influence costs and capital structure this paper analyzes the role of capital structure in the presence of intrafirm influence activities the hierarchical structure of large organizations inevitably generates attempts by members to influence the distributive consequences of organizational decisions in corporations for example top management can reallocate or eliminate quasi rents earned by their employees while at the same time they must rely on these employees to provide them with information vital to their decision making this creates the opportunity for lower level managers to influence top management s discretionary decisions as a result divisional managers may attempt to inflate the corporate perception of their relative contributions to the firm or to take actions that make the elimination of their rents more costly for the firm this incentive to influence is especially acute when managers fear losing their jobs for example in the event of a divestiture since the firm s capital structure can affect future divestiture decisions it can be chosen to reduce or increase the divisional managers incentives to influence top management s decisions the control of influence activities arises at the expense of restrictions on future divestiture decisions hence there emerges an optimal capital structure that trades off the costs of influence activities against the costs of making poor divestiture decisions the findings suggest that capital structure can also be chosen to control influence activities that arise under less extreme motivations we identify several key factors that determine the optimal capital structure the top management s prior assessment of the likelihood that it will be optimal to divest a specific division the costs of influence activities to the firm and to the divisional managers and the difference in the valuation of the division s assets in the current firm and under alternative uses

why does the economy fall to pieces after a financial crisis the worst fi nancial crisis in the history of the united states and many other he worst fi nancial crisis in the history of the united states and many other countries started in 1929 the great depression followed the second worst countries started in 1929 the great depression followed the second worst struck in the fall of 2008 and the great recession followed commentators struck in the fall of 2008 and the great recession followed commentators have dwelt endlessly on the causes of these and other deep fi nancial collapses have dwelt endlessly on the causes of these and other deep fi nancial collapses less conspicuous has been the macroeconomists concern about why output and less conspicuous has been the macroeconomists concern about why output and employment collapse after a fi nancial crisis and remain at low levels for several or employment collapse after a fi nancial crisis and remain at low levels for several or many years after the crisis this article pursues modern answers to that question it many years after the crisis this article pursues modern answers to that question it focuses on events in the united states since 2008 focuses on events in the united states since 2008 existing macroeconomic models account successfully for the immediate effects existing macroeconomic models account successfully for the immediate effects of a fi nancial crisis on output and employment i will lay out a simple macro model of a fi nancial crisis on output and employment i will lay out a simple macro model that captures the most important features of modern models and show that realistic that captures the most important features of modern models and show that realistic increases in fi nancial frictions that occurred in the crisis of late 2008 will generate increases in fi nancial frictions that occurred in the crisis of late 2008 will generate declines in real gdp and employment of the magnitude that occurred but this declines in real gdp and employment of the magnitude that occurred but this model cannot explain why gdp and employment failed to recover once the fi nancial model cannot explain why gdp and employment failed to recover once the fi nancial crisis subsided the model implies a recovery as soon as fi nancial frictions return to crisis subsided the model implies a recovery as soon as fi nancial frictions return to normal at the end of the article i will mention the ideas that are in play to explain normal at the end of the article i will mention the ideas that are in play to explain the persistent adverse effects of temporary crises but these ideas have not made their the persistent adverse effects of temporary crises but these ideas have not made their way into the mainstream model way into the mainstream model this article cites only a few of the many important contributions to the mainthis article cites only a few of the many important contributions to the mainstream model my paper hall 2009 contains many citations and the forthcoming stream model my paper hall 2009 contains many citations and the forthcoming new volume of the new volume of the handbook of monetary economics discusses the literature fully discusses the literature fully

why is bank debt senior a theory of asymmetry and claim priority based on influence costs this theory can explain why bank debt is universally senior consistent with the presence of conflict lawyers and absolute priority violations in financial distress better organized banks would more strongly contest priority in financial distress if they were junior because deterrence can reduce creditors total expenses in a priority contest the ex post stronger lobbyist litigant should be senior ex ante for equivalent reasons the theory can advise when public debt should be senior to trade credit and or implicit contracts and can even suggest one rationale for the absolute priority rule apr this article further shows that chapter hi creditor reimbursement procedures can lower overall costs article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

how debt markets have malfunctioned in the crisis the financial crisis that began in 2007 is especially a crisis in debt markets a full understanding of what happened in the financial crisis requires investigation into the plumbing of debt markets during a financial crisis when funds often cannot be raised easily or quickly the fundamental values for certain assets can become separated for a time from market prices with consequences that can echo into the real economy this article will explain in concrete ways how debt markets can malfunction with deleterious consequences for the real economy after a quick overview of debt markets i discuss three areas that are crucial in all debt markets decisions risk capital and risk aversion repo financing and haircuts and counterparty risk in each of these areas feedback effects can arise so that less liquidity and a higher cost for finance can reinforce each other in a contagious spiral i will document the remarkable rise in the premium that investors placed on liquidity during the crisis next i will show how these issues caused debt markets to break down indeed fundamental values and market values seemed to diverge across several markets and products that were far removed from the toxic subprime mortgage assets at the root of the crisis finally i will discuss briefly four steps that the federal reserve took to ease the crisis and how each was geared to a specific systemic fault that arose during the crisis

welfare specifications and optimal control of climate change an application of fund the sensitivity of the optimal control of carbon dioxide emissions to the specification of the social welfare function is systematically explored using the fund model increasing risk aversion emphasises climate change damages relative to emission reduction costs but at the same time increases the discount rate of consumption without international co operation the discount rate effect dominates so that optimal control decreases with increasing risk aversion with international co operation optimal control first increases then decreases with increasing risk aversion since climate change falls heaviest on the poor optimal control increases with increasing inequity aversion full fledged intergenerational welfare functions on the one hand emphasise climate change damages but on the other hand place more weight on current poorer generations in fund the two tendencies almost cancel

structural causes of the global financial crisis a critical assessment of the new financial architecture we are in the midst of the worst financial crisis since the great depression this crisis is the latest phase of the evolution of financial markets under the radical financial deregulation process that began in the late 1970s this evolution has taken the form of cycles in which deregulation accompanied by rapid financial innovation stimulates powerful financial booms that end in crises governments respond to crises with bailouts that allow new expansions to begin as a result financial markets have become ever larger and financial crises have become more threatening to society which forces governments to enact ever larger bailouts this process culminated in the current global financial crisis which is so deeply rooted that even unprecedented interventions by affected governments have thus far failed to contain it in this paper we analyse the structural flaws in the financial system that helped bring on the current crisis and discuss prospects for financial reform

econometric analysis of bank lending and business cycles in south africa this article examines econometric relationships between bank lending and business cycle in south africa two long run economic relationships are hypothesized between total credit and the variables namely coincidental indicators spread between lending and borrowing rates money supply stock price index inflation and banking sector specific factors included in the model of these variables only coincident indicators changes in money supply as well as capital and reserve are found to exert some influence on short run total credit availability

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

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

cognition market sentiment and financial instability the purpose of this paper is to explore the role for psychology within an open system structural theory of financial instability and to consider the implications for policy while behavioural finance has drawn on ideas from psychology in order to explain evidence of behaviour that deviates from the rationality axioms it is argued that the way in which psychology is framed by this approach is unduly limiting minsky s structural theory of financial instability with its keynesian and ultimately humean roots incorporates psychology into the theoretical foundations in particular cognition and sentiment are shown to be interconnected rather than separable it is concluded that the policy implications for addressing the current crisis while apparently similar between these different approaches are in fact very different the underlying theory involves different methodology and indeed different framing from behavioural finance the way in which the crisis is understood is therefore important for policy copyright the author 2010 published by oxford university press on behalf of the cambridge political economy society all rights reserved oxford university press

can the trade off theory explain debt structure we examine the optimal mixture and priority structure of bank and market debt using a tradeoff model where banks have the unique ability to renegotiate outside formal bankruptcy flexible bank debt offers a superior tradeoff between tax shields and bankruptcy costs ease of renegotiation limits bank debt capacity however optimal debt structure hinges upon which party has bargaining power in private workouts weak firms have high bank debt capacity and utilize bank debt exclusively strong firms lever up to their lower bank debt capacity augment with market debt and place the bank senior therefore the tradeoff theory offers an explanation for i why young small firms use bank debt exclusively ii why large mature firms employ mixed debt financing and iii why bank debt is senior the tradeoff theory also generates predictions consistent with international evidence in countries where the bankruptcy regime entails soft tough enforcement of contractual priority bank debt capacity is low high implying greater less reliance on market debt

macroeconomics after the crisis time to deal with the pretense of knowledge syndrome the recent financial crisis has damaged the reputation of macroeconomics largely for its inability to predict the impending financial and economic crisis to be honest this inability to predict does not concern me much it is almost tautological that severe crises are essentially unpredictable for otherwise they would not cause such a high degree of distress what does concern me about my discipline is that its current core by which i mainly mean the so called dynamic stochastic general equilibrium approach has become so mesmerized with its own internal logic that it has begun to confuse the precision it has achieved about its own world with the precision that it has about the real one this is dangerous for both methodological and policy reasons to be fair to our field an enormous amount of work at the intersection of macroeconomics and corporate finance has been chasing many of the issues that played a central role during the current crisis including liquidity evaporation collateral shortages bubbles crises panics fire sales risk shifting contagion and the like however much of this literature belongs to the periphery of macroeconomics rather than to its core i will discuss the distinction between the core and the periphery of macroeconomics as well as the futile nature of the integrationist movement that is the process of gradually bringing the insights of the periphery into the dynamic stochastic general equilibrium structure i argue that the complexity of macroeconomic interactions limits the knowledge we can ever attain and that we need to place this fact at the center of our analysis we should consider what this complexity does to the actions and reactions of the economic agent and seek analytical tools and macroeconomic policies that are robust to the enormous uncertainty to which we are confined

the effect of bankruptcy protection on investment chapter 11 as a screening device asymmetric information and conflicts of interest between equity and debt holders can force a distressed but efficient firm to liquidate and may enable a distressed inefficient firm to continue in the extreme if it is costless for an inefficient firm to mimic an efficient firm in a debt restructuring efficient and inefficient firms are equally likely to continue or liquidate this article shows that chapter 11 procedures impose costs on ineffilcient firms that would otherwise mimic efficient firms this separation induces voluntary filing for bankruptcy by ineffilcient firms and consequently enables efficient firms to continue when they would otherwise be liquidated

when do banks take equity in debt restructurings this article examines the conditions under which bank lenders make concessions by taking equity in financially distressed firms i show that the role banks play in debt restructurings depends on the financial condition of the firm the existence of public debt in the firm s capital structure and the ability of public debt to be restructured empirically i find that for firms with public debt outstanding banks never make concessions unless public debtholders also restructure their claims when banks do take equity on average they obtain a substantial proportion of the firm s stock and they maintain their position for over two years article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

reading about the financial crisis a twenty one book review the recent financial crisis has generated many distinct perspectives from various quarters in this article i review a diverse set of twenty one books on the crisis eleven written by academics and ten written by journalists and one former treasury secretary no single narrative emerges from this broad and often contradictory collection of interpretations but the sheer variety of conclusions is informative and underscores the desperate need for the economics profession to establish a single set of facts from which more accurate inferences and narratives can be constructed jel e32 e44 e52 g01 g21 g28

the aggregation of climate change damages a welfare theoretic approach the economic value of environmental goods is commonly determined using the concepts of willingness to pay wtp or willingness to accept wta however the wtp wta observed in different countries or between individuals will differ according to socio economic characteristics in particular income this notion of differentiated values for otherwise identical goods say a given reduction in mortality risk has been criticized as unethical most recently in the context of the social cost chapter of the ipcc second assessment report these critics argue that being a function of income wtp wta estimates reflect the unfairness in the current income distribution and for equity reasons uniform per unit values should therefore be applied across individuals and countries this paper analyses the role of equity in the aggregation of climate change damage estimates using basic tools of welfare economics it shows one way of how wtp wta estimates can be corrected in aggregation if the underlying income distribution is considered unfair it proposes that in the aggregation process individual estimates be weighted with an equity factor derived from the social welfare and utility functions equity weighting can significantly increase aggregate global damage figures although some specifications of weighting functions also imply reduced estimates the paper also shows that while the postulate of uniform per unit values is compatible with a wide range of reasonable utility and welfare specifications there are also cases where the common value notion is not compatible with defensible welfare concepts

bank debt restructurings and the composition of exchange offers in financial distress this article examines the relation between bank debt forgiveness and the structure of public debt exchange offers in financial distress i find that the structure of exchange offers and the likelihood of an offer s success are significantly related to whether the bank participates in the restructuring transaction exchange offers made in conjunction with bank concessions are characterized by significantly greater reductions in public debt outstanding and significantly less senior debt offered to bondholders overall the results suggest that the structure of a firm s public and private claims significantly affects the firm s ability to modify its capital structure in financial distress recent empirical studies provide apparently conflicting evidence on the relation between the mix of private and public debt in a firm s capital structure and the ability of the firm to restructure its debt outside of bankruptcy for example gilson john and lang 1990 find that the likelihood of a successful debt restructuring is positively related to a firm s reliance on bank borrowing in contrast asquith gertner and scharfstein 1994 and james 1995 find that for firms with public debt outstanding banks rarely make unilateral concessions indeed the latter two studies suggest that the avoidance of bankruptcy depends on the ability to restructure public not private debt claims finally gilson 1994 finds less debt reduction in financial distress the higher the proportion of bank debt a firm uses in this article i examine the relation between bank debt restructurings and the composition of public debt exchange offers by financially distressed firms the secured status of bank debt and institutional constraints on bank debt for equity swaps imply that banks are unlikely to provide debt forgiveness unless their claims are impaired i e the face value of the bank s claim is greater than the value of the collateral net of transactions and bankruptcy costs 2 however drawing on theoretical work by gertner and scharfstein 1991 i argue that bank participation in a restructuring can play an important role in resolving

an empirical investigation of u s firms in reorganization the purpose of this paper is to understand the institutional features of chapter 11 from an empirical examination of thirty firms that have emerged from reorganization we find the recontracting framework of chapter 11 to be complex lengthy and costly violations of absolute priority in favor of stockholders are frequently encountered these deviations may result from the bargaining process of chapter 11 or from a recontracting process between creditors and stockholders which recognizes the ability of stockholder oriented management to preserve firm value an example of such recontracting addresses myers underinvestment problem an investigation of the effects of chapter 11 on the pricing of risky debt is also provided the purpose of this paper is to understand the institutional features of chapter

the intergenerational transfer of solar radiation management capabilities and atmospheric carbon stocks solar radiation management srm technologies are considered one of the likeliest forms of geoengineering if developed a future generation could deploy them to limit the damages caused by the atmospheric carbon stock inherited from the current generation despite their negative side effects should the current generation develop these geoengineering capabilities for a future generation and how would a decision to develop srm impact on the current generation s abatement efforts natural scientists ethicists and other scholars argue that future generations could be more sanguine about the side effects of srm deployment than the current generation in this paper we add economic rigor to this important debate on the intergenerational transfer of technological capabilities and pollution stocks we identify three conjectures that constitute potentially rational courses of action for current society including a ban on the development of srm however the same premises that underpin these conjectures also allow for a novel possibility if the development of srm capabilities is sufficiently cheap the current generation may for reasons of intergenerational strategy decide not just to develop srm technologies but also to abate more than in the absence of srm

land aggregation using contingent and guaranteed payments this article explores the use of alternative payment mechanisms to overcome the holdout problem when multiple parcels of land must be acquired to complete a real estate development project purchase offers contingent upon successful land aggregation are compared to combination offers containing both guaranteed and contingent payments to determine which approach better mitigates holdout the distribution of gains between developers and landowners is also examined the results of a series of economic experiments suggest that contingent offers expedite land aggregation but developer payoffs are higher when combination offers are used the results offer insight to real estate developers participating in land aggregation and inform government entities considering the necessity of public sector intervention in real estate markets to encourage desired development projects

a cost benefit analysis of slowing climate change there are many conflicting views regarding the true dimensions of the climate change problem often these viewpoints are based on different estimates of key parameters with little indication as to why parameter estimates vary so much and which ones might be the more reliable the prospects for a co ordinated strategy to tackle climate change appear dim little consensus has emerged for example regarding the costs of abating carbon emissions some take the view that considerable improvements in energy efficiency are available at negative cost by setting minimum efficiency standards for vehicles and domestic appliances e g mills et al 1991 others regard the macroeconomic costs of even small reductions in carbon emissions as substantial manne and richels 1993 in the judgement of other researchers a proportion of carbon emissions arise purely as a result of institutional failings either at a regional level in the subsidies paid to fossil fuel energy producers in the erroneous belief that this promotes economic growth shah and larsen 1994 in failure to deal with air pollution glomsrod et al 1992 and vehicle congestion in urban areas hughes 1994 or at a global level in failing to make appropriate transfers to those countries whose forests contain rich biodiversity which we would wish to preserve pearce 1991

how long do junk bonds spend in default this paper analyzes junk bond defaults during 1980 to 1991 to determine which factors affect the length of time spent in default bondholder holdouts are not a significant problem as firms with proportionately more bonds have shorter default spells in contrast bank debt is associated with slower restructurings bargaining problems arising from contingent liabilities lawsuits and size delay the process although multiple bond classes do not neither information problems nor firm value appear to matter hlts do not resolve their defaults at a significantly faster pace defaults tend to take less time in the 1990s despite drexel s disappearance from the market

ontology and the study of social reality emergence organisation community power social relations corporations artefacts and money the conception of social reality i have previously defended and here extend positing features such as social relations positions and powers is thoroughly naturalistic and even consistent with modern interpretations of quantum field theory it also serves to ground a social science that can be scientific in the sense of natural science this is the thesis defended here central to the argument is an emphasis on a strong form of emergence and the category of organisation in process to bring out various salient features of the position defended i take the opportunity to compare aspects of it with relevant components of the contribution of john searle whose ontological conception appears at once to be both very similar yet also very different copyright the author 2012 published by oxford university press on behalf of the cambridge political economy society all rights reserved oxford university press

seniority and maturity of debt contracts abstract this paper provides a model of how borrowers with private information about their credit prospects choose seniority and maturity of debt increased short term debt leads lenders to liquidate too often it also increases the sensitivity of financing costs to new information although better than average borrowers desire information sensitivity the model implies that short term debt will be senior to long term debt and that long term debt will allow the issue of additional future senior debt the model also has implications on the structure of leveraged buyouts and on how various types of lenders respond to potential defaults

computer mediated transactions every now and then a set of technologies becomes available that sets off a period of combinatorial innovation think of standardized mechanical parts in the 1800s the gasoline engine in the early 1900s electronics in the 1920s integrated circuits in the 1970s and the internet in the last decade or so the component parts of these technologies can be combined and recombined by innovators to create new devices and applications since these innovators are working in parallel with similar components it is common to see simultaneous invention there are many well known examples such as the electric light the airplane the automobile and the telephone many scholars have described such periods of innovation using terms such as recombinant growth general purpose technologies cumulative synthesis and clusters of innovation the internet and the web are wonderful examples of combinatorial innovation in the last 15 years we have seen a huge proliferation of web applications all built from a basic set of component technologies the internet itself was a rather unlikely innovation i like to describe it as a lab experiment that got loose since the internet arose from the research community rather than the private sector it had no obvious business model other public computer networks such as aol compuserve and minitel generally used a subscription models but were centrally controlled and offered little scope for innovation at the user level the internet won out over these alternatives precisely because it offered a flexible set of component technologies which encouraged combinatorial innovation

what s different about banks abstract negotiable certificates of deposit cd s trade in the capital market in competition with other securities like commercial paper and bankers acceptances if cd s must pay lenders competitive monetary interest the reserve tax on cd s is borne by bank borrowers viability of the tax means there must be something special about bank loans that makes some borrowers willing to pay higher interest rates than those on other securities of equivalent risk moreover there must be something special about banks that prevents other intermediaries from competing to assure that it never pays to finance loans with cd s

the current economic crisis its nature and the course of academic economics the current crisis has triggered significant debate concerning economic theory and policy largely absent from this debate is an informed discussion of the methods used by economists in analysing the economy and formulating their proposals but method matters here i argue that current academic research practices need to be transformed before real insight can be achieved specifically i indicate why and how a more grounded framework than that presupposed by current research practices facilitates a potentially more fruitful approach to understanding the crisis

the social cost of carbon and its policy implications the shadow price or social cost of carbon is an important indicator of the global incremental damage done by emitting greenhouse gases today cost benefit analysis would set the optimal amount of greenhouse gas emission reduction at the point where this social cost just equals the incremental cost of controlling emissions the higher the value for the social cost of carbon the more control is warranted this comparison assumes that cost benefit analysis is the correct way of determining climate change policy and many believe this is not the case because of the very long term irreversible and potentially catastrophic nature of global warming but in the short run at least a comparison of cost and benefits is required and in any event all decisions imply costs and benefits but what is the right figure for the social cost of carbon this paper reviews the uk government s assessment of the cost and concludes that it has been set far too high because of a misreading of the integrated assessment models used to balance costs and benefits moreover adoption of the uk government s shadow price would have formidable implications for energy policy in the uk and for policies on afforestation copyright 2003 oxford university press

technology distribution and the rate of profit in the us economy understanding the current crisis this paper offers a synoptic account of the state of the debate among marxist scholars regarding the current structural crisis of capitalism identifies two broad streams within the literature dealing in turn with aggregate demand and profitability problems and proceeds to concentrate on an analysis of issues surrounding the profitability problem in two steps first evidence on profitability trends for the non farm non financial corporate business the non financial corporate business and the corporate business sectors in post war usa are summarised a broad range of profit rate measures are covered and data from both the us bureau of economic analysis nipa and fixed assets tables and the federal reserve flow of funds account are used second the underlying drivers of profitability in terms of technology and distribution are investigated the profitability analysis is used to offer some hypotheses about the current structural crisis copyright oxford university press

the effect of capital structure on a firm s liquidation decision abstract a firm s liquidation can impose costs on its customers workers and suppliers an agency relationship between these individuals and the firm exists in that the liquidation decision controlled by the firm as the agent affects other individuals the customers workers and suppliers as principals the analysis in this paper suggests that capital structure can control the incentive conflict problem of this relationship by serving as a pre positioning or bonding mechanism appropriate selection of capital structure assures that incentives are aligned so that the firm implements the ex ante value maximizing liquidation policy

the double bubble at the turn of the century technological roots and structural implications this paper argues that the two boom and bust episodes of the turn of the century the internet mania and crash of the 1990s and the easy liquidity boom and bust of the 2000s are two distinct components of a single structural phenomenon they are essentially the equivalent of 1929 developed in two stages one centred on technological innovation the other on financial innovation hence the frequent references to that crash to the 1930s and to bretton woods are not simple journalistic metaphors for interpreting the credit crunch and its solution but rather the intuitive recognition of a fundamental similarity between those events and the current ones the paper holds that such major boom and bust episodes are endogenous to the way in which the market economy evolves and assimilates successive technological revolutions it will discuss why it occurred in two bubbles on this occasion it examines the differences and continuities between the two episodes and presents an interpretation of their nature and consequences

equitable cost benefit analysis of climate change policies the literature of welfare maximising greenhouse gas emission reduction strategies pays remarkably little attention to equity this paper introduces three ways to consider efficiency and equity simultaneously the first method inspired by kant and rawls maximises net present welfare without international cooperation as if all regions share the fate of the region affected worst by climate change optimal emission abatement varies greatly depending on the spatial and temporal resolution that is the grid at which maximum impact is defined the second method is inspired by varian s no envy emissions are reduced so as to equalise total costs and benefits of climate change over all countries of the world and over all time periods emission reductions are substantial this method approximately preserves the inequities that would occur in a world without climate change the third method uses non linear aggregations of welfare the utilitarian default is linear in a cooperative setting this method cannot distinguish between sources of inequity the higher the aversion to inequity the higher optimal greenhouse gas emission reduction

the credibility revolution in empirical economics how better research design is taking the con out of econometrics since edward leamer s memorable 1983 paper let s take the con out of econometrics empirical microeconomics has experienced a credibility revolution while leamer s suggested remedy sensitivity analysis has played a role in this we argue that the primary engine driving improvement has been a focus on the quality of empirical research designs the advantages of a good research design are perhaps most easily apparent in research using random assignment we begin with an overview of leamer s 1983 critique and his proposed remedies we then turn to the key factors we see contributing to improved empirical work including the availability of more and better data along with advances in theoretical econometric understanding but especially the fact that research design has moved front and center in much of empirical micro we offer a brief digression into macroeconomics and industrial organization where progress by our lights is less dramatic although there is work in both fields that we find encouraging finally we discuss the view that the design pendulum has swung too far critics of design driven studies argue that in pursuit of clean and credible research designs researchers seek good answers instead of good questions we briefly respond to this concern which worries us little

covenants and collateral as incentives to monitor although monitoring borrowers is thought to be a major function of financial institutions the presence of other claimants reduces an institutional lender s incentives to do this thus loan contracts must be structured to enhance the lender s incentives to monitor covenants make a loan s effective maturity and the ability to collateralize makes a loan s effective priority contingent on monitoring by the lender thus both covenants and collateral can be motivated as contractual devices that increase a lender s incentive to monitor these results are consistent with a number of stylized facts about the use of covenants and collateral in institutional lending modern finance theory suggests that financial intermediaries such as commercial banks insurance companies and finance companies monitor and control their borrowers on behalf of other investors 1 this article investigates how the loans made by these institutions can be structured so as to best enhance the institutions role as delegated monitors covenants and collateral are common features of loans made by financial institutions but these features are somewhat difficult to justify consider loan covenants clauses in a loan contract that require the borrower to take or refrain from various actions berlin and mester 1992 magee and sridhar 1994 and park 1994 show that by giving institutions the right to renegotiate or call loans when covenants are violated covenants serve as tripwires that enhance the flexibility and efficiency of financial contracting also as documented in smith and warner 1979 control rights from covenants reduce borrower adverse selection or moral hazard nevertheless by allowing institutions to demand repayment based on any information contractible or not

the damage costs of climate change towards a dynamic representation economic assessments of climate change impacts are commonly presented as the effect of a climate change associated with a doubling of the atmospheric concentration of carbon dioxide on the current economy this paper is an attempt to express impact as a function of both climate change and socio economic change with regard to climate change issues discussed are level versus rate of change speed of adaptation speed of restoration and value adjustment and symmetry with regard to socio economic change agriculture migration and the valuation of intangible losses are addressed uncertainty and higher order impacts are treated briefly it is qualitatively argued and quantitatively illustrated that these issues matter a great deal for the damage profile over the next century a damage model based on my best guesses is presented in the appendix

mortgages and monetary policy mortgages are long term nominal loans under incomplete asset markets monetary policy is shown to affect housing investment and the economy through the cost of new mortgage borrowing and the value of payments on outstanding debt these channels distinct from traditional transmission of monetary policy are evaluated within a general equilibrium model persistent monetary policy shocks resembling the level factor in the nominal yield curve have larger effects than transitory shocks manifesting themselves as long short spread the transmission is stronger under adjustable than fixed rate mortgages higher persistent inflation benefits homeowners under frms but hurts them under arms

the design of bank loan contracts the unique characteristics of bank loans emerge endogenously to enhance efficiency in a model of renegotiation between a borrower and a lender in which there is the potential for moral hazard on each side of the relationship firm risk is endogenous and renegotiated interest rates on the debt need not be monotone in firm risk the initial terms of the debt are not set to price default risk but rather are set to efficiently balance bargaining power in later renegotiation loan pricing may be nonlinear involving initial transfers either from the borrower to the bank or front the bank to the borrower article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

original issue high yield bonds aging analyses of defaults exchanges and calls this paper presents an aging analysis of 741 high yield bonds and finds default exchange and call percentages substantially higher than reported in earlier studies by december 31 1988 cumulative defaults are 34 percent for bonds issued in 1977 and 1978 and range from 19 to 27 percent for issue years 1979 1983 and from 3 to 9 percent for issue years 1984 1986 exchanges are also a significant factor although they often are followed by default moreover a significant percentage of high yield debt 26 47 percent for 1977 1982 has been called by december 31 1988 approximately one third of the bonds issued in 1977 1982 has defaulted or been exchanged and an additional one third had been called on average only 28 percent of these issues are still outstanding there is no evidence that early results for more recent issue years differ markedly from issue years 1977 to 1982

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

estimating the benefits of contractual completeness i provide a revealed preference based framework that uses covenant prices and choices to quantitatively study how covenants generate firm benefits by completing debt contracts i use a rational expectations based panel estimator of covenant prices which does not require quasi experimental variation to circumvent the problem of endogenous covenant choices i find that firms surpluses exceed the spread paid on a loan leverage and interest rate covenants produce the largest benefits lending quantitative credence to several standard theories of covenants once covenants are chosen the benefits from fine tuning them are small thus rationalizing boilerplate covenants i conclude by discussing the extensions and limitations of my method the author 2013 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

financial intermediation and macroeconomic analysis a macroeconomic framework in which fi nancial intermediation matters for the allocation of resources allocation of resources in this paper i fi rst discuss why neither standard macroeconomic models that in this paper i fi rst discuss why neither standard macroeconomic models that abstract from fi nancial intermediation nor traditional models of the bank lending abstract from fi nancial intermediation nor traditional models of the bank lending channel are adequate as a basis for understanding the recent crisis i argue that channel are adequate as a basis for understanding the recent crisis i argue that instead we need models in which intermediation plays a crucial role but in which instead we need models in which intermediation plays a crucial role but in which intermediation is modeled in a way that better conforms to current institutional intermediation is modeled in a way that better conforms to current institutional realities in particular we need models that recognize that a market based fi nan realities in particular we need models that recognize that a market based fi nan cial system one in which intermediaries fund themselves by selling securities in cial system one in which intermediaries fund themselves by selling securities in competitive markets rather than collecting deposits subject to reserve require competitive markets rather than collecting deposits subject to reserve require ments is not the same as a frictionless system ments is not the same as a frictionless system i then sketch the basic elements of an approach that allows fi nancial inter i then sketch the basic elements of an approach that allows fi nancial inter mediation and credit frictions to be integrated into macroeconomic analysis in a mediation and credit frictions to be integrated into macroeconomic analysis in a straightforward way i show how the model can be used to analyze the macroeco straightforward way i show how the model can be used to analyze the macroeco nomic consequences of the recent fi nancial crisis and conclude with a discussion of nomic consequences of the recent fi nancial crisis and conclude with a discussion of some implications of the model for the conduct of monetary policy some implications of the model for the conduct of monetary policy

equity development and climate change control the paper analyzes the effects of different equity principles on the decision of developing countries to join a world coalition whose aim is to control greenhouse gas emissions a game theoretic framework is proposed to assess the incentives for different countries to sign an international treaty on climate change control then the effects of different equity rules on these incentives are evaluated by using a dynamic integrated growth and climate model policy proposals based on transfers from developed to developing countries are also analyzed jel c7 h0 h3 q38

distress risk premia in expected stock and bond returns abstract prior studies find that shareholders strategic actions over debtholders are significant for stock prices but not for bond prices i find that for firms with private and public debt strategic default has no significant effect on distress risk premia in expected stock or bond returns suggesting that the dispersion of bondholders greatly weakens the shareholder advantage effect the shareholder advantage effect on stock prices is only significant for firms with only private debt and to some degree affected by the dispersion of stockholders and complexity in capital structure overall renegotiation friction helps explain the cross sectional implications of strategic default for stock and bond prices

international equity and differentiation in global warming policy ne of the major obstacles to reaching a comprehensive agreement on global warming is the setting of greenhouse gas emission reduction targets for individual countries long standing tensions between industrialized and developing countries have raised the issue of equity in burden sharing moreover individual industrialized nations have pleaded special circumstances and have sought differentiation in their obligations this paper analyzes alternative rules for distributing tradable carbon dioxide emissions permits a non linear programming model which distinguishes between allocation based and outcome based rules is used to analyze the relative welfare outcomes the model is applied to the world body of nations and yields several important policy implications

financial intermediation and delegated monitoring this paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders it presents a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary diversification within an intermediary serves to reduce these costs even in a risk neutral economy the paper presents some more general analysis of the effect of diversification on resolving incentive problems in the environment assumed in the model debt contracts with costly bankruptcy are shown to be optimal the analysis has implications for the portfolio structure and capital structure of intermediaries

do bondholders lose from junk bond covenant changes this article documents that firms can and do change the covenants of their public debt indentures through consent solicitations a game theoretic model shows that bondholders may consent to covenant changes even when it is not in their collective interest to do so despite this finding bondholder returns around solicitations are positive further analysis indicates that bondholders coordinate their actions to modify or defeat disadvantageous proposals and therefore can demand some of the gains resulting from covenant modifications the policy implication of this study is that bondholders may not need additional regulatory or judicial protection in the solicitation process copyright 1993 by university of chicago press

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

liquidity efficiency and bank bailouts governments can efficiently provide liquidity as when the banking system is bailed out we study a model in which not all assets can be used to purchase all other assets at every date agents sometimes want to sell projects the market price of the projects sold depends on the supply of liquidity which is determined in general equilibrium while private liquidity provision is socially beneficial since it allows valuable reallocations it is also socially costly since liquidity suppliers could have made more efficient investments ex ante there is a role for the government to supply liquidity by issuing government securities

recent progress of cooperation on climate mitigation a bibliometric analysis abstract effective international cooperation is an important measure to mitigate climate change the purpose of this study is to clarify the research progress in the field of cooperation on emission reduction identify the influential authors and articles and reveal the main research topics based on the bibliometric method and the web of science database this study analyzes the literature in the field of cooperation on emission reduction the results show that the publications in this field have increased significantly over the past decade with the usa and china are the most influential countries keyword co occurrence and frequency analysis show that the most important research topics are as follows burden sharing and equity the stability of the climate coalition and international environmental agreements technology transfer and climate finance the linkage of carbon markets and the response to noncooperation behavior the main methods involved are game theory model integrated assessment models and computable general equilibrium model equitable distribution of mitigation responsibilities is the basis for cooperation on carbon reduction specific rulebooks for carbon market linkage is the key to its successful implementation this study helps researchers to clarify the current research status in the field of cooperation on emission reduction and provide valuable information for future research

the economic crisis from a neoclassical perspective abstract this paper assesses the 2007 2009 recession using neoclassical business cycle theory i find that the 2007 2009 u s recession differs substantially from other postwar u s recessions and also from the 2008 recession in other countries in that lower labor input accounts for virtually all of the decline in income and output in the united states while lower productivity accounts for much of other u s recessions and the 2007 2009 recession in other countries i also find that existing classes of models including financial market imperfections models do not explain the u s recession this is because the 2007 2009 recession is almost exclusively related to what appear to be labor market distortions that drive a wedge between the marginal product of labor and the marginal rate of substitution between consumption and leisure a topic about which current classes of financial imperfection models are largely silent i discuss future avenues for developing this class of models and i consider alterna

length of time spent in chapter 11 bankruptcy a censored partial regression model this paper investigates original issuers of high yield bonds in chapter 11 bankruptcy to determine which factors affect the length of time spent in chapter 11 in order to do this analysis a flexible new duration model is proposed the censored partial regression model this model allows consideration of the effect of some variables on the duration using a nonparametric functional form it is found that the choice of prepackaged chapter 11 the length of time negotiating before filling for chapter 11 the profitability the highly leveraged transactions the participation on different disputes the role of vulture funds and some institutional changes turn out to be relevant to analyse this duration

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

the intra country distributional impact of policies to fight climate change a survey abstract in this paper we present a survey of distributional impact analysis of environmental policies with emphasis on taxes envisaged or implemented to reduce greenhouse gas emissions ghg these policies usually aim at reducing ghg directly or indirectly however they can produce important changes in factor allocation relative prices in specific countries as well as on world markets when adopted by a large number of countries changes in welfare can be important for vulnerable groups of population in developing countries this survey reviews the evidence on the incidence of these policies in the process it shows that the computable general equilibrium cge microsimulation approach has not been fully exploited in the context

on international equity weights and national decision making on climate change abstract estimates of the marginal damage costs of carbon dioxide emissions require the aggregation of monetised impacts of climate change over people with different incomes and in different jurisdictions implicitly or explicitly such estimates assume a social welfare function and hence a particular attitude towards equity and justice we show that previous approaches to equity weighting are inappropriate from a national decision maker s point of view because domestic impacts are not valued at domestic values we propose four alternatives sovereignty altruism good neighbour and compensation with different views on concern for and liability towards foreigners the four alternatives imply radically different estimates of the social cost of carbon and hence the optimal intensity of climate policy

internal vs external financing of r d the empirical evidence suggests that while small firms in united states united kingdom and canada rely on internal funds for financing r d similar firms in japan germany and france have access to bank loans in this paper we analyze the financial decisions of small firms willing to invest in r d we find that their high ratio of intangible assets along with the high risk nature of their investments can explain their inability to raise debt in external capital markets we also show that financing r d with bank loans might be feasible especially if banks are willing to monitor the investment activities of their clients

macroeconomic effects and frailties in the resolution of non performing loans resolution of non performing loans is a key determinant of bank credit default losses this paper analyzes macroeconomic and systematic frailty effects of the default resolution time for a sample of 17 395 defaulted bank loans in usa great britain and canada we find that frailties have a huge impact on the resolution times in a representative sample portfolio median resolution times more than double in a recession when compared to an expansion this leads to highly skewed distributions of losses and considerable systematic risk of the bank portfolio

environmental equity and sustainability rejecting the kaldor hicks criteria abstract an implementable translation of environmental equity and sustainability is provided for use in benefit cost analysis as such the approach builds on the underlying economic structure of benefit cost analysis while trying to cause it to evolve in ways that take into account issues of greater concern to ecological economists environmental equity and sustainability are interpreted as imposing new decision criteria that require additional benefit cost tests based on actual compensation to identified sub groups of the population this rejects the pre world war ii compromise of economists regarding potential compensation embodied in the kaldor hicks criteria for environmental equity a project is proposed to pass a benefit cost test if the identified group either receives net benefits or is more than compensated for its losses for sustainability a project is proposed to pass a benefit cost test if the compensation is larger than the net value of the resource and the net value of the resource is reinvested

optimal debt structure and the number of creditors within an optimal contracting framework we analyze the optimal number of creditors a company borrows from we also analyze the optimal allocation of security interests among creditors and intercreditor voting rules that govern renegotiation of debt contracts the key to our analysis is the idea that these aspects of the debt structure affect the outcome of debt renegotiation following a default debt structures that lead to inefficient renegotiation are beneficial in that they deter default but they are also costly if default is beyond a manager s control the optimal debt structure balances these effects we characterize how the optimal debt structure depends on firm characteristics such as its technology its credit rating and the market for its assets

investment policy and exit exchange offers within financially distressed firms this article examines the conflict of interest between shareholders and bondholders in a setting in which firms can renegotiate the terms of existing debt with public debtholders in particular we consider one of the most common types of debt restructuring the exit exchange offer our analysis explores the relation between exitexchange offers and investment choice by the manager and it concludes that managers acting strategically on behalf of shareholders may select inefficient investment projects in order to enhance their bargaining position vis a vis creditors holding the upside potential of an investment project fixed managers shareholders prefer projects with lower payoffs in states of bankruptcy because it induces individual bondholders to accept poorer terms in a debt for debt exit exchange offer thus generating a greater residual for shareholders in states of solvency additionally we show how the investment inefficiencies in our analysis depend on i the inability of bondholders to coordinate their actions ii the ability of managers to commit to suboptimal investment projects and iii the coupling of an individual bondholder s decision to tender and her decision to consent to allow the firm to strip fiduciary covenants we suggest conditions under which a ban on coupled exit exchange offers or alternatively constraints on debt for debt exchanges would be efficiency enhancing

the implications of debt heterogeneity for r d investment and firm performance an assumption in prior research is that debt is homogeneous and provides inappropriate governance for r d investments we argue that debt is heterogeneous although transactional debt does indeed impose strict contractual constraints that provide inappropriate governance for r d investments relational debt has very different characteristics that provide more appropriate governance using a sample of japanese firms we find that firms that align their debt structures with their r d investments perform better than those that are misaligned furthermore firms tend to align their debt structure with r d investments but only after deregulation permits relatively free access to various types of debt

how can we explain the persistence of the great recession a balanced stability approach the great recession gr brings about a stalemate in macroeconomics on the one hand while describing the immediate effects of the gr standard models fail to account for its persistence on the other heterodox approaches do not regain consensus as they fail to devise an alternative method for capturing the deep causes of the gr that account for its persistence in a systematic way this paper fills this gap by proposing a new framework called balanced stability approach unlike standard macro which takes stability for granted it provides a balanced assessment of stability considering both threats and opportunities for phenomena such as the so called new economy ne on a par on these grounds the paper draws the conclusion that the persistence of the gr is due to a low level of aggregate demand rooted in the structural changes generated by the ne

spatial and temporal efficiency in climate policy applications of fund fund is an integrated assessment model of the interactions between climate and economy nine world regions emit greenhouse gases and suffer damages from climate change a number of greenhouse gas emission reduction policies are compared including optimal and cost effective strategies strategies with early and late abatement and strategies with and without international co operation the analyses confirm that co operation matters resulting in substantially lower costs or higher welfare the real commitments of policy targets based on an absolute level e g 1990 emissions are hard to estimate because of the uncertainties in the baseline postponing action conflicts with minimising costs and maximising welfare but so does sharp emission reduction at the short term as proposed in the kyoto protocol

balancing contemporary fairness and historical justice a quasi equitable proposal for ghg mitigations abstract in this paper we analyze the impasse caused by polarizing positions of the united states and china in international negotiations on carbon mitigation by incorporating the bern carbon cycle module into the rice model developed by nordhaus and yang 1996 we set up a framework for tracking regional contributions to carbon concentration and to global climate change our proposal labeled the color preservation principle uses regional contribution share to global carbon concentration as the criterion for international cooperation through simulations in rice model with bern module rice b we examine the rationales of the arguments made by the united states and china we conclude that both countries standpoints are severely flawed to facilitate the global cooperation on carbon mitigations major concessions are needed from the two top carbon emitters

optimal debt and equity values in the presence of chapter 7 and chapter 11 explicit presence of reorganization in addition to liquidation leads to conflicts of interest between borrowers and lenders in the first best outcome reorganization adds value to both parties via higher debt capacity lower credit spreads and improved overall firm value if control of the ex ante reorganization timing and the ex post decision to liquidate is given to borrowers most of the benefits are appropriated by borrowers ex post lenders can restore the first best outcome by seizing this control or by the ex post transfer of control rights reorganization is more likely and liquidation is less likely relative to the benchmark case with liquidation only the u s bankruptcy code which includes a liquidation process chapter 7 and a reorganization process chapter 11 aims to resolve a number of important issues associated with a distressed firm these issues can be classified into information asymmetry problems e g quality of the firm heinkel and zechner 1993 agency problems e g risk shifting jensen and meckling 1976 or coordination problems e g debt of various maturities berglof and von thadden 1994 in this paper we investigate whether there is a place for a reorganization process in the presence of costly financial distress and liquidation these costs capture in reduced form the aforementioned frictions we wish to characterize the states of a borrowing firm relative to its outstanding contractual debt obligations at different stages of financial distress assuming full information and a single issue of debt we also seek to determine the role played by the bankruptcy code in improving the welfare of borrowers and lenders and how its influence depends on the rights given to borrowers and lenders at various stages of financial distress more precisely we build on structural models of debt merton 1974 black and cox 1976 which allows us to determine overall firm value along with the values of equity and debt in line with this literature we assume that liquidation destroys part of the firm s value we then ask the basic and yet important

security pricing and deviations from the absolute priority rule in bankruptcy proceedings claims ultimately awarded to shareholders of firms in reorganization were examined for a sample of 30 filings under the 1978 bankruptcy reform act we measured the amount paid to shareholders in excess of that which they would have received under the absolute priority rule and found that this amount represents on average 7 6 of the total awarded to all claimants evidence is also reported that common share values reflect a significant proportion of value ultimately received in violation of absolute priority suggesting that deviations from the rule were expected by the equity markets the absolute priority rule hereafter apr states that a bankrupt firm s value is to be distributed to suppliers of capital such that senior creditors are fully satisfied before any distributions are made to junior creditors and junior creditors are paid in full before common shareholders bankruptcy reorganization proceedings however are leaving shareholders and junior creditors with valuable assets even when senior claimants receive only partial settlements as barrett and sullivan 1988 noted traditionally shareholders have been last in line their claims on a troubled company s assets have had the lowest priority and their impact on the course of bankruptcy code proceedings generally has been next to nil but lately the balance of power has been shifting warner 1977 provided one of the early discussions of the implications of deviations from the apr baldwin and mason 1983 pp 510 511 examined the resolution of claims in the massey ferguson reorganization and provided no support for the hypothesis that the market believes absolute priority rules will be enforced if the firm defaults on its financial obligations franks and torous 1989 analyzed a sample of bankruptcies that occurred during the period 1970 through 1984 and found that 21 of 27 sample cases exhibited departures from the apr more recently weiss 1990 examined 37 firms that filed for bankruptcy between 1980 and 1986 and reported that 27 of the cases involved apr violations

bank skin in the game and loan contract design evidence from covenant lite loans in a model of dual agency problems where borrower lender and bank nonbank incentives may conflict we predict a hockey stick relation between bank skin in the game and covenant tightness as bank participation declines covenant tightness increases until reaching a low threshold at which point the relation sharply reverses and covenant protection is removed with a commensurate increase in spread we find support for the hockey stick relation with bank s stake in covenant lite loans averaging 8 0 median we also find that covenant lite loans are more likely when borrower moral hazard is less severe and when bank relationship rents are high

specifications of social welfare in economic studies of climate policy overview of criteria and related policy insights an important assumption in economic studies of climate policy is the social welfare function this paper shows that applying distinct decision or social welfare criteria can result in different optimal policies of climate control notably if climate change impacts are uncertain first decision criteria in current climate economic studies are reviewed next the most important alternatives are discussed including their mathematical formalization and incorporation in economy climate models most of these alternative criteria suggest more stringent climate policies to be optimal than the standard discounted utilitarianism approach however several important welfare criteria have not or hardly seen any application in the economic analysis of climate policy we conclude that there is clear need for systematic research on this theme for which the current review provides a solid basis

endogenous financial intermediation and real effects of capital account liberalization abstract we consider lending and investment under asymmetric information in a small developing economy we allow different forms of financial contracts to arise endogenously financial intermediaries mitigate a moral hazard problem in investment choice through costly monitoring we then examine the impact of opening the capital account on both welfare and the structure of lending contracts liberalizing the capital account may improve or worsen the efficiency of financial intermediaries leading to an improvement or worsening of the aggregate composition of investment projects we show that efficient financial intermediaries in the closed economy are neither necessary nor sufficient for a capital account liberalization to improve welfare

resolution of financial distress under chapter 11 abstract we develop a contingent claims model for a firm in financial distress with a formal account for renegotiations under the u s bankruptcy procedure known as chapter 11 shareholders and two classes of creditors senior and junior alternatively propose a reorganization plan subject to a vote the bankruptcy judge can intervene in any renegotiation round to impose a plan the multiple stage bargaining process is solved in a non cooperative game theory setting the calibrated model yields the liquidation rate the duration of chapter 11 and the frequency of deviations from the absolute priority rule which are consistent with empirical evidence

the four fallacies of contemporary austerity policies the lost keynesian legacy the contemporary wide scale austerity measures are likely to fail in most countries the first fallacy derives from the false diagnosis that the present crisis is the outcome of lax public spending policy when it is actually the outcome of a private credit led speculative boom the second fallacy assumes the possibility or even the generality of the so called expansionary fiscal contractions this neglects the short term negative effects on domestic demand and overestimates the generality of ricardian equivalence the importance of crowd in effects related to lower interest rates and the positive impact on trade balances the third fallacy one size fits all is problematic since greece and portugal cannot replicate the hard won german success their productive institutional and political configurations differ drastically and thus they require different policies the fourth fallacy states that the spill over from one country to another may resuscitate the inefficient and politically risky beggar my neighbour policies from the interwar period

a regional dynamic general equilibrium model of alternative climate change strategies outcomes and noncooperative equilibria this study finds that cooperative policies show much higher levels of emissions reductions than do noncooperative strategies that there are substantial differences in the levels of controls in both the cooperative and the noncooperative policies among different countries and that high income countries may be the major losers from cooperation jel h41 q4 q2 q20

evaluating corporate bonds and analyzing claim holders decisions with complex debt structure abstract although many different aspects of debt structures such as bond covenants and repayment schedules are empirically found to significantly influence values of bonds and equity many theoretical structural models still oversimplify debt structures and fail to capture phenomena found in financial markets this paper proposes a carefully designed structural model that faithfully models typical complex debt structures containing multiple bonds with various covenants for example the ability for an issuing firm to meet an obligation is modeled to rely on its ability to meet previous repayments and the default trigger is shaped according to the characteristics of its debt structure such as the amount and schedule of bond repayments thus our framework reliably provides theoretical insight and concrete quantitative measurements consistent with extant empirical research such as the shapes of yield spread curves under various firm s financial statuses and the impact of payment blockage covenants on newly issued and other outstanding bonds we also develop the forest a novel quantitative method to handle contingent changes in the debt structure due to premature bond redemptions a forest consists of several trees that capture different debt structures for instance those before or after a bond redemption this method can be used to analyze how poison put covenants in the target firm s bonds influence the bidder s costs of debt financing for a leveraged buyout or investigate how the presence of wealth transfer among the remaining claim holders due to a bond redemption influences the firm s call policy or further reconcile conflicts among previous empirical studies on call delay phenomena

the damage costs of climate change toward more comprehensive calculations it is argued that estimating the damage costs of a certain benchmark climate change is not sufficient what is needed are cost functions and confidence intervals although these are contained in the integrated models and their technical manuals this paper brings them into the open in order to stimulate discussion after briefly reviewing the benchmark climate change damage costs region specific cost functions are presented which distinguish tangible from intangible losses and the losses due to a changing climate from those due to a changed climate furthermore cost functions are assumed to be quadratic as an approximation of the unknown but presumably convex functions results from the damage module of the integrated climate economy model fund are presented next uncertainties are incorporated and expected damages are calculated it is shown that because of convex loss functions and right skewed uncertain ties the risk premium is substantial calling for more action than analysis based on best guess estimates the final section explores some needs for further scientific research

the costs of bankruptcy chapter 7 liquidation versus chapter 11 reorganization our paper explores a comprehensive sample of small and large corporate bankruptcies in arizona and new york from 1995 to 2001 bankruptcy costs are very heterogeneous and sensitive to the measurement method used we find that chapter 7 liquidations appear to be no faster or cheaper in terms of direct expense than chapter 11 reorganizations however chapter 11 seems to preserve assets better thereby allowing creditors to recover relatively more our paper also provides a large number of further empirical regularities our paper analyzes the largest sample of corporate bankruptcies to date we research approximately 300 cases from the arizona and new york federal bankruptcy courts from 1995 to 2001 these cases consist of 1 both publicly traded and privately held corporations and 2 both chapter 7 liquidations and chapter 11 reorganizations this sample is practically the entire population of unique corporate bankruptcies in these courts our paper s primary objective is to measure how the two available bankruptcy procedures differ especially but not only in terms of cost we explore four variables namely the change in the estate s value during bankruptcy a measure of indirect costs the time spent in bankruptcy another and more common measure of indirect costs the expenses submitted to and approved by the bankruptcy court a measure of direct costs and the recovery rates for creditors and apr violations our most important findings are that chapter 7 liquidations are not cheaper than chapter 11 reorganizations particularly after we control for endogenous self selection of firms into bankruptcy procedure bankruptcy professionals attorneys accountants trustees regularly end up with most of the post bankruptcy firm s value in chapter 7 arturo bris is at imd yale school of management and ecgi ivo welch is at brown uni

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