conduit à s'interroger sur l'évolution du rôle du Japon dans cette dynamique régionale. Nous examinerons cette question à travers deux dimensions qui sous-tendent les processus d'intégration régionale et que nous distinguons à des fins analytiques : le déploiement des activités productives sur l'espace régional avec la mise en place d'une division régionale du travail, à partir de laquelle s'organisent dans une large mesure les flux commerciaux (2), et la dimension institutionnelle du processus (2).
    Keywords: régionalisation ; investissement direct ; intégration régionale ; échange commercial ; investissement à l'étranger ; Japon ; Asie
    Date: 2006–09–25
  22. By: Brishti Guha (School of Economics and Social Sciences, Singapore Management University)
    Abstract: Firm insiders – a manager and a board – face moral hazard in relation to their outside shareholders in a repeated game with asymmetric information and stochastic market outcomes. The manager determines whether or not outsiders are cheated; the board, whose objectives differ from those of outside shareholders, attempts to control the manager through compensation contracts and dismissal threats Since compensation determines the manager’s incentive to cheat, firms competing for outside capital publicly announce their managerial contracts. However, secret renegotiation between firm and manager is still possible: so outsiders guard against being cheated by limiting their total stake in any firm. This imposes a credibility constraint on firm size, providing a rationale for the shape of long-run cost curves. Given this limit on outside funds, the minimum size requirement for enterprises to become operational and the ability to pay managers enough to ensure honesty both set a floor to the personal wealth required to enter entrepreneurship. Thus, we endogenize entry into industry, establish a unique equilibrium for any distribution of wealth, and characterize different equilibria. We also explain features of poor countries like dominance of family firms, moral hazard induced vicious circles that retard industrialization and the stimulus that inequality may provide to industrial development.
    Keywords: Moral hazard, firm size, managerial compensation, repeated games
    JEL: D82 L21 M52 O11
    Date: 2005–09
  23. By: Brishti Guha (School of Economics and Social Sciences, Singapore Management University)
    Abstract: We examine self-enforcing honesty in firm-investor relations in an imperfect public information game. Minimum firm size requirements and moral hazard limit ability to raise outside capital, yielding a floor on personal wealth required to enter entrepreneurship. Credible auditing could create efficiency gains. We propose mandatory disclosure of audit fees and an interpretation of international differences in shareholding patterns. We endogenize auditor-firm collusion and extortion by auditors. We embed our game-theoretic analysis in a general equilibrium model to generate unique equilibria that trace the impact of the distribution of wealth on the existence of the market and consequences for development.
    Keywords: Corporate governance, moral hazard, vicious circles, inequality and development, general equilibrium, repeated games.
    JEL: D82 G3 O1
    Date: 2005–09
  24. By: Brishti Guha (School of Economics and Social Sciences, Singapore Management University)
    Abstract: We pin down the optimal relational contract between an input supplier and a final goods producer given a framework of bilateral moral hazard with variable but non-verifiable input quality. Given the inability of third parties to verify input quality, each party has an incentive to cheat the other by making a false claim about input quality. We derive the contract which (a) induces honest behavior and brings about the Pareto superior “first-best” outcome for the widest possible range of exogenous parameters, and (b) maximizes the Nash product of both parties’ payoffs subject to incentive compatibility. An interesting feature of the optimal contract is that it is of a “fixed-price” variety with the final producer paying the supplier the same transfer price whether he has been supplied a high or low quality input when the agreement was to supply high quality. This contrasts with the traditional incomplete contracting literature where fixed-price contracts (eg, payment of a fixed wage to workers) was optimal only in the full information case – while ours is a case of incomplete information. The contrast is rooted both in the bilateral nature of the moral hazard we consider and in the repeated game framework we use. We also pinpoint the exact transfer price in the optimal contract, which may vary for different parameter ranges, and show how the best contract differs from the optimal contract under complete contracting.
    Keywords: Incomplete contracting, upstream and downstream moral hazard, repeated games, Nash bargaining.
    Date: 2005–09
  25. By: Brishti Guha (School of Economics and Social Sciences, Singapore Management University)
    Abstract: We apply a game-theoretic model to the analysis of the recent spate of corporate scandals in which firms have cheated their investors, often with the aid of external auditors. We characterize the different types of equilibria that obtain for different parameter ranges in an auditor’s absence (the parameters we consider being “early signal accuracy” – a measure of transparency – and “withdrawal costs” – a measure of the liquidity of investments). We also analyze whether and under what conditions the presence of an informed auditor could lead to an improvement in the sense of honest behavior replacing cheating as the firms’ equilibrium strategy. In doing so we take into account the auditor’s incentives to collude with his clients or extort from them. We use our results to derive some policy predictions including those relating to the Sarbanes-Oxley reforms, and contrast the case of a firm-hired intermediary (like an auditor) with the situation in which an intermediary is hired by investor consortia. Interestingly, we find that mandatory disclosure of audit fees could guarantee honest behavior, in equilibrium, for much of the parameter space in which cheating would have prevailed in an auditor’s absence – as investors are able to check that audit fees lie in a range which removes incentives to cheat for the auditor and his clients. Such disclosure would need to be backed by heavy penalties for false disclosure. We also find that while firm-hired intermediaries have a non-monotone reaction to improvements in public transparency, initially favoring and then opposing them, investor-hired intermediaries unambiguously dislike improvements in public transparency. We argue that frequent rotation of an auditor’s clients may have costs, not just benefits.
    Keywords: Corporate governance, auditing, disclosure, repeated games
    JEL: C72 D82 L20
    Date: 2005–09
  26. By: Rajeev Kohli (Columbia University); Raaj Sah (School of Economics and Social Sciences, Singapore Management University)
    Abstract: This paper: (i) reports an empirical regularity in the market shares of brands; (ii) presents a theoretical framework for understanding the observed regularity; (iii) adduces additional empirical consequences of the framework, which are some counterintuitive relationships among market shares of brands across different product categories; and (iv) presents empirical evidence for these consequences, thus providing additional support for the theoretical framework. Our cross-sectional data on market shares consists of 1171 brands in 91 product categories of foods and sporting goods sold in the US. If we assign a lower rank to a brand with a higher market share, then the key empirical regularity is that, in each category, the ratio of market shares between two successively-ranked brands becomes smaller as one progresses from higher-ranked to lower-ranked brands. The power law represents these patterns well, in an absolute sense, and better than an alternative model, namely, the exponential form, which has been studied in the literature but without having been compared to any alternative. The latter form predicts that the ratio of the market shares of any two successively ranked brands is a constant. We present some potential implications of our findings for marketing practice and research. We also offer an interpretation of the previously known square-root relationship between market share and the order of entry of firms into an industry. The theoretical framework that we present for understanding the patterns reported here shares its foundation with that of the familiar Dirichlet-multinomial paradigm of brand purchases. This framework has some intuitive interpretations; it accommodates multiple product categories; and it allows for the entry and exit of brands over time.
    Date: 2005–03
  27. By: Raaj Sah (School of Economics and Social Sciences, Singapore Management University)
    Abstract: Large and persistent differences in corruption across comparable countries often are loosely attributed to unarticulated “cultural factors.” Such attributions may indicate a lack of firmer perspectives from social sciences. An even more challenging research issue is the presence of such differences across regions within the same country, because, in comparison to different countries, such regions generally share more socioeconomic and governance characteristics. A principal theme of this paper is that an individual’s perceptions of his or her environment are influenced by the realities that this individual and others have faced in the past, and that these perceptions affect current and future actions of individuals, which in turn exert influences on the current and future realities. A dynamic analysis of this theme yields a number of observations concerning individuals’ behavior and societal outcomes.
    Date: 2005–03
  28. By: Winston T.H. Koh (School of Economics and Social Sciences, Singapore Management University)
    Abstract: This paper investigates the optimality of intertemporal price discrimination for a durable-good monopoly in a model where infinitely-lived households face an intertemporal budget constraint, and consume both durable goods and non-durable goods. We prove that the optimal price of the durable good is not constant, and may decrease or increase over time. Some households may choose to purchase the durable good at a later date, and pay lower or higher prices, since the gain in discounted utility of consuming more of the non-durable good more than compensates for the loss in utility from delaying the consumption of the durable good.
    Keywords: Intertemporal price discrimination, durable good monopoly, optimal pricing strategy, household demand
    JEL: D40 D42 D91
    Date: 2005–01
  29. By: Peter C. B. Phillips (Yale University); Jun Yu (School of Economics and Social Sciences, Singapore Management University)
    Abstract: We find ourselves very much in agreement with the thrust of HL’s message concerning the complexity induced by microstructure noise. In particular, we agree that noise is time dependent and correlated with the efficient price - features that in our view are a necessary consequence of the observed form of market transactions, as we have argued above - and that the properties of noise inevitably evolve over time, again just as the efficient price is itself evolutionary. We further agree that microstructure noise cannot be accommodated by simple specifications. Since microstructure noise at ultra high infill sampling frequencies often off-sets the actual transactions data to the latent efficient price, the complexity of microstructure noise includes local nonstationarity and perfect correlation with the efficient price. These are properties that are not permitted in the models and methods presently used in the literature. However, there are empirical procedures that are capable of addressing these additional complexities as we have indicated in parts of our discussion. We join the authors in saying there is still much to do in this exciting field and we look forward to further developments that build on the work they and others have done recently.
    Date: 2005–09
  30. By: Hian Teck Hoon (School of Economics and Social Sciences, Singapore Management University); Edmund S Phelps (Columbia University)
    Abstract: Open-economy macroeconomics contains a monetary model in the Keynesian tradition that is deemed serviceable for analyzing the short run and a nonmonetary neoclassical model thought capable of handling the long run. But do the Keynesian and neoclassical models meet the challenges thrown out by the main events of the past few decades—the ’80s shock to Europe from the sharp increase of external real interest rates; the kind of speculative shock experienced in the U.S. and parts of northern Europe in the second half of the ’90s: the prospect of new industries emerging in the future with needs for new capital; and what may have been an important shock in the U.S.: the large Kennedy cut in income taxes in 1964? We first indicate that the effects of these shocks on the open economy are not well captured by either the standard Keynesian model or the standard neoclassical theory. Next we provide a careful development of a nonmonetary model of the equilibrium path of the real exchange rate, share price level,as well as natural output, employment and interest that contains “trading frictions” of the customer-market type. We then examine its implications for the above kinds of shocks not only over the medium run but over the short run and the long run as well. The structuralist model we develop also provides an explanation for the dollar’s weakening and accompanying decline in U.S. employment from early 2002 to late 2004 (and prediction of subsequent recovery) resting on belated apprehensions over the scheduled explosion over future decades of Medicare and Social Security outlays for the baby boomers and alarm over the large tax cuts enacted in spite of this prospect.
    Keywords: structuralist model; share price; real exchange rate; employment
    JEL: E24 F3 F4
    Date: 2005–05
  31. By: Ashok S Guha (Jawaharlal Nehru University); Brishti Guha (School of Economics and Social Sciences, Singapore Management University)
    Abstract: Multiple Pareto-rankable equilibria may obtain in an overlapping generations model where consumers save to reach a fixed target. Existence and uniqueness conditions are discussed. The model displays excess consumption sensitivity to current income and perfect old-age insurance.
    Keywords: Multiple equilibria, saving, overlapping generations, excess sensitivity.
    JEL: E21 D91
    Date: 2005–10

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