... which arguably have fundamentally changed the incentive landscape in the U.S. in that most managers/ pay is now thought to be convex in ... regain the pre-shock employment levels, in the case of a temporary shock, in a bid to stay closer to their steady-state profit levels; ...
Story - puput - 11/17/2010 - 03:09 - 0 comments - 0 attachments
Market manipulation has been less thoroughly examined in the academic literature but is a growing concern on many emerging stock markets. The possibility that the markets can be manipulated is an important issue for both the regulation of trading and the efficiency of the market. Security regulators generally prohibit market manipulations on the basis that they distort prices, hamper price discovery, and create deadweight losses. In particular, many Asian stock markets have securities that are thinly traded and therefore more susceptible to manipulation.
Those with an interest in the credit card industry, including regulators, equity analysts, and investors, would likely agree that one of the most important publicly available measures of industry health is the percentage of receivables that card issuers "charge off." Charged-offs loans are considered uncollectible and removed from issuers portfolios usually because of cardholder bankruptcy, death, or prolonged delinquency.
Charge offs are a significant drain on industry profitability and are closely watched by investors and regulators. Last year, bankcard issuers charged off $35B, or approximately 6.5 percent of their average out standings. The number of different entities that regularly produce a credit card industry charge off statistic ¾ at least eight ¾ reflects the importance of this metric to those who study this sector. Debt rating agencies, government regulators, brokerage firms, websites, and trade publications have all come up with their own ways of measuring credit card charge offs at the industry and individual issuer level.
It is widely recognized that sovereign debt differs from corporate debt in that the debtor cannot credibly grant the debtor (conditional) property rights over fixed assets or cash flows . Hence, most of the literature assumes that sovereign debt is enforced under the threat penalties — such as trade sanctions. However, an important branch of the corporate-debt literature assumes that cash flows are not verifiable so that rights to fixed assets are actually used as threat-points for potential renegotiations; see Hart and Moore (1998). It thus follows that sovereign and corporate debt are quite similar. In both cases the debtor repays under threat, the difference being more in the ability to adjust and refine the penalty; see Eaton and Gersovitz (1981) or Bulow and Rogoff (1989a, b) for classic references. The conclusion that sovereign and corporate debt both have similar incentive structure has quite important practical implications: c.f. Krueger’s (2002) proposal for a Sovereign Debt Restructuring Mechanism, which is modeled after Chapter 11 of the US Bankruptcy Code.
In this paper we consider an alternative (extreme) case where no penalty for default is implementable, so that sovereign debt must be supported by an entirely different incentive scheme. The main idea is that sovereign debt is structured so that it is in the best interest of the median voter to serve it. Two elements in this structure are critical; first, the debt should be tradable, so that in case of sanctions foreigners can sell the bonds to locals who would obtain repayment. Second, the debt should remain at the level at which the median voter still has an incentive to repay. Note that when domestic and foreign creditors hold identical instruments, default benefits domestic tax-payers but harms domestic bond holders, where the net effect depends on exact positions. The trick then is to find a level of debt where the interests of the median voter are more closely aligned with foreign bondholders than with local taxpayers.
