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

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

dynamic replenishment from two sources with different yields costs and leadtimes abstract we study a single item periodic review inventory system with two sources of supply in house production and outsourcing the two sources differ in yields costs and leadtimes demands in consecutive periods are independent random variables and stockout is fully backlogged our problem is to characterize the optimal dynamic policy that simultaneously determines the in house production quantity and the outsourcing quantity for each period to minimize the total discounted cost we show that the optimal policy for in house production can be characterized by a threshold and the production quantity is decreasing in the starting inventory the optimal outsourcing policy however is more complex and a threshold type policy is only optimal under a more restrictive assumption about the yields comparative statics about the effects of yield uncertainty outsourcing on the optimal policy and cost performance are discussed

capital ideas from the past to the future modern finance theory modern portfolio theory neoclassical economics the ideas bestowed on us in 1952 1973 by the giants in our field are alive and well challenges to the efficient market theory the capital asset pricing model and mean variance efficiency have been raised but while recognizing that the assumptions of the theories do not hold up empirically we still lean on the ideas and develop them in new directions to say that this body of work is obsolete is to say that aristotle and euclid are obsolete

stochastic comparisons in production yield management manufacturing firms routinely commit resources to increase yield rates through product and process improvement initiatives champions of such yield improvement projects may assume that stochastically larger yield rates are beneficial in this note we show that this need not hold even when the contingent production lot sizes are chosen optimally we employ stochastic comparison techniques to show that a yield rate that is smaller in the convex order ensures higher expected profit and we provide a distribution free bound on the size of increase in expected profit we also identify properties of yield rate distributions that do make stochastically larger yield rates beneficial

persistent poverty and informal credit abstract this paper explores the consequences of nonlinear wealth dynamics for the formation of bilateral credit arrangements to help manage idiosyncratic risk using original data on expected wealth dynamics social networks and informal loans among southern ethiopian pastoralist households we find that the threshold at which expected wealth dynamics bifurcate serves as a focal point at which lending is concentrated informal lending responds to recipients losses but only so long as the recipients are not too poor our results suggest that when shocks can have long term effects loans are best understood as providing a safety net rather than a scale neutral insurance mechanism furthermore the persistently poor are excluded from social networks that are necessary to obtain loans given in response to shocks

joint inventory replenishment and pricing control for systems with uncertain yield and demand we study the joint inventory replenishment and pricing problem for production systems with random demand and yield more specifically we analyze the following single item periodic review model demands in consecutive periods are independent random variables and their distributions are price sensitive the production yield is uncertain so that the quantity received from a replenishment is a random variable whose distribution depends on the production quantity stockouts are fully backlogged our problem is to characterize the optimal dynamic policy that simultaneously determines the production quantity and the price for each period to maximize the total discounted profit we show that the optimal replenishment policy is of a threshold type i e it is optimal to produce if and only if the starting inventory in a period is below a threshold value and that both the optimal production quantity and the optimal price in each period are decreasing in the starting inventory we further study the operational e

the structure of periodic review policies in the presence of random yield this work provides a comprehensive analysis of a general periodic review production inventory model with random variable yield existence of an order point whose value does not depend on yield being random is proved in the single period case without specifying the yield model and using a very general cost structure when yield is a random multiple of lot size the nonorder up to optimal policy is characterized for a finite horizon model the finite horizon value functions are shown to converge to the solution of an infinite horizon functional equation and the infinite horizon order point is shown to be no smaller than when yield is certain

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

a single period stocking and pricing problem involving stochastic emergency supply abstract we develop a model for determining jointly optimal price and production policy of products with short life cycles subject to partially uncertain supply capacity within the price setting newsvendor framework we consider that demand in excess of the stocking quantity can be met by an emergency order due to the randomness of emergency supply capacity it may not always be possible to satisfy the demand completely assuming that all customers are charged the same price we explore the optimal sourcing and pricing decisions in the commonly used additive and multiplicative demand scenarios the first order conditions imply that the optimal price in the problem with random emergency supply is less than the optimal price associated with the deterministic demand problem when demand uncertainty is additive and it is greater than the optimal price associated with the deterministic demand problem when demand uncertainty is multiplicative we also find that the same type of comparative static applies in the multiplicative uncertainty case when there exists a dual source emergency system consisting of a perfectly reliable supplier and a second supplier with a stochastic capacity

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

a periodic review lot sizing problem with random yields disruptions and inventory capacity this paper examines a periodic reviewed lot sizing problem with random yields disruptions and limited inventory capacity to characterise the continuous production an additive random yield model is considered rather than a multiplicative one disruptions cause breakdowns to production inventory capacity is included since the production has to be shut down when the inventory buffer is full both disruptions and shutdowns lead to a start up cost and a stochastic lead time to recover the production these compound factors of uncertainty are encountered in practical planning decisions in process industries we review the existing random yield models which are then compared with the additive model with a linear production cost the additive model has an order up to policy to be optimal disruptions deteriorate the expected actual production quantity and the fill rate dramatically even though the optimal order up to level increases compared with the cases of no disruption considering inventory capacity makes the problem to be a non convex dynamic programming problem numerical analysis shows that the performance is dramatically deteriorated when the inventory capacity is rather tight which indicates the importance of selecting a proper inventory capacity to reduce the negative impacts and avoid redundant investment on capacity moreover the start up cost plays an important role in determining the level of inventory capacity

joint pricing and inventory replenishment decisions with returns and expediting abstract we study a single item periodic review model for the joint pricing and inventory replenishment problem with returns and expediting demand in consecutive periods are independent random variables and their distributions are price sensitive at the end of each period after the demand is realized a buyer can return excess stocks to a supplier or if there are stockouts the buyer can place an expediting order at the supplier to reduce the amount of shortage unfilled demands are fully backlogged we characterize the optimal dynamic policy that determines the pricing inventory replenishment and adjustment decisions in each period so that the total expected discounted profit is maximized for a very general stochastic demand function we can show that the optimal replenishment policy is a modified base stock policy the optimal pricing policy is a modified base stock list price policy and the optimal policy for inventory adjustment follows a dual threshold policy we further study the operational effect of returns and expediting analytical and numerical results demonstrate that returns and expediting lead to a significant profit increase in a number of situations including limited supply capacity sufficient flexibility of the expediting order high demand uncertainty and a price sensitive market

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

diversification under supply uncertainty supply chain management is becoming an increasingly important issue especially when in most industries the cost of materials purchased comprises 40 60 of the total sales revenue despite the benefits cited for single sourcing in the popular literature there is enough evidence of industries having two three sources for most parts in this paper we address the operational issue of quantity allocation between two uncertain suppliers and its effects on the inventory policies of the buyer based on the type of delivery contract a buyer has with the suppliers we suggest three models for the supply process model i is a one delivery contract with all of the order quantity delivered either in the current period with probability or in the next period with probability 1 model ii is also a one delivery contract with a random fraction of the order quantity delivered in the current period the portion of the order quantity not delivered is cancelled model iii is similar to model ii with the remaining quantity delivered in the next period we derive the optimal ordering policies that minimize the total ordering holding and penalty costs with backlogging we show that the optimal ordering policy in period n for each of these models is as follows for x a n order nothing for vi n x a n use only one supplier and for x vi n order from both suppliers for the limiting case in the single period version of model i we derive conditions under which one would continue ordering from one or the other or both suppliers for model ii we give sufficient conditions for not using the second more expensive supplier when the demand and yield distributions have some special form for the single period version of models ii and iii with equal marginal ordering costs we show that the optimal order quantities follow a ratio rule when demand is exponential and yields are either normal or gamma distributed

diversification under yield randomness in inventory models abstract in this paper we consider the case of random yield and diversification in two different inventory models it is assumed that two sources suppliers exist who ship an amount which is a random function of the amount requisitioned since they may charge different prices and their reliability in terms of the variance of the yield random variable may be different diversification may be more desirable than using a single supplier we analyze this problem for both the eoq model and the newsboy model analytic results for the optimal order quantities and the minimum cost are obtained for the eoq model convexity of the objective function is also discussed we develop the necessary conditions for the newsboy model and propose an approximate solution technique the concavity of the expected profit function is shown numerical examples are provided for both models

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

collateral free lending with risk contingent credit for agricultural development indemnifying loans against pulse crop price risk in india this article addresses the problem of collateral free lending in the context of agricultural development we investigate a viable alternative to traditional credit products through the development of risk contingent credit for operating loans and farm mortgages and apply the concept to agricultural loans for pulse crops in india risk contingent credit mitigates business and financial risk by reducing debt obligations depending on the embedded commodity options whose payoffs are linked with commodity price fluctuations we analyze daily commodity spot prices for pulse crops in india and show how risk contingent structured financial instruments can be priced in practice

analysis of an inventory system under supply uncertainty in this paper we analyze a periodic review single item inventory model under supply uncertainty the objective is to minimize expected holding and backorder costs over a finite planning horizon under the supply constraints the uncertainty in supply is modeled using a three point probability mass function the supply is either completely available partially available or the supply is unavailable machine breakdowns shortages in the capacity of the supplier strikes etc are possible causes of uncertainty in supply we demonstrate various properties of the expected cost function and show the optimality of order up to type policies using a stochastic dynamic programming formulation under the assumption of a bernoulli type supply process in which the supply is either completely available or unavailable and when the demand is deterministic and dynamic we provide a newsboy like formula which explicitly characterizes the optimal order up to levels an algorithm is given that computes the optimal inventory levels over the planning horizon extensions and computational analysis are presented for the case where the partial supply availability has positive probability of occurrence

beyond portfolio theory the next frontier logically investment theory s next frontier is to put into practice the rich set of tools that academia has bestowed on the investment community starting with harry markowitz s seminal article on portfolio selection in 1952 or is it in fact the next frontier lies beyond simply engineering the implementation of new investment decision tools the time has come to integrate the powerful insights offered by information theory and principal agent theory into a holistic comprehensive theory of investing only such an expanded theory offers any material hope of improving the economic prospects of the millions of clients beneficiaries of today s mutual funds pension funds endowments and foundations

pricing weather derivatives this article presents a general method for pricing weather derivatives specification tests find that a temperature series for fresno ca follows a mean reverting brownian motion process with discrete jumps and autoregressive conditional heteroscedastic errors based on this process we define an equilibrium pricing model for cooling degree day weather options comparing option prices estimated with three methods a traditional burn rate approach a black scholes merton approximation and an equilibrium monte carlo simulation reveals significant differences equilibrium prices are preferred on theoretical grounds so are used to demonstrate the usefulness of weather derivatives as risk management tools for california specialty crop growers

insurance credit and technology adoption field experimental evidence from malawi this brief summarizes the insurance credit and technology adoption field experimental evidence from malawi the farmers were offered loans for the november 2006 planting season does production risk suppress the demand for credit the author implemented a randomized field experiment to ask whether provision of insurance against a major source of production risk induces farmers to take out loans to adopt a new crop technology the study sample was composed of roughly 800 maize and groundnut farmers in malawi where by far the dominant source of production risk is the level of rainfall the author randomly selected half of the farmers to be offered credit to purchase high yielding hybrid maize and groundnut seeds for planting in the november 2006 crop season the other half of farmers were offered a similar credit package but were also required to purchase at actuarially fair rates a weather insurance policy that partially or fully forgave the loan in the event of poor rainfall surprisingly take up was lower by 13 percentage points among farmers offered insurance with the loan take up was 33 0 percent for farmers who were offered the uninsured loan there is suggestive evidence that reduced take up of the insured loan was due to farmers already having implicit insurance from the limited liability clause in the loan contract insured loan take up was positively correlated with farmer education income and wealth which may proxy for the individual s default costs by contrast take up of the uninsured loan was uncorrelated with these farmer characteristics

the unbanked evidence from indonesia to analyze the prospects for expanding financial access to the poor bank professionals assessed 1 438 households in six provinces in indonesia to judge their creditworthiness about 40 percent of poor households were judged creditworthy according to the criteria of indonesia s largest microfinance bank but fewer than 10 percent had recently borrowed from a micro bank or formal lender possessing collateral appeared as a minor determinant of creditworthiness in keeping with microfinance innovations although these households were judged able to service loans reliably most desired small loans calculations show that the bank given its current fee structure and banking practices will lose money when lending at the scales desired so while innovations have helped to extend financial access it remains difficult to lend in small amounts and cover costs

why we need a pension revolution a broad consensus exists that workplace pension arrangements around the world are sick and in need of strong medicine rather than resurrect the traditional defined benefit db plan or broaden defined contribution dc plan coverage this article argues that we move from an either or to an and and mindset to improve global workplace pension coverage adequacy and certainty pension arrangements can combine the best of db and dc plans and minimize the impact of their less attractive features however we must also redesign the institutions through which workplace pensions are delivered the ideal pension delivery institution is expert has scale and acts solely in the best interests of plan participants

optimal replenishment and rework with multiple unreliable supply sources we study a production inventory system with multiple unreliable supply sources through inspection and rework the system can improve the quality of the units received from the supply sources there are two interleaved decisions the replenishment quantities from the sources and the inspection rework quantities among the units received we show the optimal solution to the replenishment decision can be efficiently derived from a greedy algorithm and inspection rework is optimally applied to a single source identified by the algorithm furthermore in the case of linear cost functions it is optimal to place orders from two supply sources i e dual sourcing the results extend to the infinite horizon case where an order up to policy is optimal the model also readily adapts to situations in which the supply imperfection takes the form of a reduced delivery quantity yield loss

thoughts on the future theory and practice in investment management existing finance theory can be put into practice in ways that will greatly benefit clients from individuals to pension funds to endowments

optimal mean variance portfolio selection using cauchy schwarz maximization fund managers highly prioritize selecting portfolios with a high sharpe ratio traditionally this task can be achieved by revising the objective function of the markowitz mean variance portfolio model and then resolving quadratic programming problems to obtain the maximum sharpe ratio portfolio this study presents a closed form solution for the optimal sharpe ratio portfolio by applying cauchy schwarz maximization and the concept of kuhn tucker conditions an empirical example is used to demonstrate the efficiency and effectiveness of the proposed algorithms moreover the proposed algorithms can also be used to obtain the optimal portfolio containing large numbers of securities which is not possible or at least is complicated via traditional quadratic programming approaches

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

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

the pension problem on demographic time bombs and odious debt much has been written recently particularly after 2000 2002 left pensions in tatters about the challenge of meeting pension obligations the challenge discussed here is interesting and multifaceted embracing issues of demographics reasonable expectations business ethics stakeholder interests the social compact and intergenerational equity the first step is to acknowledge the reality that assuming investments will earn a risk premium without acknowledging the risk that they will not deliver a premium disguises the real size of pension liabilities

dynamic capacity expansion for a service firm with capacity deterioration and supply uncertainty motivated by the challenges faced by the telecom industry during the past decade in this paper we study a dynamic capacity expansion problem for service firms there is a random demand for the firm s capacity in each period the demand in excess of the capacity is lost and revenue is generated for the fulfilled demand at the beginning of each period the firm might increase its capacity through purchasing equipment for immediate delivery which is constrained by a random supply limit or it might sign a future contract for equipment delivery in the following period we assume that the firm s capacity might partially become obsolete due to natural deterioration or technology innovation we aim at characterizing optimal capacity expansion strategies and comparing the profit functions as well as the optimal control policies of different options specifically we show that the optimal capacity expansion policy for the current period is determined by a base stock policy compared with the case where no future contracts are available the optimal control parameters of capacity expansion are always smaller we further show that when the obsolescence rate is deterministic the optimal policy for capacity expansion through future contracts is also a base stock type the results are extended to the cases with stochastically dependent capacity supply limits and stochastically dependent demand processes which establish the robustness of the optimal policy in various market conditions

periodic review production models with variable capacity random yield and uncertain demand we investigate a production planning problem in a periodic review environment with variable production capacity random yields and uncertain demand the implications of random yields and variable capacity for lot sizing previously have been explored separately but not jointly many production environments are likely to be subject to both types of uncertainties to minimize the total discounted expected costs production holding and shortage costs we formulate the problem as a stochastic dynamic program for the finite horizon problem we prove that the objective function is quasi convex and that the structure of the optimal policy is characterized by a single critical point for the initial stock level at each period that is if the initial stock is greater than this critical point the optimal planned production is zero otherwise it is greater than zero expressions for solving the critical point and the optimal planned production are obtained we further show that the solution for the finite horizon problem converges to that of the infinite horizon problem

risk rationing and wealth effects in credit markets theory and implications for agricultural development we develop a model that shows that asymmetric information can result in two types of credit rationing conventional quantity rationing and risk rationing whereby farmers are able to borrow but only under high collateral contracts that offer them lower expected well being than a safe subsistence activity after exploring its incidence with respect to wealth we show that risk rationing has important policy implications specifically land titling will be only partially effective because it does not enhance producers willingness to offer up the collateral needed to secure loans under moral hazard constraints efforts to enhance agricultural investment and the working of agricultural credit markets must step beyond land titling and also deal with risk copyright 2008 oxford university press