Working papers authored by Tuck professors may be found via the Tuck faculty directory, personal faculty websites, or the Social Science Research Network.
All working papers are copyrighted by the authors. For permission to reproduce or to request a copy of a paper, please contact the author directly. To locate a professor's profile, visit the Faculty Directory.
Contracting and the Division of the Gains from Trade, August 2014
This paper examines the microstructure of import markets and the division of the gains from trade among consumers, importers and exporters. When exporters and importers transact through anonymous markets, double marginalization and business stealing among competing importers lead to lower profits. Trading parties can overcome these inefficiencies by investing in richer contractual arrangements such as bilateral contracts that eliminate double marginalization and joint ventures that internalize business stealing. Introducing these contractual choices into a trade model with heterogeneous exporters and importers, we show that trade liberalization increases the incentive to form joint ventures, thus raising the profits of exporters and importers at the expense of consumer welfare. We examine the implications of the model for prices, quantities and exporter-importer matches in Colombian import markets before and after the US-Colombia free trade agreement. US exporters that started to enjoy duty-free access were more likely to increase their average import price, decrease their quantity exported and reduce the number of import partners. Download PDF.
Growth Through Rigidity: An Explanation of the Rise of CEO Pay, April 2014
Abstract: We explore a rigidity-based explanation of the dramatic and off-trend growth in US executive compensation during the 1990s and early 2000s. We show that executive option and stock grants are rigid in the number of shares granted. In addition, salary and bonus exhibit downward nominal rigidity. Rigidity implies that the value of executive pay will grow with firm equity returns, which averaged 30% annually during the Tech Boom. Rigidity can also explain the increased dispersion in pay, the difference in growth rates between the US and other countries, and the increased correlation between pay and firm-specific equity returns. Regulatory changes requiring the disclosure of the value of option grants help explain the moderation in executive pay in the late 2000s. Finally, we find suggestive evidence that number-rigidity in executive pay is generated by money illusion and rule-of-thumb decision-making. Download PDF.
Are Stock-Financed Takeovers Opportunistic?, November 2013
The estimated probability that a bidder offers all-stock as payment in takeovers increases with measures of market overvaluation of bidder shares. However, when we instrument the bidder pricing error using aggregate mutual fund flows, the reverse happens: greater bidder overvaluation reduces the all-stock payment propensity. Since the price pressure created by aggregate fund flows is exogenous to bidder fundamentals -- while directly impacting bidder pricing errors -- this evidence rejects the notion that all-stock financed takeovers are opportunistic. Bidders paying with stock tend to be small, non-dividend paying growth companies with low leverage, suggesting that financing constraints play an important role in the all-stock payment decision. Moreover, all-stock payment is more likely in high-tech industries, when the two firms operate in highly complementary industries, and when the target is geographically close, indicating that targets in all-stock bids are relatively informed about bidder value. Overall, our evidence does not suggest a particular role for bidder mispricing in driving the all-stock payment decision in takeovers. Download PDF.
Aligning Incentives at Systemically Important Financial Institutions, March 2013
Abstract: UBS recently announced it would pay part of the bonuses of 6,500 highly compensated employees with bonds that would be forfeited if the bank does not meet its capital requirements. This memo underscores the benefits of contingent deferred compensation and makes recommendations for how such compensation should be structured at systemically important institutions. We also revise our proposal for contingent convertible bonds, explaining how these hybrid bonds can be combined with better designs for deferred compensation to reduce the need for future bailouts. Download PDF.
Trade, Education and the Shrinking Middle Class, February 2013
We develop a new model of trade in which educational institutions drive comparative advantage and determine the distribution of human capital within and across countries. Our framework exploits a multiplicity of sectors and the continuous support of human capital choices to demonstrate that freer trade can induce crowding out of the middle occupations towards the skill acquisition extremes in one country, and simultaneous expansion of middle-income industries in another. Individual gains from trade may be non-monotonic in workers' ability, and middle ability agents can lose the most from trade liberalization. Comparing trade and education policy, we nd that targeted education subsidies are more eective than taris as a means to preserve \middle class" jobs, while uniform educational subsidies have no eect. Download PDF.
Human Capital and Regional Development, April 2012
We investigate the determinants of regional development using a newly constructed database of 1569 sub-national regions from 110 countries covering 74 percent of the world’s surface and 97 percent of its GDP. We combine the cross-regional analysis of geographic, institutional, cultural, and human capital determinants of regional development with an examination of productivity in several thousand establishments located in these regions. To organize the discussion, we present a new model of regional development that introduces into a standard migration framework elements of both the Lucas (1978) model of the allocation of talent between entrepreneurship and work, and the Lucas (1988) model of human capital externalities. The evidence points to the paramount importance of human capital in accounting for regional differences in development, but also suggests from model estimation and calibration that entrepreneurial inputs and possibly human capital externalities help understand the data. Download PDF.