Efficient Levels Of Investment Research Articles

Joint Ownership of Production Projects as a Commitment Device against Interest Groups

This paper investigates an unexplored rationale for joint ownership of a production project. We model projects with autocorrelated productivity shocks as creating an option value of investing over time so that later investments benefit from the information revealed by the realization of earlier investments. However, internal and external interest groups may pressurize owners into paying out early revenues. Joint ownership provides a commitment mechanism against them, thereby enabling more efficient levels of investment. The Business Environment and Enterprises Performance survey data corroborate the model's prediction that organizations under interest-group lobbying pressure are more likely to choose joint ownership.

Pandemic lockdown: The role of government commitment

This paper studies lockdown policy in a dynamic economy without government commitment. Lockdown imposes a cap on labor supply, which improves health prospects at the cost of economic output and consumption. A government would like to commit to the extent of future lockdowns in order to guarantee an economic outlook that supports efficient levels of investment into intermediate inputs. However, such a commitment is not credible, since investments are sunk at the time when the government chooses a lockdown. As a result, lockdown under lack of commitment deviates from the optimal policy. Rules that limit a government's lockdown discretion can improve social welfare, even in the presence of noncontractible information. Quantitatively, lack of commitment causes lockdown to be significantly more severe than is socially optimal. The output and consumption loss due to lack of commitment is greater for higher intermediate input shares, higher discount rates, higher values of life, higher disease transmission rates at and outside of work, and longer vaccine arrival times.

Pandemic Lockdown: The Role of Government Commitment

This paper studies lockdown policy in a dynamic economy without government commitment. Lockdown imposes a cap on labor supply, which improves health prospects at the cost of economic output and consumption. A government would like to commit to the extent of future lockdowns in order to guarantee an economic outlook that supports efficient levels of investment into intermediate inputs. However, such a commitment is not credible, since investments are sunk at the time when the government chooses a lockdown. As a result, lockdown under lack of commitment deviates from the optimal policy. Rules that limit a government's lockdown discretion can improve social welfare, even in the presence of noncontractible information. Quantitatively, lack of commitment causes lockdown to be significantly more severe than is socially optimal. The output and consumption loss due to lack of commitment is greater for higher intermediate input shares, higher discount rates, higher values of life, higher disease transmission rates at and outside of work, and longer vaccine arrival times.

Joint Ownership of Production Projects as a Commitment Device against Interest Groups

This paper investigates an unexplored rationale for joint ownership of a production project. We model projects with autocorrelated productivity shocks as creating an option value of investing over time so that later investments benefit from the information revealed by the realization of earlier investments. However, internal and external interest groups may pressurize owners into paying out early revenues. Joint ownership provides a commitment mechanism against them, thereby enabling more efficient levels of investment. The Business Environment and Enterprises Performance survey data corroborate the model's prediction that organizations under interest-group lobbying pressure are more likely to choose joint ownership.

First-price auction implements efficient investments

This note shows that the first-price auction fully implements efficient investments when agents make not only ex ante but also ex post investments. The essential assumptions of our model are that (i) each agent can invest before and after participating in the auction under the same cost function and (ii) the cost functions are common knowledge among agents. In any equilibrium of our model, the most efficient agent always wins and makes the efficient level of investment.

An experimental study of democracy breakdown, income and inequality

Many empirical studies investigate the relationships between economic development, inequality, and democracy survival; however, establishing causal links with naturally occurring cross-country data is problematic. We address this question in a laboratory experiment, where in democracy citizens can invest in profitable projects and vote on income taxation. In the alternative regime—autocracy—efficient investment levels and equitable redistribution are implemented exogenously, but there is a risk of resources being partially expropriated. Citizens can voluntarily switch from democracy to autocracy by a majority vote, which mimics recent historical examples, where voters voluntarily delegate political powers to an autocrat in exchange for a promise of high taxation and redistribution. We find that the likelihood of democracy breakdown increases with the degree of inequality but does not vary with productivity. The link between productivity and democracy survival depends critically on the degree of sophistication of the median voter.

Distortionary Taxation of Human Capital Acquisition Costs

Government subsidies to higher education have recently become a hot button political issue. But what if the federal government doesn’t actually subsidize higher education, but rather, taxes it? This article gauges efficient investment levels based on marginal rates of return relative to other investments. Labor economists struggle to explain why the rates of return to higher education have remained much higher than the rates of return to other investments. This article proposes a novel explanation: distortionary taxation. Economic theory suggests that when investments that are substitutes for one another are taxed inconsistently, investors are less likely to choose the investment option that is taxed more heavily. Unfavorable tax treatment of higher education relative to other forms of investment could create an undersupply of educated labor. This distortion would increase pretax returns to education and reduce economic growth and social welfare.Part I of this article reviews empirical evidence linking higher education to increased earnings and economic growth, and considers student responsiveness to financial incentives. Part II explains why the unusually high rates of return to higher education may indicate underinvestment. Part III presents a mathematical model illustrating the link between tax rates and rates of return. Part IV reviews optimal tax theory and the distortion problem. Part V contrasts taxation of favored investments with taxation of higher education. Part VI considers policy implications.

Foreign Aid, Incentives and Efficiency: Can Foreign Aid Lead to the Efficient Level of Investment?

AbstractThis paper develops a two‐period model in which the recipient faces borrowing constraint and the donor is a Stackelberg follower to address two important policy questions: (i) whether foreign aid can lead to the efficient level of capital investment in the recipient country and (ii) how does the form (e.g. budgetary transfers, capital transfer) and the timing of aid affect the recipient's financial savings and capital investment. It finds that the disincentive effect of the capital transfer on the capital investment by the recipient is larger than the budgetary transfers. It makes financial savings more attractive relative to the capital investment for the recipient. In the absence of capital transfer, the multi‐period budgetary transfers not only lead to the efficient level of capital investment by the recipient, but also achieve the same allocation as under commitment. The capital transfer can lead to the efficient level of capital investment, but in this case, it completely crowds out the recipient's own capital investment.

Public transit investment and sustainable transportation: A review of studies of transit's impact on traffic congestion and air quality

In this paper we provide a framework for evaluating public transit investment, taking account of the effects of transit investment on traffic congestion and air quality. We discuss how to assess the sustainability of transit investment and the mechanisms through which public transit investment can affect equilibrium auto travel volumes and the associated congestion and air quality outcomes. Several related issues are addressed: the differences between short-run and long-run equilibria; the role of regional heterogeneity; regulatory and policy considerations; and the potential endogeneity of transit investment when conducting empirical analyses. As the transportation policy landscape evolves and technological advancements continue, a complete evaluation of the social benefits of transit investment is essential both for allocating investment funds and for designing policies that result in an efficient level of investment and travel in the long run. Does the existing evidence bolster public transit's ‘green’ reputation? Reviewing the recent empirical literature, it appears that transit can both reduce congestion and improve air quality, but the magnitudes of these benefits are uncertain and may be specific to each location.

The poor are twice cursed: Wealth inequality and inefficient credit market

This paper investigates the role of unobservable wealth differences on credit market equilibrium, given there is also asymmetric information concerning effort preferences and choices. In equilibrium, poor but able entrepreneurs may subsidise the rich and incompetent or be excluded. As a result, investment may exceed or fall short of the optimal level. Low inequality may deliver conditions for perfect screening and an efficient level of investment. The equilibrium with cross subsidisation is consistent with otherwise puzzling empirical observations.

Transmission Network Investment With Probabilistic Security and Corrective Control

This paper demonstrates that the growth in application of corrective actions to enhance network utilization will require a probabilistic treatment of network security for determining efficient levels of investment in network reinforcement. A Benders decomposition based two-stage probabilistic optimization model for the operational and investment problems is proposed. For selecting relevant contingencies (beyond N-1 criteria), a novel filtering technique for efficient elimination of redundant outages is presented and successfully tested. In 2 numerical examples we compare efficiency of network reinforcement propositions under both deterministic and probabilistic frameworks, while optimizing available preventive and corrective control actions, and in particular focusing on the application of generation reserve in combination with special protection schemes (SPS) for network congestion management purposes. We highlight the inadequacies of the deterministic approach with respect to its inherent inability to optimize accurately the portfolio of pre-fault post-fault actions since the impacts of corrective actions (in the form of SPS, demand response) and occurrence of “non-credible” events require explicit consideration of the likelihood of various outages. We conclude that deterministic approach drives less efficient and potentially more risky system operation that ultimately leads to inefficient network investment.

Intellectual Property Rights on Plant Genetic Resources: Perspective from Economics

Abstract Given the existence of transaction costs, the location of property rights is an important factor in determining the incentives for efficient levels of investment at various levels of the industry. This paper applies some of the economic theories of property rights and industrial structure to the issues concerning the conservation of biodiversity. Although the expansion of Intellectual Property Rights (IPR) systems into the area of genetic resources has increased private investment in R&D process of the agriculture, it does not generate enough incentives for in situ conservation of biodiversity. To solve this economic inefficiency, farmers’ rights and other design of incentives and institutional arrangement should be reconsidered.

Joint Ownership of Production Projects as a Commitment Device Against Interest Groups

This paper investigates a hitherto unexplored rationale for firms to have joint ownership of a production project. We model risky projects with autocorrelated productivity shocks as creating an option value of investing over time so that later investments benefit from the information revealed by the realization of earlier investments. However, internal and external interest groups are likely to pressurize owners into paying out early revenues from such investments precisely when the autocorrelation of productivity implies they should be reinvesting them in the project. Joint ownership provides a commitment mechanism against interest groups, thereby enabling more efficient levels of investment. The Business Environment and Enterprises Performance survey data corroborate the model's prediction that organizations under conditions favorable to internal or external lobbying pressure are more likely than other firms to choose joint ownership.

The Deterioration of Corporate Fiduciary Duties and Managerial Accountability

The accountability of corporate managers for their mismanagement and under management is declining. A major contributing factor to this decline in accountability is the deterioration in the fiduciary standards by which we measure the propriety of corporate managerial conduct. In this paper I look at two rules offered from influential quarters, rules that - especially when considered together - significantly reduce the accountability of corporate managers for actions that are not in the best interests of the corporation and its shareholders. The first of the proffered rules is that corporate managers should not be accountable for a lack of due care in their decisions. Advocates for this rule justify it as providing an incentive for managers to take value creating risks. The second rule is that managers should be free to allocate and re-allocate corporate wealth among various privileged corporate constituencies. Advocates for this rule justify it as providing an incentive for the investment of efficient levels of firm specific capital by those who provide monetary and human capital to corporations. These two proffered rules generate no material disagreement on matters of principle, at least, certainly, not from me. Indeed, the principles on which the rules are based - that it is good to encourage corporate managers to take value creating risks and that it is good to encourage efficient levels of investment of firm specific capital - are at the very heart of economic efficiency and fairness in the relationship between a corporation and its managers.My polemic, therefore, is not about principles but, instead, about facts - about the vast factual expanse between the proffered rules and the principles used to support the rules. The multiple and essential factual assumptions necessary to connect the principles to the rules not only are unproven empirically but also are counter intuitive and seem to get only more factually improbable when unpacked and analyzed closely. In short, the factual assumptions offered in support of the two rules amount to a thin reed and do not meet what should be a heavy burden required of those who propose a reduction in corporate managerial accountability. A strong version of corporate fiduciary duties promotes efficient and fair outcomes. Accountability on the part of corporate managers for their actions and decisions is integral to achieving these good results. Without a regime that includes strong fiduciary duties and accountability for the full value of the economic loss that results from managers' decisions, achieving efficiency and fairness is less likely.

The Economics of Regulation and Taxation Policies for Casino Tourism

A number of states and countries have promoted the development of a casino industry primarily to attract tourists. The policies operated have generally used regulatory or taxation instruments. Such policies may or may not lead to an efficient level of investment and production for the sector. This paper considers four alternative forms of regulatory and taxation policies and examines the interactions between these two sets of investments. The authors find that a turnover tax yields an efficient outcome with a competitive industry and also in the case of a cartel association; but it will be distortionary if a multiplant private monopoly controls the sector. Furthermore, a pure public sector-owned multiplant monopolist is efficient, while a tax on the fixed costs is inefficient if a casino association regulates the sector.

Does Earnings Management Affect Firms’ Investment Decisions?

ABSTRACT: This paper examines whether firms manipulating their reported financial results make suboptimal investment decisions. We examine fixed asset investments for a large sample of public companies during the 1978–2002 period and document that firms that manipulate their earnings—firms investigated by the SEC for accounting irregularities, firms sued by their shareholders for improper accounting, and firms that restated financial statements—over-invest substantially during the misreporting period. Furthermore, following the misreporting period, these firms no longer over-invest, consistent with corrected information leading to more efficient investment levels. We find similar patterns for firms with high discretionary revenues or accruals. Our findings suggest that earnings management, which is largely viewed as targeting parties external to the firm, can also influence internal decisions.

The Inefficiency of Contractually-Based Liability with Rational Consumers

The prevailing view in the law and economics literature is that preventing firms and consumers from contracting out of mandatory liability rules is optimal only if consumers are irrational or misperceive the risks of the products they buy. In this paper, I show that even if consumers do correctly judge a product's risk, if they cannot directly observe the safety characteristics of that product, then allowing firms and consumers to choose their own liability rules cannot lead firms to make efficient investments in product safety (unless the efficient level of investment is zero). Because the legal system is costly, consumers always have an incentive to waive liability in exchange for a lower price after safety investments are sunk. If they do so, however, firms will anticipate this, thereby undermining there incentive to invest in safety. Mandatory product liability provides a mechanism for consumers and firms to commit not waive liability. Copyright 2006, Oxford University Press.

MERCHANT TRANSMISSION INVESTMENT*

We examine the performance attributes of a merchant transmission investment framework that relies on ‘market driven’ investment to increase transmission network capacity needed to support competitive wholesale markets for electricity. Under a stringent set of assumptions, the merchant investment model has a remarkable set of attributes that appears to solve the natural monopoly problem and the associated need for regulating electric transmission companies. We expand the merchant model to incorporate several attributes of wholesale power markets and transmission networks that the merchant model ignores. These include market power in wholesale electricity markets, lumpiness in transmission investment opportunities, stochastic attributes of transmission networks and associated property rights definition issues, strategic behavior by potential merchant transmission investors and issues related to the coordination of transmission system operators and merchant transmission owners. Incorporating these more realistic attributes of transmission networks and the behavior of transmission owners and system operators leads to the conclusion that several potentially significant inefficiencies may result from reliance on the merchant transmission investment framework. Accordingly, it is inappropriate for policymakers to assume that they can avoid dealing with the many challenges associated with stimulating efficient levels of investment in electric transmission networks by adopting the merchant model.

Inter-Departmental Cost Allocation and Investment Incentives

This paper endeavors to demonstrate that fixed cost allocation can align investment incentives in a multi-period and multi-division setting. In a decentralized firm, a divisional manager can make an investment that benefits both his own and the operations of a downstream division. The relative budgeted activity (RBA) cost allocation method assigns fixed cost charges according to the ratio of a division’s budgeted activity in proportion to that of the firm, and thereby resolves the hold-up problem created by the decentralized setting. Internal accounting rules can be designed to give managers strong incentives to internalize the firm’s objective regarding efficient investment levels, and alleviate the tension between ex ante investment efficiency and ex post production efficiency. This paper examines how much the fixed charges should be in order to achieve the optimal level of investment.

Setting prices for new vaccines (in advance).

New vaccines have high social value, but the incentives to firms to develop new vaccines appear to be weak. This paper recommends setting a procurement price for a new vaccine prior to the vaccine's development, with the price based on the anticipated benefits from developing the vaccine. The price paid to vaccine suppliers is not equal to the price charged to either consumers supplied by public or private sources, so a high price does not choke off demand. A supply price leading to efficient levels of investment can be figured in advance based on cost-effectiveness analyses. Calculations indicate that efficient vaccine prices are considerably above prices currently paid for new vaccines.