imprecise information disclosure and truthful certification abstract this article studies the interaction of information disclosure and reputational concerns in certification markets we argue that by revealing information less precisely a certifier reduces the threat of capture because this reduces her gains from selling fraudulent certificates as a result only imprecise disclosure rules are implementable for intermediate discount factors our results therefore suggest that contrary to the common view imprecise disclosure may be socially desirable regulatory intervention may provoke market failure especially in industries where certifier reputational rents are low

reputation effects in the market of certifiers evidence from the audit industry i introduction asymmetric information between seller and buyer can impede mutually beneficial transactions one of the solutions to this problem is to recruit an independent third party a certifier who verifies unobserved product characteristics for the buyer the certifier s independence is at the heart of the tripartite arrangement this independence however can be compromised when sellers pay for the certification for instance in the market of auditors and credit rating agencies cra it is not the investor i e the buyer of the security who pays for the certifier s services but the company which is to be impartially rated or audited in this business model companies can naturally manipulate their ratings audits furthermore investors only have a limited power to weed out dishonest certifiers simply because companies instead of investors choose auditors and cra ultimately these problems can pervert the certifier s mission to serve the investing community dranove and jin 2010 not surprisingly this conflict of interest has often been cited as a cause for accounting scandals and more recently for inflated credit ratings e g bis cfgs 2008 the economist 2004 2006 auditors and cra alike refute the criticism of their business model arguing that the threat of losing their reputation is a sufficient disciplinary device e g the economist 2005 1 however this claim has not yet been empirically substantiated a successful mechanism of reputation has three components in the presence of conflicts of interest consider the audit market 2 first investors have to punish companies which chose low quality auditors there is evidence that capital markets severely penalize companies whose audit reports are of dubious quality e g chaney philipich and kirk 2002 gao 2003a krishnamurthy zhou and zhou 2006 pacini and hillison 2003 second this negative capital market reaction should feed into companies auditor choice i e companies should choose high quality auditors third auditors then should have the incentive to provide high quality audits the second stage of this mechanism has not been empirically validated yet in particular it has not been analyzed whether the adverse capital market reaction to low audit quality feeds into companies auditor choice and if it does how a positive effect of adverse quality signals on audit demand means that firms prefer to engage lenient auditors in order to receive favorable reports suggesting that conflicts of interest overwhelm reputation concerns and clearly fail the disciplinary mechanism a negative effect on the other hand indicates that while investors do not pay for audit services they can exert discipline on auditors indirectly by forcing public companies to choose high quality auditors a success of reputation in this paper i exploit the natural experiment of arthur andersen s collapse and test the effects of audit quality signals on companies auditor choice in discrete choice models the quality signals in this study are auditors industry specific financial restatement histories i e the proportion of clients in an industry which restated financial statements in the past i find that auditors restatement histories are a crucial driving force in the subsequent auditor choice of deserting andersen clients there are compelling reasons why auditors financial restatement histories should forcibly feed into a company s auditor choice restatements are material corrections of published financial statements which cannot be relied upon anymore and have to be reissued since the very role of the independent auditor is to ensure that financial statements are fairly presented in all material respects it appears natural to think that the auditor has not done his job properly if a financial statement has to be restated later indeed there is ample evidence that capital markets receive restatements badly

designing and rating an area yield crop insurance contract this article documents the design and rate making procedures used in the development of the group risk plan grp the new federal crop insurance product that insures based on area yield the authors of this article worked closely with personnel in the federal crop insurance corporation and others in developing methodological and practical constraints needed in implementing a workable area yield contract grp indemnity payments are made based on percentage shortfalls in actual county yields relative to a forecasted yield historical county yield data are used to develop forecasted yields and premium rates

using state pension shocks to estimate fiscal multipliers since the great recession has government spending raised income and employment since 2008 i use new data on state pension returns during the great recession to recover exogenous changes in spending instrumenting with these return shocks i estimate that each dollar of windfall financed spending raised local incomes by 1 43 and every additional 22 011 of spending created one contemporaneous job these estimates are similar to those found in shoag 2010 despite the non overlapping datasets unlike shoag 2010 however the bulk of the employment increase post 2008 stems from decreases in unemployment rather than increased labor force participation

reputation and signaling in asset sales abstract static adverse selection models of security issuance show that informed issuers can perfectly reveal their private information by maintaining a costly stake in the securities they issue this paper shows that allowing an issuer to both signal current security quality via retention and build a reputation for honesty leads that issuer to misreport quality even when owning a positive stake that is the equilibrium is neither separating nor pooling an issuer retains less as reputation improves and prices are more sensitive to retention when the issuer has a worse reputation

modeling conditional yield densities given the increasing interest in agricultural risk many have sought improved methods to characterize conditional crop yield densities while most have postulated the beta as a flexible alternative to the normal others have chosen nonparametric methods unfortunately yield data tends not to be sufficiently abundant to invalidate many reasonable parametric models this is problematic because conclusions from economic analyses which require estimated conditional yield densities tend not to be invariant to the modeling assumption we propose a semiparametric estimator that because of its theoretical properties and our simulation results enables one to empirically proceed with a higher degree of confidence copyright 2003 oxford university press

a public good approach to credit ratings from concept to reality abstract from the onset of the 2008 2009 financial crisis to the subsequent european sovereign debt crisis credit rating agencies have been assigned considerable blame reforming the credit rating industry has hence become an important policy issue in addition to the regulatory efforts in the context of accepting the for profit business model of ratings there is a growing realization that credit ratings bear the characteristics of a public good financial market participants need reliable transparent and independent assessment of credit risks credit ratings are therefore better viewed as an infrastructure matter however the proposed regulations seem to have missed this point this paper introduces a new approach to credit ratings undertaken by the risk management institute at the national university of singapore that is predicated on the provision of credit ratings as a public good with a public good alternative in place the currently predominant for profit business model may be counterbalanced

energy rent and public policy an analysis of the canadian coal industry abstract this paper analyses issues in resource rent through a case study of the canadian coal industry a model of the coal industry is constructed to estimate the magnitude of rent and distribution of coal rent between government and industry over the 30 year period from 1970 to 2000 disaggregation of results by coal sector shows that rent varied widely with one sector generating substantial rent and other sectors incurring large losses the pattern of development of the coal sector followed what can be termed a rent dissipation cycle in which the generation of rent in the profitable sector created excessively optimistic expectations that encouraged new entrants to dissipate rent by developing uneconomic capacity the analysis also shows that the system used to collect rent was ineffective the public owner collected only one third of the rent on the profitable mines and collected royalty revenue from the unprofitable mines even though no rent was generated the case study illustrates that improvements in private sector planning based on a better appreciation of resource market fundamentals elimination of government subsidies that encourage uneconomic expansion and more effective rent collection are all needed to avoid rent dissipation and increase the benefits of energy development in producing jurisdictions the study also illustrates that estimates of rent in the resource sector should disaggregate results by sector and make adjustments for market imperfections to accurately assess the magnitude of potential rent

optimum area yield crop insurance cet article determine le contrat optimal d assurance dont l indemnite depend du rendement agrege sur recoltes d un bassin de production le schema optimal d assurance est base sur le coefficient individuel de regression qui mesure la sensibilite du rendement agrege a des variations du rendement agrege une indemnite est versee lorsque le rendement agrege est inferieur superieur a un rendement critique si le coefficient de regression est positif negatif le contrat optimal contient une franchise evanescente si le coefficient de regression est superieur a l unite

last bank standing what do i gain if you fail banks are highly leveraged institutions potentially attracted to speculative lending even without deposit insurance a counterbalancing incentive to lend prudently is the risk of loss of charter value which depends on future rents we show in a dynamic model that current concentration does not reduce speculative lending and may in fact increase it in contrast a policy of temporary increases in market concentration after a bank failure by promoting a takeover of failed banks by a solvent institution is very effective by making speculative lending decisions strategic substitutes it grants bankers an incentive to remain solvent subsequent entry policy fine tunes the trade off between the social costs of reduced competition and the gain in stability

certification under oligopolistic competition in a symmetric duopolistic market where each firm s choice regarding certain quality attributes such as the environmental friendliness of its product is its own private information the extent of horizontal differentiation between firms plays a crucial role in a certifier s optimal certification policy under a non profit certifier it is always the case that both firms produce the highest quality and opt for certification this is also the case under a for profit certifier but only when the degree of horizontal differentiation is sufficiently high when horizontal differentiation is low the for profit certifier by charging a very high certification fee creates maximum vertical differentiation between firms as a result only one firm produces the highest quality and opts for certification whereas the other firm produces the lowest quality and does not opt for certification this asymmetry under a for profit certifier makes the market inefficient which provides one possible explanation for the existence of mostly non profit certifiers in such markets

a theory of credibility this paper presents models in which one agent must decide whether to trust another whose motives are uncertain reliability can only be communicated through actions in this context it pays for people to build a reputation based on reliable behaviour someone becomes credible by consistently providing accurate and valuable information or by performing useful services the theory provides a justification for long term arrangements without binding contracts it also describes those situations where it pays an agent to cash in on his reputation many decisions depend on trusting someone consumers must decide whether to believe advertisements banks need to judge the reliability of loan applicants and employers must decide how much responsibility to delegate to their employees this paper attempts to model situations that arise when someone is uncertain about whether to trust the people he deals with in this context reputations for reliability are valuable an agent becomes credible by consistently providing accurate valuable information or by always acting responsibly i analyse a series of simple abstract models of information transmission in the basic model there are two agents the sender s and the receiver r who are to play the game a known finite number of times at each stage both players learn the value of a parameter measuring the importance of that period s play of the game that is the value of making a correct decision and s obtains payoff relevant information s then sends a signal to r who makes a decision that affects the welfare of both players after both players learn the consequences of r s decision the process repeats at each stage r must decide what action to take in order to do that he must assess the credibility of s the difficulty arises because r is uncertain about s s preferences when play begins i model this by assuming that with positive probability s has identical preferences to r s is a friend and with positive probability s has completely opposed preferences to r s is an enemy this uncertainty creates a trade off for enemy senders at each stage providing honest information enhances s s reputation but only at the expense of foregoing an opportunity for immediate gain by duping r the possibility that s is a friend lends credibility to what he says but this credibility may also be exploited by an enemy s the principal equilibrium has the following form in the basic model where s has no control over the importance of a given play s typically conveys accurate information for the first several periods r raises the probability he places on s being friendly after receiving accurate information if he believes that an enemy would have lied to him with positive probability the more important the information the more likely an enemy will attempt to deceive r an enemy will eventually take advantage of r by misleading him when this happens the sender loses all opportunities for deception in the future i

sovereign credit ratings growth volatility and the global financial crisis using monthly data from january 1996 to may 2010 for a panel of 76 developed and emerging economies and adopting an instrumental variable iv estimation technique by correcting for both heterogeneity and endogeneity with the generalized two stage least squares g2sls ec2sls procedure method suggested by balestra and varadharajan krishnakumar 1987 and baltagi and li 1995 this article provides empirical evidence that volatility of per capita gdp growth is reduced when there are positive changes in credit ratings in other words when sovereign credit risk improves to deal with potential simultaneity between sovereign credit ratings and output volatility a system 3sls approach is undertaken and our findings remain robust by weakening the volatility dampening effects of ratings changes it is found that the global financial crisis gfc has enhanced macroeconomic volatility one of the channels via which sovereign rating changes affect growth volatility is the financial markets repricing of sove

are crop yields normally distributed the evidence for nonnormality of crop yields is reassessed three methodological problems are identified in typical yield distribution analyses i misspecification of the nonrandom components of yield distributions ii missreporting of statistical significance and iii use of aggregate timeseries ats data to represent farm level yield distributions one or more of these problems infect virtually all evidence against normality to date the positive contribution of the article is a set of principles that must be followed in any valid investigation of yield normality

credit rating inflation and firms investments we analyze credit rating effects on firm investments in a rational bond financing game that features a feedback loop the credit rating agency cra inflates the rating providing a biased but informative signal to creditors creditors response to the rating affects the firm s investment decision and thus its credit quality which is reflected in the rating the cra might reduce ex ante economic efficiency which results solely from its strategic effect the cra assigns more firms high ratings and allows them to gamble for resurrection we derive empirical predictions on the determinants of rating standards and inflation and discuss policy implications

does the market understand rating shopping predicting mbs losses with initial yields we study rating shopping on the mbs market outside of aaa losses are higher on single rated tranches than on multi rated ones and yields predict future losses for single rated tranches but not for multi rated ones conversely ratings have less explanatory power for single rated tranches these results suggest that single rated tranches have been shopped whereby pessimistic ratings never reach the market for aaa rated mbs by contrast 93 receive two or three such ratings and those ratings agree 97 of the time this ratings convergence suggests that agencies cater to investors who cannot purchase a tranche unless it has multiple aaa ratings

the ethics of credit rating agencies what happened and the way forward during the short span of a few months in 2008 14 trillion dollars of highly rated bonds fell into junk status surprising the global financial system and accelerating an economic decline the result was the worst fracture of the us financial system since the great depression credit rating agencies cras in particular have come under intense scrutiny as a result of this latest disaster both domestically and internationally including many congressional inquiries and government investigations most of the public and scholarly discussions about cras focus on reforming the financial system so that the crisis of the magnitude of the 2008 disaster will not happen again an important overtone of industry criticisms includes a sense of ethical impropriety on the part of cras and ethical uncertainty about the institutional mechanisms that are currently in place rarely however are the ethics of the industry the explicit subject of analysis in this article we discuss the lessons from the policy debates and recent legislation to develop an account of the ethics of the cra industry

parametric and nonparametric statistical modelling of crop yield implications for pricing crop insurance contracts this article considers alternative methods to calculate the fair premium rate of crop insurance contracts based on county yields the premium rate was calculated using parametric and nonparametric approaches to estimate the conditional agricultural yield density these methods were applied to a data set of county yield provided by the statistical and geography brazilian institute ibge for the period of 1990 through 2002 for soybean corn and wheat in the state of parana in this article we propose methodological alternatives to pricing crop insurance contracts resulting in more accurate premium rates in a situation of limited data

great expectations and the end of the depression what ended the great depression in the united states this paper suggests that the recovery was driven by a shift in expectations this shift was triggered by president franklin delano roosevelt s fdr policy actions on the monetary policy side roosevelt abolished the gold standard and announced an explicit policy objective of inflating the price level to pre depression levels on the fiscal policy side roosevelt expanded real and deficit spending which helped make his policy objective credible the key to the recovery was the successful management of expecta tions about future policy roosevelt s rise to power is modeled as a policy regime change as in thomas sargent 1983 and peter temin and barry wigmore 1990 this paper formalizes temin and wigmore s argu ment in a repeated game setting using a dynamic stochastic general equilibrium dsge model and argues that the regime change can account for the recovery in the model a regime change means the elimination of certain policy dogmas that constrain the actions of the government the regime change generates an endogenous shift in expectations due to a coordination of mon etary and fiscal policy this coordination ended the great depression by engineering a shift in expectations from contractionary i e the private sector expected future economic contrac tion and deflation to expansionary i e the public expected future economic expansion and inflation the expectation of higher future inflation lowered real interest rates thus stimulating demand while the expectation of higher future income stimulated demand by raising permanent income

rating the raters are reputation concerns powerful enough to discipline rating agencies abstract credit rating agencies cras are accused of bearing a strong responsibility for contributing to the subprime crisis by having been deliberately too lax in the ratings of some structured products in response to this accusation cras argue that such an attitude would be too dangerous for them since their reputation is at stake the objective of this article is to examine the validity of this argument within a formal model are reputation concerns sufficient to discipline rating agencies we show that the reputation argument only works when a sufficiency large fraction of the cra income comes from other sources than rating complex products by contrast when rating complex products becomes a major source of income for the cra we show that it is always too lax with a positive probability and inflates ratings with probability one when its reputation is good enough we provide some empirical support for this prediction by showing that ceteris paribus the proportion of subprime residential mortgage backed securities rmbs that were rated aaa by the three main cras indeed increased over the last eight years we analyze the policy implications of our findings and advocate for a new business model of cras that we call the platform pays model

the real consequences of market segmentation we study the real effects of market segmentation due to credit ratings using a matched sample of firms just above and just below the investment grade cutoff these firms have similar observables including average investment rates however flows into high yield mutual funds have an economically significant effect on the issuance and investment of the speculative grade firms relative to their matches especially for firms likely to be financially constrained the effect is associated with the discrete change

the value of delegated quality control this paper studies the case in which a firm delegates quality control to an independent monitor in a repeated game consumers trust provides incentives to acquire information about whether the good is defective and withhold defective goods from sale if third party reports are observable to consumers delegation lessens the first and dispenses with the second moral hazard concern but also creates agency costs internal quality control is optimal only if trades are sufficiently frequent and consumer information is sufficiently precise this result holds in the presence of the possibility of collusion fully non verifiable presale information and economies of scale in external quality control

the relationship between childhood obesity and food insecurity a nonparametric analysis childhood obesity and food insecurity are major public health concerns in the united states and other developed countries research on the relationship between the two has provided mixed results across a variety of data sets and empirical methods common throughout this research however is the use of parametric frameworks for empirical analyses this study moves beyond parametric methods by examining the relationship between childhood obesity and food insecurity among low income children with nonparametric regression techniques we examine data from the child development supplement cds of the panel study of income dynamics psid a nationally representative data set from the us consistent with recent work our parametric analyses indicate that there is no statistically significant relationship between childhood obesity and food insecurity in contrast our nonparametric results indicate that the probability of being obese varies markedly with the level of food insecurity being experienced by the chi

crop insurance valuation under alternative yield distributions considerable disagreement exists about the most appropriate characterization of farm level yield distributions yet the economic importance of alternative yield distribution specifications on crop insurance valuation has not been well documented the results of this study demonstrate that large differences in expected payouts from popular crop insurance products can arise solely from the parameterization chosen to represent yield distributions the results suggest that the frequently unexamined yield distribution specification may lead to economically significant errors in crop insurance policy rating and assessment of expected payouts from policies

ratings quality over the business cycle credit rating agencies cras have long held that reputational concerns discipline their behavior the value of reputation however depends on economic fundamentals that vary over the business cycle in a model of ratings incorporating endogenous reputation and a market environment that varies we find that ratings quality is countercyclical specifically a cra is more likely to issue less accurate ratings when fee income is high competition in the labor market for analysts is tough and securities default probabilities are low persistence in economic conditions can diminish our results while mean reversion exacerbates them the presence of naive investors reduces overall quality but quality remains countercyclical finally we demonstrate that competition among cras yields similar results

certification and market transparency we provide elementary insights into the effectiveness of certification to increase market transparency in a market with opaque product quality sellers use certification as a signaling device while buyers use it as an inspection device this difference alone implies that seller certification yields more transparency and higher social welfare under buyer certification profit maximizing certifiers further limit transparency but because seller certification yields larger profits active regulation concerning the mode of certification is not needed these findings are robust and widely applicable to for instance patents automotive parts and financial products

the taxation of uk oil and gas production why the windfalls got away abstract starting with evidence that united kingdom continental shelf oil and gas companies have benefitted very disproportionately from the recent period of extraordinarily high oil prices this paper traces the history of this weakness in the uk s petroleum fiscal regime evidence is provided that the progressive relaxations in the uk s petroleum fiscal regime in 1983 1987 1988 and 1993 were largely unnecessary to stimulate the development of new smaller marginal fields misguided in their assumption that such fields were more costly to develop than earlier counterparts or larger contemporary fields and impotent compared with the effects of oil price movements the paper concludes with a conceptualisation which illuminates why these failures of policy were not just random they emerged from the uk s non proprietorial stance with respect to the country s oil and gas resources a stance which assumes responsibility for oil company profitability and vainly tries to counter market forces at the expense of government revenues

the economics of collective reputation evidence from the wine industry we use original data regarding the array of italian winery coalitions wine denominations to analyze the economics and determinants of collective reputation we first run a cross sectional analysis with 2008 data and the full set of control variables then move to the dynamics of collective reputation with panel data analysis on a 30 year time span 1978 2008 group reputation is history dependent in particular past bad collective behavior increases the probability of being stuck in a bad reputation trap minimum quality standards and effective enforcement are fundamental drivers of group reputation the relationship between group size and collective reputation is non linear free entry may not be optimal due to free riding problems finally institutional signals such as the wine classification system are useful because they can be used by consumers as easily available proxies for information that is much more difficult to acquire

credit ratings and security prices in the subprime mbs market we present and discuss preliminary evidence suggesting that credit ratings significantly influenced prices for subprime mortgage backed securities issued in the period leading up to the recent financial crisis ratings are closely correlated with prices even controlling for a rich set of security and loan level controls this incremental variation in ratings has much less predictive power for security defaults however based on findings to date from our ongoing research suggesting prices were excessively sensitive to ratings relative to their informational content

competition and strategic incentives in the market for credit ratings empirics of the financial crisis of 2007 we study the market for ratings agencies in the commercial mortgage backed securities sector leading up to and including the financial crisis of 2007 2008 using a structural model adapted from the auctions literature we characterize the incentives of ratings agencies to distort ratings in favor of issuers we find an important equilibrium distortion which decreased after the crisis we study several counterfactual experiments motivated by recent policymaking in this industry

nonparametric estimation of crop yield distributions implications for rating group risk crop insurance contracts we use nonparametric density estimation procedures to evaluate county level crop yield distributions implications for rating area yield crop insurance contracts are discussed the procedures developed are used to measure yield risk and calculate insurance premium rates for wheat and barley in the 1995 96 group risk program

ratings competition in the cmbs market we consider the relationship between competition among credit rating agencies and the ratings of commercial mortgage backed securities cmbs using data from 2002 to 2007 we characterize competition using fitch s aggregate share of cmbs ratings and a measure of fitch s deal specific market share constructed as the probability of fitch being hired for a specific transaction controlling for deal characteristics we find that subordination levels were lower when fitch s aggregate and deal specific market shares were higher which suggests that ratings competition yielded less stringent ratings when fitch was a more significant competitor although this effect dissipates when fitch s market shares were high

fear of rejection tiered certification and transparency product quality certifiers may not reveal the identity of unsuccessful applicants sellers for three reasons first they respond to the desire of individual sellers to avoid the stigma from rejection second nontransparency helps a certifier to increase his market power by raising the stigma from lower tier certification third transparency does not help screen among heterogeneous sellers strategic complementarities arise as sellers move down the certification pecking order and lead to the stigmatization of the lower tiers mandating transparency benefits the sellers but has an ambiguous impact on buyers who actually become less informed about product quality

the failure of models that predict failure distance incentives and defaults statistical default models widely used to assess default risk fail to account for a change in the relations between different variables resulting from an underlying change in agent behavior we demonstrate this phenomenon using data on securitized subprime mortgages issued in the period 1997 2006 as the level of securitization increases lenders have an incentive to originate loans that rate high based on characteristics that are reported to investors even if other unreported variables imply a lower borrower quality consistent with this behavior we find that over time lenders set interest rates only on the basis of variables that are reported to investors ignoring other credit relevant information as a result among borrowers with similar reported characteristics over time the set that receives loans becomes worse along the unreported information dimension this change in lender behavior alters the data generating process by transforming the mapping from observables to loan defaults to illustrate this effect we show that the interest rate on a loan becomes a worse predictor of default as securitization increases moreover a statistical default model estimated in a low securitization period breaks down in a high securitization period in a systematic manner it underpredicts defaults among borrowers for whom soft information is more valuable regulations that rely on such models to assess default risk could therefore be undermined by the actions of market participants

u s soybean yields estimation and forecasting with nonsymmetric disturbances national average soybean yields are skewed with a relatively high chance of low yields maximum likelihood estimates support this hypothesis revised forecasts which account for skewed yields are positioned higher than forecasts based on the illusion of a symmetric distribution also yield instability has been increasing steadily the standard deviation of the soybean yield distribution is twenty five percent higher in the late 1980s than it was in the early 1970s

the value of school facility investments evidence from a dynamic regression discontinuity design author s cellini stephanie riegg ferreira fernando rothstein jesse abstract despite extensive public infrastructure spending surprisingly little is known about its economic return in this paper we estimate the value of school facility investments using housing markets standard models of local public goods imply that school districts should spend up to the point where marginal increases would have zero effect on local housing prices our research design isolates exogenous variation in investments by comparing school districts where referenda on bond issues targeted to fund capital expenditures passed and failed by narrow margins we extend this traditional regression discontinuity approach to identify the dynamic treatment effects of bond authorization on local housing prices student achievement and district composition our results indicate that california school districts underinvest in school facilities passing a referendum causes immediate sizable increases in home prices implying a willingness to pay on the part of marginal homebuyers of 1 50 or more for each 1 of capital spending these effects do not appear to be driven by changes in the income or racial composition of homeowners and the impact on test scores appears to explain only a small portion of the total housing price effect c 2010 by the president and fellows of harvard college and the massachusetts institute of technology

gambling reputation repeated bargaining with outside options we study the role of incomplete information and outside options in determining bargaining postures and surplus division in repeated bargaining between a long run player and a sequence of short run players the outside option is not only a disagreement point but reveals information privately held by the long run player in equilibrium the uninformed short run players offers do not always respond to changes in reputation and the informed long run player s payoffs are discontinuous the long run player invokes inefficient random outside options repeatedly to build reputation to a level where the subsequent short run players succumb to his extraction of a larger payoff but he also runs the risk of losing reputation and relinquishing bargaining power we investigate equilibrium properties when the discount factor goes to 1 and when the informativeness of outside options diffuses in both cases bargaining outcomes become more inefficient and the limit reputation building probabilities are interior publication abstract

do rating agencies benefit from providing higher ratings evidence from the consequences of municipal bond ratings recalibration we ask whether credit rating agencies receive higher fees and gain greater market share when they provide more favorable ratings to investigate this question we use the 2010 rating scale recalibration by moody s and fitch which increased ratings absent any underlying change in issuer credit quality consistent with prior research we find that the recalibration allowed the clients of moody s and fitch to receive better ratings and lower yields we add to this evidence by showing that the recalibration also led to larger fees and to increases in the market shares of moody s and fitch these results are consistent with critics concerns about the effects of the issuer pay model on the credit ratings market

the contribution of weather variability to economic sectors every day people make economic decisions based on the weather affecting sales of companies in a wide range of economic sectors in many cases the impact of weather on sales is not constant from

economic analysis of the introduction of agricultural revenue insurance contracts in spain using statistical copulas this article aims at determining how the introduction of agricultural revenue insurance contracts in spain will affect the cost of purchasing insurance relative to yield insurance schemes we focus our empirical analysis on the apple and orange sectors in spain statistical copulas are used to jointly model price and yield perils premium rates under revenue and yield insurance are simulated through monte carlo methods results indicate that revenue insurance is likely to reduce the price of agricultural insurance in spain which may result in higher acceptance and demand for agricultural insurance programs

the american recovery and reinvestment act solely a government jobs program abstract this paper estimates the private and government sector employment effects of american recovery and reinvestment act arra spending via an instrumental variables strategy we argue that this aid was effectively fungible and states used it to offset declines in revenue this enables us to use exogenous variation in states budget positions to identify the act s employment effects we also exploit exogenous variation across states in arra highway funding according to our benchmark estimates average state and local government employment during the 24 months following the program s inception was between 156 000 and 563 000 persons greater as a result of arra spending 90 confidence interval the corresponding estimate for the private sector ranges from a loss of 182 000 to a gain of 1 1 million jobs our point estimate for the implied cost of creating a job lasting one year is 202 000 which is substantially larger than the corresponding estimate from the president s council of economic advisors

on the effect of aggregate uncertainty on certification intermediaries incentives to distort ratings abstract we analyze a certification intermediary s incentives to distort ratings in a model with a monopolistic profit maximizing certification intermediary a continuum of heterogeneous sellers and a competitive market of risk neutral buyers the value of a seller s good is known to the seller and observable by the certifier but not by buyers sellers can choose to get a rating the certification intermediary can reveal a signal of arbitrary precision about the quality of the good in contrast to the existing literature we allow aggregate uncertainty as in the existing literature one rating class is optimal however the certification intermediary does not generally choose a socially optimal cutoff the certifier is more likelyto be too lenient if the distribution of aggregate uncertainty has a lower mean a higher variance and is more left skewed it is more likely to be too strict if the opposite holds

sustaining wealth simulating a sovereign wealth fund for the uk s oil and gas resources past and future abstract exhaustible resources and the revenues they generate present a number of broad problems for macroeconomic management for example tax revenues can be large and highly volatile and the stream of revenues is finite an increasing number of countries now view resource funds and or fiscal rules for resource revenues as the answer to these challenges in this paper we explore the consequences for the uk if past revenues arising from the depletion of subsoil assets had been channelled into a sovereign wealth fund we show that had a decision been made to establish such a fund in 1975 this could have been substantial in size by 2018 about gbp 354 billion and moreover would have had a number of benefits such as a reduction in volatility of resource revenues flowing to the treasury crucially the fund s value would have substantially boosted the size of the government balance sheet yielding corresponding fiscal benefits we argue this missed opportunity is underlined further by considering the current debate about shale gas development in the uk notwithstanding considerable uncertainties favourable and optimistic projections for key parameters are required for any shale based fund to match what we simulate based on past experience for conventional subsoil assets

disappearance of reputations in two sided incomplete information games abstract this paper examines the sustainability of reputations in a class of games with imperfect public monitoring and two long lived players both of whom have private information about their own type and uncertainty over the types of the other player this class namely reputation games with one sided moral hazard can capture economic interactions that may involve hidden information or hidden action extending the techniques of cripps et al 2004 it is found that neither player can sustain a reputation permanently for playing a noncredible behavior in these games and the reputations disappear uniformly across all nash equilibria

profitability and taxation in the ukcs oil and gas industry analysing the distribution of rewards between company and country abstract against the background of record levels of uk hydrocarbon production and a government review of the ukcs tax regime this paper provides evidence that the government s share of ukcs profits is very low by historical and international standards and demonstrates that the current tax regime is extremely weak the justification for the latter is then challenged by assessing the relative profitability of ukcs companies using data from uk national accounts and from form 10 k and form 20 f company reports and analysing both accounting profits and forecast discounted cash flow this shows that companies operating on the ukcs enjoy substantially higher profitability relative to both other uk companies and other oil and gas provinces elsewhere in the world further evidence of the weakness of the uk regime is provided by a comparison with the norwegian oil and gas tax regime the paper therefore makes a strong case for the reform of the ukcs tax regime

estimating the costs of issuer paid credit ratings we compare the stability and timeliness of credit ratings produced by a traditional issuer paid rating agency moody s investors service and a subscriber paid rater rapid ratings moody s ratings exhibit less volatility but are slower to identify default risk we control for moody s aversion to ratings volatility and still find its ratings lag rapid ratings more importantly accuracy ratios indicate that rapid ratings provides a better ordinal ranking of credit risk we quantify the loss avoidance associated with rapid ratings signals to estimate costs associated with regulatory and contractual systems based on issuer paid ratings 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

can government purchases stimulate the economy this essay briefly reviews the state of knowledge about the government spending multiplier drawing on theoretical work aggregate empirical estimates from the united states as well as cross locality estimates i assess the likely range of multiplier values for the experiment most relevant to the stimulus package debate a temporary deficit financed increase in government purchases i conclude that the multiplier for this type of spending is probably between 0 8 and 1 5 jel e23 e62 h50

predation reputation and entry deterrence abstract economists often argue that predatory practices are irrational since there exist cheaper or more certain means to gain or maintain a monopoly our gametheoretic equilibrium analysis suggests that if a firm is threatened by several potential entrants then predation may be rational against early entrants even if it is costly when viewed in isolation because it yields a reputation which deters other entrants asymmetric information plays a crucial role in our analysis since it provides the rationale for entrants to base their expectations of the firm s future behavior on its past actions the analysis also suggests methods to treat general reputational phenomena

the economic effects of public financing evidence from municipal bond ratings recalibration we show that the supply of local public financing can have important effects on local economies we identify these effects by exploiting exogenous variation on municipal bond ratings due to moody s recalibration of its scale in 2010 we find that local governments increase expenditures and employment due to an expansion of their debt capacity following an upgrade these increases in local government spending lead to multiplier effects on non tradable employment and income our findings suggest that debt financed increases in government spending can improve economic conditions during recessions

an experimental investigation of rating market regulation abstract we introduce a simple game theoretical model that captures the main aspects of the repeated interaction between an issuer and a credit rating agency it involves up front payments of issuer fees and direct publication of requested ratings due to pecuniary injuries for untruthful ratings the credit rating agency should always report truthfully in the subgame perfect equilibrium knowing this the issuer should never request a rating conducting laboratory experiments we find that behavior significantly deviates from the equilibrium prediction in favor of a cooperative solution issuers frequently do request ratings which is often reciprocated with untruthful good ratings

rate making for farm level crop insurance implications for adverse selection this research identifies two problems in the new federal crop insurance that may cause adverse selection a the relationship between rate making and expected yields for individual farmers and b the bias introduced in coverage protection when trends are not used to establish expected yields a theoretical investigation using the normality assumption demonstrates the potential severity of these problems and empirical results from farm level data lend further support as crop insurance changes to individualized methods of protection these issues will be particularly important for developing rates

the employment effects of credit market disruptions firm level evidence from the 2008 9 financial crisis this article investigates the effect of bank lending frictions on employment outcomes i construct a new data set that combines information on banking relationships and employment at 2 000 nonfinancial firms during the 2008 9 crisis the article first verifies empirically the importance of banking relationships which imply a cost to borrowers who switch lenders i then use the dispersion in lender health following the lehman crisis as a source of exogenous variation in the availability of credit to borrowers i find that credit matters firms that had precrisis relationships with less healthy lenders had a lower likelihood of obtaining a loan following the lehman bankruptcy paid a higher interest rate if they did borrow and reduced employment by more compared to precrisis clients of healthier lenders consistent with frictions deriving from asymmetric information the effects vary by firm type lender health has an economically and statistically significant effect on employment at small and medium firms but the data cannot reject the hypothesis of no effect at the largest or most transparent firms abstracting from general equilibrium effects i find that the withdrawal of credit accounts for between one third and one half of the employment decline at small and medium firms in the sample in the year

nonparametric estimation of crop insurance rates revisited with the crop insurance program becoming the cornerstone of u s agricultural policy recovering accurate rates is of paramount interest lack of yield data presents by far the most fundamental obstacle to recovery of accurate rates thisarticle employsnew methodology to estimate conditional yield densities and derive the insurance rates in our application we find the nonparametric kernel density estimator requires an additional twenty six years of yield data to estimate the shape of the conditional yield dens itiesasaccurately asthe recently developed empirical bayesnonparametric kernel density estimator such methodological improvements can significantly aid in ameliorating the data problem recovering accurate premium ratesis paramount to the actuarial soundness of the crop insurance program a program which hasgained prominence in the overall u s agricultural policy agenda the 1996 federal agricultural improvement and reform fair act signaled a new policy environment under which farmerswould be s to market forces under this policy regime crop insurance remains in some respects one of the only government subsidized income stabilizing mechanisms available to agricultural producers in addition it appears that current political forcesare in the proces sof fashioning crop insurance as the cornerstone of u s agricultural policy consider the 1999 state of the union address in which the president stated

quality disclosure and certification theory and practice this essay reviews the theoretical and empirical literature on quality disclosure and certification after comparing quality disclosure with other quality assurance mechanisms and describing a brief history of quality disclosure we address two sets of theoretical issues first why don t sellers voluntarily disclose through a process of unraveling and given the lack of unraveling is it desirable to mandate seller disclosure second when we rely on certifiers to act as the intermediary of quality disclosure do certifiers necessarily report unbiased and accurate information we further review empirical evidence on these issues with a particular focus on healthcare education and finance the empirical review covers quality measurement the effect of third party disclosure on consumer choice and seller behavior as well as the economics of certifiers jel d18 k32 l15 m31

traders vs relationship managers reputational conflicts in full service investment banks we present a model that explains why investment bankers struggle to manage conflicts of interest banks can build a type reputation for technical competence by performing complex deals that may not serve their clients interest on the other hand banks can sustain a behavioral reputation by refraining from doing so a behavioral reputation is a luxury reserved for banks that have proven their abilities the model sheds light on conflicts between the trading and advisory divisions of investment banks as well as the consequences of technological change for time variation in the relative strength of behavioral and type reputation concerns

imperfect information transmission from banks to investors macroeconomic implications abstract our goal is to elucidate the interaction of banks screening effort and strategic information production in loan backed asset markets using a general equilibrium framework asset quality is unobserved by investors but banks may purchase error prone ratings the premium paid on highly rated assets emerges as the main determinant of banks screening effort the fact that rating strategies reflect banks private information about asset quality helps keep this premium high conventional regulatory policies interfere with this decision margin thereby reducing signaling value of high ratings and exacerbating the credit misallocation problem we propose a tax subsidy scheme that induces efficiency

contracting to compete for flows abstract we present a model in which asset managers design their contracts to attract flows of investor capital we find that they make their contracts depend on public information e g credit ratings or benchmark indices as a way to attract flows rather than as a way to mitigate incentive problems as has been emphasized in the literature unfortunately asset managers competition for flows triggers a race to the bottom asset managers use public information in their contracts even though it is socially inefficient this inefficiency arises because contracting on public information prevents risk sharing

mafia and public spending evidence on the fiscal multiplier from a quasi experiment a law issued to combat political corruption and mafia infiltration of city councils in italy has resulted in episodes of large unanticipated temporary contractions in local public spending using these episodes as instruments we estimate the output multiplier of spending cuts at provincial level controlling for national monetary and fiscal policy and holding the tax burden of local residents constant to be 1 5 assuming that lagged spending is exogenous to current output brings the estimate of the overall multiplier up to 1 9 these results suggest that local spending adjustment may be quite consequential for local activity jel d72 e62 h71 k42 the widespread resort to fiscal stimulus at the onset of the global crisis and more recently the emerging need to consolidate deficits in response to rising fiscal imbalances have revitalized the empirical debate on the transmission of fiscal policy the multiplier while the literature has mostly focused on aggregate effects at a national level several recent contributions reviewed below have called attention to the local dimension this shift in focus is motivated by specific policy questions combined with the opportunity to exploit institutional information to address econometric issues in identification 1

discretionary ratings and the pricing of subprime mortgage backed securities using a dataset of home equity loan securities issued up to june 2007 and rated by moody s and or sp however these alternative thresholds do not appear to play a role as relevant as that of the ig sg boundary rating bias is also found to have an asymmetric impact on spreads the relevance of actual over expected ratings is greater for tranches receiving evaluations that are higher rather than lower than expected taken together these pieces of empirical evidence point toward ratings based regulation as an important explanation for the observed mispricing of structured finance products

credit rating industry a helicopter tour of stylized facts and recent theories the recent subprime crisis and the ongoing euro zone crisis have generated an enormous interest in the credit rating industry not only among economists but also among average citizens as a consequence we have seen an explosion of the economic literature on the industry the objective of this survey is to introduce readers to the key stylized facts of the credit rating industry and to the recent theoretical economic literature on this industry

do high oil prices justify an increase in taxation in a mature oil province the case of the uk continental shelf in response to the structural shift in oil price coupled with greater import dependency concerns about security of supply have once again emerged as a major policy issue the uk the largest producer of oil and natural gas in the european union became a net importer of natural gas in 2004 and according to government estimates will become a net importer of oil by the end of the decade a weakened north sea performance means extra reliance both for the uk and europe as a whole on global oil and gas network and imports in 2002 the uk government introduced a 10 supplementary charge and in 2005 doubled the charge to 20 in an attempt to capture more revenues from the oil industry as a result of the increase in the price of crude oil however higher tax rates do not necessarily generate higher fiscal revenue and in the long term may result in materially lower revenues if investment is discouraged as indeed occurred when the 2007 uk annual budget statement showed a shortfall in north sea oil revenues below forecasts of 4 billion it is therefore argued that the increase in the fiscal take came at the wrong time for the uk continental shelf and that the uk government s concern should have been to encourage more oil production from its declining province especially in the light of the rising concern surrounding the security of supply

certification and minimum quality standards when some consumers are uninformed we compare certification to a minimum quality standard mqs policy in a duopolistic industry where firms incur quality dependent fixed costs and only a fraction of consumers observe the quality of the offered goods compared to the unregulated outcome both profits and social welfare would increase if firms could commit to producing a higher quality an mqs restricts the firms quality choice and leads to less differentiated goods this fuels competition and may therefore deter entry a certification policy which awards firms with a certificate if the quality of their products exceeds some threshold does not restrict the firms quality choice in contrast to an mqs certification may lead to more differentiated goods and higher profits we find that firms are willing to comply with an ambitious certification standard if the share of informed consumers is small in that case certification is more effective from a welfare perspective than a minimum quality standard because it is less detrimental to entry

estimating bivariate yield distributions and crop insurance premiums using nonparametric methods modelling crop yield distribution is crucial in crop insurance premium setting the correlation between different crop yields due to rotations or systemic risks requires estimation of joint yield distribution for multiple crops in this article we apply a nonparametric method to estimate bivariate yield distributions using farm level yield data of wheat and corn in shandong province in china then the simulated yields are used to evaluate the expected indemnity of one traditional and one hypothetical crop insurance programme our results reveal that the nonparametric bivariate method is very flexible in shaping the yield probability density functions to estimate local idiosyncrasies and correlation between two crops it is also feasible to simulate the nonparametric yield distributions at a satisfying level of accuracy the simulation results show that the hypothetical two crop insurance contract can be more affordable to farmers than traditional individual crop insurance contracts

using privileged information to manipulate markets insiders gurus and credibility access to private information is shown to generate both the incentives and the ability to manipulate asset markets through strategically distorted announcements the fact that privileged information is noisy interferes with the public s attempts to learn whether such announcements are honest it allows opportunistic individuals to manipulate prices repeatedly without ever being fully found out this leads us to extend sobel s 1985 model of strategic communication to the case of noisy private signals our results show that when truthfulness is not easily verifiable restrictions on trading by insiders may be needed to preserve the integrity of information embodied in prices

the effects of fiscal stimulus evidence from the 2009 cash for clunkers program we evaluate the impact of the 2009 cash for clunkers program on short and medium run auto purchases our empirical strategy exploits variation across u s cities in ex ante exposure to the program as measured by the number of clunkers in the city as of summer 2008 we find that the program induced the purchase of an additional 370 000 cars in july and august 2009 however we find strong evidence of reversal high clunker counties bought fewer autos in the 10 months after the program expired which offset most of the initial purchases we find no evidence of an effect on employment house prices or household default rates in cities with higher exposure to the program jel codes h20 e62 copyright 2012 oxford university press

bank ratings what determines their quality this paper examines the quality of credit ratings assigned to banks by the three largest rating agencies we interpret credit ratings as relative assessments of creditworthiness and define a new ordinal metric of rating error based on banks expected default frequencies our results suggest that on average large banks receive more positive bank ratings particularly from the agency to which the bank provides substantial securitization business these competitive distortions are economically significant and contribute to perpetuate the existence of too big to fail banks we also show that overall differential risk weights recommended by the basel accords for investment grade banks bear no significant relationship to empirical default probabilities harald hau sam langfield and david marques ibanez

insurability and moral hazard in agricultural insurance markets pareto optimal and constrained pareto optimal all risk insurance contracts are studied conditions required for emergence of competitive insurance markets are isolated and discussed full insurance contracts are shown to be dominated by contracts involving coinsurance and deductibles if insurers are pseudo risk averse the effect of moral hazard on all risk agricultural insurance indemnity schedules is examined results for indemnity schedules under moral hazard and constant absolute risk aversion show that providing farmers with the incentives to take appropriate actions may imply lower deductibles in the presence of moral hazard than in the absence of moral hazard

does the source of capital affect capital structure prior work on leverage implicitly assumes capital availability depends solely on firm characteristics however market frictions that make capital structure relevant may also be associated with a firm s source of capital examining this intuition we find firms that have access to the public bond markets as measured by having a debt rating have significantly more leverage although firms with a rating are fundamentally different these differences do not explain our findings even after controlling for firm characteristics that determine observed capital structure and instrumenting for the possible endogeneity of having a rating firms with access have 35 more debt copyright 2006 oxford university press

ratings hardwiring and asset prices this paper discusses the asset pricing implications of ratings hardwiring the latter is defined as the mechanical response of trading decisions to changes in ratings this issue is studied within a noisy rational expectations framework of asset pricing under asymmetric information in which traders specialize in different driving factors of asset payoffs and interact with others who mechanically link their asset supply to ratings we show that ratings hardwiring leads to predictable supply shocks and induces informed traders to overreact to new information thus creating a channel through which shocks are amplified and prices become less informative and more volatile

relaxing heteroscedasticity assumptions in area yield crop insurance rating this article focuses on the effect of differing heteroscedasticity assumptions on derived premium rates of area yield crop insurance tests of the proportional and absolute heteroscedasticity assumptions are conducted using both in sample and out of sample measures our results suggest that arbitrarily imposing a specific form of heteroscedasticity or homoscedasticity in insurance rate calculations limits actuarial soundness our results have practical implications for the federal crop insurance programs as we reject the traditional rating assumptions for many cotton regions and lower yielding higher risk corn and soybean counties but not in the heart of the cornbelt copyright 2011 oxford university press

systemic risk reinsurance and the failure of crop insurance markets without affordable reinsurance private crop insurance markets are doomed to fail because systemic weather effects induce high correlation among farm level yields defeating insurer efforts to pool risks across farms using an empirical model of the u s crop insurance market we find that u s crop insurer portfolios are twenty to fifty times riskier than they would be otherwise if yields were stochastically independent across farms we also find that area yield reinsurance contracts would enable crop insurers to cover most of their systemic crop loss risk reducing their risk exposure to levels typically experienced by more conventional property liability insurers copyright 1997 oxford university press

credit rating and debt crises we develop an equilibrium theory of credit rating in the presence of rollover risk by influencing rational creditors ratings affect sovereigns probability of default which in turn affects ratings our analysis reveals a pro cyclical impact of credit rating in equilibrium the presence of a rating agency increases default risk when it is high and decreases default risk when it is low

sovereign credit ratings in the european union a model based fiscal analysis abstract we present a model based measure of sovereign credit ratings derived solely from the fiscal position of a country a forecast of its future debt liabilities and its potential to use fiscal policy to repay these we use this measure to calculate credit ratings for 14 european countries over the period 1995 2012 this measure identifies a european sovereign debt crisis almost two years before the official ratings of the credit rating agencies