Liquidity preference and information

This paper explores the link between anticipated information and a preference for liquidity in investment choices. Given a subjective ordering of investment portfolios by their liquidity, we identify a sufficient condition under which the prospect of finer resolution of uncertainty creates a preference for more liquid positions. We then show how this condition might arise naturally in some standard classes of sequential decision problems

Developing Countries in the New Economy: The Role of Demand-side Initiatives

ICT, developing countries

Customer anger and incentives for quality provision

Emotions are a significant determinant of consumer behaviour. A customer may get angry if he feels that he is being treated unfairly by his supplier and that anger may make him more likely to switch to an alternative provider. We model the strategic interaction between firms that choose quality levels and anger-prone customers who pick their supplier based on their expectations of suppliers' quality. Strategic interaction can allow for multiple equilibria including some in which no firm invests in high quality. Allowing customers to voice their anger on peer-review fora can eliminate low-quality equilibria, and may even support a unique equilibrium in which all firms choose high quality

How green should environmental regulators be?

The extent to which environmental regulatory institutions are either 'green' or 'brown' impacts not just the intensity of regulation at any moment, but also the incentives for the development of new pollution-control technologies. We set up a strategic model of R&D in which a polluter can deploy technologies developed in-house, or license technologies developed by specialist outsiders. Polluters exert R&D effort and may even develop redundant technologies to improve the terms on which they procure technology from outside. We find that, while regulatory bias has an ambiguous impact on the best-available technology, strategic delegation to systematically biased regulators can improve social welfare

The internationalization of Chinese and Indian firms: trends, motivations and policy implications

The rapid rise in the overseas investments of Indian and Chinese firms has attracted widespread attention in recent years. To a large extent, the growing internationalization of these emerging economies has been driven by a search for resources, technology and related assets. What are the implications of this for foreign direct investment policy in both the source and the recipient countries? Furthermore, how will the ongoing global financial crisis affect the continued expansion of multinationals from the two countries, which have relied on international markets to fund their investments

The internationalization of Chinese and Indian firms: trends, motivations and strategy

The last two decades have seen significant internationalization of firms from developing economies, in terms of their greater participation in international trade, growing outflows of foreign direct investment (FDI), and a recent surge in their cross-border mergers and acquisition activity. Outward investment from developing countries is not a new phenomenon but in recent years there has been a marked increase in the magnitude of flows and a qualitative transformation in their pattern. Within this broad trend, the growing internationalization of firms from two fastgrowing developing countries, China and India, is particularly notable. Exports have been a central feature of the growth of the Chinese economy over the last three decades and, more recently, they have made a visible contribution to Indian growth too. Outward FDI from China and India has grown rapidly in recent years, and firms from these two countries are increasingly involved in overseas mergers and acquisitions

Literacy in India

Literacy refers to an individual’s ability to communicate through reading and writing. The literacy rate for any population measures the fraction of the population, above a certain cut-off age, that is literate. Based on the most recent statistics compiled by UNESCO, more than one in three Indians above the age of 15 years is unable to read and write. Further, the roughly 268 million adult illiterates in India constitute one-third of the global population of illiterates. International comparisons show that the Indian literacy rate is well below those for other populous countries like China and also below those for developing countries in general

Community pressure for green behaviour

The desire to avoid rousing community hostility may encourage firms to behave in an environmentally responsible manner. It has been conjectured that such 'informal regulation' could effectively replace formal intervention in some settings, and usefully complement it in others. We explore these conjectures with mixed results. Informal regulation is necessarily less efficient than a well-designed formal alternative and the pattern of green behaviour induced by the threat of community hostility may increase or decrease welfare. The existence of community pressure may increase or decrease the optimal calibration of a formal intervention (in this case an environmental tax) and may complement or detract from the incentives generated by an optimally-calibrated tax

Relative Performance Evaluation Contracts and Asset Market Equilibrium

We analyse the equilibrium consequences of performance-based contracts for fund managers. Managerial remuneration is tied to a fund's absolute performance and its performance relative to rival funds. Investors choose whether or not to delegate their investment to better-informed fund managers; if they delegate they choose the parameters of the optimal contract subject to the fund manager's participation constraint. We find that the impact of relative performance evaluation on equilibrium equity premium and on portfolio herding critically depends on whether the participation constraint is binding. Simple numerical examples suggest that the increased importance of delegation and performance evaluation may lower the equity premium.portfolio delegation, relative performance evaluation, equity premium

Volatility and the Debt-Intolerance Paradox

A striking feature of sovereign lending is that many countries with moderate debtto-income ratios systematically face higher spreads and more stringent borrowing constraints than other countries with far higher debt ratios. Earlier research has rationalized the phenomenon in terms of sovereign reputation and countries' distinct credit histories. This paper provides theoretical and empirical evidence to show that differences in underlying macroeconomic volatility are key. While volatility increases the need for international borrowing to help smooth domestic consumption, the ability to borrow is constrained by the higher default risk that volatility engenders. Copyright 2006, International Monetary Fund