implementing efficient allocations in a model of financial intermediation abstract in a finite trader version of the diamond and dybvig j polit econ 91 1983 401 model the ex ante efficient allocation is implementable by a direct mechanism i e each trader announces the type of his own ex post preference in which truthful revelation is the strictly dominant strategy for each trader when the model is modified by formalizing the sequential service constraint cf wallace fed reserve bank minneapolis quart rev 12 1988 3 the truth telling equilibrium implements the symmetric ex ante efficient allocation with respect to iterated elimination of strictly dominated strategies

wage mobility in the united states this paper examines the mobility of individuals through the wage and earnings distributions using 1979 1991 data from the national longitudinal survey of youth lifetime wages will be more equally distributed than wages from any single year if individuals change position in the wage distribution over time the results suggest that mobility is predominantly within group mobility reducing wage inequality by 12 26 over a four year horizon a detailed examination of within group mobility using year to year estimates of transition probabilities among quintiles of the distribution reveals similar general patterns across all skill groups mobility declined significantly over the years especially at the lower end of the wage and earnings distributions

financial intermediation with risk aversion the paper extends diamond s 1984 analysis of financial intermediation to allow for risk aversion of the intermediary it shows that as in the case of risk neutrality the agency costs of external funds provided to an intermediary are relatively small if the intermediary is financing many entrepreneurs with stochastically independent returns even though the intermediary is adding rather than subdividing risks the underlying large numbers argument is not invalidated by the presence of risk aversion with risk aversion of entrepreneurs as well as the intermediary financial intermediation provides insurance as well as finance in contrast to earlier results on optimal intermediation policies under risk neutrality the paper shows that when an intermediary is financing many entrepreneurs with stochastically independent returns optimal intermediation policies must shift return risks away from risk averse entrepreneurs and impose them on the intermediary or on final investors

financial intermediary coalitions abstract in this article an environment in which the investment opportunities of agents are private information is studied and it is shown that financial intermediaries arise endogenously within that environment it is established that financial intermediaries are part of an efficient arrangement in the sense that they are needed to support the authors private information core allocations these intermediaries which are coalitions of agents exhibit the following characteristics in equilibrium they borrow from and lend to large groups of agents they produce information about investment projects and they issue claims that have different state contingent payoffs than claims issued by ultimate borrowers

accuracy of response in labor market surveys evidence and implications this paper examines the extent of response errors in labor market survey data and explores the implications of such errors for economic analysis explicitly examined are responses to questions on industry occupation union status hours worked and wages analyses are based on two sources 1 a special supplement to the january 1977 current population survey that obtained data from workers and their employers and 2 an exact match of workers and their employers interviewed in the employment opportunity pilot project survey the dual nature of these surveys provides a basis for analyzing the effect of response error on a variety of economic analyses including the trade off between wages and risk the wage impact of unionism and the sensitivity of wage determination models to alternative responses to earnings questions

currency competition a partial vindication of hayek abstract this paper establishes the existence of equilibria for environments in which outside money is issued competitively such equilibria are typically believed not to exist because of a classic overissue problem if money is valued in equilibrium an issuer produces money until its value is driven to zero by backward induction money cannot have value in the first place this paper shows that overissuance is not a problem if agents believe that if an issuer produces more than some threshold number of notes then only those notes issued up to the threshold will be valued additional notes will be worthless this result is very general applying to any monetary economy in which equilibria with and without valued money exist if the money supply is finite the paper also compares the allocation achieved by a monopolist to that achieved with competitive issuance in both a search and an overlapping generations environment the results depend on the environment considered but two general conclusions arise first it is ambiguous whether competitive issuers can achieve a more desirable allocation than a monopolist second with competitive issuance a licensing agency can always improve on pure laissez faire and achieve the efficient allocation in the long run

estimating income poverty in the presence of measurement error and missing data problems reliable measures of poverty are an essential statistical tool for public policies aimed at reducing poverty in this article we consider the reliability of income poverty measures based on survey data which are typically plagued by missing data and measurement error neglecting these problems can bias the estimated poverty rates we show how to derive upper and lower bounds for the population poverty rate using the sample evidence an upper bound on the probability of misclassifying people into poor and nonpoor and instrumental or monotone instrumental variable assumptions by using the european community household panel we compute bounds for the poverty rate in 10 european countries and study the sensitivity of poverty comparisons across countries to missing data and measurement error problems supplemental materials for this article may be downloaded from the jbes website

measurement error in human capital and the black white wage gap proxy variables are frequently used in economics to control for unavailable variables in a linear regression setting for example afqt scores have been used to control for human capital accumulati

inflation financial markets and long run real activity abstract empirical evidence suggests that real activity the volume of bank lending activity and the volume of trading in equity markets are strongly positively correlated at the same time inflation and financial market activity are strongly negatively correlated in the long run as are inflation and the real rate of return on equity inflation and real activity are also negatively correlated in the long run particularly for economies with relatively high rates of inflation we present a monetary growth model in which banks and secondary capital markets play a crucial allocative function we show that at least under certain configurations of parameters the predictions of the model are consistent with these and several other observations about inflation finance and long run real activity

measurement error and misclassification a comparison of survey and administrative data we provide both a theoretical and empirical analysis of the relation between administrative and survey data by distinguishing between different sources of deviations between survey and administrative data we are able to reproduce several stylized facts we illustrate the implications of different error sources for estimation in simple econometric models and find potentially very substantial biases this article shows the sensitivity of some findings in the literature for the assumption that administrative data represent the truth in particular the common finding of substantial mean reversion in survey data largely goes away once we allow for a richer error structure

continuity in auction design abstract j cremer and r p mclean econometrica56 1988 1247 1257 have shown that the auctioneer can extract all the surplus when the private valuations of bidders are not statistically independent the paper shows that this result does not necessarily arise under limited liability or risk aversion under limited liability and or risk aversion we prove that the functions corresponding to the auctionner s optimal expected gain and to the maximum total surplus are continuous in the space of possible information distributions thus by continuity the auctioneer wil not be able to extract all the rents when bidders private valuations are approximately independent

racial disparities in job finding and offered wages abstractthe extent to which discrimination can explain racial wage gaps is one of the most divisive issues in the social sciences using a newly available data set this paper develops a simple empirical test that under plausible but not innocuous conditions provides a lower bound on the extent of discrimination in the labor market taken at face value our estimates imply that differential treatment accounts for at least one third of the black white wage gap we argue that the patterns in our data are most naturally rationalized through a search matching model in which employers statistically discriminate on the basis of race when hiring unemployed workers but learn about their marginal product over time

optimal contracts with public ex post information abstract we are concerned with the value of public ex post information about a seller s costs to an initially uninformed buyer we derive necessary and sufficient conditions for a public ex post signal s s that is correlated with the risk neutral seller s costs to render the initial information asymmetry inconsequential to the buyer the first best outcome for the buyer is shown to be feasible if 1 the dimension of s is at least that of or 2 the conditional likelihood function of s given is for one of its realizations sj a strictly increasing function of and more concave in than is the seller s cost function

costly monitoring financial intermediation and equilibrium credit rationing abstract this paper establishes a link between equilibrium credit rationing and financial intermediation in a model with asymmetrically informed lenders and borrowers costly monitoring and investment project indivisibilities intermediation is shown to dominate borrowing and lending between individuals and these financial intermediaries exhibit several of the important features of intermediaries as we know them equilibrium interest rates and the aggregate quantity of loans respond quite differently to changes in taste and technology parameters depending on whether or not there is rationing in equilibrium

bank incentives contract design and bank runs abstract we study the diamond dybvig bank runs deposit insurance and liquidity j polit econ 91 1983 401 419 model as developed in green and lin implementing efficient allocations in a model of financial intermediation j econ theory 109 2003 1 23 and peck and shell equilibrium bank runs j polit econ 111 2003 103 123 we dispense with the notion of a bank as a coalition of depositors instead our bank is a self interested agent with a technological advantage in record keeping we examine the implications of the resulting agency problem for the design of bank contracts and the possibility of bank run equilibria for a special case we discover that the agency problem may or may not simplify the qualitative structure of bank liabilities we also find that the uniqueness result in green and lin implementing efficient allocations in a model of financial intermediation j econ theory 109 2003 1 23 is robust to our form of agency but that the non uniqueness result in peck and shell equilibrium bank runs j polit econ 111 2003 103 123 is not

competition and increasing returns to scale a model of bank size this study examines the causal effects of bank size on banks survival asset quality and leverage two forces drive these effects increasing returns to scale derived from banks expertise and competition the first enables bigger banks to survive competition better have higher asset quality and be more leveraged it drives banks into a race for expansion this race toughens competition between banks which edges out small banks and may worsen all banks asset quality consequently the banking industry will be dominated by a small number of highly leveraged banks in this study financial intermediation arises endogenously and co exists with direct finance

the optimal size of a bank costs and benefits of diversification abstract this paper provides a theory of diversification and financial structure of banks it shows that by diversifying the bank portfolio and financing it with debt the bank can commit to a higher level of monitoring by linking the benefits of diversification to the costs the paper derives an optimal size of the bank which is bounded the costs of diversification lie in the higher overload costs with which the banker is faced by monitoring more projects the benefits of diversification lie in increasing the bank s owner s incentives to monitor the lenders

technical change wage inequality and taxes this paper considers the normative implications of technical change for tax policy design a task to talent assignment model of the labor market is embedded into an optimal tax problem technical change modifies equilibrium wage growth across talents and the substitutability of talents across tasks the overall optimal policy response is to reduce marginal income taxes on low to middle incomes while raising those on middle to high incomes the reform favors those in the middle of the income distribution reducing their average taxes while lowering transfers to those at the bottom jel d31 h21 h23 h24 j31 o33

the effect of nonfarm income on investment in bulgarian family farming this article documents a relationship between nonfarm income primarily earnings and pensions and agricultural investment in bulgaria specifically expenditures on working capital variable inputs such as feed seed and herbicides and investment in livestock among those with positive spending on farm inputs the estimated elasticity of these expenditures with respect to nonfarm income is 0 14 nonfarm income also has an effect on the number of households that purchase farm animals with an estimated elasticity of 0 35 the use of nonfarm income for farm investment is consistent with the presence of credit constraints as is the fact that less than one percent of farmers report outstanding debts for agricultural purposes yet many farm households take out large unsecured loans for other purposes primarily to cover consumption expenditures implying that credit is available but that farmers prefer not to use borrowed funds to finance agricultural investment this would suggest that increases in the availability of agricultural credit may have little effect on farm outcomes whereas increases in nondebt financed sources of liquidity such as subsidies or transfers may better stimulate investment

evidence on the validity of cross sectional and longitudinal labor market data this article investigates error properties of survey reports of labor market variables we use the panel study of income dynamics psid validation study a two wave panel survey of workers employed by a large firm that shared its detailed payroll records individuals reports of annual earnings are fairly accurate errors are negatively related to true earnings reducing bias due to measurement error when earnings are used as an independent variable biases are moderately larger for changes in earnings earnings per hour are less reliably reported than annual earnings biases in estimating earnings functions are relatively small but those in labor supply functions may be important

inflation dynamics when inflation is near zero this paper discusses the likely evolution of u s inflation in the near and medium term on the basis of 1 past u s experience with very low levels of inflation 2 the most recent japanese experience with deflation and 3 recent u s micro evidence on downward nominal wage rigidity our findings question the view that stable long run inflation expectations and downward nominal wage rigidity will provide sufficient support to prices such that deflation can be avoided we show that an inflation model fitted on japanese data over the past 20 years which accounts for both short and long run inflation expectations matches the recent u s inflation experience quite well while the model indicates that u s inflation might be subject to a lower bound it does not rule out a prolonged period of mild deflation going forward in addition our micro evidence on wages suggests no obvious downward rigidity in the firm s wage costs downward rigidity in individual wages notwithstanding as a consequence downward nominal wage rigidity may provide little offset to deflationary pressures in the current u s situation despite some circumstantial evidence that this channel might have been at work in the past

monitoring the monitor an incentive structure for a financial intermediary this paper studies financial intermediation i e delegated monitoring in a costly state verification model there are a finite number of agents thus the intermediary cannot fully diversify its portfolio and is subject to default risk the role of the intermediary is to satisfy simultaneously the different portfolio preferences of borrowers and lenders two questions arise when a delegated monitor is subject to non trivial default risk a what arrangement solves the problem of monitoring the monitor b what intermediary portfolio accomplishes optimal asset transformation between borrowers and lenders unlike previous delegated monitoring studies the law of large numbers is not sufficient to obtain our results instead we appeal to a stronger results the large deviation principle which establishes that convergence in the law of large numbers is exponential

earnings dynamics and measurement error in matched survey and administrative data this article analyzes earnings dynamics and measurement error using a matched longitudinal sample of individuals survey and administrative earnings in line with previous literature the reported

is earnings nonresponse ignorable abstract earnings nonresponse in the current population survey is roughly 30 in the monthly surveys and 20 in the march survey if nonresponse is ignorable unbiased estimates can be achieved by omitting nonrespondents little is known about whether cps nonresponse is ignorable using sample frame measures to identify selection we find clear cut evidence among men but limited evidence among women for negative selection into response wage equation slope coefficients are affected little by selection but because of intercept shifts wages for men and to a lesser extent women are understated as are gender gaps selection is least severe among household heads

measurement error and earnings dynamics some estimates from the psid validation study previous empirical work on measurement error in survey earnings data has shown that the variance of the measurement error is roughly constant over time it is negatively correlated with true earnings and it is autocorrelated with previous measurement errors this article proposes a simple model in which the measurement error stems from underreporting of transitory earnings fluctuations and a white noise component the model fits well to data from the panel study of income dynamics validation study the results imply that autocorrelations in the changes of earnings can be estimated relatively accurately despite the presence of measurement error

imperfect competition risk taking and regulation in banking abstract we asses the welfare implications of banking competition under various deposit insurance regimes in a model of imperfect competition with social failure costs and where banks are subject to limited liability we study the links between competition for deposits and risk taking incentives and conclude that the welfare performance of the market and the appropriateness of alternative regulatory measures depend on the degree of rivalry and the deposit insurance regime specifically when competition is intense and the social failure costs high deposit rates are excessive both in a free market and with risk based insurance if insurance premiums are insensitive to risk then the same is true even if there is no social cost of failure we find also that in an uninsured market with nonobservable portfolio risk or with flat premium deposit insurance deposit regulation rate regulation or deposit limits and direct asset restrictions are complementary tools to improve welfare in an uninsured market with observable portfolio risk or with risk based insurance deposit regulation may be a sufficient instrument to improve welfare

financial market frictions monetary policy and capital accumulation in a small open economy abstract we consider a small open economy with a costly state verification problem and binding reserve requirements the presence of these frictions leads to the existence of two steady states with credit rationing an increase in the money growth rate the world interest rate or reserve requirements raises lowers gdp in the high low activity steady state however sufficiently large increases in money growth or the world interest rate can transform the high activity steady state from a sink to a source the model also delivers prescriptions for restoring the stability of this steady state in such an eventuality journal of economic literatureclassification numbers e5 f4

an assessment of tarp assistance to financial institutions six years after the passage of the 2008 troubled asset relief program commonly known as tarp it remains hard to measure the total social costs and benefits of the assistance to banks provided under tarp programs tarp was not a single approach to assisting weak banks but rather a variety of changing solutions to a set of evolving problems tarp s passage was associated with significant improvements in financial markets and the health of financial intermediaries as well as an increase in the supply of lending by recipients however a full evaluation must also take into account other factors including the risks borne by taxpayers in the course of the bailouts moral hazard costs that could result in more risk taking in the future and social costs related to perceived unfairness our evaluation is organized in five parts 1 what did policymakers do 2 what are the proper objectives of interventions like tarp assistance to financial institutions 3 did tarp succeed in those economic objectives 4 were tarp funds allocated purely on an economic basis or did political favoritism play a role 5 would alternative policies either alongside or instead of tarp and alternative design features of tarp have worked better

are wages habit forming evidence from micro data although utility functions play a central role in economics the axiom that utility depends only on the absolute levels of its arguments is rarely tested this paper uses panel data on 2000 british employees who remain with the same employer and who are not promoted from one wave to the next it is shown that one important measure of well being overall job satisfaction is strongly positively correlated with the change in the worker s pay between waves but is unrelated to the current level of pay empirical tests suggest that a reference dependent satisfaction function where individual well being depends on current pay relative to past pay is more consistent with these regression results than are productivity or agency explanations of increasing wage profiles some evidence is presented of greater job satisfaction effects of pay rises for lower paid less well educated and younger workers these results provide some micro evidence consistent with the theory widespread in social science of habituation individuals may become used to any given level of consumption or income as such they tie in with the finding that a country s well being as measured by the average happiness of its citizens is only weakly correlated with its per capita gnp

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

banking risk and macroeconomic fluctuations abstract this paper develops a model of banking frictions and banking risk as a sort of systemic risk changes in banking risk lead to fluctuations in aggregate economic activity we decompose the macroeconomic effect of a banking risk shock into a pure default effect and a risk aversion effect when risk sharing among investors is imperfect when the shock generates a bank risk spread similar to the peak value during the global financial crisis the overall effect is a decline in employment by 4 66 the default effect leads to a 3 40 employment decline by a within model measure and a 3 51 decline by a between model measure the remaining is attributed to the risk aversion effect a practical implication of our analysis is that by developing financial safety net and improving risk sharing among investors the society can mitigate the adverse macroeconomic effects of banking risk shocks to some extent but cannot eliminate all of them

correlated information and mechanism design in models of asymmetric information possession of private information leads to rents for the possessors this induces mechanism designers to distort away from efficiency the authors show that this is an artifact of the presumption that information is independently distributed rent extraction in a large class of mechanism design games is analyzed and a necessary and sufficient condition for arbitrarily small rents to private information is provided additionally the two person bargaining game is shown to have an efficient solution under first order stochastic dominance and a hazard rate condition similar conditions allow full rent extraction in milgrom weber auctions

the sensitivity of an empirical model of married women s hours of work to economic and statistical assumptions this study undertakes a systematic analysis of several theoretic and statistical assumption s used in many empirical models of female labor supply using a singl e data set psid 1975 labor supply data the author is able to replic ate most of the range of estimated income and substitution effects fo und in previous studies in this field he undertakes extensive specif ication tests and finds that most of this range should be rejected du e to statistical and model misspecifications the two most important assumptions appear to be the tobit assumption used to control for sel f selection into the labor force and exogeneity assumptions on the wi fe s wage rate and her labor market experience copyright 1987 by the econometric society

bank capital requirements business cycle fluctuations and the basel accords a synthesis abstract in order to survey the mechanisms through which the introduction of basel ii bank capital requirements is likely to accentuate the procyclical tendencies of banking this paper brings together the theoretical literature on the bank capital channel of propagation of exogenous shocks and the literature on the regulatory framework of capital requirements under the basel accords we conclude that the theoretical models that revisit the bank capital channel under the new accord generally support the basel ii procyclicality hypothesis and that the magnitude of the procyclical effects essentially depends on i the composition of banks asset portfolios ii the approach adopted by banks to compute their minimum capital requirements iii the nature of the rating system used by banks iv the view adopted concerning how credit risk evolves through time v the capital buffers over the regulatory minimum held by the banking institutions vi the improvements in credit risk management and vii the supervisor and market intervention under basel ii the recent events and instability in financial markets all over the world have led the procyclicality issue to enter the agendas of several political international fora and some measures to mitigate procyclicality are being put forward the bank capital channel literature should now play an important role in evaluating their effectiveness

the demand for variety a household production perspective abstract economists have devoted substantial attention to firms supply of variety but little to consumers demand for variety employing the framework of home production we trace differences in demand to differences in the opportunity costs of activities associated with investments in human capital schooling alters time costs and changes the variety of activities household members choose time budgets from australia israel and west germany show that higher own and spouses incomes raise variety suggesting positive income effects education increases variety independent of income and earnings part of its impact goes beyond a correlation of educational attainment with preferences for variety

auction design with endogenously correlated buyer types abstract this paper studies optimal auction design when the seller can affect the buyers valuations through an unobservable ex ante investment the key insight is that the optimal mechanism may have the seller play a mixed investment strategy so as to create correlation between the buyers otherwise conditionally independent valuations assuming that the seller announces the mechanism before investing the paper establishes conditions on the investment technology so that a mechanism exists which leaves buyers no information rent and leaves the seller indifferent between his investments under these conditions the seller can in fact extract the first best surplus almost fully

managers compensation and misreporting a costly state verification approach i introduction the use of stock options in compensation packages as a way of providing the firm management with the right incentives has been quite popular in the 1990s the favor encountered by options started however to decrease in the past few years the decline in the use of option grants in top executives compensation packages occurred mainly as a reaction to the recent accounting scandals which has prompted the design of alternative stock based compensation schemes e g restricted stock grants or indexed options as reported by hall and murphy 2003 the grant date value of options assigned to all employees of an average standard poor s 500 firm measured in millions of 2002 constant us increased from 22 in 1992 to 238 in 2000 and subsequently decreased to 141 in 2002 although percentages varied from year to year the ceos share of the total grant has fallen from about 7 in the mid 1990s to less than 5 in 2000 2002 1 the decline in the use of options for top management is widely confirmed according to a pearl meyer partners study for the new york times stock option grants that accounted for 52 of the pay of the average ceo of a major company in 2002 were down to an estimated 35 in 2003 a recent watson wyatt report states that the value of new stock option awards granted to ceos at large companies fell by nearly 60 between 2001 and 2003 with the average value of new stock option grants declining from us 10 2 million in 2001 to us 4 2 million in 2003 the decline in options has been softened by the sharp increase in restricted stock grants and other long term incentive award values 2 in this paper we aim to reevaluate the role of stock options as an ingredient of top management compensation packages able to align the interests of managers and shareholders avoiding misreporting of the firm value at the same time 3 in a costly state verification csv model with moral hazard we show that incentive compatible contracts inducing both incentive alignment and truthful revelation of the firm value must entail a strictly convex compensation schedule that is a fixed payment wage when the firm value is sufficiently low and a state contingent claim increasing in the firm value otherwise a simple and commonly observed way to achieve a convex compensation scheme is to design a remuneration including a fixed wage and a call option on the firm equity as we will show such remuneration allows on the one hand to preserve top management incentives providing for a compensation increasing in equity value and on the other hand to reduce the verification costs that must be incurred to avoid misreporting as verification is not needed in the region where the remuneration is fixed 4 options are by no means the only way to achieve a convex compensation however many other schemes having otherwise desirable properties over options do not have the convex shape discussed above for instance combining a fixed wage with restricted stock grants defines a compensation linearly increasing in the firm s equity value which does not allow to reduce misreporting verification costs that always have to be sustained in this case using an incentive compatible compensation scheme fixed wage plus call options we characterize the contract offered by the firm under the assumption of a deterministic and perfect audit technology showing that for any given value of the option package the manager should receive the largest possible number of options at the highest strike price allowing shareholders to reduce the expected verification cost furthermore the strike price of the option turns out to be determined by incentive compatibility i e the option value must be such that the manager is induced to exert the desired level of effort while the magnitude of the fixed wage is defined by individual rationality there are three main policy implications of our analysis

correlated information mechanism design and informational rents abstract cremer and mclean econometrica 56 1988 1247 1258 obtain a sufficient and necessary condition for full surplus extraction in bayesian nash equilibrium the rank condition which mcafee and reny econometrica 60 2 1992 395 421 later generalize for continuous type spaces this paper shows that if the principal does not know how noisy is the agent s signal or equivalently when signals available to an agent can be ranked by blackwell s informativeness and an agent s informativeness is independent of others information the rank condition fails to hold conversely when rank condition fails and informational rents are left to an agent the model can be interpreted as if the principal were uncertain about the informativeness of the agent s signal

intertemporal substitution in labor supply evidence from micro data the sensitivity of the supply of labor to intertemporal variation in the wage is an important issue in macroeconomics the analysis of social security and pensions and the study of life cycle patterns of work this paper explores two approaches to the measurement of intertemporal substitution that have appeared in the literature the first approach is to use consumption to control for wealth and unobserved expectations about future wages in the labor supply equation the second approach is to estimate a first difference equation for hours in which labor supply from the previous period serves as a control for wealth and wage expectations the results indicate that intertemporal substitution elasticity for married men is positive but small

inter industry wage differentials revisited wage volatility and the option value of mobility analysis of data from the psid reveals that idiosyncratic wage volatility varies inversely with inter industry wage differentials and is positively correlated with both returns to industry tenure and rates of inter industry mobility an incomplete markets life cycle model in which inter industry mobility decisions and wage differentials are endogenously determined in equilibrium is then developed and shown to be capable of rationalizing these features of the data in the model the ability of worker to switch industries generates option value that is large enough to offset the standard risk premium that workers demand for exposure to excess wage volatility

optimal use of correlated information in mechanism design when full surplus extraction may be impossible we study the mechanism design problem when the principal can condition the agent s transfers on the realization of ex post signals that are correlated with the agent s types cremer and mclean econometrica 53 1985 345 361 56 1988 1247 1257 mcafee and reny econometrica 60 2 1992 395 421 and riordan and sappington j econ theory 45 1988 189 199 studied situations where the signals are such that full surplus can be extracted from every agent type we study optimal utilization of the signals when there are fewer signals than types and the riordan and sappington conditions do not always hold for some special cases we show the level of surplus that can be extracted and identify the agent types who obtain rent

intertemporal diversification in financial intermediation abstract this paper examines the incentive problem between a bank and depositors or deposit insurer limited liability makes risk shifting lucrative we show how intertemporal diversification of lending decisions i e bank s loan portfolio consists of overlapping long term loans and is thus gradually renewed may solve the incentive problem of risk shifting a new or expanding bank sets a high equity level and acquires depositors confidence subsequently it can allow its equity to depreciate to a permanently lower level depositors can control the bank by monitoring equity and realized credit losses ex post they do not have to monitor bank s lending choices ex ante maturity mismatch illiquidity of long term loans and liquidity of deposits is optimal the analysis can be extended more generally to the borrower lender relationship

fund families as delegated monitors of money managers because a money manager learns more about her skill from her management experience than outsiders can learn from her realized returns she expects inefficiency in future contracts that condition exclusively on realized returns a fund family that learns what the manager learns can reduce this inefficiency cost if the family is large enough the family s incentive is to retain any given manager regardless of her skill but when the family has enough managers it adds value by boosting the credibility of its retentions through the firing of others as the number of managers grows the efficiency loss goes to zero

diversification and competition financial intermediation in a large cournot walras economy abstract an economy with partially diversified imperfectly competitive cournot intermediaries is replicated the cournot walras equilibrium converges to the perfectly competitive equilibrium with no uncertainty despite the convergence the tension between diversification and competition persists when the economy becomes large and is manifested in the rates of convergence of price quantities and per capita welfare to their respective limits to maximize the rate of convergence of per capita welfare resources must be allocated in a particular way that balances the gains from better diversified intermediaries and the gains from more competition in the intermediation sector journal of economic literature classification numbers d43 d61 d89 g10 g21 l10 l16 o16

banking crises and the lender of last resort how crucial is the role of information this article develops a model of bank runs and crises and analyses how the presence of a lender of last resort lolr affects the solvency of the banking system we obtain a one to one mapping from the depositors equilibrium strategy to an optimal contract prevailing in the economy the study finds that the difference between a perfectly informed and an imperfectly informed lolr can be crucial our results indicate that a perfectly informed lolr is a pareto improvement however if the supervisory process of the lolr is subject to noise then the gains from ex post efficiency may be outweighed by ex ante inefficiency induced by moral hazard which is conducive to lower lending rates in the economy

optimal contracts with contingent allocation abstract we study the contractual design problem of a seller that observes an ex post signal correlated with the buyer s valuation and can make the allocation but not payments contingent on it we show that to maximize her profit the seller should offer a menu of contracts whereby the good is transferred to the buyer only if the signal is sufficiently low the welfare implications of these contracts are also discussed

bank and nonbank financial intermediation conglomerates trade credit arrangements and banks are all instances of financial intermediation however these institutions differ significantly in the extent to which the projects financed absorb aggregate intermediary risk in whether or not intermediation is carried out by a financial specialist in the type of projects they fund and in the type of claims they issue to investors the paper develops a simple unified model that both accounts for the continued coexistence of these different forms of intermediation and explains why they differ specific applications to conglomerate firms trade credit and banking are discussed conglomerates trade credit arrangements and banks are all instances of financial intermediation in each case the conglomerate headquarters supplier bank obtains funds by selling financial securities while in turn providing funds in exchange for a claim on project cash flows 1 however in spite of the fundamental similarity between these forms of financial intermediation important differences exist between them in particular

estimates of year to year volatility in earnings and in household incomes from administrative survey and matched data abstract we document trends in the volatility in earnings and household incomes between 1985 and 2005 in three different data sources administrative earnings records the survey of income and program participation sipp matched to administrative earnings records and sipp survey data in all data sources we find a substantial amount of year to year volatility in workers earnings and household incomes in the data sources that contain administrative earnings we find that volatility has been roughly constant and has even declined slightly since the mid 1980s these findings differ from what is found using survey data and what has been reported in previous studies

swimming upstream trends in the gender wage differential in the 1980s using michigan panel study of income dynamics data for 1979 and 1988 we analyze how a falling gender wage gap occurred despite changes in wage structure unfavorable to low wage workers the decrease is traced to gender specific factors which more than counterbalanced changes in measured and unmeasured prices working against women supply shifts net of demand were unfavorable for women generally and hurt high skilled more than middle and low skilled women by analyzing wages we find support for the notion of a gender twist in supply and demand having its largest negative effect on high skilled women

does it matter who responded to the survey trends in the u s gender earnings gap revisited studies have shown a decreasing trend in the u s gender earnings gap since the 1980s the authors work with a framework established by blau and kahn 1997 jole 2006 ilrr who used the michigan panel of income dynamics psid to decompose that gap into observable and unobservable components in order to determine which contributing factors are gender specific and which can be attributed to the wage structure they extend the blau and kahn framework to consider measurement error due to the use of proxy representative respondents of the survey s earnings variable first they find a trend toward more females in the gender composition of the household respondents and second they estimate the impact of that change on blau and kahn s decomposition they determine that some of the changes in the gender earnings gap could actually be attributed to whether the surverys were self or proxy responded that is the actual reduction in the gender pay gap may be smaller than what the estimates without taking into account the measurement error might indicate the authors suggest the need for a careful validation study to ascertain the extent of the spurious measurement error effects

information constrained insurance the revelation principle extended abstract private information induced incentive constraints can cause allocations to diverge from full information optimal allocations often in the direction of limited insurance but can bring unanticipated anomalies related plausible contract exclusion restrictions can be damaging in welfare terms more generally private information optimal allocations can be sensitive to the information structure suggesting that the latter be specified with an eye toward realism as well as tractability in an effort to make tractability less of a constraint the paper shows how two apparently difficult information structures a costly state verification environment and a multiperiod multilateral private information environment can be handled theoretically by revelation principle methods the paper also shows how solutions can be generated numerically

correlated default and financial intermediation financial intermediation naturally arises when knowledge about the aggregate state is valuable for managing investments and lenders cannot easily observe the aggregate state i show this using a costly enforcement model in which lenders need ex post incentives to enforce payments from defaulted loans and borrowers payoffs are correlated when projects have correlated outcomes learning the state of one project via enforcement provides information about the states of other projects a large correlated portfolio provides ex post incentives for enforcement as a result intermediation dominates direct lending intermediaries are financed with risk free deposits earn positive profits and hold systemic default risk

contractual design with correlated information under limited liability we examine contractual design in a principal agent model under two forms of limited liability nonnegative constraints on the transfer payments to and the profits of the agent we show that when limited liability is a binding constraint the principal cannot implement the first best solution and the agent earns rents from private information limited liability is a binding constraint in the nonnegative transfers model only when a signal is insufficiently responsible to type inelastic further as the production rule and profits are continuous in the type elasticity of the signal density function the level of the inefficiency is less than that which obtains with no signal if a signal is sufficiently responsive to type elastic in this environment then the principal can implement the first best allocation and the value of the agent s private information is zero we show that limited liability will always be a binding constraint in the nonnegative ex post profits model regardless of the information content of the signal the production rule and welfare are increasing in the informativeness of the signal

full extraction of the surplus in bayesian and dominant strategy auctions we consider auctions for a single indivisible object in the case where the bidders have information about each other which is not available to the seller we show that the seller can use this information to his own benefit and we completely characterize the environ ments in which a well chosen auction gives him the same expected payoff as that obtainable were he able to sell the object with full information about each bidder s willingness to pay we provide this characterization for auctions in which the bidders have dominant strate gies and for those where the relevant equilibrium concept is bayesian nash in both set ups the existence of these auctions hinges on the possibility of constructing lotteries with the correct properties we consider the situation in which an agent the seller possesses one indivisible unit of a good to which he attaches no value but the good has value to a number of potential buyers and its transfer to one of them would increase social welfare in particular the transfer to the buyer with the highest valuation maximizes social welfare in this paper we completely characterize environments in which the seller can design an auction that will enable him to capture for himself the full increase in social welfare induced by the transfer of the good to the bidder with the highest willingness to pay if the seller had full information about the reservation prices of potential buyers his optimal selling strategy would be very simple he would announce a price equal or very close to the highest reservation value the optimal strategy for the bidder with the highest evaluation would be to accept the offer note that we are treating a situation in which the seller can commit himself to a price as a result of the exchange the utility of the seller increases by the full amount of the increase in social welfare and he has been able to fully extract the surplus in many circumstances however a seller has only imperfect knowledge of the buyers willingnesses to pay in this case he must find some mechanism or auction which will enable him to maximize his benefit from the sale of the object the auction literature starts with this observation and shows how the seller can by an astute choice of auction extract the largest possible fraction of the surplus in general the literature has shown that this proportion is strictly less than one in some circumstances the bidders will have information about each other which is not available to the seller for instance in auctions for petroleum drilling rights bidders know the results of geological tests which they have

does the confucius institute impact international travel to china a panel data analysis this article examines the impact of confucius institutes on inbound travel to china we estimate a panel gravity model of inbound tourism flows to china between 2004 and 2010 we use a poisson pseudo maximum likelihood estimator to control for heteroscedasticity endemic in gravity models santos silva and tenreyro 2006 we find that the presence of confucius institute s in the source country increases overall tourism in general and business and worker tourists in particular

curbing agency problems in the procurement process by protest oversight we study a model in which a potential bidder in a government procurement may challenge its exclusion from the procurement before a quasi judicial board in the case of a sole source procurement the excluded vendor does not know whether the decision was justified in terms of expected surplus or alternatively was due to an agency problem we explain the occurrence of i equilibrium protests ii deterrence of inefficient sole sourcing iii overdeterrence the choice of a competitive procurement when sole source would be appropriate iv buyoff settlements which preserve inappropriate sole source procurement and v fedmail settlements which accompany appropriate sole source procurements our normative analysis addresses recent legislative initiatives to reform the protest process

costly intermediation and consumption smoothing i introduction financial intermediaries play an essential role in economies transferring funds from agents who do not wish to use them immediately to those who do improving the allocation of resources with consequences for efficiency and welfare as hahn 1971 pointed out financial intermediation is not a costless activity it uses real resources such as labor and capital and governments often tax such activity this generates a wedge between the deposit and borrowing rates and consequently implies that households face different interest rates depending on whether they are savers or borrowers we construct a neoclassical growth model with costly intermediation in order to analyze two positive questions 1 what are the quantitative welfare implications of intermediation costs 2 are the welfare effects evenly distributed across individuals with different levels of wealth individuals in our neoclassical growth model face uninsurable idiosyncratic shocks to labor productivity an endogenous borrowing limit and costly intermediation households smooth consumption over time by making deposits at a financial intermediary in good times and running down credit balances or getting loans in bad times intermediation costs generate a wedge between loan and deposit rates with interest payments on loans higher than the return on deposits we assume that financial institutions provide all the intermediation and therefore abstract from direct borrowing and lending between households 1 as in martins da rocha and vailakis 2010 the intermediary has a labor intensive technology maximizes profit is remunerated by the marginal product of labor and takes regulation as given 2 see hahn 1971 diaz gimenez et al 1992 and mehra piguillem and prescott 2011 for similar approaches our goal is to analyze the effects of intermediation costs on agents intertemporal ability to smooth consumption and insure against labor income shocks as a consequence we focus on unsecured consumption loans such as personal loans and credit card debt and abstract from the effects of intermediation costs on entrepreneurship and productivity unsecured consumption loans while only a subset of the total credit market allow us to construct a direct measure of intermediation costs for our quantitative exercise in addition the fraction of unsecured credit over all credit in the data provides another dimension on which we can assess the performance of our model we use our model to measure key statistics of the u s economy including intermediation costs and perform counterfactual experiments reducing intermediation costs leads to two effects first for a given interest rate decreasing borrowing costs expands net borrowers consumption possibility frontiers and even current savers may benefit with positive probability they may need to borrow to smooth consumption in the future due to bad labor productivity shocks second there is an indirect effect lower intermediation costs imply an increase in the demand for loans which raises the interest rate this offsets part of the decrease in borrowing costs and also increases interest income improving savers welfare determining the net impact of these effects requires a quantitative analysis we interpret a reduction in intermediation costs as an improvement in the financial intermediation technology or a reduction in taxes on financial transactions the welfare analysis focuses on stationary equilibria and transitional dynamics the transition is slow and abstracting from it can lead to misleading welfare calculations also mobility in wealth means that comparing for instance the agent with median wealth in two stationary equilibria may not involve the same household we find three main quantitative results first intermediation costs have a large effect on welfare for the u s economy the average aggregate welfare gain of all agents from reducing intermediation costs from 3

response error and the union wage differential broad variation in estimates of the union wage gap has perplexed labor economists one specification error that is consistent with the observed variation is measurement error in reported union status this article applies results of bollinger 1996 to estimate a range for the union wage gap both a cross sectional model and a fixed effects model are estimated in order for the true coefficient in the fixed effects model to be bounded below the true coefficient in the cross sectional estimates measurement error would have to be less than 0 8 the difference between the fixed effects estimates and the cross sectional estimates is primarily due to measurement error rather than to unobserved heterogeneity an examination of differences in returns to union membership by industry occupation and educational level shows that these differences are largely robust to measurement error many of these differences would be found even if error rates were as high as 10 or more an array of empirical estimates for the union wage differential has resulted from the variety of approaches to estimation lewis 1986 reviews the vast literature that attempts to estimate the union wage effect two extremes are represented by mincer 1983 who estimates the wage differential to be 0 01 while farber 1990 reports an estimate of 0 26 clearly specification error is the root cause of these differences the literature has focused upon unobserved heterogeneity in worker status as the main specification error frequently estimation approaches based on within estimators applied to fixed effects models using panel data are used to account for the possibility of unobserved heterogeneity as would be predicted by unobserved heterogeneity lewis 1986 p 94 reports that the panel wage gap estimates surveyed in the chapter on the average are roughly half as large as the corresponding cross section estimates this is often taken as evidence for bias in the cross section estimates due to the presence of fixed effects however these results are also consistent with measurement error in the report of the union status indeed chapter 5 in lewis 1986 focuses upon this possibility the difference might be the result of union status measurement error p 94 this article applies results of bollinger 1996 to compare the effect of measurement error on cross sectional estimates and panel estimates of the union wage differential bollinger 1996 establishes bounds for the slope coefficients of a linear regression when a binary regressor is thought to have measurement error the results here do not identify a point estimate of the union wage differential they relax many of the assumptions that are required to obtain the point estimates these bounds serve the purpose of sensitivity analysis as called for by leamer 1985