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INTRODUCTION 1927 I. THE LEVERAGED LOAN LANDSCAPE 1932 A. Leveraged Buyouts and Fraudulent Transfers 1932 B. The Genesis of Section 546(e) 1934 C. Section 546(e)'s Muddied Waters 1936 D. The [...], Corporate bankruptcy cases have recently undergone a shift. After decades where creditors exercised outsized control, private equity sponsors have now ascended the throne. This new group exploits contractual loopholes and employs coercive tactics to initiate creditor-on-creditor violence. The result is the ability to dictate outcomes in distress situations where equity sponsors would normally be idle passengers. The unwritten rules have been rewritten. This new disequilibrium has the potential to fundamentally harm the financial ecosystem. Scholars have successfully chronicled the new tactics but formulating the means to mitigate market distortion has been elusive. Most scholars have appealed to the judiciary to intervene. Unfortunately, the judiciary has rejected this call, arguing that sophisticated parties should address coercion through contracts. What if that is not possible? An efficient public debt market relies on some sort of check on outright exploitation. The inability to manage bad actors renders these markets more volatile and amplifies contagion risk for national and global economies. Further, coercive measures allow a company that should have sought bankruptcy protection or some other substantive restructuring to artificially limp along. There is a significant risk that this iniquity destroys value and leaves little left to salvage by the time the company actually lands in bankruptcy. This Article argues that a significant movement towards equilibrium is attainable by adjusting two aspects of this ecosystem. Primarily, Delaware courts have limited creditors to derivative breach-of-fiduciary-duty actions, even when a corporation is insolvent, and directors are actively attacking certain stakeholders. Delaware case law protects the mechanism by which equity sponsors implement coercion. I argue that when a corporation is insolvent, directors and officers who undertake hostile actions against specific creditors to whom they owe fiduciary duties should be subject to direct claims by those creditors. Unable to act with impunity, directors would be forced to properly consider all key stakeholders in formulating rehabilitation measures. Further, I advocate for the amendment of section 546(e) of the Bankruptcy Code to exclude leveraged buyouts from the fraudulent transfer safe harbor. My proposal aligns the section with its historical underpinnings and acts as a natural check on debt levels in overly aggressive acquisitions. This proposal reduces the need for coercive restructuring measures when a corporation experiences financial distress.

Abstract. We consider a day-ahead electricity market that consists of multiple competing renewable firms (e.g., wind generators) and conventional firms (e.g., coal-fired power plants) in a discrete-time setting. The market [...]

Analysis of standard auction rules when bidders are risk averse is usually carried out under the assumption that the seller is able to set an optimal reserve. The role of entry fees has been generally overlooked in that analysis. We consider bidders with constant absolute risk aversion and show that reserve price is an essential tool in the second price auction while entry fee is essential in the first price auction. Furthermore, setting a reserve price and entry fee combination optimally may change some of the rankings of the standard auctions that hold under optimal reserves. (JEL D44), I. INTRODUCTION Rent extraction from 'higher type' buyers in the monopoly seller's problem often involves lesser allocation for 'lower types,' and in some situations, screening out low-type buyers below a [...]

This paper examines a game-theoretic model of attack and defense of multiple networks of targets in which there exist intranetwork strategic complementarities among targets. The defender's objective is to successfully defend all the networks and the attacker's objective is to successfully attack at least one network of targets. Although there are multiple equilibria, we characterize correlation structures in the allocations of forces across targets that arise in all equilibria. For example, in all equilibria the attacker utilizes a stochastic 'guerrilla warfare' strategy in which a single random network is attacked. (JEL C72, D74), I. INTRODUCTION In the literature on game-theoretic models of attack and defense there has been a growing interest in the attack and defense of networks of targets. One focus of [...]

Under a myopic best-reply dynamic, efforts in repeated contests may exhibit chaotic behavior. This may help explain, for example, why experimental data often show nonconvergence to one-shot equilibrium efforts. (JEL C61, C72, D72, D74, D83), I. INTRODUCTION Contests, in which players expend effort or resources in order to increase their probability of winning a prize, have long been a popular subject of economic experiments (see, [...]

Abstract. This paper examines how managerial short-termism can affect a firm's inventory decision when external investors have only partial information about the firm's demand uncertainty. We first study the scenario [...]

Abstract. In an industry with knowledge spillover and debt financing, equilibrium investments in research and development (R&D) projects are subject to three economic forces. First, knowledge spillover among firms enables [...]

This paper investigates the long-term effects of conditional cash transfers on school attainment and child labor. To this end, we construct a dynamic heterogeneous agent model, calibrate it with Brazilian data, and introduce a policy similar to the Brazilian Bolsa Familia. Our results suggest that this type of policy has a very strong impact on educational outcomes, sharply increasing primary school completion. The conditional transfer is also able to reduce the share of working children from 22% to 17%. We then compute the transition to the new steady state and show that the program actually increases child labor over the short run, because the transfer is not enough to completely cover the schooling costs, so children have to work to be able to comply with the program's schooling eligibility requirement. We also evaluate the impacts on poverty, inequality, and welfare. (JEL Oil, 125, J24), I. INTRODUCTION This paper examines the long-term general equilibrium effects of conditional cash transfers (CCTs) on human capital accumulation and child labor. To this end, we construct a dynamic heterogeneous [...]

Abstract. This paper examines firms' product policies when they sell an add-on (e.g., Internet service) in addition to a base product (e.g., hotel rooms) under vertical differentiation (e.g., four- versus [...]

We offer a new explanation for the occurrence of delegation in rent-seeking contests. We consider a two-player contest for a prize of common value. The players only know that the prize is high or low, with given probabilities. Each player can hire a delegate to act on his behalf. After a delegate is hired, she privately observes the true value of the prize. We derive the conditions under which, respectively, no player, only one player, or both players delegate in equilibrium. (JEL D7), I. INTRODUCTION We consider a rent-seeking contest where players can compete for a single prize by exerting nonrefundable efforts. The contest has been introduced in a seminal study by Tullock [...]

Countries in the Middle East and Africa (MEA) have diverse economic structures. Some countries are oil exporters, some are oil importers and some countries are very poor, dependent on agriculture. Since current account is an important indicator of an economy's health, it is of interest to examine if current account balances in MEA region are sustainable. However, empirical research paid scant attention to this issue. No study has been conducted before to examine this issue. The present paper makes an attempt to fill this research gap by employing panel data model over the period from 1995 to 2014 to examine current account sustainability in MEA countries. We follow intertemporal budget constraint approach and examine long-run relationship between export and import plus interest on net foreign debt. As we work with panel data, we pay special attention to cross-section dependence. We use annual data collected from World Development Indicators. All data (exports, imports and interest on long-term external borrowing) are in current US dollar and expressed as percentage of GDP. Interest payment on long-term external borrowing (also in current US dollar) is used as a proxy for interest on net foreign debt. Panel unit root test to cross-section dependence indicate variables are first-difference stationary. We next use panel cointegration and bootstrap critical values under null hypothesis to accommodate cross-section dependence. Panel cointegration result suggests that current account is sustainable. However, panel cointegrating regression estimation indicates that the value of sustainability coefficient is less than 1 (one), which implies that current account is weakly sustainable. As current account is weakly sustainable, it is desirable to make policy intervention at macro level to ensure strong sustainability. This may be achieved by accelerating ongoing trade reforms in MEA countries to boost export earnings and hence ensure the sustainability of external debt in the long run. JEL Classifications: F32, F34, F41 Keywords: Current account, sustainability, cross-section dependence, panel unit root, panel cointegration, MEA countries, INTRODUCTION Current account measures a country's net export of goods and services to the rest of the world, typically, over one year period. Current account, either deficit or surplus, is [...]

One approach for handling more aggressive goals under an ethanol mandate is to use a 'dual blend' mandate in which both the preferred new ethanol blend and the old (possibly ethanol-free) blend of gasoline coexist. Highlighting the case of New South Wales, Australia, we show the dual nature of such a mandate can potentially lead to significant costs when consumers are averse. We show consumers en masse rejected the new blend and paid 43 cents per gallon more to avoid it. Not even the second of the mandate's four targets could be reached, and the consumer cost was substantial. (JEL L51, Q41, Q42, Q51), I. INTRODUCTION Regulation is a tool policymakers can use to steer markets away from private outcomes deemed to be socially suboptimal or inefficient. Regulations work either by altering market incentives [...]

Prices can credibly signal whether a durable-goods monopolist will offer an improved good in the future. When the future release of a new version is private information, a monopoly seller will reveal a failure to develop and market a new version with a lower price than he or she would charge in full information. A firm would be willing to pay more to innovate when consumers are uncertain than if they are informed ex ante because a failure to innovate is punished by a low equilibrium price. Consumers' uncertainty about innovation intensifies an unsuccessful innovator's Coasian problem and increases consumer welfare. (JEL D82, L12, L15), I. INTRODUCTION Many products are marketed some time after they have been developed. For instance, a new smartphone may be developed and tested well before it is available for purchase. [...]

Search frictions are a prominent departure from the standard style of model we tend to write, which relies on frictionless Walrasian markets. They are not only prominent because they help [...]

In this article, I investigate the size of the returns to scale in aggregate U.S. production. I do so by estimating the aggregate returns to scale within a theory-consistent general [...]

We study how the equilibrium risk sharing of agents with heterogeneous perceptions of aggregate consumption growth affects bond and stock returns. Although credit spreads and their volatilities increase with the degree of heterogeneity, the decreasing risk premium on moderately levered equity can produce a violation of basic capital structure no-arbitrage relations. Using bottom-up proxies of aggregate belief dispersion, we give empirical support to the model predictions and show that risk premia on corporate bond and stock returns are systematically explained by their exposures to aggregate disagreement shocks. Keywords: credit risk; credit spreads; heterogeneous beliefs; uncertainty History: Received January 17, 2012; accepted July 5, 2013, by Jerome Detemple, finance. Published online in Articles in Advance December 18, 2013., 1. Introduction Representative-agent structural models with time-additive preferences find it difficult to explain the behavior of corporate bond spreads. The so-called credit spread puzzle is due to the difficulty of [...]

We experimentally analyze how to design preopening mechanisms facilitating coordination on high equilibrium liquidity and gains from trade. We allow a call auction to be preceded by a preopening or not, preopening orders to be binding or not, and the opening time to be deterministic or random. When the preopening is nonbinding, traders place manipulative orders, reducing the credibility of preplay communication. Random market opening deters manipulation, but also hinders communication by making it costly. Gains from trade are maximized when preopening orders are binding. This enables some traders to place early limit orders, attracting further liquidity. Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2013.1787. Keywords: cheap talk; experimental markets; equilibrium discovery; preopening period; preplay communication History: Received October 10, 2011; accepted May 22, 2013, by Wei Xiong, finance. Published online in Articles in Advance October 23, 2013., 1. Introduction At the opening of the market, there is large uncertainty about supply, demand, and valuations. Market openings can, therefore, be plagued by informational problems and coordination failures. Abstracting [...]

A game-theoretic analysis of terrorism examines interactions between a terrorist organization and multiple target countries. It considers both preemption and deterrence as counter-terrorist policies. Damage from terror includes material costs and resultant fear. Fear effects lead to different equilibria and implications for counter-terrorism policies. The model identifies conditions under which greater preemption may be the rational response to an increase in terrorism, that is, it analyzes the merit of the dictum 'offense is the best defense.' It also examines the characteristics of cooperative behavior among target countries in dealing with the threat of terrorism. (JEL C72, D74, F52, F53, H41), I. INTRODUCTION Terrorism has become a global phenomenon and a matter of concern for both developed and developing countries. While there is a large list of terrorist organizations, many of [...]

This paper examines soccer teams' strategic choices about the extent of offense/defense to adopt in competing with other teams. The sample is European Champions League group stage matches played between 1997-1998 and 2009-2010. We begin by developing a characterization of teams' strategies (extent of offense or defense) using principal component analysis. This is used to estimate the relationship between a team's probabilities of scoring and conceding goals and its chosen strategy. Knowing that relationship, it is then possible to derive a team's optimal strategy, and to study how this varies in different situations (such as playing at home or away). A comparison between optimal and actual strategy reveals that teams appear to adopt more defensive strategies than is optimal A notable feature of our study is that we model a team as choosing a strategy at the start of each match and also at half time, thereby incorporating a dynamic element. (JEL C23, C72, L83, Z00), I. INTRODUCTION Soccer is one of the most popular sports in the world. The major soccer event is the World Cup, which in 2010 was broadcast to over 100 countries [...]

A market where short-lived customers interact with long-lived experts is considered. Experts privately observe which treatment best serves a customer, but are free to choose more or less profitable treatments, Customers only observe records of experts' past actions. If experts are homogeneous there exists an equilibrium where experts always choose the customer's preferred treatment (play truthfully). Experts are incentivized with the promise of future business: new customers tend to choose experts who performed less profitable treatments in the past. If expert payoffs are private information, experts can never always be truthful. But sufficiently patient experts may be truthful almost always. (JEL C73, D82), I. INTRODUCTION In many economic environments, uninformed customers must rely on experts to both diagnose and treat their problems. Doctors, dentists, mechanics, and management consultants all help to determine what [...]

Product space metrics reflect the complementarity of product attributes and lead to different geometries in multidimensional spaces. This matters for optimal product positioning. I consider how a planner should design two substitute public goods with multiple attributes to best serve different needs. Attribute complementarity affects whether a given menu dominates another (using an extension of the Pareto criterion). Distancing the goods proportionately in every attribute guarantees improvement when tastes are maximally diverse. The intuition is that the planner must minimize overlap in the populations the goods serve, since benefits are wasted in appealing to the same individual with two offerings. (JEL C65, D78, H41), I. INTRODUCTION The positioning of brands, placement of stores, or design of public goods is usually treated as an optimal location problem in a product space. Firms and planners have [...]

This paper asks whether brand extension can serve as a signal of product quality given that it costs less than a new brand. (Existing literature has assumed either that brand [...]

Recent articles hypothesize that an asymmetry in regret motivates aggressive bidding in laboratory first-price auctions. Subjects emphasize potential earnings foregone from being outbid. Proposed motivators of this asymmetry include the one-to-one relationship in the auction between winning and positive earnings and the ex post knowledge that bidders who do not win the auction know they earned less than the winning bidder. We design a novel implementation of the first-price auction environment in which these characteristics are not present, while leaving unchanged the expected-earnings maximizing bidding strategy against any fixed beliefs about the bidding behavior of others. Bidding is significantly less aggressive in this treatment. These findings support the hypothesis that aggressive bidding is motivated in part by features of the protocol for incentivizing subjects that are not essential to the auction environment. JEL Classification: D44, C90, C91, 1. Introduction If you've never been surprised by the effect that a small change in instructions can have, then you've never tried it. Vernon Smith, keynote plenary session, World Meeting [...]

We study collective rent seeking between two groups in which each group has the option of releasing or not its sharing-rule information. First, we show that the case where both groups release their sharing-rule information never occurs in equilibrium; when the players are unevenly matched, one group releases its sharing-rule information and the other does not. Then, we select the Pareto-superior equilibrium when the players are unevenly matched. We show that, in this selected equilibrium, the underdog releases its sharing-rule information, and the favorite does not; thus, the underdog becomes the leader, and the favorite the follower (JEL D72)., I. INTRODUCTION Rent seeking can be seen all around us. Firms or coalitions of firms expend resources to influence government officials who have authority to award monopoly rights. Self-interested pressure [...]

We have not clearly acknowledged the abstraction from unpriceable 'social goods' (derived from communities) which, different from private and public goods, simply disappear if it is attempted to market them. Separability from markets and economics has not been argued, much less established. Acknowledging communities would reinforce rather than undermine them, and thus facilitate the production of social goods. But it would also help economics by facilitating our understanding of--and response to--financial crises as well as environmental destruction and many social problems, and by reducing the alienation from economics often felt by students and the public. Keywords: assumptions, communities, general equilibrium, separability, social goods. JEL: A12, A13, B52, D20, Z13., All theorems of economics are necessarily valid in every instance in which all the assumptions presupposed are given. Of course, they have no practical significance in situations where these conditions [...]

Laos depends heavily on imported petroleum for its fuel requirements. The volatility of international petroleum prices has raised concerns about its implications for poverty, but the linkages between petroleum prices and poverty are complex. This study examines the effect that petroleum prices have on the poor of Laos, using a general equilibrium modelling approach, which emphasizes the way transport costs impact on different categories of households. The results indicate that higher petroleum import prices raise transport costs and thereby harm rural people, among whom poverty incidence is highest, more severely than urban people, because rural people are more vulnerable to increases in transport costs. Keywords: Lao PDR, poverty incidence, petroleum prices, general equilibrium, transport costs., I. Introduction Lao PDR (subsequently Laos, for brevity) imports virtually all of the petroleum products it uses. It is obvious that if the international prices of these imports rise, there [...]

In games with multiple, Pareto-rankable equilibria and repeated play, does a history of playing an inefficient equilibrium make it harder for players to reach the efficient equilibrium? In other words, can people 'get stuck' in bad equilibria? Previous studies have found support for this, but they have relied on naturally occurring variation in precedent. I implement randomized control to establish that precedent effects are important, but that naturally occurring variation exaggerates the importance of precedent. I present evidence that some of the endogeneity of naturally occurring precedents is due to variation in risk attitudes. This is because in the coordination games used, the inefficient equilibrium is associated with a safe strategy. Understanding the causal effect of precedent is important since many development problems are viewed as coordination games. Moreover, an appreciation of the way in which potential heterogeneity may interact with the policy is essential when trying to lift groups out of bad precedents. JEL Classification: D02, D8, 043, 1. Introduction In coordination games, can people 'get stuck' in bad equilibria? Coordination games have been used as a metaphor for a wide variety of social interactions, such as the [...]

The benefits of supplier diversification are well established for price-taking firms. In this paper, we investigate the benefits from supplier diversification for dual-sourcing duopolists. We consider a two-echelon supply chain [...]

Post Keynesian economists have followed Joan Robinson's criticism of general equilibrium theory as abolishing history by allowing all contracts to be executed today for all future contingencies. This was the justification for the support of financial innovation to provide for the completeness of futures markets. The recent crisis has shown that force of history. Instead, many evolutionary and Keynesian economists have suggested the approach of cumulative causation as an approach that includes history and eschews equilibrium. This approach may provide a way to take history seriously in economic analysis. Keywords: cumulative causation, economic evolution, general equilibrium JEL Classification Codes: A11, B22, D8, E11, E12, Joan Robinson used the aphorism '[t]ime is a device to keep everything from happening at once' to distinguish history from an economy in equilibrium with complete markets for all states, [...]

Recent developments in the manufacturing of high performance liquid chromatography stationary phases have created polar stationary phases that have the ability to retain certain polar species. However, these stationary phases [...]

We prove that every multiplayer perfect-information game with bounded and lower-semicontinuous payoffs admits a subgame-perfect [epsilon]-equilibrium in pure strategies. This result complements Example 3 in Solan and Vieille [Solan, E., [...]

Built on the fictional concept of equilibrium, mainstream economics provides a method of analysis that, when paired with the calculus, enables relatively easy identification of maximum and minimum values. Lacking empirical evidence of its behavioral assumptions, the profession accepts such familiar claims as consumer maximization of utility and business firm maximization of profit or revenue. In place of the relatively static concept of equilibrium, the Veblen-Myrdal notion of circular and cumulative causation (CCC) arguably has greater descriptive capability and more penetrating insight for policy recommendations. This article traces the historical origins of both concepts and argues that CCC offers considerable potential for a broad, dynamic, interdisciplinary, more thorough, and more accurate analytical framework. Specific examples of work that has been done along with suggestions for future applications of this concept are given.

This article reports results from an experiment comparing the effects of vague versus precise pre-play communication in a highly competitive two-player game with conflicting interests. In the classic Traveler's Dilemma, non-binding precise messages about intent of play are pure cheap talk. We conjecture that a form of imprecise pre-play communication whereby subjects can submit ill-defined messages may help foster cooperation because of their vagueness. Comparing behavior both across modes of communication and to a baseline case without communication, we find that cooperation is highest when players can communicate using precise numerical messages. When communication with ill-defined messages is allowed, then conditional on receiving a message, subjects act more cooperatively than when no message is received. However, overall the ability to exchange ill-defined messages does not substantially improve cooperation. JEL Classification: C72, C92, 1. Introduction Day-to-day language abounds with imprecise terms like 'high,' 'low,' 'good,' and 'bad.' A natural question to ask is whether there are situations in which economic agents find it [...]