local government structure and public expenditures the law of 1 n postulates a positive relationship betweenthe number of democratically electedrepresentative districts and governmentspending strong support for thisrelationship exists in legislatures in theunited states at both the state andnational level and across countries fewstudies have examined this relationship atthe local level despite the fact that localgovernments operate under constraintssimilar to those faced by representativelegislatures using a sample of georgiacounties we find the number of countycommissioners to be positively correlatedwith county government expenditures indicating support for the law of 1 nat the local level

did dubious mortgage origination practices distort house prices zip codes with high concentrations of originators who misreported mortgage information experienced a 75 larger relative increase in house prices from 2003 to 2006 and a 90 larger relative decrease from 2007 to 2012 compared with other zip codes several causality tests show that high fractions of dubious originators in a zip code lead to large price distortions originators with high misreporting gave credit to borrowers with high ex ante risk yet further understated the borrowers true risk overall excess credit facilitated through dubious origination practices explain much of the regional variation in house prices over a decade

the effect of large investors on asset quality evidence from subprime mortgage securities abstract fannie mae and freddie mac the gses the dominant investors in subprime mortgage backed securities before the 2008 crisis substantively affected collateral composition in this market mortgages included in securities designed for the gses performed better than those backing other securities in the same deals holding observable risk constant consistent with the transmission of private information these effects are concentrated in low documentation loans and for issuers that were highly dependent on the gses and were corporate affiliates of the mortgage originators additional analysis of yield spreads shows that these performance differences were not reflected in prices

political and institutional determinants of fiscal policy in the european community in recent theoretical and empirical research the variation in political and institutional arrangements which may affect the process of national policy formation is examined in order to explain cross country differences with respect to fiscal policies pursued in this paper we build upon this literature and examine whether and how cross country differences in debt accumulation and public sector size of member countries of the european community during the 1980s can be explained we conclude that the growth of government debt is positively related to the frequency of government changes and negatively to sound budgetary procedures in countries with left wing governments the growth of the share of government spending in total output generally tends to be higher

beyond the transaction banks and mortgage default of low income homebuyers we evaluate the effects of the lending institution and soft information on mortgage loan performance for low income homebuyers we find that even after controlling for the propensity of a borrower to get a loan from a local bank based on observable characteristics those who receive a loan from a local bank branch are significantly less likely to become delinquent or default than other bank or nonbank borrowers consistent with an unobserved information effect these effects are most pronounced for loans originated to borrowers with marginal credit where soft information may have a stronger effect these findings support previous research on information driven lending and provide additional explanation for observed differences in mortgage loan performance between bank and nonbank lenders

wall street and the housing bubble we analyze whether mid level managers in securitized finance were aware of the housing bubble and a looming crisis in 2004 2006 using their personal home transaction data we find little evidence of them timing the bubble or exercising cautious behavior in purchasing homes relative to two uninformed control groups one composed of non housing equity analysts and the other of non real estate lawyers to the extent that the practice of securitization may have led to lax screening of subprime borrowers the average person in our sample did not expect it to lead to problems in the wider housing market our findings suggest the need to expand the incentives based view of the crisis to incorporate a role for distorted beliefs

a theory of disclosure in speculative markets this paper presents a theory of disclosure in a market where investors have heterogeneous beliefs and face short sale constraints assets trade above fundamentals reflecting the value of the option to sell to more optimistic investors in the future the initial seller has an incentive to commit to an imprecise disclosure policy despite the negative effect this has on the fundamental value of the asset in order to increase the potential for disagreement and hence the magnitude of the speculative premium i show that there is a strategic complementarity between sellers in their disclosure decisions this explains why financial misreporting and episodes of speculation occur together in waves and demonstrates that the endogenous choice of imprecise disclosure amplifies the extent to which assets are overpriced this paper was accepted by amit seru finance

the double trigger for mortgage default evidence from the fracking boom this paper exploits a natural experiment afforded by the fracking boom in pennsylvania to shed light on the determinants of mortgage default looking only at mortgages originated before fracking be

delinquency model predictive power among low documentation loans abstract using data from a major mortgage bank we examine the predictive power of mortgage delinquency models as an aggregate measure of the quality of information recorded at loan origination we measure model predictive power using an out of sample prediction criterion and compare predictive power of delinquency models over time and across loans of different documentation levels and origination channels we found that model predictive power declined over time throughout the housing boom further predictive power is attenuated in delinquency models for low documentation loans providing suggestive evidence that loan and borrower characteristics used in the delinquency predictions may be inaccurate or falsified for such loans we do not find differences in model predictive power when comparing bank versus third party broker originated loans

elections coalitions and legislative outcomes predictions of electoral behavior in a multiparty setting should be a function of the voters beliefs about how parties will perform following an election similarly party behavior in a legislature should be a function of electoral promises and rewards we develop a multistage game theoretic model of three party competition under proportional representation the final policy outcome of the game is generated by a noncooperative bargaining game between the parties in the elected legislature this game is essentially defined by the vote shares each party receives in the general election and the parties electoral policy positions at the electoral stage parties and voters are strategic in that they take account of the legislative implications of any electoral outcome we solve for equilibrium electoral positions by the parties and final policy outcomes

the provision of public goods under alternative electoral incentives politicians who care about the spoils of office may underprovide a public good because its benefits cannot be targeted to voters as easily as pork barrel spending we compare a winner take all system where all the spoils go to the winner to a proportional system where the spoils of office are split among candidates proportionally to their share of the vote in a winner take all system the public good is provided less often than in a proportional system when the public good is particularly desirable we then consider the electoral college system and show that it is particularly subject to this inefficiency

effects of government characteristics on fiscal deficits in 18 oecd countries 1961 1994 political economists studying industrialized countries have claimed that certain institutional characteristics of governments such as majority status the number of parties in government and stability affect levels of public deficits they have specifically argued that weak unstable governments produce higher deficits than strong stable ones the author tests the validity of such claims by examining empirical data from 18 organization for economic cooperation and development oecd countries between 1961 and 1994 it is shown that evidence does not support the deficit prone weak governments thesis if anything there is some evidence to suggest that deficits are lower under what political economists call weak unstable governments such as minority governments coalition governments or less durable governments it is further shown that there is extremely limited evidence to support another line of argument that the strength stability of governments does not necessarily create deficits but does affec

the inefficiency of refinancing why prepayment penalties are good for risky borrowers abstract this paper provides a theoretical analysis of the efficiency of prepayment penalties in a dynamic competitive lending model with risky borrowers and costly default when considering improvements in the borrower s creditworthiness as one of the reasons for refinancing mortgages we show that refinancing penalties can be welfare improving and that they can be particularly beneficial to riskier borrowers in the form of lower mortgage rates reduced defaults and increased availability of credit thus a high concentration of prepayment penalties among the riskiest borrowers can be an outcome of efficient equilibrium in a mortgage market we also provide empirical evidence that is consistent with the key predictions of our model

securitization and loan performance ex ante and ex post relations in the mortgage market this study examines the relation between securitization and loan performance using a comprehensive dataset from a major national mortgage lender loans remaining on the bank s balance sheet ex post incurred higher delinquency rates than sold loans contrasting the negative relation between screening efforts and ex ante probability of loan sale explored by prior studies moreover the performance gap between sold and retained loans was wider among the subsample of loans that were perceived as easier to resell the investors seeming advantage over the originating bank can mostly be explained by information revealed during the time between loan origination and sale

mortgage lending in boston interpreting hmda data the home mortgage disclosure act was enacted to monitor minority and low income access to the mortgage market the data collected for this purpose show that minorities are more than twice as likely to be denied a mortgage as whites yet variables correlated with both race and creditworthiness were omitted from these data making any conclusion about race s role in mortgage lending impossible the federal reserve bank of boston collected additional variables important to the mortgage lending decision and found that race continued to play an important though significantly diminished role in the decision to grant a mortgage copyright 1996 by american economic association

securitization and distressed loan renegotiation evidence from the subprime mortgage crisis abstract we examine whether securitization impacts renegotiation decisions of loan servicers focusing on their decision to foreclose a delinquent loan conditional on a loan becoming seriously delinquent we find a significantly lower foreclosure rate associated with bank held loans when compared to similar securitized loans across various specifications and origination vintages the foreclosure rate of delinquent bank held loans is 3 to 7 lower in absolute terms 13 to 32 in relative terms there is a substantial heterogeneity in these effects with large effects among borrowers with better credit quality and small effects among lower quality borrowers a quasi experiment that exploits a plausibly exogenous variation in securitization status of a delinquent loan confirms these results

liar s loan effects of origination channel and information falsification on mortgage delinquency 1 this paper presents an analysis of mortgage delinquency between 2004 and 2008 using a loan level data set from a major national mortgage bank our analysis highlights two problems underlying the mortgage crisis a reliance on mortgage brokers who tend to originate lower quality loans and a prevalence of low documentation loans known in the industry as liar s loans that result in borrower information falsification while over three quarters of the difference in delinquency rates between bank and broker channels can be attributed to observable loan and borrower characteristics the delinquency difference between full and low documentation mortgages is due to unobservable heterogeneity about half of it potentially due to income falsification

the validity of piecemeal second best policy abstract if there are irreducible distortions in one sector of an economy when is it optimal to set consumer prices proportional to producer prices in the other sector for the case of a single consumer jewitt demonstrated that implicit separability of the consumer s preferences is necessary and sufficient for the optimality of piecemeal second best policy we show that in a multi consumer economy piecemeal policy is optimal if and only if the aggregate compensated demand system has a two sector representation only three broad classes of economies can have two sector representations this considerably restricts the circumstances in which piecemeal second best policies are optimal

preference structure and piecemeal second best policy abstract this paper examines the question when should prices in a subset of markets be set proportional to marginal costs even if other markets are distorted the conditions on preferences and demand functions are derived they are found to be weaker than have been required by previous authors

screening peers softly inferring the quality of small borrowers this paper examines the performance of new online lending markets that rely on nonexpert individuals to screen their peers creditworthiness we find that these peer lenders predict an individual s likelihood of defaulting on a loan with 45 greater accuracy than the borrower s exact credit score unobserved by the lenders who only see a credit category moreover peer lenders achieve 87 of the predictive power of an econometrician who observes all standard financial information about borrowers screening through soft or nonstandard information is relatively more important when evaluating lower quality borrowers our results highlight how aggregating over the views of peers and leveraging nonstandard information can enhance lending efficiency this paper was accepted by amit seru finance

credit rationing income exaggeration and adverse selection in the mortgage market we examine the role of borrower concerns about future credit availability in mitigating the effects of adverse selection and income misrepresentation in the mortgage market we show that the majority of additional risk associated with low doc mortgages originated prior to the great recession was due to adverse selection on the part of borrowers who could verify income but chose not to we provide novel evidence that these borrowers were more likely to inflate or exaggerate their income our analysis suggests that recent regulatory changes that have essentially eliminated the low doc loan product would result in credit rationing against self employed borrowers abstract from author

credit induced boom and bust this paper exploits the federal preemption of national banks in 2004 from local laws against predatory lending to gauge the effect of the supply of credit on the real economy first the preemption regulation resulted in an 11 increase in annual lending in the 2004 2006 period which is associated with a 3 3 rise in annual house price growth rate and a 2 2 expansion of employment in nontradable sectors this was followed by a sharp decline in subsequent years furthermore we show that the increase in the supply of credit reduced delinquencies during boom years but increased them in bust years received june 7 2015 editorial decision december 22 2016 by editor robin greenwood

rates for vehicle loans race and loan source a household s vehicle purchases are among its largest expenditure outlays moreover unlike housing purchases which a typical household may make once or twice over a lifetime a house hold may well buy several cars over the same interval the magnitude and relative frequency of vehicle purchases suggest that differential treatment by race in the vehicle market may have important implications for differences in wealth and financial well being by race yet whereas a robust literature in economics has studied virtu

credit booms and lending standards evidence from the subprime mortgage market this paper links the u s subprime mortgage crisis to demand side factors that contributed to the rapid expansion of the u s mortgage market we show that denial rates were relatively lower in areas that experienced faster credit demand growth and that lenders in these high growth areas attached less weight to applicants loan to income ratios the results are robust to controlling for supply side factors including house price appreciation mortgage securitization and other economic fundamentals and to several robustness tests controlling for endogeneity the results are consistent with the notion that a relaxation of lending standards triggered by an increased demand for loans contributed to the boom and the ensuing crisis together with other supply side explanations these findings shed new light on the relationship between credit booms and financial instability

the effect of negative equity on mortgage default evidence from hamp s principal reduction alternative the home affordable modification program s hamp s principal reduction alternative pra is a government sponsored program to reduce the principal balances and monthly mortgage payments of troubled borrowers we examine the effect of principal forgiveness on borrowers subsequent mortgage default the program s rules imply a kink in the relationship between principal forgiveness and a borrower s initial equity level our identification strategy exploits the quasi experimental variation in principal forgiveness generated by this kink using a regression kink design rkd which compares the relationship between initial equity and default on either side of the kink we estimate that hamp pra reduced the quarterly default hazard from 3 8 to 3 1 received february 4 2015 accepted august 2 2015 by editor philip strahan

mortgage mis pricing the case of co borrowers abstract this paper provides evidence for a performance differential between loans with one borrower and loans with two borrowers we argue that the choice of observables considered during the rate adjustment process may lead to mortgage mispricing for loans with co borrowers our findings offer an example of borrower level information that mortgage lenders collect which is not used in pricing but is predictive of performance

public economics and the theory of public policy when james mirrlees and william vickrey were awarded the nobel prize in economics last year it marked only the third time that the award had gone to scholars of public sector economics in contrast to the reception given to the previous two winners ronald coase and james buchanan the news was greeted with some bewilderment by policy specialists once removed from the academic literature who are mirrlees and vickrey and what have they done that has been of lasting benefit to the study of public economics let alone of practical benefit to policy makers this seems to me to be a fair question coase after all had set out a conceptual approach to the study of externalities and transaction costs that has become an implicit part of the methodological baggage carried around by policy economists and policy makers alike buchanan was in part responsible for the welcome emphasis on institutions in public sector decision making and for insisting that politicians bureaucrats and voters are human beings with human motives the legacy of mirrlees and vickrey is less well known but i would argue it is every bit as profound their approach to the theory of economic policy which is grounded on the importance of imperfect information as a constraint on public policy has changed the very nature of public economics research and of its implications for economic

loan originations and defaults in the mortgage crisis the role of the middle class this paper highlights the importance of middle class and high fico borrowers for the mortgage crisis contrary to popular belief which focuses on subprime and poor borrowers we show that mortgage originations increased for borrowers across all income levels and fico scores the relation between mortgage growth and income growth at the individual level remained positive throughout the pre 2007 period finally middle income high income and prime borrowers all sharply increased their share of delinquencies in the crisis these results are consistent with a demand side view where homebuyers and lenders bought into increasing house values and borrowers defaulted after prices dropped

a direct test of agency theories of debt evidence from residential mortgage backed securities when a firm is facing default equity holders have incentives to engage in asset substitution underinvest or directly transfer wealth few papers document investment distortions on account of debt equity agency conflicts only that the threat of distortions influence ex ante financing costs a nonagency residential mortgage backed security deal represents an entity that is highly leveraged where ex ante equity holders know they will face default this provides an ideal laboratory for testing whether the threat of default creates any of the distortions predicted in theory we estimate a lower bound on agency costs associated with direct wealth transfers to be in the range of 018 per dollar the internet appendix is available at https doi org 10 1287 mnsc 2017 2853 this paper was accepted by amit seru finance

black white differences in wealth and asset composition using data from the 1976 and 1978 national longitudinal surveys of young men and young women this study examines racial differences in the magnitude and composition of wealth and the reasons for them on average young black families hold 18 percent of the wealth of young white families and hold their wealth in proportionately different forms even after controlling for racial differences in income and other demographic factors as much as three quarters of the wealth gap remains unexplained we speculate on the causes for this concluding that racial differences in intergenerational transfers and to a lesser extent barriers to the accumulation of business and home equity most likely play a role

fraudulent income overstatement on mortgage applications during the credit expansion of 2002 to 2005 treating fraudulently overstated income on mortgage applications as true income can lead to incorrect conclusions on the nature of the mortgage credit supply expansion toward marginal borrowers from 2002 to 2005 a positive gap between zip code level income growth calculated from mortgage applications and income growth from the irs likely reflects mortgage fraud not an improvement in home buyer income in support of the credit supply view mortgage credit for home purchase expanded significantly more in low credit score neighborhoods on both the extensive and intensive margins from 2002 to 2005 even though these neighborhoods deteriorated on many measures of income prospects

the determinants of western european government growth 1950 1980 european publics and politicians are concerned about big and growing governments such concern is not ill founded government size measured as the ratio of government expenditures to gross domestic product has marched upwards steadily since 1950 in the 12 european nations examined here the present research represents an initial step toward solving the mystery of why these governments have grown to begin a modest theoretical framework for understanding government growth is advanced next specific hypotheses of growth are fitted into the framework and operationalized for empirical testing finally statistical models to account for public sector expansion in each of the dozen nations over the 1950 1980 period are developed the models suggest that a variety of forces have worked to enlarge european governments with perhaps the most important being pressure for government assistance from groups disadvantaged by sour economic conditions

adverse selection and liquidity distortion this article develops a tractable model with two dimensional asymmetric information in asset markets sellers are privately informed about their asset quality and distress positions illiquidity arises endogenously and manifests itself through two distinct market outcomes the first outcome features limited market participation resulting in a dry up in trading volume the second outcome involves a large volume at a depressed price only in the latter outcome do distressed sellers engage in fire sales quickly unwinding their positions at a steep price discount the article further establishes that this equilibrium can arise only when buyers expect that sellers with a higher need for immediacy will on average have higher quality assets hence both the information structure and the distribution of sellers distress are crucial for the existence of fire sales

short versus long coalitions electoral accountability and the size of the public sector this article examines the policy consequences of the number of parties in government we argue that parties externalize costs not borne by their support groups larger parties thus internalize more costs than small parties because they represent more groups this argument implies that the public sector should be larger the more parties there are in the government coalition we test this prediction using yearly time series cross sectional data from 1970 to 1998 in 17 european countries we find that increasing the number of parties in government increases the fraction of gdp accounted for by government spending by close to half a percentage point or more than one billion current dollars in the typical year we find little support for the alternative claim that the number of legislative parties affects the size of the public sector except via the number of parties in government