the peter principle a theory of decline some have observed that individuals perform worse after being promoted the peter principle which states that people are promoted to their level of incompetence suggests that something is fundamentally misaligned in the promotion process this view is unnecessary and inconsistent with the data below it is argued that ability appears lower after promotion purely as a statistical matter being promoted is evidence that a standard has been met regression to the mean implies that future ability will be lower on average firms optimally account for the regression bias in making promotion decisions but the effect is never eliminated rather than evidence of a mistake the peter principle is a necessary consequence of any promotion rule furthermore firms that take it into account appropriately adopt an optimal strategy usually firms inflate the promotion criterion to offset the peter principle effect and the more important the transitory component is relative to total variation in ability the larger

why democracies produce efficient results by applying the standard tools of microeconomic analysis i argue that democratic markets work as well as economic markets in particular i show that previous work has greatly exaggerated the existence of principal agent and informational problems in electoral markets and has drawn incorrect conclusions

centralized versus decentralized provision of local public goods a political economy approach abstract this paper takes a fresh look at the trade off between centralized and decentralized provision of local public goods it argues that the sharing of the costs of local public spending in a centralized system will create a conflict of interest between citizens in different jurisdictions when spending decisions are made by a legislature of locally elected representatives this conflict of interest will play out in the legislature depending on precisely how the legislature behaves the result may be excessive public spending or allocations of public goods characterized by uncertainty and misallocation across districts the extent of the conflict of interest between districts is affected by spillovers and differences in tastes for public spending thus the relative performance of centralized and decentralized systems depends upon spillovers and differences in tastes for public spending but for different reasons than suggested in the existing literature

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

information and the skewness of music sales this paper studies the role of product discovery in the demand for recorded music we show that releasing a new album causes a substantial and permanent increase in sales of the artist s old albums especially if the new release is a hit patterns in these backward spillovers suggest that they result from consumers discovering the artist upon hearing the new release to explore the implications of consumers incomplete information we estimate a simple learning based model of market demand our results imply that the distribution of sales is substantially more skewed than it would be if consumers were more fully informed

luck effort and reward in an organizational hierarchy using the personnel records of a large british financial sector employer we investigate how workers respond to remuneration differences and luck in the promotion system the results confirm that workers respond to larger remuneration spreads by working harder increased certainty in the promotion process also has this effect there appears to be no difference between men s and women s reactions to promotion incentives gender differences in the raw data therefore appear not due to incentives we need to look elsewhere for an explanation

the effects of formal and informal contracting in credit availability this paper investigates how the use of collateral formal contracting along with the market power of banks which facilitates relational contracts affects the availability of credit for business firms using loan data from the spanish credit register we show that the average credit quality of borrowers in a provincial market decreases with market concentration and the availability of collateral additionally the marginal effect of each variable decreases with the higher values of the other variable we also find that credit line interest rates increase with the availability of collateral although the increase is lower for banks operating in more concentrated credit markets therefore market power relations and collateral formal contracting act as substitutes to increase the availability of bank finance under asymmetric information

mean reversion in investment decisions the case of hollywood one explanation for the comparatively lower quality of movie sequels is selection bias known in personnel economics as the peter principle only abnormally successful movies are selected for a sequel another explanation is a deterministic depreciation in quality due to the decline in the novelty of the sequel s characters and storyline both explanations predict that relative to the original the sequel s performance will revert towards the mean we develop a structural model to decompose the two explanations and estimate its parameters using detailed data on 306 franchise films and 2 823 non franchise films between 1995 and 2014 parameter estimates provide evidence of selection bias for action adventure and horror movies and evidence of a deterministic decline in quality for comedies

deregulation market power and risk behaviour in spanish banks abstract this paper provides empirical evidence on the effects of regulatory changes in the market power of spanish banks it also analyses the response of banks in terms of risk taking behaviour as a result of a reduction in economic profits we find that liberalisation measures have increased competition and eroded banks market power we observe that banks with lower charter values tend to have lower equity assets ratios lower solvency and to experience higher credit risk the last evidence is new in the literature and calls for strengthening regulatory concerns about credit risk management by banks in situations of increased competition

collateral loan quality and bank risk abstract most commercial loans are made on a secured basis yet little is known about the relationship between collateral and credit risk several theoretical studies find that when borrowers have private information about risk the lowest risk borrowers tend to pledge collateral in contrast conventional wisdom holds that when risk is observable the highest risk borrowers tend to pledge collateral an additional issue is whether secured loans as opposed to secured borrowers tend to be safer or riskier than unsecured loans empirical evidence presented here strongly suggests that collateral is most often associated with riskier borrowers riskier loans and riskier banks

optimal multiperiod contracts and the gain from enduring relationships under private information informational asymmetries can play a key role in explaining the existence and nature of multiperiod contracts in an illustrative risk sharing model even relatively short two period contracts can be mutually beneficial if there is private information though one period contracts suffice otherwise further contracts which are pareto optimal relative to the environment and the information structure are defined and partially characterized an example illustrates how otherwise inefficient intertemporal tie ins can be used optimally to mitigate incentive problems the obvious borrowing lending schemes are not private information pareto optimal in these period by period actions are not sufficiently constrained discounting affects the form of the optimal contract but none of these qualitative conclusions

optimal secession rules abstract should the constitution of a federation allow for peaceful secession constitutionally defined secession rules are optimal ex post if the federation breaks down however they may be suboptimal ex ante if the member countries receive a benefit from the perceived long term stability of the federation and constitutionally defined secession rules increase the probability of a break up the optimal social contract trades off ex ante benefits and ex post losses and it may avoid explicit secession rules if transfers are costly the trade off is present even if ex post renegotiation is allowed finally we show that under asymmetric information it is more difficult to keep the federation together and that a secession war may occur

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

secured lending and default risk equilibrium analysis policy implications and empirical results the authors examine collateral in a competitive equilibrium in which borrowers can choose hidden actions and may additionally possess hidden knowledge apart from explaining the widespread use of collateral despite deadweight costs they show that an increase in the riskless interest rate causes equilibrium loan rates and collateral requirements to increase a decline in the deadweight costs of collateral reduces the equilibrium collateral use under moral hazard and an increase in the borrower s project size reduces equilibrium collateral use under moral hazard some of these predictions are tested and found to be supported by the data copyright 1991 by royal economic society

secessionism and minority protection in an uncertain world abstract with the changing political and economic circumstances confronting their countries regionally concentrated minorities have been facing a strategic problem important aspects of which can be stylized as a situation in which a minority leader is uncertain about the costs of secession for her community this paper shows that this uncertainty is a central cause of secession using a model which incorporates both policies to appease secessionist aspirations and informational asymmetries in a situation of asymmetric information in which the policy maker is better informed about the consequences of separation than the minority leader signaling incentives make secession the unique equilibrium outcome whether mutually advantageous compromises exist or not we also show that the ruling majority may seek to maintain political unity by pre committing to minority protection rules which prevent bluffing by the informed policy maker additionally the model generates comparative statics results on the question of which states are most likely to adopt constitutional rules protecting the minorities living within their borders

bank competition and firm creation we investigate the effects of competition in the financial sector on the creation of firms in the nonfinancial sector explicitly allowing for heterogeneous effects across borrowers characterized by different degrees of asymmetric information we find evidence of a bell shaped relationship between bank competition and firm creation in addition consistently with theories arguing that competition may reduce the availability of credit to informationally opaque firms we find that bank competition results less favorable to the emergence of new firms in industrial sectors where informational asymmetries are more important

does information sharing reduce the role of collateral as a screening device this is the authors accepted refereed and final manuscript to the article publisher s version available at http dx doi org 10 1016 j jbankfin 2014 02 010

the politics of 1992 fiscal policy and european integration the internal market in europe will greatly increase the international mobility of resources how will this affect fiscal policy in different countries we consider taxation of capital in a two country model where a democratically chosen government in each country chooses tax policy higher capital mobility changes the politico economic equilibrium in two ways on the one hand it leads to more tax competition between the countries this economic effect tends to lower tax rates in both countries on the other hand it alters voters preferences and makes them elect a different government this political effect offsets the increased tax competition although not completely

the breakup of nations a political economy analysis this paper develops a model of the breakup or unification of nations in each nation the decision to separate is taken by majority voting a basic trade off between the efficiency gains of unification and the costs in terms of loss of control on political decisions is highlighted the model emphasizes political conflicts over redistribution policies the main results of the paper are i when income distributions vary across regions and the efficiency gains from unification are small separation occurs in equilibrium and ii when all factors of production are perfectly mobile all incentives for separation disappear i introduction following the demise of communism the entire map of europe from the atlantic coast to the urals is being redrawn and issues of separation unification and the redrawing of borders are yet again at the forefront of european concerns many of the issues raised by this process are primarily of a political cultural or linguistic nature however there are also economic considerations that bear on this problem the objective of this paper is to analyze some important economic and political determinants of the process of unification and separation of democratic nations the starting point of our analysis is to suppose that from an economic efficiency point of view separation of nations is never desirable a unified nation is always more efficient since free trade among regions is guaranteed duplication costs in defense and law enforcement are avoided and local public goods provision such as transportation and communication networks or common standards can be coordinated furthermore any benefits of decentralization that might be obtained in a world with several nations may also be achieved within a unified nation by replicating the administrative structure of the world with several

asymmetric valuations and the role of collateral in loan agreements loan contracts with provision for collateral are of two general types in one the collateral may be an existing asset of the borrowing firm which is pledged to a lender in the event of default in this case collateral does not increase the assets that the borrower would lose if there is default since all the borrower s assets are attachable therefore the expected marginal cost to the borrower of providing an additional unit of collateral includes principally transactions costs associated with the collateral l this describes the usual type of commercial loan arrangement with the collateral being either equipment real estate accounts receivable or inventories in the other type of loan contract the collateral is an additional asset that is given up by the borrower if there is default that is in addition to the usual assets that are available to its lenders the borrower assigns as collateral to a creditor an asset that would normally not be legally attachable this arrangement is more common in small business loans that are secured by a personal asset e g a house of the entrepreneur likewise debt issued by a legally separate subsidiary may be secured by an asset of the parent firrn in these cases the expected marginal cost to the borrower the owner manager of the small firm or the parent corporation in the latter example of providing an additional unit of collateral

are output fluctuations transitory according to the conventional view of the business cycle fluctuations in output represent temporary deviations from trend the purpose of this paper is to question this conventional view if fluctuations in output are dominated by temporary deviations from the natural rate of output then an unexpected change in output today should not substantially change one s forecast of output in say five or ten years our examination of quarterly postwar united states data leads us to be skeptical about this implication the data suggest that an unexpected change in real gnp of 1 percent should change one s forecast by over 1 percent over a long horizon

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

distributional conflict and jurisdictional organization abstract this paper explores the endogenous formation of jurisdictions assuming the political process is a costly fight to acquire shares of the gnp pie in such a setting the stability of a unified jurisdiction is not necessarily determined by the preferences of the richest member region we also show that a system of federalism is especially significant in ameliorating distributional competition and conflict less resources are spent in aggregate on appropriative activities under a hierarchical system of federalism than in a unified jurisdiction with a single central government

collateral and rationing sorting equilibria in monopolistic and competitive credit markets the authors examine how market structure affects credit allocation under universal risk neutrality and asymmetric information about borrowers they consider both monopolistic and perf ectly competitive banks and examine the role of collateral in each ca se when a bank is a monopolist on the loan side they find collatera l is never used and asymmetric information results in reduced bank le nding under perfect competition collateral has a useful sorting rol e moreover rationing is possible even with collateral availability and perfectly elastic deposit supply in this setting the authors sh ow co signers are valuable social welfare properties of the monopoly and competitive equilibria are also compared copyright 1987 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

externalities vs internalities a model of political integration abstract decentralized government leads to inter regional externalities whereas an integrated jurisdiction solves the externality problem centralized government entails other costs in particular a neglect for minority interests the paper models formally the trade off between these two forces in determining the optimum as well as the equilibrium design of jurisdictions both the relative size of regions and the distribution of tastes are shown to be important parameters of the problem

participation in a currency union in any voluntary cooperative agreement the potential gain from deviation should determine the minimum influence required over common decision making this paper begins by observing that a highly asymmetric distribution of power between two partners is not sustainable if the choice variables are strategic substitutes it then studies a simple general equilibrium model of a monetary union and shows that a small economy will not take part in the agreement unless it can secure influence that is more than proportional to its size and a transfer of seigniorage revenues in its favor copyright 1992 by american economic association

political bargaining in a federation buchanan meets coase abstract in recent decades the issues of federalism and political integration have gained prominence in public debate as well as in the academic realm a frequently made point is that allowing free secession may protect the minority s interests thus providing it with an incentive to enter the federation this paper explicitly considers the political process in the federation arguing that the option to secede may distort the political choices made by the individual regions to improve their bargaining positions as a result the allocation of resources in the federation could well end up being inefficient and unattractive for the minority region in contrast limiting the secession possibilities by requiring the consent of a majority of voters through a regional referendum rather than leaving it to the discretion of the legislature restores efficiency

the benefits of lending relationships evidence from small business data this paper empirically examines how ties between a firm and its creditors affect the availability and cost of funds to the firm we analyze data collected in a survey of small firms by the small business administration the primary benefit of building close ties with an institutional creditor is that the availability of financing increases we find smaller effects on the price of credit attempts to widen the circle of relationships by borrowing from multiple lenders increases the price and reduces the availability of credit in sum relationships are valuable and appear to operate more through quantities rather than prices

credit ratings collateral and loan characteristics implications for yield this article studies how collateral affects bond yields using a large data set of public bonds we document that collateralized debt has higher yield than general debt after controlling for credit rating our model of agency problems between managers and claim holders explains this puzzling result by recognizing imperfections in the rating process we test the model s implications consistent with our model and in results new to the literature we find the yield differential between secured and unsecured debt after controlling for credit rating is larger for low credit rating nonmortgage assets longer maturity and with proxies for lower levels of monitoring

does voluntary participation undermine the coase theorem abstract the coase theorem states that costless enforcement of voluntary agreements yields efficient outcomes we argue that previous treatments fail to recognize the full meaning of voluntary it requires a two stage game a non cooperative participation decision followed by coaseian bargaining only among those who choose to participate we illustrate this in a simple public goods model and find outcomes ranging from extremely inefficient to fully efficient however the efficient equilibrium is not robust to even very small transaction costs thus we cast doubt on coaseian claims of universal efficiency finally we outline a kind of coercion that restores efficiency