international institutional lending arrangements to sovereign borrowers abstract recent financial crises in east asia and elsewhere have illustrated the problems that plague emergency liquidity arrangements and the lender of last resort role of the international monetary fund and other international institutions in particular these act under conditions of extreme uncertainty where potential sovereign borrowers as well as private financial institutions are kept in the dark regarding the intentions of the emergency lenders and the amounts and terms of emergency liquidity that can be tapped from april 1999 longer term credit lines are being offered by the imf designed to be awarded to healthy countries before they experience contagion or distress the paper evaluates the advantages of this form of imf lending and this new trend in imf operations it is argued that provision of imf financing through such long term lending facilities is better in some senses than shorter term lending long term contracts reduce the uncertainty with respect to imf intentions moral hazard problems are reduced for the borrowing country and financial markets know the future level and terms of imf support another advantage is that long term loan contracts improve the allocation of resources within the borrowing country much as private sector facility lending is the dominant mode of finance in many markets so facility lending has efficiency advantages when it is provided by the imf this efficiency advantage is derived formally it is shown that sovereign borrowers are actually better off when utilizing these as backup lines of credit instead of emergency borrowing that is conducted after distress occurs facility lending by international institutions can lead to a welfare improvement and superior resource allocation for sovereign borrowers the intuition for this is that when financial distress drives these borrowers to increase their debt risk premia in borrowing rates would not rise at least up to the limits established by the size of the facility

the limits of market oriented regulatory techniques the case of automotive fuel economy the search for more efficient market oriented regulatory techniques has produced significant recent advances in several areas among these would appear to be the corporate average fuel economy cafe approach to reducing gasoline consumption by the domestic automobile fleet the 1975 energy policy and conservation act required manufacturers to sell fleets with a sales weighted average of 18 miles per gallon in the 1978 model year 19 mpg in 1979 20 mpg in 1980 and 27 5 mpg in 1985 1 the standards for the four intervening years were subsequently set by the national highway traffic safety administration at 22 24 26 and 27 miles per gallon the advantages of the averaging approach over uniform vehicle standards or a gas guzzler tax are two fold first cafe permits each firm to increase its overall fuel efficiency in the cheapest manner since the costs of mileage improvements for different vehicles may be rather different 2 and second it permits the continuation of a diverse product mix to the consumer since a uniform standard would probably result in the demise of certain models these arguments for averaging are now so widely accepted that the principle is being proposed inter alia for automotive emissions standards as well that is instead of maximum allowable emissions for each and every model manufacturers could produce models with various levels of pollutants

optimizing multinomial logit profit functions the multinomial logit model is a standard approach for determining the probability of purchase in product line problems when the purchase probabilities are multiplied by product contribution margins the resulting profit function is generally nonconcave because of this standard nonlinear search procedures may terminate at a local optimum which is far from the global optimum we present a simple procedure designed to alleviate this problem the key idea of this procedure is to find a path of prices from the global optimum of a related but concave logit profit function to the global optimum of the true but nonconcave logit profit function

feebates rebates and gas guzzler taxes a study of incentives for increased fuel economy abstract us fuel economy standards have not been changed significantly in 20 years feebates are a market based alternative in which vehicles with fuel consumption rates above a pivot point are charged fees while vehicles below receive rebates by choice of pivot points feebate systems can be made revenue neutral feebates have been analyzed before this study re examines feebates using recent data assesses how the undervaluing of fuel economy by consumers might affect their efficacy tests sensitivity to the cost of fuel economy technology and price elasticities of vehicle demand and adds assessments of gas guzzler taxes or rebates alone a feebate rate of 500 per 0 01 gallon per mile gpm produces a 16 percent increase in fuel economy while a 1000 per 0 01 gpm results in a 29 percent increase even if consumers count only the first 3 years of fuel savings unit sales decline by about 0 5 percent but sales revenues increase because the added value of fuel economy technologies outweighs the decrease in sales in all cases the vast majority of fuel economy increase is due to adoption of fuel economy technologies rather than shifts in sales

new vehicle feebates new vehicle feebate programs encourage improved fleet wide vehicle fuel efficiency yet analyses of these policies have been limited to ad hoc proposals in this paper we exploit an extensive multi year dataset which includes more than 16 million observations to evaluate the welfare implications of a long standing vehicle feebate program in the canadian province of ontario we 1 show that second best optimal feebates can be written as a function of new vehicle pigouvian taxes 2 find that ontario s feebate program was welfare enhancing relative to a no feebate scenario but that a second best optimal benchmark would have yielded additional welfare while reducing fleet wide emissions and 3 find that ontarian consumers responded asymmetrically to fees versus rebates

credit lines and credit utilization while much is known about the characteristics of consumers or businesses that obtain credit lines relatively little is known empirically about credit line utilization after origination this study fills that gap by testing two interrelated hypotheses concerning borrower credit quality and credit line utilization the empirical analysis confirms that borrowers with higher expectations of future credit quality deterioration originate credit lines to preserve financial flexibility furthermore we estimate a competing risks model that confirms our predictions concerning changes in borrower credit line utilization in response to borrower credit quality shocks

collateral in credit rationing in markets with imperfect information note in their 1981 article joseph stiglitz and andrew weiss analyze adverse selection and incentive effects in the loan market the models considered are based on two crucial assumptions borrowers are subject to limited liability and lenders cannot distinguish borrowers projects of different risk stiglitz and weiss show that a bank that raises its interest rate may suffer adverse selection because only risky borrowers will be willing to borrow at the higher rate thus lenders may choose not to raise the interest rate to eliminate excess demand resulting in the possibility of a credit rationing equilibrium stiglitz and weiss also consider briefly the role of collateral in such credit rationing models they conclude that lenders may choose not to use collateral requirements as a rationing device an increase in collateral requirements like an increase in the interest rate potentially leads to a decrease in the lender s expected return on loans because of resulting adverse incentive and selection effects the purpose of this note is to further investigate the role of collateral in these models stiglitz and weiss discussion in section iii establishes that adverse selection effects can result from increases in collateral when borrowers are risk averse i will show by returning to a model they discussed earlier in section i that the adverse selection effects can also occur when borrowers are risk neutral stiglitz and weiss outline a model to consider the use of collateral as a rationing device section iii in that model all potential borrowers face the same array of risky projects each potential borrower chooses at most one of those projects to undertake the individuals are by assumption risk averse with decreasing absolute risk aversion and possess different amounts of initial wealth thus choice of project if any to undertake and the method of finance selffinance from initial wealth or loan finance will differ from one individual to the next stiglitz and weiss show that among those who undertake risky projects and who choose borrowing as the method of finance wealthier individuals undertake riskier projects an increase in collateral has two effects on the market for loans those individuals who remain in the market will choose to undertake less risky projects and those individuals who drop out of the market are less wealthy low risk borrowers if the second effect is sufficiently strong then increased collateral requirements will mean decreased expected returns for the lender thus a credit rationing equilibrium may occur since lenders may not choose to use collateral requirements or the interest rate to eliminate excess demand the adverse selection effect just described does not occur in this model if the individuals are risk neutral consequently the potential for a credit rationing equilibrium is limited to cases where borrowers are risk averse to see that increases in collateral requirements can also result in adverse selection if borrowers are risk neutral consider the model stiglitz and weiss used to analyze the adverse selection effects of increases in the interest rate section i pp 395 99 it differs from the section iii model discussed above in three ways first borrowers are risk neutral second all projects ar loan financed the analogy to the section iii model is that no individuals have sufficient wealth to self finance projects third in the section

product market imperfections and loan commitments i show in a model of competitive banks that the characteristics of loan contracts are affected by product market imperfections in the borrower s industry a bank loan commitment increases the value of a borrower firm operating in an imperfectly competitive industry and thus dominates a simple loan even in the absence of risk sharing considerations and informational asymmetries between the borrower and the bank while it is individually rational for a firm to obtain a loan commitment all the firms in that industry taken together are made worse off by the existence of loan commitments a loan commitment is a contract guaranteeing future availability of credit to a borrower at a prespecified fixed or stochastic interest rate although bank loan commitments are an important financial instrument and there exists an extensive literature analyzing them the rationale for their existence is still a matter of research this paper provides an explanation for the existence of bank loan commitments to borrowers from industries in which there is imperfect competition in the product market it is shown that in such industries the option to acquire financing at predetermined rates enhances the borrower s strategic power and thus creates value for the individual borrower consider an industry with imperfect competition where firms face the problem of noncooperatively exploiting a product market opportunity the optimal product market strategy of a firm depends on the output of its rivals a firm with access to resources at a lower marginal cost than its competitors has a strategic advantage that it can exploit to gain a larger market share and profits it is shown here that a firm that does not have such a strategic advantage can create it by purchasing for a fixed initial fee an option to acquire a factor of production such as financing at favorable terms specifically by initially negotiating a bank loan commitment the firm can finance an expansion of output to meet a strategic contingency at more favorable terms than would be possible if the expansion had to be financed in the spot market the ability to exercise the commitment enables the firm to threaten its rivals strategically and moves the industry to an equilibrium more favorable to that firm thus creating value for the borrower it is shown below that it is optimal for all firms to acquire bank loan commitments altering the industry equilibrium in the process

bank forward lending in alternative funding environments this paper examines the effects of loan commitments on bank lending behavior in both deposit funding and liability management environments assuming that the bank lends exclusively under commitments and that the number of commitments exercised is uncertain the bank must choose its supply of commitments given this choice the bank becomes a passive lender to commitment holders our focus on forward credit markets sheds new light on the private bankers assertion that they do not directly determine their level of lending but merely accommodate the credit needs of their customers similarly the central banker s claimed inability to control monetary aggregates in the short run becomes understandable in a new context it is shown that the advent of liability management will reduce the volume of loan commitments and the expected size of the bank and of the banking system it is also shown that increased uncertainty regarding borrower takedown behavior diminishes the volume of commitments expected bank and banking system size

financial contracts when costs and returns are private abstract most bank loans are made under some form of commitment contract like a line of credit we show that a commitment dominates an ordinary debt contract when investment projects have random returns that are costly to observe and random costs that are completely unobservable the fees charged on commitments reduce default risk which in turn permits larger loans than under ordinary debt contracts our results contribute to the theoretical literature on financial intermediation and square with several stylized facts about commitment contracts

bank credit rationing and the customer relation abstract this paper investigates the theory that preference in situations of bank rationing is given to those customers with the strongest customer relation it has shown that within a certainty model where competitive pressure among banks requires full compensation for other bank relationships neither deposit levels nor intertemporal demand would produce the preferential treatment claimed it has also been shown that the prime borrowers would be unable to bargain effectively for credit line protection from such occasions of credit restriction

competitive equilibrium in the credit market under asymmetric information abstract we study a competitive credit market equilibrium in which all agents are risk neutral and lenders a priori unaware of borrowers default probabilities admissible credit contracts are characterized by the credit granting probability the loan quantity the loan interest rate and the collateral required the principal result is that in equilibrium lower risk borrowers pay higher interest rates than higher risk borrowers moreover the lower risk borrowers get more credit in equilibrium than they would with full information no credit is rationed and collateral requirements are higher for the lower risk borrowers

an economic rationale for the pricing structure of bank loan commitments abstract an economic rationale is provided for the competitive equilibrium deployment of commitment and usage fees in loan commitment pricing it is shown that under perfect information assessing both fees rather than just one permits optimal risk sharing when the borrower is privately informed about its probability of future commitment utilization commitment and usage fees can be used to induce borrowers to identify themselves by self selection through contract choice the equilibrium characterized here is dissipative and thus raises the usual existence questions which are addressed in the paper

international asset pricing and portfolio diversification with time varying risk we test the conditional capital asset pricing model capm for the world s eight largest equity markets using a parsimonious generalized autoregressive conditional heteroskedasticity garch parameterization our methodology can be applied simultaneously to many assets and at the same time accommodate general dynamics of the conditional moments the evidence supports most of the pricing restrictions of the model but some of the variation in risk adjusted excess returns remains predictable during periods of high interest rates our estimates indicate that although severe market declines are contagious the expected gains from international diversification for a u s investor average 2 11 percent per year and have not significantly declined over the last two decades

design and rating of risk contingent credit for balancing business and financial risks for kenyan farmers abstractweather related agricultural risks and limited access to credit are serious impediments to agricultural productivity and growth in developing countries this paper describes a novel insuran

optimal futures positions for large banking firms in this paper we extend earlier work on hedging models so that uncertainty about both deposit supply and loan demand is incorporated as well as random rates of return on loans and cd s our model suggests that the optimal forward position is the sum of three ratios that should be estimated simultaneously using bank specific data the optimal hedge ratios are estimated in both the pre deregulation and deregulation subperiods our results show that previous studies of bank hedging with interest rate futures have greatly overstated a the volume of short futures positions that banks should take and b the degree of homogeneity of optimal hedge ratios across the banking system similarly deregulation has not uniformly affected the interest rate risk borne by different institutions as the financial futures markets have matured there has been increased interest in the use of these markets to hedge the risks faced by financial intermediaries the literature on hedging with financial futures has grown dramatically with studies by ederington 4 franckle 5 schweser cole and d antonio 17 arak and mccurdy 2 dew and martell 3 picou 13 ho and saunders 6 koppenhaver 8 and morgan and smith 9 10 with the exception of some of the more recent work most articles that have addressed the use of financial futures have described the hedging problem as a relatively simple risk management situation even studies that have focused on intermediaries have viewed the hedging problem as one dimensional the intermediary wants either to hedge a cash position in a security such as a t bill or to hedge an anticipated issue of a cd this viewpoint does not incorporate the complexity of the situation faced by intermediaries or other firms that may be subject to uncertainty from a variety of sources the more recent literature incorporates some of this additional uncertainty by considering quantity risk in lending partial takedown of loan commitments or deposits for which the intermediary acts as a rate setter seldom are both sources of uncertainty incorporated in the same model for example koppenhaver 8 allows for quantity uncertainty in deposits and in the rate that the intermediary will pay on cd s but not for uncertainty in loan rates or loan quantity morgan and smith 9 allow for uncertainty in loan quantity but not in deposit supply in this paper we extend koppenhaver s 8 model and that of morgan and smith 9 so that uncertainty about both deposit supply and loan demand is incorporated as well as random rates of return on loans and cd s

enforcing time inconsistent regulation i introduction passage of legislation is merely the beginning of the regulatory task the successful translation of policy from legislative debate into regulation is not guaranteed implementation may be especially problematic for regulations that are time inconsistent regulations have the potential for time inconsistency if the government cannot credibly commit itself to enforcement of the original legislation at every relevant point in time consider a law that sets a regulatory standard to be enforced several years in the future the regulation s implementation may take the following course for any given enforcement period first firms are expected to engage in long term investment to move towards meeting the standard second after that investment has been completed an enforcement agency reviews and has the opportunity to modify the standards shortly before the date at which they are to be enforced finally after the agency s review firms make short term investment to meet the standard this process may be repeated for subsequent enforcement periods this sequence of events presents inherent problems for the enforceability of a regulation during the long term investment stage regulated firms know that the relevant administrative agency may be unable to credibly bind itself to future actions given this firms may believe that the agency s enforcement posture depends on their own actions firms may therefore be able to act strategically to induce the regulatory agency to lower the relevant standard before its enforcement date facing such incentives firms may not undertake the desired long term investments upon review the enforcement agency could find that requiring firms to make short term investments to meet the standard may involve substantial social costs facing such costs the agency may grant regulatory relief and relax the standard in these circumstances society s welfare may be greater if firms engaged in the necessary long term investment to meet the standard prior to the enforcement date in order to force firms to make the necessary long term investment however the enforcement agency may need to threaten to punish firms by enforcing the original standard even if firms long term investments are below optimal levels the need to threaten this punishment places the agency in a difficult position if firms do not undertake the desired long term investments it may be in the agency s and society s interests to relax the initial standard to avoid the potentially higher costs associated with short term investments firms will understand this and thus make no ex ante investment towards meeting the standard the regulation is therefore time inconsistent and unenforceable in the case of automobile fuel economy regulations for example congress in 1975 set standards for model years 1978 and afterwards but provided the executive branch in the form of the national highway traffic safety administration nhtsa with discretion to modify the standard for model years after 1984 automobile manufacturers then undertook long term product investment that may have been initiated in order to meet the standards for model years 1985 1986 and 1989 however firms were able to gain regulatory relief from nhtsa at the start of the relevant model years if relief had not been granted there would have been insufficient time for further product innovation and firms would have had to meet the standard by eliminating less fuel efficient vehicles from their fleets a strategy that would have been costly not only to themselves but to their employees and customers as well see kleit 1990 and greene 1991 on the other hand in the 1970s the congress passed laws to be enforced by the environmental protection agency that required automobile companies to invest millions of dollars in pollution control devices while automobile firms achieved some delay in the implementation of the law the devices ultimately were installed

impacts of fuel economy improvements on the distribution of income in the u s abstract we estimate the impacts of passenger car and light truck fuel economy improvements in the u s since 1975 on the real monetary incomes of u s households by income quintile over the period 1980 2014 we limit our analysis to the direct monetary impacts fuel savings minus increased vehicle costs and do not attempt a full welfare analysis we include all vehicle purchases new and used household fuel expenditures come from the u s consumer expenditures surveys ces costs of increased new passenger car and light truck fuel economy were obtained from four national research council nrc studies plus a literature review of earlier estimates the nrc cost functions provide a unique time series of technology supply functions constructed by balanced expert panels and comprised of specific technologies proven to increase fuel economy effects of fuel economy improvements on used vehicle prices are based on an analysis of the ces data retrospective analysis indicates that all income quintiles received net savings and that the effect on the distribution of income was progressive a prospective analysis of future fuel economy improvements produced similar results sensitivity analysis indicates that these findings are relatively robust

commercial paper bank reserve requirements and the informational role of loan commitments abstract an explanation is provided of the often observed purchase of back up bank loan commitments by corporations immediately preceding their sale of dealer placed commercial paper since loan commitments are typically viewed as hedging instruments our paper explains why a risk neutral corporation would purchase this type of instrument and how it is priced it is assumed that while firms know their own credit risks neither banks nor the paper market can distinguish between some credit applicants we show that the purchase of a commitment can identify these firms to the market the equilibrium is partially revealing of the firms with unobservable quality those with higher quality identify themselves by purchasing commitments while those with lower quality sell unbacked paper and are pooled together unbacked paper is sold also by firms whose quality is observable unidentified firms in the lowest quality range do not sell commercial paper

inflation risk and international asset returns abstract we show that inflation risk is priced in international asset returns we analyze inflation risk in a framework that encompasses the international capital asset pricing model icapm of adler and dumas 1983 in contrast to the extant empirical literature on the icapm we relax the assumption that inflation rates are constant we estimate and test a conditional version of the model for the g5 countries france germany japan the uk and the us over the period 1975 1998 and find evidence of statistically and economically significant prices of inflation risk in addition to priced nominal exchange rate risk our results imply a rejection of the restrictions imposed by the icapm in an extension of our analysis to 2003 we show that even after the termination of nominal exchange rate fluctuations in the euro area in 1999 differences in inflation rates across countries entail non trivial real exchange rate risk premia

a note on the nonexistence of a rationing equilibrium in the besanko thakor model it is shown that in a credit market with two types of borrowers distinguished only through their not commonly known probability of default and with a perfectly elastic supply of deposits a pair of contracts with random rationing of less risky loan applicants cannot be a nash equilibrium copyright 1993 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

symbiosis vs crowding out the interaction of formal and informal credit markets in developing countries abstract it is a common observation in many developing countries that enterprises are active borrowers in both formal and informal credit markets we propose a model in which the formal sector s superior ability in deposit mobilization is traded off against the informational advantage that lenders in the informal sector enjoy the formal sector can screen borrowers by providing only partial financing for projects thereby forcing borrowers to resort to the informal sector for the remainder of the loan we use the model to predict how the market structure responds to changes in the environment and we consider the policy implications of various forms of government intervention

the higher cost of follow up loans this paper uses unique data and looks at the interest margin for follow up finance vis a vis first round finance applying data for asset values we examine the substitution between collateral and interest margins consistent with the theories of bester 1985 besanko and thakor 1987 and the empirical evidence of cressy 1996b we find that a trade off between collateral and interest margins exists our main result indicates that follow up finance is more expensive for loans but not for overdrafts we suggest that a relatively fixed asset base land and buildings as seen in higher security to loan values raises the price and risk of successive financial increments this explains the higher relative cost of follow up finance to borrowers

an analysis of bank loan rate indexation this paper examines the economic rationale for the use of bank loan commitments and the effect on the allocation of bank credit of indexing the loan rate offered through the commitment to the prime a simple model of the loan market is constructed and used to examine the effect changes in loan demand and the cost of bank funds have on the allocation of bank credit under indexation it is shown that indexing implies changes in the relative cost of borrowing for certain groups of bank customers for nonprime customers an increase in the cost of bank funds results in a decline in the relative cost of borrowing under commitments the pattern of commitment use is found to be consistent with the predictions of the model recent surveys have found that the majority of commercial and industrial loans are made under pre existing loan commitments these surveys also find that for most commercial and industrial loans the interest rate is tied or indexed to the prime rate although indexing loan rates is widespread there has been little theoretical or empirical work on the effect of this pricing scheme on the allocation of bank credit the paucity of research in this area is surprising considering the frequency with which indexed contracts are used and the current controversy surrounding the use of the prime as an index 2 the purpose of this paper is to provide an analysis of the effect of indexed loan rates on the intertemporal allocation of bank credit a simple model of the loan market is constructed and used to examine the effect changes in the cost of bank funds and changes in loan demand have on the allocation of credit under indexation use of this model demonstrates that indexed contracts do not result in an efficient allocation in the sense that the resulting allocation does not replicate the allocation obtained with complete contingent contracts finally the model is tested empirically using data on commitment use from the quarterly survey of the terms of commercial bank lending it is shown that indexing

the motivations for loan commitments backing commercial paper a comment on commercial paper bank reserve requirements and the informational role of loan commitments abstract bank loan commitments backing commercial paper issues other than credit guarantees insure against systematic liquidity risk by providing an alternative to rolling over maturing paper the form of these commitment contracts the fact that they are issued only by banks and the determinants of variation across issuers in the extent of commitment backing are consistent with their role as liquidity insurance and not with a recently espoused view that commitments signal firm quality

a representative consumer theory of the logit model the log it model is usually derived from a discrete choice approach with stoc hastic utilities it is shown here that the logit demand system may also be derived from the maximization of a deterministic entropy type utility the latter may be interpreted as the preference function of a representative consumer with variety seeking behavior this altern ative view suggests a generalization of the standard logit which allo ws total demand to be determined endogenously copyright 1988 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

tradable fuel economy credits competition and oligopoly corporate average fuel economy cafe regulations specify minimum standards for fuel efficiency that vehicle manufacturers must meet independently we design a system of tradeable fuel economy credits that allows trading across vehicle classes and manufacturers with and without considering market power in the credit market we perform numerical simulations to measure the potential cost savings from moving from the current cafe system to one with stricter standards but that allows vehicle manufacturers various levels of increased flexibility we find that the ability for each manufacturer to average credits between its cars and trucks provides a large percentage of the potential savings as expected the greatest savings come from the greatest flexibility in the credit system market power lowers the potential cost savings to the industry as a whole but only modestly loss in efficiency from market power does not eliminate the gains from credit trading

toward a theory of bank loan commitments abstract the characteristics of fixed and variable rate bank loan commitments are analyzed in a contingent claims framework and valuation expressions are derived for these commitments the valuation expressions are used to present estimates of the impact of interest rate uncertainty on the liability assumed by a bank issuing loan commitments finally a simple two period asymmetric information model is employed to explain the recent trend among bankers to substitute variable rate commitments for their fixed rate counterparts

applied welfare economics with discrete choice models economists have been paying increasing attention to the study of situations in which consumers face a discrete rather than a continuous set of choices such models are potentially very important in evaluating the impact of government programs upon consumer welfare but very little has been said in general regarding the tools of applied welfare economics indiscrete choice situations this paper shows how the conventional methods of applied welfare economics can be modified to handle such cases it focuses on the computation of the excess burden of taxation and the evaluation of quality change the results are applied to stochastic utility models including the popular cases of probit and logit analysis throughout the emphasis is on providing rigorous guidelines for carrying out applied work this abstract was borrowed from another version of this item

repossession and the democratization of credit we exploit a 2004 credit reform in brazil that simplified the sale of repossessed cars used as collateral for auto loans we show that the reform expanded credit to riskier self employed borrowers who purchased newer more expensive cars the legal change has led to larger loans with lower spreads and longer maturities although the credit reform improved riskier borrowers access to credit it also led to increased incidences of delinquency and default our results shed light on the consequences of a credit reform and highlight the crucial role that collateral and repossession play in the liberalization and democratization of credit

is relationship lending special evidence from credit file data in germany the german financial market is often characterized as a bank based system with strong bank customer relationships the corresponding notion of a housebank is closely related to the theoretical idea of relationship lending it is the objective of this paper to provide a direct comparison between housebanks and normal banks as to their credit policy therefore we analyze a new data set representing a random sample of borrowers drawn from the credit portfolios of five leading german banks over a period of five years we use credit file data rather than industry survey data and thus focus the analysis on information that is directly related to actual credit decisions in particular we use bank internal borrower rating data to evaluate borrower quality and the bank s own assessment of its housebank status to control for information intensive relationships the major results of our study support the view that housebanks are able to establish a distinct behavioral pattern consistent with the idea of long term commitment we find that housebanks do provide liquidity insurance in situations of unexpected deterioration of borrower ratings with respect to loan pricing we find no evidence for intra or intertemporal price differentiation related to housebanking

moral hazard and secured lending in an infinitely repeated credit market game we analyze repeated moral hazard with discounting in a competitive credit market with risk neutrality even without learning or risk aversion long term bank borrower relationships are welfare enhancing the main result is that the borrower obtains an infinite sequence of unsecured loans at below spot market cost following the first good project realization this contract produces first best action choices prior to this stage the borrower gets secured loans with above market borrowing cost the optimal contract thus displays a selective memory feature taking only one of two forms at any given point in time depending on prior history we consider an infinitely repeated bank borrower relationship with moral hazard and universal risk neutrality and explore the ramifications of credit contract duration when the two well known benefits of long term contracting learning and improved risk sharing are absent our objectives are twofold the first is to analyze an infinitely repeated game with discounting in a credit market context we thus relate the theory of repeated games to financial intermediation theory particularly to issues of moral hazard and collateral related distortions the second objective is to understand noteworthy stylized facts of credit markets such as durability in credit relationships lower borrowing costs for established borrowers and unsecured loans for established borrowers versus secured loans for newer borrowers while these practices may be partly due to learning we show that learning is not essential to rationalize them even if information decays rapidly and banks learn nothing about borrowers through time these aspects of credit contracting arise in a repeated game context our main results are as follows first despite universal risk neutrality and the absence of learning a durable bank relationship benefits the borrower 2 the intuition is that the long term contracting permitted by a durable relationship enables the bank to efficiently tax and subsidize the borrower through time to reduce the use of costly collateral second the average welfare loss due to moral hazard per period is positive even as the time horizon goes to infinity third the optimal infinite horizon contract has the striking property that following the period

comparing flexibility mechanisms for fuel economy standards since 1975 the corporate average fuel economy cafe program has been the main policy tool in the us for coping with the problems of increasing fuel consumption and dependence on imported oil the program mandates average fuel economy requirements for the new vehicle sales of each manufacturer s fleet with separate standards for cars and light trucks the fact that each manufacturer must on its own meet the standards means that the incentives to improve fuel economy are different across manufacturers and vehicle types although the problems associated with fuel consumption do not make such distinctions this paper evaluates different mechanisms to offer automakers the flexibility of joint compliance with nationwide fuel economy goals tradable cafe credits feebates output rebated fees and tradable credits with banking the policies are compared according to the short and long run economic incentives as well as to issues of transparency implementation administrative and transaction costs and uncertainty

collateral type of lender and relationship banking as determinants of credit risk abstract this paper analyses the determinants of the probability of default pd of bank loans we focus the discussion on the role of a limited set of variables collateral type of lender and bank borrower relationship while controlling for the other explanatory variables the study uses information on the more than three million loans entered into by spanish credit institutions over a complete business cycle 1988 2000 collected by the bank of spain s credit register central de informacion de riesgos we find that collateralised loans have a higher pd loans granted by savings banks are riskier and finally that a close bank borrower relationship increases the willingness to take more risk

competitive equilibrium with type convergence in an asymmetrically informed market this article studies an asymmetric information game with type convergence in which under some realizations of a common uncertainity inducing informed agents to reveal their types through self selection by contract choice is either costly or impossible under other realizations self selection permits costless distinctions between informed agents i obtain sufficient conditions under which contracting with options prior to the realization of the common uncertainity leads to the existence of a perfectly separating costless nash equilibrium applications to variable rate loan commitments and life insurance contracting are discussed article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

bank forward lending a note increase in the bank s borrowing cost similarly leads to reduced commitment sales and expected bank lending a stochastic increase in customer takedowns is found to have an ambiguous effect on the bank s commitment decision the force of these results is limited because all bank lending is assumed to be done via loan commitments although most bank lending particularly to businesses is indeed done via commitments see hanweck 4 the possibility of spot market lending can be expected to influence the bank s commitment decision for example if the bank initially chooses its commitment volume and the customer subsequently determines the fraction of commitments to exercise the bank commonly retains the option of purchasing and or selling additional loans in the spot market after the customer s takedown is realized moreover the bank s opportunity to transact in the spot market after realizing the customer s takedown can be expected to influence its initial choice of commitments the purpose of this note is to examine whether the dgk results continue to hold in a setting where banks have spot market lending opportunities the model used here incorporates two significant modifications whereas both deposits d and the takedown fraction 0 were random variables in dgk we now have only one random variable the spot interest rate s realized after the bank chooses its commitment volume the takedown fraction is consequently expressed as a deterministic function of the spot interest rate second a more general bank borrowing cost function mc l s depending on the bank s level of lending l and the spot interest rate obviates the need for a deposits variable with our slightly altered formulation we examine three cases

loan commitment contracts terms of lending and credit allocation this paper analyzes the structure of loan commitment contracts and the interrelationships among their component parameters lenders offer borrowers a set of loan packages from which the latter may choose that package found to be most appealing borrowers may trade off changes in any loan parameter in exchange for other adjustments the borrower at this time may purchase a larger credit ration for a price supporting empirical evidence is presented recently researchers have begun to study the determinants of loan commitment or line of credit contracts such contracts play an extremely important role in bank credit allocation according to the federal reserve bulletin over 70 of u s commercial and industrial loans are made under loan commitment contracts given the central importance of the institution it is not surprising that it is the subject of a growing literature loan commitment contracts have importance both at the micro level in terms of the bank customer relationship and at the marco level in terms of the channels of operation of monetary policy in this paper we seek to present and test empirically an analytic model of loan commitment contracts our paper differs from most previous work in that we include empirical analysis of credit allocation moreover most previous theoretical work on the subject has concentrated on the specific issue of pricing of the contracts often using an approach based on option theory and not on the quantity allocation of credit and its determinants we are particularly interested in the determinants of the quantitative allocation of credit to bank customers and in the composition of and trade offs among the various parameters comprising such a loan commitment package our model helps explain how contract terms are established in the market and will illuminate the institutional framework of commercial lending a view of the credit contract as a package of loan terms has been implied recently in connection with the credit rationing problem studies by azzi and cox 21 arzac schwartz and whitcomb 11 and koskela 81 show that the

robust financial contracting and the role of venture capitalists we derive a role for inside investors such as venture capitalists in resolving various agency problems that arise in a multistage financial contracting problem absent an inside investor the choice of securities is unlikely to reveal all private information and overinvestment may occur an inside investor however always makes optimal investment decisions if and only if he holds a fixed fraction contract where he always receives a fixed fraction of the project s payoff and finances that same fraction of future investments this contract also eliminates any incentives of the venture capitalist to misprice securities issued in later financing rounds in this article we develop a model of financial contracting with multiple investment decisions and show how conflicts of interest and informational asymmetries can be effectively resolved by an inside investor i e an investor who not only provides capital but also works closely with the firm monitors it frequently and is generally very well informed about the firm s prospects and investment opportunities venture capitalists are obvious examples of inside investors and their function has been an important motivation for this article banks especially in japan and germany are also involved in monitoring and can be viewed as playing the role of inside investors in this article we examine the potential benefits of inside investors in a context where there are no restrictions beyond limited liability on the type of financial contracts that can be written we address a basic financial contracting problem involving an entrepreneur who has an idea for a project but does not have sufficient capital to fund it an important assumption is that there are several stages in the project s development and that a decision must be made at each stage whether the project should be continued or abandoned if the project is continued the amount of additional capital to be invested must also be determined we assume that the entrepreneur as an insider observes private information about the project s profitability at each stage this information is not

competition risk neutrality and loan commitments abstract we rationalize fixed rate loan commitments forward credit contracting with options in a competitive credit market with universal risk neutrality future interest rates are random but there are no transactions costs borrowers finance projects with bank loans and choose ex post unobservable actions that affect project payoffs credit contract design by the bank is the outcome of a non cooperative nash game between the bank and the borrower the initial formal analysis is basically in two steps first we show that the only spot credit market nash equilibria that exist are inefficient in the sense that they result in welfare losses for borrowers due to the bank s informational handicap second we show that loan commitments because of their ability to weaken the link between the offering bank s expected profit and the loan interest rate enable the complete elimination of informationally induced welfare losses and thus produce an outcome that strictly pareto dominates any spot market equilibrium perhaps our most surprising result is that if the borrower has some initial liquidity it is better for the borrower to use it now to pay a commitment fee and buy a loan commitment that entitles it to borrow in the future rather than save it for use as inside equity in conjunction with spot borrowing

loan commitments investment decisions and the signalling equilibrium abstract this paper analyzes the use of loan commitments to finance future risky investment projects when the capital market is informed of a firm s project quality having a loan commitment would lead the firm to overinvest if banks are competitively rational the cost of this overinvestment would be borne by the firm making the loan commitment contract unattractive when the project quality is private information firms will signal their project qualities through purchasing loan commitments this signal is credible because purchasing a loan commitment poses overinvestment cost to the firm this paper establishes and characterizes this dissipative signalling equilibrium

short run pricing strategies to increase corporate average fuel economy short run pricing strategies to increase corporate average fuel economy i introduction in 1974 the average fuel efficiency of new automobiles sold in the united states reached a low of 14 2 miles per gallon mpg close on the heels of the arab opec oil embargo of 1973 74 and the ensuing petroleum price shocks congress passed the 1975 energy policy and conservation act the act required each manufacturer to meet sales weighted corporate average fuel economy cafe standards beginning with 18 mpg in 1978 and gradually increasing each year to 27 5 mpg in 1985 figure 1 the expressed purpose of the cafe standards was to stimulate the development of technology to improve fuel efficiency the possibility of raising the relative prices of the least energy efficient models as a strategy to meet the standards was considered but only as a last resort 1 although there continues to be intense debate as to whether fuel price increases or the cafe regulations drove the fuel economy improvements of the 1970s and 80s several studies agree that improvements in automotive engineering and design rather than pricing strategies played an overwhelmingly dominant role 2 no empirical evidence supports the effectiveness of using pricing strategies to increase the overall level of automotive fuel economy every year since 1985 automobile manufacturers have successfully petitioned the national highway traffic safety administration which determines the level of the cafe standard to reduce the target from 27 5 to 26 mpg in 1986 88 and 26 5 mpg in 1989 in each case at least one manufacturer argued that it would be unable to meet the original target with its planned product offerings and would have to resort to other strategies that would result in unacceptable economic costs this paper explores a method of estimating the costs of achieving fuel economy goals when pricing strategies are used to alter the distribution of sales the method employs the closed form equation for consumers surplus derived from the multinational logit model of discrete choice discussed by mcfadden 1973 and assumes that manufacturers must bear the full cost of meeting the fuel economy target the estimated cost represents an upper bound on the losses firms would incur by setting prices to minimize loss of profit using econometric estimates of the sensitivity of vehicle choice to vehicle price together with market shares and fuel efficiencies for 1986 i estimate the costs of short term improvements in average fuel economy using pricing strategies for general motors ford and chrysler minor adjustments of up to 1 mpg cost 1 2 percent of the price of a 10 000 car for improvements of 2 mpg or more however pricing strategies become a costly way to improve fuel economy the technique also estimates the market shares for each car line that correspond to the pricing solution it thereby identifies which car lines would be most affected the technique produces precise price changes and market shares for each car line readers should not place too much weight on the apparent precision but should consider the estimates as an approximation the usefulness of which lies in measuring the difficulty of meeting fuel economy targets via pricing strategies alone one can compare the size of these estimates to the fines for failing to meet the standards 50 per mpg per car or to typical manufacturer rebates to stimulate sales often 100 to 2 000 per car ii a formulation of the pricing problem faced with the cafe requirements a firm can respond with engineering and design improvements or by raising the prices of less efficient models and lowering the prices of those that exceed the standard technological improvements generally require a lead time of three to five years very large fluctuations in fuel prices have occurred in far shorter perids figure 1 creating the risk that a manufacturer s product offering could be out of step with the market

collateral and competitive equilibria with moral hazard and private information the authors examine equilibrium credit contracts and allocations under different competitivity specifications and explain the economic roles of collateral under these specifications both moral hazard and adverse selection are considered the principal message is that how a competitive equilibrium is conceptualized significantly affects the characterization of equilibrium credit contracts specifically some well known results in the rationing literature are shown to rest delicately on the adopted equilibrium concept two somewhat surprising results emerge first high quality borrowers with unlimited collateral may be priced out of the market despite the bank having idle deposits second high quality borrowers may put up more collateral this paper explores the allocational consequences of alternative credit market competitivity specifications and explains the different economic roles of collateral under these specifications we model banks that lend to borrowers financing projects with payoffs depending on a priori unknown borrower attributes and ex post unobservable borrower actions borrowers are assumed to have unconstrained access to collateral our analysis is based on two concepts of competitive equilibrium under both banks compete in the sense that they earn zero expected profits however under the first concept of equilibrium ti as in jaffee and russell 11 all rents accrue to borrowers whereas under the second concept t2 all rents accrue to depositors as in stiglitz and weiss 17 our research makes two main points first we demonstrate that the manner in which a competitive equilibrium is conceptualized importantly influences the characterization of equilibrium credit allocations specifically one of the findings is that the rationing equilibria of stiglitz and weiss 17 and others should be viewed as rather delicate things in that they are very sensitive to the competitivity specification used for instance

new vehicle characteristics and the cost of the corporate average fuel economy standard by 2016 the corporate average fuel economy cafe standard will increase by 40 this article focuses on the medium run effects of fuel economy regulation we estimate consumers willingness to pay for vehicle characteristics we employ a novel empirical strategy that accounts for the characteristics endogeneity by using variation of engine models used in vehicle models the results imply that consumers value an increase in power more than an increase in fuel economy simulations of the effects of an increase in the cafe standard suggest that regulatory costs are significantly smaller in the medium run than in the short run

bank loan commitments and interest rate volatility bank loan commitments are examined in the context of option pricing models and a valuation formula is obtained the partial takedown phenomenon which is both distinctive and vexatious is considered in detail finally estimates of the value of u s bank loan commitments and their sensitivity to interest rate changes are provided

tests of asset pricing with time varying expected risk premiums and market betas tests of asset pricing models are developed that allow expected risk premiums and market betas to vary over time these tests exploit the relation between expected excess returns and current market values using weekly data for 1963 through 1982 on ten common stock portfolios formed according to equity capitalization a single risk premium model is not rejected if the expected premium is time varying and is not constrained to correspond to a market factor conditional mean variance efficiency of a value weighted stock index is rejected and the rejection is insensitive to how much variability of expected risk premiums is assumed financial economists have studied valuation models in which securities expected returns are related to the covariances of unanticipated returns with the return on the market portfolio or with other risk factors empirical tests of such models typically have employed unconditional sample moments of returns recent studies provide mounting evidence that expected returns change over time with information such evidence presents an opportunity to develop new approaches for evaluating and implementing asset pricing models that exploit this time variation this paper presents new tests of financial valuation models in which expected returns are allowed to vary over time time series of relative

evaluation of credit guarantee policy using propensity score matching in this article we evaluate the effect of the credit guarantee policy by comparing a large sample of guaranteed firms and matched non guaranteed firms from 2000 to 2003 the sample firms are compared with respect to growth rates of different performance indicators including productivity sales employment investment r d wage level and the survival of firms in the post crisis period in order to avoid the selectivity problem propensity score matching methodologies are adopted results suggest that credit guarantees influenced significantly firms ability to maintain their size and increase their survival rate but not to increase their r d and investment and hence their growth in productivity moreover due to the adverse selection problem firms with lower productivity were receiving guarantees

involuntary unemployment and worker self selection abstract consider a firm that lacks information about the reservation wage or ability of any specific worker but is aware that workers with higher reservation wages tend to be more able on average we show that under a simple condition that the efficiency wage exceeds the lowest reservation wage the optimal hiring policy for the firm involves 1 no wage discrimination and 2 rationing of jobs when demand for its product is low the result also extends to the case where hours of work are variable provided each worker is most productive when working a strictly positive number of hours per week

investment opportunities and corporate demand for lines of credit abstract the behavior of a risk neutral corporation in selection of a line of credit is modeled in a new framework where demand for credit lines by a firm arises from the stochastic arrival in continuous time of short lived opportunities to capture investment projects the firm needs speed and secrecy to capture projects before competitors the firm chooses a credit line that balances its up front commitment cost against the expected extra cost of borrowing in the spot market upon exhaustion of its credit line the firm s demanded credit line depends upon both relative pricing within the contract and the nature of the firm s growth opportunities interestingly while credit line demand is positively related to business growth prospects it is potentially negatively related to uncertainty in those prospects

the role of sentiment in global risk premia this article examines the role of sentiment for global risk premia we analyse whether the global risk premia on macroeconomic fundamentals can be estimated more thoroughly if sentiment is included as additional conditioning information the analysis is performed in the framework of a conditional multiple beta pricing model the focus of analysis is the asset excess returns of the g 7 stock markets in the period from february 1999 to february 2012 the obtained results indicate that sentiment as conditioning information is able to contribute to the explanation of the general macroeconomic risk premia

the use of bank lines of credit in corporate liquidity management a review of empirical evidence abstract this paper reviews empirical evidence on the use of bank lines of credit as a source of corporate liquidity traditional explanation for lines of credit is that they provide insurance against liquidity shocks in much the same as way hoarding cash does however recent empirical research suggests that access to lines of credit is contingent on the credit quality of the borrower as well as the financial condition of the lender these findings suggest that lines of credit are an imperfect substitute for cash as a source of corporate liquidity

sharing contracts marginalisation adverse selection and markup calculation this paper proposes a new approach to explain the dominance in the islamic banking market of markup contracts at the expense of sharing ones we show that the dual pricing practised in this market produces an additional or artificial dimension of adverse selection which is causing the sharing contracts marginalization we suggest specialized use of two islamic contractual categories as a device for eliminating artificial adverse selection we suggest also an endogenous calculation of the markup that is independent of the interest rate based on the financing cost unification this approach allows the deduction of default and liquidity risk premiums

asymmetric information collateral and moral hazard in a credit market characterized by a priori asymmetric information collateral not only can identify credit applicants but also can result in moral hazard involving the borrower s use of pledged assets the borrower s other alternatives are to apply for unsecured bank credit and be priced as average or to acquire financing by selling an asset and subsequently renting it for continued use the optimal secured loan contract for higher quality firms is shown to involve overcollateralization there is underinvestment relative to first best in maintenance of the pledged assets but overinvestment relative to the level that would be chosen without bank monitoring self financing and unsecured credit are chosen by the intermediate and lowest quality groups respectively

policy watch the economics of fuel economy standards one of the most hotly contested of all energy policy issues involves corporate average fuel economy or cafe standards for new cars and light duty trucks tighter standards would reduce gasoline consumption and hence both greenhouse gas emissions as well as this country s vulnerability to oil price shocks but they would also increase the price of new vehicles worsen traffic congestion and depending on how they are phased in possibly even reduce occupant safety these effects are amenable to economic analysis and we review the evidence to date bearing on this interesting and important question

automobile quality choice under pollution control regulation in this paper we develop a modified quality choice model to study the effects of various mobile source air pollution control regulations we have a single producer that supplies a fixed number of car types two but faces a spectrum of consumers differing in their valuation of car quality the car manufacturer chooses the quality levels of the two car types as well as the sales mix between the two types and the size of the market it wishes to supply by endogenizing both the sales mix and the market size while still allowing quality to be a choice variable we are able to more completely analyze the impact of any car pollution control regulation existing studies of this impact either focus on the model line adjustment response shifts in the quality array or on the price adjustment response changes in the sales mix and market size in allowing for both the model line and the price adjustment options we find that the corporate average fuel efficiency cafe standard is unambiguously welfare superior to the low emission vehicle quantity constraint lev and zero emission vehicle zev programs we also show that the effects of the cafe standard are not equivalent to those of a fuel tax as previously found and that for a given car pollution target the former is preferred to the latter

the effect of vehicle fuel economy standards on technology adoption abstract many countries are tightening passenger vehicle fuel economy standards this paper provides the first empirical evidence on the effects of fuel economy standards on technology adoption we investigate changes in the rate and direction of technology adoption that is the extent to which technology is used to increase fuel economy at the expense of other vehicle attributes we find that recent changes in u s and european standards have both increased the rate of technology adoption and affected the direction of technology adoption producers reduced horsepower and torque compared to a counterfactual in which fuel economy standards remained unchanged we estimate opportunity costs from reduced horsepower and torque to be economically significant relative to the gains from fuel savings

fixed rate loan commitments take down risk and the dynamics of hedging with futures this paper develops a normative model to analyze the hedging and fee pricing decisions of a financial institution supplying fixed rate loan commitments to its customers in supplying fixed rate loan commitments the financial institution hereafter referred to as bank is assumed to act as an agent that transforms commitment risk through the use of financial futures contracts while most pre vious loan commitment models have analyzed the interest rate or price risk the bank faces in supplying fixed rate loan commitments they either have ignored or assumed away the loan take down or quantity risk l in general by making a formal fixed rate loan commitment the bank exposes itself to both a price and a quantity risk specifically a formal loan com mitment prespecifies the maximum size of the loan the purpose of the loan of ten project specific as well as the interest rate and fee to be paid by the borrower 14 15 however while a formal loan commitment imposes a contractual re quirement on the bank to supply funds up to a maximum amount at an agreed rate of interest the expected size of the loan to be taken down is often uncertain the reason is that for project specific lines of credit the amount taken down will depend on the future state s of the world that are revealed to the borrower at the end of the commitment period as well as on the limitations and constraints im posed on the use of funds in the loan commitment contract for example construction delays and other market imperfections that hamper a planned invest

a matter of relational style loan officer consistency and exchange continuity in microfinance social scientists have long considered what mechanisms underlie repeated exchange three mechanisms have garnered the majority of this attention formal contracts relational contracts and relationally embedded social ties although each mechanism has its virtues all three exhibit a common limitation an inability to fully explain the continuation and stability of intertemporal exchange between individuals and organizations in the face of change drawing on extensive quantitative data on approximately 450 000 microfinance loans made by a microfinance institution in mexico from 2004 to 2008 that include random assignment of loan officers this research proposes the concept of relational styles to help explain how repeated exchange is possible in the face of personnel change we define relational styles as systematically reoccurring patterns of interaction employed by social actors within and across exchange relationships in this paper between microfinance clients and loan officers we show that relati

the importance of equity finance for r d activity this article analyzes the importance of equity finance for the r d activity of small and medium sized enterprises we use information on almost 6 000 german smes from a company survey using the intensity of banking competition at the district level as an instrument to control for endogeneity we find that a higher equity ratio is conducive to a higher r d intensity owners may only start r d activities if they have the financial resources to sustain them until successful completion we find a larger influence of the equity ratio for young companies equity may be more important for young companies which have to rely on the original equity investment of their owners since they have not yet accumulated retained earnings and can rely less on bank financing

basis risk partial takedown and hedging by financial intermediaries in this paper we provide a model of futures market equilibrium in which both financial intermediaries and their customers are able to hedge both quantity and price risk the interplay between alternative loan commitment arrangements and hedging decisions is examined in some detail as an example we show conditions under which futures contracts can be used in conjunction with a particular loan pricing scheme to replicate another pricing mechanism by considering both input and output price uncertainty we argue that due to the built in hedge on their balance sheets the equilibrium hedge ratios for both firms and intermediaries is less than one that is a partial hedge this generalization also allows us to provide counterexamples to some commonly held beliefs concerning futures trading for example that hedgers would always want to avoid basis risk