lessons from the tequila crisis abstract this paper draws several important lessons from the tequila crisis of 1994 and 1995 the overriding lesson is that the dynamics of financial crises in emerging market countries differ from those in industrialized countries because institutional features of their debt markets differ several policy lessons for emerging market countries also emerge from the analysis 1 pegged exchange rate regimes are extremely dangerous 2 strong prudential supervision of the banking system is critical for prevention of financial crises 3 financial liberalization must be managed extremely carefully and 4 different policies are needed to promote recovery in emerging market countries than those that are applicable to industrialized countries

outcome based accountability theory and evidence abstract a firm s payoffs can often depend on whether it exceeds a threshold of performance in a principal agent setting we demonstrate that the optimal contract induces efficient effort by basing firing decisions solely on whether the agent was successful even though the absolute level of performance is more informative we test the predictions of our model using thirty seasons of nfl data we find that a coach is 6 percentage points more likely to be fired after a close loss beyond this the margin of victory has no significant impact on firing probabilities despite being more informative about future success also consistent with the predictions of our model coaches maximize team effort by playing their best players when doing so has the largest impact on the probability of winning

capital market development in china abstract this paper examines why and how capital markets have developed in a low income socialist country it shows that the development is the response of economic agents operating under a more market oriented economic environment with a highly regulated and inefficient banking system this development has presented new policy challenges and opportunities the paper argues that the developmental effects of the emergence of capital markets in china can be as important as its impact on improving allocative efficiency and resource mobilization

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

interlinked contracts and moral hazard in investment abstract in agricultural tenancy arrangements the tenant is often required to undertake effort aimed at maintaining and improving the productive stocks this paper investigate the design of contracts which induce optimal investment of such effort it is found that a long term contract which interlinks tenancy with a credit agreement is optimal in equilibrium the tenant obtains credit from the landlord at a rate of interest below the market and is perpetually indebted to the landlord

the economics of exchange rate regimes a review essay the exchange rate regime issue has taken centre stage in discussions of international economic policy much of the profession appears to have been converted to the hypothesis of the vanishing middle regime for countries well integrated into world capital markets there is little if any middle ground between floating exchange rates and monetary unification this paper considers the exchange rate regime issue in the context of recent books on the subject by w max corden and morris goldstein both authors prescribe managed floating exchange rates supplemented with inflation targeting for emerging market economies under managed floating and with a credible monetary policy the public finances in order and strengthened debt management and prudential regulation the exchange rate is free to act as a market gauge for assessing policies and as a mode of conflict resolution both authors also argue however that no exchange rate regime is a holy grail ultimately a credible exchange rate regime depends upon the trust evoked by governments there is no exchange rate regime whether of the managed floating or hard fix variety that can eradicate a history of failed stabilisation attempts

introduction imperfect information and rural credit markets puzzles and policy perspectives rural credit markets have been at the center of policy intervention in developing countries over the past forty years many governments supported by multilateral and bilateral aid agencies have devoted considerable resources to supplying cheap credit to farmers in a myriad of institutional settings the results of many of these interventions have been disappointing and one explanation for this must be that they were based on an inadequate understanding of the workings of rural credit markets the articles in this symposium issue are devoted to empirical and theoretical investigations of rural credit markets in the framework of the imperfect information paradigm the authors show how this framework is useful not only in explaining puzzling features of these markets but also in providing a policy perspective to assess the successes and failures of specific interventions

optimal taxation of flow pollutants when firms may also inflict catastrophic environmental damage in many industries firms affect the environment in two distinct types of ways firstly they emit routine anticipated volumes of flow pollutants secondly they can potentially inflict catastrophic environmental damage liability for which may be overhanging or limited by the law operaters of chemical plants nuclear power stations and oil tankers are three examples if an emissions tax or charge is to be levied on the flow pollutants in these cases how should it be set we use simple dynamic programming techniques to characterise second best optimality we identify contexts in which the tax should be raised above its pigovian level to take account of the catastrophic potential and others where it should be set below that level the analysis has significant implications for how policymakers should go about calibrating ecological taxes in a number of high profile industries

vertical coordination financial structure and the changing theory of the firm developments for evaluating these changes including the relationships to financial structure the theoretical developments include contributions from the economics of organizations stiglitz 1991 agency relationships jensen and meckling transactions cost economics williamson 1979 1985 incomplete contracting hart 1988 asymmetric information and financial contracting 1 these theoretical developments provide rich opportunities to apply new interesting concepts toward understanding and evaluating the changing managerial and organizational environment in agriculture

has the european monetary system led to more exports evidence from four european union countries abstract we attempt to investigate whether the exchange rate mechanism erm period has coincided with an increase in intra eu exports we conclude that this has not been the case but it is likely that the elimination of nominal exchange rate variability arising from a single currency will boost intra european union trade

competitive equilibrium in the credit market under asymmetric information abstract we study a competitive credit market equilibrium in which all agents are risk neutral and lenders a priori unaware of borrowers default probabilities admissible credit contracts are characterized by the credit granting probability the loan quantity the loan interest rate and the collateral required the principal result is that in equilibrium lower risk borrowers pay higher interest rates than higher risk borrowers moreover the lower risk borrowers get more credit in equilibrium than they would with full information no credit is rationed and collateral requirements are higher for the lower risk borrowers

the global credit boom challenges for macroeconomics and policy the recent financial crisis has put the spotlight on the rapid rise in credit which preceded it in this paper we provide an empirical and theoretical analysis of the credit boom and the macroeconomic context in which it developed we find that the boom was unusually long and associated with neither particularly strong growth nor rising inflation in the economies in which it took place we show that this type of credit and financial cycle is hard to reconcile with existing economic theory and argue that while the global savings glut may account for the cycle s initial phase other factors such as the conduct of monetary policy and perceptions of declining macroeconomic risk were more important from the mid 2000s onwards we conclude by identifying some of the challenges now facing macroeconomics and policy

financial constraints and firm post entry performance abstract firms finance production by internally generated funds and external loans the benefits of leverage however come with a cost this cost is related to the uncertainty banks face about the firm s quality and output price as time evolves banks learn about the firm and adjust the terms of the loan contract because of this firms do not have equal access to credit small young firms face greater binding debt constraints than more mature firms with well known prospects the firm survival rate as well as the firm rate of growth are therefore important issues in analyzing firm post entry performance

the swedish banking crisis roots and consequences the article analyses the swedish banking crisis in the early 1990s newly deregulated credit markets after 1985 stimulated a competitive process between financial institutions where expansion was given priority combined with an expansive macro policy this contributed to an asset price boom the subsequent crisis resulted from a highly leveraged private sector being simultaneously hit by three major exogenous events a shift in monetary policy with an increase in pre tax interest rates a tax reform that increased after tax interest rates and the erm crisis combined with some overinvestment in commercial property high real interest rates contributed to breaking the boom in real estate prices and triggering a downward price spiral resulting in bankruptcies and massive credit losses the government rescued the banking system by issuing a general guarantee of bank obligations the total direct cost to the taxpayer of the salvage has been estimated at around 2 per cent of gdp copyright 1999 by oxford university press

group credit a means to improve information transfer and loan repayment performance information asymmetries plague credit markets in developing countries leading to selective rationing and market segmentation with adverse income distributional consequences for small borrowers data collected from the finca group credit programme in costa rica were used to study the viability and cost effectiveness of group credit as a means to transmit information on borrower creditworthiness groups that screened members and used local information had lower delinquency rates than those that did not however less than half the groups had positive rates of economic return suggesting that group lending may improve information flow but is a cost sensitive institutional design

incrementality of sme loan guarantees in many countries loan guarantee programs are important elements of government policy with respect to small and medium sized enterprises smes if loan guarantee schemes are to be effective a majority of firms obtaining assistance through such a scheme ought not to be able to obtain financing from existing sources a property known as incrementality or additionality this paper describes a new approach to measuring incrementality this work uses a two stage process to estimate the incrementality of loans made under the terms of the canada small business financing csbf program first a logistic regression based model of loan outcomes essentially a credit scoring model is estimated based on a large representative sample of smes the resulting model was consistent with prior expectations and exhibited high levels of goodness of fit the model was then employed to classify a sample of firms that had received loans under the terms of the loan guarantee scheme incremental loans ought to be classified as turndowns by the model hence the proportion of loan guarantee recipients that the model classified as turndowns is a direct measure of incrementality for the csbf loan guarantee program incrementality was estimated with 95 confidence as 74 8 9 0

incentives in principal agent relationships this article identifies some of the major issues that have been examined in the literature on incentives the article begins by discussing the frictions that lie at the heart of incentive problems next the principal s optimal response to these frictions is explored taking as given the characteristics of the agents with whom the principal interacts in a nonrepeated setting the design of individualized contracts contests and tournaments is analyzed then the principal s task of selecting the best agent is addressed and repeated agency relationships are considered

risky debt investment incentives and reputation in a sequential equilibrium the agency relationship of corporate insiders and bondholders is modeled as a dynamic game with asymmetric information the incentive effect of risky debt on the investment policy of a levered firm is studied in this context in a sequential equilibrium of the model a concept of reputation arises endogenously resulting in a partial resolution of the classic agency problem of underinvestment the incentive of the firm to underinvest is curtailed by anticipation of favorable rating of its bonds by the market this anticipated pricing of debt is consistent with rational expectations pricing by a competitive bond market and is realized in equilibrium some empirical implications of the model for bond rating debt covenants and bond price response to investment announcements are explored

choosing an exchange rate system abstract the focus of academic discussions of exchange rate policy has shifted in recent years the new literature on exchange rate regime choice emphasizes considerations relating to the problems of credibility in exchange rate targeting and the connections between exchange rate regime choices and choices of monetary and fiscal policy arguments for exchange rate targeting are reviewed under most circumstances and for most countries a system of freely floating exchange rates is likely to be a better choice than attempting to peg the exchange rate

the mirage of fixed exchange rates this paper discusses the profound difficulties of maintaining fixed exchange rates in a world of expanding global capital markets contrary to popular wisdom industrialized country monetary authorities easily have the resources to defend exchange parities against virtually any private speculative attack but if their commitment to use those resources lacks credibility with markets the costs to the broader economy of defending an exchange rate peg can be very high the dynamic interplay between credibility and commitment is illustrated by the 1992 swedish and british crises and the 1994 95 mexican collapse we also discuss the small number of successful fixers

an analysis of offer functions of banks and credit unions in guatemala economists have sought to identify institutions which might fill the gap in household access to credit arising from rationing by formal lenders credit unions have been identified as institutions which might use informational and monitoring advantages to fill that gap using information on household perceptions of their access to credit this article analyses the impact of certain credit unions on the access to credit of households in guatemala regression results indicate that credit unions serve markets unserved by formal lenders and that information on household perceptions of their access to credit is important in making inferences about lender lending activities

credit rationing concessionary lending and debt maturity abstract a firm raises capital for a two period investment while creditors observe the project status midstream unobservable managerial perks may consume capital each period when the firm is unfortunate early on short term financing results in either concessionary lending or costly liquidation rolling over short term debt may be problematic because the high risk premium creditors demand when asset value is low relative to debt impares managerial motivation precisely when the incentive to defer perk consumption is weakest long term financing may reduce total agency costs be enabling lenders to charge higher initial premia in effect shifting loan repayments to states in which incentive constraints are non binding

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

balanced budget redistribution as the outcome of political competition this paper models balanced budget redistribution between socio economic groups as the outcome of electoral competition between two political parties equilibrium is unique in the present model and a sufficient condition for existence is given requiring that there be enough stochastic heterogeneity with respect to party preferences in the electorate the validity of hotelling s principle of minimum differentiation and of director s law are examined under alternative hypotheses concerning administrative costs of redistributions and voter s possibilities both of abstaining from voting and of becoming campaign activists for one of the parties the policy strategy of expected plurality maximization is contrasted with the strategy of maximizing the probability of gaining a plurality incomes are fixed and known so lump sum taxation is feasible however constraints on tax transfer differentiation between individuals are permitted in the analysis

imperfectly informed voters and strategic extremism we analyze a two candidate downsian model considering that voters use shortcuts e g interest group media endorsements to infer candidates policy platforms that is voters do not observe candidates exact platforms but only which candidate offers the more leftist rightist platform relative positions in equilibrium candidates behavior tends to maximum extremism but it may converge or diverge depending on how voters behave when indifferent policywise between the candidates when the tie breaking rule used by the voters is sufficiently fair candidates converge to the extreme preferred by the median voter but when it strongly favors a certain candidate each candidate specializes in a different extreme

redistributive politics and economic efficiency the political process often compensates the losers from technical change or international competition in an economically inefficient way namely by subsidizing or protecting declining industries instead of encouraging the movement of resources to other more productive uses we find that a dynamic inconsistency in the game of redistributive politics contributes to this outcome to achieve economically efficient outcomes it is necessary that those making economically inefficient choices not be given offsetting transfers but the political process distributes income on the basis of political characteristics which are in general different from the economic characteristics that are rewarded by the market we identify circumstances in which the inefficient choosers have desirable political characteristics and are therefore immune from threats of having to face the economic consequences of their choices

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

the economics of workout lending lenders are forced to consider a workout loan when a borrower loses access to financial markets and must seek loans from existing creditors to continue servicing outstanding loans a model of the loan decision is developed that distinguishes socially useful from socially wasteful workout loans the analysis is extended to examine two collective action problems that may arise when many lenders have claims on a troubled borrower the paper concludes with a consideration of the implications of the model for the establishment of prudential lending limits and of policies to stimulate new lending to troubled debtor countries copyright 1989 by ohio state university press

financing new venture exporters this paper investigates the demand for and access to financing for young small and medium sized enterprises smes the work compares theoretically and empirically two sets of new firms those that export and those that do not export as to the frequency with which they seek and obtain external financing the work hypothesizes that new growth firms and new exporter firms are especially likely to seek external financing yet less likely to obtain financing empirical findings confirm these expectations demonstrating that young growth firms were more likely than non growth firms to seek all forms of capital and exporters were particularly likely to apply for equity and trade credit commercial lenders were less likely to approve loan applications from early stage growth firms and especially so for applications from young growth oriented sme exporters the implications of these results for research and public policy are discussed

adverse selection in dynamic moral hazard this paper studies a multiperiod moral hazard problem under two assumptions i contracts are subject to renegotiations ii the agent s action has long term effects the action is also interpreted as a choice of characteristic or type renegotiation proof contracts that implement various actions including random ones are characterized under appropriate conditions the equilibrium involves the principal implementing a random action therefore the equilibrium has standard properties of adverse selection models

farm debt default and foreclosure an economic rationale for policy action economic analysis of farm programs typically focusses on economic costs here we show that because of market failures and imperfections there are possible economic benefits to be derived from programs which reduce or eliminate the threat of default and foreclosure a production model of an indebted firm is developed and serves as a basis for an aggregate model which identifies possible costs and benefits from a program of transfers to indebted farmers the challenge facing policy makers is to design programs which capture the benefits of reducing the probability of default while minimizing perverse incentive effects of such programs

international trade and integration of the european community an econometric analysis the paper contributes to the policy debate on european integration by analyzing inte community trade and studying the structural determinants of intra ec trade are distinguished 1 factors relate

competition risk neutrality and loan commitments abstract we rationalize fixed rate loan commitments forward credit contracting with options in a competitive credit market with universal risk neutrality future interest rates are random but there are no transactions costs borrowers finance projects with bank loans and choose ex post unobservable actions that affect project payoffs credit contract design by the bank is the outcome of a non cooperative nash game between the bank and the borrower the initial formal analysis is basically in two steps first we show that the only spot credit market nash equilibria that exist are inefficient in the sense that they result in welfare losses for borrowers due to the bank s informational handicap second we show that loan commitments because of their ability to weaken the link between the offering bank s expected profit and the loan interest rate enable the complete elimination of informationally induced welfare losses and thus produce an outcome that strictly pareto dominates any spot market equilibrium perhaps our most surprising result is that if the borrower has some initial liquidity it is better for the borrower to use it now to pay a commitment fee and buy a loan commitment that entitles it to borrow in the future rather than save it for use as inside equity in conjunction with spot borrowing

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

the incentive effects of dismissals efficiency wages piece rates and profit sharing the relation of several incentive schemes to productivity is studied with a particular emphasis on the effects and determinants of dismissals dismissals turn out to be positively but in a nonlinear way associated with productivity similarly profit sharing raises productivity wages and piece rates are insignificant profit sharing decreases the number of dismissals made by firms copyright 1991 by mit press

corporate fraud and investment distortions in efficient capital markets inefficient investment allocation induced by corporate fraud where informed insiders strategically manipulate outside investors beliefs has been endemic historically and has recently attracted much attention we reconcile corporate fraud and investment distortions with efficient capital markets building on shareholder manager agency conflicts and investment renegotiation in active takeover markets because investments that are ex post inefficient are not renegotiation proof the optimal renegotiation proof contract induces overstatements by managers accompanied by overinvestment in low return states and underinvestment in high return states by rational investors our framework also helps explain why easy access to external capital appears to facilitate corporate fraud

collateral and competitive equilibria with moral hazard and private information the authors examine equilibrium credit contracts and allocations under different competitivity specifications and explain the economic roles of collateral under these specifications both moral hazard and adverse selection are considered the principal message is that how a competitive equilibrium is conceptualized significantly affects the characterization of equilibrium credit contracts specifically some well known results in the rationing literature are shown to rest delicately on the adopted equilibrium concept two somewhat surprising results emerge first high quality borrowers with unlimited collateral may be priced out of the market despite the bank having idle deposits second high quality borrowers may put up more collateral this paper explores the allocational consequences of alternative credit market competitivity specifications and explains the different economic roles of collateral under these specifications we model banks that lend to borrowers financing projects with payoffs depending on a priori unknown borrower attributes and ex post unobservable borrower actions borrowers are assumed to have unconstrained access to collateral our analysis is based on two concepts of competitive equilibrium under both banks compete in the sense that they earn zero expected profits however under the first concept of equilibrium ti as in jaffee and russell 11 all rents accrue to borrowers whereas under the second concept t2 all rents accrue to depositors as in stiglitz and weiss 17 our research makes two main points first we demonstrate that the manner in which a competitive equilibrium is conceptualized importantly influences the characterization of equilibrium credit allocations specifically one of the findings is that the rationing equilibria of stiglitz and weiss 17 and others should be viewed as rather delicate things in that they are very sensitive to the competitivity specification used for instance

is work special justice and the distribution of employment i investigate from an egalitarian welfarist standpoint the issue of whether state guaranteed employment should be offered as a matter of right to able bodied poor citizens who suffer chronic or persistent unemployment an affirmative answer is defended one consideration supporting this right to work is that provision of transfer aid in the form of jobs rather than cash screens nonneedy bohemians from the class of beneficiaries the main conclusion of the essay is defended from one objection based on efficiency wage models of the labor market and from another based on the alleged impossibility of maintaining the self respect and self esteem of able bodied individuals who fail to earn their own keep independently in a market economy

why financial structure matters the 1958 paper by franco modigliani and merton miller has been justly hailed as a landmark in the modern theory of finance what has not been sufficiently emphasized is the importance of the paper to the development of economic theory and practice indeed it is ironic that a paper which purportedly established that one need not pay any attention to financial structure that financial structure was irrelevant should have focused economists attention on finance merton miller gives what must be part of the explanation in his preceding paper in this issue by providing conditions where financial policy was irrelevant conditions which were close to the assumptions used by most conventional economists the paper forced a reexamination of those standard assumptions that reexamination is still going on the mm results have such great intellectual power and appeal that their direct effect has sometimes been to lead economists astray this result may perhaps be seen most forcefully in the work in investment theory in the major study done prior to mm that of meyer and kuh 1959 financial variables like profitability were identified as having important independent effects on investment but the paradigm that became dominant following the publication of mm most forcefully articulated by dale jorgenson and his associates argues that in the absence of taxation financial structure for instance the magnitude of the firm s equity base or cash fiow would make no difference to the level of investment theory drove the econometrics financial structure variables were excluded because economic theory that is modigliani and miller said they should be excluded only recently as a developing and substantial body of economic theory says once again that such variables should be included have econometricians included profit variables again in their specifications

information and economic analysis a perspective ten years ago i delivered a paper before this group with the title information and economic analysis i chose the title deliberately i did not call the subject on which i was speaking the economics of information because to do so would have been to suggest that my topic like the economics of agriculture or the economics of industry or the economics of labour represented another branch of specialisation within economics i wanted to suggest that informational considerations were in fact central to the analysis of a wide variety of phenomena that they constituted a central part of the foundations of economic analysis at the time though economists had long paid lip service to the importance of information there was little formal literature the last decade has seen a burgeoning of the literature it has become to the late 7o s and early 8o s what growth theory was to the early 6o s and it has been greeted with some of the same scepticism there seems to be a myriad ofspecial cases and few general principles the little examples are often contrasted unfavourably with the generality of general equilibrium theory what have we learned have diminishing returns set in are there fruitful directions for future research and if so what are they these are the questions which i wish to address here the work of the past decade has made i think a fundamental and lasting contribution to economic analysis the contributions have been both negative and positive we have learned that much of what we believed before is of only limited validity that the traditional competitive equilibrium analysis though having the superficial appearance of generality in terms of superscripts and subscripts is indeed not very general the theory is not robust to slight alterations in the informational assumptions it is but a special and not very plausible example among the possible set of informational assumptions which can be employed to characterise an economy at the same time the theory has been able to provide insights into phenomena about which the traditional model had nothing to say or which seemed inconsistent or inexplicable within the competitive paradigm it has provided some of the micro foundations for macro economics it has provided the basis of a new theory of the firm of a new new welfare economics and of a theory of economic organisation including a comparison of economic

credit layering in informal financial markets abstract informal lenders with access to markets or capital often find it attractive to delegate loan provision to downstream lenders who have an information or enforcement advantage in dealing with particular borrowers in this paper we examine the conditions under which such an arrangement is preferred by two informal lenders a landlord and a merchant who compete in loan provision to tenant farmers differentiated by wealth we show that credit layering is preferred only when tenants are sufficiently poor in this case the trader lends to tenant farmers via a contract with their landlord otherwise only the trader lends as a consequence a pattern of borrowing emerges in which relatively wealthy tenants borrow from merchants while poor tenants borrow mainly from their landlords interlinkage between land and credit thus arises only for a subset of tenants and purely as a consequence of credit layering this pattern is shown to be supported empirically

environmental accidents under moral hazard and limited firm liability we study optimal government policy when firms operations involve a risk of a large environmental accident firms do not have sufficient assets to cover such costs and the risk is affected by firms efforts which are unobservable to outsiders when firms profits and government revenues have equal weights in the social welfare function a first best can be implemented and requires that the firm be subsidized heavily when operating with no accident and all its assets confiscated in the event of an accident with a lower weight on firm profits the solution is always second best with lower subsidies to the firm and a firm effort lower than at the first best solution when firm investments affect both the required accident preventing effort for given risk and the work effort required for a given output the first best never involves specific investment subsidies while a second best solution generally always does

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

unemployment in open economies the impact of trade finance and european integration this article compares variations in the level of unemployment in four small open economies austria belgium the netherlands and sweden rather than focusing on the political institutional differences between these four countries the article examines international economic variables such as the role of the european monetary system the structure of foreign trade and linkages to international markets to understand the greater deterioration of employment in belgium and the netherlands in turn the decision to join the european community and to seek firmer integration into financial markets is attributed to the relatively greater influence of banking capital or the financial sector in the systems of economic policy making of belgium and the netherlands the article concludes that the detachment of the austrian and swedish economies from the european experience in economic integration has greatly helped the social democrats in these countries in fulfilling their promises of full employment

theoretical foundations for sticky wages abstract the paper compares three different types of theoretical explanation of sticky wages they are implicit contracts efficiency wage models and insider outsider models it then reconsiders keynes rationale for sticky wages which focuses on relative wage issues finally the paper considers possible directions for future research

bank bias in europe effects on systemic risk and growth europe s financial structure has become strongly bank based far more so than in other economies we document that an increase in the size of the banking system relative to equity and private bond markets is associated with more systemic risk and lower economic growth particularly during housing market crises we argue that these two phenomena arise owing to an amplification mechanism by which banks overextend and misallocate credit when asset prices rise and ration it when they drop the paper concludes by discussing policy solutions to europe s bank bias which include reducing regulatory favouritism towards banks while simultaneously supporting the development of securities markets

voters private valuation of candidates quality abstract different voters might have different valuations of candidates qualitative features we argue that this intuitive fact acts as a strong stabilizing force in electoral competition dynamics when candidates are office motivated pure strategy equilibria may exist unlike when all voters favor the same candidate perhaps more importantly it affects candidates platform moderation incentives in a rather intriguing manner when voters are evenly split in terms of their candidates quality valuations then both candidates have incentives to locate sufficiently near but not necessarily exactly at the center of the policy space however as the number of voters who favor the same candidate rises maximum equilibrium differentiation follows a non trivial u shaped pattern it is first decreasing and then increasing in the fraction of voters who prefer the more popular candidate

unidimensional downsian politics median utilitarian or what else abstract in this note we show that in the probabilistic version of the standard unidimensional downsian model with two candidates maximizing their expected pluralities there do not exist nash equilibria in pure strategies whenever the probabilistic component is arbitrarily small but not degenerate we argue that empirical research on electoral competition should pay more attention to the magnitude of partisanship in each group of voters since equilibrium predictions will be very sensitive to that specific electoral parameter

dynamic microlending under adverse selection can it rival group lending we derive an optimal lending contract in a two period adverse selection model with limited commitment on the borrower side the contract involves penalty interest rates after default and favorable rates after success under some conditions it also charges first time borrowers higher rates than repeat borrowers as in relationship lending because the lender is constrained to keep borrowing attractive while using revealed information to price for risk we compare the efficiency of a group lending contract of the kind popularized by the microcredit movement to the dynamic individual contract both types of contracts reveal the same information but the contracts face different constraints on using the information to improve risk pricing as a result either type of contract can lead to greater efficiency depending on specifics of the environment opening the possibility that dynamic lending has played a role comparable to that of group lending in the success of microcredit we also characterize the optimal dynamic group contract when both lending techniques are feasible and find that it combines both approaches but with varying emphases a recurrent theme is that in more marginal environments dynamic lending performs relatively better than and is prioritized over group lending we also discuss a number of extensions including spatially and serially correlated risk and the effect of competition

peer monitoring and credit markets a major problem for institutional lenders is ensuring that borrowers exercise prudence in the use of the funds so that the likelihood of repayment is enhanced one partial solution is peer monitoring having neighbors who are in a good position to monitor the borrower be required to pay a penalty if the borrower goes bankrupt peer monitoring is largely responsible for the successful financial performance of the grameen bank of bangladesh and of similar group lending programs elsewhere but peer monitoring has a cost it transfers risk from the bank which is in a better position to bear risk to the cosigner in a simple model of peer monitoring in a competitive credit market this article demonstrates that the transfer of risk leads to an improvement in borrowers welfare

intertemporal incentives under loss aversion this paper studies the intertemporal allocation of incentives in a repeated moral hazard model with reference dependent preferences as in k oszegi and rabin 2009 besides consumption utility the agent experiences utility from the change in his beliefs about present and future eort and income when eort plans are rational the prospect of being disappointed by the outcome realization equals that of being pleasantly surprised and hence the loss averse agent is on net hurt by news in contrast to the prediction with classical preferences but consistent with real world contracts if consumption utility is not too concave and news about present income carries suciently larger weight in utility than news about future income a contract setting a current

short term contracting and strategic oil reserves the effect of short term contracting on resource extraction is studied in a two country model of international trade in oil countries planners are assumed to be fully rational with perfect information and perfect foresight contracts are assumed perfectly enforceable and complete except that short term contracts do not allow commitments to actions taken beyond the contract period we show that short term contracting limits countries opportunities for intertemporal consumption smoothing reducing their collective tolerance for temporal variation in consumption this tends to make them extract more slowly than in the efficient plan that results from long term contracting contractual relationships often outlive the contracts that govern them it is therefore common for a long term relationship to be governed by a sequence of short term contracts when these contracts allow complete control of the organization of the relationship within each contract period any outcome that can be achieved in a long term contract covering the entire life of the relationship is also feasible with a sequence of short term contracts short term contracting can nevertheless have significant effects on resource allocation because each contract must be voluntarily negotiated in the environment created by its predecessors an allocation that is acceptable to both parties as a long term contract might not be voluntarily negotiable as a sequence of short term contracts because short term contracting is so prevalent it is worth asking what sorts of relationship can be organized efficiently only by long term contract and what kinds of distortion are caused by short term contracting two kinds of answers to these questions have been given in the literature one important line of investigation considers the use of memory in contracts designed to control parties incentives under asymmetric information baron and besanko 1985 rubinstein and yaari 1983 sanchez and zapater 1985 stiglitz and weiss 1983 tirole 1986 and townsend 1982 among others have shown how parties can use

building an incentive compatible safety net abstract bank safety nets originally proposed as a means of stabilizing financial systems have become an important destabilizing influence government protection of bank debts encourages banks to undertake excessive risk particularly in response to adverse shocks to asset values reforms that would remove the destabilizing moral hazard consequences of government protection are considered both from the perspective of economic desirability and political feasibility requiring banks to maintain a minimal proportion of subordinated debt finance and restricting the means by which government recapitalization of insolvent banks occurs are the central features of promising reforms to the safety net

credit market consequences of improved personal identification field experimental evidence from malawi we implemented a randomized field experiment in malawi examining borrower responses to being fingerprinted when applying for loans this intervention improved the lender s ability to implement dynamic repayment incentives allowing it to withhold future loans from past defaulters while rewarding good borrowers with better loan terms as predicted by a simple model fingerprinting led to substantially higher repayment rates for borrowers with the highest ex ante default risk but had no effect for the rest of the borrowers we provide unique evidence that this improvement in repayment rates is accompanied by behaviors consistent with less adverse selection and lower moral hazard jel d14 d82 g21 o12 o16

information institutions and banking sector development in west africa i introduction banks and other financial intermediaries can perform an important developmental function especially in africa where alternative sources of finance are limited or nonexistent by providing firms with essential finance they help them to take advantage of productive investment opportunities which may not otherwise materialize by screening loan applicants they can help to address adverse selection in the credit market and channel funds toward productive uses by monitoring borrowers they can contain moral hazard behavior for example excessively risky investment activity that could undermine a borrower s ability to repay a loan through long term bank borrower relationships well established banks can address both adverse selection and moral hazard this not only helps banks to remain solvent but also ensures that bank finance is channeled toward productive and sound investments there is a large body of empirical evidence which suggests that the development of banking systems goes hand in hand with economic development see e g levine 2004 although the evidence on causality is mixed see e g demetriades and hussein 1996 there is broad consensus that well functioning banking systems promote economic growth demetriades and andrianova 2005 it is therefore a puzzle that so many countries remain financially underdeveloped this is particularly true of sub saharan africa which remains one of the most financially under developed regions in the world a recent study by the world bank has shown that african banking systems lack depth compared to other regions in the world but are also excessively liquid honohan and beck 2007 according to the world bank banks themselves complain that there is a lack of creditworthy borrowers while at the same time households and firms find finance to be a major constraint the evidence presented by the world bank also suggests that the least developed banking systems are also the most liquid suggesting that excess liquidity is a common feature of financial under development this article aims to shed light on these features of financial under development in africa utilizing a panel data set comprising the banks operating in the west african economic and monetary union uemoa during 2000 2005 the uemoa provides a uniform financial system across eight countries the structure of this system has changed little in the last 15 years therefore we can be sure that the variations in bank behavior we observe within the uemoa are not because of variations in the nature of public financial institutions which the banks face this makes feasible the identification of the institutional sources of the variations in bank behavior which are not correlated with variations in the quality of public financial institutions our data set includes balance sheet information on each bank in the uemoa including bank characteristics such as age and ownership type profitability and the number of urban and rural branches we also utilize country level data on loan defaults which provides information on the average quality of borrowers we use this as a proxy for the severity of information problems faced by banks in the credit market we combine this information with macroeconomic data including institutional quality indices constructed by the world bank our data set enables us to examine the extent to which informational and institutional factors and interactions between different factors can explain a bank s loans to assets ratio which is an inverse measure of bank liquidity our data set is also used to examine the microeconomic and macroeconomic determinants of the total volume of assets of an individual bank which is a good micro level indicator of overall banking sector development our results suggest that to a large extent financial under development including excess liquidity and low banking sector development can be attributed to severe informational problems

competing lending platforms endogenous reputation and fragility in microcredit markets this paper shows that market fragility and mass default can arise in microcredit markets as a result of the strategic interaction between a microlender using a reputation based mechanism and a traditional lender using physical collateral in our model borrowers solve a dynamic programming problem which induces an endogenous equilibrium distribution of reputational capital because the quality of each lender s pool of borrowers is affected by both lenders interest rates lender reaction curves are non monotonic and discontinuous this can result in knife edge equilibria and mass default on the microlender precipitated by minor parametric perturbations fragility is exacerbated by borrower screening and sovereign risk but ameliorated when microlenders have social welfare goals our results highlight the importance of studying the entire credit market rather than microfinance in isolation

dynamic fiscal competition a political economy theory abstract i develop a political economy theory of dynamic fiscal competition via public spending and debt with internationally mobile capital strategic policies generate two cross border externalities that voters in each country fail to internalize 1 an increase in public spending that bolsters capital accumulation but also 2 a race to the top in public debt which crowds out capital the relative size of these two externalities varies with the number of financially integrated countries and interacts with the domestic political conflict between young and old voters despite residence based taxation capital tax rates are lower under strategic policies than under coordination furthermore they may decline with financial integration strategic policies lead to lower long run output and welfare relative to coordination but are preferred by subsequent generations of voters if the number of financially integrated countries is low or the political weight of the young is high

the welfare case for the european monetary system abstract this paper argues that the european monetary system can be interpreted as a cooperative game yielding benefits to its members a simple model is set up in which it is shown that the ems solution is superior to nash if the menber countries differ this superiority to nash may require an occasional realignment it will also then require that there be no sterilization of foreign exchange interventions since otherwise the system would collpase the ems is interpreted in this paper as an arrangement manner and not o bretton woods type of arrangement when there is a leader follower relationship inside

the life cycle of a microfinance institution the irish loan funds abstract ireland s loan funds were a long lived self sustaining large scale microfinance organization that made millions of loans without collateral to the poor during the first 100 years of their life cycle a period of growth ending in the 1840s they adapted constantly and obtained improvements to their legal structure because they were complementary to the banking system and seen as effective in relieving poverty in their 2nd century they became ossified in part because of competition with commercial banks the loan funds provide an example of sustainable microfinance under harsh economic conditions and illustrate how organizations change incrementally and when successful alter their institutional framework

a characteristics definition of financial markets abstract this paper employs a characteristics approach to define and classify financial products and markets emphasis is placed on the demand side models for the supply side being comparatively well developed based on changes in the united kingdom the model is used to illustrate how applied economists might analyse the impact of regulatory and technological changes on financial markets avenues for further research are discussed

elections and income redistribution this paper has analyzed a model of elections in which each candidate selects a reputation for the distribution of income that can be expected if he is elected the first result established that whenever there are three or more groups of voters and no single group has half or more of the voters if the candidates believe that the voters choices are determined solely by the candidates redistributional reputations then there is no electoral equilibrium the candidates expectations about the voters choices were then reformulated using a qualitative response model the next result established that this alternative model leads to the existence of electoral equilibria the remainder of the paper analyzed the nature of these equilibria for any given electorate among other things the results established that there is always a unique equilibrium provided a simple procedure for finding the precise location of this equilibrium and showed that this location implicitly maximizes the sum of the voters utility functions on the possible income distributions the penultimate sections provided some simple examples which illustrate the main results in the paper and a discussion of these results in terms of the politics of redistribution

equilibrium credit rationing of small farm agriculture it is often argued that externally imposed contractual restrictions lead to inequitable credit rationing this paper argues that unrestricted laissez faire markets may also inequitably ration credit a formal model which grants borrowers autonomy in credit application and use demonstrates that adverse incentive and selection effects may cause banks to endogenously impose interest rate restrictions and ration small farms out of the credit market consequently liberalization of financial markets may be insufficient to guarantee small farms access to credit

exchange rate variability and trade why is it so difficult to find any empirical relationship this paper discusses why previous literature has found little evidence of any effect of exchange rate variability on international trade methodological and statistical issues are discussed in particular comparisons are made of estimations based on different specifications or using different data sets and changes in the results depending on the method used are shown