Debt Matters: The Firms Optimization Problem With Financial Distress

We argue that firms in financial distress face real costs associated with financial restructuring, in addition to the agency costs identified elsewhere in the literature. Distress costs arise from the presence of debt in the firms financial structure. Because firms facing uncertain demand will act to minimize expected distress costs even when not near the point of defaulting on debts, the prospect of facing distress costs has implications for the optimization problem of every firm. Our model shows that distress costs have a nonlinear effect on the value function of the firm. This effect may make the firm risk averse or risk seeking, depending on the magnitude of expected distress costs, with very different implications for its output decisions. Our results bridge a gap between the emphasis of economists on risk aversion induced by financial distress and the view of legal scholars that financial distress induces risk-seeking behavior

Regulation with Direct Benefits of Information Disclosure and Imperfect Monitoring

We model the optimal design of programs requiring heterogeneous firms to disclose harmful emissions when disclosure yields both direct and indirect benefits. The indirect benefit arises from the internalization of social costs and resulting reduction in emissions. The direct benefit results from the disclosure of previously private information which is valuable to potentially harmed parties. Previous theoretical and empirical analyses of such programs restrict attention to the former benefit while the stated motivation for such programs highlights the latter benefit. When disclosure yields both direct and indirect benefits, policymakers face a tradeoff between inducing truthful self-reporting and deterring emissions. Internalizing the social costs of emissions, such as through an emissions tax, will deter emissions, but may also reduce incentives for firms to truthfully report their emissions

Managerial incentives for compliance with environmental information disclosure programs

Publicly reported information on the environmental behavior of firms can increase the efficacy of private markets as a mechanism to control environmental malfeasance through liability for harm, consumer demand response, and shareholder reaction. In the case of mandatory information disclosure programs, firms are required to report information that is potentially damaging to them. We argue that a firm’s internal organizational structure alters the incentives faced by decision-makers and therefore has the potential to affect their compliance decisions. We adapt a theoretical model developed by Gilpatric (2005) to examine these incentives and test the resulting hypotheses using experimental data. Experimental results confirm theoretical predictions of increased non-compliance when audit probabilities increase, but in contrast to theory there is no discernable effect of changing penalties for non-compliance

Social Networks and Non-market Valuations *

Abstract This paper considers the role of social networks in the non-market valuation of public goods. In the model individuals derive utility from both their own direct enjoyment of the public good as well as from the enjoyment of those in their network. We find that network structure almost always matters, both for utility and for valuation. The network increases aggregate valuation when it assigns higher importance, that is, greater total weight, to individuals with higher private values for the public good. The model provides a theoretical foundation for the idea of opinion leaders who have disproportionate influence over their communities. Specifically, opinion leaders are individuals assigned high importance by the network, and projects favored by opinion leaders tend to be favored by the network as a whole. The model can also guide future empirical studies by enabling a more structural approach to non-market valuation in a socially-connected group

Optimal Contest Design When Policing Damaging Behavior

We consider the design of a contest in which the prize may motivate not only productive efforts, but also some damaging aggressive behavior by contestants. The organizer must choose prizes and an enforcement regime defined as a limit on how much aggressiveness will be tolerated and the probability of inspection. When the value of contestants’ output is low, it may be optimal to motivate much less effort than first best because the prize spread necessary to induce higher effort necessitates a high level of enforcement, which is not worth the cost. On the other hand, when the output value is sufficiently high, it becomes optimal to offer a high prize spread to motivate substantial but still below first-best effort, with costly enforcement then being employed to constrain damaging aggressive behavior. Additionally, a less accurate inspection technology is associated with a tighter limit on aggressive behavior, and “zero tolerance” can be optimal if the aggressive behavior has no value

The effect of charter schools on traditional public school students in Texas: Are children who stay behind left behind?

Texas has been an important player in the emergence of the charter school industry. We test for a competitive effect of charters by looking for changes in student achievement in traditional public schools following charter market penetration. We use an eight-year panel of data on individual student test scores for public schools students in Texas in order to evaluate the achievement impact of charter schools. We estimate a model that includes student/campus spell fixed effects to control for campus demographic and peer group characteristics, and to control directly for student and student family background characteristics. We find a positive and significant effect of charter school penetration on traditional public school student outcomes.

Managerial Incentives for Compliance with Environmental Information Disclosure Programs

The essays in this volume will be illuminating for both researchers and practitioners, specifically in relation to questions of environmental policy and how a proposed change in incentives or benefits might affect behavior and consequently, the likely success of a policy. This book argues that the experimental evidence complements theoretic insights, field date and simulating models to improve our understanding of the underlying assumptions and incentives that drive behavioral responses to policy. Covering topical areas of interest such as tradable permit markets, common property and public goods, regulation and compliance and valuation and preferences, the critical advantage of this volume is that each section concludes with discussion points written by economists who do not use experimental methods