a note on the nonexistence of a rationing equilibrium in the besanko thakor model it is shown that in a credit market with two types of borrowers distinguished only through their not commonly known probability of default and with a perfectly elastic supply of deposits a pair of contracts with random rationing of less risky loan applicants cannot be a nash equilibrium copyright 1993 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

collateral in credit rationing in markets with imperfect information note in their 1981 article joseph stiglitz and andrew weiss analyze adverse selection and incentive effects in the loan market the models considered are based on two crucial assumptions borrowers are subject to limited liability and lenders cannot distinguish borrowers projects of different risk stiglitz and weiss show that a bank that raises its interest rate may suffer adverse selection because only risky borrowers will be willing to borrow at the higher rate thus lenders may choose not to raise the interest rate to eliminate excess demand resulting in the possibility of a credit rationing equilibrium stiglitz and weiss also consider briefly the role of collateral in such credit rationing models they conclude that lenders may choose not to use collateral requirements as a rationing device an increase in collateral requirements like an increase in the interest rate potentially leads to a decrease in the lender s expected return on loans because of resulting adverse incentive and selection effects the purpose of this note is to further investigate the role of collateral in these models stiglitz and weiss discussion in section iii establishes that adverse selection effects can result from increases in collateral when borrowers are risk averse i will show by returning to a model they discussed earlier in section i that the adverse selection effects can also occur when borrowers are risk neutral stiglitz and weiss outline a model to consider the use of collateral as a rationing device section iii in that model all potential borrowers face the same array of risky projects each potential borrower chooses at most one of those projects to undertake the individuals are by assumption risk averse with decreasing absolute risk aversion and possess different amounts of initial wealth thus choice of project if any to undertake and the method of finance selffinance from initial wealth or loan finance will differ from one individual to the next stiglitz and weiss show that among those who undertake risky projects and who choose borrowing as the method of finance wealthier individuals undertake riskier projects an increase in collateral has two effects on the market for loans those individuals who remain in the market will choose to undertake less risky projects and those individuals who drop out of the market are less wealthy low risk borrowers if the second effect is sufficiently strong then increased collateral requirements will mean decreased expected returns for the lender thus a credit rationing equilibrium may occur since lenders may not choose to use collateral requirements or the interest rate to eliminate excess demand the adverse selection effect just described does not occur in this model if the individuals are risk neutral consequently the potential for a credit rationing equilibrium is limited to cases where borrowers are risk averse to see that increases in collateral requirements can also result in adverse selection if borrowers are risk neutral consider the model stiglitz and weiss used to analyze the adverse selection effects of increases in the interest rate section i pp 395 99 it differs from the section iii model discussed above in three ways first borrowers are risk neutral second all projects ar loan financed the analogy to the section iii model is that no individuals have sufficient wealth to self finance projects third in the section

entry and strategic information display in credit markets in many countries lenders voluntarily provide information about their borrowers to private credit registries a recent world bank survey reveals that the display of a lender s own borrower information is often not reciprocated that is access to these registries does not require the prior provision of proprietary data we argue that incumbent lenders release information about a portion of their profitable borrowers for strategic reasons the reasoning is that the pool of unreleased borrowers becomes characterised by a severe adverse selection problem this prevents the entrants from bidding for all the incumbent s profitable borrowers and reduces their scale of entry

design and rating of risk contingent credit for balancing business and financial risks for kenyan farmers abstractweather related agricultural risks and limited access to credit are serious impediments to agricultural productivity and growth in developing countries this paper describes a novel insuran

measuring positive externalities from unobservable victim precaution an empirical analysis of lojack lojack is a hidden radio transmitter device used for retrieving stolen vehicles because there is no external indication that lojack has been installed it does not directly affect the likelihood that a protected car will be stolen there may however be positive externalities due to general deterrence we find that the availability of lojack is associated with a sharp fall in auto theft rates of other crime do not change appreciably at least historically the marginal social benefit of an additional unit of lojack has been fifteen times greater than the marginal social cost in high crime areas those who install lojack however obtain less than 10 percent of the total social benefits leading to underprovision by the market

auctions actions and the failure of information aggregation we study a market where k identical and indivisible objects are allocated using a uniform price auction where n k bidders each demand one object before the auction each bidder receives an informative but imperfect signal about the state of the world the good that is auctioned is a common value object for the bidders and a bidder s valuation for the object is determined jointly by the state of the world and an action that he chooses after winning the object but before he observes the state we show that there are equilibria where the auction price is completely uninformative about the state of the world and aggregates no information even in an arbitrarily large auction in the equilibrium that we construct because prices do not aggregate information agents have strict incentives to acquire costly information before they participate in the market also market statistics other than price such as the amount of rationing and bid distributions contain extra information about the state our findings sharply contrast with past work which shows that large auctions aggregate information when there is no ex post action

sharing default information as a borrower discipline device abstract creditors often share information about their customers credit records besides helping them to spot bad risks this acts as a disciplinary device if creditors are known to inform one another of defaults borrowers must consider that default on one lender would disrupt their credit rating with all the other lenders this increases their incentive to perform however sharing more detailed information can reduce this disciplinary effect borrowers incentives to perform may be greater when lenders only disclose past defaults than when they share all their information in some instances by fine tuning the type and accuracy of the information shared lenders can raise borrowers incentives to their first best level

symbiosis vs crowding out the interaction of formal and informal credit markets in developing countries abstract it is a common observation in many developing countries that enterprises are active borrowers in both formal and informal credit markets we propose a model in which the formal sector s superior ability in deposit mobilization is traded off against the informational advantage that lenders in the informal sector enjoy the formal sector can screen borrowers by providing only partial financing for projects thereby forcing borrowers to resort to the informal sector for the remainder of the loan we use the model to predict how the market structure responds to changes in the environment and we consider the policy implications of various forms of government intervention

relative wages wage growth and quit behavior using italian social security records for male workers from a sample of firms in turin from 1981 to 1983 we show that conditional on the worker s own wage the average wage in the establishment for similar workers is negatively related to quits we also find that this variable predicts future wage growth this is consistent with an economic model in which workers compare the longrun value of employment opportunities when making quit decisions

does the disclosure of gun ownership affect crime evidence from new york abstract while the social costs of gun violence are high opponents of gun restrictions argue that gun ownership deters crime and creates a positive externality by increasing unobserved risk to criminals this paper investigates the evidence for these two deterrence channels exploiting the sudden disclosure of all handgun permit holders names and addresses in two new york counties permit holders have more crime incidents at their homes relative to non permit holders in the baseline which is not driven by selection into neighborhoods i find little evidence in favor of direct deterrence and little evidence of peer deterrence instead i find that victimization is associated with a higher likelihood of future gun ownership

symmetrical information and credit rationing graphical demonstrations as this article shows the pro debtor u s bankruptcy code alone can cause credit rationing even without asymmetrical information in the market because the code entails substantial costs to lenders if borrowers file for bankruptcy in the absence of bankruptcy cost lenders are always justified in raising interest rates and clearing markets if the bankruptcy cost is nontrivial however lenders profits are concave in the relevant range of interest rates thus lenders cannot always clear the market by using higher rates the study reported here also found that the use of collateral in debt contracts can reduce rationing but that even 100 percent collateral does not eliminate all rationing possibilities a positive relationship was found between credit risk and the amount of pledged collateral which is not necessarily true with models based on asymmetrical information

the higher cost of follow up loans this paper uses unique data and looks at the interest margin for follow up finance vis a vis first round finance applying data for asset values we examine the substitution between collateral and interest margins consistent with the theories of bester 1985 besanko and thakor 1987 and the empirical evidence of cressy 1996b we find that a trade off between collateral and interest margins exists our main result indicates that follow up finance is more expensive for loans but not for overdrafts we suggest that a relatively fixed asset base land and buildings as seen in higher security to loan values raises the price and risk of successive financial increments this explains the higher relative cost of follow up finance to borrowers

public information and coordination evidence from a credit registry expansion this paper provides evidence that lenders to a firm close to distress have incentives to coordinate lower financing by one lender reduces firm creditworthiness and causes other lenders to reduce financing to isolate the coordination channel from lenders joint reaction to new information we exploit a natural experiment that forced lenders to share negative private assessments about their borrowers we show that lenders while learning nothing new about the firm reduce credit in anticipation of other lenders reaction to the negative news about the firm the results show that public information exacerbates lender coordination and increases the incidence of firm financial distress

more guns more crime this paper examines the relationship between gun ownership and crime previous research has suffered from a lack of reliable data on gun ownership i exploit a unique data set to reliably estimate annual rates of gun ownership at both the state and the county levels during the past two decades my findings demonstrate that changes in gun ownership are significantly positively related to changes in the homicide rate with this relationship driven almost entirely by an impact of gun ownership on murders in which a gun is used the effect of gun ownership on all other crime categories is much less marked recent reductions in the fraction of households owning a gun can explain one third of the differential decline in gun homicides relative to nongun homicides since 1993

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

the social costs of gun ownership abstract this paper provides new estimates of the effect of household gun prevalence on homicide rates and infers the marginal external cost of handgun ownership the estimates utilize a superior proxy for gun prevalence the percentage of suicides committed with a gun which we validate using county and state level panels for 20 years we estimate the elasticity of homicide with respect to gun prevalence as between 0 1 and 0 3 all of the effect of gun prevalence is on gun homicide rates under certain reasonable assumptions the average annual marginal social cost of household gun ownership is in the range 100 to 1800

adjustable and fixed rate mortgages as a screening mechanism for default risk abstract this paper studies how borrowers with different levels of default risk would self select between fixed rate mortgages frms and adjustable rate mortgages arms we show that under asymmetric information where the risk type of a borrower is private information to the borrower and not known by the lender the unique equilibrium may be a separating equilibrium in which the high risk low risk borrowers choose arms frm s thus the borrower s mortgage choice will serve as a signal of default risk enabling lenders to screen high risk and low risk borrowers it is possible for the separating equilibrium to yield positive economic profits for lenders in a competitive market it is also possible to have a unique pooling equilibrium where all borrowers choose either frms or arms the model implies that an increase in the proportion of high risks will increase the likelihood of a separating equilibrium where both mortgage types are offered also a uniform downward shift in the expected change in the interest rate or an increase in borrowers current or future incomes make arms more attractive for both types of borrowers

loan collateral decisions and corporate borrowing costs we examine the relation between borrowing costs and the presence of loan collateral we find the presence of collateral increases with default risk consistent with low quality borrowers reducing their risks and borrowing costs through the use of collateral by explicitly controlling for the interdependence between the decision to pledge collateral and borrowing costs we find that secured loans have predicted spreads substantially lower than if they had been made on an unsecured basis alternatively loans made on an unsecured basis have spreads not substantially different from if they had been secured the evidence suggests that collateral pledging decisions are generally consistent with borrowing cost minimization

endogenous communication among lenders and entrepreneurial incentives if banks have an informational monopoly about their clients borrowers may curtail their effort level for fear of being exploited via high interest rates in the future banks can correct this incentive problem by committing to share private information with other lenders the fiercer competition triggered by information sharing lowers future interest rates and future profits of banks but provided banks retain an initial informational advantage their current profits are raised by the borrowers higher effort this trade off determines the banks willingness to share information their decision affects credit market competition interest rates volume of lending and social welfare article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the poor are twice cursed wealth inequality and inefficient credit market abstract this paper investigates the role of unobservable wealth differences on credit market equilibrium given there is also asymmetric information concerning effort preferences and choices in equilibrium poor but able entrepreneurs may subsidise the rich and incompetent or be excluded as a result investment may exceed or fall short of the optimal level low inequality may deliver conditions for perfect screening and an efficient level of investment the equilibrium with cross subsidisation is consistent with otherwise puzzling empirical observations

on the coexistence of banks and markets we examine the coexistence of banks and financial markets by studying a credit market where the qualities of investment projects are not observable and the investment decisions of entrepreneurs are not contractible standard banks can alleviate moral hazard problems while financial markets operated by investment banks can alleviate adverse selection problems in competition standard banks are forced to increase repayments since financial markets can attract the highest quality borrowers this in turn increases the share of shirkers and may make lending unprofitable for standard banks the coexistence of financial markets and standard banks is socially inefficient the same inefficiency may occur with the entrance of sophisticated banks operating with a combination of rating and ongoing monitoring technologies

inequality and crime this paper considers the relationship between inequality and crime using data from urban counties the behavior of property and violent crime are quite different inequality has no effect on property crime but a strong and robust impact on violent crime with an elasticity above 0 5 by contrast poverty and police activity have significant effects on property crime but little on violent crime property crime is well explained by the economic theory of crime while violent crime is better explained by strain and social disorganization theories

repossession and the democratization of credit we exploit a 2004 credit reform in brazil that simplified the sale of repossessed cars used as collateral for auto loans we show that the reform expanded credit to riskier self employed borrowers who purchased newer more expensive cars the legal change has led to larger loans with lower spreads and longer maturities although the credit reform improved riskier borrowers access to credit it also led to increased incidences of delinquency and default our results shed light on the consequences of a credit reform and highlight the crucial role that collateral and repossession play in the liberalization and democratization of credit

is relationship lending special evidence from credit file data in germany the german financial market is often characterized as a bank based system with strong bank customer relationships the corresponding notion of a housebank is closely related to the theoretical idea of relationship lending it is the objective of this paper to provide a direct comparison between housebanks and normal banks as to their credit policy therefore we analyze a new data set representing a random sample of borrowers drawn from the credit portfolios of five leading german banks over a period of five years we use credit file data rather than industry survey data and thus focus the analysis on information that is directly related to actual credit decisions in particular we use bank internal borrower rating data to evaluate borrower quality and the bank s own assessment of its housebank status to control for information intensive relationships the major results of our study support the view that housebanks are able to establish a distinct behavioral pattern consistent with the idea of long term commitment we find that housebanks do provide liquidity insurance in situations of unexpected deterioration of borrower ratings with respect to loan pricing we find no evidence for intra or intertemporal price differentiation related to housebanking

moral hazard and secured lending in an infinitely repeated credit market game we analyze repeated moral hazard with discounting in a competitive credit market with risk neutrality even without learning or risk aversion long term bank borrower relationships are welfare enhancing the main result is that the borrower obtains an infinite sequence of unsecured loans at below spot market cost following the first good project realization this contract produces first best action choices prior to this stage the borrower gets secured loans with above market borrowing cost the optimal contract thus displays a selective memory feature taking only one of two forms at any given point in time depending on prior history we consider an infinitely repeated bank borrower relationship with moral hazard and universal risk neutrality and explore the ramifications of credit contract duration when the two well known benefits of long term contracting learning and improved risk sharing are absent our objectives are twofold the first is to analyze an infinitely repeated game with discounting in a credit market context we thus relate the theory of repeated games to financial intermediation theory particularly to issues of moral hazard and collateral related distortions the second objective is to understand noteworthy stylized facts of credit markets such as durability in credit relationships lower borrowing costs for established borrowers and unsecured loans for established borrowers versus secured loans for newer borrowers while these practices may be partly due to learning we show that learning is not essential to rationalize them even if information decays rapidly and banks learn nothing about borrowers through time these aspects of credit contracting arise in a repeated game context our main results are as follows first despite universal risk neutrality and the absence of learning a durable bank relationship benefits the borrower 2 the intuition is that the long term contracting permitted by a durable relationship enables the bank to efficiently tax and subsidize the borrower through time to reduce the use of costly collateral second the average welfare loss due to moral hazard per period is positive even as the time horizon goes to infinity third the optimal infinite horizon contract has the striking property that following the period

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

collateral type of lender and relationship banking as determinants of credit risk abstract this paper analyses the determinants of the probability of default pd of bank loans we focus the discussion on the role of a limited set of variables collateral type of lender and bank borrower relationship while controlling for the other explanatory variables the study uses information on the more than three million loans entered into by spanish credit institutions over a complete business cycle 1988 2000 collected by the bank of spain s credit register central de informacion de riesgos we find that collateralised loans have a higher pd loans granted by savings banks are riskier and finally that a close bank borrower relationship increases the willingness to take more risk

the role of personal wealth in small business finance abstract this paper provides new empirical evidence on the relationship between personal commitments and the allocation of small business credit the data suggest that personal commitments are important for firms seeking certain types of loans guarantees are more prevalent than collateral and organization type corporate versus noncorporate status appears to be particularly important in determining commitment use no systematic relationship is observed between commitment use and owner wealth personal commitments appear to be substitutes for business collateral at least for lines of credit while personal collateral and personal guarantees do not seem to substitute for each other personal commitments have generally become more important to small business lending since the late 1980s

foreign entry and bank competition abstract foreign entry and bank competition are modeled as the interaction between asymmetrically informed principals the entrant uses collateral as a screening device to contest the incumbent s informational advantage both better information ex ante and stronger legal protection ex post are shown to facilitate the entry of low cost outside competitors into credit markets the entrant s success in gaining borrowers of higher quality by offering cheaper loans increases with its efficiency cost advantage this paper accounts for evidence suggesting that foreign banks tend to lend more to large firms thereby neglecting small and medium enterprises the results also explain why this observed bias is stronger in emerging markets

capital requirements monetary policy and aggregate bank lending theory and empirical evidence capital requirements linked solely to credit risk are shown to increase equilibrium credit rationing and lower aggregate lending the model predicts that the bank s decision to lend will cause an abnormal runup in the borrower s stock price and that this reaction will be greater the more capital constrained the bank i provide empirical support for this prediction the model explains the recent inability of the federal reserve to stimulate bank lending by increasing the money supply i show that increasing the money supply can either raise or lower lending when capital requirements are linked only to credit risk the motivation of this article is first to examine the impact of risk based capital requirements namely those that link mandatory capital to asset ratios for banks to their loans on aggregate bank lending these requirements called the basle capital rules or bis guidelines went into effect in march 1989 for banks in the leading industrialized nations these rules initially required banks to maintain capital equal to 7 25 percent of business and most consumer loans with the requirement increasing to 8 percent by the end of 1992 secondly i wish to understand the link between monetary policy and aggregate bank credit in the presence of risk based capital requirements my curiosity is sparked in part by two recent phenomena one is the experience of the u s economy which displayed sluggish growth during 1989 93 despite a monetary policy that attempted to spur bank lending and economic activity and the other is the striking decline in loans relative to security holdings mostly government bonds in the asset portfolios of u s

firm heterogeneity internal finance and credit rationing this paper assesses the role of internal net worth holding constant investment opportunities in the allocation of credit in the presence of asymmetric information in the capital market the authors consider an economy in which both symmetric information and information intensive entrepreneurs seek funds from the capital market and they develop a simple general equilibrium model of credit allocation their emphasis is on shocks to borrower net worth depending on levels of net worth the symmetric information allocation a credit collapse or intermediate allocations are possible the model yields predictions corresponding to accelerator effects on investment and output as well as real effects of collateral redistributions copyright 1990 by royal economic society

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

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

the impact of mass shootings on gun policy abstract there have been dozens of high profile mass shootings in recent decades this paper presents three main findings about the impact of mass shootings on gun policy first mass shootings evoke large policy responses a single mass shooting leads to a 15 increase in the number of firearm bills introduced within a state in the year after a mass shooting this effect increases with the extent of media coverage second mass shootings account for a small portion of all gun deaths but have an outsized influence relative to other homicides third when looking at bills that were actually enacted into law the impact of mass shootings depends on the party in power the annual number of laws that loosen gun restrictions doubles in the year following a mass shooting in states with republican controlled legislatures we find no significant effect of mass shootings on laws enacted when there is a democrat controlled legislature nor do we find a significant effect of mass shootings on the enactment of laws that tighten gun restrictions

selection on observed and unobserved variables assessing the effectiveness of catholic schools in this paper we measure the effect of catholic high school attendance on educational attainment and test scores because we do not have a good instrumental variable for catholic school attendance we develop new estimation methods based on the idea that the amount of selection on the observed explanatory variables in a model provides a guide to the amount of selection on the unobservables we also propose an informal way to assess selectivity bias based on measuring the ratio of selection on unobservables to selection on observables that would be required if one is to attribute the entire effect of catholic school attendance to selection bias we use our methods to estimate the effect of attending a catholic high school on a variety of outcomes our main conclusion is that catholic high schools substantially increase the probability of graduating from high school and more tentatively attending college we find little evidence of an effect on test scores

pyramidal groups and debt abstract this paper suggests that debt should be raised by subsidiaries in order to exploit the limited liability of the holding company however when this behavior increases the cost of funds the holding might prefer to raise debt to a point where it would also default when subsidiaries are insolvent after accounting for standard controls we find that holding companies in italian pyramids have higher leverage than subsidiaries and that the cash flow share of the entrepreneur in the subsidiary does not play a significant role these findings are consistent with the implications of our model of group capital structure

short term loans and long term relationships relationship lending in early america recent banking theory holds that durable firm bank relationships are valuable to both parties this paper uses the contract specific loan records of a 19th century u s bank and shows that firms with extended relationships received three principal benefits first firmswith extended relationships had lower credit costs second long term customers provided fewer personal guarantees which were an alternative to collateral third long term customers were more likely to have loan terms renegotiated during a credit crunch these findings support theories that banks realize cost advantages through the use of proprietary information

information sharing and lending market competition with switching costs and poaching abstract we analyze information sharing with repeated banking competition in the presence of switching costs we find that information sharing renders poaching more profitable in future rounds of competition since the poaching activities can be targeted towards more creditworthy borrowers we find that information sharing reduces relationship benefits and therefore relaxes competition for initial market shares information sharing introduces a welfare tradeoff by promoting equilibrium profits at the expense of talented entrepreneurs whenever market power persists in credit market whereas it is a matter of indifference without market power thus information sharing may induce exclusion of creditworthy borrowers from credit markets

information and bank credit allocation abstract private information obtained by lenders leads to borrower capture to the extent that such information cannot be communicated credibly to outsiders we analyze how this capture affects the loan portfolio allocation of informed lenders first we show that banks charge higher interest rates and finance relatively less creditworthy borrowers in market segments with greater information asymmetries second when faced with greater competition from outside lenders banks reallocate credit toward more captured borrowers flight to captivity third if borrower quality and captivity are sufficiently correlated an increase in the competitiveness of uninformed lenders can worsen the informed lender s overall loan portfolio the model explains observed consequences of financial liberalizations

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

robust financial contracting and the role of venture capitalists we derive a role for inside investors such as venture capitalists in resolving various agency problems that arise in a multistage financial contracting problem absent an inside investor the choice of securities is unlikely to reveal all private information and overinvestment may occur an inside investor however always makes optimal investment decisions if and only if he holds a fixed fraction contract where he always receives a fixed fraction of the project s payoff and finances that same fraction of future investments this contract also eliminates any incentives of the venture capitalist to misprice securities issued in later financing rounds in this article we develop a model of financial contracting with multiple investment decisions and show how conflicts of interest and informational asymmetries can be effectively resolved by an inside investor i e an investor who not only provides capital but also works closely with the firm monitors it frequently and is generally very well informed about the firm s prospects and investment opportunities venture capitalists are obvious examples of inside investors and their function has been an important motivation for this article banks especially in japan and germany are also involved in monitoring and can be viewed as playing the role of inside investors in this article we examine the potential benefits of inside investors in a context where there are no restrictions beyond limited liability on the type of financial contracts that can be written we address a basic financial contracting problem involving an entrepreneur who has an idea for a project but does not have sufficient capital to fund it an important assumption is that there are several stages in the project s development and that a decision must be made at each stage whether the project should be continued or abandoned if the project is continued the amount of additional capital to be invested must also be determined we assume that the entrepreneur as an insider observes private information about the project s profitability at each stage this information is not

the suspension of borrowing an implicit penalty for loan default under imperfect information abstracta credit seeker may be suspended from borrowing for a period of time due to a previous default such suspension is widely used in bank lending through credit check our work analyses the effects of suspension on the investment choice of borrowers under uncertainty and on the lending policy of banks facing asymmetric information we show that suspension should be tightened at low loan rates but loosened otherwise to improve the repayment performance of borrowers we also show that although credit rationing may not be completely removed due to imperfect information the excess demand for credit or transitive waiting in the market can actually be attenuated by such efficient use of suspension our theoretical predictions are consistent with observed cyclical patterns of changes in lendingrates and suspension severity

guns violence and the efficiency of illegal markets in economics the standard mechanism for allocating scarce resources is the market a smoothly functioning market however is built upon legally enforceable contracts and property rights in the absence of law it is likely that violence or the threat thereof rather than prices is the means by which resources will be allocated interactions among animals provide clear evidence for this claim dominance hierarchies based on fighting ability also sometimes known as pecking orders have been documented across a wide variety of species e g primates chickens and other birds reptiles lobsters and a broad range of resources including food nesting sites and access to mates warder c allee 1938 john alcock 1993 evidence suggests that violence also plays a critical role in human interactions when property rights are not legally enforceable e g drug dealing and extortion see e g peter reuter 1983 geoffrey canada 1995 in this paper we analyze the determinants of the efficiency with which illegal markets allocate scarce resources we develop a stylized model in which players compete for a fixed prize with the winner determined by fighting ability efficiency in this context is determined by the amount of resources spent on fighting two factors affecting efficiency emerge from the model lethality and predictability perhaps surprisingly the use of more lethal mechanisms for resolving disputes does not have a clear impact on the social costs of violence the intuition underlying this result is that as the costs of losing a fight rise the willingness to fight falls we show that holding other factors constant the resources spent on fighting are lowest when the cost of losing is either very low or very high e g nuclear deterrence but over a wide range of lethality levels the overall social costs of fighting are fairly stable in contrast the costs of violence are critically linked to the predictability of dispute outcomes i e the certainty with which potential combatants know who will be victorious ex ante when the outcome of a conflict is highly correlated with observable characteristics such as strength or size there is little need to actually fight thus unpredictability all else equal increases the expected payoff to fighting for the lower ranked member leading to more conflicts

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

the rise of risk based pricing of mortgage interest rates in italy abstract this paper assesses how much mortgage interest rates in italy are priced on credit risk as proxied by the probability of household mortgage delinquency estimated using the eu silc database owing to data availability we restrict the analysis of mortgage pricing to italian households consistent with the more widespread use of credit scoring estimates indicate that italian lenders have increasingly priced mortgage interest rates on household credit risk for mortgages granted between 2000 and 2007 we find that a 1 point increase in the probability of default is associated with a 21 basis point rise in mortgage interest rates lower than the 38 basis point premium edelberg 2006 estimated for the us at the end of the 1990s

do wages rise with job seniority many previous studies have found a strong positive effect of job seniority tenure on wages this paper re examines the evidence using a simple instrumental variables scheme to deal with the fact that tenure is likely to be related to unobserved individual and job characteristics that affect the wage we use the variation of tenure over a given job match as the principal instrumental variable for tenure the variation in tenure over the job is uncorrelated by construction with the fixed individual and job match specific components of the error term of the wage equation our main finding is that the partial effect of tenure on wages is small and that general labour market experience and job shopping account for most wage growth over a career the strong cross section relationship between tenure and wages is due primarily to heterogeneity bias prior researchers see mincer and jovanovic 1981 bartel and borjas 1981 borjas 1981 cline 1979 and mellow 1981 and many others have established that job seniority has a strong positive relationship with wage rates in a cross section or a cross section time series of individuals in this paper we re evaluate the evidence concerning the partial effects on wages of job seniority tenure and total labour market experience the extent to which wages rise with tenure is important for several reasons first and foremost the wage tenure profile is a fundamental question about the structure of earnings over careers second the wage tenure profile is a key determinant of the extent to which the earnings power of individuals is tied to specific jobs and it is important for assessment of the losses suffered by displaced workers hamermesh 1984 third evidence that wages rise with job tenure has been used to explain the decline in quits with tenure since the wage growth on the current job lowers the probability that the worker will locate a superior alternative a growing theoretical literature surveyed in parsons 1984 has taken the evidence of a strong wage tenure profile at face value and sought to provide an explanation for the relationship the most prominent explanation is the theory of specific human capital oi 1962 becker 1962 mincer 1974 parsons 1972 kuratani 1973 and hashimoto 1980 in which the growth of wages with tenure holding experience constant is attributed to the worker s share of investments in firm specific skills more recently lazear 1981 has presented a supervision model of wage growth in which firms defer compensation as a means of inducing workers not to shirk freeman 1977 and harris and holmstrom 1982 provide an explanation for wage growth based on an insurance motive salop and salop 1976 nickell 1976 and guasch and weiss 1982 present adverse selection models of wage growth in which firms use a wage tenure profile as a

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

intertemporal diversification in financial intermediation abstract this paper examines the incentive problem between a bank and depositors or deposit insurer limited liability makes risk shifting lucrative we show how intertemporal diversification of lending decisions i e bank s loan portfolio consists of overlapping long term loans and is thus gradually renewed may solve the incentive problem of risk shifting a new or expanding bank sets a high equity level and acquires depositors confidence subsequently it can allow its equity to depreciate to a permanently lower level depositors can control the bank by monitoring equity and realized credit losses ex post they do not have to monitor bank s lending choices ex ante maturity mismatch illiquidity of long term loans and liquidity of deposits is optimal the analysis can be extended more generally to the borrower lender relationship

evaluation of credit guarantee policy using propensity score matching in this article we evaluate the effect of the credit guarantee policy by comparing a large sample of guaranteed firms and matched non guaranteed firms from 2000 to 2003 the sample firms are compared with respect to growth rates of different performance indicators including productivity sales employment investment r d wage level and the survival of firms in the post crisis period in order to avoid the selectivity problem propensity score matching methodologies are adopted results suggest that credit guarantees influenced significantly firms ability to maintain their size and increase their survival rate but not to increase their r d and investment and hence their growth in productivity moreover due to the adverse selection problem firms with lower productivity were receiving guarantees

involuntary unemployment and worker self selection abstract consider a firm that lacks information about the reservation wage or ability of any specific worker but is aware that workers with higher reservation wages tend to be more able on average we show that under a simple condition that the efficiency wage exceeds the lowest reservation wage the optimal hiring policy for the firm involves 1 no wage discrimination and 2 rationing of jobs when demand for its product is low the result also extends to the case where hours of work are variable provided each worker is most productive when working a strictly positive number of hours per week

sharing contracts marginalisation adverse selection and markup calculation this paper proposes a new approach to explain the dominance in the islamic banking market of markup contracts at the expense of sharing ones we show that the dual pricing practised in this market produces an additional or artificial dimension of adverse selection which is causing the sharing contracts marginalization we suggest specialized use of two islamic contractual categories as a device for eliminating artificial adverse selection we suggest also an endogenous calculation of the markup that is independent of the interest rate based on the financing cost unification this approach allows the deduction of default and liquidity risk premiums

information sharing in credit markets we present a model with adverse selection where information sharing between lenders arises endogenously lenders incentives to share information about borrowers are positively related to the mobility and heterogeneity of borrowers to the size of the credit market and to advances in information technology such incentives are instead reduced by the fear of competition from potential entrants in addition information sharing increases the volume of lending when adverse selection is so severe that safe borrowers drop out of the market these predictions are supported by international and historical evidence in the context of the consumer credit market a large body of literature on credit markets has shown that asymmetric information may prevent the efficient allocation of lending leading to credit rationing e g jaffee and russell 1976 stiglitz and weiss 1981 or to a wedge between lending and borrowing rates e g king 1986 in this literature informational asymmetries are taken to be exogenous lenders fail to observe some relevant characteristic or action of potential borrowers and have no way of learning about it in some countries however lenders can improve their knowledge about new customers by exchanging information with other lenders through information brokers generally known as credit bureaus the latter collect file and distribute the information voluntarily supplied by their members and operate on the principle of reciprocity lenders who do not provide data are denied access to the bureau s files in other countries instead these institutions do not exist the literature offers no guide to identify the factors that lead to endogenous communication between lenders this paper is an attempt to fill the gap information sharing is important for a number of reasons it may increase the degree of competitiveness within credit markets vives 1990 improve

financial matching asymmetric information and entrepreneurial risk taking we study financial matching in credit markets when entrepreneurs have private information about their success potential entrepreneurs can search for financing for either a risky or a safe investment and only the risky project is sensitive to entrepreneurs intrinsic types there is excess risk taking in the sense that entrepreneurs with inefficiently low success probabilities choose the risky investment however steady states featuring greater market liquidity are associated with higher efficiency as market liquidity also reflects the intensity of competition among financiers earlier results which indicate a negative relationship between competition and allocative efficiency do not hold in our setup

the interaction between potential criminals and victims demands for guns abstract i develop a model with endogenous gun ownership and study the interaction between the demands for guns by heterogeneous potential offenders and victims i show that the interaction depends on pervasiveness of guns injury probabilities and in particular the impact of the gun on the probability of success against armed relative to unarmed adversaries while the sanction on armed offense is maximal under plausible conditions the sanction on unarmed offense balances direct deterrence benefits against marginal deterrence costs and corresponding net property losses optimal gun control policy disarms all offenders but allows the attractive potential victims to own guns the paper also discusses the effects of enforcement and price controls on the demands for guns and welfare

income losses of women and men injured at work women and men injured at work in wisconsin during 1989 and 1990 have similar levels of lost earnings in the quarter of injury however in the three and one half years after the post injury quarter women lose an average of 9 2 percent of earnings while men lose only 6 5 percent even after accounting for covariates with a variant of the oaxaca blinderneumark decomposition the disparity in long term losses remains differences in injury related nonemployment account for about half the covariate adjusted gap over the four year post injury period changes in hours worked may explain all or part of the remaining gap gender differ

are good or bad borrowers discouraged from applying for loans evidence from us small business credit markets this paper takes the concept of a discouraged borrower originally formulated by kon and storey kon y storey d j 2003 a theory of discouraged borrowers small business economics 21 37 49 and examines whether discouragement is an efficient self rationing mechanism using us data it finds riskier borrowers have higher probabilities of discouragement which increase with longer financial relationships suggesting discouragement is an efficient self rationing mechanism it also finds low risk borrowers are less likely to be discouraged in concentrated markets than in competitive markets and that in concentrated markets high risk borrowers are more likely to be discouraged the longer their financial relationships we conclude discouragement is more efficient in concentrated than in competitive markets

credit bureau policy and sustainable reputation effects in credit markets welfare increasing reputation effects arise in credit markets when adverse selection gives rise to borrower reputation formation incentives that mitigate moral hazard problems this paper shows that welfare stemming from reputation effects will diminish over time as the private information of borrowers is revealed to lenders in the form of lengthening credit histories aggregate borrower welfare may therefore decrease over time unless reputation effects can be sustained restricting a lender s access to a borrower s credit history via credit bureau policy is shown to be one method of sustaining reputation effects and preventing a decline in welfare copyright 1995 by the london school of economics and political science

a quick and easy method for estimating switching costs abstract i develop and test a method for a quick and easy calculation of consumer switching costs among brands in a given industry the theory developed and tested here maps observed brands prices and market shares onto the switching costs which deter a consumer of a specific brand from switching to any other competing brand then i demonstrate how users switching costs can be directly calculated in two different industries a the israeli cellular phone market and b the finnish market for bank deposits this calculation method can be used to calculate switching costs in a wide variety of other industries such as airlines health services computers software telecommunications and more

role of collateral and personal guarantees in relationship lending evidence from japan s sme loan market this paper investigates the determinants of the use of collateral and personal guarantees in japan s sme loan market we find that firms riskiness does not have a significant effect on the likelihood that collateral is used we find however that main banks whose claims are collateralized monitor borrowers more intensively and that borrowers who have a long term relationship with their main banks are more likely to pledge collateral these findings are consistent with the theory that the use of collateral is effective in raising the bank s seniority and enhances its screening and monitoring this incentive effect for the bank becomes tenuous for personal guarantees

do liquidation values affect financial contracts evidence from commercial loan contracts and zoning regulation we examine the impact of asset liquidation value on debt contracting using a unique set of commercial property loan contracts we employ commercial zoning regulation to capture the flexibility of a property s permitted uses as a measure of an asset s redeployability or value in its next best use within a census tract more redeployable assets receive larger loans with longer maturities and durations lower interest rates and fewer creditors controlling for the property s type sale price and earnings to price ratio these results are consistent with incomplete contracting and transaction cost theories of liquidation value and financial structure

switching costs and adverse selection in the market for credit cards new evidence abstract to explain persistence of credit card interest rates at relatively high levels calem and mester aer 1995 argued that informational barriers create switching costs for high balance customers as evidence using data from the 1989 survey of consumer finances they showed that these households were more likely to be rejected when applying for new credit in this paper we revisit the question using the 1998 and 2001 scf further we use new information on card interest rates to test for pricing effects consistent with information based switching costs we find that informational barriers to competition persist although their role may have declined

exploiting naivete about self control in the credit market we develop a model of the credit market where competitive lenders oer long term contracts specifying a non linear schedule of possible repayment schedules to borrowers who may dier both in their taste for immediate gratication and their prior beliefs about that taste the equilibrium contract to a borrower with given beliefs is discontinuous it features an advantageous option involving fast repayment and a penalty for deviating and repaying later these predictions seem to resemble some salient features of many credit card and mortgage contracts for fully sophisticated borrowers the discontinuity acts as a commitment device and yields fast repayment but all other borrowers even those with an arbitrarily small amount of naivete end up delaying repayment despite the penalty and receive little benet from commitment furthermore because they believe they will repay early they underestimate the cost of credit and hence borrow too much non sophisticated borrowers cross subsidize sophisticated borrowers while sophisticated borrowers discipline rms by preventing very exploitative contracts we identify natural conditions under which the above results obtain even if

motives for forming research development financing organizations abstract we study the decision to fund r d through a separate financing organization an rdfo that takes the form of either a limited partnership or a corporation the rdfo offers tax and financial reporting benefits as a form of external funding it also creates moral hazard and adverse selection problems information costs using convertible debt as a comparative form of external funding we find that debt related but not equity related financial reporting benefits affect the decision to form rdfos the evidence is mixed on whether taxes influence the formation decision and the information costs of rdfos restrict their use

some evidence on the empirical significance of credit rationing this paper examines the credit rationing debate using detailed contract information on over one million commercial bank loans from 1977 to 1988 while commercial loan rates are sticky consistent with rationing this stickiness varies with loan contract terms in ways that are not predicted by equilibrium credit rationing theory in addition the proportion of new loans issued under commitment does not increase significantly when credit markets are tight despite the fact that borrowers without commitments can be rationed whereas commitment borrowers are contractually insulated from rationing overall the data suggest that equilibrium rationing is not a significant macroeconomic phenomenon

aggregate consumption behaviour and liquidity constraints the canadian evidence this paper considers a general permanent income model in which a fraction of consumers in the economy is liquidity constrained consumption growth rate for these individuals is related to the growth rate of their income and the level of real interest rates the interest rate coefficient is predicted to be smaller in the presence of liquidity constraints empirically liquidity constraints are found to be important and the estimated intertemporal elasticity of substitution parameter is much larger than the one obtained by estimating the standard representative agent model lastly there is some evidence of structural changes over the sample period which are associated with the 1982 recession

a matter of relational style loan officer consistency and exchange continuity in microfinance social scientists have long considered what mechanisms underlie repeated exchange three mechanisms have garnered the majority of this attention formal contracts relational contracts and relationally embedded social ties although each mechanism has its virtues all three exhibit a common limitation an inability to fully explain the continuation and stability of intertemporal exchange between individuals and organizations in the face of change drawing on extensive quantitative data on approximately 450 000 microfinance loans made by a microfinance institution in mexico from 2004 to 2008 that include random assignment of loan officers this research proposes the concept of relational styles to help explain how repeated exchange is possible in the face of personnel change we define relational styles as systematically reoccurring patterns of interaction employed by social actors within and across exchange relationships in this paper between microfinance clients and loan officers we show that relati

the importance of equity finance for r d activity this article analyzes the importance of equity finance for the r d activity of small and medium sized enterprises we use information on almost 6 000 german smes from a company survey using the intensity of banking competition at the district level as an instrument to control for endogeneity we find that a higher equity ratio is conducive to a higher r d intensity owners may only start r d activities if they have the financial resources to sustain them until successful completion we find a larger influence of the equity ratio for young companies equity may be more important for young companies which have to rely on the original equity investment of their owners since they have not yet accumulated retained earnings and can rely less on bank financing

cost of capital and public loan guarantees to small firms in this paper we study the determinants of the spread charged by banks under a uk policy intervention scheme aimed at supporting access to the credit market for small firms through guarantee backed loans we exploit a unique dataset containing data on 29 266 guarantee backed loans under the uk sflg scheme over the period 2000 to 2005 results suggest that lower spreads are offered for loans of larger amounts and higher durations for service firms for larger firms and for those located in the most advanced regions higher spreads are applied to high tech manufacturing firms and to loans issued for working capital purposes we also find that the presence of other extant debt is associated with a relatively higher spread and that this effect is especially significant for the subset of firms that have reached a maximum debt capacity based on collateralized assets further we also find that the higher the incidence of the publicly guaranteed debt over the total amount of outstanding loans the lower on average the spread however an increase in the guaranteed coverage leads to a contraction in the spread only for loans aimed at covering working capital needs rather than investments