effects of financial innovations on the money demand function a canadian evidence a money demand function for the candian economy has been estimated to explore if recent financial innovations have caused any significant change in the structural relationship between the demand for money and its determinants two sets of estimation results have been analysed the first set is obtained by estimating a standard money demand function for several overlapping sample periods and the other set is obtained by estimating a modified version which included a dummy or a ratchet variable to capture the effects of innovations the estimated equations have been used to generate ex post simulations and forecasts the results suggest that innovations have displaced the money demand function in the early 1980s it also appears that the incorporation of approriate innovation variables improves the predictive performance of the money demand function

the structure of licensing contracts industrial organization theory has explored several issues related to licensing but empirical analyses are extremely rare we amass a new and detailed dataset on licensing contracts and use it to present some simple facts concerning licensing behavior our analysis reveals robust cross industries differences in several contractual features such as exclusivity cross licensing ex ante versus ex post technology transfers and licensing to related versus unrelated parties we offer an interpretation of these facts based on cross industry variation in the strength of intellectual property rights

income distribution and the size of the financial sector a sraffian analysis the recent expansion of the financial sector has been accompanied by deregulation an acceleration of financial innovation and changes in income distribution the size of these phenomena has attracted the attention of the literature a large part has analysed the relationship between financial development and inequality arguing that the former tends to reduce the latter for a review of this literature see demirguc kunt and levine 2009 it moves from the claim that perfect credit markets reduce inequality by bringing about the efficient exploitation of personal qualities material endowments and the growth potentials of the economy credit market imperfections hold back the achievement of these results but are counteracted by deregulation and financial innovation which tend to eliminate rent positions

wages and human capital in the u s financial industry 1909 2006 we study the allocation and compensation of human capital in the u s finance industry over the past century across time space and subsectors we find that financial deregulation is associated with skill intensity job complexity and high wages for finance employees all three measures are high before 1935 and after 1980 but not in the interim period workers in the finance industry earn the same education adjusted wages as other workers until 1990 and significantly more afterward by 2006 the premium is 40 on average and 200 for top earners and ceos earnings risk and firm size effects account for some of the premium but the majority does not appear to be sustainable

empirical studies of financial innovation lots of talk little action this paper reviews the extant empirical studies of financial innovation adopting broad criteria we could find only somewhat more than two dozen studies and since some financial innovations are examined by more than one study they cover only seventeen phenomena especially striking is the fact that only two studies offer tests of the broad hypotheses concerning the environmental conditions spurring financial innovation e g regulation taxes unstable macroeconomic conditions and ripe technologies that have been advanced in descriptive articles we offer some tentative conjectures as to why empirical studies of financial innovation are comparatively rare among our suggested culprits is an absence of accessible data we urge financial regulators to undertake more surveys of financial innovation and to make the survey data more available to researchers

risk sharing in licensing abstract this paper studies the design of linear license contracts under demand or cost uncertainty the optimal contract consists in general of a mix of a fixed fee and royalties the source of uncertainty has a crucial impact on the type of royalties that must be used in particular under demand uncertainty at most two of the instruments are used the contract generally combines a fixed fee with an ad valorem royalty when cost is uncertain a wider variety of cases can arise the contract may involve a combination of either type of royalties coupled with a fixed fee alternatively it may be optimal to use all three available instruments

optimal innovation of futures contracts this article presents a simple model of the innovation of new futures contracts by transaction volume maximizing futures exchanges in incomplete markets under uncertainty with mean variance preferences and proportional transactions costs we characterize the set of nash equilibria for a number of exchanges simultaneously or sequentially choosing contracts the optimal monopolistic contract design is shown to be pareto optimal an example shows the failure of pareto optimality for aparticularnash equilibrium likewise in a monopolistic multiperiod setting an example shows the failure of pareto optimality given an incentive for the exchange to induce turnover

changes in the output euler equation and asset markets participation recent estimates of the output euler equation for the united states indicate that the elasticity of aggregate demand to interest rates is not significantly different from zero we first argue that this result may hide a structural break the estimated elasticity is a convolution of two coefficients with opposite signs across the samples 1965 1979 and 1982 2003 the sign of the coefficient in the earlier sample is inconsistent with standard economic theory and intuition we outline a model with limited asset markets participation that can generate this change in sign when asset market participation changes from low to high and provide institutional evidence for such a change in the united states in the late 70s and early 80s

scale and scope economies in the multi product banking firm abstract the multi product nature of the banking firm is examined utilizing the translog cost function this analysis indicates that contrary to conventional wisdom natural monopoly scale economies and product specific decreasing costs are not robust characterizations of the banking industry there is however evidence that the cost function is characterized by economies of scope the implications of these results are discussed and extensions of this approach suggested

what s different about banks abstract negotiable certificates of deposit cd s trade in the capital market in competition with other securities like commercial paper and bankers acceptances if cd s must pay lenders competitive monetary interest the reserve tax on cd s is borne by bank borrowers viability of the tax means there must be something special about bank loans that makes some borrowers willing to pay higher interest rates than those on other securities of equivalent risk moreover there must be something special about banks that prevents other intermediaries from competing to assure that it never pays to finance loans with cd s

financial innovation in the uk this study employs a national survey of over 1100 british financial firms to ascertain the determinants of financial innovation and their sales success using the logit and the generalized tobit models we find that the likelihood of financial innovation rises with the size of financial firms employee education greater expenditure on research and development the availability of finance and the extent to which firms cooperate with each other perceptions of economic risk and innovation costs are also influential r d cooperation and human capital are the main variables driving the success of financial innovation measured by the percentage share of innovations sold firms in london the south have a significantly greater tendency to innovate though scotland also does well stock broking fund management and related activities are more innovative than firms in the financial intermediation and pension insurance sectors

misspecification of capital asset pricing this study documents empirical anomalies which suggest that either the simple one period capital asset pricing model capm is misspecified or that capital markets are inefficient in particular portfolios based on firm size or earnings price e p ratios experience average returns systematically different from those predicted by the capm furthermore the abnormal returns persist for at least two years this persistence reduces the likelihood that these results are being generated by a market inefficiency rather the evidence seems to indicate that the equilibrium pricing model is misspecified however the data also reveals that an e p effect does not emerge after returns are controlled for the firm size effect the firm size effect largely subsumes the e p effect thus while the e p anomaly and value anomaly exist when each variable is considered separately the two anomalies seem to be related to the same set of missing factors and these factors appear to be more closely associated with firm size than e p ratios

the pricing of risky assets on the belgian stock market abstract this paper presents the first empirical examination of the relationship between the average return and the risk of a comprehensive sample of 200 securities which traded continuously from 1966 to 1980 on the brussels stock exchange a relatively thin equity market based on our empirical findings we cannot reject the hypothesis that the pricing of common stocks on the brussels stock exchange conforms to the capital asset pricing model

market values earnings yields and stock returns evidence from singapore abstract results of u s studies about the relation between stock returns and the effects of firm size and earnings to price ratio e p are not consistent basu 1983 argues that e p dominates size while others conclude that size dominates e p this paper attempts to provide evidence on these two effects with a sample of data 1975 1985 from the stock exchange of singapore we find that stock returns are significantly related to both size and e p but the size effect appears to be of secondary importance when compared with e p effect

risk in banking and capital regulation this paper investigates the role of bank capital regulation in risk control it is known that banks choose portfolios of higher risk because of inefficiently priced deposit insurance bank capital regulation is a way to redress this bias toward risk utilizing the mean variance model the following results are shown a the use of simple capital ratios in regulation is an ineffective means to bound the insolvency risk of banks b as a solution to problems of the capital ratio regulation the theoretically correct risk weights under the risk based capital plan are explicitly derived and c the theoretically correct risk weights are restrictions on asset composition which alters the optimal portfolio choice of banking firms the recent increase in bank failures especially after the 1980 and 1982 deregulatory acts has again ignited a controversy over the risk portfolio of the banking industry given the importance of this sector there has been increased scrutiny of the industry s motives for risk taking and possible regulatory changes to improve its stability these investigations have centered around two rather complementary areas the first of these is the role of deposit insurance and how its current pricing procedure encourages risk taking and justifies current bank regulations the works of buser chen and kane 4 kane 9 and benston et al 2 have made substantive contributions the authors demonstrates the way in which our current fixed rate insurance system rewards risk taking by the firm and insulates it through deposit insurance from the market discipline that needs to exist to ensure proper risk evaluation this realization has led these authors to propose a series of regulatory changes to encourage proper portfolio choice within the industry these include a shift to market value accounting risk based deposit insurance premiums and additional capital regulation the last of these serves as a method of coinsurance whereby higher capital levels require the bank to absorb greater losses in the event of failure and encourage additional prudence in management in essense it is one method of risk reduction that may offset the risk preference imposed on the industry due to the inappropriate insurance pricing because the amount of capital influences the probability of bank insolvency and thus the soundness of the entire banking system the regulators ceteris paribus prefer more capital to

measuring welfare effects of unbundling financial innovations the case of collateralized mortgage obligations abstract the proposition that market extending financial innovations enhance welfare has strong theoretical support however quantification of these welfare benefits has previously been unavailable in this paper we demonstrate that such quantification is possible for market extending innovations that unbundle an existing asset by selling its cash flows in two or more parts we apply this approach to a prominent recent example of an unbundling innovation collateralized mortgage obligations and find the benefits to have been substantial

technology transfer under asymmetric information licensing contracts for newly patented innovations are observed to vary along several dimensions including the form and size of the payment to the inventor fixedfee versus some output based royalty the degree of exclusivity and the division of rents in this article we show that theform of the contract can be explained by two problems in technology exchange the superiority of a licensor s precontractual information about the economic value of the innovation and thefact that sharing this information with the licensee mayfacilitate imitation we show that a licensor signals her technology type with an output based payment or royalty and may leave some of the rents with the licensee conditions under which exclusive license contracts linear and nonlinear and nonexclusive linear contracts are used to transfer technology are identified

flood insurance wealth redistribution and urban property values abstract this paper examines the economics of the wealth transfer created by the national flood insurance program nfip by its very nature nfip is unique in that it subsidizes existing homeowners but not new construction thus for comparable properties the gain captured by existing homeowners is the difference between selling prices of equivalent qualified and nonqualified properties using standard hedonic pricing models we empirically test the impact of subsidized and nonsubsidized flood insurance on property values

bank capital regulation and structured finance we construct a model in which bank capital regulation and financial innovation interact innovation takes the form of pooling and tranching of assets and the creation of separate structures with different seniority different risk and different capital charges a process that captures some stylized features of structured finance regulation is motivated by the divergence of private and social interests in future profits capital regulation lowers bank profits and may induce banks to innovate in order to evade the regulation itself we show that structured finance can improve welfare in some cases however innovation may also be adopted to avoid regulation even in cases where it decreases welfare

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

fee versus royalty licensing in a cournot duopoly model abstract this paper finds that royalty licensing can be superior to fixed fee licensing for the patent holding firm when the cost reducing innovation is non drastic the reason for this result is that the patent holding firm enjoys a cost advantage over the licensee under royalty licensing while the two firms compete on equal footing under fixed fee licensing

contracting with externalities the paper studies inefficiencies arising in contracting between one principal and n agents when the utility of each agent depends on all agents trades with the principal when the principal commits to a set of publicly observable bilateral contract offers the arising inefficiency is due entirely to the externalities imposed on non signers in contrast when the principal s offers are privately observed the distortion is due to the externalities given agents equilibrium trades comparison of the two externalities determines the relative efficiency of the two contracting regimes in both cases we show that when n is large each agent can be treated as non pivotal provided that appropriate continuity assumptions are satisfied we also study the case in which the principal can condition each agent s trade on other agents messages we characterize the set of such mechanisms in which each agent s participation is voluntary when the principal can commit to any such mechanism she implements the first best outcome while threatening each deviator with the harshest possible punishment however in the presence of noise that goes to zero slower than n goes to infinity in the limit we obtain a generally inefficient outcome in which each agent feels non pivotal

modeling the banking firm a survey this paper reports on the status of the literature on micro bank modeling and assesses our understanding of the banking firm s optimal behavior this is no mean task for much has been written on banking broadly defined over the past couple of decades the review is developed in pieces each major subproblem is outlined and the analysis used to deal with the issue explicated this is not the best way to summarize the development of a field it should be immediately recognized one would prefer to have a smooth continuum of development moving the frontier of knowledge evenly through time and across subareas yet this is rarely the way a field develops more likely individual questions attract attention and are the subjects of a substantial number of contributions after a time the field moves on to the new area of interest the banking field is no exception before embarking upon the review however a couple of lines should be devoted to previous attempts there have been essentially three first pyle 1972 analyzes the uncertainty portfolio models at a time when little existed in the literature and hence one finds the review a bit vague and sketchy baltensperger s contributions 1978 1980 are the next serious and rather extensive reviews the quality of these

the optimal level of monetary aggregation in this paper i have three objectives 1 to describe the aggregation theoretic procedure for selecting the optimal monetary aggregates 2 to survey the available empirical evidence for information on the optimal aggregates and 3 to describe the procedures that should be followed to complete a redefinition of the monetary aggregates although all of the federal reserve board s current official aggregates are rejected as targets some newer aggregates are found to be substantially preferable to the official aggregates the board s staff recently completed the official redefinition of its monetary aggregates in a manner largely unrelated to aggregation and index number theory my own research in recent years has sought to remedy that shortcoming except for monetary aggregates most of the data provided by governmental agencies are constructed in accordance with aggregation and index number theory since aggregation theory can be applied to monetary aggregation 1 i constructed new monetary aggregates that are consistent with the economic theory 2 recently the empiri

abuse of dominance and licensing of intellectual property patent thickets layers of licenses a firm needs to be able to offer products that embody technologies owned by multiple firms and licensing policies have drawn increasing scrutiny from policy makers patent thickets involve complementary products which gives rise to double marginalization the so called royalty stacking problem and has the potential to retard diffusion of new technologies and reduce consumer welfare this paper examines the impact of licensing policies of one or more upstream owners essential intellectual property ip on the downstream firms that require access to that ip the terms under which downstream firms can access this ip affects entry decisions product diversity prices and welfare we consider both the case in which a single party controls the essential ip and the case in which different parties control complementary pieces of essential ip we compare the outcome of several alternative standard licensing arrangements such as flat rate access fees royalty percentages per unit fees patent pools and cross licensing arrangements with or without vertical integration we first consider the case where there is a single upstream owner of essential ip increasing the number of licenses enhances product variety which creates added value but it also intensifies downstream competition which dissipates profits we derive conditions under which the upstream ip monopoly will then want to provide an excessive or insufficient number of licenses relative to the number that maximizes consumer surplus or social welfare when there are multiple owners of essential ip royalty stacking can reduce the number of the downstream licensees but also the downstream equilibrium prices the consumers face the paper derives conditions determining whether this reduction in downstream price and variety is beneficial to consumers or society finally the paper explores the impact of alternative licensing policies with fixed license fees or royalties expressed as a percentage of the price an upstream ip owner cannot control the intensity of downstream competition in contrast volume based license fees i e per unit access fees do permit an upstream owner to control downstream competition and to replicate the outcome of complete integration the paper also shows that vertical integration can have little impact on downstream competition and licensing terms when ip owners charge fixed or volume based access fees

asset market participation monetary policy rules and the great inflation this paper argues that limited asset market participation is crucial in explaining u s macroeconomic performance and monetary policy before the 1980s and their changes thereafter in an otherwise conventional sticky price model standard aggregate demand logic is inverted at low enough asset market participation interest rate increases become expansionary passive monetary policy ensures equilibrium determinacy and maximizes welfare this suggests that federal reserve policy in the pre volcker era was better than conventional wisdom implies we provide empirical evidence consistent with this hypothesis and study the relative merits of changes in structure and shocks for reproducing the conquest of the great inflation and the great moderation

financial innovation the bright and the dark sides based on data from 32 countries over the period 1996 2010 this paper is the first to assess the relationship between financial innovation on the one hand and bank growth and fragility as well as economic growth on the other hand we find that different measures of financial innovation capturing both a broad concept and specific innovations are associated with faster bank growth but also higher bank fragility and worse bank performance during the recent crisis these effects are stronger in countries with larger securities markets and more restrictive regulatory frameworks in spite of these seemingly ambiguous findings our evidence points to a positive net effect of financial innovation on economic growth financial innovation is associated with higher growth in countries and industries with better growth opportunities

fees versus royalties and the private value of a patent we compare how much profit an owner of a patented cost reducing invention can realize by licensing it to an oligopolistic industry producing a homogeneous product by means of a fixed fee or a per unit royalty our analysis is conducted in terms of a noncooperative game involving n 1 players the inventor and the n firms in this game the inventor acts as a stackelberg leader and it has a unique subgame perfect equilibrium in pure strategies it is shown that licensing by means of a fixed fee is superior to licensing by means of a royalty for both the inventor and consumers only a drastic innovation is licensed to a single producer

small firm effect evidence from korean stock exchange the objective of the paper is to examine the small firm and earnings yield effects on the korean stock returns during 1982 1988 we find that smaller or high e p ratio firms obtain higher risk adjusted returns on average than larger or low e p ratio firms we also document that the existence of january effect in korean stock returns unlike the findings for the us market stock returns of small and as well as large korean firms are found to be 2 or 3 times higher in january than the other months however the well known tax loss selling hypothesis can not be used to explained these anomalies because there are no capital tax or loss offsets in korea

on licensing policies in bertrand competition abstract three licensing policies the auction the fee and the royalty are studied in a bertrand type duopoly with differentiated goods the analysis is conducted in terms of a multistage noncooperative game involving an external patentee and two firms each producing a differentiated good in bertrand price competition a principal finding is that for a patentee the royalty may be superior to the other two policies journal of economic literature classification numbers 026 611 621

licensing a new product with non linear contracts this paper looks at a situation where a licensor owns a patent on a technology that allows the production of a new good the licensor seeks to license its innovation to a set of producers that differ according to their marginal cost of producing an existing good we show that the licensor is able to obtain the profit a monopolist would achieve by producing the new good the equilibrium licensing contract specifies both a fixed fee and a royalty scheme based on the production of a licensee le memoire examine la situation ou un detenteur de brevet sur une technologie qui permet de produire un nouveau bien cherche a ceder une autorisation d exploiter cette innovation a un ensemble de producteurs qui ont differents couts marginaux de production d un bien existant on montre que le detenteur de brevet est capable d obtenir le profit qu un monopoleur obtiendrait en produisant le nouveau bien le contrat de licence d equilibre specifie a la fois un paiement forfaitaire et un arrangement de royautes sur la base du volume de production de l exploitant

how to license intangible property we examine the optimal licensing strategy of a research lab selling to firms who are product market competitors we consider an independent lab as well as a research joint venture we show that 1 demands are interdependent and hence the standard price mechanism is not the profit maximizing licensing strategy 2 the seller s incentives to develop the innovation may be excessive 3 the seller s incentives to disseminate the innovation typically are too low 4 larger ventures are less likely to develop the innovation and more likely to restrict its dissemination in those cases where development occurs and 5 a downstream firm that is not a member of the research venture is worse off as a result of the innovation

competitive interest payments on bank deposits and the long run demand for money reply this paper tests two assumptions made in previous demand for money studies the first assumption concerns the role assigned to the interest rate in the demand for money function common practice identifies the rate of interest with the opportunity cost of holding money in section i this formulation is shown to blur an important distinction between the price of money and the price of money substitutes and to implicitly assume that the relevant price variable is the difference between these two distinct prices a second assumption is that the current ban on interest payments on demand deposits is fully effective in section ii i operationally define these price variables and estimate perfectly competitive interest payments on commercial bank deposits this is done by crudely measuring commercial bank marginal costs and assuming that all excess profit is passed on to depositors in indirect ways section iii presents estimates of a more complete longrun demand for money relationship which explicitly includes an own price and a cross price as separate influences and assumes that the prohibition of the payment of interest on deposits is totally ineffective although no firm conclusion is reached concerning the proper functional specification of the demand function the results significantly improve upon previous demand for money estimates which assumed that the interest payment prohibition is totally effective in section iv the results are summarized and implications of the analysis for monetary theory are presented my competitive demand for money formulation leads to a reinterpretation of the existing evidence on what is generally referred to as the interest elasticity of demand for money this estimate is shown to be significantly biased downward it also implies that the demand for and supply of money are more interdependent than is usually assumed

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

bank reserves and financial stability a stochastic financial model is developed which derives the reserve levels on financial assets which minimize price level fluctuations it is shown that these levels of reserves are a function of the structure of unanticipated shocks to asset demands and are in general quite different from the levels which minimize the fluctuations of either the nominal or real value of these assets application of the model to currency and demand deposits in the u s a suggest that the price stabilizing reserve ratio on demand deposits is approximately one half of the 12 currently mandated by the monetary control act of 1980 required reserves on deposits at financial institutions have two major economic aspects first reserves may be regarded as a tax on bank liabilities if the rate of return on reserves measured either explicitly or implicitly is less than the market rate of interest secondly reserves may be considered an important monetary instrument for controlling the value of monetary aggregates and ultimately such variables as prices interest rates and income 1 unfortunately there appears to be little agreement among economists either as to the optimal level of reserves or to the criteria for setting such reserves in order to achieve macroeconomic stability friedman 3 had formerly advocated 100 percent reserves on both time and demand deposits but recently 4 has claimed that uniformity of reserves on transactions balances is far more important than the level at which they are imposed 2 at the other end of the spectrum carson 1 has advocated abolishing required reserves on all deposits while poole and lieberman 11 have urged elimination of reserves on time deposits only if m1 is accepted as the money stock definition this paper develops a macroeconomic model where it is demonstrated that the levels of reserves which minimize the fluctuations of such ultimate economic variables as prices are in general quite different from those which stabilize various monetary aggregates these reserve levels which minimize price level fluctuations are determined primarily from the covariance structure of unanticipated disturbances influencing financial assets empirical estimation of asset disturbances for the united states suggests that these stabilizing levels of reserves on demand deposit are lower than those scheduled to prevail under the monetary control act of 1980