Internal versus External Capital Markets

This paper presents a framework for analyzing the costs and benefits of internal vs. external capital allocation. We focus primarily on comparing an internal capital market to bank lending. While both represent centralized forms of financing, in the former case the financing is owner-provided, while in the latter case it is not. We argue that the ownership aspect of internal capital allocation has three important consequences: 1) it leads to more monitoring than bank lending; 2) it reduces managers' entrepreneurial incentives; and 3) it makes it easier to efficiently redeploy the assets of projects that are performing poorly under existing management.

AN INSTITUTIONAL ECONOMIC APPRAISAL OF WORKER EQUITY SCHEMES IN AGRICULTURE:

The institutional economic appraisal conducted in this paper confirms that equity schemes are subject to institutional incompleteness as proposed in ICT. The incompleteness stem from the lack of verifiability related to social capital, embeddedness, governance and micro performance. In addition, they lack the requisite ex ante incentives to enable ex post adaptation, counterveilance over opportunism, and the distribution of residual claims and control. The first reason for incompleteness emanate from the motivations of the initiators, which is opportunism by landowners to secure their assets in the face of uncertainty and/or enhance their returns in the marketplace. The lack of worker effort and options in the early stages raises credible commitment questions. Examining the governance aspects of equity schemes reveal that they are consistent with modern trends to separate ownership and control. However, a key concern is the asymmetry in human capital and subsequently in power, residual control, gratification, and ultimately economic empowerment. The analysis is aimed at identifying the incentives and innovations required to make equity schemes, as a type of shareholder contract, more complete and credible in an empowerment context. Recommendations towards institutional innovation are offered.Labor and Human Capital,

Career concerns and investment maturity in mutual funds

An important puzzle in financial economics is why fund managers invest in short-maturity assets when they could obtain larger profits in assets with longer maturity. This work provides an explanation to this fact based on labor contracts signed between institutional investors and fund managers. Using a career concern setup, we examine how the optimal contract design, in the presence of both explicit and implicit incentives, affects the fund managers decisions on investment horizons. A numerical analysis characterizes situations in which young (old) managers prefer short-maturity (long-maturity) positions. However, when including multitask analysis, we find that career concerned managers are bolder and also prefer assets with long maturity

Are older workers overpaid? A literature review

It is widely believed that wage and productivity profiles of individual workers do not coincide at all ages. We give an overview of the theories which provide a rationale for this, and discuss the empirical literature. Human capital theories typically imply that wages rise with tenure, so that job reallocation at old age would imply a wage cut. Incentive theories typically imply that wages exceed productivity at the end of a worker's career. Bargaining power of unions may also lead to 'overpayment' of older workers. Some general conclusions regarding the wages of older workers are formulated on the basis of the authors' reading of the empirical literature.

Monitoring for worker quality

Much nonmanagerial work is routine, with all workers having similar output most of the time. However, failure to address occasional challenges can be very costly, and consequently easily detected, while challenges handled well pass unnoticed. We analyze job assignment and worker monitoring for such “guardian” jobs. If monitoring costs are positive but small, monitoring is nonmonotonic in the firm’s belief about the probability that a worker is good. The model explains several empirical regularities regarding nonmanagerial internal labor markets: low use of performance pay, seniority pay, rare demotions, wage ceilings within grade, and wage jumps at promotion.The research in this paper was supported in part by National Science Foundation grant SES-1260917. We are grateful to Costas Cavounidis, Bob Gibbons, Sambuddha Ghosh, Eddie Lazear, Bart Lipman, Andy Newman, Mike Waldman, and participants at seminars, workshops, and conferences at Boston University, Massachusetts Institute of Technology, the National Bureau of Economic Research, the Society of Labor Economics, Tel Aviv University, University of California, Santa Barbara, and the University of New South Wales for helpful comments and suggestions. The usual caveat applies. Contact the corresponding author, Kevin Lang, at [email protected]; and coauthor Gautam Bose at [email protected]. (SES-1260917 - National Science Foundation

Career concerns and investment maturity in mutual funds

An important puzzle in financial economics is why fund managers invest in short-maturity assets when they could obtain larger profits in assets with longer maturity. This work provides an explanation to this fact based on labor contracts signed between institutional investors and fund managers. Using a career concern setup, we examine how the optimal contract design, in the presence of both explicit and implicit incentives, affects the fund managers decisions on investment horizons. A numerical analysis characterizes situations in which young (old) managers prefer short-maturity (long-maturity) positions. However, when including multitask analysis, we find that career concerned managers are bolder and also prefer assets with long maturity.Contract theory, Career concerns, Financial equilibrium, Investment maturity

Are we working too hard or should we be working harder? A simple model of career concerns

Productivity ; Employment