individual heterogeneity and cultural attitudes in credence goods provision abstract i study the heterogeneity of credence goods provision in taxi drivers taking detours in new york city first i document that there is significant detouring on average by drivers second there is significant heterogeneity in detouring across individuals yet each individual s propensity to take detours is stable drivers who detour almost always detour while those who do not detour almost never do drivers who take longer detours on each trip also take such trips more often third cultural attitudes plausibly explain some of this heterogeneity in behavior across individuals

quality and accountability in health care delivery audit study evidence from primary care in india we present unique audit study evidence on health care quality in rural india and find that most private providers lacked medical qualifications but completed more checklist items than public providers and recommended correct treatments equally often among doctors with public and private practices all quality metrics were higher in their private clinics market prices are positively correlated with checklist completion and correct treatment but also with unnecessary treatments however public sector salaries are uncorrelated with quality a simple model helps interpret our findings where public sector effort is low the benefits of higher diagnostic effort among private providers may outweigh costs of potential overtreatment

reference dependent preferences and labor supply the case of new york city taxi drivers i develop a model of daily labor supply where preferences are dependent on a reference daily income level and i apply this model to data on the labor supply of new york city taxi drivers i find that there may be a reference level of income on a given day that affects labor supply however there is substantial day to day variation in a given driver s reference level and most shifts end before reaching the reference income level this pattern is inconsistent with an important role for reference dependent preferences

internal capital markets and the competition for corporate resources this article examines the role of corporate headquarters in allocating scarce resources to competing projects in an internal capital market unlike a bank headquarters has control rights that enable it to engage in winner picking the practice of actively shifting funds from one project to another by doing a good job in the winner picking dimension headquarters can create value even when it cannot help at all to relax overall firm wide credit constraints the model implies that internal capital markets may sometimes function more efficiently when headquarters oversees a small and focused set of projects this article analyzes the process by which internal capital markets channel limited resources to different uses inside a company in so doing it seeks to address two related sets of questions first what is the fundamental economic rationale for creating an internal capital market that is under what circumstances can it make sense to combine several technologically distinct projects under one roof and have them seek funding from corporate headquarters as opposed to setting them up as stand alone companies that each raise external financing on their own second given this rationale what is the optimal size and scope of an internal capital market should headquarters be involved in funding a large number of projects or just a few and should these projects be unrelated to one another or in similar lines of business the answers to both sets of questions flow from the insight that in a credit constrained setting where not all positive npv projects can be financed headquarters can create value by actively reallocating scarce funds across projects for example the cash flow generated by one division s activities may be taken and spent on investment in another division where the returns are higher or alternatively one division s assets may be used as collateral to raise financing that is then diverted to the other division simply put individual projects must compete for the scarce funds and headquarters job is to pick the winners and losers in this competition

safety first criteria and their measures of risk a cardinal measure of risk which represents the safety first criteria is defined the functional form of that measure is determined for a subgroup of risk averse agents that do not have money illusion an empirical illustration of possible applications of that measure shows a method of identifying the subgroup of agents for which a given alternative dominates the others in a group of risky alternatives when none of these alternatives dominates any of the others according to the first and the second criteria of stochastic dominance

competitive equilibrium in the credit market under asymmetric information abstract we study a competitive credit market equilibrium in which all agents are risk neutral and lenders a priori unaware of borrowers default probabilities admissible credit contracts are characterized by the credit granting probability the loan quantity the loan interest rate and the collateral required the principal result is that in equilibrium lower risk borrowers pay higher interest rates than higher risk borrowers moreover the lower risk borrowers get more credit in equilibrium than they would with full information no credit is rationed and collateral requirements are higher for the lower risk borrowers

the impact of group membership on cooperation and norm enforcement evidence using random assignment to real social groups due to incomplete contracts efficiency of an organization depends on willingness of individuals to take non selfish actions such as cooperating when there is no incentive to do so or punishing inefficient actions by others organizations also constitute a social boundary or group we investigate whether this social aspect of organizations has an important benefit fostering unselfish cooperation and norm enforcement within the group but also whether there is a dark side in the form of hostility between groups our experiment provides the first evidence free from the confounding effect of self selection into groups individuals are randomly assigned to different platoons during a four week period of officer training in the swiss army we conduct choice experiments simultaneous prisoner s dilemma games with and without third party punishment in week three random assignment significantly increases willingness to cooperate with fellow platoon members assignment does not lead to hostility in the sense of vindictive punishment of outsiders but does affect norm enforcement enhancing willingness to enforce a norm of cooperation towards fellow platoon members this suggests that the social aspect of organizations motivates efficient behavior even when ordinary incentives fail and helps to explain practices designed to foster social ties or group identification within an organization this abstract was borrowed from another version of this item

the incidence of secured debt evidence from the small business community critics claim that theories of secured debt fail to explain the widespread use of collateral because they incorrectly predict when a loan will be secured this paper provides the first rigorous statistical test of the transaction cost models of secured debt data from two samples of over 1 000 small business loans generally support the common set of predictions of these theories the incidence of secured debt is positively related to probability of default loan size loan maturity and marketability of assets changes in the legal and economic environment also alter firms decisions regarding the pledging of collateral

chance constrained financing as a response to financial risk the results of a recent survey suggest that many decision makers view financial risk in a safety first context imposing safety first chance constraints on potential financial ratios or flows can be difficult with traditional methods this is particularly true with financial ratios when both the numerator and denominator are random and are affected by endogenous decisions a model and numerical example are presented which enforce probabilistic or chance constraints upon potential debt asset ratios in a multiperiod linear program the model can be easily modified to probabilistically constrain alternative financial performance measures such as current ratios working ratios or cash flows

management ownership and market valuation an empirical analysis we investigate the relationship between management ownership and market valuation of the firm as measured by tobin s q in a 1980 cross section of 371 fortune 500 firms we find evidence of a significant nonmonotonic relationship tobin s q first increases then declines and finally rises slightly as ownership by the board of directors rises for older firms there is evidence that q is lower when the firm is run by a member of the founding family than when it is run by an officer unrelated to the founder

agricultural bank portfolio adjustments to risk an asset allocation model is developed in which the bank s problem is one of selecting the mix of loan assets and securities that will generate desired levels of portfolio return and risk a reduced form econometric model is derived and historical rural bank asset allocations are predicted asset equations show consistency with the framework of equilibrium adjustments under uncertainty higher expected default rates on variable rate loans result in significant joint effects which alter a bank s optimal allocation

equilibrium loan pricing under the bank client relationship abstract we determine the loan interest rate policy of a lender who is better informed about a client than other potential lenders the informational advantage possessed by the informed lender derives from the durability of information acquired as a result of an extant relationship given heterogeneous potential loan rate offers to the client by competitive lenders and client search costs the incumbent lender s policy of loan interest rate offers is examined we show that the optimal loan rate will exceed the incumbent lender s cost of funds and will exceed the average offer of competing lenders the potential lenders will offer loan rates that are exceeded by their cost of funds implying immediate losses in order to attract the client and to thereby earn expected profits in the future finally we show that the expected remaining duration of a lender client relationship is decreasing in the existing length of the relationship thus clients that have been with a particular lender longer will be more likely to leave and establish a relationship with another lender

efficient informal trade theory and experimental evidence from the cape town taxi market informal sectors in developing countries are often thought of as responses to rigid and cumbersome market regulations in this paper i study informal trade as a first best outcome in the model i propose rigid regulations can be necessary to achieve efficiency even though they are always sidestepped the key assumption is that the regulations define the trading parties fall back position in case the informal bargaining process breaks down i set up a field experiment to test the model s mechanisms in the cape town market for metered taxis consistent with the model i find that sidestepping the regulations increase cost efficiency taxis take the shortest route the price is however unaffected suggesting informal bargaining leads to a pareto improvement

the economics of credence goods an experiment on the role of liability verifiability reputation and competition credence goods markets are characterized by asymmetric information between sellers and consumers that may give rise to inefficiencies such as under and overtreatment or market breakdown we study in a large experiment with 936 participants the determinants for efficiency in credence goods markets while theory predicts that liability or verifiability yield efficiency we find that liability has a crucial but verifiability at best a minor allowing sellers to build up reputation has little influence as predicted seller competition drives down prices and yields maximal trade but does not lead to higher efficiency as long as liability is violated jel d12 d82

do firms get the financing they want measuring credit rationing experienced by small businesses in the u s this paper measures the extent to which small businesses in the united states in the late 1980s were able to access the external credit finance they desired we argue that a comprehensive definition of credit rationing must account for both a creditworthy firms that apply for and are denied financing and b creditworthy firms that decide not to apply for desired external financing given expectations about how long it may take to obtain financing and the evolution of investment opportunities

availability of credit to family businesses the paper provides evidence that family own ership is associated with greater availability of credit this may be because family owned businesses are seen by lenders as having fewer moral hazard problems than non family owned businesses one reason for this could be that family owned businesses by definition have a controlling share in the equity of the firm other factors considered important by lenders may be the managerial characteristics and the relatively conservative investment choices of family owned businesses in spite of these advantages family ownership is not associated with a reduction in premiums on the loans the research also highlights differences between outside equity holders and debt holders in their decision to invest in a firm equity holders are known to prefer separation of ownership and control and the possibility of takeovers as this could increase the value of the firm debt holders on the other hand prefer arrangements that ensure continuity and stability family business small business credit rationing

on doctors mechanics and computer specialists the economics of credence goods most of us need the services of an expert when our apartment s heating or our washing machine breaks down or when our car starts to make strange noises and for most of us commissioning an expert to solve the problem causes concern this concern does not disappear even after repair and payment of the bill on the contrary one worries about paying for a service that was not provided or receiving some unnecessary treatment this article studies the economics underlying these worries under which conditions do experts have an incentive to exploit the informational problems associated with markets for diagnosis and treatment what types of fraud exist what are the methods and institutions for dealing with these informational problems under which conditions does the market provide incentives to deter fraudulent behavior and what happens if all or some of those conditions are violated

moral hazard and secured lending in an infinitely repeated credit market game we analyze repeated moral hazard with discounting in a competitive credit market with risk neutrality even without learning or risk aversion long term bank borrower relationships are welfare enhancing the main result is that the borrower obtains an infinite sequence of unsecured loans at below spot market cost following the first good project realization this contract produces first best action choices prior to this stage the borrower gets secured loans with above market borrowing cost the optimal contract thus displays a selective memory feature taking only one of two forms at any given point in time depending on prior history we consider an infinitely repeated bank borrower relationship with moral hazard and universal risk neutrality and explore the ramifications of credit contract duration when the two well known benefits of long term contracting learning and improved risk sharing are absent our objectives are twofold the first is to analyze an infinitely repeated game with discounting in a credit market context we thus relate the theory of repeated games to financial intermediation theory particularly to issues of moral hazard and collateral related distortions the second objective is to understand noteworthy stylized facts of credit markets such as durability in credit relationships lower borrowing costs for established borrowers and unsecured loans for established borrowers versus secured loans for newer borrowers while these practices may be partly due to learning we show that learning is not essential to rationalize them even if information decays rapidly and banks learn nothing about borrowers through time these aspects of credit contracting arise in a repeated game context our main results are as follows first despite universal risk neutrality and the absence of learning a durable bank relationship benefits the borrower 2 the intuition is that the long term contracting permitted by a durable relationship enables the bank to efficiently tax and subsidize the borrower through time to reduce the use of costly collateral second the average welfare loss due to moral hazard per period is positive even as the time horizon goes to infinity third the optimal infinite horizon contract has the striking property that following the period

using the semivariance to estimate safety first rules tion an example of a safety first rule is choose the fertilization level to maximize income subject to the constraint that there is a 5 or less probability of not being able to pay for the fertilizer from crop revenues de janvry safety first rules are used by de janvry nakajima and roumasset to analyze production decisions of low income farmers in developing countries wright provides an application to the nineteenth century cotton industry telser applies it to hedging and boussard and petit use a safety first model to explain cropping patterns for a theoretical review of various safety first rules see pyle and turnovsky there are at least three methods to estimate the probability mass in the lower part of the revenue distribution although the best method is to use the observed frequency itself often there are insufficient observations in the tails a second

what drives taxi drivers a field experiment on fraud in a market for credence goods credence goods are characterized by informational a symmetries between sellers and consumers that invite fraudulent behavior by seller s this paper presents the results of a natural field experiment on taxi rides in athens g reece set up to measure different types of fraud and to examine the influence of passengers p resumed information and income on the extent of fraud results reveal that taxi drivers c heat passengers in systematic ways passengers with inferior information about optimal routes are taken on longer detours while asymmetric information on the local tariff system l eads to manipulated bills higher income seems to lead to more fraud

covenants and collateral as incentives to monitor although monitoring borrowers is thought to be a major function of financial institutions the presence of other claimants reduces an institutional lender s incentives to do this thus loan contracts must be structured to enhance the lender s incentives to monitor covenants make a loan s effective maturity and the ability to collateralize makes a loan s effective priority contingent on monitoring by the lender thus both covenants and collateral can be motivated as contractual devices that increase a lender s incentive to monitor these results are consistent with a number of stylized facts about the use of covenants and collateral in institutional lending modern finance theory suggests that financial intermediaries such as commercial banks insurance companies and finance companies monitor and control their borrowers on behalf of other investors 1 this article investigates how the loans made by these institutions can be structured so as to best enhance the institutions role as delegated monitors covenants and collateral are common features of loans made by financial institutions but these features are somewhat difficult to justify consider loan covenants clauses in a loan contract that require the borrower to take or refrain from various actions berlin and mester 1992 magee and sridhar 1994 and park 1994 show that by giving institutions the right to renegotiate or call loans when covenants are violated covenants serve as tripwires that enhance the flexibility and efficiency of financial contracting also as documented in smith and warner 1979 control rights from covenants reduce borrower adverse selection or moral hazard nevertheless by allowing institutions to demand repayment based on any information contractible or not

secured lending and default risk equilibrium analysis policy implications and empirical results the authors examine collateral in a competitive equilibrium in which borrowers can choose hidden actions and may additionally possess hidden knowledge apart from explaining the widespread use of collateral despite deadweight costs they show that an increase in the riskless interest rate causes equilibrium loan rates and collateral requirements to increase a decline in the deadweight costs of collateral reduces the equilibrium collateral use under moral hazard and an increase in the borrower s project size reduces equilibrium collateral use under moral hazard some of these predictions are tested and found to be supported by the data copyright 1991 by royal economic society

trade credit and credit rationing asymmetric information between banks and firms can preclude financing of valuable projects trade credit alleviates this problem by incorporating in the lending relation the private information held by suppliers about their customers incentive compatibility conditions prevent collusion between two of the agents e g the buyer and the seller against the third e g the bank consistent with the empirical findings of petersen and rajan 1995 firms without relationships with banks resort more to trade credit and sellers with greater ability to generate cash lows provide more trade credit finally small firms react to monetary contractions by using trade credit consistent with the empirical results of nilsen 1994 article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

do binary collateral outcome variables proxy collateral levels the case of collateral from start ups and existing smes this paper is designed to test whether the factors which affect the decision to collateralise business loans affect the level of collateralisation in the same manner if the level of collateralisation does matter the provision of collateral becomes more than a goodwill gesture to placate banks and more a device to ameliorate the risk of lending we use a thitherto unseen dataset from a u k retail bank comprising 4 618 transfers and start ups ts group who applied for business loans and overdrafts between january 1998 and january 2000 the control sample comprised 9 596 existing businesses from the same period our unique dataset permits an analysis of this kind for the first time because it contains a continuous variable for collateral unlike previous studies existing businesses exhibit a higher frequency binary outcome and level tobit outcome of collateral than the businesses who are start ups or have transferred from another bank only when distortions within the data are not controlled for these distortions negate the value of binary collateral variables factors such as business type and loan purpose are useful at explaining the likelihood of a borrower having his loan collateralised and the level of collateralisation for borrowers who provided collateral or not

gender effects in the credence goods market an experimental study abstract in this paper we offer further explanation for differences in earnings across genders we investigate difference in preferences in payment systems for credence goods we find that women were no less likely to select variable rate payment schemes as compensation for providing credence goods than men however overall earnings remained higher for men than for women disaggregating behavior by type of payment and gender reveals that women who chose fee for service provided significantly fewer units of services paid for than men who chose fee for service this difference accounts for the lower overall earnings for women in our experiments

gender differences in bargaining outcomes a field experiment on discrimination abstract relying on a commonly used fixed offer bargaining script we examine gender differences in bargaining outcomes in a highly competitive and frequently used market the taxi market in lima peru our bargaining script secures that only the seller can change prices and terminate negotiations thus we are able to examine differences in the seller s entire path of negotiation and in the reservation price at which they are willing to trade we find that male and female passengers who use the same bargaining script are not treated equally men face higher initial prices final prices and rejection rates these differences are consistent with male drivers being more reluctant to give in to demanding negotiations by male passengers and with male passengers being perceived as having high valuations to identify whether taste based or statistical discrimination drives the inferior treatment of men we conduct an experiment where passengers send a signal on valuation before negotiating the signal eliminates gender differences and the response is shown only to be consistent with statistical discrimination thus in the limiting case of a highly competitive market with experienced traders we do not find evidence of taste based discrimination the differential observed is however consistent with statistical discrimination

second degree moral hazard in a real world credence goods market in a field experiment in the market for taxi rides we investigate a phenomenon called second degree moral hazard the tendency of the supply side in a market to react to anticipated moral hazard on the demand side by increasing the extent or price of the service our moral hazard manipulation consists of some passengers explicitly stating that their expenses will be reimbursed this has a strong positive effect on the likelihood and the amount of overcharging and consequently increases consumer expenditure our results suggest that second degree moral hazard may have a severe impact on the provision of credence goods

new york city cab drivers labor supply revisited reference dependent preferences with rational expectations targets for hours and income this paper reconsiders whether cabdrivers labor supply decisions reflect reference dependent preferences following botond koszegi and matthew rabin 2006 we construct a model with targets for hours as well as income both determined by rational expectations estimating using henry s farber s 2005 2008 data we show that the reference dependent model can reconcile his 2005 finding that drivers stopping probabilities are significantly related to hours but not income with the negative wage elasticity of hours found by colin camerer et al 1997 and farber 2005 2008 the model yields sensible estimates that avoid farber s 2008 criticism that drivers income targets are too unstable to allow a useful reference dependent model of labor supply

collateral and rationing sorting equilibria in monopolistic and competitive credit markets the authors examine how market structure affects credit allocation under universal risk neutrality and asymmetric information about borrowers they consider both monopolistic and perf ectly competitive banks and examine the role of collateral in each ca se when a bank is a monopolist on the loan side they find collatera l is never used and asymmetric information results in reduced bank le nding under perfect competition collateral has a useful sorting rol e moreover rationing is possible even with collateral availability and perfectly elastic deposit supply in this setting the authors sh ow co signers are valuable social welfare properties of the monopoly and competitive equilibria are also compared copyright 1987 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

is tomorrow another day the labor supply of new york city cabdrivers the labor supply of taxi drivers is consistent with the existence of intertemporal substitution my analysis of the stopping behavior of new york city cabdrivers shows that daily income effects are small and that the decision to stop work at a particular point on a given day is primarily related to cumulative daily hours to that point this is in contrast to the analysis of camerer et al who find that the daily wage elasticity of labor supply of new york city cabdrivers is substantially negative implying large daily income effects this difference in findings is due to important differences in empirical methods and to problems with the conception and measurement of the daily wage rate used by camerer et al

asymmetry and ambiguity in newsvendor models a basic assumption of the classical newsvendor model is that the probability distribution of the random demand is known but in most realistic settings only partial distribution information is available or reliably estimated the distributionally robust newsvendor model is often used in this case where the worst case expected profit is maximized over the set of distributions satisfying the known information which is usually the mean and covariance of demands however covariance does not capture information on asymmetry of the demand distribution in this paper we introduce a measure of distribution asymmetry using second order partitioned statistics semivariance is a special case with a single partition of the univariate demand with mean variance and semivariance information we show that a three point distribution achieves the worst case expected profit and derive a closed form expression for the distributionally robust order quantity for multivariate demand the distributionally robust problem

the relationship between u k banks and their small business customers much emphasis is placed upon the benefits to both parties of a good relationship between banks and their small business customers having explained the significance of smes in the u k economy the papers goes on to consider briefly some of the arguments which underpin the rationale for these relationships the roles of information and communication are discussed and the poor co ordination between banks smes and their accountants is highlighted evidence from over 6 000 small businesses in response to the forum of private business survey in 1994 is then presented this demonstrates the strong positive association between more participative relationships and more positive perceptions of their banks by firms finally it is suggested that a virtuous circle of information and communication could be established if the parties cooperate in a systematic process of risk assessment

are internal capital markets efficient using segment information from compustat we find that the investment by a segment of a diversified firm depends on the cash flow of the firm s other segments but significantly less than it depends on its own cash flow the investment by segments of highly diversified firms is less sensitive to their cash flow than the investment of comparable single segment firms the sensitivity of a segment s investment to the cash flow of other segments does not depend on whether its investment opportunities are better than those of the firm s other segments

internal versus external capital markets this paper presents a framework for analyzing the costs and benefits of internal versus external capital allocation we focus pritnarily on comparing an internal capital market with bank lending while both represent centralized forms of financing in the former case the financing is owner provided while in the latter ceise it is not we argue that the ownership aspect of internal capital allocation has three important consequences 1 it leads to more monitoring than bank lending 2 it reduces managers entrepreneurial incentives and 3 it makes it easier to efficiently redeploy the assets of projects that are performing poorly under existing management

how social preferences shape incentives in experimental markets for credence goods credence goods markets suffer from inefficiencies caused by superior information of sellers about the surplus maximising quality while standard theory predicts that equal mark up prices solve the credence goods problem if customers can verify the quality received experimental evidence indicates the opposite we identify a lack of robustness with respect to heterogeneity in social preferences as a possible cause of this and conduct new experiments that allow for parsimonious identification of sellers social preference types our results confirm the assumed heterogeneity in social preferences and provide strong support for our explanation of the failure of verifiability to increase efficiency

labor supply of new york city cabdrivers one day at a time life cycle models of labor supply predict a positive relationship between hours supplied and transitory changes in wages because such changes have virtually no effect on life cycle wealth previous attempts to test this hypothesis empirically with time series data have not been supportive estimated elasticities are typically negative or nonsignificant such analyses however are vulnerable to measurement error and other estimation problems we use data on daily observations of wages and hours for new york city cab drivers to estimate the supply response to transitory fluctuations in wages cab drivers decide daily how many hours to supply and face wages that are positively correlated within days but largely uncorrelated between days using these data our central finding is that wage elasticities are persistently negative from 5 to 1 in three different samples even after correcting for measurement error using instrumental variables these negative wage elasticities challenge the notion that cab drivers trade off labor and leisure at different points in time and question the empirical adequacy of life cycle formulations of labor supply

a theory of discouraged borrowers this paper examines the implications for the sme financing market of application costs that vary between firms and of imperfect screening of applicants by banks under these conditions discouraged borrowers can exist these are good borrowers who do not apply for a bank loan because they feel they will be rejected the paper shows that under a range of assumptions the scale of discouragement in an economy depends upon the screening error of the banks the scale of application costs and the extent to which the bank interest rate differs from that charged by the moneylender discouragement is shown to be at a maximum where there is some but not perfect information

business collateral and personal commitments in sme lending abstract using a database of sme credit approvals from a large belgian bank this paper extends the empirical evidence on the determinants of collateral by examining the determinants of business collateral simultaneously with the determinants of personal collateral commitments our results suggest that firm and relationship characteristics seem to be more important determinants of collateral commitment protection than loan and lender characteristics family firms are more likely to offer a higher degree of collateral commitment protection while introducing competition between banks decreases this likelihood the collateral requirement decreases in the length of the bank borrower relationship furthermore trade credit seems to have a signalling effect the lazy banks hypothesis was not supported our results suggest that beside risk arguments also commercial arguments help explain the pledging of collateral using a continuation ratio logit model we discover several differences in the determinants of the collateralisation decision and the determinants of the type of collateral commitments

car mechanics in the lab investigating the behavior of real experts on experimental markets for credence goods credence goods such as car repairs or medical services are characterized by severe informational asymmetries between sellers and consumers leading to fraud in the form of provision of insufficient service undertreatment provision of unnecessary service overtreatment and charging too much for a given service overcharging recent experimental research involving a standard student subject pool has examined the influence of informational and market conditions on the type and level of fraud we investigate whether professional car mechanics as real sellers of credence goods react in the same way to changes in informational and institutional constraints while we find qualitatively similar effects in the fraud dimensions of undertreatment and overcharging for both subject pools car mechanics are significantly more prone to supplying unnecessary services in all conditions which could be a result of decision heuristics they learned in their professional training