Contributions published at Finance

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Using a unique dataset containing separate information on the base and bonus pay of over a million workers, we provide novel evidence on the determinants and earnings effects of performance pay. Several observables—in particular age, education, tenure, and job complexity—have a large impact on both the likelihood and the magnitude of performance pay. Performance pay workers earn a sizable wage premium compared to salary workers, and the earnings premium is larger for men than for women. The wage functions differ markedly between salary and performance pay workers. In particular, the earnings premia associated with age, job complexity, and managerial position are much larger for performance pay workers than for salary workers. The difference in these earnings premia can in part be explained by the fact that heterogeneity among workers increases with age, job complexity, and managerial position. It accounts for about half of the earnings differential between salary and performance pay workers. A separate analysis of the base pay and bonus components of performance pay workers’ earnings reveals that workers who receive higher base pay also get larger bonuses, and that observables predict base pay much better than bonuses.

We study the pricing of systematic and idiosyncratic variance risk in the options market. We rst develop a methodology that allows to separately identify risk premia on systematic and, respectively, idiosyncratic variances by combining options data on several indices with the cross-section of options on the index constituents. We nd that both systematic and idiosyncratic variance risk are heavily priced. Systematic variance risk exhibits a negative price of risk, whereas idiosyncratic variance risk carries a large positive risk premium|even though systematic and idiosyncratic variances comove positively. This dierential pricing of systematic and idiosyncratic variance risk allows reconciling several phenomena, (1) the relative prices of index and individual options, (2) the sizeable crosssectional variation in risk premia on individual stock variances, (3) the volatility mispricing puzzle documented by Goyal and Saretto (2009), and (4) the substantial returns earned on various option portfolio strategies. We nd little evidence for an ICAPM-based explanation of the observed patterns, but nd support for theories of nancial intermediation under capital constraints that account for priced idiosyncratic variance risk.

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Implementing performance pay requires that workers' output be measured. When measurement costs differ among firms, those with a measurement cost advantage choose to implement performance pay. They attract the best workers, and both the level and variability of compensation are higher at these firms than at salary firms. Workers may select firms with different compensation methods at different stages of their work life. Productive workers start at performance pay firms and switch to salary firms once their productivity is revealed. The magnitude of the resulting worker flows depends on the payoff from effort and is therefore related to the age profile of the wage differential between performance pay and salary firms. Advantages in measuring worker productivity constitute a plausible explanation for the emergence of specialized business related service (BRS) firms. Accordingly, BRS firms should make a much wider use of performance pay and employ better workers than diversified corporations. Data from the 1998 Swiss Wage Structure Survey confirm the model's predictions both for the economy at large and for BRS firms.

In spite of the fact that they can draw on a larger, more liquid and more diversiedpool of capital than the equity of reinsurance companies, nancial markets have failedto displace reinsurance as the primary risk-sharing vehicle for natural catastropherisk. We show that this failure can be explained by dierences in information gatheringincentives between nancial markets and reinsurance companies. Using a simple modelof an insurance company that seeks to transfer a fraction of its risk exposure eitherthrough nancial markets or through traditional reinsurance, we nd that the supplyof information by informed traders in nancial markets may be excessive relative to itsvalue for the insurance company, causing reinsurance to be preferred. We show thatwhether traditional reinsurance or nancial markets are ultimately selected dependscrucially on the information acquisition cost structure and on the degree of redundancyin the information produced. Limits on the ability of informed traders to protablytake advantage of their information make the use of nancial markets more likely.

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Implied risk aversion estimates reported in the literature are strongly U-shaped. This article explores different potential explanations for these “smile” patterns: (i) preference aggregation, both with and without stochastic volatility and jumps in returns, (ii) misestimation of investors’ beliefs caused by stochastic volatility, jumps, or a Peso problem, and (iii) heterogeneous beliefs. The results reveal that preference aggregation and misestimation of investors’ beliefs caused by stochastic volatility and jumps are unlikely to be the explanation for the smile. Although a Peso problem can account for the smile, the required probability of a market crash is unrealistically large. Heterogeneous beliefs cause sizable distortions in implied risk aversion, but the degree of heterogeneity required to explain the smile is implausibly large.

When information is costly, a seller may wish to prevent prospective buyers from acquiring information, for the cost of information acquisition ultimately is borne by the seller. A seller can achieve the desired prevention through posted-priceselling, by offering prospective buyers a discount. No such prevention is possible in the case of an auction. We establish the result that the seller prefers posted-priceselling when the cost of information acquisition is high andauctions when it is low. We view corporatebonds as an instance of the former case, andgovernmentbonds as an instance of the latter.

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In der vorliegenden Studie werden erstmals für den schweizerischen Arbeitsmarkt umfassende Informationen über den Umfang, die Verbreitung und die Determinanten befristeterArbeitsverhältnisse präsentiert und eine ökonomische Bewertung dieser Beschäftigungsform im Vergleich zu unbefristeten Arbeitsverträgen vorgenommen. Verwendet werden Daten aus den ersten drei Wellen des neuen Schweizerischen Haushalts-Panels (SHP) für die Jahre 1999 bis 2001. Hierbei zeigt sich, dass eine Befristung der Beschäftigung bei hoch qualifizierten Arbeitskräften sowie bei jüngeren und älteren Arbeitnehmern häufiger vorkommt. Die Löhne befristet beschäftigter Frauen sind geringer als diejenigen der anderen weiblichen Erwerbstätigen. Diese Lohndifferenz ist jedoch nicht auf die Befristung der Beschäftigung per se, sondern auf unbeobachtbare individuelle Heterogenität zwischen den Frauen zurückzuführen. Für die Gruppe der Männer ist hingegen kein Einfluss der unterschiedlichen Beschäftigungsformen auf den Lohn festzustellen. Sowohl das empfundene als auch das tatsächliche Arbeitslosigkeitsrisiko sind bei befristet Beschäftigten größer. Gleichzeitig besteht – trotz gewisser Persistenzphänomene – eine erhebliche Mobilität von befristeter zu dauerhafter Beschäftigung. Ferner ist zu beobachten, dass ein befristeter Arbeitsvertrag die Wahrscheinlichkeit erhöht (reduziert) mit der Arbeitsstelle generell sehr zufrieden (unzufrieden) zu sein. Die Zufriedenheit mit dem Lohn ist bei temporär angestellten Männern geringer als bei den anderen männlichen Arbeitskräften. Die Wahrscheinlichkeit, an beruflichen Weiterbildungsmaßnahmen teilzunehmen, ist hingegen für befristet Beschäftigte nicht kleiner als für andere Arbeitnehmer. Ein internationaler Vergleich anhand von Daten des International Social Survey Programme (ISSP) von 1997 zeigt, dass sich die Determinanten befristeter Beschäftigung in der Schweiz mit denen anderer Länder weitgehend decken. Schließlich hängt die Befristungsquote nicht signifikant vom Ausmaß des Kündigungsschutzes, sondern vielmehr von der Arbeitslosenquote ab.

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In this paper, a model of labor contracting with asymmetric information is developed in order to explain the existence of inefficient long working hours. Since firms cannot observe workers' true productivity, they use long working hours as a mechanism to sort productive workers. The model therefore predicts that workers with a high productivity will tend to work inefficient long hours. An empirical analysis confirms this prediction: high-productivity workers are more likely to experience hours constraints in the form of overemployment than low-productivity workers. Moreover, the extent of overemployment is positively related to productivity.

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Turmoil in financial markets is often accompanied by a significant decrease in market liquidity. Here, we investigate how such key risk measures as likelihood of insolvency, value at risk, and expected tail loss respond to bid-ask spreads that are likely to widen just when positions must be liquidated to maintain capital ratios. Our results show that this sort of illiquidity causes significant increases in risk measures, especially with fat-tailed returns. A potential strategy that a financial institution may adopt to address this problem is to sell illiquid assets first while keeping a "cushion" of cash and liquid assets for a "rainy day." Our analysis demonstrates that, although such a strategy increases expected transaction costs, it may significantly decrease tail losses and the probability of insolvency. In light of our results, we recommend that financial institutions carefully examine their strategies for liquidation during periods of severe stress.

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