incentive effects of benevolent intervention the case of government loan guarantees abstract there has been a substantial recent growth in government loan guarantees to ailing firms in the united states this paper investigates the potential incentive effects of this practice using the simplest available two period model it is shown that when firms know that loan guarantees may be forthcoming they may be induced to adopt riskier investments and take on more leverage these perverse incentive effects imply that the actual loan guarantees related contingent liability of the government could be much larger than suspected our policy recommendation is that the government either abandon the practice altogether or set up a federal agency that sells loan guarantees to all firms at prices that depend on the riskiness of the firm s assets and its leverage

tell me something i don t already know informedness and the impact of information programs we document how imperfect information generates heterogeneous effects in information treatments with personalized high frequency feedback and peer comparisons in our field experiment in retail electricity we find that high and low energy users symmetrically underestimate and overestimate their relative energy use pre treatment responses to personalized feedback however are asymmetric households that overestimate their relative use and low users both respond by consuming more these boomerang effects provide evidence that peer comparison information programs even those coupled with normative comparisons are not guaranteed to lead to increases in prosocial behavior jel codes c93 d12 d83 l94 q41

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

federal lending and the market for credit abstract federal lending is an important but unrecognized feature of modern credit markets this paper analyzes the effects of credit interventions on credit allocation and economic efficiency the underlying model posits asymmetric information between borrowers and lenders and allows for market clearing rationed or redlined equilibria principal results include unsubsidized credit interventions are neutral the relative effectiveness of alternative lending instruments depends on whether rationing occurs interactions among programs can have perverse effects and even without an informational advantage the government may enact welfare improving credit policies under certain conditions

the allocation of credit and financial collapse this paper examines the allocation of credit in a market in which borrowers have greater information concerning their own riskiness than do lenders it illustrates that 1 the allocation of credit is inefficient and at times can be improved by government intervention and 2 small changes in the exogenous risk free interest rate can cause large discontinuous changes in the allocation of credit and the efficiency of the market equilibrium these conclusions suggests a role for government as the lender of last resort

the importance of being informed experimental evidence on demand for environmental quality abstract to what extent does information affect the demand for environmental quality a randomly selected group of households in an indian city were informed whether or not their drinking water had tested positive for fecal contamination using a simple inexpensive test kit households initially not purifying their water and told that their drinking water was possibly contaminated were 11 percentage points more likely to begin some form of home purification in the next eight weeks than households that received no information they spent 7 24 at ppp more on purification than control households by way of comparison an additional year of schooling of the most educated male in the household is associated with a 3 percentage point rise in the probability of initial purification while a standard deviation increase in the wealth index is associated with a 12 percentage point rise in this probability and an 11 75 rise in expenditure initially purifying households that received a no contamination result did not react by reducing purification these results suggest that estimates of the demand for environment quality that assume full information may significantly under estimate it

state intervention and the microcredit market the role of business development services we analyze in this paper how various forms of state intervention can impact microfinance institutions lending behavior using a simple model where entrepreneurs receive individual uncollateralized loans we show that not surprisingly state intervention through the loan guarantee increases the number of entrepreneurs receiving a loan however after modeling business development services bds provided by the microfinance institution we show that the loan guarantee can have a counterproductive effect by reducing the number of entrepreneurs benefiting from such services we therefore analyze an alternative policy bds subsidization we show that if bds are efficient enough and are targeted toward less performing borrowers then for fixed government expenditures such subsidies do better in terms of financial inclusion than the loan guarantee moreover we argue that under similar conditions bds subsidization alone does better in terms of financial inclusion than a mix of policies

information and subsidies complements or substitutes abstract does providing information about a product influence the impact of price subsidies on purchases this question is particularly relevant for health products in developing countries where both informational campaigns and price subsidies are common policy instruments we conduct a field experiment in zambia and find that providing information about a new version of a product significantly increases the impact of price subsidies on take up taken alone the information manipulation has no significant impact on demand while the price subsidy substantially increases demand however the evaluation of either intervention in isolation fails to capture the significant complementarity between the two

nutrition information and household behavior experimental evidence from malawi incorrect knowledge of the health production function may lead to inefficient household choices and thereby to the production of suboptimal levels of health this paper studies the effects of a randomized intervention in rural malawi that over a six month period provided mothers of young infants with information on child nutrition without supplying any monetary or in kind resources a simple model first investigates theoretically how nutrition and other household choices including labor supply may change in response to the improved nutrition knowledge observed in the intervention areas we then show empirically that the intervention improved child nutrition household food consumption and consequently health we find evidence that labor supply increased which might have contributed to partially fund the increase in food consumption this paper is the first to study whether non health choices particularly parental labor supply might be affected by parents knowledge of the child health production function

voters as fiscal conservatives voters penalize federal and state spending growth this is the central result of my analysis of voting behavior in presidential senatorial and gubernatorial elections from 1950 1988 the composition of federal spending growth seems irrelevant the vote loss to the president s party from an extra dollar of defense or nondefense spending is the same however in gubernatorial elections expansion of state welfare spending exacts a disproportionate political price deficit financing of federal or state spending does not appear to matter politically i conclude by discussing the obvious question of why government budgets have grown in the face of this voter hostility

keeping the doctor away experimental evidence on investment in preventative health products household investment in preventative health products in developing countries is typically low even though the returns to such products are high in this paper we experimentally estimate demand curves for health products and test whether 1 information about health risk 2 cash liquidity 3 peer effects and 4 intra household differences in preferences affect demand in our main experiment in kenya involving children s shoes critical for preventing hookworm infection price is by far the most important predictor of purchase providing liquidity and targeting women also increased demand information had no effect even though we find that genuine learning occurred we find no peer effects even though people discussed the product purchase decision extensively we find similar results for price and information in three smaller studies in guatemala india and uganda in experiments involving soap and multivitamins

rebates as a mechanism to induce the entry of commercial banks into new markets abstract for several reasons governments may want to encourage commercial banks to offer credit to some specific groups this paper analyzes a contract scheme that may help achieve this objective without inducing financial disintermediation or other adverse behavior two sources of information asymmetry are considered between the government and the bank credit might be diverted to borrowers not belonging to the targeted group and between the bank and the borrower the latter may divert credit to purposes other than stated compared to other policies the scheme analyzed here is superior since it brings about lower interest rates and higher cooperation from banks to achieve the government s objective

observing unobservables identifying information asymmetries with a consumer credit field experiment information asymmetries are important in theory but difficult to identify in practice we estimate the presence and importance of hidden information and hidden action problems in a consumer credit market using a new field experiment methodology we randomized 58 000 direct mail offers to former clients of a major south african lender along three dimensions i an initial offer interest rate featured on a direct mail solicitation ii a contract interest rate that was revealed only after a borrower agreed to the initial offer rate and ii a dynamic repayment incentive that was also a surprise and extended preferential pricing on future loans to borrowers who remained in good standing these three randomizations combined with complete knowledge of the lender s information set permit identification of specific types of private information problems our setup distinguishes hidden information effects from selection on the offer rate via unobservable risk and anticipated effort from hidden action effects via moral hazard in effort induced by actual contract terms we find strong evidence of moral hazard and weaker evidence of hidden information problems a rough estimate suggests that perhaps 13 to 21 of default is due to moral hazard asymmetric information thus may help explain the prevalence of credit constraints even in a market that specializes in financing high risk borrowers

credit market efficiency and tax policy in the presence of screening costs after establishing the existence of capital market equilibrium in the presence of asymmetric information and screening costs this paper examines tax policies designed to correct the attendant externalities when projects differ in expected returns it is shown to be ambiguous whether costly private screening weakens or strengthens the case for an interest income tax however when projects differ only in riskiness as in the model of stiglitz and weiss screening opportunities cause the efficiency case for tax intervention to disappear

too much investment a problem of asymmetric information this paper shows that under plausible assumptions the inability of lenders to discover all of the relevant characteristics of borrowers results in investment in excess of the socially efficient level raising the rate of interest above the free market level will restore optimality this conflicts with generally held views and is contrasted with the stiglitz weiss model it is shown that the assumptions which yield overinvestment support debt as the equilibrium method of finance however under the stiglitz weiss assumptions used to derive an underinvestment result equity is shown to be the equilibrium method of finance

externalities in economies with imperfect information and incomplete markets this paper presents a simple general framework for analyzing externalities in economies with incomplete markets and imperfect infonnation by identifying the pecuniary effects of these externalities that net out the paper simplifies the problem of determining when tax interventions are pareto improving the approach indicates that such tax interventions almost always exist and that equilibria in situations of imperfect information are rarely constrained pareto optima it can also lead to simple tests based on readily observable indicators of the efficacy of particular tax policies in situations involving adverse selection signaling moral hazard incomplete contingent claims markets and queue rationing equilibria traditional discussions of externalities have emphasized the distinction between technological externalities in which the action of one individual or firm directly affects the utility or profit ofanother and pecuniary externalities in which one individual s or firm s actions affect another only through effects on prices while the presence of technological externalities imply in general that a competitive equilibrium may not be pareto efficient pecuniary externalities hy themselves are not a source of inefficiency the fact that prices change has of course important consequences there are both distributional and allocational effects but the distribution effects net out gains for example hy firms whose prices increase are precisely offset by losses e g to individuals who must pay higher prices and there are no welfare losses from the allocation effects as long as the price changes involved are small if firms are maximizing profits and individuals are maximizing utility both facing prices that correctly refiect opportunity costs then standard envelope theorem arguments imply that changes in profits or utility induced by changes in allocations resulting from any small change in prices are negligible

asymmetric information and imperfect competition in lending markets we study the effects of asymmetric information and imperfect competition in the market for small business lines of credit we estimate a structural model of credit demand loan use pricing and firm default using matched firm bank data from italy we find evidence of adverse selection in the form of a positive correlation between the unobserved determinants of demand for credit and default our counterfactual experiments show that while increases in adverse selection increase prices and defaults on average reducing credit supply banks market power can mitigate these negative effects

does price affect the demand for information about new health technologies evidence from a field experiment in nigeria we study how prices influence the demand for information about a new preventative health technology we conducted a field experiment in nigeria where women were offered the opportunity to get screened for cervical cancer at baseline 2 3 of women had no knowledge of cervical cancer screening field staff made house calls to give women information about the test and also distributed vouchers that randomly varied the price of screening at the point of service we find an inverse u shaped relationship between prices and the demand for information going from zero to a small positive price increased the demand for information about the test but increasing the price further by 100 resulted in a net decrease in the demand for information we argue that these results have interesting implications for the debate about the pricing of new health technologies in developing countries

fiscal effects of the voter initiative in the first half of the twentieth century abstract this paper compares the fiscal policy of initiative and noninitiative states in the first half of the twentieth century states with initiatives had higher combined state and local expenditure after controlling for income and other demographics but a lower ratio of state to local expenditure this together with existing evidence from later in the century suggests that the voter initiative does not have a consistent effect on the overall size of state and local government however it does systematically lead to more decentralized expenditure

pesticides productivity and farmer health a philippine case study health is recognized as one of the most important components of the human capital of rural people in developing countries there is a growing body of literature showing the productivity effects of health associated with nutrition e g bliss and stern 1978 strauss 1986 deolalikar 1988 pitt rosenzweig and hassan 1990 in this literature the productivity effects of health are inferred either by correlating health indicators with wages or by including health indicators in an agricultural production function the human capital literature also has demonstrated that farmer education plays an important role in the allocative and technical efficiency of farmers welch 1970 schultz 1975

structural constraints on partisan bias under the efficient gerrymander partisan bias occurs when the translation of the popular vote into legislative seats differs between competing parties this paper contains a theoretical and empirical analysis of the consequences of an efficient gerrymander for the partisan bias of an electoral system under partisan apportionment bias is shown to depend on some structural features of the electoral environment namely the size of the voting population and the number of single member districts within a political jurisdiction a statistical analysis reveals the predicted relationships in data on congressional elections across states in the 1950 1984 period this paper highlights the importance of some measurable features of the electoral environment for determining bias and provides an indirect test of partisan gerrymandering in congressional apportionment processes

some consequences of credit rationing in an endogenous growth model an endogenous growth model is developed where all investment is financed via credit extension there is also an adverse selection problem in loan markets so that in equilibrium credit rationing arises endogenously the result is that equilibrium levels of credit rationing and real growth rates are jointly determined in this context several changes in the environment can have unusual consequences for instance improvements in the technology for producing capital can reduce growth because of their adverse impacts on credit rationing for similar reasons various government investment subsidies can be growth reducing this phenomenon is often observed empirically

asymmetric information option to wait to invest and the optimal level of investment abstract this paper analyzes equilibrium rationing on credit markets in the case of gains from waiting to acquire information about the future profitability of investment we compare the competitive outcome with the socially optimal level of investment we show that the opportunity to postpone investment changes the nature of the inefficiencies of the competitive outcome fundamentally without the option to wait high risk firms tend to invest and the outcome is characterized by a situation of underinvestment if firms can wait high risk firms benefit the most from waiting in this case low risk firms tend to invest immediately and a situation of overinvestment will result since from the banks point of view firms do not delay enough

a theory of competition among pressure groups for political influence this paper presents a theory of competition among pressure groups for political influence political equilibrium depends on the efficiency of each group in producing pressure the effect of additional pressure on their influence the number of persons in different groups and the deadweight cost of taxes and subsidies an increase in deadweight costs discourages pressure by subsidized groups and encourages pressure by taxpayers this analysis unifies the view that governments correct market failures with the view that they favor the politically powerful both are produced by the competition for political favors

federal lending and aggregate economic activity attention to federal activity in credit markets is typically focused on the government s role as a borrower in contrast scant attention is paid to its equally large and dominant role as a lender this paper evaluates the aggregate impact of federal lending activity within the framework of a vector autoregressive representation of the us macroeconomy the empirical regularities uncovered suggest that aggregate federal lending activity does not have a net positive impact on output

improved source improved quality demand for drinking water quality in rural india abstract this paper tests the hypothesis that the expansion of improved drinking water supplies in rural india reduced household expenditure on water quality offsetting some of the quality benefits from source protection i estimate demand for in home treatment using geological characteristics to predict a household s drinking water source the probability of treatment and in particular boiling reduces by 18 27 percentage points in response to source protection offsetting 4 of the water quality gains and saving households 0 5 1 in monthly expenditure behavioral choices partly counteract the water quality gains from source protection

incentives information and malnutrition evidence from an experiment in india abstract this study provides one of the first pieces of evidence comparing the effectiveness of different performance pay contracts among caregivers to improve child health we carry out a cluster randomized controlled trial in urban slums of kolkata india covering 209 childcare centers to test three separate performance pay treatments in addition to providing information on the demand side we promise low or high absolute performance incentives to public sector caregivers where each bonus is based on improvements in health of 3 6 year old children under their care we also test for the impact of relative incentives where the bonus depends upon a worker s performance relative to her peers all mothers in the treatment arms are also provided nutritional information high absolute incentives to workers combined with nutritional information to mothers works to reduce severe malnutrition by 5 percentage points over three months relative incentives and low absolute incentives show no significant improvements in child health on average