Corporate Financial Policy, Taxation, and Macroeconomic Risk

This paper develops a simple model of corporate financial structure intended to formalize the macroeconomic concern over excessive leverage. In particular, we attempt to rationalize why firms designing an optimal capital structure would choose a level of debt that leaves them heavily exposed to macroeconomic risk. Our starting point is a variant of the "corporate control" model often used to motivate debt as the optimal financial contract. We modify this framework in two ways. First, we include common risks, interpretable as business cycle risks, as well as idiosyncratic risks. Second, we include corporate and investor-level taxes, and consider the implications of a net tax bias against equity finance. The tax distortion confronts firms with a tradeoff ex ante between the costs of equity finance and the costs of increased exposure to macroeconomic risk accompanying debt finance. In this regard, an equilibrium with "excessive leverage" is possible. Further, despite the possibility of renegotiation, debt is in general less effective than equity in insulating the firm against aggregate risk. Our model leads to the prediction that individual firm dividends may vary with macroeconomic conditions, even after controlling for the effects of relevant firm-specific performance measures, such as earnings. We present some formal econometric evidence in support of this prediction, using a panel of individual corporations. Evidence on some related predictions is also presented.

The Science of Monetary Policy: A New Keynesian Perspective

MONETARY POLICY; STABILIZATION; CREDIBILITY.

Taxation, Corporate Capital Structure, and Financial Distress

Is corporate leverage excessive? Is the tax code distorting corporate capital structure decisions in a way that increases the possibility of an economic crisis owing to "financial instability"? Answering these kinds of questions first requires some precision in terminology. In this paper, we describe the cases for and against the trend toward high leverage, and evaluate the role played by taxation. While provision of proper incentives to managers may in part underlie the trend to the debt, high leverage may in practice be a blunt way to address the problem, and one which opens up the possibility for undue exposure to the risks of financial distress. Our story takes as given the kinds of managerial incentive problems deemed important by advocates of leverage. We maintain, however, that when a firm is subject to business-cycle risk as well as individual risk, a profit maximizing arrangement is not simple debt, but rather a contract with mixed debt and equity features. That is, the contract should index the principal obligation to aggregate and/or industry-level economic conditions. We argue that the tax system encourages corporations to absorb more business cycle risk than they would otherwise. It does so in two respects: First, it provides a relative subsidy to debt finance; second, it restricts debt for tax purposes from indexing the principal to common disturbances. At a deeper level, the issue hinges on the institutional aspects of debt renegotiation. If renegotiation were costless, then debt implicitly would have the equity features relevant for responding to business-cycle risk. However, because of the diffuse ownership pattern of much of the newly issued debt and also because of certain legal restrictions, renegotiation is likely to be a costly activity.

Monetary Policy Rules and Macroeconomic Stability: Evidence and some Theory

We estimate a forward-looking monetary policy reaction function for the postwar U.S. economy, pre- and post-October 1979. Our results point to substantial differences in the estimated rule across periods. In particular, interest rate policy in the Volcker-Greenspan period appears to have been much mors sensitive to changes in expected inflation than in the pre-Volcker period.BUSINESS CYCLES ; MONETARY POLICY

Control in the technical societies: a brief history

By the time control engineering emerged as a coherent body of knowledge and practice (during and just after WW2) professional engineering societies had existed for many decades. Since control engineering is an interdisciplinary branch of the profession, new sections devoted to control were quickly established within the various existing technical societies. In addition, some new bodies devoted specifically or primarily to control were established. This article, a revised version of a paper presented at the IEEE 2009 Conference on the History of Technical Societies, describes how control engineering as a distinct branch of engineering became represented in technical societies in a number of countries

Paying primary health care centers for performance in Rwanda

Paying for performance (P4P) provides financial incentives for providers to increase the use and quality of care. P4P can affect health care by providing incentives for providers to put more effort into specific activities, and by increasing the amount of resources available to finance the delivery of services. This paper evaluates the impact of P4P on the use and quality of prenatal, institutional delivery, and child preventive care using data produced from a prospective quasi-experimental evaluation nested into the national rollout of P4P in Rwanda. Treatment facilities were enrolled in the P4P scheme in 2006 and comparison facilities were enrolled two years later. The incentive effect is isolated from the resource effect by increasing comparison facilities'input-based budgets by the average P4P payments to the treatment facilities. The data were collected from 166 facilities and a random sample of 2158 households. P4P had a large and significant positive impact on institutional deliveries and preventive care visits by young children, and improved quality of prenatal care. The authors find no effect on the number of prenatal care visits or on immunization rates. P4P had the greatest effect on those services that had the highest payment rates and needed the lowest provider effort. P4P financial performance incentives can improve both the use of and the quality of health services. Because the analysis isolates the incentive effect from the resource effect in P4P, the results indicate that an equal amount of financial resources without the incentives would not have achieved the same gain in outcomes.Health Monitoring&Evaluation,Population Policies,Health Systems Development&Reform,Disease Control&Prevention,Adolescent Health

Local Nodes in Global Networks: The Geography of Knowledge Flows in Biotechnology Innovation

The literature on innovation and interactive learning has tended to emphasize the importance of local networks, inter-firm collaboration and knowledge flows as the principal source of technological dynamism. More recently, however, this view has come to be challenged by other perspectives that argue for the importance of non-local knowledge flows. According to this alternative approach, truly dynamic economic regions are characterized both by dense local social interaction and knowledge circulation, as well as strong inter-regional and international connections to outside knowledge sources and partners. This paper offers an empirical examination of these issues by examining the geography of knowledge flows associated with innovation in biotechnology. We begin by reviewing the growing literature on the nature and geography of innovation in biotechnology research and the commercialization process. Then, focusing on the Canadian biotech industry, we examine the determinants of innovation (measured through patenting activity), paying particular attention to internal resources and capabilities of the firm, as well as local and global flows of knowledge and capital. Our study is based on the analysis of Statistics Canada’s 1999 Survey of Biotechnology Use and Development, which covers 358 core biotechnology firms. Our findings highlight the importance of in-house technological capability and absorptive capacity as determinants of successful innovation in biotechnology firms. Furthermore, our results document the precise ways in which knowledge circulates, in both embodied and disembodied forms, both locally and globally. We also highlight the role of formal intellectual property transactions (domestic and international) in promoting knowledge flows. Although we document the importance of global networks in our findings, our results also reveal the value of local networks and specific forms of embedding. Local relational linkages are especially important when raising capital—and the expertise that comes with it—to support innovation. Nevertheless, our empirical results raise some troubling questions about the alleged pre-eminence of the local in fostering innovation

A high-throughput microfluidic assay to study neurite response to growth factor gradients

Studying neurite guidance by diffusible or substrate bound gradients is challenging with current techniques. In this study, we present the design, fabrication and utility of a microfluidic device to study neurite guidance under chemogradients. Experimental and computational studies demonstrated the establishment of a steep gradient of guidance cue within 30 min and stable for up to 48 h. The gradient was found to be insensitive to external perturbations such as media change and movement of device. The effects of netrin-1 (0.1–10 µg mL−1) and brain pulp (0.1 µL mL−1) were evaluated for their chemoattractive potential on neurite turning, while slit-2 (62.5 or 250 ng mL−1) was studied for its chemorepellant properties. Hippocampal or dorsal root ganglion (DRG) neurons were seeded into a micro-channel and packed onto the surface of a 3D collagen gel. Neurites grew into the matrix in three dimensions, and a gradient of guidance cue was created orthogonal to the direction of neurite growth to impact guidance. The average turning angle of each neurite was measured and averaged across multiple devices cultured under similar conditions to quantify the effect of guidance cue gradient. Significant positive turning towards gradient was measured in the presence of brain pulp and netrin-1 (1 µg mL−1), relative to control cultures which received no external guidance cue (p < 0.001). Netrin-1 released from transfected fibroblasts had the most positive turning effect of all the chemoattractive cues tested (p < 0.001). Slit-2 exhibited strong chemorepellant characteristics on both hippocampal and DRG neurite guidance at 250 ng mL−1 concentration. Slit-2 also showed similar behavior on DRG neuron invasion into 3D collagen gel (p < 0.01 relative to control cultures). Taken together, the results suggest the utility of this microfluidic device to generate stable chemogradients for studying neurobiology, cell migration and proliferation, matrix remodeling and co-cultures with other cell lines, with potential applications in cancer biology, tissue engineering and regenerative medicine.Seoul R&BD Support Center (program PA090930