Showing papers by "London School of Economics and Political Science published in 1998"

Financial Constraints and Stock Returns

Abstract: We test whether the impact of financial constraints on firm value is observable in asset returns. We form portfolios of firms based on observable characteristics related to financial constraints, and test for common variation in the stock returns of these firms. Financially constrained firms? stock returns move together over time. Constrained firms have low returns in our sample of growing manufacturing firms in 1968-1997. We find little evidence that the relative performance of financially constrained firms reflects monetary policy, credit conditions, or business cycles.

Default and Renegotiation: A Dynamic Model of Debt

Abstract: We analyze the role of debt in persuading an entrepreneur to pay out cash e ows, rather than to divertthem. In the e rstpartof the paper we study the optimal debt contract— specie cally, the trade-off between the size of the loan and the repayment— under the assumption that some debt contract is optimal. In the second part we consider a more general class of (nondebt) contracts, and derive sufficient conditions for debt to be optimal among these.

Technology and Market Structure

Abstract: This paper re-examines the relationship between the R&D intensity of an industry and its level of concentration, from the perspective of the Bounds approach to market structure. In so doing, it proposes an index which summarises those aspects of technology and tastes that are relevant to the determination of a lower bound to concentration.

Structural risk minimization over data-dependent hierarchies

Abstract: The paper introduces some generalizations of Vapnik's (1982) method of structural risk minimization (SRM). As well as making explicit some of the details on SRM, it provides a result that allows one to trade off errors on the training sample against improved generalization performance. It then considers the more general case when the hierarchy of classes is chosen in response to the data. A result is presented on the generalization performance of classifiers with a "large margin". This theoretically explains the impressive generalization performance of the maximal margin hyperplane algorithm of Vapnik and co-workers (which is the basis for their support vector machines). The paper concludes with a more general result in terms of "luckiness" functions, which provides a quite general way for exploiting serendipitous simplicity in observed data to obtain better prediction accuracy from small training sets. Four examples are given of such functions, including the Vapnik-Chervonenkis (1971) dimension measured on the sample.

Land Reform, Poverty Reduction and Growth: Evidence from India

Abstract: In recent times there has been a renewed interest in relationships between redistribution, growth and welfare. Land reforms have been central to strategies to improve the asset base of the poor in developing countries though their effectiveness has been hindered by political constraints on implementation. In this paper we use panel data on the sixteen main Indian states from 1958 to 1992 to consider whether the large volume of land reforms as have been legislated have had an appreciable impact on growth and poverty. The evidence presented suggests that land reforms do appear to be associated with poverty reduction.

Craft Guilds, Apprenticeship, and Technological Change in Preindustrial Europe

Abstract: This article argues that medieval craft guilds emerged in order to provide transferable skills through apprenticeship. They prospered for more than half a millennium because they sustained interregional specialized labor markets and contributed to technological invention by stimulating technical diffusion through migrant labor and by providing inventors with temporary monopoly rents. They played a leading role in preindustrial manufacture because their main competitor, rural putting out, was a net consumer rather than producer of technological innovation. They finally disappeared not through adaptive failure but because national states abolished them by decree.

High Commitment Management in the U.K.: Evidence from the Workplace Industrial Relations Survey, and Employers' Manpower and Skills Practices Survey

Abstract: Are the practices widely associated with the high commitment or involvement model, such as job flexibility and minimal status differences, actually used in conjunction with each other? Or rather are they being used, as some commentators speculate, in a fragmented or ad hoc manner? The authors use Latent Variable Analysis to assess whether practices identified with high commitment management do form a unity. They are simultaneously attempting to see if such practices can be used as indicators for measuring an underlying high commitment orientation on the part of management. The analysis uses data from the 1990 UK Workplace Industrial Relations Survey and its sister survey, the Employers' Manpower and Skills Practices Survey, on the use of a range of high commitment practices across the whole economy. The evidence suggests that there is an identifiable pattern to the use of high commitment practices. Four progressive styles of high commitment management (HCM) were discovered. Though the use of it in its ent...

Accounting and Organizations: Realizing the Richness of Field Research

Abstract: Over the past fifteen years the literature has seen a considerable growth in field work, motivated by the quest for rich descriptions of accounting in action. Despite a lively methodology debate on the topic, the question of how richness can be realized in field studies has not been directly discussed. This paper seeks to address this gap. It suggests a focus for rich studies of accounting, and points to three issues that researchers need to consider to produce rich accounts. It goes on to discuss six studies of accounting, showing how different decisions on these issues can inform different styles of research. It concludes with some observations on the research process itself.

How Valuable is Patent Protection?: Estimates by Technology Field

Abstract: This study presents evidence on the private value of patent for different technology fields and nationalities of ownership, using both nonparametric and parametric techniques. The model of patent renewal developed by Pakes and Schankerman is applied to a new data set on patents taken out in France during the period 1969-1982. We find that the distribution of the value of patent rights is highly skewed, that patent protection is a significant but not the major source of private returns to R&D, and that these characteristics vary sharply across technology fields. The paper computes the R&D cash subsidy that would be equivalent to the property rights generated by patents, measures the variations in the value of patent rights over time, technology fields and nationalities, and shows that these differences are correlated with patent grant rates.

The Effects of Macroeconomic News on High Frequency Exchange Rate Behavior

Abstract: This paper studies the high frequency reaction of the DEM/USD exchange rate to publicly announced macroeconomic information emanating from Germany and the U.S. By us? ing data sampled at a five-minute frequency, we are able to identify significant impacts of most announcements on the exchange rate change in the 15 minutes post-announcement, although the significance of these effects decreases rapidly as the interval over which the post-announcement change in exchange rates is increased. The direction of the exchange rate response conforms, in general, with a reaction function interpretation whereby reac? tions to macroeconomic news are driven by the likely operations of monetary authorities in domestic money markets. Further, we detect influences of German monetary policy deci? sions on the reaction of the exchange rate, and also differences between U.S. and German announcements in the exchange rate reaction time pattern. I. Introduction This paper studies the high frequency reaction of the DEM/USD exchange rate to macroeconomic information emanating from Germany and the U.S. Specif? ically, we utilize exchange rate data covering the period 1/1/92 to 31/12/94, sam? pled at a five-minute frequency, to investigate how the major monthly macroe? conomic releases from these two countries impact the DEM/USD. The infor? mation contained in announcements over this three-year period is extracted via a set of market expectation series supplied by Money Market Services Interna? tional (MMS).1 Our analysis improves on previous work in this area in two main respects. First, our study is conducted using very high frequency data, whereas most earlier work has used exchange rate data sampled at a frequency of a number of hours or more. This allows us to construct a very precise characterization of

Sales Taxes and Prices: an Empirical Analysis

Abstract: One of the most fundamental questions in public finance is who bears the burden of taxes -- the incidence of taxation' Our understanding of incidence from an empirical standpoint is quite meager Indeed, there seems to be little evidence even in the case that is theoretically the easiest -- partial equilibrium commodity taxes Are taxes levied on commodities completely shifted into their prices, or does the incidence also fall on firms? How long does the shifting process take? In this paper we employ a unique data source to examine the incidence of sales taxes The main idea is to take information on the prices of specific commodities in different US cities and to examine the extent to which differences in tax rates and bases are reflected in prices, controlling for other factors (such as costs) We find a surprising variety of shifting patterns For some commodities, the after-tax price increases by exactly the amount of the tax, a result consistent with the standard competitive model However, taxes on other commodities are overshifted -- an increase in tax revenue of one dollar per unit increases the price by more than one dollar

Analysing information systems evaluation: another look at an old problem

Abstract: Information systems (IS) evaluation is a thorny problem. In this paper we re-examine the area in light of recent developments in the field. Our examination begins with an example of a common contemporary IS assessment problem, viz. evaluating outsourcing. The example highlights the organizational and political issues that make evaluation fraught with difficulties. The paper argues that IS evaluation is a ‘necessary evil’ but the context in which IS are developed and used has become much more demanding and complex. A conceptual framework, first proposed in an earlier paper as a way to classify the literature, is presented and brought up to date. The framework is then used to re-examine the outsourcing example, demonstrating the usefulness of the framework.

Semiparametric Estimation of the Intercept of a Sample Selection Model

Abstract: This paper provides a consistent and asymptotically normal estimator for the intercept of a semiparametrically estimated sample selection model. The estimator uses a decreasingly small fraction of all observations as the sample size goes to infinity, as in Heckman (1990). In the semiparametrics literature, estimation of the intercept has typically been subsumed in the nonparametric sample selection bias correction term. The estimation of the intercept, however, is important from an economic perspective. For instance, it permits one to determine the "wage gap" between unionized and nonunionized workers, decompose the wage differential between different socioeconomic groups (e.g. male-female and black-white), and evaluate the net benefits of a social programme.

Physical Attractiveness, Opportunity, and Success in Everyday Exchange.

Abstract: The role of perceived physical attractiveness in everyday exchange is addressed using a laboratory paradigm that examines both play–versus–not–play and cooperate–versus–defect choices in an ecology of available prisoner's dilemma games. The analysis considers the actions of both subject and other in encounters where exchange relationships are possible and include perceptions of others' and own physical attractiveness. Results indicate that subjects are more likely to enter play and to cooperate with others they find attractive. Men who see themselves as more attractive more often cooperate than other men, while women who see themselves as more attractive less often cooperate than other women. In addition, subjects who rate themselves as highly attractive are more likely to cooperate with others they see as also highly attractive. Subjects expect others whom they see as attractive to cooperate more often. At the same time, the effect of perceived attractiveness on choice is independent of these expectation...

Toward a role-theoretic conception of embeddedness

Abstract: Attempting to formalize Granovetter's embeddedness argument, rational choice theorists have viewed social relationships as repeated games. This article argues that role theory would provide a better metatheoretical perspective on embeddedness. A preliminary sketch of role theory suggests a promising theoretical methodology. To illustrate, I construct a repeated‐game model in which the players are not individuals but roles (a profit‐maximizing “businessperson” and nonstrategic “friend”); the businessperson role acts strategically in light of a metatule that governs intrapersonal role switching.

Human Services and the Voluntary Sector: Towards a Theory of Comparative Advantage

Abstract: his article explores whether human service organisations in the voluntary sector possess characteristics which might assure them of possible comparative advantages over the for-profit and public sectors with respect to certain sorts of users. We argue that there are inherent structural characteristics of organisations in each sector (for example, ownership, stakeholders and resources) which predispose them to respond more or less sensitively to different states of ‘disadvantage’ experienced by their users. These states are defined as financial, personal, societal and community disadvantage. We suggest that voluntary organisations have a comparative advantage over other sector agencies in areas where their distinctive ambiguous and hybrid structures enable them to overcome problems of principal–agent gap, median voter reluctance, weak messages from politicians to staff and lack of market interest. By taking ideas of comparative advantage into account, a coherent case can be developed regarding the strengths and weaknesses of the expanded role of voluntary agencies in welfare provision. In essence, the article contends that a diminution in stakeholder ambiguity, resulting from organisational growth, lowers the comparative advantage of voluntary agencies.

Territorial competition: Some lessons for policy

Abstract: This paper analyses the policy implications of territorial competition; that is the promotion of local economic development in competition with other territories. It does so both in analytical and empirical terms moving from a wider supranational and analytical standpoint to a more practical and local one. The impact of territorial competition in welfare terms depends critically on the perspective adopted. Some policies are pure waste even from the point of view of the initiating territory. Other policies may have a positive impact in economic welfare terms, viewed from the perspective of the territory, but be zero sum from a wider perspective. There may also be policies, however, which increase economic welfare, both locally and from a wider perspective. This suggests that there is a case for providing a supranational regulatory framework. The empirical section first examines the evidence as to whether local policies for economic growth do, in fact, have any impact. The paper concludes with an examination of the actual policies pursued in a sample of European regions and draws out some conclusions for local policy makers.

How can IT enable economic growth in developing countries

Abstract: In this paper we review theories on the economic significance of IT and telecommunications, and discuss the nature of the economic effects that should be expected from the diffusion of these technologies and increased emphasis on information activities. Economic and social theory both lead to the suggestion that the diffusion of IT and telecommunications, and intensification of information activities do not lead deterministically to economic growth. Rather, organisations are faced with pressures to work out changes in the ways they do business or deliver their services, and policymakers must plan for a macro-economic environment that facilitates economic and social changes. A crucial question which emerges in this context is whether organisations in developing countries acquiring information and communication technologies (ICT) should also seek to transfer ‘best practice’ for doing business. In this paper we question the feasibility and desirability of such an approach, and suggest that developing countries should make efforts to develop organisational practices which are locally appropriate.

Innovation and Bureaucracy Under Soft and Hard Budget Constraints

Abstract: Because of the inherent uncertainty, promotion of innovation critically depends on screening mechanisms to select projects. This paper studies the relationship between bureaucracy and financial constraints as two such mechanisms. The lack of commitment to hard financial constraints interferes with its ex post screening capability; ex ante bureaucratic screening is optimally chosen as a substitute. However, bureaucracy makes mistakes by rejecting promising projects and delays innovation, and the efficiency loss due to soft financial constraints increases as prior knowledge becomes worse and as research stage investment requirements become lower. In a centralized economy, bureaucracy may reduce the number of parallel projects, particularly for projects with higher uncertainties and less research stage requirements. This theory fits much of the evidence and in particular it explains why the computer industry, but not the nuclear or aerospace industries, has fared so poorly in centralized economies. The fundamental importance of innovation to the survival and evolution of economic systems and organizations has long been recognized (Marx (1978), Schumpeter (1950)). Innovation is characterized by its inherent uncertainty because it is "a process whose every element takes considerable time in revealing its true features and ultimate effects" (Schumpeter (1950), p. 83), and people are unable "to anticipate the future impact of successful innovations, even after their technical feasibility has been established" (Rosenberg (1994)). An understanding of how different systems and organizations deal with the uncertainties associated with innovation and the resultant consequences is crucial for understanding alternative economic systems and organizations. In this paper, we provide a theory to analyse how different systems screen uncertain innovative projects and the impact of the various screening mechanisms on those systems. We distinguish two alternative screening mechanisms: the bureaucratic screening mechanism vs. the market screening mechanism. The latter is directly linked to financial constraints. With this perspective, our theory explains why centralized economies did well in certain areas of innovation but fared poorly in others. For instance, in the early 1960s the West was frightened by the USSR's great success in launching the first unmanned satellite and the first manned space capsule; while in the 1980s, in contrast, the centralized system

Credit and business cycles

Abstract: This paper presents two dynamic models of the economy in which credit constraints arise because creditors cannot force debtors to repay debts unless the debts are secured by collateral. The credit system becomes a powerful propagation mechanism by which the effects of shocks persist and amplify through the interaction between collateral values, borrowers’ net worth and credit limits. In particular, when fixed assets serve as collateral, I show that relatively small, temporary shocks to technology or wealth distribution can generate large, persistent fluctuations in output and asset prices. JEL Classification Numbers: E32, E44.

A nonparametric test for i(0)

Abstract: There is frequently interest in testing that a scalar or vector time series is I(0), possibly after first- differencing or other detrending, while the I(0) assumption is also taken for granted in autocorrelation-consistent variance estimation. We propose a test for I(0) against fractional alternatives. The test is non-parametric, and indeed makes no assumptions on spectral behaviour away from zero frequency. It seems likely to have good efficiency against fractional alternatives, relative to other nonparametric tests. The test is given large samle justification, subjected to a Monte Carlo analysis of finite sample behaviour, and applied to various empirical data series.

Measuring central bank independence: a tale of subjectivity and of its consequences

Abstract: The paper first scrutinises the two indices of central bank independence (CBI) most commonly used in the empirical literature. It defines and discovers an impressive interpretation spread, a major criteria spread but a negligible weighting spread in those indices. Second, it examines the robustness of the empirical 'common knowledge' on the benefits of CBI. It finds that, when rankings produced by various CBI indices are regressed with, among others, average inflation, 87.5% of the regression coefficients are not statistically significant. Third, following recent theoretical developments, it suggests an alternative approach to the measurement of a central bank's operational status.

Patent Renewals and R&D Incentives

Abstract: In a model with moral hazard and assymmetric information, we show that it can be welfare-improving to differentiate patent lives when firms have different R&D productivities. A uniform patent life provides excessive R&D incentive to low-productivity firms, and too little to high ones. The optimally differentiated patent scheme can be implemented through a menu of patent lives (or renewals) and associated fees. We characterize the optimal mechanism, and use simulation analysis to compare it with existing patent renewal systems and to illustrate the potential welfare gains from the optimal policy.

The meaning and determinants of skills shortages

Abstract: In this paper we use establishment-level data to examine what managers mean when they report having skills shortages. We find that the concept of a skills shortage is not always the same as a hard-to-fill vacancy despite the latter being used by many authors who have considered the economic consequences of skills shortages. It seems that, while employers appear not to have any problems for themselves in interpreting questions on ‘skills shortages’, we cannot rely on them being perceived in a uniform way by all employers. Indeed, many employers stress that, amongst both their existing workforce and job applicants, there appear to be important shortfalls in motivational and attitudinal skills, leading us to believe that social skills are an important part of the skills said to be in shortage. Our findings point to two main conclusions for future research. First, studies that investigate the causes and effects of ‘skill shortages’ need to pay greater attention to their definition and measurement. Secondly, in future research on establishments and their skill formation practices, further steps could be taken to gain clarification either directly or indirectly from respondents as to the experiences they choose to classify as a skills shortage.