banking panics information and rational expectations equilibrium this paper shows that bank runs can be modeled as an equilibrium phenomenon we demonstrate that some aspects of the intuitive story that bank runs start with fears of insolvency of banks can be rigorously modeled if individuals observe long lines at the bank they correctly infer that there is a possibility that the bank is about to fail and precipitate a bank run however bank runs occur even when no one has any adverse information extra market constraints such as suspension of convertibility can prevent bank runs and result in superior allocations banking panics were a recurrent phenomenon in the united states until the 1930s they have re emerged as a source of public concern and much theoretical research recently in this paper we provide an information theoretic rationale for bank runs the traditional story is that contagion is an important aspect of bank runs the idea seems to be that when the general public observes large withdrawals from the banking system fears of insolvency grow resulting in even larger withdrawals of deposits in our model some individuals withdraw because they get information that future returns are likely to be low uninformed individuals observing this also have an incentive to liquidate their investments in addition some individuals need to withdraw deposits for other than informationally based reasons thus if the random realization of such a group of individuals is unusually large then the uninformed individuals will be misled and will precipitate a run on the bank the technology is such that a large volume of withdrawals involves liquidation costs consequently runs on the bank do impose social costs a mechanism that may reduce these costs in our model is to suspend convertibility if withdrawals are high however those individuals who need to withdraw their assets for liquidity reasons are worse off ex post our model provides a rationalization for restrictions in demand deposits that were widespread prior to 1929 friedman and schwartz 7 suggest that restrictions of payments ensured

permanent income in the consumption and the demand for money functions abstract this paper examines whether the concept of permanent income relevant for consumption decisions is the same as the one relevant for cash balance decisions the equivalence has often been assumed in theoretical and empirical work but it has never been explicitly tested for although some comparisons have been made using canadian quarterly data consumption and demand for money functions are estimated jointly the results indicate that the hypothesis that the elasticity of income expectations is the same in the two functions cannot be rejected this conclusion holds whether or not the same income variable is used in the two functions

contra coercion russian tax reform exogenous shocks and negotiated institutional change the view of institutions as coercion rather than as contracts dominates the comparative politics literature on both institutional creation and the politics of economic reform the emergence of a collectively optimal tax code in russia demonstrates the limitations of this emphasis on coercion this new tax code was not imposed by a strong central leader mandated by international institutions or the result of state capture by powerful economic interest groups rather it is the product of a mutually beneficial exchange between the russian government and the russian oil companies russia s ability to negotiate an effective tax regime also suggests the conditions under which and the microcausal mechanism whereby exogenous shocks promote institutional change and economic reform owing to their mutual vulnerability and interdependence the august 1998 financial crisis generated widely shared perceptions among these actors that the payoffs of cooperation had changed yet the economic reform institution that resulted required a series of incremental strategic moves that established common knowledge

market rate versus fixed rate demand deposits abstract in an economy with uninsured banks market rate deposits are shown to provide services identical to fixed rate deposits without risking banking panics as long as there is not both aggregate uncertainty about liquidity demands and asymmetric information about bank asset quality however if both factors are present then the preferred deposit form depends on the riskiness of bank assets and information revealed through market prices the analysis may explain the evolution of fixed rate deposits before the introduction of deposit insurance moreover it provides currently relevant insights regarding deposit contract forms and deposit insurance

distinguishing panics and information based bank runs welfare and policy implications in this paper we contrast panics and information based bank runs in an effort to provide a robust and empirically plausible model of how bank runs are triggered the model of information based runs is characterized by two sided asymmetric information the bank cannot observe the true liquidity needs of the depositors while depositors are asymmetrically informed about bank asset quality we also examine the relative degrees of risk sharing provided by bank deposit contracts and traded equity contracts we show that the choice of deposit or equity depends on the attributes of and information about the underlying investment returns

microprudential regulation in a dynamic model of banking this paper studies the quantitative impact of microprudential bank regulations on bank lending and value metrics of efficiency and welfare in a dynamic model of banks that are financed by debt and equity undertake maturity transformation are exposed to credit and liquidity risks and face financing frictions we show that 1 there exists an inverted u shaped relationship between bank lending welfare and capital requirements 2 liquidity requirements unambiguously reduce lending efficiency and welfare and 3 resolution policies contingent on observed capital such as prompt corrective action dominate in efficiency and welfare terms noncontingent capital and liquidity requirements

comparing capitalisms understanding institutional diversity and its implications for international business this paper examines the role of institutional analysis within the field of international business ib studies within ib institutions matter but the view of institutions tends to be thin utilizing summary indicators rather than detailed description and thus approaches institutions as unidimensional variables that impact on particular facets of business activity this paper argues that ib research would be usefully advanced by greater attention to comparing the topography of institutional landscapes and understanding their diversity a number of alternative case based approaches are outlined that draw on a growing comparative capitalisms literature in sociology and political science the paper develops a number of empirical examples to show the utility and limits of these approaches for ib scholars

the small world of germany and the durability of national networks the globalization offinancial markets and the concomitant restructuring decisions of firms challenge the historical legacy of national systems of governance german corporate ownership patterns and restructuring events in the 1990 s are examined here in this light the results show that ownership links among german firms constitute a small world that has consequences for understanding mergers and acquisitions ownership links form closely knit clusters offirms that are nonetheless highly connected across the network as a whole restructuring events fall squarely in the center of this structure despite increasing global competition the german small world tends to replicate itself to illustrate this robustness potential disruptions to the observed german network are simulated this simulation shows that the properties of the small world remain intact even when ownership ties are changed these findings suggest that a more global economy in germany need not lead to the dissolution of the ownership structure but rather may be associated with a deepening of network ties

liquidity provision banking and the allocation of interest rate risk abstract the paper studies the efficient allocation of technology induced interest rate risk and the implications of such risk for efficient liquidity provision complete immunization against interest rate risk is shown to be undesirable as it precludes the exploitation of favourable reinvestment opportunities under the assumptions of diamond dybvig 1983 interest induced valuation risks of long term assets should be born by early withdrawers reinvestment opportunity risks of short term assets by late withdrawers efficient liquidity provision thus entails no shifting of interest rate risk in the absence of additional moral hazard second best allocations can be implemented through unregulated competition among banks

financial development growth and the distribution of income a paradigm is presented in which both the extent of financial intermediation and the rate of economic growth are endogenously determined financial intermediation promotes growth because it allows a higher rate of return to be earned on capital and growth in turn provides the means to implement costly financial structures thus financial intermediation and economic growth are inextricably linked in accord with the goldsmith mckinnon shaw view on economic development the model also generates a development cycle reminiscent of the kuznet hypothesis in particular in the transition from a primitive slow growing economy to a developed fast growing one a nation passes through a stage in which the distribution of wealth across the rich and poor widens

the politics of common knowledge ideas and institutional change in wage bargaining domestic economic institutions change through processes of conflict and bargaining why do the strongest groups in such conflicts ever change their minds about the acceptability of institutional arrangements they once opposed drawing on the cases of ireland in 1986 87 and italy in 1989 93 this article demonstrates how the process of common knowledge creation between employers and unions changed the course of negotiations over national wage bargaining institutions common knowledge creation happens when existing institutions are in crisis the institutional experimentation that follows such crises characterized by deep uncertainty places a premium on persuasive argument the ideas most likely to serve as the basis for newly common knowledge will have analytical and distributive appeal to both unions and employers and they must be ratified in public agreements which i call common knowledge events common knowledge events establish new social facts which can change the payoffs associated with different institutional outcomes this can lead even powerful actors to accept institutions they had previously opposed the author thanks marius busemeyer mary louise culpepper keith darden orfeo fioretos archon fung peter hall andrew martin cathie jo martin victoria murillo kathleen thelen and gunnar trumbull along with three anonymous reviewers and the editors of io for comments and conversations that improved this article ben ansell and vikram siddarth provided valuable research assistance financial support from the john f kennedy school of government and the weatherhead center for international affairs at harvard university is gratefully acknowledged any remaining errors are my own

banks and the false dichotomy in the comparative political economy of finance the wide ranging varieties of capitalism literature rests on a particular conception of banks and banking that the authors argue no longer reflects the reality of modern financial systems they take advantage of the greater information regarding bank activities revealed by the financial crisis to consider the reality across eight of the world s largest developed economies of the financial power of banks to act as bulwarks against market forces this article offers a marketbased banking framework that transcends the bank based capital market based dichotomy that dominates comparative political economy s consideration of financial systems and argues that future cpe research should focus on the activities of banks by demonstrating how market based banking increases market influences on the supply of credit the authors highlight an underappreciated source of financial market pressure on nonfinancial companies nfc s that can have a potential impact across the range of issues that the varieties of capitalism voc literature has seen as differentiating national systems this approach has implications in areas such as labor welfare innovation and flexibility

blocks liquidity and corporate control the paper develops a simple model of corporate ownership structure in which costs and benefits of ownership concentration are analyzed the model cornpares the liquidity benefits obtained through dispersed corporate ownership with the benefits from efficient management control achieved by some degree of ownership concentration the paper reexamines the free rider problem in corporate control in the presence of liquidity trading derives predictions for the trade and pricing of blocks and provides criteria for the optimal choice of ownership structure the recent incomplete contracting approach in corporate finance has considerably improved our understanding of how small firms determine their capital structure the basic setting considered in this line of research is one where a founder manager seeks funding from one or several financiers the main premise is that the founder manager in her dealings with the financiers is primarily concerned with maintaining her private benefits of control for small firms these are often quite large relative to the financial returns thus for a small firm the problem of determining the financial structure often reduces to the problem of how to obtain fundingr while giving away as little control as possible to the financiers of course most financiers insist on some form of protection so that the final compromise reached in most financial contracts for small firms is one resembling a debt contract or a venture capital contract which protects the founder manager s control as long as the firm is performing adequately this perspective for small firms does not extend naturally to large firms because the private benefits of control of the managers for large firms are likely to be small relative to the firm s monetary returns so that protection of these benefits is not an overriding consideration moreover large firms

small states and skill specificity austria switzerland and interemployer cleavages in coordinated capitalism the varieties of capitalism literature has put skill systems at the center of comparative politics yet its claims about skill specificity are driven by two large coordinated economies germany and

bank panics suspensions and geography some notes on the contagion of fear in banking bank panics suspensions and geography some notes on the contagion of fear in banking recent attempts to understand bank panics tend to emphasize informational asymmetries or the possibilities of multiple equilibria such approaches stand in contrast to historical research that emphasizes legal factors influencing the organization of the banking system this paper constructs a model of a banking system operating under regulations similar to those in effect under the national banking system and in which information is complete in all other respects the model resembles that of diamond and dybvig 1983 the results indicate that given the regulatory environment it would have been surprising if suspensions of convertibility had not recurred periodically i introduction traditional explanations of panics under the national banking system 1863 1913 offered both by scholars and contemporaries stressed three factors 1 limitations on branching created incentives for the development and heavy use of correspondent banking relations 2 regulations favored holding interbank deposits with a relatively small group of new york banks this concentrated the reserves of the banking system in one location guaranteeing that heavy withdrawals of interbank balances from any source would affect new york banks and through them the entire banking system 3 legal restrictions prevented banks especially those holding large interbank deposits from adjusting interest rates in order to protect those deposits during periods of heavy withdrawal demand 1 this traditional explanation of the periodic recurrence of panics which emphasizes the organization of the banking system stands in marked contrast to more recent theories of panics which tend to focus on various informational asymmetries between banks and depositors 2 most of the recent literature on panics follows diamond and dybvig 1983 in modelling banks as a mechanism for pooling liquidity risks faced by depositors more specifically potential depositors can invest in the same primary assets available to banks however primary assets are costly to liquidate and depositors face random future liquidity needs at the time they make their investment decisions in such a framework the role of banks is to create and issue liabilities more liquid than their assets this activity provides insurance to depositors against random liquidity needs in diamond and dybvig s paper exogenous shocks to agents liquidity preference motivate withdrawal demand contracts between banks and depositors allow agents with liquidity needs to liquidate deposits at a lower cost than would be incurred in liquidating the primary asset however for each withdrawal due to inopportune liquidity needs a bank must liquidate primary assets and bear these costs hence the provision of liquidity by banks is feasible only if withdrawal demand is restricted to those actually requiring liquidity in the model of diamond and dybvig 3 panics can occur because the liquidity needs of individuals are private information in particular banks are assumed to be unable to observe whether any individual needs liquidity and hence cannot limit payments to individuals who actually need to withdraw funds banks are thus subject to runs as the result of self fulfilling prophecies if all depositors fear a run and they all seek to withdraw it will not be feasible for the banking system to provide liquidity to all of them thus the banking system must either suspend payments or be rendered insolvent of course a crucial component of this reasoning is that banks cannot distinguish legitimate from panic motivated withdrawals and hence cannot ration funds on this basis this model of panics provides no role for the organization of the banking system it therefore suggests that different countries or different regulatory regimes within the same country should have similar histories with respect to panics so long as they had similar deposit insurance schemes and similarly behaving lenders of last resort

institutional change in contemporary capitalism coordinated financial systems since 1990 what happens when the unstoppable force of liberalization collides with the immovable object of national financial institutions in the advanced industrial democracies to answer this question and evaluate alternative mechanisms to explain institutional change this article examines the cases of the three large european economies with concentrated share ownership france germany and italy in the formal legal mechanism interest coalitions adopt new laws leading actors to deviate from formerly stable patterns of behavior in shareholding in the joint belief shift mechanism collective actors use a triggering event to jointly reevaluate their views of how the world works and thus how their interests can best be pursued using the metric of patient capital this article shows that institutional change took place in france but not in germany or italy despite the fact that germany and italy experienced significant regulatory change in the area of corporate governance while france did not this evidence fits joint belief shift and is inconsistent with the formal legal mechanism it is likely that the importance of the two mechanisms of institutional change depends on the degree of strategic interdependence among institutional actors where it is high the joint belief shift mechanism is likely to precipitate change and where it is low the formal legal mechanism is likely to precipitate change

a comparison among partial adjustment rational expectations and error correction estimates of the canadian demand for money starting from a dynamic optimization principle the currently most popular approaches to modelling money demand functions are derived the partial adjustment adaptive expectations rational expectations and error correction mechanism formulations are then estimated using a common data set the error correction mechanism equation is found to dominate the others either because their implicit restrictions are rejected rational expectations or by employing the encompassing principle partial adjustment adaptive expectations surprisingly all three forms have similar long run solutions since the short run dynamics differ substantially the results have important implications for the conduct of monetary policy

run proof banking without suspension or deposit insurance abstract in a model of banking with asymmetric information among depositors and multiple sources of aggregate risk i show that a demand deposit arrangement with state contingent deposit payments and a priority of claims provision on final date resources is almost best under this arrangement intermediaries infer the realization of aggregate risk and of a privately observed signal on the outcome of the risky technology from depositors withdrawal choices and panics as well as information based runs are averted neither suspension provisions nor deposit insurance are necessary for an efficient run proof banking system furthermore intermediation provides information production services that a credit market does not necessarily provide

the use of electronic funds transfers to capture the effects of cash management practices on the demand for demand deposits a note the rapidly increasing use of more sophisticated cash management practices is a factor influencing the demand for money that is not considered in standard models of money demand within the framework of an inventory theoretic model of money demand this paper provides theoretical grounds for using the number of electronic funds transfers as an indication of increasing cash management sophistication specifically the demand for demand deposits is determined from the solution of a simultaneous equation system that also determines the optimal level of cash management therefore the level of cash management services influences transactions costs implying that transactions costs are endogenous the number of electronic funds transfers is closely linked to the level of cash management services and is therefore related to transactions costs models of money demand that treat transactions costs as exogenous and fixed are therefore misspecified and will not perform well when transactions costs are changing by explicitly incorporating the changing nature of transactions costs through the use of electronic funds transfers the problems of instability and poor predictive power associated with the demand for money in the 1970 s are overcome this paper analyzes the effects of cash management techniques on the demand for demand deposits these effects are derived from an inventory demand for money model in which cash management services are viewed as lowering transactions costs this derivation implies that the solution of the model results in a two equation system that simultaneously determines the optimal level of cash management services and the optimal average demand deposit balances since the number of electronic funds transfers is related to investment in cash management services modelling cash management in this way gives theoretical content to kimball s 20 contention that the number of electronic funds transfers is an important variable in explaining the demand for demand deposits the model of the demand for demand deposits presented in this paper implies that omitting cash management innovations will produce serious misspecification and will bias regression results these innovations allow deposit holders especially firms to economize on deposit balances therefore the desired amount of demand deposits for any given level of transactions income and interest rates will be lower than that implied by any historical relationship failure to incor

avoiding bank runs in transition economies the role of risk neutral capital abstract in a general equilibrium model with risk neutral and risk averse agents we show that if banks issue both demand deposits and equity then free banking is run proof and efficient in particular we obtain the first best insurance solution if there is adequate risk neutral capital if sufficient risk neutral capital is unavailable then a partial suspension of convertibility is optimal in general therefore policies like capital adequacy norms and deposit insurance are neither necessary nor desirable