the collateral channel how real estate shocks affect corporate investment abstract what is the impact of real estate prices on corporate investment in the presence of financing frictions firms use pledgeable assets as collateral to finance new projects through this collateral channel shocks to the value of real estate can have a large impact on aggregate investment to compute the sensitivity of investment to collateral value we use local variations in real estate prices as shocks to the collateral value of firms that own real estate over the 1993 2007 period the representative us corporation invests 0 06 out of each 1 of collateral jel d22 g31 r30

nonmonetary effects of the financial crisis in propagation of the great depression this paper examines the effects of the financial crisis of the 1930s onthe path of aggregate output during that period our approach is complementary to that of friedman and schwartz who emphasized the monetary impact of the bank failures we focus on non monetary primarily credit related aspects of the financial sector output link and consider the problems of debtors as well as those of the banking system we argue that the financial disruptions of 1930 33 reduced the efficiency of the credit allocation process and that the resulting higher cost and reduced availability of credit acted to depress aggregate demand evidence suggests that effects of this type can help explain the unusual length and depth of the great depression this abstract was borrowed from another version of this item

more on measuring budget related rent seeking a comment following the work of tuuock 1967 kreuger 1974 and posner 1975 the theory of rent seeking has become a well established part of economics in a recent paper we katz and rosenberg 1989 offered a measure of the rentseeking associated with government spending basing himself on our work scully 1991 presents further results relating to such rent seeking and makes two claims first that our measure is a conceptually incorrect evaluation of the rent seeking associated with government expenditure and second that the measure of rent seeking suggested by him and into which our measure is an input is a meaningful and appropriate estimate of such rent seeking while reading scully s paper we realized that he touches upon a matter whose importance goes far beyond his offered measure this issue concerns the extent of rent seeking that takes place in given periods of time is there rentseeking for everything in every period or does the rent seeking occurring at any point in time mainly involve struggles over m i n o r reallocations of property rights the answer to this question has crucial implications for the amount of waste which occurs through rent seeking activities if rent seeking is always for everything rent seeking waste is likely to suck up a large proport ion of gnp in each period in this view rent seeking constitutes something like an economic black hole which threatens all economic well being if on the other hand rent seeking involves minor adjustments then while it reduces economic welfare rent seeking does not devour the benefits of a major proport ion of economic activity

policy burdens accountability and the soft budget constraint in a socialist economy when a state owned enterprise soe incurs losses the government often provides it with additional funding cuts its taxes and offers other compensations coincidentally the managers of an soe also expect to receive financial assistance from the state such a phenomenon is called the soft budget constraint sbc a term coined by janos kornai 1986 kornai attributes many problems in a socialist economy to the existence of the sbc to achieve successful reform of both the soe s and socialist economies it is imperative to eliminate the sbc however the sbc phenomenon continues to exist in transitional economies even after soe s are privatized world bank 1996 p 45 there is a large literature on the sbc mathias dewatripont et al 1996 and eric maskin 1996 provide surveys on the recent literature according to kornai 1998 there are two types of explanations for the existence of the sbc the exogenous and endogenous explanations of the first type attribute the existence of the sbc to various exogenous reasons including the paternalism of a socialist state and the government s aims for job creation or for gaining political support kornai 1986 explanations of the second type view the sbc as an endogenous phenomenon arising from a time inconsistency problem dewatripont and maskin 1995 for an inefficient uncompleted investment project the state or creditor may have incentives to refinance the investment because the marginal benefit of refinancing exceeds the marginal cost of abandoning it yingyi qian 1994 attributed the shortage of goods in socialist economies to the sbc based on such a timeinconsistency argument in this paper we provide another explanation for the prevalence of the sbc in socialist and transitional economies we will argue that the sbc is rooted in the state s accountability problem the traditional stalinist system was designed to facilitate the establishment of certain strategic soe s which were not viable in a market system to establish the nonviable soe s a socialist government distorted the prices of all kinds of inputs and of outputs and used administrative measures to allocate these inputs and outputs according to plans however due to information and coordination problems the state could make wrong decisions regarding investment production and fail to deliver necessary materials and inputs in time consequently the state instead of soe s was accountable for the failures and needed to allocate additional credits and other assistance to the soe s in order to complete the investment and production as such the sbc arose after the transition to a market economy many strategic firms still remain nonviable in a market economy for strategic purposes the state needs to support these finns moreover most firms in a transitional economy carry many types of policy burdens inherited from the pretransition system lin et al 1998 because the state is accountable for the losses arising from policy burdens the sbc phenomenon persists in a market economy the state s attempts to build nonviable industry and the state s policy burdens on enterprises will also lead to sbc

the regulatory choice of noncompliance in emissions trading programs this paper addresses the following question to achieve a fixed aggregate emissions target cost effectively should emissions trading programs be designed and implemented to achieve full compliance or does allowing a certain amount of noncompliance reduce the costs of reaching the emissions target the total costs of achieving the target consist of aggregate abatement costs monitoring costs and the expected costs of collecting penalties from noncompliant firms under common assumptions i show that allowing noncompliance is cost effective only if violations are enforced with an increasing marginal penalty however one can design a policy that induces full compliance with a constant marginal penalty that meets the aggregate emissions target with lower expected costs this last result does not depend on setting an arbitrarily high constant marginal penalty in fact the marginal penalty need not be higher than the equilibrium marginal penalty under the policy with the increasing marginal penalty and can actually be lower finally tying the marginal penalty directly to the permit price allows the policy objective to be achieved without any knowledge of firms abatement costs

mortgage terminations heterogeneity and the exercise of mortgage options as applied to the behavior of homeowners with mortgages option theoiy predicts that mortgage prepayment or default will be exercised if the call or put option is in the money by some specific amount our analysis tests the extent to which the option approach can explain default and prepayment behavior evaluates the practical importance of modeling both options simultaneouisly and models the unobserved heterogeneity of borrowers in the home mortgage market the paper presents a uinified model of the competing risks of mortgage termination by prepayment and default considering the two hazards as dependent competing risks that are estimated jointly it also accounts for the unobserved heterogeneity among borrowers and estimates the unobserved heterogeneity simultaneously with the parameters and baseline hazards associated with prepayment and default functions our results show that the option model in its most straightfolward version does a good job of explaininig default and prepayment but it is not enouigh by itself the simultaneity of the options is very important empirically in explaining behavior the results also show that there exists significant heterogeneity among mortgage borrowers ignoring this heterogeneity results in serious errors in estimating the prepayment behavior of homeowners

enforcement leverage when penalties are restricted in the united states empirical studies of the enforcement of continuous compliance with environmental regulations especially air and water pollution regulations have repeatedly demonstrated the following i for most sources the frequency of surveillance is quite low ii even when violations are discovered fines or other penalties are rarely assessed in most states iii sources are nonetheless thought to be in compliance a large part of the time the evidence for the apparently low level of enforcement activity is found in a number of case studies of state and local enforcement of air and water quality regulations conducted jointly by the environmental protection agency epa and council on environmental quality ceg together with periodic surveys of implementation of air and water quality legislation conducted by the general accounting office gao these surveys show

china s land market auctions evidence of corruption this paper studies the urban land market in china in 2003 2007 in china all urban land is owned by the state leasehold use rights for land for re development are sold by city governments and are a key source of city revenue leasehold sales are viewed as a major venue for corruption prompting a number of reforms over the years reforms now require all leasehold rights be sold at public auction there are two main types of auction regular english auction and an unusual type which we call a two stage auction the latter type of auction seems more subject to corruption and to side deals between potential bidders and the auctioneer absent corruption theory suggests that two stage auctions would most likely maximize sales revenue for properties which are likely to have relatively few bidders or are cold which would suggest negative selection on property unobservables into such auctions however if such auctions are more corruptible that could involve positive selection as city officials divert hotter properties to a more corruptible auction form the paper finds that overall sales prices are lower for two stage auctions and there is strong evidence of positive selection the price difference is explained primarily by the fact that two stage auctions typically have just one bidder or no competition despite the vibrant land market in chinese cities

avoidance screening and optimum enforcement a standard assumption in the economic literature on crime and punishment is that fines are costless transfers given this assumption several economists have argued that it is optimal to set the fine for engaging in a proscribed activity as high as possible the argument is a simple one raising the probability of a fine is costly since it requires devoting more resources to monitoring and apprehending individuals in contrast raising the magnitude of a fine is costless therefore the least costly way to achieve a given expected fine is to set the fine as high as possible presumably equal to the offender s wealth and adjust its probability so that the desired expected fine is obtained

enforcement and price controls in emissions trading this paper examines how enforcement affects the structure and performance of emissions trading programs with price controls under uncertainty about firms abatement costs the analysis highlights how an enforcement strategy can cause abatement cost risk to be transmitted to enforcement costs via the price of permits when this occurs accommodating the effect of abatement cost risk with an optimal policy results in higher expected emissions and lower expected permit price than their second best optimal values however it is possible to design an enforcement strategy that shields enforcement costs from abatement cost risk by tying sanctions directly to permit prices this enforcement strategy stabilizes enforcement effort the optimal permit supply and price controls are independent of enforcement costs and the policy produces the second best optimal outcome

the empirical measurement of rent seeking costs this survey focuses on the efforts carried out mainly by public choice scholars to measure the social cost of rent seeking the concept introduced by gordon tullock in 1967 and coined by anne krueger in 1974 is well known and accepted by the profession but its empirical measurement has fallen behind with respect to its theoretical formulation an often criticized lack in the literature although there are good general surveys none has specifically focused on reviewing the empirical efforts made to measure the phenomenon the purpose of this paper is to provide such a survey it could be said that the rent seeking concept has been fully integrated into economic jargon it is commonly used when some agent seeks to obtain an artificial transfer usually from government and covers all the actions efforts or expenses that the agent has to carry out to obtain the prize the key issue however is the possible social waste that arises in these situations the empirical efforts to measure such waste constitute the main purpose of this survey the concept of rent seeking was introduced by tullock 1967 although the term was first coined by krueger 1974 in a paper not related to the former in a recent paper tullock himself wrote of the history of the concept and the intellectual context within which it arose tullock 2003 starting with the pioneering work by harberger 1954 several studies were conducted during the 1950s in which the calculation of the social cost of monopolies and tariffs always gave the result of very modest figures the first response to these results was made by leibenstein 1966 and his x efficiency which refers to a hypothetical loss in efficiency due to the absence of competition shortly after leibenstein s paper appeared tullock argued that the deadweight costs of monopoly and tariffs understate the true social cost because the expenditures made to capture related rents have to be included so rectangles as well as harberger s triangles have to be included in the calculations let us see this argument once more figure 1 depicts the iconic tullock graphic analysis of rent seeking it represents the demand schedule d for a monopolized good where pm is the monopoly

changes in budgetary allocations and international comparisons of the social cost of rent seeking a critical note the katz rosenberg measure of rent dissipation across countries fails to encompass the consequences of different political systems wherein allocations are made observations about fiscal federal structures and the particular political structures of different countries affect political discretion in allocating government transfers owing both to the absence of these considerations which are indeed self evident and some other considerations regarding the measure the cross country rankings that katz and rosenberg present are meaningless at best and at worst misleading

enforcement costs and the choice of policy instruments for controlling pollution i introduction when evaluating policy instruments for controlling pollution analysts generally agree that economic incentives are superior to direct controls in terms of minimizing abatement costs however when it comes to minimizing enforcement costs there is no such agreement some analysts such as freeman et al 1973 and anderson et al 1977 argue that economic incentives would be much easier to enforce than direct controls while others such as drayton 1978 argue that they would be virtually unenforceable the debate typically centers on technical difficulties in continuously monitoring emissions and to a lesser extent on political and legal issues related to the assessment of penalties 1 an issue that has not been examined is whether there are economic reasons for enforcement costs to vary across policy instruments although there is now a sizable economic literature on the problem of noncompliance with pollution control policies there have been no attempts to formally compare enforcement costs across policy instruments 2 accordingly the purpose of this note is to examine whether there are economic grounds for arguing that enforcement costs would be lower for economic incentives than direct controls 3 the policy instruments compared are marketable permits or emissions taxes and uniform standards the instruments are compared in a setting where the penalty schedule is previously specified by some judicial or legislative body and the regulator s enforcement policy is limited to the choice of audit frequency the analysis is based on the premise that for any policy instrument that targets emissions the regulator will have to periodically monitor emissions and assess penalties for noncompliance the relevant question then is whether less frequent monitoring would be required to ensure compliance with economic incentives casual analysis suggests this should be the case economic incentives minimize aggregate abatement costs and lower abatement costs imply lower costs to firms of complying this should imply in turn that less stringent enforcement is needed to achieve compliance this argument although intuitively appealing is flawed using a simple model of pollution control with costly enforcement i show that enforcement costs narrowly defined may be higher for economic incentives for purposes of exposition the result is established in a setting where the regulator ensures each firm is fully compliant however as shown in the appendix the result generalizes to the more realistic setting where firms are partially compliant ii the model consider a group of n risk neutral firms emitting a single pollutant for simplicity the damages from the pollutant are assumed to depend only on total emissions each firm s abatement costs are given by a strictly convex function c sub i x sub i that is decreasing in emissions x sub i the firm s maximum emissions level is denoted mathematical expression omitted and is defined by mathematical expression omitted with probability p sub i a regulator audits each firm and measures its emissions if the regulator finds the firm s actual emissions x sub i exceed its allowed emissions s sub i the firm is assessed a fine of f x sub i s sub i as is common in the literature on enforcement i assume the fine schedule is previously specified e g by a legislative body 4 thus the regulator can choose the probability with which it audits firms but not the fine it assesses for noncompliance i assume the fine schedule is such that both the total fine and marginal fine are increasing in the violation size x sub i s sub i f prime is greater than 0 and f prime prime is grater than 0 because the regulator is assumed to ensure full compliance no violations occur and no fines are collected therefore enforcement costs consist solely of auditing or monitoring costs to simplify the analysis the cost of conducting an audit a is assumed to be the same across firms

real estate collateral value and investment the case of china previous research on the united states and japan finds economically large impacts of changing real estate collateral value on firm investment that amplified the business cycles of those countries working with unique data on land values in 35 major chinese markets and a panel of firms outside the real estate industry we estimate investment equations that yield no evidence of a collateral channel effect further analysis indicates that china s debt is not characterized by the frictions that give rise to collateral channel effects elsewhere essentially financially constrained borrowers appear able credibly to commit to repay debt in china while there is no impact on investment via the collateral channel our results should not be interpreted as implying there will be no negative fallout from a potential real estate bust on the chinese economy there likely would be but through different channels

the cost effective choice of policy instruments to cap aggregate emissions with costly enforcement we study the cost effectiveness of inducing compliance in a program that caps aggregate emissions of a given pollutant from a set of heterogeneous firms based on emissions standards and the relative cost effectiveness of such a program with respect to an optimally designed program based on tradable discharge permits our analysis considers abatement monitoring and sanctioning costs as well as perfect and imperfect information on the part of the regulator with regard to the polluters abatement costs under perfect information we find that a the total cost effective design of a program based on standards is one in which the standards are firm specific and perfectly enforced and b the total cost of an optimally designed program based on standards is lower than the total cost of an optimally designed transferable emission permits system except under special conditions this is true when it is optimum to induce perfect compliance and when it is not under imperfect information nevertheless it is only by implementing a system of tradable permits and perfectly enforcing it with a constant marginal penalty tied to the price of the permits that the regulator can surmount the informational problem and at the same time minimize the total cost of the program with certainty

perspectives on positive political economy this volume serves as an introduction to the field of positive political economy and the economic and political processes with which it is concerned this new research tradition is distinct from both normative and historical approaches to political economy grounded in the rational actor methodology of microeconomics positive political economy is the study of rational decisions in a context of political and economic institutions more analytical than traditional approaches it is concerned with the derivation of principles and propositions against which real world experience may be compared its focus is on empirical regularities and its goal is theoretical explanation the field has focused on three main areas of research models of collective action constraints on competitive market processes and the analysis of transaction costs developments in all of these areas are covered in the book the first part of the volume surveys the field while the second part displays positive political economy at work examining a variety of subjects the final part contains essays by leading political economists on the theoretical foundations of the field

using taxes to deter illegal fishing in itq systems we study the effects of different tax schemes used in fisheries management in combination with an individual transferable quota system we focus on the effects of taxes on equilibrium quota prices and on violations under the assumption that enforcement to induce compliance is imperfect and costly the use of taxes is motivated by the regulator s need to recover costs for enforcement activities we propose the use of a tax on the price of the processed products based on its impact on violations and the information that is required to implement it we also show that this tax has a double pay off for enforcement because it reduces the demand for illegal fishing and increases revenue for enforcement activities without producing a deadweight loss in the quota market we present an application of our model to the case of the red shrimp fishery in chile in our simulation example a tax of 7 on the price of fish exports could sufficiently reduce harvest demand and generate enough funding to completely eliminate quota violations which in the absence of taxes can be more than 100 of the total allowable catch at the same time this tax could increase the equilibrium quota price by 19

to comply or not to comply pollution standard setting under costly monitoring and sanctioning in this paper we characterize optimal regulatory policies composed of a pollution standard a probability of inspection and a fine for non compliance in a context where both monitoring and sanctioning are socially costly and the penalty may include gravity and non gravity components at the regulator s discretion under given penalties the optimal policy entails compliance with the standard as long as a quite intuitive condition is met non compliant policies may include standards even below the pollution levels that minimize the sum of abatement costs and external damages interestingly the appropriate structure of the penalty under non compliance is highly progressive while the best possible shape of the fine under compliance is linear if the regulator is entitled to choose the structure of the fine linear penalties are socially preferred and the optimal policy induces compliance

the measurability of budget related rent seeking it has been suggested that the extent of rent seeking expenditures arising from attempts to influence budget allocations should be estimated by the absolute magnitude of the observed changes in allocation instead we argue that it is the extent of theex ante prospective changes that determine the level of rent seeking and that in the presence of countervailing activity these may be quite unrelated to the ex post observed values we further argue that the traditional rent seeking model of competition for a pre specified rent is inappropriate in this context

environmental enforcement when inspectability is endogenous a model with overshooting properties if a firm can influence its monitorability vis a vis an environmental regulator it is shown that increasing the thoroughness of inspections induces the firm to substitute towards more transparent technologies whilst increasing their frequency may cause substitution the other way perversely when the effect of such substitution is taken into account an increase in the frequency of inspections or equally the stringency of penalties may worsen the firm s environmental performance the agency should favour more thorough inspections than existing theory suggests particularly in sectors where the scope for such substitution is great moreover when monitorability adjusts only sluggishly to policy shocks because it is an embodied characteristic of capital for example the environmental impacts of increased frequency and increased thoroughness well over and under shoot their respective long run impacts in assessing regulatory reform therefore it is important to leave sufficient time for the class of adjustments identified to occur the possibility of overshooting can be used as an alternative to existing regulatory capture theories to explain why the efficacy of some classes of regulatory reform may fade through time

rent seeking for budgetary allocation preliminary results for 20 countries in this paper we present quantitative measures of the proneness of different countries to respond to pressure groups in determining the composition of their spending these in turn help us to derive simple measures of the rent seeking done in relation to the government s spending pie