Excessive Rents Research Articles

Impact of the Pharma Economic Act on Diffusion of Innovation and Reduction of Costs in the Hungarian Prescription Drug Market (2007–2010)

ObjectiveIn this study, we examined the impact of the Pharma Economic Act, which was introduced in Hungary in 2007. MethodsWe used detailed data on the Hungarian prescription drug market, which had been made publicly available by the authorities. We evaluated the effect of the Pharma Economic Act on both dynamic and static efficiencies and also on equity, which has been historically a controversial issue in Hungary. We analyzed the overall prescription drug market and statin and atorvastatin markets; as a proxy for determining dynamic efficiency, we examined the oncology drug market for some specific products (e.g., bortezomib) and the long-acting atypical antipsychotic drugs market. ResultsThere is no denying that the authorities managed to control the overall prescription drug costs; however, they were still paying excessive rents for off-patent drugs. Examples of oncology and long-acting atypical antipsychotic drugs showed that the diffusion of innovation was on per-capita basis at least comparable to G-5 countries. While the share of out-of-pocket co-payments markedly increased and the reimbursement was lowered, the concurrent price decreases often meant that the co-payment per milligram of a given dispensed drug was actually lower than that before the Act, thereby benefiting the patient. ConclusionsIt appears that strong mechanisms to control volume rather than price on the supply side (marketing authorization holders) contained the drug expenditure, while offering enough room to strive for innovation. Making data on prescription drug expenditures and associated co-payments publicly available is an item that should be definitely followed by the surrounding jurisdictions.

Credit protection and lending relationships

We examine the impact of credit default swaps (CDS) on lending relationships and credit market efficiency. CDS insulate lenders against losses from forcing borrowers into default and liquidation. This improves the credibility of foreclosure threats, which can have positive implications for borrower incentives and credit availability ex ante. However, lenders may also abuse their enhanced bargaining power vis-à-vis borrowers and extract excessive rents in debt renegotiations. If this hold up threat becomes severe, borrowers will be reluctant to agree to debt maturity designs or control rights transfers that would have been optimal in the absence of CDS markets. The introduction of CDS markets may then ultimately tighten credit constraints and be detrimental to welfare. Our analysis yields a number of empirical implications, some of which have been tested.

A Theory of Net Debt and Transferable Human Capital*

Traditional theories of capital structure do not explain the puzzling phenomena of zero-leverage firms and negative net debt ratios. We develop a theory where firms adopt a net debt target that acts as a balancing variable between equityholders and managers. Negative (positive) net debt occurs in human (physical) capital intensive industries. Negative net debt arises because tradeable claims cannot be issued against transferable human capital. Heterogeneity in capital structure occurs when firms have debt that is not fully collateralized. Physical capital intensive firms take on high leverage but may underlever to avoid bankruptcy costs. This creates excess rents for managers (even if the supply of human capital is competitive) because wealth constraints prevent managers from co-investing.

Top Executive Team Remuneration, Performance and Governance in the Australian Finance Sector

Research Question/Issue: The finance industry has come under increased scrutiny during the global financial crisis (GFC) of 2008-2009. The potential impact of remuneration plans on excessive risk taking is one factor that has been argued to play a role in the GFC. This study makes four contributions to our understanding of top executive team pay in Australia and its association with firm performance. First, while prior research focuses on CEO pay in the sector, we examine both the level and structure of executive remuneration across the top executive group. Second, we document the association between pay and a range of accounting and market performance measures, incorporating performance measures unique to the finance sector. Third, the study also determines whether compensation committee governance plays a role in this relationship. Finally, we document differences in pay structure before and after the GFC, and examine if the association between pay and performance changes around this event. Research Findings/Insights: Utilising a sample of 1,178 firm year observations for 73 firms between 2005 and 2010, we find that the level of all measures of remuneration for the CEO is significantly higher than for other executives. The proportion of total pay contributed by cash bonus declines for the senior executive group, and salary and LTIPs increase post-GFC. We observe a positive relationship between accounting measures of performance and cash bonus and total pay for both the CEO and the executive team. LTIPs are associated with ROE for all executives. Consistent with prior research, larger firms pay higher levels of all forms of compensation. We observe an increased alignment between both bonus and LTIP, and performance post-GFC. We also find that while governance itself is not associated with compensation in general, good governance reduces total and bonus compensation to the executive team. Theoretical/Academic Implications: We contribute to research documenting tournament incentives by finding that the pay differential between CEO pay and that of lower-level executives is used to encourage performance of lower level executives, and not necessarily evidence of CEOs using power or influence to extract excessive rents. We also find that committee monitoring provides limited explanation for the alignment of pay and performance across the executive team. Practitioner/Policy Implications: Our results provide important policy implications for the finance sector. We find that, despite regulatory intervention, there is currently no alignment between firm risk and executive pay, and there is a heavy reliance on cash salary and bonus rather than long-term incentives. This provides evidence of a need to strengthen regulatory enforcement, and a need to improve firm compliance with prudential regulation.

A case for intellectual property rights

It has been over 12 years since the passage of the Copyright Term Extension Act (CTEA), a disputed law that has given copyright holders an extra 20 years of legal protection for their works. The law withstood a constitutional challenge and now individual authors enjoy protection for 70 years after their death while rights of corporate authors endure for 95 years. This piece of legislation is an egregious example of the ability of powerful content providers to capture policy makers, since it is hard to argue that this extension promotes justice or serves the public interest by stimulating creativity. No author is apt to be incentivized by an extra 20 years of protection after his or her death. Nor does it seem a matter of social justice to have rights with this sort of longevity, especially when the legitimate needs of future creators are taken into account. The balance between individual rights and the common good must be carefully calibrated and this law creates a critical imbalance that will be difficult to remedy. The CTEA has been demonized by many legal scholars and certainly deserves repudiation. Along with several parts of the Digital Millennium Copyright Act (DMCA) it has contributed to the copyright thicket that complicates an author’s efforts to use older copyrighted sources in a way that goes beyond the parameters of fair use. The CTEA and DMCA have become a rallying cry for opponents of intellectual property rights who come in many different stripes. An array of books by familiar names such as Lessig (Free Culture) and Boyle (Public Domain) has recently been published attacking the whole intellectual property regime and calling for systematic reform. More radical works by authors like Drahos (Information Feudalism) often seek to undermine the philosophical foundation of copyright and patent law. What most of these books share in common is advocacy for minimal protections that will provide more access to cultural goods without completely negating authorial entitlement. Rarely does one come upon a book that dares to defend exclusive intellectual property (IP) rights, as a growing number of scholars and jurists join the anticopyright bandwagon. One of the more pungent critiques to appear in recent years is Against Intellectual Monopoly. This book was written by two economists, Michele Boldrin and David Levine, who warn their readers at the outset they are two theorists ‘‘bearing radical ideas’’ (p. 15). The authors’ erudition and wit is on display throughout this well-written book as they attempt to refute the conventional justification for intellectual property rights. Along the way, Boldrin and Levine sort out the deficiencies in recent IP policy. Their basic contention is that intellectual property rights do not adequately resolve the market failure of the underproduction of public goods (i.e., goods that are non-excludable and can be easily copied) because they do not optimize social welfare. These rights lead to excessive monopoly rents and distributional inequities that should not be tolerated in a just society. Despite much sound economic analysis, the book is a strident polemic against the doctrine of property rights as evidenced by their choice of a title. The authors prefer the term ‘‘intellectual monopoly’’ to ‘‘intellectual property,’’ since patents and copyrights give creators a monopoly over an idea. All monopolies create social costs but some monopolies generate benefits that outweigh those costs. In R. A. Spinello (&) Carroll School of Management, Boston College, Chestnut Hill, MA 02467, USA e-mail: spinello@bc.edu

A Theory of Net Debt and Transferable Human Capital

Traditional theories of capital structure do not explain the puzzling phenomena of zero-leverage firms and negative net debt ratios. We develop a theory where firms adopt a net debt target that acts as a balancing variable between equityholders and managers. Negative (positive) net debt occurs in human (physical) capital intensive industries. Negative net debt arises because tradeable claims cannot be issued against transferable human capital. Heterogeneity in capital structure occurs when firms have debt that is not fully collateralized. Physical capital intensive firms take on high leverage but may underlever to avoid bankruptcy costs. This creates excess rents for managers (even if the supply of human capital is competitive) because wealth constraints prevent managers from co-investing.

Roaming in the Mobile Internet

With the acquisition of UMTS licenses Mobile Operators (MOs), have often been obliged to deploy 3G network infrastructures covering at least a given percentage of users by a given date. This paper discusses the rationale for imposing these minimum coverage requirements by regulatory bodies. To that end, a model is built, which studies the incentives for MOs to compete for market share and over coverage within an unregulated environment where MOs are assumed to be free to enter sharing agreements and to negotiate a reciprocal roaming charge. Within this framework, it is first shown that MOs would deploy their infrastructure to guarantee the coverage of the entire territory (population), but they would avoid any network duplication in order to maximize rents from roaming revenues. It is then discussed whether a minimum coverage requirement is the best policy to reduce these excess rents, or whether alternative measures could be adopted which could serve other goals as well, such as the avoidance of network duplication.

Roaming in the Mobile Internet

The introduction of UMTS serveices has often been submitted to the obligation for Mobile Internet operators, MOs, to deploy 3G network infrastructures covering at least a given percentage of users by a given date. This paper discusses the rationale for imposing these minimum coverage requirements by regulatory bodies. To that end, a model is built, which studies the incentives for MOs to compete for market share and over coverage within an unregulated environment where MOs are assumed to be free to enter sharing agreements and to negotiate a reciprocal roaming charge. Within this framework, it is first shown that MOs would deploy their infrastructure to guarantee the coverage of the entire territory (population), but they would avoid any network duplication in order to maximize rents from roaming revenues. It is then discussed whether a minimum coverage requirement is the best policy to reduce these excess rents, or whether alternative measures could be adpoted which could serve other goals as well, such as the avoidance of network duplication.

Predatory Lending in a Rational World

Regulators express growing concern over lending, which we take to mean lending that extracts excessive rent from borrowers. We present a rational model of consumer credit in which such lending is possible, and we identify the circumstances in which it arises with and without competition. Predatory lending is associated with highly collateralized loans, inefficient rolling over of subprime loans, lending with disregard to ability to pay, prepayment penalties, balloon payments and poorly informed borrowers. Under most circumstances competition among lenders eliminates predatory lending. We use our model to analyze the effects of prominent legislative interventions.

Franchising in Residential Brokerage

This paper explores the profitability of real estate franchises. The database for the study consists of observations from the National Association of Realtors®' 2001 survey of real estate brokerage firms. Franchises are found to generate additional revenue for franchisees. However, net margins defined as the difference between revenues received and expenses paid (including franchise royalties) are lower for firms with franchises. The findings indicate that franchisors appear to extract the excess rents from the franchisee.

How profitable are private infrastructure concessions in Latin America?: Empirical evidence and regulatory implications

This paper estimates the returns that private investors in infrastructure projects in Latin America really made on their investments, and assesses the adequacy of these returns relative to the risks taken—the cost of capital—and the impact that the quality of regulation had on the closeness of alignment between returns and the cost of capital. This is done by estimating both historical and projected future returns earned by a sample of private infrastructure concessions, across a variety of Latin American countries and infrastructure sectors, and comparing them against expected returns given the level of risk taken—the cost of capital. In this way, it is possible to evaluate whether or not private investors did earn abnormally high returns on their investments as popular belief and politician against PPI often claim. The paper develops a quality of regulation index and examines the extent to which the quality of the regulatory framework contributed to maintaining a closer alignment between rates of return and cost of capital, or did allow for the capture of excessive rents by the investors or of excessive benefits by the users at the expense of the investors. The findings of this paper are that contrary to general public perceptions, the financial returns of private infrastructure concessions have been modest and that in fact for a number of concessions the returns have been below the cost of capital. On average telecom and energy concessions have feared better than transport and water. It also shows that the variance of returns across concessions and countries is considerable. The variance of returns across concessions can be partially explained by the quality of regulation. It shows that the better the quality of regulation the closer the alignment between financial returns and costs of capital as is desirable. Thus, the paper shows and validates the claim that regulation indeed matters.

The effect of decimalization on the components of the bid-ask spread

Previous empirical studies that decompose the bid-ask spread were done when securities traded in discrete price points equal to one-sixteenth or one-eighth of a dollar. These studies concluded that inventory and adverse-selection costs were economically insignificant compared to order-processing costs. Natural questions arise as to: (i) whether price discreteness allowed market makers to enjoy excess rents, thus reducing the significance of the inventory and adverse selection costs; (ii) whether discreteness decreased the traders' incentives to gather information; or (iii) whether methodologies previously employed mis-estimated the inventory and the adverse-selection costs. We show that the recent conversion to decimal pricing results in significantly tighter spreads. However, the dollar value of spreads attributed to adverse selection and inventory costs do not change significantly. Almost all of the reduction occurs in the order-processing component. As a result, inventory and adverse-selection costs now account for a significantly larger proportion of the traded spreads. A plausible explanation is that the minimum tick size constraint previously in place under fractional pricing allowed market makers to enjoy spreads that were larger than their actual costs.

Capital structure and the control of managerial incentives

We present a theory of capital structure based on the power of shareholders, bondholders and managers to control the incentive conflicts in large corporations. The manager–owner conflict produces a trade-off between inefficiency in the low state and rents in the high state, and the shareholder–bondholder conflict produces under-investment as in Myers [Journal of Financial Economics 19 (1997) 147]. Since managers and bondholders both prefer more efficient actions in the low state, the two conflicts are interdependent. With risk-less levels of debt, there are no shareholder–bondholder agency costs, but managerial control over the incentive-setting process produces excessive rents. With risky debt, shareholders focus more on returns in the high state so that shareholder–bondholder agency costs increase but managerial rents decrease. Efficient levels of debt holder protection facilitate a reduction in manager–owner agency costs that outweighs shareholder–bondholder agency costs, and are decreasing in firm performance. The results are consistent with the separate empirical results relating control to both compensation and leverage, and suggest how future studies can be integrated.

International Inequality in the Age of Globalization: Japanese Economic Ascent and the Restructuring of the Capitalist World-Economy

This paper shows how Japanese ?rms and the Japanese state constructed a development model based on the steel industry as a generative sector that drove Japan’s economic ascent in the world-historical context of U.S. hegemony. We make three arguments in this paper. First, there is a new model of capital accumulation that does create new forms of social inequality by redistributing costs and bene?ts in very di?erent ways than earlier models. Second, Japanese ?rms and the Japanese state created this new model of capital accumulation and social inequality via mechanisms including joint ventures, long term contracts, and other forms of international trade and investment, not U.S.-based transnational corporations, as is usually assumed. Third, world-systems theory reconstructed through the lens of the new historical materialism explains this restructuring of the capitalist world-economy as the outcome of Japan’s economic ascent over the last ?fty years. Further, we argue that this new model of capital accumulation has had similar impacts on redistributing the costs and bene?ts of development between core and peripheral regions of the capitalist world-economy in a wide range of global industries. These strategies created a tightly linked set of technological and organizational innovations to overcome the natural and social obstacles to Japanese development, dramatically increase Japan’s international economic competitiveness by lowering production costs in all sectors of the economy, turn Japan into the world’s largest exporter of manufactured products, restructure a range of global industries, and recreate the world-system hierarchy in support of Japanese development. In particular, organizational inno-vations in the use of long term contracts and joint ventures in raw materials industries to foster global excess capacity and lower rents to resource extracting ?rms and states reallocated the costs of providing the material building blocks of Japanese development to the states and ?rms of its new raw materials periphery. This competitive advantage drove Japanese capital accumulation and economic ascent, and simultaneously drove underdevelopment in Japan’s periphery. These Japanese innovations became key elements of globalization as U.S. and European transnational corporations and states sought to compete with Japan. Joint ventures, long-term contracts, and other forms of inter?rm cooperation have replaced vertically integrated foreign direct investment, the earlier U.S. model of capital accumulation and international economic linkage, as the model for global industries.

The Effect of Decimalization on the Components of the Bid-Ask Spread

Previous empirical studies that decompose the bid-ask spread were done when securities traded in discrete price points equal to one-sixteenth or one-eighth of a dollar. These studies concluded that inventory and adverse-selection costs were economically insignificant compared to order-processing costs. Natural questions arise as to: (i) whether price discreteness allowed market makers to enjoy excess rents, thus reducing the significance of the inventory and adverse selection costs; (ii) whether discreteness decreased the traders' incentives to gather information; or (iii) whether methodologies previously employed mis-estimated the inventory and the adverse-selection costs. We show that the recent conversion to decimal pricing results in significantly tighter spreads. However, the dollar value of spreads attributed to adverse selection and inventory costs do not change significantly. Almost all of the reduction occurs in the order-processing component. As a result, inventory and adverse-selection costs now account for a significantly larger proportion of the traded spreads. A plausible explanation is that the minimum tick size constraint previously in place under fractional pricing allowed market makers to enjoy spreads that were larger than their actual costs.

Weather-Based Adverse Selection and the U.S. Crop Insurance Program: The Private Insurance Company Perspective

Surprisingly, investigations of adverse selection have focused only on farmers. Conversely, this article investigates if insurance companies, not farmers, can generate excess rents from adverse selection activities. Currently political forces fashioning crop insurance as the cornerstone of U.S. agricultural policy make our analysis particularly topical. Focusing on El Nino/La Nina and winter wheat in Texas, we simulate out-of-sample reinsurance decisions during the 1978 through 1997 crop years while reflecting the realities imposed by the risk-sharing arrangement between the insurance companies and the federal government. The simulations indicate that economically and statistically significant excess rents may be garnered by insurance companies through weather-based adverse selection.

A method for valuing global ecosystem services

The goal of this paper is to provide an investigation of several approaches to valuing ecosystem services and to contribute additional techniques which may be used in evaluating ‘green’ GDP accounts. Our estimates focus on the ecosystem as a productive economic input, not a stock which is depreciated or depleted over time; as such, it differs with other concepts more frequently employed in green GDP accounting. Most of our results are derived from the analytical fiction that a single owner of the biosphere establishes a market for all ecological resources. This monopolist then appropriates all rents from the human population. The maximum amount the monopolist charges is first assumed to be world gross product less the global human subsistence level. In addition, we examine the excess rents available in factor markets using the assumption of weak complementarity between factor inputs and ecosystem services. We also provide more conservative estimates of the value of ecosystem services by investigating the sustainable price the monopolist could charge the global population and by exploring the effects of compensating wage differentials and a non-monopolist owner of the ecosystem.

Assessing the Height of Mobility Barriers: A Methodology and an Empirical Test in the UK Retail Grocery Industry1

SUMMARYA profitable niche will have few entrants if the presence of significant mobility barriers impedes entry and, hence, reduces the expected rents for entrants. Identifying sources of mobility barriers is critical in explaining how incumbents can sustain competitive advantage and obtain supranormal profits (excess rents). While much of strategic management research (and strategic group research, in particular) focuses on the pursuit of sustainable performance advantages, there is relatively little empirical research exploring the dynamics of firm movement and the impact of mobility barriers on performance. The paper analyses mobility dynamics and, most importantly, develops a method to identify the location and severity of mobility barriers. The method is illustrated on a database of large multiples in the UK retail grocery industry for the period 1982–1986. It appears that there are two dimensions of strategic change that facilitate movement into profitable niches. Implications for competition and profitability are discussed.

Syed Nawab Haider Naqvi, Mahmood Hasan Khan and M. Ghaffu Otaudhry (edt.). LaJld Reforms in Pakistan, A Historical Perspective. Islamabad: Pakistan Institute of Development Economics 1987. viii+216 pp.Price: Rs 220 (USS 35) for hardcover; Rs 140.00 (USS 20) for soft-cover.

The authors describe how Pakistan has grappled with land reform, surely one of the most intractable and divisive issues facing agriculture anywhere. The land-tenure system at independence in 1947 included a high degree of land ownership concentration, absentee landlordism, insecurity of tenant tenure, and excessive rent. Land reform since 1947 focused on imposition of ceilings on landholding, distribution of land to landless tenants and small owners, and readjustments of contracts to improve the position of the tenant. These reformist measures have removed some but by no means all of the undesirable characteristics of the system. The authors list as well as present a critique of the reports of five official committees and commissions on land reform. The reports highlight the conflicts and ideologies of the reformers. The predominant ideal of the land reformers is a system of peasant proprietorship although some reformers favoured other systems such as communal farming and state ownership of land, and still others favoured cash rents over share rents. More pragmatic reformers recognized that tenancy is likely to be with Pakistan for the foreseeable future and that the batai (sharecropping) arrangement is the most workable system. According to the editors, the batai system can work to the advantage of landlord and tenant if the ceilings on landholding can be sufficiently lowered (and enforced), the security of the tenant is ensured, and the tenant has recourse to the courts for adjudication of disputes with landlords. Many policy-makers in Pakistan have come to accept that position but intervention by the State to realize the ideal has been slow. The editors conclude that" ... the end result of these land reforms is that they have not succeeded in significantly changing the status quo in rural Pakistan" (p. 29).

Theories of regulation and the deregulation movement

Theories of regulation and the deregulation movement