Economics Insights @ CBS

In this article we argue that advances made in automation, communication, and manufacturing portend a dramatic reversal of the “bigger is better” approach to cost reductions prevalent in many basic infrastructure industries; for example, transportation, electric power generation, and raw material processing. We show that the traditional reductions in capital costs achieved by scaling up in size are generally matched by learning effects in the mass production process when scaling up in numbers instead. In addition, using the U.S.

Global economic transactions such as foreign direct investment (FDI) must extend over an institutional abyss between the jurisdiction, and therefore protection, of the states involved. Intergovernmental organizations (IGOs) represent an important attempt to span this abyss. The authors use a network approach to demonstrate that the connections between two countries, through joint membership in the same IGOs, are associated with a large positive influence on the FDI that flows between them.

This paper reviews recent research at the intersection of industrial organization and corporate finance on credit default swap (CDS) markets. These markets have been at the center of the financial crisis of 2007-2009 and many aspects of their operation are not well understood. The paper covers topics such as counterparty risk in CDS markets, the "empty creditor problem," "naked" CDS positions, the super-senior status of credit (and other) derivatives in Chapter 11 bankruptcy, and strategic behavior in CDS settlement auctions.