the dynamics of the leverage cycle abstract we present a simple agent based model of a financial system composed of leveraged investors such as banks that invest in stocks and manage their risk using a value at risk constraint based on historical observations of asset prices the value at risk constraint implies that when perceived risk is low leverage is high and vice versa a phenomenon that has been dubbed pro cyclical leverage we show that this leads to endogenous irregular oscillations in which gradual increases in stock prices and leverage are followed by drastic market collapses i e a leverage cycle this phenomenon is studied using simplified models that give a deeper understanding of the dynamics and the nature of the feedback loops and instabilities underlying the leverage cycle we introduce a flexible leverage regulation policy in which it is possible to continuously tune from pro cyclical to countercyclical leverage when the policy is sufficiently countercyclical and bank risk is sufficiently low the endogenous oscillation disappears and prices go to a fixed point while there is always a leverage ceiling above which the dynamics are unstable countercyclical leverage policies can be used to raise the ceiling we also study the impact on leverage cycles of direct temporal control of the bank s riskiness via the bank s required value at risk quantile under such a rule the regulator relaxes the value at risk quantile following a negative stock price shock and tightens it following a positive shock while such a policy rule can reduce the amplitude of leverage cycles its effectiveness is highly dependent on the choice of parameters finally we investigate fixed limits on leverage and show how they can control the leverage cycle

taming macroeconomic instability monetary and macro prudential policy interactions in an agent based model abstract we develop an agent based model to study the macroeconomic impact of alternative macro prudential regulations and their possible interactions with different monetary policy rules the aim is to shed light on the most appropriate policy mix to achieve the resilience of the banking sector and foster macroeconomic stability simulation results show that a triple mandate taylor rule focused on output gap inflation and credit growth and a basel iii prudential regulation is the best policy mix to improve the stability of the banking sector and smooth output fluctuations moreover we consider the different levers of basel iii and their combinations we find that minimum capital requirements and counter cyclical capital buffers allow to achieve results close to the basel iii first best with a much more simplified regulatory framework finally the components of basel iii are non additive the inclusion of an additional lever does not always improve the performance of the macro prudential regulation

risk management with interdependent choice risks faced by traders from price movements are sometimes magnified by the actions of other traders risk management systems which neglect this feature may give a seriously misleading picture of the true risks the hazards arising from this potential blindspot are at their most dangerous when the prevailing conventional wisdom lulls traders into a false sense of security on the attractiveness of a trading position the efforts of one trader to reverse his trade makes more acute the need to follow suit on the part of others for markets dominated by traders with short time horizons such interdependence leads to exaggerated price movements estimates of value at risk which recognize such interdependence of actions can diverge substantially from those given by conventional techniques copyright 1999 by oxford university press

teacher quality in educational production tracking decay and student achievement growing concerns over the inadequate achievement of u s students have led to proposals to reward good teachers and penalize or fire bad ones the leading method for assessing teacher quality is value added modeling vam which decomposes students test scores into components attributed to student heterogeneity and to teacher quality implicit in the vam approach are strong assumptions about the nature of the educational production function and the assignment of students to classrooms in this paper i develop falsification tests for three widely used vam specifications based on the idea that future teachers cannot influence students past achievement in da ta from north carolina each of the vams exclusion restrictions are dramatically viola ted in particular these models indicate large effects of 5th grade teachers on 4th grade t est score gains i also find that conventional measures of individual teachers value added fade out very quickly and are at best weakly related to long run effects i discuss implic ations for the use of vams as personnel tools

network models and financial stability abstract systemic risk is a key concern for central banks charged with safeguarding overall financial stability in this paper we investigate how systemic risk is affected by the structure of the financial system we construct banking systems that are composed of a number of banks that are connected by interbank linkages we then vary the key parameters that define the structure of the financial system including its level of capitalisation the degree to which banks are connected the size of interbank exposures and the degree of concentration of the system and analyse the influence of these parameters on the likelihood of knock on defaults first we find that the better capitalised banks are the more resilient is the banking system against contagious defaults and this effect is non linear second the effect of the degree of connectivity is non monotonic i e initially a small increase in connectivity increases the contagion effect but after a certain threshold value connectivity improves the ability of a banking system to absorb shocks third the size of interbank liabilities tends to increase the risk of knock on default even if banks hold capital against such exposures fourth more concentrated banking systems are shown to be prone to larger systemic risk all else equal in an extension to the main analysis we study how liquidity effects interact with banking structure to produce a greater chance of systemic breakdown we finally consider how the risk of contagion might depend on the degree of asymmetry tiering inherent in the structure of the banking system a number of our results have important implications for public policy which this paper also draws out

public sector pay and corruption measuring bribery from micro data abstract this study provides the first systematic measure of bribery using micro level data on reported earnings household spending and asset holdings we use the compensating differential framework and the estimated sectoral gap in reported earnings and expenditures to identify the size of unobserved unofficial compensation i e bribes of public sector employees in the case of ukraine we find that public sector employees receive 24 32 less wages than their private sector counterparts the gap is particularly large at the top of the wage distribution at the same time workers in both sectors have essentially identical level of consumer expenditures and asset holdings that unambiguously indicate the presence of non reported compensation in the public sector using the conditions of labor market equilibrium we develop an aggregate measure of bribery and find that the lower bound estimate of the extent of bribery in ukraine is between 460 million and 580 million u s dollars 0 9 1 2 of ukraine s gdp in 2003

measuring the impacts of teachers i evaluating bias in teacher value added estimates are teachers impacts on students test scores value added a good measure of their quality one reason this question has sparked debate is disagreement about whether value added va measures provide unbiased estimates of teachers causal impacts on student achievement we test for bias in va using previously unobserved parent characteristics and a quasi experimental design based on changes in teaching sta using school district and tax records for more than one million children we nd that va models which control for a student s prior test scores exhibit little bias in forecasting teachers impacts on student achievement although teachers have substantial impacts

interbank loans collateral and modern monetary policy this study develops a novel agent based model of the interbank market with endogenous credit risk formation mechanisms we allow banks to exchange funds through unsecured and secured transactions which facilitates the flow of funds to the most profitable investment projects risk premiums result from banks forecasting rules and depend on past performance of the benchmark risk factors and interest rates our model confirms basic stylized facts of the interbank interest rates and volumes we also find that network structures within the secured market segment are characterized by the presence of dealer banks while we do not observe similar patterns in the unsecured market we perturb the model with exogenous shocks and policy scenarios which correspond to unconventional monetary policies

how debt markets have malfunctioned in the crisis the financial crisis that began in 2007 is especially a crisis in debt markets a full understanding of what happened in the financial crisis requires investigation into the plumbing of debt markets during a financial crisis when funds often cannot be raised easily or quickly the fundamental values for certain assets can become separated for a time from market prices with consequences that can echo into the real economy this article will explain in concrete ways how debt markets can malfunction with deleterious consequences for the real economy after a quick overview of debt markets i discuss three areas that are crucial in all debt markets decisions risk capital and risk aversion repo financing and haircuts and counterparty risk in each of these areas feedback effects can arise so that less liquidity and a higher cost for finance can reinforce each other in a contagious spiral i will document the remarkable rise in the premium that investors placed on liquidity during the crisis next i will show how these issues caused debt markets to break down indeed fundamental values and market values seemed to diverge across several markets and products that were far removed from the toxic subprime mortgage assets at the root of the crisis finally i will discuss briefly four steps that the federal reserve took to ease the crisis and how each was geared to a specific systemic fault that arose during the crisis

portfolio insurance in complete markets a note this note presents an elementary derivation of the optimal investment strategy of an investor who wants to assure that his investment in risky assets does not lead his wealth to fall below a predetermined floor copyright 1989 by the university of chicago

the pupil factory specialization and the production of human capital in schools i conducted a randomized field experiment in traditional public elementary schools in houston texas designed to test the potential productivity benefits of teacher specialization the average impact of encouraging schools to specialize their teachers on student achievement is 0 11 standard deviations per year on a combined index of math and reading test scores i argue that the results are consistent with a model in which the benefits of specialization driven by sorting teachers into a subset of subjects based on comparative advantage is outweighed by inefficient pedagogy due to having fewer interactions with each student though other mechanisms are possible

a general equilibrium model of portfolio insurance this article examines the effects of portfolio insurance on market and asset price dynamics in a general equilibrium continuous time model portfolio insurers are modeled as expected utility maximizing agents martingale methods are employed in solving the individual agents dynamic consumption portfolio problems comparisons are made between the optimal consumption processes optimally invested wealth and portfolio strategies of the portfolio insurers and normal agents at a general equilibrium level comparisons across economies reveal that the market volatility and risk premium are decreased and the asset and market price levels increased by the presence of portfolio insurance article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

task specific experience and task specific talent decomposing the productivity of high school teachers abstract we use administrative panel data to decompose worker performance into components relating to general talent task specific talent general experience and task specific experience we consider the context of high school teachers in which tasks consist of teaching particular subjects in particular tracks using the timing of changes in the subjects and difficulty levels to which teachers are assigned to provide identifying variation we show that a substantial part of the productivity gains to teacher experience are actually subject specific similarly while three quarters of the variance in the permanent component of productivity among teachers is portable across subjects and levels there exist non trivial subject specific and level specific components counterfactual simulations suggest that maximizing the test score contribution of task specific experience and task specific talent can increase student performance by as much as 04 test score standard deviations relative to random assignment of teachers to classrooms

bonuses and promotion tournaments theory and evidence standard models of promotion tournaments do not distinguish between wages and bonuses and thus cannot explain variation in the use of bonuses we combine classic and market based tournament theories to develop a model in which wages and bonuses serve distinctly different roles we use this model to derive testable predictions which we test employing both a single firm data set and a data set encompassing a large segment of the finnish economy our empirical analysis supports the testable predictions and shows that our theoretical approach better matches the data than alternative theories of bonus determination based on arguments already in the literature

word of mouth communication and percolation in social networks this paper develops a model of demand pricing and advertising in the presence of social learning via word of mouth communication between friends in the model consumers must receive information about a monopolist s product in order to consider purchasing it the presence of word of mouth is not sufficient for demand to be more elastic and prices to be lower compared to an informed population i derive the comparative static results of connectivity mean preserving spread of friendships and clustering of friends on prices the optimal targets for advertising are not generically the individuals with the most friends jel l12 l14 a fundamental issue for economists is understanding the process by which demand is formed through social learning by consumers this article develops a framework based on random graphs for understanding the ways social learning via

the impact of risk regulation on price dynamics most financial risk regulations assume that asset returns are exogenous where risk is estimated from historical data this assumption fails to take into account the feedback effect of trading decisions on prices we investigate the consequences of risk constrained trading by means of simulations of a general equilibrium model with a value at risk constraint and compare the results to the case when risk constraints are not present prices are lower on average in the presence of risk regulation while volatility is higher risk regulation may have the perverse effect of exacerbating price fluctuations

task specific human capital since gary becker s 1964 seminal work the theoretical and empirical literature on human capital has focused almost exclusively on general purpose and firm specific human capital in this paper we discuss the implications of a third type of human capital which we call task specific and which we believe is potentially as commonplace and as important as the two classic types by task specific human capital we mean that some of the human capital an individual acquires on the job is specific to the tasks being performed as opposed to being specific to the firm in other words task specific human capital is the simple but plausible idea that much of the human capital accumulated on the job is due to task specific learning by doing the idea of task specific human capital is closely related to occupationand industryspecific human capital in each case human capital is specific to the nature of the work not specific to the firm hence when capital is accumulated multiple firms value the capital so most or even all of the value of the capital will be reflected in the worker s wage the main difference between the idea of task specific human capital and occupationand industryspecific human capital is in how the idea is applied we argue that task specific human capital has much wider applicability than suggested so far by the occupationand industry specific human capital literatures the specific issues we address are cohort effects job design and promotions another argument in the literature closely related to ours is the classic argument of adam smith 1776 in the wealth of nations concerning returns to specialization smith s argument was that due to learning by doing at the level of the task productivity can be enhanced by having each job entail fewer tasks we believe that smith was correct in focusing on learningby doing at the level of the task as an important idea for thinking about organizations the goal of our paper is to describe some of the other implications of this idea for the design and operation of organizations

assessing systemic risk due to fire sales spillover through maximum entropy network reconstruction abstract monitoring and assessing systemic risk in financial markets is of great importance but it often requires data that are unavailable or available at a very low frequency for this reason systemic risk assessment with partial information is potentially very useful for regulators and other stakeholders in this paper we consider systemic risk due to fire sales spillovers and portfolio rebalancing by using the risk metrics defined by greenwood et al 2015 by using a method based on the constrained minimization of the cross entropy we show that it is possible to assess aggregated and single bank s systemicness and vulnerability using only the information on the size of each bank and the capitalization of each investment asset we also compare our approach with an alternative widespread application of the maximum entropy principle allowing to derive graph probability distributions and generating scenarios and we use it to propose a statistical test for a change in banks vulnerability to systemic events

risk in a large claims insurance market with bipartite graph structure we model the influence of sharing large exogeneous losses to the reinsurance market by a bipartite graph using pareto tailed claims and multivariate regular variation we obtain asymptotic results for the value at risk and the conditional tail expectation we show that the dependence on the network structure plays a fundamental role in their asymptotic behaviour as is well known in a nonnetwork setting if the pareto exponent is larger than 1 then for the individual agent reinsurance company diversification is beneficial whereas when it is less than 1 concentration on a few objects is the better strategy an additional aspect of this paper is the amount of uninsured losses that are covered by society in our setting of networks of agents diversification is never detrimental to the amount of uninsured losses if the pareto tailed claims have finite mean diversification is never detrimental to society or individual agents by contrast if the pareto tailed claims have infinite mean a conflicting s

dynamical macroprudential stress testing using network theory the increasing frequency and scope of nancial crises have made global nancial stability one of the major concerns of economic policy and decision makers this has led to the understanding that nancial and banking supervision has to be thought of as a systemic task focusing on the interdependent relations among the institutions using network theory we develop a dynamic model that uses a bipartite network of banks and their assets to analyze the system s sensitivity to external shocks in individual asset classes and to evaluate the presence of features underlying the system that could lead to contagion as a case study we apply the model to stress test the venezuelan banking system from 1998 to 2013 the introduced model was able to capture monthly changes in the structure of the system and the sensitivity of bank portfolios to dierent external shock scenarios and to identify systemic vulnerabilities and their time evolution the model provides new tools for policy makers and supervision agencies to use for macroprudential dynamical stress testing

leverage cycles and the anxious economy ing opportunities for emerging economies their access to international markets has turned out to be very volatile with frequent periods of market closures even worse as we will show emerging economies with sound fundamentals are the ones that issue less debt during these closures the goal of this paper is to present a theory of asset pricing that will shed light on the problems of emerging assets like emerging markets that are not yet mature enough to be attractive to the general public their marginal buyers are liquidity constrained investors with small wealth relative to the whole economy who are also marginal buyers of other risky assets we will use our theory to argue that the periodic problems faced by emerging asset classes are sometimes symptoms of what we call a global anxious economy rather than of their own fundamental weaknesses

neglected risks financial innovation and financial fragility abstract we present a standard model of financial innovation in which intermediaries engineer securities with cash flows that investors seek but modify two assumptions first investors and possibly intermediaries neglect certain unlikely risks second investors demand securities with safe cash flows financial intermediaries cater to these preferences and beliefs by engineering securities perceived to be safe but exposed to neglected risks because the risks are neglected security issuance is excessive as investors eventually recognize these risks they fly back to the safety of traditional securities and markets become fragile even without leverage precisely because the volume of new claims is excessive

match quality worker productivity and worker mobility direct evidence from teachers i investigate the importance of the match between teachers and schools for student achievement i show that teacher effectiveness increases after a move to a different school and estimate teacher school match effects match quality explains away a quarter of and has two thirds the explanatory power of teacher quality match quality is negatively correlated with school switching is unrelated to exit and increases with experience this paper provides the first estimates of worker firm match quality using output data as opposed to inferring productivity from wages or employment durations the results suggest that workers seek high quality matches for reasons other than higher pay

costly search and mutual fund flows this paper studies the flows of funds into and out of equity mutual funds consumers base their fund purchase decisions on prior performance information but do so asymmetrically investing disproportionately more in funds that performed very well the prior period search costs seem to be an important determinant of fund flows high performance appears to be most salient for funds that exert higher marketing effort as measured by higher fees flows are directly related to the size of the fund s complex as well as the current media attention received by the fund which lower consumers search costs

leverage induced systemic risk under basle ii and other credit risk policies abstract we use a simple agent based model of value investors in financial markets to test three credit regulation policies the first is the unregulated case which only imposes limits on maximum leverage the second is basle ii and the third is a hypothetical alternative in which banks perfectly hedge all of their leverage induced risk with options when compared to the unregulated case both basle ii and the perfect hedge policy reduce the risk of default when leverage is low but increase it when leverage is high this is because both regulation policies increase the amount of synchronized buying and selling needed to achieve deleveraging which can destabilize the market none of these policies are optimal for everyone risk neutral investors prefer the unregulated case with low maximum leverage banks prefer the perfect hedge policy and fund managers prefer the unregulated case with high maximum leverage no one prefers basle ii

do capital adequacy requirements reduce risks in banking abstract in a dynamic framework it is shown that capital adequacy rules may increase a bank s riskiness in addition to the standard negative effect of rents on risk attitudes of banks a further intertemporal effect has to be considered the intuition behind the result is that under binding capital requirements an additional unit of equity tomorrow is more valuable to a bank if raising equity is excessively costly the only possibility to increase equity tomorrow is to increase risk today

what has 20 years of public private pay gap literature told us eastern european transitioning vs developed economies this paper surveys the literature on public private sector pay differentials based on 20 years of research in transitioning countries of eastern europe ee and compares the results with estimates obtained from developed market economies the majority of empirical studies from ee economies found evidence of public sector pay penalties during the period of economic transition from a communist to market based economy in developed economies however the average differential is usually around zero or positive the public sector pay inequality reducing effect relative to the private sector is greater in transitioning economies than in developed economies nevertheless there is evidence that the sign of the public sector pay gap as well as the relative public sector pay distribution change with the progress of economic transition towards those usually observed in developed economies different pay setting arrangements between private and public sectors and competition for workers seem to be major arguments for the existence of systematic pay differences between the two sectors

procyclical leverage and value at risk the availability of credit varies over the business cycle through shifts in the leverage of financial intermediaries empirically we find that intermediary leverage is negatively aligned with the banks value at risk var motivated by the evidence we explore a contracting model that captures the observed features under general conditions on the outcome distribution given by extreme value theory evt intermediaries maintain a constant probability of default to shifts in the outcome distribution implying substantial deleveraging during downturns for some parameter values we can solve the model explicitly thereby endogenizing the var threshold probability from the contracting problem

when micro prudence increases macro risk the destabilizing effects of financial innovation leverage and diversification by exploiting basic common practice accounting and risk management rules we propose a simple analytical dynamical model to investigate the effects of microprudential changes on macroprudential outcomes specifically we study the consequence of the introduction of a financial innovation that allows reducing the cost of portfolio diversification in a financial system populated by financial institutions having capital requirements in the form of value at risk var constraint and following standard mark to market and risk management rules we provide a full analytical quantification of the multivariate feedback effects between investment prices and bank behavior induced by portfolio rebalancing in presence of asset illiquidity and show how changes in the constraints of the bank portfolio optimization endogenously drive the dynamics of the balance sheet aggregate of financial institutions and thereby the availability of bank liquidity to the economic system and systemic risk the model shows that when fin

teacher training teacher quality and student achievement abstract we study the effects of various types of education and training on the productivity of teachers in promoting student achievement previous studies on the subject have been hampered by inadequate measures of teacher training and difficulties in addressing the non random selection of teachers to students and of teachers to training we address these issues by estimating models that include detailed measures of pre service and in service training a rich set of time varying covariates and student teacher and school fixed effects we find that elementary and middle school teacher productivity increases with experience informal on the job training the largest gains from experience occur in the first few years but we find continuing gains beyond the first five years of a teacher s career in contrast we do not find a consistent relationship between formal professional development training and teacher productivity however this may be partly driven by estimation issues as we find more significant positive effects of formal training in the subject grade combination where estimates should be most precise middle school math there is no evidence that teachers pre service undergraduate training or college entrance exam scores are related to productivity

performance pay and the white black wage gap we show that the reported tendency for performance pay to be associated with greater wage inequality at the top of the earnings distribution applies only to white workers this results in the white black wage differential among those in performance pay jobs growing over the earnings distribution even as the same differential shrinks over the distribution for those not in performance pay jobs we show that this remains true even when examining suitable counterfactuals that hold observables constant between whites and blacks we explore reasons behind our finding focusing on the interactions between discrimination unmeasured ability and selection

impact of value at risk models on market stability abstract financial institutions around the world use value at risk var models to manage their market risk and calculate their capital requirements under basel accords var models as any other risk management system are meant to keep financial institutions out of trouble by among other things guiding investment decisions within established risk limits so that the viability of a business is not put unduly at risk in a sharp market downturn however some researchers have warned that the widespread use of var models creates negative externalities in financial markets as it can feed market instability and result in what has been called endogenous risk that is risk caused and amplified by the system itself rather than being the result of an exogenous shock this paper aims at analyzing the potential of var systems to amplify market disturbances with an agent based model of fundamentalist and technical traders which manage their risk with a simple var model and must reduce their positions when the risk of their portfolio goes above a given threshold we analyse the impact of the widespread use of var systems on different financial instability indicators and confirm that var models may induce a particular price dynamics that rises market volatility these dynamics which we have called var cycles take place when a sufficient number of traders reach their var limit and are forced to simultaneously reduce their portfolio the reductions cause a sudden price movement raise volatility and force even more traders to liquidate part of their positions the model shows that market is more prone to suffer var cycles when investors use a short term horizon to calculate asset volatility or a not too extreme value for their risk threshold

the gender wage gap a comparison of australia and canada using data from the 1989 canadian labour market activity survey and for australia the 1989 90 income distribution survey the authors investigate the reasons for the significantly lower gender wage gap in australia than in canada key similarities and differences between these two countries the authors argue make them a good basis for a natural experiment to investigate the effects of different labor market institutions in particular australia has a stronger union movement and a greater degree of centralization in wage determination than canada and most of its workers are covered by legally binding minimum working conditions the authors conclude that several differences between the countries in labor market structure notably a lower rate of return to education a lower rate of return to labor market experience and a lower level of wage inequality in australia than in canada are largely responsible for the smaller gender wage gap in australia

wage structure and gender earnings differentials an international comparison using microdata to analyse the gender pay gap in ten industrialized nations we focus on the role of wage structure the prices of labour market skills in influencing the gender gap we find wage structure enormously important in explaining why the us gender gap is higher than that in most other countries we conclude that the us gap would be similar to that in sweden and australia the countries with the smallest gaps if the united states had their levels of wage inequality this finding reflects the larger penalty in the united states for those with low skill levels or employed in low wage sectors 650 o 75 the united states was amoung the countries with the largest differ entials oecd ilo usbls this paper uses microdata to analyse inter national differences in the gender pay gap among a sample of ten industrialized nations we focus particularly on explaining the surprisingly low ranking of the united states in comparison with other industrialized countries an advan tage of an international perspective is that countries vary considerably with respect to governmental policies women s relative labour market qualifications and wage setting institutions such variability allows one to infer reasons for differences in the pay gap and by implication the impact of alternative govern ment policies empirical research on gender pay gaps has traditionally focused on the role of gender differences in qualifications and on differences in the treatment of otherwise equally qualified male and female workers i e labour market dis crimination analyses of trends over time in the gender differential within countries as well as inter country comparisons of gender earnings ratios have tended to emphasize these types of gender specific factors an innovative feature of our study is to focus on the role of wage structure as an additional factor influencing the gender gap to analyse the impact of wage structure we adapt a framework developed by juhn et al 1991 to analyse trends over time in race differentials in the united states our findings suggest that labour market institutions that affect overall wage inequality have an extremely impor tant effect on the gender earnings gap wage structure describes the array of prices set for various labour market skills measured and unmeasured and rents received for employment in par

public and private sector wages interactions in a general equilibrium model it is common wisdom that public sector wages are not determined in the same way as private sector wages at the same time the empirical evidence available for oecd countries finds a strong positive correlation between public and private sector wages in this paper we develop a model that is consistent with a political economy view of the determination of public sector wages and employment while being consistent with the said empirical evidence public finance constraints are crucial in booms governments expand employment and wages while in downturns lack of tax revenues forces the government to cut back the wage bill

examining equality between public and private sector wage distributions i introduction institutional political and economic factors all contribute to the determination of public sector wages for example the public sector is almost the only place in many advanced economies where unions continue to have a significant presence and an influential voice in setting wages and conditions of work political factors such as desiring to be a good employer may also influence the public sector wage structure as a good employer governments may offer low skilled workers higher rates of pay than they might get in the private sector on the other hand the public sector may be adverse to paying very skilled workers high rates of pay if the public does not like to see public sector workers earning too much economic factors such as spending and tax receipt limits can also affect the wage structure in the public sector all of these factors could make the public sector labor market be less efficient than that of the private sector from an economic perspective if government workers are paid more than private sector workers ceteris paribus then taxes are being wasted if private sector workers are paid more than government workers governments cannot recruit and retain appropriately skilled and productive workers to make the wage structures comparable many countries use surveys to ascertain the prevailing earnings levels for jobs in the private sector that are similar to public sector jobs however as fogel and lewin 1974 and gregory 1990 point out these survey methods are fraught with biases that may affect comparability of wages indeed there is little empirical evidence that wages between the two sectors are equal bender 1998 and gregory and borland 1999 survey the current literature on public private wage differentials and report that most studies find that central governments pay more on average compared to the private sector even after controlling for differences in the productive characteristics of workers furthermore as elliott et al 1999 find comparability in pay is currently important in the debates over public sector pay reform particularly in europe the institutional and political factors outlined above are waning in importance and economic considerations are seemingly coming to the fore because of perceptions of the overpayment of public sector workers and the desire to cut government wage bills politicians in these countries are devising policies to align average rates of pay by slowing the relative rate of public sector wage growth the policies should be different however if wage distributions are not the same indeed there is some evidence that the distributions differ as found in the double imbalance concept articulated by schager 1993 katz and krueger 1993 and elliott and duffus 1996 this imbalance is characterized by public sector workers at the lower end of the occupational hierarchy receiving the largest wage premia and workers at the upper end earning less than their private sector counterparts if the distributions are incomparable ceteris paribus mandating equal average rates of pay growth will not ensure comparability policies aimed at realigning wage structures at the ends of the distribution should then be followed to promote comparability this article compares public and private sector wage distributions and examines the extent to which focusing exclusively on differences in mean wages obscures the true nature of the wage relativities data from the british social change and economic life initiative sceli are employed to investigate comparability this data set is well suited for a comparability study given the range of personal and job characteristics that control for differences in public and private sector jobs moreover the data were collected in 1986 before substantial reform of public sector pay in the united kingdom reviewed in bender and elliott 1999 this offers a test to see if the reform policies were appropriate to promote wage comparability

learning the ropes general experience task specific experience and the output of police officers abstract we estimate the role that law enforcement officer experience has on the probability of punishment using a unique data set of tickets issued by the idaho state police linked to human resource records all else equal officers issue fewer tickets earlier in their career than later in their career quasi exogenous shocks to an officer s task specific experience generated by law changes cause a temporary reduction in the frequency with which a subset of troopers use those laws creating disparities in the likelihood that individual citizens are cited for law violations the reduction in ticketing in response to a law change is largest for newer troopers and law changes later in a trooper s career have a smaller effect on his use of that law

overlapping portfolios contagion and financial stability abstract we study the problem of interacting channels of contagion in financial networks the first channel of contagion is counterparty failure risk this is captured empirically using data for the austrian interbank network the second channel of contagion is overlapping portfolio exposures this is studied using a stylized model we perform stress tests according to different protocols for the parameters we study neither channel of contagion results in large effects on its own in contrast when both channels are active at once bankruptcies are much more common and have large systemic effects

are low skill public sector workers really overpaid a quasi differenced panel data analysis public private sectoral wage differentials have been studied extensively using quantile regression techniques these typically find large public sector premiums at the bottom of the wage distribution this may imply that low skill workers are overpaid prompting concerns over efficiency we note several other potential explanations for this result and explicitly test whether the premium varies with skill using australian data we use a quasi differenced generalized method of moments gmm panel data model which has not been previously applied to this topic internationally unlike other available methods this technique identifies sectoral differences in returns to unobserved skill it also facilitates a decomposition of the wage gap into components explained by differences in returns to all observed and unobserved skills and by differences in their stock we find no evidence to suggest that the premium varies with skill one interpretation is that the compressed wage profile of the public sector ind

reconstructing and stress testing credit networks abstract financial networks are an important source of systemic risk but often only partial network information is available in this paper we use data on bank firm credit relationships in japan and conduct a horse race between different network reconstruction methods in terms of their ability to reproduce the actual credit networks we then compare the different reconstruction methods in terms of their implied levels of systemic risk based on a standard model of price mediated contagion we find that the observed credit network displays relatively high levels of systemic risk compared with most reconstruction methods lastly we explore whether different policies can improve the robustness of the system

estimation of the us federal job queue in the presence of an endogenous union queue past research on the federal sector job queue fails to incorporate the important role of unioniz ation we estimate a two stage bivariate probit in which the willingness of a worker to queue for a union job enters the estimation of the federal queue we demonstrate that the failture to implement our approach may lead to the inappropriate conclusion that there does not exist a federal queue in the us labour market we identify the characteristics that lead workers to seek employment in the federal sector and as a byproduct also provide independent confirm ation of the presence of a queue for union jobs ability in bivariate probit models to examine job queues abowd and farber 1982 use poirier s technique and find evidence of a queue of workers waiting for union jobs they estimate separate equations determining which character istics make a worker more likely to enter the queue and which characteristics make a worker more likely to be chosen from the queue indeed farber 1983 leigh 1985 and heywood 1990 have all reaffirmed the existence of a union queue under varying degrees of partial observability recently venti 1987 krueger 1988 and heywood and mohanty 1990 have examined whether or not a queue exists for federal government jobs while this research confirms the existence of a federal queue it fails to incorporate the earlier research indicating the presence of a union queue indeed none of the authors controls for any dimension of unionization in the federal queue esti mates this failure is problematic for several related reasons first heywood and mohanty 1994 demonstrate that statistical confirmation of a federal job queue is highly sensitive to specification particularly the inclusion or exclusion of specific variables 2 second the federal sector is far more heavily unionized than the private sector see freeman 1986 1988 ichniowski 1988 and reder 1988 thus if the earlier research is correct and workers do queue for union

stability analysis of financial contagion due to overlapping portfolios abstract common asset holdings are widely believed to have been the primary vector of contagion in the recent financial crisis we develop a network approach to the amplification of financial contagion due to the combination of overlapping portfolios and leverage and we show how it can be understood in terms of a generalized branching process this can be used to compute the stability for any particular configuration of portfolios by studying a stylized model we estimate the circumstances under which systemic instabilities are likely to occur as a function of parameters such as leverage market crowding diversification and market impact although diversification may be good for individual institutions it can create dangerous systemic effects and as a result financial contagion gets worse with too much diversification there is a critical threshold for leverage below it financial networks are always stable and above it the unstable region grows as leverage increases note that our model assumes passive portfolio management during a crisis however we show that dynamic deleveraging during a crisis can amplify instabilities the financial system exhibits robust yet fragile behavior with regions of the parameter space where contagion is rare but catastrophic whenever it occurs our model and methods of analysis can be calibrated to real data and provide simple yet powerful tools for macroprudential stress testing

the effect of the interbank network structure on contagion and common shocks abstract this paper proposes a dynamic multi agent model of a banking system with central bank banks optimize a portfolio of risky investments and riskless excess reserves according to their risk return and liquidity preferences they are linked via interbank loans and face stochastic deposit supply comparing different interbank network structures it is shown that money centre networks are more stable than random networks evidence is provided that the central bank stabilizes interbank markets in the short run only systemic risk via contagion is compared with common shocks and it is shown that both forms of systemic risk require different optimal policy responses

winter is possibly not coming mitigating financial instability in an agent based model with interbank market abstract we develop a macroeconomic agent based model to study how financial instability can emerge from the co evolution of interbank and credit markets and the policy responses to mitigate its impact on the real economy the model is populated by heterogenous firms consumers and banks that locally interact in different markets in particular banks provide credit to firms according to a basel ii or iii macro prudential frameworks and manage their liquidity in the interbank market the central bank performs monetary policy according to different types of taylor rules we find that the model endogenously generates market freezes in the interbank market which interact with the financial accelerator possibly leading to firm bankruptcies banking crises and the emergence of deep downturns this requires the timely intervention of the central bank as a liquidity lender of last resort moreover we find that the joint adoption of a three mandate taylor rule tackling credit growth and the basel iii macro prudential framework is the best policy mix to stabilize financial and real economic dynamics however as the liquidity coverage ratio spurs financial instability by increasing the pro cyclicality of banks liquid reserves a new counter cyclical liquidity buffer should be added to basel iii to improve its performance further finally we find that the central bank can also dampen financial instability by employing a new unconventional monetary policy tool involving active management of the interest rate corridor in the interbank market

monitoring indirect contagion abstract we propose two indicators for quantifying the potential exposure of financial institutions to indirect contagion arising from deleveraging of assets in stress scenarios the first indicator the endogenous risk index eri captures spillovers across portfolios arising from deleveraging in stress scenarios the second indicator the indirect contagion index ici measures the systemic importance of a bank by quantifying the loss its distressed liquidation would inflict on other institutions both are computable from portfolio holdings of financial institutions and measures of market depth for the assets held in the portfolio we discuss the micro foundation of these indicators and apply them to the analysis of the vulnerability of the european banking system to indirect contagion using data on portfolio holdings of european banks we show that our indicators correlate to the magnitude of fire sales losses in simulated stress scenarios thus providing a simple to compute proxy for the outcome of stress tests we also show that the information provided by our indicators on the systemic importance of banks is different from indicators based on size thereby providing a measure of interconnectedness complementary to those currently used by supervisors

forward looking solvency contagion abstract solvency contagion risk is a key channel through which systemic risk can come about we introduce a model that accounts not only for losses transmitted after banks default but also for losses due to the fact that creditors revalue their exposures when probabilities of default of their counterparties change we apply the model to run a series of simplified stress tests of the uk banking system from 2008 to 2016 based on two datasets of real interbank exposures between the seven major uk banks we show that risks due to solvency contagion decrease markedly from the peak of the crisis to the point of becoming negligible we also characterise the distributions of both vulnerabilities and systemic importances of individual banks thereby tracking the evolution of risk concentration

asset commonality debt maturity and systemic risk we develop a model in which asset commonality and short term debt of banks interact to generate excessive systemic risk banks swap assets to diversify their individual risk two asset structures arise in a clustered structure groups of banks hold common asset portfolios and default together in an unclustered structure defaults are more dispersed portfolio quality of individual banks is opaque but can be inferred by creditors from aggregate signals about bank solvency when bank debt is short term creditors do not roll over in response to adverse signals and all banks are ine ciently liquidated this information contagion is more likely under clustered asset structures in contrast when bank debt is long term welfare is the same under both asset structures

equilibrium analysis of portfolio insurance a martingale approach is used to characterize general equilibrium in the presence of portfolio insurance insurers sell to noninsurers in bad states and general equilibrium requires that the risk premium rises to induce noninsurers to increase their holdings we show that portfolio insurance increases price volatility causes mean reversion in asset returns raises the sharpe ratio and volatility in bad states and causes volatility to be correlated with volume we also explain why out of the money sp that is the demand for an absolute level of price protection is equivalent to a demand for put options 1 we show that a similar argument can be used in a

the impact of systemic and illiquidity risk on financing with risky collateral abstract repurchase agreements repos are one of the most important sources of funding liquidity for many financial investors and intermediaries in a repo some assets are given by a borrower as collateral in exchange of funding the capital given to the borrower is the market value of the collateral reduced by an amount termed as haircut or margin the haircut protects the capital lender from loss of value of the collateral contingent on the borrower s default for this reason the haircut is typically calculated with a simple value at risk estimation of the collateral for the purpose of preventing the risk associated to volatility however other risk factors should be included in the haircut and a severe undervaluation of them could result in a significant loss of value of the collateral if the borrower defaults in this paper we present a stylized model of the financial system which allows us to compute the haircut incorporating the liquidity risk of the collateral and most important possible systemic effects these are mainly due to the similarity of bank portfolios excessive leverage of financial institutions and illiquidity of assets the model is analytically solvable under some simplifying assumptions and robust to the relaxation of these assumptions as shown through monte carlo simulations we also show which are the most critical model parameters for the determination of haircuts

basel iii capital surcharges for g sibs are far less effective in managing systemic risk in comparison to network based systemic risk dependent financial transaction taxes in addition to constraining bilateral exposures of financial institutions there exist essentially two options for future financial regulation of systemic risk first regulation could attempt to reduce the financial fragility of global or domestic systemically important financial institutions g sibs or d sibs as for instance proposed by basel iii second it could focus on strengthening the financial system as a whole by reducing the probability of large scale cascading events this can be achieved by re shaping the topology of financial networks we use an agent based model of a financial system and the real economy to study and compare the consequences of these two options by conducting three computer experiments with the agent based model we find that re shaping financial networks is more effective and efficient than reducing financial fragility capital surcharges for g sibs could reduce systemic risk but they would have to be substantially larger than those specified in the current basel iii proposal in order to have a measurable impact this would cause a loss of efficiency

a switching regression model of public private sector wage differentials in peru 1985 86 this article examines the combined impact of the employment guarantee for graduates and public sector compensation policies on the egyptian labor market besides contributing to an unsustainable rate of growth in the government labor force these

a modified switching regression model for earnings differentials between the public and private using dutch 1986 data the wage differentials between public sector and private sector workers are investigated by employing a variation of the switching regression model this model imposes fewer identification restrictions on the parameters of the model than the standard switching regression model the estimation results show that some categories of public sector workers earn substantially less than private sector workers copyright 1993 by mit press

central government versus private sector wages and cognitive skills evidence using endogenous switching regression the importance of estimation techniques that allow for nonrandom selection of workers into the public and private sectors has been established in the theoretical and empirical literature a separate body of work has explored the contribution of cognitive and other basic skills to earnings this article brings together these two strands of empirical literature using adult literacy and lifeskills all survey data for norway and bermuda in the case of norway results from both ordinary least squares ols and a switching regression model agree that cognitive skills are rewarded more in the public sector and that in both sectors the main effect is the direct effect of skills on earnings in the case of bermuda however switching regression estimates are substantially different with respect to the how skills affect earnings furthermore controlling for cognitive skills changes the nature of selection and hence the estimates of sector wage differentials

human capital specificity evidence from the dictionary of occupational titles and displaced worker surveys 1984 2000 measures of four basic skills constructed from the dictionary of occupational titles are used to examine the source of human capital specificity the measures are used to characterize the skill portfolio of each job and to construct distance measures between jobs wage losses in the displaced worker surveys are shown to be more closely associated with switching skill portfolios than switching industry or occupation code per se these switches represent large decreases in the skill portfolio in the postdisplacement job the recent evidence for industry specific capital is reexamined the results suggest a difference between fluid and crystallized skills

measuring network systemic risk contributions a leave one out approach abstract the aim of this paper is to propose a new network measure of systemic risk contributions that combines the pair wise granger causality approach with the leave one out concept this measure is based on a conditional granger causality test and consists of measuring how far the proportion of statistically significant connections in the system breaks down when a given financial institution is excluded we analyse the performance of our measure of systemic risk by considering a sample of the largest banks worldwide over the 2003 2018 period we obtain three important results first we show that our measure is able to identify a large number of banks classified as global systemically important banks g sibs by the financial stability board fsb second we find that our measure is a robust and statistically significant early warning indicator of downside returns during the last financial crisis finally we investigate the potential determinants of our measure of systemic risk and find similar results to the existing literature in particular our empirical results suggest that the size and the business model of banks are significant drivers of systemic risk

public and private sector wages in the netherlands there is much debate in the netherlands about underpayment of public sector workers relative to private sector workers in this paper we analyze the wage structures in both sectors using an endogenous switching regression model unlike previous dutch studies we find that the earnings prospects of public sector workers are better in the public sector than in the private sector for private sector workers we find the exact opposite their earnings prospects are better in the private sector moreover the allocation over sectors points to comparative advantages

the dynamics of teacher quality abstract an extensive literature finds that while teachers vary considerably in initial quality there are limited teacher quality dynamics except for the first few years of teaching teacher quality does not improve over the course of a teacher s career this study evaluates the importance of various modeling restrictions to the key findings of this literature using data covering all 5th grade public school teachers from the state of north carolina i replicate the findings of the previous literature using their restrictive experience assumptions however using an unrestricted experience model i find that for mathematics achievement there are high returns to later career teaching experience about twice as much dispersion in initial teacher quality as previously estimated and a pattern of negative selection where high quality teachers are more likely to exit

capital regulation under price impacts and dynamic financial contagion abstract we construct a continuous time model for price mediated contagion precipitated by a common exogenous stress to the banking book of all firms in the financial system in this setting firms are constrained so as to satisfy a risk weight based capital ratio requirement we use this model to find analytical bounds on the risk weights for assets as a function of the market liquidity under these appropriate risk weights we find existence and uniqueness for the joint system of firm behavior and the asset prices we further consider an analytical bound on the firm liquidations which allows us to construct exact formulas for stress testing the financial system with deterministic or random stresses numerical case studies are provided to demonstrate various implications of this model and analytical bounds

the emperor has no clothes limits to risk modelling abstract this paper considers the properties of risk measures primarily value at risk var from both internal and external regulatory points of view it is argued that since market data is endogenous to market behavior statistical analysis made in times of stability does not provide much guidance in times of crisis in an extensive survey across data classes and risk models the empirical properties of current risk forecasting models are found to be lacking in robustness while being excessively volatile for regulatory use the var measure may give misleading information about risk and in some cases may actually increase both idiosyncratic and systemic risk

to bail out or to bail in answers from an agent based model since the beginning of the 2008 financial crisis almost half a trillion euros have been spent to financially assist eu member states in taxpayer funded bail outs these crisis resolutions are often accompanied by austerity programs causing political and social friction on both domestic and international levels the question of how to resolve failing financial institutions and how this depends on economic preconditions is therefore a pressing and controversial issue of vast political importance in this work we employ an agent based model to study the economic and financial ramifications of three highly relevant crisis resolution mechanisms to establish the validity of the model we show that it reproduces a series of key stylized facts of the financial and real economy the distressed institution can either be closed via a purchase assumption transaction it can be bailed out using taxpayer money or it may be bailed in in a debt to equity conversion we find that for an economy characterized by low unemployment and high productivity the optimal crisis resolution with respect to financial stability and economic productivity is to close the distressed institution for economies in recession with high unemployment the bail in tool provides the most efficient crisis resolution mechanism under no circumstances do taxpayer funded bail out schemes outperform bail ins with private sector involvement

when panic makes you blind a chaotic route to systemic risk abstract we present an analytical model to study the role of expectation feedbacks and overlapping portfolios on systemic stability of financial systems building on corsi et al 2016 we model a set of financial institutions having value at risk capital requirements and investing in a portfolio of risky assets whose prices evolve stochastically in time and are endogenously driven by the trading decisions of financial institutions assuming that they use adaptive expectations of risk we show that the evolution of the system is described by a slow fast random dynamical system which can be studied analytically in some regimes the model shows how the risk expectations play a central role in determining the systemic stability of the financial system and how wrong risk expectations may create panic induced reduction or over optimistic expansion of balance sheets specifically when investors are myopic in estimating the risk the fixed point equilibrium of the system breaks into leverage cycles and financial variables display a bifurcation cascade eventually leading to chaos we discuss the role of financial policy and the effects of some market frictions as the cost of diversification and financial transaction taxes in determining the stability of the system in the presence of adaptive expectations of risk

diversification and systemic risk abstract portfolio diversification makes investors individually safer but creates connections between them through common asset holdings such connections create endogenous covariances between assets and investors and enhance systemic risk by propagating shocks swiftly through the system we provide a theoretical model in which shocks spread through constrained selling from n diversified portfolio investors in a network of asset holdings with home bias and study the desirability of diversification by comparing the multivariate distribution of implied losses for every level of diversification there may be a region on the parameter set for which the propagation effect dominates the individually safer one we derive analytically the general element of the covariance between two assets i and j we find agents may minimize their exposure to endogenous risk by spreading their wealth across more and more distant assets the resulting network enhances systemic stability

financial contagion and economic development an epidemiological approach abstract we develop an epidemiological approach to analyze how financial contagion may affect and be affected by economic activity we show that according to specific parameter values the economy may converge either to a non speculative or to a speculative equilibrium in the former situation the level of per capita income is maximal while in the latter it is reduced by financial contagion the presence of economic and financial feedback effects may also give rise to macroeconomic fluctuations during the transitional path clearly showing that such economic and financial links are an important driver of the short run macroeconomic performance by extending the analysis to a spatial dimension we also show that financial contagion in some specific region may propagate quickly also in regions far away from those in which the contagion initially occurs highlighting the role of regional policy coordination to avoid interregional contagion

public private wage differentials in haiti do public servants earn a rent abstract this study uses a newly collected data set on haiti where data are very limited to assess how individuals are selected into the public vs private sectors and to estimate public private sector wage differentials the central question is whether or not public servants are earning a rent the estimation procedure is an extension of heckman s 1979 sample selection technique to the case where two selection rules generate the sample the procedure first estimates by bivariate probit analysis the probability of employment in the public or private sector and then for those in the public sector the probability of employment in the state owned enterprises soes vs public administration wage functions are then estimated for all three sectors using the inverse mills ratios from reduced form probits selectivity bias is found to exist in one sector soes correction for this bias in the wage equations lowers the wage differentials between the soe and the private sector and the soe and public administration as is clearly demonstrated by the oaxaca decomposition of these estimated mean differentials nevertheless the corrected findings still indicate that the public sector especially the soes earn a sizable rent

market liquidity hedging and crashes in the absence of significant news hedging strategies were blamed for the stock market crash of october 1987 but traditional models cannot explain how a relatively small amount of selling could cause so large a price drop the authors develop a rational expectations model in which prices play an important role in shaping expectations markets are much less liquid in their model than in traditional models discontinuities or crashes can occur even with relatively little hedging the model is consistent with theories as disparate as keynes beauty contest insights and thom s catastrophe analysis and suggests means to reduce volatility copyright 1990 by american economic association

productivity returns to experience in the teacher labor market methodological challenges and new evidence on long term career improvement abstract we present new evidence on the relationship between teacher productivity and job experience econometric challenges require identifying assumptions to model the within teacher returns to experience with teacher fixed effects we describe the identifying assumptions used in past models and in a new approach that we propose and we demonstrate how violations of these assumptions can lead to substantial bias consistent with past research we find that teachers experience rapid productivity improvement early in their careers however we also find evidence of returns to experience later in the career indicating that teachers continue to build human capital beyond these first years

the central government private sector wage differential since ehrenberg and schwarz 1986 there has been a plethora of articles investigating the relationship between public and private sector wages this article examines part of this post 1986 literature by reviewing articles that examine central government private sector wage differentials in sum most articles find that there is a premium paid to central government workers although the premium has declined in recent years in developing countries however the differential is usually negative women and minorities tend to do better in the public sector relative to their private sector counterparts the evidence on union premiums between sectors is mixed although the premium tends to be higher in the private sector however public sector union workers do not do much better than private sector union members the magnitude of all of the wage differentials discussed are sensitive to the estimation technique and data source used the most common explanation for the public sector wage premium is economic rent accruing to government workers although the public sector wage determination literature suggests that the differential is due to returns to political and vote producing activities not relevant in the private sector