the cost of market versus regulatory discipline in banking1 abstract we present evidence that insured deposit financing shields banks from the full costs of market discipline moody s downgrades indicators of increasing risk are associated with negative abnormal equity returns that are increasing in the bank s reliance on insured deposits moreover banks raise their use of insured deposits following increases in risk these findings cast doubt on the ability of capital market participants to effectively discipline bank behavior within the current regulatory environment more generally our findings highlight the potential for regulation to undermine market discipline in regulated industries

competition and microfinance abstract competition between microfinance institutions mfis in developing countries has increased dramatically in the last decade we model the behavior of non profit lenders and show that their non standard client maximizing objectives cause them to cross subsidize within their pool of borrowers thus when competition eliminates rents on profitable borrowers it is likely to yield a new equilibrium in which poor borrowers are worse off as competition exacerbates asymmetric information problems over borrower indebtedness the most impatient borrowers begin to obtain multiple loans creating a negative externality that leads to less favorable equilibrium loan contracts for all borrowers

the basic analytics of moral hazard the basic analytics of moral hazard are developed using the simplest possible model of the insurance market even when the underlying expected utility function and the function relating the accident probability to accident prevention effort are extremely well behaved the indifference curves and feasibility set the set of insurance contracts which at least break even are not indifference curves need not be convex and feasibility sets never are priceand income consumption lines may be discontinuous and effort is not in general a monotonic or continuous function of the parameters of the insurance policies provided

farsighted coalitional stability abstract i define the largest consistent set a solution concept which applies to situations in which coalitions freely form but cannot make binding contracts act publicly and are fully farsighted in that a coalition considers the possibility that once it acts another coalition might react a third coalition might in turn react and so on without limit i establish weak nonemptiness conditions and apply it to strategic and coalitional form games and majority rule voting i argue that it improves on the von neumann morgenstern stable set as it is usually defined but is consistent with a generalization of the stable set as in the theory of social situations journal of economic literature classification numbers c70 c71

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

do village funds improve access to finance evidence from thailand summary this paper examines whether recently introduced village funds one of the largest microfinance programs ever implemented improve access to finance village funds are analyzed in a cross sectional approach in comparison to competing financial institutions we find first that they reach the target group of lower income households better than formal financial institutions second village funds provide loans to those kinds of borrowers who tend to be customers of informal financial institutions third village funds help to reduce credit constraints thus village funds provide services in the intended direction albeit to a seemingly limited degree

simple solutions to the initial conditions problem in dynamic nonlinear panel data models with unobserved heterogeneity i study a simple widely applicable approach to handling the initial conditions problem in dynamic nonlinear unobserved effects models rather than attempting to obtain the joint distribution of all outcomes of the endogenous variables i propose finding the distribution conditional on the initial value and the observed history of strictly exogenous explanatory variables the approach is flexible and results in simple estimation strategies for at least three leading dynamic nonlinear models probit tobit and poisson regression i treat the general problem of estimating average partial effects and show that simple estimators exist for important special cases copyright 2005 john wiley sons ltd

toward a theory of bank loan commitments abstract the characteristics of fixed and variable rate bank loan commitments are analyzed in a contingent claims framework and valuation expressions are derived for these commitments the valuation expressions are used to present estimates of the impact of interest rate uncertainty on the liability assumed by a bank issuing loan commitments finally a simple two period asymmetric information model is employed to explain the recent trend among bankers to substitute variable rate commitments for their fixed rate counterparts

federal home loan bank advances and commercial bank portfolio composition this paper considers the role of federal home loan bank fhlb advances in stabilizing their commercial bank members residential mortgage lending activities our theoretical model shows that using mortgage related membership criteria or requiring mortgage related collateral does not ensure that fhlb advances will be put to use for stabilizing members financing of housing using panel vector autoregression var techniques we estimate recent dynamic responses of u s bank portfolios to fhlb advance shocks bank lending shocks and macroeconomic shocks our empirical findings suggest that fhlb advances are just as likely to fund other types of bank credit as to fund single family mortgages

the s l debacle public policy lessons for bank and thrift regulation this book describes the period of failures of savings and loan associations and sets out a program of policies to prevent future debacles it explains the regulatory actions and inactions that created the incentives for large numbers of thrifts to make excessively risky and ill conceived and in some cases fraudulent and criminal investments it describes the failure of the accounting system to provide adequate information to regulators and in many cases even to the managers of the thrifts themselves concerning the health and riskiness of individual thrifts it also discusses how the regulatory system that had been conceived in an earlier and highly regulated era was overwhelmed in the deregulated environment of the early 1980s it shows how the reforms that were made in response to the growing crisis were too little and too late and finally it offers a set of policy reforms that could prevent future crises in the savings and loan industry this work should be of interest to political and financial economists

moral hazard and peer monitoring in a laboratory microfinance experiment abstract this paper reports the results from a laboratory microfinance experiment of group lending in the presence of moral hazard and costly peer monitoring we compare peer monitoring treatments in which credit is provided to members of the group to individual lending treatments with lender monitoring we find that if the cost of peer monitoring is lower than the cost of lender monitoring peer monitoring results in higher loan frequencies higher monitoring and higher repayment rates compared to lender monitoring in the absence of monitoring cost differences however lending monitoring and repayment behavior is mostly similar across group and individual lending schemes within group lending contrary to theoretical predictions simultaneous and sequential lending rules provide equivalent empirical performance

forward looking behavior in hawk dove games in endogenous networks experimental evidence abstract we conduct an experiment in continuous time every subject can change her links to others and her action in a hawk dove game which she plays bilaterally with each of her linked partners at any time we hypothesize that norms exist regarding who establishes and thus pays for links and that players take these norms into account when deciding on their strategy for such limitedly forward looking players who consider others linking reactions we introduce a strategy adaptation rule anticipatory better reply rule abr and a related stability criterion reaction anticipatingly stable ras our data support our assumption on linking reactions subjects seem to take these reactions into account when deciding to switch from hawk to dove abr behavior however better reply behavior is prevalent when short term profits allure ras configurations occur more often than nash equilibria of the base game however with respect to stability they perform similar

deposit insurance regulation and moral hazard in the thrift industry evidence from the 1930 s this paper compares risk taking of insured and uninsured thrifts operating under strict and less strict regulatory regimes during the 1930 s analysis of balance sheet data indicates that while newly insured thrifts undertook less risk than their uninsured counterparts possibly because of screening by deposit insurance authorities moral hazard emerged gradually insured institutions operating under relatively permissive regulatory regimes were more prone to undertake risky lending activities than their more tightly regulated counterparts possibly because of screening by deposit insurance authorities moral hazard emerged gradually insured institutions operating under relatively premissive regulatory regimes were more prone to undertake risky lending activities than their more tightly regulated counterparts given the current system of deposit insurance the results suggest that effective regulation and supervision will play a key role in maintaining thrift stability in the 1990s copyright 1992 by american economic association

evidence of bank market discipline in subordinated debenture yields 1983 1991 we examine debenture yields over the period 1983 1991 to evaluate the market s sensitivity to bank specific risks and conclude that investors have rationally reflected changes in the government s policy toward absorbing private losses in the event of a bank failure although this evidence does not establish that market discipline can effectively control banking firms it soundly rejects the hypothesis that investors cannot rationally differentiate among the risks undertaken by the major u s banking firms an increasingly important issue in the regulation of financial institutions concerns the extent to which market investors can will recognize and control the risks of banking firms although the banking act of 1933 replaced some private risk bearing with federal deposit insurance legislators were reluctant to displace market discipline very extensively flood 1992 by the early 1980s however u s regulators had come to protect virtually all bank liability holders from credit losses most visibly at large banks which were deemed too big to fail sprague 1986 o hara and shaw 1990 this extension of the government safety net largely reflects a skepticism on the part of regulators that normal market forces could adequately identify and control bank risks while u s regulators have recently shown an increased willingness to let some bank investors bear default losses an official suspicion of the efficacy of market discipline remains widespread by contrast some prominent academic economists argue that market investors in bank debentures could provide timely and effective control over banking firms risk exposures and that the social cost of supervising banks would be lower if regulators ceded greater

good intentions pave the way to the local moneylender abstract access to microfinance entails a risk of over indebtedness a naive present biased micro borrower may roll over debt after failure of an investment project financed with an mfi loan even though she planned not to do so and would not have taken the mfi loan if she had been aware of the time inconsistency of her plan similarly she may use a new loan to repay and end up over indebted if she discounts the future too strongly relative to her true preferences

moral hazard and optimal commodity taxation abstract this paper demonstrates that in an economy with moral hazard and more than one commodity competitive equilibrium is not constrained efficient to correct the market failure differential commodity taxation is necessary a general optimal tax formula is derived and special cases of is discussed

an experiment on risk taking and evaluation periods does the period over which individuals evaluate outcomes influence their investment in risky assets results from this study show that the more frequently returns are evaluated the more risk averse investors will be the results are in line with the behavioral hypothesis of myopic loss aversion which assumes that people are myopic in evaluating outcomes over time and are more sensitive to losses than to gains the results have relevance for the equity premium puzzle and also for the marketing strategies of fund managers

micro finance competition motivated micro lenders double dipping and default abstract we develop a tractable model of competition among socially motivated mfis so that the objective functions of the mfis put some weight on their own clients utility we find that the equilibrium involves double dipping i e borrowers taking multiple loans from different mfis whenever the mfis are relatively profit oriented further double dipping necessarily leads to default and inefficiency and moreover borrowers who face relatively higher transactions costs optimally decide to double dip interestingly an increase in mfi competition can increase the extent of double dipping and default further the interest rates may go either way with the interest rate likely to increase with more competition if the mfis are very socially motivated

microfinance spillovers a model of competition in informal credit markets with an application to indian villages despite widespread interest in the development of microfinance spillover effects on the non using population and redistributive issues remain largely unexplored i study a competition game between microfinance institutions mfis offering joint liability loans and moneylenders offering individual loans in presence of adverse selection i show that one unintended consequence of the entry of a microfinance sector in local credit markets can be to trigger an increase in the equilibrium informal interest rate because mfis tend to attract a disproportionately safe share of the borrower pool away from incumbent moneylenders the existence of such composition externality depends crucially on the size of the microfinance sector and the risk composition of the borrower pool the model predicts a non linearly increasing relationship between informal interest rates and mfis capacity in relatively safe credit markets and no relationship in risky villages i show evidence supporting these predictions using a first hand panel database that records all credit transactions over 8 years for a sample of about 1000 households living in indian villages with extensive space and time variation in the size of their microfinance sector

the effect of lender identity on a borrowing firm s equity return previous research demonstrates that a firm s common stock price tends to fall when it issues new public securities by contrast commercial bank loans elicit significantly positive borrower returns this article investigates whether the lender s identity influences the market s reaction to a loan announcement although we find no significant difference between the market s response to bank and nonbank loans we do find that lenders with a higher credit rating are associated with larger abnormal borrower returns this evidence complements earlier findings that an auditor s or investment banker s perceived quality signals valuable information about firm value to uninformed market investors previous studies show that certain types of loan announcements generate significantly positive abnormal returns to the average borrower s equity 1 this finding contrasts with the negative equity returns generally associated with a corporation s issuance of public securities smith 1986 this difference in market reactions indicates that private and public securities are not perfect substitutes for the average firm in this sense lender identity defined as public versus private lender significantly impacts the borrower s abnormal equity return the standard theoretical explanation for this difference is that private lenders either obtain private information about the firm s value or they have the incentive and ability to monitor firm behavior more effectively than other outside monitors can although the empirical literature on private lending has evaluated primarily commercial bank loans and lines of credit these theoretical arguments apply equally to any type of private

access to capital in rural thailand an estimated model of formal versus informal credit the aim of this paper is to understand the mechanism underlying access to credit the author focuses on two important aspects of rural credit markets in thailand first moneylenders and other informal lenders coexist with formal lending institutions such as government or commercial banks and more recently micro lending institutions second potential borrowers presumably face sizable transaction costs obtaining external credit the author develops and estimates a model based on limited enforcement and transaction costs that provides a unified view of those facts the results show that the limited ability of banks to enforce contracts more than transaction costs is crucial in understanding the observed diversity of lenders

limited farsightedness in network formation pairwise stability jackson and wolinsky 1996 is the standard stability concept in network formation it assumes myopic behavior of the agents in the sense that they do not forecast how others might react to their actions assuming that agents are perfectly farsighted related stability concepts have been proposed we design a simple network formation experiment to test these extreme theories but find evidence against both of them the subjects are consistent with an intermediate rule of behavior which we interpret as a form of limited farsightedness on aggregate the selection among multiple pairwise stable networks and the performance of farsighted stability crucially depends on the level of farsightedness needed to sustain them and not on efficiency or cooperative considerations individual behavior analysis corroborates this interpretation and suggests in general a low level of farsightedness around two steps on the part of the agents

social connections and group banking lending to the poor is expensive due to high screening monitoring and enforcement costs group lending advocates believe lenders overcome this by harnessing social connections using data from finca peru i exploit a quasi random group formation process to find evidence of peers successfully monitoring and enforcing joint liability loans individuals with stronger social connections to their fellow group members i e either living closer or being of a similar culture have higher repayment and higher savings furthermore i observe direct evidence that relationships deteriorate after default and that through successful monitoring individuals know who to punish and who not to punish after default

microfinance in times of crisis the effects of competition rising indebtedness and economic crisis on repayment behavior this paper analyzes repayment determinants for loans from caja los andes a bolivian mi crolender the analysis focuses on the influence of recent changes in the bolivian microfinance market in particular we examine the effects of the rapidly growing supply of funds for micro loans the increasing competition a rising level of indebtedness among micro entrepreneurs and the recent economic crisis our results show a two fold influence structure of competition and indebtedness firstly clients with loans from multiple sources at the same time are found to be more likely to default than others secondly clients with given characteristics have an overall better repayment behaviour in areas with higher competition and a higher supply of micro loans

experimental tests of ricardian equivalence this study employs laboratory experiments to test aspects of ricardian equivalence an overlapping generations model forms the basis of the experimental design whenever ricardian equivalence predicts a positive bequest outcomes close to those predicted occur after allowance for learning observed deviations from ricardian equilibrium are small but biased in a keynesian direction changes in bequests do not fully offset changes in government debt the imposition of a binding nonnegativity constraint on bequests produces the predicted neoclassical behavior the cost to the players of deviations from the theoretical equilibrium is apparently an important determinant of the variability of observed deviations

principles of network development and evolution an experimental study this paper reports on an experimental investigation of the evolution of networks and the individual decision making processes that guide it inasmuch as there is no history of experimental work on network formation part of the paper is devoted to the formulation of problems that can be examined experimentally the results are that networks composed of decentralized decision makers are capable of overcoming complex coordination and learning problems and converge to stationary when it does not occur significant and persistent inefficiencies can result the models of equilibration based on the principle of nash equilibrium are more reliable than models based on the alternative principles of efficiency seeking or focalness of the network configuration however individual decision making within networks is not in accordance with the simple decision rules of nash best response instead we observed complicated strategies that appear to trade short term profits in order to signal to and teach other agents the strategies required for long term profit maximization

using market information in prudential bank supervision a review of the u s empirical evidence in principle market and government supervision provide alternative devices for controlling governing any type of corporation most national governments have instituted nonmarket regulatory mechanisms for banking firms on the grounds that market based mechanisms do not adequately discipline banks but what evidence supports this assessment why must governments assure bank solvency but not the solvency of other firms government oversight naturally displaces private efforts to evaluate and control financial firms moreover if the banking business changes over time as it assuredly has in the past decade or two the best combination of government and private supervision may change concurrently this paper reviews and evaluates the growing empirical literature on private investors abilities to assess the financial condition of banking firms the evidence supports the proposition that market investors and analysts could reasonably provide a greater proportion of corporate governance services for large traded u s financial firms

optimal partial group liability in microfinance lending abstract this paper develops a model of group borrowing that incorporates partial group liability where borrowers are penalized if their group members default but are not held responsible for the entirety of the failed loan the model illustrates a trade off of group liability lending while higher levels of group liability increase within group risk sharing if liability is too high borrowers strategically default the model predicts the existence of an optimal partial liability that maximizes transfers between group members while avoiding strategic default consistent with this prediction loan officers from a large microfinance institution in southern mexico who rarely allow one group member to repay while the other defaults achieve substantially lower default rates than loan officers for whom the practice is commonplace or for those for whom it has never occurred structural estimation using repayment data suggests that while a partial liability below full liability may reduce default rates the incidence of strategic default is rare

coalition formation as a dynamic process abstract we study coalition formation as an ongoing dynamic process with payoffs generated as coalitions form disintegrate or regroup a process of coalition formation pcf is an equilibrium if a coalitional move to some other state can be justified by the expectation of higher future value compared to inaction this future value in turn is endogenous it depends on coalitional movements at each node we study existence of equilibrium pcfs we connect deterministic equilibrium pcfs with unique absorbing state to the core and equilibrium pcfs with multiple absorbing states to the largest consistent set in addition we study cyclical as well as stochastic equilibrium pcfs

delegated monitors large and small germany s banking system 1800 1914 banks play a greater role in the german financial system than in those of the united states or britain germany s large universal banks are admired by those who advocate bank deregulation in the united states others admire the universal banks for their supposed role in corporate governance and industrial finance many discussions distort the german banking system by overstressing one of several types of banks and ignore the competition and cooperation between the famous universal banks and other banking groups tracing the historical development of the german banking system from the early nineteenth century places the large universal banks in context

the standard error of regressions statistical significance as used in economics has weak theoretical justification in particular it merges statistical and substantive significance the 182 papers using regression analysis in the american economic review in the 1980s were tested against 19 criteria for the accepted use of statistical significance most some three quarters of the papers did poorly likewise textbooks in econometrics do not distinguish statistical and economic significance statistical significance should not be the focus of empirical economics

which banks choose deposit insurance evidence of adverse selection and moral hazard in a voluntary insurance system this article investigates adverse selection and moral hazard in the voluntary deposit insurance system of kansas which operated from 1909 to 1929 regulations were imposed to limit risk taking and membership was made voluntary to assuage objections that insurance forces conservative banks to protect depositors of high risk institutions the authors find however that risk prone banks were the most likely to join the system at its inception using a simultaneous equations model they also detect both adverse selection and moral hazard behavior throughout the system s first ten years copyright 1995 by ohio state university press

the interrelated dynamics of unemployment and low wage employment this paper examines the extent of state dependence in unemployment and the role played in this by intervening low wage employment a range of dynamic random and fixed effects estimators are compared low wage employment is found to have almost as large an adverse effect as unemployment on future prospects and the difference in their effects is found to be insignificant evidence is presented that low wage jobs act as the main conduit for repeat unemployment and considerably increases its probability obtaining a higher wage job reduces the increased risk of repeat unemployment to insignificance

the federal home loan bank system the lender of next to last resort the federal home loan bank fhlb system is a large complex and understudied government sponsored liquidity facility that currently has more than 1 trillion in secured loans outstanding mostly to commercial banks and thrifts this paper first documents the significant role played by the fhlb system at the outset of the ongoing financial crisis and then provides evidence about the uses of these funds by their bank and thrift members we then identify the trade offs faced by fhlb member borrowers when choosing between accessing the fhlb system or the federal reserve s discount window during the crisis we conclude by describing the fragmented u s lender of last resort framework and finding that additional clarity about the respective roles of the various liquidity facilities would be helpful

persistency of financial distress amongst italian households evidence from dynamic models for binary panel data abstract this paper builds on existing studies on households financial distress and provides new evidence on the determinants of financial hardship in italy and its persistence over time it suggests a quantitative definition of financial distress based on the distribution of net wealth and tests whether the probability of experiencing financial difficulty is persistent over time using random and fixed effects dynamic models for binary panel data the analysis exploits the longitudinal component of the bank of italy survey on household income and wealth for the period 1998 2006 its results show that after accounting for unobserved heterogeneity past values of the outcome variable play a large part in explaining the probability of experiencing financial distress in addition the probability of financial vulnerability decreases with income and greater sophistication of the household portfolio and at least in one of the model specifications increases in areas with higher unemployment rates

bank loan commitments and interest rate volatility bank loan commitments are examined in the context of option pricing models and a valuation formula is obtained the partial takedown phenomenon which is both distinctive and vexatious is considered in detail finally estimates of the value of u s bank loan commitments and their sensitivity to interest rate changes are provided

temporal stability of time preferences abstract the preferences assumed to govern intertemporal trade offs are generally considered to be stable economic primitives though evidence on this stability is notably lacking we present evidence from a large field study conducted over two years with around 1 400 individuals using incentivized intertemporal choice experiments aggregate choice profiles and corresponding estimates of discount parameters are unchanged over the two years and individual correlations through time are high by existing standards however some individuals show signs of instability by linking experimental measures to administrative tax records we showthat identified instability is uncorrelated with both levels and changes in sociodemographic variables

here today gone tomorrow can dynamic incentives make microfinance more flexible this paper presents a model of microfinance lending to individuals that uses dynamic incentives in the form of access to additional loans to discourage borrowers from strategic default or the unwillingness to repay a loan once a positive outcome is realized we propose an improvement on contracts currently used by microfinance institutions mfis by endogenizing the default penalty while constraining the mfi to maintain sustainable lending operations furthermore accounting for the risks that the poor face by including a negative economic shock we show that under certain circumstances the punishment for default need not be a lifetime without loans

policies and impact an analysis of village level microfinance institutions this paper uses variation in policies and institutional characteristics to evaluate the impacts of village level microfinance institutions in rural thailand to identify impacts we use policies related to the successful unsuccessful provision of services as exogenous variation in effective financial intermediation we find that institutions particularly those with good policies can promote asset growth consumption smoothing and occupational mobility and can decrease moneylender reliance specifically cash lending institutions production credit groups and especially women s groups are successful in providing intermediation and its benefits to members while buffalo banks and rice banks are not the policies identified as important to intermediation and benefits the provision of savings services especially pledged savings accounts emergency services and training and advice surprisingly much publicized policies such as joint liability default consequences or repayment frequency had no measured impacts jel 012 016

networks and farsighted stability the main contribution of this paper is to provide a framework in which the notion of farsighted stability for games introduced by chwe 1994 can be applied to directed networks in particular we introduce the notion of a supernetwork a supernetwork is made up of a collection of directed networks the nodes and uniquely represents via the arcs connecting the nodes agent preferences and the rules governing network formation by reformulating chwe s basic result on the nonemptiness of farsightedly stable sets we show that for any supernetwork i e for any collection of directed networks and any collection of rules governing network formation there exists a farsightedly stable directed network we also introduce the notion of a nash network relative to a given supernetwork as well as the notions of symmetric nonsimultaneous and decomposable supernetworks to illustrate the utility of our framework we present several examples of super networks compute the farsightedly stable networks and the nash networks

the role of the state in financial markets this paper reexamines the role of the state in financial markets and identifies seven major market failures that provide a potential rationale for government intervention in practice government interventions in capital markets even in industrial countries have been pervasive the paper provides a taxonomy of those interventions with respect to both the objectives they serve and the instruments they employ there is a role for the government in financial markets but the success of government interventions has been mixed it is important that interventions be well designed the paper sets out principles for government regulatory interventions and applies them to prudential regulation it then examines three other areas of intervention directed credit finanical repression and competition policy and identifies circumstances in which some amount of financial repression may actually be beneficial

the information content of bank exam ratings and subordinated debt prices do supervisory examinations of large commercial banking firms produce useful information not already reflected in market prices to investigate this question we apply a new research methodology to data on bank exam ratings and the subordinated debt risk spreads of their parent holding companies we find that government exams do produce new value relevant information that debenture prices do not immediately reflect this information and that the market prices the likely regulatory actions implied by this information these results have implications for market versus regulatory discipline at large banking firms and for proposals to make subordinated debt mandatory for these firms

can social cohesion be harnessed to repair market failures evidence from group lending in guatemala the success of group lending in developing countries has been attributed to the ability of the institution to mitigate asymmetric information problems in credit markets previous research has offered a number of explanations for this phenomenon social ties between borrowing group members internal group pressure to repay loans and peer monitoring this research presents empirical tests on borrowing group data from guatemala which indicate that peer monitoring significantly effects borrowing group performance through stimulating intra group insurance group pressure is found to have a small effect in deterring moral hazard while the effect of social ties among members is statistically insignificant

the thai rural credit system public subsidies private information and segmented markets thailand has sought to increase farmers access to credit by government intervention in 1966 it created a government agricultural bank to lend solely to farm households and beginning in the late 1970s it required commercial banks to lend heavily in the rural sector either directly or by making deposits in the agricultural bank the result was an enormous expansion of credit in the rural sector but because formal lenders were either unable or unwilling to solve the information problems involved in the broad range of rural credit transactions the informal credit sector wbich charged interest rates many times higher than the formal sector continued to thrive using household surveys and surveys of moneylenders this article provides a detailed analysis of the ways in which lenders in the informal sector have solved the information problems of providing credit the authors argue that the informal sector is competitive and that high interest rates reflect high information costs not the scarcity of funds this article reports on a set of investigations of the impact of thai government policies to expand bank lending in the rural sector their purpose was to increase farmers access to capital and reduce their dependence on informal lenders fifteen years after the principal government measures were introduced we hope to be able to answer several questions how has the expansion of formal sector lending affected the informal sector did the increase in the supply of formal credit reduce the business of informal lenders and lower interest rates in the informal market what has been the performance of the formal credit system in terms of coverage efficiency and incidence lacking time series data on the informal sector we cannot give a direct answer to these questions but we can with confidence say that the informal lenders are still very much alive by examining the behavior of the rural credit market at the present time we can throw an indirect light on what transpired over the last fifteen years our main findings are the following on the basis of our 1984 85 survey of households and moneylenders

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

cost of debt and federal home loan bank funding at u s bank and thrift holding companies abstractwe investigate the relationship between the cost of debt issued by bank holding companies bhcs and thrift holding companies thcs and their use of federal home loan bank fhlb advances cost of debt is used as a measure of bank riskiness for the first time in a fhlb study a two equation model of fhlb advances and cost of debt is estimated three main results are obtained first greater reliance on advances by bhcs and thcs is associated with lower cost of debt in the pre crisis period and more strongly so during the crisis because granting of advances sends a positive signal to the market about fhlb s support second greater holding company hc cost of debt as an explanatory variable is associated with smaller advances as fhlbs restrict advances to riskier hcs third we find no separate effect on the cost of debt from fhlb membership our results are robust to 3sls estimation used to address endogeneity and to alternative model specifications the negative association between cost o

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

poverty and social exclusion two sides of the same coin or dynamically interrelated processes there is growing interest in the analysis and measurement of social exclusion to complement the static and dynamic literature on income poverty on theoretical grounds social exclusion and income poverty are seen as different processes but with closely interrelated dynamics however our empirical understanding of the way these two processes dynamically interact at the individual level is still very limited to shed some light on the issue we use a dynamic bivariate probit model controlling for unobserved heterogeneity and wooldridge 2005 type initial conditions both the first and second order markov dynamics are examined we estimate the model using the italian sample of the european community household panel echp waves 1 8 and find a sizable extent of state dependence in both poverty and social exclusion moreover there are dynamic cross effects implying that poverty and social exclusion are mutually reinforcing social policies aimed at eradicating poverty and avoiding individuals social

financial asset demand is elastic evidence from new issues of federal home loan bank debt abstract we estimate the slope of the demand curve for newly auctioned fhlb discount notes and investigate the impacts of arbitrage risk and heterogeneity of investor beliefs on demand elasticity our unique dataset of roughly 2900 observations of two price quantity pairs the first from a pre auction dealer survey the second from actual auction results provides the quantity shift necessary to identify demand in contrast to previous findings of downward sloping demand curves for equities we show that demand for newly issued fhlb notes is nearly perfectly elastic during normal market conditions we find however that frictions like arbitrage risk and to a lesser extent heterogeneity of investor beliefs negatively affect elasticity and explain the nearly 50 drop in elasticity observed during the recent financial crisis

moneylenders and bankers price increasing subsidies in a monopolistically competitive market abstract in many areas of the world a significant part of the cost of obtaining a good or service is the cost of enforcing the contracts entailed in its provision we present models of markets with endogenous enforcement costs motivated by studies of rural credit markets we show that subsidies may have perverse effects under monopolistic competition increasing prices or inducing exit higher prices interest rates result from the loss of scale economies or from negative externalities among suppliers the models are consistent with the puzzling evidence that infusions of government subsidized formal credit have not improved the terms offered by moneylenders

a strategic model of social and economic networks we study the stability and efficiency of social and economic networks when self interested individuals can form or sever links first for two stylized models we characterize the stable and efficient networks there does not always exist a stable network that is efficient next we show that this tension persists generally to assure that there exists a stable network that is efficient one is forced to allocate resources to nodes that are not responsible for any of the production we characterize one such allocation rule the equal split rule and another rule that arises naturally from bargaining of the players

over indebtedness in microfinance an empirical analysis of related factors on the borrower level summary this paper analyzes the over indebtedness of microborrowers in ghana from a customer protection perspective it measures over indebtedness as a subjective indicator based on loan related sacrifices that borrowers report it finds that male microborrowers are more likely to be over indebted so are borrowers with adverse economic shocks low returns on investment and non productive loan use over indebtedness is lower for borrowers with good debt literacy general financial literacy and numeracy seem insufficient to reduce over indebtedness the paper details the relationship of the above factors to the specific sacrifices borrowers make and suggests that policy measures address the full complexity of the over indebtedness phenomenon

repayment performance in group based credit programs in bangladesh an empirical analysis abstract this paper analyzes the repayment rates of 128 credit groups belonging to three group based credit programs in bangladesh the association for social advancement asa the bangladesh rural advancement committee brac and the rangpur dinajpur rural service rdrs using tobit analysis specific tests are performed on the following hypothesized determinants group size size of loans degree of loan rationing enterprise mix within groups demographic characteristics social ties and status and occurrence of idiosyncratic shocks the paper concludes that if basic principles of prudential banking are adhered to repayment rates can be good even in poor and remote communities the important thing for financial institutions is to tailor services such that it becomes worthwhile for the poor to establish a profitable long term association in addition more freedom to members in the process of group formation is recommended

farsighted network formation this paper studies a model of dynamic network formation when individuals are farsighted players evaluate the desirability of a current move in terms of its consequences on the entire discounted stream of payoffs we define a concept of equilibrium which takes into account farsighted behavior of agents and allows for limited cooperation amongst agents we show that an equilibrium process of network formation exists we also show that there are valuation structures in which no equilibrium strategy profile can sustain efficient networks we then provide sufficient conditions under which the equilibrium process will yield efficient outcomes

an experimental study on decentralized networked markets abstract we design a laboratory experiment to investigate matching in a decentralized market of deferred acceptance agents are undifferentiated and may have multiple partners their payoff depends on who they match with the experiment is designed in such a way that a stable configuration exists but cannot be eyeballed by the participants due to the computational complexity of the game in spite of this subjects are remarkably good at reaching a stable match even when the payoffs of others are not publicly observed more information does however speed up convergence thanks to self censoring we trace irrational matching choices mostly to two sources the tendency of over think in a setting where strategic thinking is not necessary and the reluctance to accept matching offers from those who have been disloyal in the past

the theory of moral hazard and unobservable behaviour part i principal agent models are studied in which outcomes conditional on the agent s action are uncertain and the agent s behaviour therefore unobservable for a model with bounded agent s utility conditions are given under which the first best equilibrium can be approximated arbitrarily closely by contracts relating payment to observable outcomes for general models it is shown that the solution may not always be obtained by using the agent s first order conditions as constraint general conditions of lagrangean type are given for problems in which contracts are finite dimensional 1 the moral hazard situation

borrowing from pui to pay pom multiple borrowing and over indebtedness in rural thailand summary rural financial markets have grown rapidly in asian emerging market economies thus contributing to economic development and the reduction of poverty at the same time however the level of indebtedness of rural households has increased making households more vulnerable to shocks one of the reasons for rising household debt is the ease of borrowing simultaneously from a growing number of lending institutions this paper addresses two major questions first does borrowing from multiple sources increase rural households risk of over indebtedness second do over indebted rural households refinance their outstanding loans through multiple borrowing running the risk of becoming trapped in a debt cycle employing a dynamic random effects bivariate probit model for a unique set of longitudinal household panel data from northeast thailand this study examines the bidirectional relationship between over indebtedness and multiple borrowing to determine to what extent rural households become trapped in debt cycles on the one hand the results indicate that households in northeast thailand take on multiple loans which further increases their risk of becoming over indebted on the other hand our model results do not confirm the widespread notion that over indebted rural households use multiple loans to refinance unpayable debts

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

which microfinance institutions are becoming more cost effective with time evidence from a mixture model italian speakers tend to stress the second component of german morphologically complex words such as compounds and prefix verbs even if the first component is lexically stressed to improve their prosodic phrasing an automatic pronunciation teaching method was developed based on auditory feedback of prosodically corrected utterances in the learners own voices basically the method copies contours of f0 local speech rate and intensity from reference utterances of a german native speaker to the learners speech signals it also adds emphasis to the stress position in order to help the learners better recognise the correct pronunciation and identify their errors a perception test with german native speakers revealed that manipulated utterances significantly better reflect lexical stress than the corresponding original utterances thus two groups of italian learners of german were provided with different feedback during a training session one group with manipulated utterances in their individual voices and the other with correctly pronounced original utterances in the teacher s voice afterwards both groups produced the same sentences again and german native speakers judged the resulting utterances resynthesised stimuli especially with emphasised stress were found to be a more effective feedback than natural stimuli to learn the correct stress position since resynthesis was obtained without previous segmentation of the learners speech signals this technology could be effectively included in computer assisted language learning software

migrants ancestors and foreign investments we use 130 years of data on historical migrations to the u s to show a causal effect of the ancestry composition of u s counties on foreign direct investment fdi sent and received by local firms to isolate the causal effect of ancestry on fdi we build a simple reduced form model of migrations migrations from a foreign country to a u s county at a given time depend on 1 a push factor causing emigration from that foreign country to the entire u s and 2 a pull factor causing immigration from all origins into that u s county the interaction between time series variation in origin specific push factors and destination specific pull factors generates quasi random variation in the allocation of migrants across u s counties we find that doubling the number of residents with ancestry from a given foreign country relative to the mean increases the probability that at least one local firm engages in fdi with that country by 4 percentage points we present evidence that this effect is primarily driven by a reduction in information frictions and not by better contract enforcement taste similarities or a convergence in factor endowments

microcredit social capital and common pool resources abstract the paper presents a conceptual scheme for understanding the impact of microcredit small loans to poor borrowers on common pool resources impacts on common pool resources are posited to occur through changes in household production and consumption the focus on women and the social capital created from group training decision making and risk bearing with the group lending techniques characteristic of many microcredit programs enhanced human and social capital can improve environmental outcomes a nonrandom survey of microfinance organizations suggests increased environmental awareness and potential cpr stewardship through microcredit but empirical research is needed to demonstrate actual impacts

do federal home loan bank membership and advances increase bank risk taking since the early 1990s commercial banks have turned to federal home loan bank fhlbank advances to plug the gap between loan and deposit growth is this trend worrisome on the one hand advances implicitly encourage risk by insulating borrowers from market discipline on the other advances give borrowers greater flexibility to managing interest rate and liquidity risk and access to fhlbank funding encourages members to reshape their balance sheets in ways that could lower credit risk using quarterly financial and supervisory data for banks from 1992 to 2005 we assess the effect of fhlbank membership and advances on risk the evidence suggests liquidity and leverage risks rose modestly but interest rate risk declined somewhat credit risk and overall failure risk were largely unaffected although the evidence suggest fhlbank membership and advances have had at best only a modest impact on bank risk we caution that our sample period constitutes one observation and that moral hazard could be pronounced if leverage ratios revert to historical norms

an analysis of the principal agent problem most analyses of the principal agent problem assume that the principal chooses an incentive scheme to maximize expected utility subject to the agent s utility being at a stationary point an important paper of mirrlees has shown that this approach is generally invalid we present an alternative procedure if the agent s preferences over income lotteries are independent of action we show that the optimal way of implementing an action by the agent can be found by solving a convex programming problem we use this to characterize the optimal incentive scheme and to analyze the determinants of the seriousness of an incentive problem

ownership of stocks and mutual funds a panel data analysis this paper analyzes the ownership dynamics of stocks and mutual funds using representative household panel data the dutch center savings survey 1993 1998 a bivariate dynamic binary choice model is introduced allowing for interactions between the two types of assets we find that unobserved heterogeneity and state dependence play a large role for both types of assets the positive relation between ownership of one type in one period and the other type in the next period is explained by correlated unobserved heterogeneity a negative state dependence effect of lagged ownership of stocks on ownership of mutual funds is found which can be explained by the costs of shifting funds across the two forms of stockholding

a matter of relational style loan officer consistency and exchange continuity in microfinance social scientists have long considered what mechanisms underlie repeated exchange three mechanisms have garnered the majority of this attention formal contracts relational contracts and relationally embedded social ties although each mechanism has its virtues all three exhibit a common limitation an inability to fully explain the continuation and stability of intertemporal exchange between individuals and organizations in the face of change drawing on extensive quantitative data on approximately 450 000 microfinance loans made by a microfinance institution in mexico from 2004 to 2008 that include random assignment of loan officers this research proposes the concept of relational styles to help explain how repeated exchange is possible in the face of personnel change we define relational styles as systematically reoccurring patterns of interaction employed by social actors within and across exchange relationships in this paper between microfinance clients and loan officers we show that relati

symposium on organizations and economics m t r ost production in modern economies occurs within organizations and this production is regulated only to a limited extent by prices the size of some of the largest organizations like general motors or ibm or att if managers didn t they would be replaced and firms that didn t maximize value wouldn t survive accordingly what went on inside the black box was mere detail the behavior of the firm could be described completely without knowledge of those details

labor turnover wage structures and moral hazard the inefficiency of competitive markets a multiperiod general equilibrium model of the labor market is developed in which risk averse workers are faced with job related uncertainty and labor turnover is costly if a worker is unlucky and suffers a bad job match he quits and joins another firm hoping that he will like its work environment more because the quality of a job match is unobservable workers cannot insure against the risk of a bad match the firm provides implicit insurance against job dissatisfaction typically by paying workers more than their net marginal products in their early years with the firm and less subsequently since the probabilities of the insured against events the quit rates over time are affected by the amount of such insurance provided this implicit insurance is characterized by moral hazard individuals quit when in the absence of insurance they would not the equilibrium contract balances out efficiency in risk bearing with efficiency in turnover incentives we show that the equilibrium contract is not con