Multinational enterprises use two types of transfer prices: the tax transfer price to achieve opt... more Multinational enterprises use two types of transfer prices: the tax transfer price to achieve optimal tax outcomes and the incentive transfer price to provide appropriate incentives to offshore managers. The two optimal transfer prices are independent if taxable income is assessed using the formula apportionment approach. Under the separate entity approach, however, they are interdependent: they both decrease as the penalty for noncompliance with the arm's length principle increases; and the tax transfer price decreases and the incentive transfer price increases as the marginal cost of production increases. We also examine the case where the incentive transfer price is negotiated rather than dictated by the parent. The results are robust to different market structures and tax environments. We thank Deloitte Touche transfer pricing specialists in Toronto and Sydney and seminar participants at the Australian Graduate School of Management for their valuable comments. We are also grateful for many detailed and constructive comments from the coeditor and two referees. The usual disclaimer applies.
This paper studies how media and democracy influence government action taken before and after a n... more This paper studies how media and democracy influence government action taken before and after a natural disaster. The key elements in this relationship are the media's role as the provider of information to voters about government action and the quality of democracy that pertains to how relevant election results are. We show that more media activity and more democratic institutions both contribute positively to the government's palliative effort after the disaster. However, the effects of media and democracy on the government's preventive effort before the disaster are negative. We provide empirical evidence based on major cholera epidemics around the world, which lends some support to these hypotheses.
his paper examines the issue of compliance monitoring in agri-enuironmental policy when a farmer ... more his paper examines the issue of compliance monitoring in agri-enuironmental policy when a farmer is risk-neutral and risk-averse. The optimal contract model presented here significant8 extends and generalists the results and conclusions of Choe and Fraser (1 998). In this paper the enuironmental agency explicitly chooses monitoring accuraq and monitoring costs as well as rewards for fanners. It is found that, by modelling the environmental agency as being costconscious optimal monitoring accuracy may or may not be higher for a risk-averse farm thanlor a risk-neutral farmer Essentially, the environmental agency faces an explicit trade-ojf between monitm'ng costs and incentive payments as a means to ensure the desired behauiour from the farmex The importance of the results derived are discussed in the context of agri-environmental policy design and implementation
In this paper, the signalling subgame in costly verification models is studied in the context of ... more In this paper, the signalling subgame in costly verification models is studied in the context of the investor±entrepreneur contract without assuming the possibility of commitment to verification. It is shown that the game has a unique Perfect Bayesian Equilibrium in mixed strategies, implying that truth-telling and deterministic verification are not an equilibrium behavior. When the entire game starting from the stage of contract design is considered, it is shown that the contract designed by the informed entrepreneur results in less verification cost than the one designed by the uninformed investor. This could be taken as a normative criterion based upon which institutional arrangements as regards the distribution of bargaining initiative are to be designed. # 1998 Elsevier Science B.V.
This paper studies internal organization of a multi-divisional firm using an incomplete contracti... more This paper studies internal organization of a multi-divisional firm using an incomplete contracting approachà la Grossman-Hart-Moore and Aghion-Tirole. Performance of each division depends on the level of human capital invested in it and there are externalities among divisional activities. We compare three types of organizational structures: centralization where the center retains decision-making authority for all divisions, decentralization where each division makes its own decision, and hierarchical delegation where authority is allocated in a hierarchical fashion. Centralization is optimal when externalities and the requisite coordination are the main issue. Decentralization is optimal if the investment in human capital is more important. Hierarchical delegation is optimal in the intermediate case. We also discuss the optimal pattern of hierarchical delegation as well as several directions extending the basic model.
Recent corporate scandals around the world have led many to single out executive stock options as... more Recent corporate scandals around the world have led many to single out executive stock options as one of the main culprits. More corporations are abandoning stock options and reverting to restricted stock. This paper argues that such a change is not entirely justifiable. We first provide a critical review of the pros and cons of executive stock options. We then compare option-based contracts with stock-based contracts using a simple principal-agent model with moral-hazard. In a general environment without restrictions on preferences or technologies, option-based contracts are shown to weakly dominate stock-based contracts. The weak dominance relation becomes strict if the manager is risk neutral. Numerical examples are provided to show that, even if the manager is risk averse, strict dominance is more likely the case.
This paper addresses some theoretical and econometric aspects of modelling addictive consumption.... more This paper addresses some theoretical and econometric aspects of modelling addictive consumption. We show that the solution to the optimisation problem leads to a specification of the reduced form equation which is different from what is found in the literature. We also demonstrate that it is also valid to apply OLS to estimate this reduced form equation and those used in the literature although the underlying variables are integrated.
This paper deals with a partnership facing an investment decision which is facilitated by costly ... more This paper deals with a partnership facing an investment decision which is facilitated by costly but valuable information acquisition. When agents are identical in preference and endowment, it is shown that a partnership arrangement that makes one agent a residual claimant can sustain optimality, under which the residual claimant acquires information and assumes decision authority. Also, it is shown that different risk aversions and relative efficiency in information gathering determine who should be the residual claimant in an optimal partnership arrangement. Finally, an example of an optimal partnership arrangement is presented, where the residual claimant does not play any role except having a residual claim, hence a (partial) counterexample to Alchian and Demsetz's theory of classical firms. (JEL C11
This research w as supported by a research fellowship from the Bank of Portugal. I a m v ery grat... more This research w as supported by a research fellowship from the Bank of Portugal. I a m v ery grateful for their generous support and hospitality. Thanks are also due to Bernardino Adão, Aloisio Araujo, Yeon-Koo Che and Gerald Garvey for helpful comments.
This paper studies how media and the quality of institutions affect government action taken befor... more This paper studies how media and the quality of institutions affect government action taken before and after a natural disaster. The key elements in this relationship are the media's role as the provider of information to voters about government action, the quality of democracy that pertains to how relevant election results are, and corruption that reduces the efficacy of government action. Provided that more media activity is focused on post-disaster government action, we show that more media activity and more democratic institutions both contribute positively to the government's palliative effort after the disaster, although corruption has a negative effect that decreases as media activity increases. On the preventive effort before the disaster, however, media and democracy both have a negative effect, as does corruption. We provide empirical evidence based on major cholera epidemics around the world, which lends some support to these hypotheses.
Multinational enterprises use two types of transfer prices: the tax transfer price to achieve opt... more Multinational enterprises use two types of transfer prices: the tax transfer price to achieve optimal tax outcomes and the incentive transfer price to provide appropriate incentives to offshore managers. The two optimal transfer prices are independent if taxable income is assessed using the formula apportionment approach. Under the separate entity approach, however, they are interdependent: they both decrease as the penalty for noncompliance with the arm's length principle increases; and the tax transfer price decreases and the incentive transfer price increases as the marginal cost of production increases. We also examine the case where the incentive transfer price is negotiated rather than dictated by the parent. The results are robust to different market structures and tax environments. We thank Deloitte Touche transfer pricing specialists in Toronto and Sydney and seminar participants at the Australian Graduate School of Management for their valuable comments. We are also grateful for many detailed and constructive comments from the coeditor and two referees. The usual disclaimer applies.
This paper studies how media and democracy influence government action taken before and after a n... more This paper studies how media and democracy influence government action taken before and after a natural disaster. The key elements in this relationship are the media's role as the provider of information to voters about government action and the quality of democracy that pertains to how relevant election results are. We show that more media activity and more democratic institutions both contribute positively to the government's palliative effort after the disaster. However, the effects of media and democracy on the government's preventive effort before the disaster are negative. We provide empirical evidence based on major cholera epidemics around the world, which lends some support to these hypotheses.
his paper examines the issue of compliance monitoring in agri-enuironmental policy when a farmer ... more his paper examines the issue of compliance monitoring in agri-enuironmental policy when a farmer is risk-neutral and risk-averse. The optimal contract model presented here significant8 extends and generalists the results and conclusions of Choe and Fraser (1 998). In this paper the enuironmental agency explicitly chooses monitoring accuraq and monitoring costs as well as rewards for fanners. It is found that, by modelling the environmental agency as being costconscious optimal monitoring accuracy may or may not be higher for a risk-averse farm thanlor a risk-neutral farmer Essentially, the environmental agency faces an explicit trade-ojf between monitm'ng costs and incentive payments as a means to ensure the desired behauiour from the farmex The importance of the results derived are discussed in the context of agri-environmental policy design and implementation
In this paper, the signalling subgame in costly verification models is studied in the context of ... more In this paper, the signalling subgame in costly verification models is studied in the context of the investor±entrepreneur contract without assuming the possibility of commitment to verification. It is shown that the game has a unique Perfect Bayesian Equilibrium in mixed strategies, implying that truth-telling and deterministic verification are not an equilibrium behavior. When the entire game starting from the stage of contract design is considered, it is shown that the contract designed by the informed entrepreneur results in less verification cost than the one designed by the uninformed investor. This could be taken as a normative criterion based upon which institutional arrangements as regards the distribution of bargaining initiative are to be designed. # 1998 Elsevier Science B.V.
This paper studies internal organization of a multi-divisional firm using an incomplete contracti... more This paper studies internal organization of a multi-divisional firm using an incomplete contracting approachà la Grossman-Hart-Moore and Aghion-Tirole. Performance of each division depends on the level of human capital invested in it and there are externalities among divisional activities. We compare three types of organizational structures: centralization where the center retains decision-making authority for all divisions, decentralization where each division makes its own decision, and hierarchical delegation where authority is allocated in a hierarchical fashion. Centralization is optimal when externalities and the requisite coordination are the main issue. Decentralization is optimal if the investment in human capital is more important. Hierarchical delegation is optimal in the intermediate case. We also discuss the optimal pattern of hierarchical delegation as well as several directions extending the basic model.
Recent corporate scandals around the world have led many to single out executive stock options as... more Recent corporate scandals around the world have led many to single out executive stock options as one of the main culprits. More corporations are abandoning stock options and reverting to restricted stock. This paper argues that such a change is not entirely justifiable. We first provide a critical review of the pros and cons of executive stock options. We then compare option-based contracts with stock-based contracts using a simple principal-agent model with moral-hazard. In a general environment without restrictions on preferences or technologies, option-based contracts are shown to weakly dominate stock-based contracts. The weak dominance relation becomes strict if the manager is risk neutral. Numerical examples are provided to show that, even if the manager is risk averse, strict dominance is more likely the case.
This paper addresses some theoretical and econometric aspects of modelling addictive consumption.... more This paper addresses some theoretical and econometric aspects of modelling addictive consumption. We show that the solution to the optimisation problem leads to a specification of the reduced form equation which is different from what is found in the literature. We also demonstrate that it is also valid to apply OLS to estimate this reduced form equation and those used in the literature although the underlying variables are integrated.
This paper deals with a partnership facing an investment decision which is facilitated by costly ... more This paper deals with a partnership facing an investment decision which is facilitated by costly but valuable information acquisition. When agents are identical in preference and endowment, it is shown that a partnership arrangement that makes one agent a residual claimant can sustain optimality, under which the residual claimant acquires information and assumes decision authority. Also, it is shown that different risk aversions and relative efficiency in information gathering determine who should be the residual claimant in an optimal partnership arrangement. Finally, an example of an optimal partnership arrangement is presented, where the residual claimant does not play any role except having a residual claim, hence a (partial) counterexample to Alchian and Demsetz's theory of classical firms. (JEL C11
This research w as supported by a research fellowship from the Bank of Portugal. I a m v ery grat... more This research w as supported by a research fellowship from the Bank of Portugal. I a m v ery grateful for their generous support and hospitality. Thanks are also due to Bernardino Adão, Aloisio Araujo, Yeon-Koo Che and Gerald Garvey for helpful comments.
This paper studies how media and the quality of institutions affect government action taken befor... more This paper studies how media and the quality of institutions affect government action taken before and after a natural disaster. The key elements in this relationship are the media's role as the provider of information to voters about government action, the quality of democracy that pertains to how relevant election results are, and corruption that reduces the efficacy of government action. Provided that more media activity is focused on post-disaster government action, we show that more media activity and more democratic institutions both contribute positively to the government's palliative effort after the disaster, although corruption has a negative effect that decreases as media activity increases. On the preventive effort before the disaster, however, media and democracy both have a negative effect, as does corruption. We provide empirical evidence based on major cholera epidemics around the world, which lends some support to these hypotheses.
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Papers by Chongwoo Choe