Organizations & Markets

Multidivisional firms frequently rely on external market prices in order to value internal transactions across profit centers. This paper examines the transfer pricing problem in a setting in which an upstream division has monopoly power in selling a proprietary component both to a downstream division within the same firm and to external customers. When internal transfers are valued at the prevailing market price, the resulting transactions are distorted by double marginalization.

Friedman's contribution to the consumption literature goes well beyond the seminal permanent-income hypothesis. He conjectured that the marginal propensity to consume out of financial wealth shall be larger than out of "human wealth," the present discounted value of future labor income. I present an explicitly solved model to deliver this widely-noted consumption property by specifying that the conditional variance of changes in income increases with its level.

Changes in nominal interest rates must be due to either movements in real interest rates, expected inflation, or the inflation risk premium. We develop a term structure model with regime switches, time-varying prices of risk and inflation to identify these components of the nominal yield curve. We find that the unconditional real rate curve is fairly flat at 1.3%. In one real rate regime, the real term structure is steeply downward sloping. An inflation risk premium that increases with maturity fully accounts for the generally upward sloping nominal term structure

The authors argue that high self-monitors may be more sensitive to the status implications of social exchange and more effective in managing their exchange relations to elicit conferrals of status than low self-monitors. In a series of studies, they found that high self-monitors were more accurate in perceiving the status dynamics involved both in a set of fictitious exchange relations and in real relationships involving other members of their social group.

We develop a model of lending and borrowing in markets where the lender has no access to physical collateral and where the borrower is heavily capital constrained. Our model of micro loans, which incorporates a) the absence of access to physical collateral, b) peer monitoring, c) threat of punishment upon default, and d) costly monitoring by lenders is used to determine the equilibrium borrowing rates. Monitoring by lenders is shown to be critical for an equilibrium to exist in our model if the maturity of the loan is too long.

Many corporate executives view private equity as a last resort, as expensive capital that should be tapped only by companies that don't have access to presumably cheaper public equity. The reality of private equity, however, is more complex, and potentially quite rewarding, for both shareholders and management. This paper surveys some of the academic work on the costs and benefits of public vs. private equity, contrasting the private equity investment process with its public counterpart and exploring how such a process may add value.

Traditional product line positioning and pricing models assume that firms have full information about the market demand and consumer preferences. In this paper we consider a setting where the firm has limited market information and tries to select its product positioning and pricing strategy optimally in light of this missing market information. To do this, we use competitive ration and maximum regret criteria, which measure (respectively) the percentage and absolute loss relative to the benchmark case where the firm has full knowledge of customer preferences.