Transaction Cost

Adapting well-established organization theories to international joint ventures (IJVs), this paper develops an overarching theoretical model of the determinants and effects of parent control of IJVs from an interpartner bargaining power perspective. Drawing upon power dependence, transaction costs, and agency theories, we argue that the relative bargaining power between IJV partners serves as the key determinant of control structure, and that control exerts a direct effect on the venture's performance. In addition, government influence and interpartner working relationship are critical factors that complicate the linkage between control and performance but may help to explain past conflicting results. Propositions regarding these relationships are formed for future empirical test, and implications and directions for future research are provided. D

Constant Proportion Portfolio Insurance (CPPI) is a dynamic portfolio man- agement strategy that is currently of popular interest in both industry and aca- demic research. The CPPI methodology is designed to guarantee, to the buyer, a minimum payoff at maturity using a portfolio comprised only of one risky asset and one riskless asset. The goal is to allow an amount of participation in capi- tal markets while removing downside risk. However, in the presence of realistic market assumptions risk to the seller exists in the form of gap risk. This gap risk accounts for the inability tomeet the guarantee atmaturity. There are many factors which contribute to the gap risk, including asset price behaviour and trading fre- quency. The effect of these factors are investigated in this paper within a discrete time framework. The results show that when considering realistic levels of volatility the CPPI does not perform well in comparison to a riskless investment and a gapless (buy- and-hold) p...

Personal bankruptcies in the United States have increased dramatically, rising from 1.4 per thousand working age population in 1970 to 8.5 in 2002. We use a heterogeneous agent life-cycle model with competitive financial intermediaries who can observe households' earnings, age and current asset holdings to evaluate several commonly offered explanations. We find that increased uncertainty (income shocks, expense uncertainty) cannot quantitatively account for the rise in bankruptcies. Instead, stories related to a change in the credit market environment are more plausible. In particular, we find that a combination of a decrease in the transactions cost of lending and a decline in the cost of bankruptcy does a good job in accounting for the rise in consumer bankruptcy. We also argue that the abolition of usury laws and other legal changes are unimportant.

This study investigates why the illegal traffic of kidneys exists and remains resilient in the Philippines. It also evaluates the efficacy of the legal and regulatory framework for kidney (and organ) transplantation, and the corresponding implications for health policy. The experiences of comparable countries are noted.Three surveys were employed in this study: 1) a review of related literature on kidney black markets; 2) questionnaire-based interviews of a multi-stage probability sample of 131 kidney vendors from the two largest supplier regions in the Philippines; and 3) a comparative content analysis of pertinent legal and regulatory measures to address the underground kidney trade.Survey results, based on a 4.0 percent statistical margin of error, indicate that kidney vendors are typically males (98.4 percent) who belong to the lower income classes/groups D and E (88.5 percent). The vast majority of vendors (89.2 percent) were unrelated to kidney recipients, many of whom were of foreign descent (60.3 percent). The study finds that certain key elements underpin the kidney black market in the Philippines: an open, brokered and compensation-based contractual system between unrelated donors and sellers. These elements are sustained and reinforced by a robust supply-and-demand interface anchored on brokerage pricing, government incapacity, policy contradictions and public tolerance or indifference.The study suggests that the relative ambiguity of, and continuity between, the legal and underground kidney transplant systems be carefully addressed prior to enacting more specific reforms. The study also calls attention to the unintended consequences of various reform efforts, which are often neglected in formulating health policy and evaluating its costs and benefits.

In their UIP regressions, Huisman et al. (1998. Extreme support for uncovered interest parity, Journal for International Money and Finance 17, 211e228.) focus on extreme forward premia and find much higher coefficients. We show that, for such results, the expectation signal needs to be thicker-tailed than the missing variable. Transaction costs may produce the right sort of bias. It is (i) bounded (i.e. it has no tails at all), (ii) wide (i.e. it may generate betas below 1/2) and (iii) U-distributed, which makes an ''extreme'' sample quite effective. We derive theoretical and numerical results in the direction of what Huisman et al. observe. We also tighten Fama's moment conditions.

This paper examines the magnitude and determinants of transactions costs for a sample of institutional traders with different investment styles. Using order-level data for recent equity transactions totaling $83 billion, we find that trading costs are economically significant and increase with trade difficulty. In addition, costs vary with traderspecific factors such as investment style and order submission strategy, as well as stock-specific factors such as exchange listing. We find evidence that institutional trades in exchange-listed stocks have lower costs than in comparable Nasdaq stocks.

Many research studies have been done to explain the reasons for the tensions and failures observed in joint ventures between Japanese and Western multinational enterprises. These studies have identified, with various degrees of sophistication, the existence of cultural differences as a primary determinant of failure. Alternative explanations focus upon a transaction cost approach, emphasising opportunism and the danger of cheating in such strategic alliances. This paper synthesises the literature through the development of a new conceptual framework. This framework, which distinguishes between economic and cultural reasons for failure, provides a new lens to view the literature. It is demonstrated that the simple view of cultural incompatibility needs to be replaced by an awareness of the combined impact of cultural and economic forces on the viability of joint ventures between Japanese and Western firms.

Why do small-business groups in developed countries exist? Research has shown the strong economic impact of business groups throughout the world but remains heavily focused on large-business groups and on emerging economies. Theoretical approaches to explain the existence of highly diversified business groups range from market power to the resource-based view and include market failure, transaction costs, agency theory, and cultural embeddedness. These approaches, however, are not very appropriate to explain the existence of small to medium-size firms in developed countries. What we know is that these smaller groups exist and that they are largely the outcome of related diversification.

Business to Business (B2B) relationships in Ecommerce are becoming increasingly important. However, there is little guidance available for managers about how relationships should be formulated or managed. Further, requirements analysis for information technology support of B2B interorganisational relationships (IORs) depends on the business model of the relationship, and needs a predictive basis. This paper describes a method for planning and managing IORs based on Williamson's transaction cost theory, to guide managers when negotiating B2B alliances, and procurement of IT support for them. This method covers market analysis, relationship planning, transaction cost estimation and IT requirements analysis. Lessons learned in presenting the method to managers and using it in case studies are reviewed.

Projects in the forestry sector, and land-use change and forestry projects more generally, have the potential to help mitigate global warming by acting as sinks for greenhouse gasses, particularly CO2. However, concerns have been expressed that participation in carbon-sink projects may be constrained by high costs. This problem may be particularly severe for projects involving smallholders in developing countries. Of particular concern are the transaction costs incurred in developing projects, measuring, certifying and selling the carbon-sequestration services generated by such projects. This paper addresses these issues by reviewing the implications of transaction and abatement costs in carbon-sequestration

Surface parking generates multiple externalities. If left to the market the supply of parking is likely to be suboptimal. But parking requirements ignore most of the externalities. This paper suggests that a tax approach may be a more efficient method to internalize the externalities associated with parking provision, thereby assuring an optimal supply of parking. However, in practice it is infeasible to value all externalities in monetary terms and to set such a tax. Hence, a suboptimal flat surface parking tax is advanced. In addition to its contribution to the reduction of externalities from land cover, this tax is likely to have several noteworthy positive attributes. It is simple to assess. It will provide an incentive for intensifying the use of parking. It may also increase the attractiveness of providing underground parking relative to surface parking, thereby reducing the attractiveness of suburban retail centers relative to central cities. A discussion of implementation issues suggests that a surface parking tax may face relatively low transaction costs. These will be largely a function of the use of revenues. Hence, the use of revenues should be specified when such a tax is proposed.

A number of studies have separately identified mean reversion and momentum. This paper considers these effects jointly: potential for mean reversion and momentum is combined into one index, interpretable as an expected return. Combination momentum-contrarian strategies, used to select from among 18 developed equity markets at a monthly frequency, outperform both pure momentum and pure mean reversion strategies. A breakdown of the combination strategies indicates that both extreme high-expected-return and low-expected-return strategies rely heavily on country-indices with higher standard deviation of return, smaller firm size, and a lower number of firms. These observations suggest a mispricing rather than risk-compensation explanation of returns, with overreaction tied to information-based neglect of countries with fewer and smaller firms.

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The potential for soil carbon sequestration to play a significant role in meeting Australia's greenhouse reduction targets has attracted widespread interest. Despite this interest, the economic scope for soil carbon sequestration remains poorly understood and the practical approaches that could be used to capture any opportunities have not been explored. In this paper we present preliminary results on a pilot soil carbon sequestration variable price, reverse tender auction in the mixed (wheat-sheep) farming system of the Lachlan Catchment, NSW. We draw on the results of the pilot to reveal; contract choice, landholders costs of soil carbon sequestration and the extent and impact of transaction costs associated with basic costeffectiveness of the market mechanism.

Eamonn is on the academic staff of the National Institute of Technology Management (NITM) in University College Dublin (UCD), and is active in teaching, research and the business development activities of the Institute. Prior to joining UCD, he was Engineering Director for Bristol Myers Squibb, and was responsible for the design, installation and maintenance of process plants for developing and manufacturing anti-cancer drugs. He also worked as a consultant advising major multinationals and government agencies in asset management and procurement process improvement.

This paper provides an economic analysis of underground gun markets drawing on interviews with gang members, gun dealers, professional thieves, prostitutes, police, public school security guards and teens in the city of Chicago, complemented by results from government surveys of recent arrestees in 22 cities plus administrative data for suicides, homicides, robberies, arrests and confiscated crime guns. We find evidence of considerable frictions in the underground market for guns in Chicago. We argue that these frictions are due primarily to the fact that the underground gun market is both illegal and "thin" the number of buyers, sellers and total transactions is small and relevant information is scarce. Gangs can help overcome these market frictions, but the gang's economic interests cause gang leaders to limit supply primarily to gang members, and even then transactions are usually loans or rentals with strings attached.

The new models of development take into account the influence of social capital in inducing the economic growth. Assuming that trust is one of the main dimensions of the social capital, we demonstrate that it is able to reduce the transaction costs and to lay off large amounts that can be redirected towards investments, thereby inducing economic growth. The policy makers are responsible for taking this into account and promote the budgetary measures able to raise the level of trust in a society. We believe, based on the model designed by Zack and Knack, that in addition to the policies which guarantee the contracts, strengthen the formal institutions that prevent the abuses, reduce the social heterogeneity and economic growth, the growth optimization is possible to be achieved by allocating sufficient resources to education. The inference is based on an empirical research on the Romanian society, whose results are presented in this study.

Amazon.com paved the way for several large-scale, behavior-based recommendation services as an important value-added expert advice service for online book shops. In this contribution we discuss the effects (and possible reductions of transaction costs) for such services and investigate how such a value-added service can be implemented in the context of scientific libraries. For this purpose we present a new, recently developed recommender system based on a stochastic purchase incidence model, present the underlying stochastic model from repeat-buying theory and analyze whether the underlying assumptions on consumer behavior hold for users of scientific libraries, too. We have analyzed the logfiles with approximately 85 million http-transactions of the web-based online public access catalog (OPAC) of the library of the Universität Karlsruhe (TH) since January 2001 and performed some diagnostic checks. A test prototype is already operational and is currently being evaluated. The recommender service will be fully operational within the library system of the Universität Karlsruhe (TH) by the end of June 2002.

Current payment for environmental service (PES) schemes face challenges in the form of evaluation of opportunity costs and ecosystem service delivery, high transaction costs, and difficulties in ensuring conditionality. Even when these conditions are met, PES may be undermined by a lack of inclusivity, leading to societal conflicts over land use. We propose a new PES-type approach that we call

showed that portfolio rebalancing based on NBER business cycle turning points substantially improves in-sample Markowitz efficiency. In a similar vein, we investigate potential improvements from rebalancing based on turning points in the monetary cycle. We find that the monetary cycle has greater influence than the business cycle on the variance/covariance structure of multiple asset classes. Furthermore, we find substantial improvements in in-sample efficiency beyond a buy-and-hold strategy and the business-cycle approach. Importantly, our indicator of monetary cycle turning points has a practical advantage over NBER business cycle turning points, in that it relies only on ex ante information. In out-of-sample tests, we continue to find superior portfolio performance after transactions costs using the monetary cycle to time portfolio rebalancing.

This paper analyses how market imperfections affect the welfare effects of introducing the CAP in the new Eastern Member States (NEMS) of the EU. We model how transaction costs and imperfect competition in the land market affect the distribution of policy rents. We find that benefits of direct payments end up with landowners in NEMS also with imperfections in the NEMS land markets. With unequal access to subsidies small tenant farmers may even lose out from the subsidies. Decoupling of payments shifts policy rents to farmers. However, decoupling will constrain productivity enhancing restructuring which would result from accession induced improvements in the land markets. Using reserve entitlements to mitigate this effect reduces the intended benefits on distortions and target efficiency.

In this paper, a theoretical framework for analyzing the selection of governance structures for implementing collaboration agreements between firms and Technological Centers is presented and empirically discussed. This framework includes Transaction Costs and Property Rights' theoretical assumptions, though complemented with several proposals coming from the Transactional Value Theory. This last theory is used for adding some dynamism in the governance structure selection. As empirical evidence of this theoretical explanation, we analyse four real experiences of collaboration between firms and one Technological Center. These experiences are aimed to represent the typology of relationships which Technological Centers usually face. Among others, a key interesting result is obtained: R&D collaboration activities do not need to always be organized through hierarchical solutions. In those cases where future expected benefits and/or reputation issues could play an important role, the traditional more static theories could not fully explain the selected governance structure for managing the R&D relationship. As a consequence, these results justify further research about the adequacy of the theoretical framework presented in this paper in other contexts, for example, R&D collaborations between firms and/or between Universities or Public Research Centers and firms.

This paper considers the stochastic cash balance problem. A dynamic simple policy (DSP) is proposed to minimise transaction costs, under a general cost structure, when the cash flows are not independently or identically distributed. The validity of the approach is demonstrated using the scenario of double exponentially distributed cash flows considered by Penttinen. A data set from a large multinational is used to demonstrate the practical application of the DSP. To provide conditional expectations of future cash flows, a time series model is developed to provide forecasts. The performance of the DSP on these cash flows achieved a 16% saving in average transaction cost (over the Penttinen model). The saving due to the forecasting model over the assumption that the cash flows exhibit a constant mean is a function of the time series structure of the relevant cash flows. For the example data, the benefit of using the bespoke forecasting model over the constant mean was only 2%.

Economists agree that governance is one of the critical factors explaining the divergence in performance across developing countries. The differences of view between economists regarding governance are to do first, with the types of state capacities that constitute the critical governance capacities necessary for the acceleration of development and secondly, with the importance of governance relative to other factors at early stages of development. On the first issue, there is an important empirical and theoretical controversy between liberal economists who constitute the mainstream consensus on good governance and statist and heterodox institutional economists who agree that governance is critical for economic development but argue that theory and evidence shows that the governance capacities required for successful development are substantially different from those identified by the good governance analysis. The economists in favour of good governance argue that the critical state...

States, state agencies, multilateral agencies, and other non-market actors are relatively under-studied in the strategic entrepreneurship literature. While important contributions examining public decision makers have been made within the agency-theoretic and transaction-cost traditions, there is little research that builds on resource-based, dynamic capabilities, and behavioral approaches to organizations. Yet public organizations can be usefully characterized as stocks of physical, organizational,

Flexible incentives are incentives that do not dictate how environmental objectives are to be achieved, and they are important tools in managing agro-environmental problems. They are, however, a means to an end and not and end in themselves. Successful implementation of these incentives depends on clear, enforceable performance standards. Furthermore, the best flexible incentive approach appears to be one that involves a combination of instruments that fit local, social, economic and environmental conditions. It is important to recognize, as well, that the flexible incentive approach can impose substantial transaction costs and can require a high level of both producer and agency human management skills. Thus the policy challenge is to find effective ways to lower the costs of using flexible incentives and of expanding the management capacity of those farmers and ranchers who can deliver high environmental values over the long run.

IVIE working papers offer in advance the results of economic research under way in order to encourage a discussion process before sending them to scientific journals for their final publication. * My deepest debt of gratitude goes to Avner Greif for his constant suggestions, encouragement and support. I also want to thank Ramon Marimon for his excellent supervision of my Ph.D. dissertation, on which this paper is based. I have benefited from many stimulating comments of B.

This paper explores the relationship between economic theory and public relations, in order to explain how public relations management contributes to companies’ overall economic gains. It uses a “blend” of economic theories to explain the role and contribution of public relations from the economic point of view. The paper sees a link between the strategic management of public relations as

The legal framework in the EU is faced today with the new water framework directive (WFD) (60/2000) that sets up new criteria for water management, regulation, and pricing. The aim of this paper is to analyze the problem of water regulation in agriculture in connection to the WFD. This is done by setting up and testing a simulation model based on the integration of a mathematical programming model at farm level and an optimal regulation model at the level of irrigation boards. The model allows quantifying water demand and optimal regulation from the policy maker's point of view. When implementing both full cost recovery and the polluter pays principle, the results show likely major impacts of water pricing on farm income and employment. The optimal policy is a combination of pricing instruments related at the same time to crop mix, water consumption, and pollution. Transaction costs connected to policy implementation have to be weighted against the incentive benefits of volumetric pricing. Altogether, economic, social, and environmental issues have to be carefully considered in order to design suitable water policies.

This paper explores long-term partnership benefits of local strategic alliances in knowledge-intensive industries. A structural model of the value continuum is formulated and tested on small and mid-size enterprises in the software industry. Partial least squares path analysis is used to investigate the cause–effect relationships between the foundation values – efficiency and effectiveness – and the innovation value. The results show that the innovation value of localised inter-firm networks originates from costs savings and quality improvements. Conversely, alliance-induced 'speed' benefits (measured by the R&D process's acceleration), which improve flexibility and/or shorten delivery time, have no significant impact on market-based performance. An alliance's time-related benefits may be important to maintain competitive parity, but they do not significantly support competitive advantage, market development and market penetration. Instead, value is created via, for example, an exchange of tacit knowledge and a reduction in transaction costs, and particularly by a reduction in customer service costs.

In the field of optimisation models for passive investments, we propose a general portfolio construction model based on principal component analysis. The portfolio is designed to replicate the first principal component of a group of stocks, instead of a traditional benchmark, thus capturing only the common trend in the stock returns. The main advantage of this approach is that the reduction of the noise present in stock returns facilitates the replication task considerably and the optimal portfolio structure is very stable.

We provide a computational study of the problem of optimally allocating wealth among multiple stocks and a bank account, to maximize the infinite horizon discounted utility of consumption. We consider the situation where the transfer of wealth from one asset to another involves transaction costs that are proportional to the amount of wealth transferred. Our model allows for correlation between the price processes, which in turn gives rise to interesting hedging strategies. This results in a stochastic control problem with both drift-rate and singular controls, which can be recast as a free boundary problem in partial differential equations. Adapting the finite element method and using an iterative procedure that converts the free boundary problem into a sequence of fixed boundary problems, we provide an efficient numerical method for solving this problem. We present computational results that describe the impact of volatility, risk aversion of the investor, level of transaction costs, and correlation among the risky assets on the structure of the optimal policy. Finally we suggest and quantify some heuristic approximations.

The purpose of this paper is to review the evidence on the profitability of technical analysis. The empirical literature is categorized into two groups, 'early' and 'modern' studies, according to the characteristics of testing procedures. Early studies indicate that technical trading strategies are profitable in foreign exchange markets and futures markets, but not in stock markets. Modern studies indicate that technical trading strategies consistently generate economic profits in a variety of speculative markets at least until the early 1990s. Among a total of 95 modern studies, 56 studies find positive results regarding technical trading strategies, 20 studies obtain negative results, and 19 studies indicate mixed results. Despite the positive evidence on the profitability of technical trading strategies, most empirical studies are subject to various problems in their testing procedures, e.g. data snooping, ex post selection of trading rules or search technologies, and difficulties in estimation of risk and transaction costs. Future research must address these deficiencies in testing in order to provide conclusive evidence on the profitability of technical trading strategies.