dealing with consumer default bankruptcy vs garnishment abstract what are the positive and normative implications of eliminating bankruptcy protection for indebted individuals without bankruptcy protection creditors can collect on defaulted debt to the extent permitted by wage garnishment laws the elimination lowers the default premium on unsecured debt and permits low net worth individuals suffering bad earnings shocks to smooth consumption by borrowing there is a large increase in consumer debt financed essentially by super wealthy individuals a modest drop in capital per worker and a higher frequency of consumer default average welfare rises by 1 of consumption in perpetuity with about 90 of households favoring the change

the economics of a blend mandate for biofuels a biofuel blend mandate may increase or decrease consumer fuel prices with endogenous oil prices depending on relative supply elasticities biofuel tax credits always reduce fuel prices tax credits result in lower fuel prices than under a mandate for the same level of biofuel production if tax credits are implemented alongside mandates then tax credits subsidize fuel consumption instead of biofuels this contradicts energy policy goals by increasing oil dependency co 2 emissions and traffic congestion while providing little benefit to either corn or ethanol producers these social costs will be substantial with tax credits costing taxpayers 28 7 billion annually by 2022 copyright 2008 oxford university press

rational panics and stock market crashes abstract this paper offers an explanation for stock market crashes which focuses on the role of rational but uninformed traders we show that uninformed traders can precipitate a price crash because as prices decline they surmise that informed traders received negative information which leads them to reduce their demand for assets and drive the price of stocks even lower the model yields several implications such as that crashes can occur even when the fundamentals are strong and that the magnitude of the crash depends on the fraction of uninformed investors and the amount of unsophisticated passive investing present in the market

do payday loans cause bankruptcy abstractpayday loans are used by millions of americans every year despite their annualized interest rates of several hundred percent we provide new evidence on the consequences of payday borrowing and the determinants of personal bankruptcy using an administrative panel data set of loan records in a regression discontinuity design we estimate that payday loans increase personal bankruptcy rates by a factor of two we assess possible mechanisms and find the most support for a novel one payday loan access appears to induce bankruptcy filings by worsening the cash flow position of the household

the political economy of bilateral bailouts imf loans during times of financial crisis often occur in conjunction with bilateral financial rescues these bilateral bailouts are substantial in size and a central component of international cooperation during financial crises we analyze the political economy of bilateral bailouts and study the trade offs that potential creditor governments experience when other countries find themselves in financial distress creditor governments want to stabilize crisis countries by providing additional liquidity particularly if the crisis country is economically or politically important to them but they are constrained by domestic politics politicians aim to balance these countervailing pressures they provide bailouts when their own economy is exposed to negative spillover effects and when the crisis country is important for geostrategic military or political reasons domestic economic and political constraints on the other hand limit their ability to bail out other countries we test our hypotheses using an original data set on bilateral bailouts by the g7 countries to countries that experienced financial crises between 1975 and 2010 the findings of our statistical analysis support our theoretical argument and contribute to a deeper understanding of international cooperation s complex structure during financial crises

recent developments in consumer credit and default literature this survey discusses recent contributions to the quantitative literature on unsecured consumer debt and default and some ongoing challenges for the literature key topics include the sources of the rise in personal bankruptcies the importance of asymmetric information and the effects of developments in information technologies on consumer credit markets delinquency and informal bankruptcy debt collection and restructuring of distressed debt the cyclical behavior of consumer debt and default and the insurance role of household debt implications for welfare analysis and policy design are discussed several theoretical contributions and approaches to modeling the consumer credit markets are also highlighted

consequences of debt forgiveness strategic default contagion and lender learning i use a unique data set of loans to small business owners to examine whether lenders face adverse consequences when they grant debt forgiveness to borrowers i provide evidence consistent with borrowers communicating their debt forgiveness to other borrowers who then more frequently strategically default on their own obligations this strategic default contagion is economically large when the lender doubles debt forgiveness the default rate increases by 10 9 on average using an exogenous shock to the lender s forgiveness policy my findings suggest that as the lender learns about the extent of borrower communication the lender tightens its debt forgiveness policy to mitigate default contagion

the role of market forces in assuring contractual performance the conditions under which transactors can use the market repeat purchase mechanism of contract enforcement are examined increased price is shown to be a means of assuring contractual performance a necessary and sufficient condition for performance is the existence of price sufficiently above salvageable production costs so that the nonperforming firm loses a discounted steam of rents on future sales which is greater than the wealth increase from nonperformance this will generally imply a market price greater than the perfectly competitive price and rationalize investments in firm specific assets advertising investments thereby become a positive indicator of likely performance

debt deleveraging and the liquidity trap a fisher minsky koo approach in this paper we present a simple new keynesian style model of debt driven slumps that is situations in which an overhang of debt on the part of some agents who are forced into rapid deleveraging is depressing aggregate demand making some agents debt constrained is a surprisingly powerful assumption fisherian debt deflation the possibility of a liquidity trap the paradox of thrift a keynesiantype multiplier and a rationale for expansionary fiscal policy all emerge naturally from the model we argue that this approach sheds considerable light both on current economic difficulties and on historical episodes including japan s lost decade now in its 18th year and the great depression itself

the resolution of financial distress most models of financial structure embody an assumption about financial distress that causes debt to be costly to the issuing firm this approach has been criticized on the grounds that the assumed costs could be avoided by a costless financial reorganization in this article we show that despite the possibility of costless reorganization it may be rational for firms to incur significant costs in the resolution of financial distress the main assumptions that give rise to our results are the existence of asymmetric courts to impose a reorganization on the claimants of a firm article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

consumption smoothing and debtor protections abstract protections for defaulting debtors are a widely used form of consumption insurance this paper evaluates the costs and benefits of this insurance both inside and outside of bankruptcy first i show that consumption declines by 6 upon default revealing a potential role for greater debtor protections to smooth consumption second i use changes in states laws to estimate the impact of one type of debtor protection asset exemptions on repayment in default and interest rates while higher exemptions smooth consumption by reducing collection in default the interest rate cost is large relative to the benefits adapting a sufficient statistics formula from the literature the estimates imply that the cost of additional exemption protection exceeds what debtors are willing to pay

sovereign debt relief and its aftermath this paper studies sovereign debt relief in a long term perspective we quantify the relief achieved through default and restructuring in two distinct samples 1920 1939 focusing on the defaults on official government to government debt in advanced economies after world war i and 1978 2010 focusing on emerging market debt crises with private external creditors debt relief was substantial in both eras averaging 21 of gdp in the 1930s and 16 of gdp in recent decades we then analyze the aftermath of debt relief and conduct a difference in differences analysis around the synchronous war debt defaults of 1934 and the baker and brady initiatives of the 1980s 1990s the economic landscape of debtor countries improves signicantly after debt relief operations but only if these involve debt write offs softer forms of debt relief such as maturity extensions and interest rate reductions are not generally followed by higher economic growth or improved credit ratings jel e6 f3 n0 and h6

bounds on elasticities with optimization frictions a synthesis of micro and macro evidence on labor supply how can price elasticities be identified when agents face optimization frictions such as adjustment costs or inattention i derive bounds on structural price elasticities that are a function of the observed effect of a price change on demand the size of the price change and the degree of frictions the degree of frictions is measured by the utility losses agents tolerate to deviate from the frictionless optimum the bounds imply that frictions affect intensive margin elasticities much more than extensive margin elasticities i apply these bounds to the literature on labor supply the utility costs of ignoring the tax changes used to identify intensive margin labor supply elasticities are typically less than 1 of earnings as a result small frictions can explain the differences between micro and macro elasticities extensive and intensive margin elasticities and other disparate findings pooling estimates from existing studies i estimate a hicksian labor supply elasticity of 0 33 on the intensive margin and 0 25 on the extensive margin after accounting for frictions

how do competitive pressures affect incentives to innovate when there is a market for inventions competition and intellectual property ip protections are complements in stimulating innovation when ip is appropriable a market for inventions forms and competitive pressures increase incentives to innovate competition among producers the demand side of the market for inventions and competition among inventors the supply side of the market for inventions create incentives to innovate when ip is not fully appropriable markets for inventions are limited and competitive pressures can decrease incentives to innovate firms vertically integrate r d and production and share technology to appropriate the returns to ip this implies that antitrust policy and ip protections are complements

the design of securities abstract this paper investigates the determinants of security design we consider the assignment of both cash flows and voting rights focusing on corporate control we postulate that a conflict of interest exists between contestants for control and outside investors the conflict arises because private benefits of control give contestants an incentive to acquire control even when this reduces firm value security design is a tool for resolving these conflicts and maximizing firm value our main result is that a single voting security is optimal

debt relief and debtor outcomes measuring the effects of consumer bankruptcy protection consumer bankruptcy is one of the largest social insurance programs in the united states but little is known about its impact on debtors we use 500 000 bankruptcy filings matched to administrative tax and foreclosure data to estimate the impact of chapter 13 bankruptcy protection on subsequent outcomes exploiting the random assignment of bankruptcy filings to judges we find that chapter 13 protection increases annual earnings by 5 562 decreases five year mortality by 1 2 percentage points and decreases five year foreclosure rates by 19 1 percentage points these results come primarily from the deterioration of outcomes among dismissed filers not gains by granted filers jel d14 i12 j22 j31 k35

pollution permits and environmental innovation abstract this paper starts with a warning about the negative impact of plain pollution allowance markets on environmental pollution innovation stand alone spot markets enable the government to expropriate an innovation by offering a competing technology pollution permits that puts an arbitrary downward pressure on the licensing price advance allowances reduce expropriation but still create suboptimal incentives for innovation they have the further drawback that permits are inefficiently used when the innovation occurs options to pollute at a given striking price fare better than allowances because they create private incentives to phase out pollution in the case of innovation we characterize the social optimum and show that it can be implemented by issuing options to pollute inter alia finally the paper compares ex ante and ex post government procurement surprisingly ex post licensing by the innovator to the government may yield a higher licensing fee than an ex ante contract

bankruptcy as implicit health insurance this paper examines the implicit health insurance that households receive from the ability to declare bankruptcy exploiting multiple sources of variation in asset exemption law i show that uninsured households with a greater financial cost of bankruptcy make higher out of pocket medical payments conditional on the amount of care received in turn i find that households with greater wealth at risk are more likely to hold health insurance the implicit insurance from bankruptcy distorts the insurance coverage decision using a microsimulation model i calculate that the optimal pigovian penalties are three quarters as large as the average penalties under the affordable care act

incarceration length employment and earnings this paper estimates effects of increases in incarceration length on employment and earnings prospects of individuals after their release from prison i utilize a variety of research designs including controlling for observable factors and using instrumental variables for incarceration length based on randomly assigned judges with different sentencing propensities the results show no consistent evidence of adverse labor market consequences of longer incarceration length using any of the analytical methods in either the state system in florida or the federal system in california

short interest and stock price crash risk abstract using a large sample of u s public firms we find robust evidence that short interest is positively related to one year ahead stock price crash risk the evidence is consistent with the view that short sellers are able to detect bad news hoarding by managers additional findings show that the positive relation between short interest and future crash risk is more salient for firms with weak governance mechanisms excessive risk taking behavior and high information asymmetry between managers and shareholders empirical support is provided showing that the relation between short interest and crash risk is driven by bad news hoarding

instrument choice for environmental protection when technological innovation is endogenous this paper compares qualitatively and quantitatively the welfare effects of emissions taxes auctioned emissions permits and free grandfathered permits when technological innovation is endogenous we find that there is no unambiguous case for preferring any of these policy instruments the relative welfare ranking of instruments depends on the costs of innovation the extent to which innovations can be imitated the slope and level of the marginal environmental benefit function and the number of polluting firms we illustrate the types of situations when there can be significant welfare discrepancies between the policies and when there are not

the economics of invention incentives patents prizes and research contracts though public intervention in the market for research is virtually universal economists have paid surprisingly little attention to the choice of the form of research incentive in a given market structure many studies concentrate on patents but any assumption of their superiority over other incentives has been founded on intuition rather than on formal analysis in this paper i analyze the choice between three of the most common alternative means of public intervention in the research market namely patents prizes and direct contracting for research services i show why and under what conditions any one of the three may be preferred by a social welfare maximizing administrator in a competitive economy using a model that for the first time pays explicit attention to differences in the informational roles of each of these alternatives in the extensive literature on the economics of patents see arnold plant 1934 fritz machlup 1958 charles taylor and z a silberston 1973 morton kamien and nancy schwartz 1975 and f m scherer 1977 for valuable surveys formal analysis weighs the benefits of patents as a solution to the market failure associated with the inappropriability of knowledge against the welfare cost due to the restriction on the use of the knowledge generated and this tradeoff is optimized by patent life adjustment in william nordhaus 1969 scant analytical attention is paid to alternative incentive mechanisms an exception is ben yu 1981 who considers the role of prior contracting for inventions but as many writers for example dan usher 1964 yoram barzel 1968 joseph stiglitz 1969 carole kitti 1973 glenn loury 1979 partha dasgupta and stiglitz 1980a have pointed out in various contexts the incentive offered by an unlimited patent to competitive researchers may be excessive due to the common pool problem discussed further in section i below if the patent administrator and researchers share the same information as implicitly assumed in previous models then the patent life limitation can be adjusted to provide the optimal patent incentive given the common pool problem but in all such models patents would not be chosen in a fully optimized fiscal system researchers and the administrator are assumed to have identical information about the shadow price of potential inventions a patent is just a means of turning this shadow price into a monetary reward but monetary compensation can instead be offered directly to researchers by the state assuming that patent revenues incur a higher deadweight loss than an equivalent amount of public funds financed by less distortionary means for example a minimally efficient tax system appropriate prizes or government contracts are socially preferable to patents with optimal lives if the patent is ever to be the optimal incentive mechanism for research it must possess advantages not captured in existing models informal discussions of patents emphasize their informational role to include the latter as a justification for decentralized invention incentives i incorporate an ex ante imbalance of information about costs and benefits of research in the model presented in section ii but this alone is not quite enough it is further necessary to specify that the terms of the award must be fixed before department of economics economic growth center box 1987 yale station yale university new haven ct 06520 i thank with the usual caveat marguerite alejandro wright cindy arfken martin baily nuong brennan steven englander robert evenson richard levin richard nelson susan rose ackerman denis wright and two referees for assistance of various kinds

welfare implications of the bankruptcy reform act of 1999 abstract in recent years personal bankruptcy has become an important issue to consumers creditors and legislators alike over 40 billion dollars of unsecured debt were discharged in 1998 by 1 44 million households these losses have led legislators to propose a variety of changes in bankruptcy law the most important and recent of which is the bankruptcy reform act of 1999 ba99 i develop a dynamic stochastic general equilibrium model of personal bankruptcy to investigate the trade off between the consumption smoothing role of bankruptcy and the interest rate and deadweight costs it imposes i find that stringent means tests would reduce filing rates only slightly and would have only modest welfare consequences on the other hand the elimination of bankruptcy altogether is found to have substantial benefits this result is robust to income shock persistence and to stringency in the application of means tests

consumer bankruptcy a fresh start consumer bankruptcy provides partial insurance against bad luck but by driving up interest rates makes life cycle smoothing more difficult we argue that to assess this trade off one needs a quantitative model of consumer bankruptcy with three key features life cycle component idiosyncratic earnings uncertainty and expense uncertainty exogenous negative shocks to household balance sheets we find that transitory and persistent earnings shocks have very different implications for evaluating bankruptcy rules more persistent shocks make the bankruptcy option more desirable larger transitory shocks have the opposite effect our findings suggest the current us bankruptcy system may be desirable for reasonable parameter values jel d14 d91 k35

who gets credit after bankruptcy and why an information channel abstract conventional wisdom holds that individuals find it difficult to obtain new credit post bankruptcy using credit bureau data we test this hypothesis and show that more than 90 of bankrupt individuals receive credit shortly after filing individuals with good credit history prior to filing have reduced credit availability after bankruptcy while those with ex ante low credit quality receive more credit we show that credit supplied to low quality individuals is severely curtailed during the financial crisis we also find that the default probability on new debt increases after bankruptcy especially among individuals with high ex ante credit score these findings are consistent with an information channel in which bankruptcy reveals new information about a borrower s credit quality

split sample instrumental variables estimates of the return to schooling this article reevaluates recent instrumental variables iv estimates of the returns to schooling in light of the fact that two stage least squares is biased in the same direction as ordinary least squares ols even in very large samples we propose a split sample instrumental variables ssiv estimator that is not biased toward ols ssiv uses one half of a sample to estimate parameters of the first stage equation estimated first stage parameters are then used to construct fitted values and second stage parameter estimates in the other half sample ssiv is biased toward 0 but this bias can be corrected the splt sample estimators confirm and reinforce some previous findings on the returns to schooling but fail to confirm others

juvenile incarceration human capital and future crime evidence from randomly assigned judges over 130 000 juveniles are detained in the united states each year with 70 000 in detention on any given day yet little is known about whether such a penalty deters future crime or interrupts social and human capital formation in a way that increases the likelihood of later criminal behavior this article uses the incarceration tendency of randomly assigned judges as an instrumental variable to estimate causal effects of juvenile incarceration on high school completion and adult recidivism estimates based on over 35 000 juvenile offenders over a 10 year period from a large urban county in the united states suggest that juvenile incarceration results in substantially lower high school completion rates and higher adult incarceration rates including for violent crimes in an attempt to understand the large effects we found that incarceration for this population could be very disruptive greatly reducing the likelihood of ever returning to school and for those who do return significantly increasing the likelihood of being classified as having an emotional or behavioral disorder jel codes k140 i210

bankruptcy and agency costs their significance to the theory of optimal capital structure we support and generalize our original results 1978 in light of potential impediments to a pure market solution to agency problems and potential causal links between liquidation and bankruptcy in the case of bankruptcy costs market impediments are easily elimi nated through the inclusion of simple provisions in corporate charters and bond inden tures further we demonstrate that recent attempts to link liquidation costs to capital structure are without merit if the firm is to be liquidated on the basis of a rule other than one that maximizes the total value of all the claimants arbitrage profits arise and informal reorganization will discipline management to follow the liquidation rule that is optimal for existing securityholders also we find that the pure market solution is not readily generalizable to other classes of agency problems particularly the risk incentive problem how ever the alternative solution of the risk incentive problem through complex financing contracting may be useful in explaining complexities in contemporary financial contracts in a previous paper 1978 we employed arbitrage arguments to show that in a well functioning market bankruptcy costs are an insignificant determinant of a firm s capital structure we also pointed out that the decision to liquidate and its associated costs can be separated from the event of bankruptcy moreover any costs actually associated with the event of bankruptcy must be limited to the costs associated with an informal reorganization of the capital structure in the capital market prior to default these results were argued to hold under a com plex environment with multiple periods multiple securities and heterogeneous expectations we concluded that bankruptcy costs would be a significant deter minant of capital structure only in the face of irrationality on the part of market participants or unavoidable impediments to the arbitrage process since the publication of our paper there has been an accumulation of the

securitization and distressed loan renegotiation evidence from the subprime mortgage crisis abstract we examine whether securitization impacts renegotiation decisions of loan servicers focusing on their decision to foreclose a delinquent loan conditional on a loan becoming seriously delinquent we find a significantly lower foreclosure rate associated with bank held loans when compared to similar securitized loans across various specifications and origination vintages the foreclosure rate of delinquent bank held loans is 3 to 7 lower in absolute terms 13 to 32 in relative terms there is a substantial heterogeneity in these effects with large effects among borrowers with better credit quality and small effects among lower quality borrowers a quasi experiment that exploits a plausibly exogenous variation in securitization status of a delinquent loan confirms these results

second best biofuel policies and the welfare effects of quantity mandates and subsidies abstract the quest for biorenewable energy sources is held to justify a number of government interventions including support policies for biofuels such as those responsible for the recent rapid growth of us ethanol production this article provides an analytical assessment of such policies we construct a general equilibrium open economy model that captures the rationale typically invoked to justify government intervention in this setting to alleviate the environmental impact of energy consumption and to decrease us energy dependence on foreign sources the model is used to study both the positive and normative implications of alternative policy instruments including the subsidies and mandates specified by the 2007 energy independence and security act from a positive perspective we find that biofuels mandates are equivalent to a combination of fuel taxes and biofuels subsidies that are revenue neutral from a welfare perspective we show that biofuels mandates dominate biofuels subsidies and that combining fuel taxes with mandates would be welfare enhancing

performance pricing in bank debt contracts abstract performance pricing links bank debt interest rate spreads to a borrower s performance via two options interest decreasing performance pricing reduces spreads if credit quality improves it is more common when prepayment is more likely or costly and when adverse selection costs are higher and is less common when multiple performance measures better predict credit quality interest increasing performance pricing increases spreads if credit quality deteriorates it is more common when lenders reduce interest rates to add this provision when downgrades are more likely and when moral hazard costs are higher we find lower spreads for contracts with interest increasing performance pricing

the determinants of attitudes towards strategic default on mortgages we use survey data to measure households propensity to default on mortgages even if they can afford to pay them strategic default when the value of the mortgage exceeds the value of the house the willingness to default increases in both the absolute and the relative size of the home equity shortfall our evidence suggests that this willingness is affected by both pecuniary and non pecuniary factors such as views about fairness and morality we also find that exposure to other people who strategically defaulted increases the propensity to default strategically because it conveys information about the probability of being sued

accounting information in financial contracting the incomplete contract theory perspective this paper reviews theoretical and empirical work on financial contracting that is relevant to accounting researchers its primary objective is to discuss how the use of accounting information in contracts enhances contracting efficiency and to suggest avenues for future research we argue that incomplete contract theory broadens our understanding of both the role accounting information plays in contracting and the mechanisms through which efficiency gains are achieved by discussing its rich theoretical implications we expect incomplete contract theory to prove useful in motivating future research and in offering directions to advance our knowledge of how accounting information affects contract efficiency

mandates and the incentive for environmental innovation mandates which establish minimum use quotas for certain goods are becoming increasingly popular policy tools to promote renewable energy use in addition to mitigating the pollution externality of conventional energy clean energy mandates have the goal of promoting research and development r d investments in renewable energy technology but how well do mandates perform as innovation incentives to address this question we develop a partial equilibrium model to examine the r d incentives induced by a mandate and compare this policy to two benchmark situations laissez faire and a carbon tax innovation is stochastic and the model permits an endogenous number of multiple innovators we present both analytical results and conclusions based on numerical simulations we find that the optimal mandate is larger than it would be without the prospect of innovation that neglecting the outlook for innovation significantly reduces welfare and that the optimal mandate is more sensitive to assumptions about the innovation process than an optimal carbon tax furthermore we find that mandates create relatively strong incentives for r d investment in low quality innovations but relatively weak incentives to invest in high quality innovations we also rank policies by expected welfare an optimal carbon tax has higher expected welfare than an optimal mandate and both have higher expected welfare than laissez faire moreover in our endogenous innovation setting a stronger result obtains a simple carbon tax equal to the damage from pollution unadjusted for the prospect of innovation has higher expected welfare than an optimal mandate

the health and earnings of rejected disability insurance applicants applicants for social security disability benefits who fail to pass the medical screening form a natural control group for beneficiaries data drawn from the 1972 and 1978 surveys of the disabled done for the social security administration show that fewer than 50 percent of rejected male applicants work typical earnings of those that do are less than 59 percent of median earnings for other men their age these data cast doubt on recent econometric work that suggests that the disincentive effects of the social security disability program have been substantial copyright 1989 by american economic association

patents and cumulative innovation causal evidence from the courts cumulative innovation is central to economic growth do patent rights facilitate or impede such follow on innovation this paper studies the effect of removing patent protection through court invalidation on the subsequent research related to the focal patent as measured by later citations we exploit random allocation of judges at the u s court of appeal for the federal circuit to control for the endogeneity of patent invalidation we find that patent invalidation leads to a 50 percent increase in subsequent citations to the focal patent on average but the impact is highly heterogeneous patent rights appear to block follow on innovation only in the technology fields of computers electronics and medical instruments moreover the effect is entirely driven by invalidation of patents owned by large patentees that triggers entry of small innovators suggesting that patents may impede the democratization of innovation

recent developments in consumer credit and default literature consumer credit and default literature this survey discusses recent contributions to the quantitative literature on unsecured consumer debt and default and some ongoing challenges for the literature key topics include the sources of the rise in personal bankruptcies the importance of asymmetric information and the effects of developments in information technologies on consumer credit markets delinquency and informal bankruptcy debt collection and restructuring of distressed debt the cyclical behavior of consumer debt and default and the insurance role of household debt implications for welfare analysis and policy design are discussed several theoretical contributions and approaches to modeling the consumer credit markets are also highlighted

the rise in student loan defaults abstract we examine the rise in student loan defaults in the great recession by linking administrative student loan data at the individual borrower level to student loan borrowers individual tax records a blinder oaxaca style decomposition shows that shifts in the composition of student loan borrowers and the massive collapse in home prices during the great recession can each account for approximately 30 of the rise in student loan defaults falling home prices affect student loan defaults by impairing individuals labor earnings especially for low income jobs by contrast when comparing the default sensitivities of homeowners and renters we find no evidence that falling home prices affect student loan defaults through a home equity based liquidity channel the income based repayment ibr program introduced by the federal government in the wake of the great recession reduced both student loan defaults and their sensitivity to home price fluctuations thus providing student loan borrowers with valuable insurance against negative shocks

opportunistic underinvestment in debt renegotiation and capital structure abstract this paper models debt renegotiation as a bargaining game between debtholders and shareholder oriented management in which management credibly threatens to run down firm assets to force concessions from the creditors creditors anticipate this opportunistic behavior by management creating an upper bound on debt capacity that is less than the value of the firm if an advantage to debt is introduced such as favorable tax treatment an interior optimal capital structure obtains even in the absence of realized bankruptcy costs our model also explains variations in debt equity ratios and the use of certain puzzling debt covenants

short sales constraints and price discovery evidence from the hong kong market short sales practices in the hong kong stock market are unique in that only stocks on a list of designated securities can be sold short by analyzing the price effects following the addition of individual stocks to the list we find that short sales constraints tend to cause stock overvaluation and that the overvaluation effect is more dramatic for individual stocks for which wider dispersion of investor opinions exists these findings are consistent with miller s 1977 intuition and other optimism models we also document higher volatility and less positive skewness of individual stock returns when short sales are allowed the question of how short sales impact capital markets is highly controversial with short sale regulations varying widely across countries and capital markets 1 although short selling has been carried out for years in major financial markets around the world its effects on market efficiency especially on pricing efficiency remain of interest to financial researchers miller 1977 theorizes that in the presence of short sales constraints security prices tend to reflect a more optimistic valuation than the average opinion of potential investors and thus tend to be upward biased this overvaluation argument is based on two conditions 1 a security s short sales are either prohibited or costly and 2 investors have heterogeneous beliefs or information about the security s value the underlying intuition is quite straightforward pessimistic investors are forced to sit out of the market when short sales are not available and thus some negative information is not reflected in prices enabling enthusiastic buyers to bid prices above the level that average investors perceive as fair this argument has significant implications for market efficiency theories since one of the major functions of capital markets is price discovery indeed an efficient market should be a market in which prices always

consumer bankruptcy and financial health this paper estimates the effect of chapter 13 bankruptcy protection on financial health using a new data set linking bankruptcy filings to credit bureau records our empirical strategy uses the leniency of randomly assigned judges as an instrument for chapter 13 protection we find that chapter 13 protection decreases an index measuring adverse financial events such as civil judgments and repossessions by 0 323 standard deviations and increases the probability of being a homeowner by 13 2 percentage points chapter 13 protection has little impact on open unsecured debt but decreases the amount of debt in collections by 1 333

an investigation of cost differences between public sales and private placements of debt abstract we examine the cost differences between public sales and private placements of debt for a sample of public utility issues the lowest cost method depends on a firm s transaction costs which comprise flotation costs agency costs and the costs of searching the market our findings suggest that firms minimize the cost of issuing securities by selecting the market providing the lowest transaction costs

household borrowing after personal bankruptcy a large body of literature has examined factors leading to filing for personal bankruptcy but little is known about household borrowing after bankruptcy this paper augments the existing literature with a comprehensive analysis of postbankruptcy borrowing using data from the survey of consumer finances we find that filers generally have more limited access to unsecured credit but borrow more secured debt after bankruptcy than comparable households that have never filed for bankruptcy filers also pay higher interest rates on all types of debt in addition as more time passes after filing credit access and borrowing costs improve however filers remain more prone than comparable nonfilers to experience financial distress accumulate less wealth and use expensive credit sources like payday loans even more than 10 years after filing

does disability insurance receipt discourage work using examiner assignment to estimate causal effects of ssdi receipt abstract we present the first causal estimates of the effect of social security disability insurance benefit receipt on labor supply using all program applicants we use administrative data to matc

arm breaking consumer credit and personal bankruptcy the consumer credit transaction is analyzed as a contract which provides insurance as well as present consumption for the borrower creditors remedies such as arm breaking are shown to facilitate provision of insurance forgiveness of debts when lenders cannot monitor outcomes alternatively if outcomes are observable but lenders do not ex ante know the risk associated with each borrower the market may generate an excessive amount of arm breaking and agreements to forgo discharge following bankruptcy as low risk borrowers signal their characteristics suggesting that government limitations on such provisions might be efficient the secured credit transaction is shown to be a complex contract which attempts to provide efficient repayment seller incentives for performance and mitigation following default and insurance for the borrower garnishment and discharge of debts following bankruptcy are also considered

a general equilibrium analysis of personal bankruptcy law we analyze an economy where principals lenders asset owners franchisors and agents borrowers tenants franchisees match and contract subject to moral hazard bankruptcy law defines the limited liability constraint in these contracts we provide a walrasian characterization of stable allocations and use it to analyze the distributional impact of changing bankruptcy law we show i weakening liability law leads to a redistribution of debt from poor to rich agents ii it makes rich agents better o and poor agents and principals worse o iii exemption limits pareto dominate other bankruptcy laws if project size is fixed and iv means testing as used in the new us bankruptcy law which is ex post pro poor in intent makes the poor worse o ex ante

short sales and stock price crash risk evidence from an emerging market abstract using a regulatory change in china as an exogenous shock we find that the removal of short sales constraints increases stock price crash risk this relation is attenuated when firms suffer less from information asymmetry highlighting the effect of interaction between uninformed and informed investors

the household bankruptcy decision personal bankruptcy filings have risen from 0 3 percent of households per year in 1984 to around 1 35 percent in 1998 and 1999 transforming bankruptcy from a rare occurrence to a routine event lenders lost about 39 billion in 1998 due to personal bankruptcy filings but economists have little understanding of why households file for bankruptcy or why filings have increased so rapidly until very recently studying the household bankruptcy decision was very difficult because no household level data set existed that included information on bankruptcy filings in this paper we use new data from the panel study of income dynamics which includes information on bankruptcy filings to estimate a model of households bankruptcy decisions we find support for the strategic model of bankruptcy which predicts that households are more likely to file when their financial benefit from filing is higher our model predicts that an increase of 1 000 in households financial benefit from bankruptcy would result in a 7 percent increase in the number of bankruptcy filings our model also predicts that if the 1997 national bankruptcy review commission s proposed changes in bankruptcy exemption levels were implemented there would be a 16 percent increase in the number of bankruptcy filings each year but if the 100 000 cap on homestead exemptions recently passed by the u s senate were adopted our model predicts that there would be only a negligible effect on the number of filings we find little support for the nonstrategic model of bankruptcy which predicts that households file when adverse events occur which reduce their ability to repay finally controlling for state and time fixed effects our model shows that households are more likely to file for bankruptcy if they live in districts with higher aggregate filing rates

insider trading in a rational expectations economy it is often argued that efficiency considerations require society to freely permit insider trading in this article an opposing efficiency argument is formalized the model incorporates an investment stage followed by a trading stage if outsiders expect insiders to take advantage of them in trading outsiders will reduce their investment the insiders loss from this diminished investor confidence may more than offset their trading gains consequently a prohibition on insider trading may effect a pareto improvement insiders are made better off if they can precommit not to trade on their privileged information govemment regulation accomplishes exactly this jel 022 026 313 the traditional rationale articulated for insider trading regulation and other securities law is that such rules promote confidence in markets indeed president franklin d roosevelt justified the first major u s securities legislation by saying it should give impetus to honest dealing in securities and thereby bring back public confidence similar language is still invoked half a century later in connection with enforcement efforts against insider trading and in proposals for tightened stock

shift share designs theory and inference we study inference in shift share regression designs such as when a regional outcome is regressed on a weighted average of sectoral shocks using regional sector shares as weights we conduct a placebo exercise in which we estimate the effect of a shift share regressor constructed with randomly generated sectoral shocks on actual labor market outcomes across u s commuting zones tests based on commonly used standard errors with 5 nominal significance level reject the null of no effect in up to 55 of the placebo samples we use a stylized economic model to show that this overrejection problem arises because regression residuals are correlated across regions with similar sectoral shares independent of their geographic location we derive novel inference methods that are valid under arbitrary cross regional correlation in the regression residuals we show using popular applications of shift share designs that our methods may lead to substantially wider confidence intervals in practice

identification of endogenous social effects the reflection problem this paper examines the reflection problem that arises when a researcher observing the distribution of behaviour in a population tries to infer whether the average behaviour in some group influences the behaviour of the individuals that comprise the group it is found that inference is not possible unless the researcher has prior information specifying the compisition of reference groups if this information is available the prospects for inference depend critically on the population relationship between the variables defining reference groups and those directly affecting outcomes inference is difficult to implossible if these variables are functionally dependent or are statistically independent the prospects are better if the variables defining reference groups and those directly affecting outcomes are moderately related in the population

why don t lenders renegotiate more home mortgages redefaults self cures and securitization we document the fact that servicers have been reluctant to renegotiate mortgages since the foreclosure crisis started in 2007 having performed payment reducing modifications on only about 3 percent of seriously delinquent loans we show that this reluctance does not result from securitization servicers renegotiate similarly small fractions of loans that they hold in their portfolios our results are robust to different definitions of renegotiation including the one most likely to be affected by securitization and to different definitions of delinquency our results are strongest in subsamples in which unobserved heterogeneity between portfolio and securitized loans is likely to be small and for subprime loans we use a theoretical model to show that redefault risk the possibility that a borrower will still default despite costly renegotiation and self cure risk the possibility that a seriously delinquent borrower will become current without renegotiation make renegotiation unattractive to investors

dynamic incentives by environmental policy instruments a survey abstract in this paper i survey and discuss recent developments on the incentives provided by environmental policy instruments for both adoption and development of advanced abatement technology a main conclusion to be drawn from the literature is that under competitive conditions market based instruments usually perform better than command and control moreover taxes may provide stronger long term incentives than tradable permits if the regulator is myopic if the government can anticipate new technology or is able to react on it optimally regulatory policies by virtue of administered prices taxes and policies by setting quantities issuing tradable permits are almost equivalent the literature also shows that under competitive conditions there is no difference between auctioning permits and grandfathering moreover timing and commitment of environmental policy is not crucial for adoption under competitive conditions commitment has positive incentive effects however if an r d sector has market power in the presence of market imperfections the ranking of the different policy instruments is ambiguous

u s consumer bankruptcy choice the importance of general equilibrium effects abstract we study the implications of u s personal bankruptcy rules for resource allocation and welfare our analysis shows that general equilibrium considerations along with bankruptcy chapter choice and production matter crucially for the effects of policy reform contrary to previous work we find that completely eliminating bankruptcy provisions causes significant declines in output and welfare by reducing capital formation and labor input furthermore subjecting chapter 7 filers to means testing as suggested by recent legislative proposals would not improve upon current bankruptcy provisions and at best leave aggregate filings output and welfare unchanged however we do find that an alternative tightening of chapter 7 in the form of lower asset exemptions can increase economic efficiency

using elasticities to derive optimal bankruptcy exemptions this article studies the optimal determination of bankruptcy exemptions for risk averse borrowers who use unsecured contracts but have the possibility of defaulting in a large class of economies knowledge of four variables is sufficient to determine whether a bankruptcy exemption level is optimal or should be increased or decreased these variables are 1 the composition of households liabilities 2 the sensitivity of the credit supply schedule to exemption changes 3 the probability of filing for bankruptcy with non exempt assets and 4 the value given by households to a marginal dollar in different states which can be mapped to changes in households consumption i recover empirical estimates of the sufficient statistics using u s data over the period 2008 16 and find that increasing exemption levels improves overall welfare although there is substantial variation in estimated welfare gains across u s states and income quintiles

mortgage modification and strategic behavior evidence from a legal settlement with countrywide abstract we investigate whether homeowners respond strategically to news of mortgage modification programs we exploit plausibly exogenous variation in modification policy induced by settlement of us state government lawsuits against countrywide financial corporation which agreed to offer modifications to seriously delinquent borrowers using a difference in differences framework we find that countrywide s monthly delinquency rate increased more than 0 54 percentage points a 10 percent relative increase immediately after the settlement s announcement the estimated increase in default rates is largest among borrowers least likely to default otherwise these results suggest that strategic behavior should be an important consideration in designing mortgage modification programs jel d14 g21 k22 r31

a tale of two market failures technology and environmental policy abstract market failures associated with environmental pollution interact with market failures associated with the innovation and diffusion of new technologies these combined market failures provide a strong rationale for a portfolio of public policies that foster emissions reduction as well as the development and adoption of environmentally beneficial technology both theory and empirical evidence suggest that the rate and direction of technological advance is influenced by market and regulatory incentives and can be cost effectively harnessed through the use of economic incentive based policy in the presence of weak or nonexistent environmental policies investments in the development and diffusion of new environmentally beneficial technologies are very likely to be less than would be socially desirable positive knowledge and adoption spillovers and information problems can further weaken innovation incentives while environmental technology policy is fraught with difficulties a long term view suggests a strategy of experimenting with policy approaches and systematically evaluating their success

the economic effects of a borrower bailout evidence from an emerging market this paper studies the credit market implications and real effects of one the largest borrower bailout programs in history enacted by the government of india against the backdrop of the 2008 2009 financial crisis the study finds that the stimulus program had no effect on productivity wages or consumption but led to significant changes in credit allocation and an increase in defaults post program loan performance declines faster in districts with greater exposure to the program an effect that is not driven by greater risk taking of banks loan defaults become significantly more sensitive to the electoral cycle after the program suggesting the anticipation of future credit market interventions as an important channel through which moral hazard in loan repayment is intensified

sequential bargaining with incomplete information this paper describes a simple two person two period bargaining game and solves it using the concept of perfect bayesian equilibrium in which the actions of each player convey information which is used by his opponent the paper examines the effects of changes in bargaining costs the size of the contract zone and the length of the bargaining process on such aspects of the solution as the probability of impasse and the likelihood of concessions the combination of information transfer and the lack of pre commitment embodied in perfectness yields many surprising results common perceptions about the effects of parameter changes on bargaining processes are suspect and should be checked in the particular game being discussed

default and renegotiation a dynamic model of debt we analyze the role of debt in persuading an entrepreneur to pay out cash e ows rather than to divertthem in the e rstpartof the paper we study the optimal debt contract specie cally the trade off between the size of the loan and the repayment under the assumption that some debt contract is optimal in the second part we consider a more general class of nondebt contracts and derive sufficient conditions for debt to be optimal among these

emissions taxes versus intensity standards second best environmental policies with incomplete regulation the best emissions tax or emissions cap may be an inferior instrument under incomplete regulation leakage without leakage an intensity standard regulating emissions per unit of output is inferior due to an implicit output subsidy this inefficiency can be eliminated by an additional consumption tax with leakage an intensity standard can dominate the optimal emissions tax since the implicit output subsidy prevents leakage the addition of a consumption tax improves an intensity standard s efficiency may prevent leakage and may be efficient comparing intensity standards to output based updating shows that the latter dominates if updating is sufficiently flexible