Michael K. Berkowitz

Disaggregate Analysis of the Demand for Gasoline

In this paper, we adopt a disaggregate approach to modeling the components of gasoline demand. Gasoline demand in our model is viewed as the outcome of the following household decisions: vehicle holdings (number and type) and vehicle usage (nondiscretionary and discretionary usage). Modeling gasoline demand in this way correctly specifies gasoline as an input into the production of transportation services and allows for the interdependence between household decisions on vehicle holdings and usage. Moreover, estimation of the components of gasoline demand allows policymakers to identify the means by which individuals will respond to policy changes. This leads to more effective policies designed to reduce gasoline consumption. We use this model to estimate price and fuel efficiency elasticities of vehicle usage and gasoline demand.

Incentives and efficiency in the market for management services: a study of Canadian mutual funds

This paper examines the incentives offered managers of Canadian equity mutual funds when their compensation is based upon the market value of the assets they manage. Although this method of compensation supplies a very weak direct link between performance and the remuneration of managers, the authors show that competition among funds supplies a stronger indirect link. Empirical evidence is provided in the paper indicating that, owing to investor expectations of positive serial correlation in the performance of mutual funds, the indirect compensation offered by asset-based schemes provides a strong incentive to managers to maximize risk-adjusted fund returns.

Managerial quality and the structure of management expenses in the US mutual fund industry

Abstract This paper examines the relationship between the fees charged by mutual funds and their performance. The work distinguishes between high- and low-quality funds and sheds some additional light on the growing controversy concerning the role of independent directors as monitors of the fee setting practices within funds. We find that for high-quality managers, there is a positive relationship between fees and performance. In contrast, for lower-quality managers, there is a negative relationship between fees and performance. We believe this reflects the incentive for poor managers to extract short-term benefits from investors, as the likelihood of survival is lower for poor performing managers. These results are consistent with the notion that the independent directors whose responsibility is to safeguard the interests of shareholders may not be effective in doing so.

Investor risk evaluation in the determination of management incentives in the mutual fund industry

Abstract This paper examines the way in which investors evaluate risk in deciding which mutual funds to invest. New fund investment is found to be positively related to a distributed lag of past fund performance with a strong degree of inertia. The relationship is mostly linear with significant nonlinearities at the upper (and possibly the lower) end of the performance spectrum. Investors appear to use publicly available data in a way that is consistent with the theory, giving equal weight in their decisions to the return and market risk components of the performance measure, while ignoring diversifiable risk. Finally, it is shown that improved performance in any year has a significant impact on the earnings of the management company. Because managers are rewarded on the basis of risk adjusted returns, risk neutral managers have no incentive to manipulate risk, except at very high performance levels.

Precommitment and Financial Structure: An Analysis of the Effects of Taxes

While modern industrial organization theory predicts the use of sunk costs to deter entry, this paper examines some factors that might act to moderate the commitment value of capital and, hence, the entry-barring impact of these sunk costs--to the point, perhaps, that empirical detection might be difficult. The authors show that the tax system and financial contracts of the incumbent firm may affect its optimal precommitment decision and, in fact, may attenuate the strategic incentives for precommitment. Copyright 1992 by The London School of Economics and Political Science.

Ex Post Production Flexibility, Asset Specificity, and Financial Structure:

This paper examines the interaction between the firms production and financing decisions, focusing on the specificity of its assets and on the flexibility of its production technology. The paper shows that production flexibility increases potential tax shields from debt and lowers expected bankruptcy costs and that, when asset specificity is low, operating and financial leverage tend to be complements, with the complementarity becoming stronger as ex post capacity adjustment costs increase. It also shows that an increase in the corporate tax rate induces the firm to increase capacity investment and financial leverage when asset specificity is low and that this effect becomes stronger as ex post capacity adjustment costs increase. The results suggest that in industries where assets are easily redeployable, the impact of taxes on both investment and financial leverage will be positive and increasing with the size of capacity adjustment costs.

A disaggregate model of residential heating mode choice: a multinomial probit modelling approach

This paper examines the characteristics that influence the households choice of heating system. A multinomial probit model is developed and tested using disaggregate survey data from 712 respondents across Canada. The results indicate that product reliability is the characteristic having the most significant impact on choice, followed by the yearly operating costs of the system. This implies that successful research and development and marketing programmes should both be directed toward improving these product attributes and relating this information to prospective purchasers.

Estimating the market risk for nontraded securities: An application to Canadian public utilities

Abstract The Capital Asset Pricing Model is now generally accepted by the investment community as a valuable input for determining a firms fair return on equity. Estimation of the firms beta has proved increasingly difficult, however, as companies are taken over or are reorganized and re-emerging as subsidiaries of complex holding companies. This paper provides a model relating accounting variables to market betas so that a nontraded firms market beta can be estimated from its accounting information when the firm is no longer traded or when the firms operating environment has changed so dramatically that historic returns are no longer useful in predicting the future risk of the firm.