regulatory discretion and the unofficial economy johnson kaufmann and shleifer 1997 find that the share of the unofficial economy in gdp is determined by the extent of control rights held by politicians and bureaucrats in post communist economies exploring in more detail the role of bribes and using a broader data set from the oecd latin america and transition economies we find that the unofficial economy accounts for a larger share of gdp when there is more corruption and when the rule of law is weaker while these findings are consistent with the earlier results for transition economies in the larger country sample we find it is not necessarily the case that more regulation or higher taxes directly increases the size of the unofficial economy the problem appears to be not regulation or taxation per se but whether the state administrative system can operate without corruption a high level of regulatory discretion helps create the potential for corruption and drive firms into the unofficial economy

financial development and financing constraints international evidence from the structural investment model this article provides evidence that financial development impacts growth by reducing financing constraints that would otherwise distort efficient allocation of investment the financing constraints are inferred from the investment euler equation by assuming that the firm s stochastic discount factor is a function of the firm s financial position specifically the stock of liquid assets the magnitude of the changes in the cost of capital is twice as large in a country with a low level of financial development as in a country with an average level of financial development the size effect business cycles and legal environment effects are also considered copyright 2003 oxford university press

industry growth and capital allocation does having a market or bank based system matter are market based or bank based financial systems better at financing the expansion of industries that depend heavily on external finance facilitating the formation of new establishments and improving the efficiency of capital allocation across industries we find evidence for neither the market based nor the bank based hypothesis while legal system efficiency and overall financial development boost industry growth new establishment formation and efficient capital allocation having a bank based or market based system per se does not seem to matter much

asymmetric information and loan contracts in a neoclassical growth model the authors consider a neoclassical growth model with risky investment projects in which a borrower s an investor s risk type is private information their innovation is to determine jointly the equilibrium loan contract and the economy s growth path and the steady state capital stock the authors show that as capital accumulates credit rationing may fall as an increasing number of lenders choose to acquire costly information to separate borrowers as to type this transition from credit rationing to screening in turn results in a higher capital accumulation path and a higher steady state capital stock they also investigate the effects of a decrease in the cost of information on the economy s capital accumulation path and steady state capital stock the authors show that the cost of information must fall below a threshold level before the economy moves from a credit rationing equilibrium to a screening one thus a threshold must be crossed before the steady state capital stock is increased with a decrease in the cost of information copyright 1997 by ohio state university press

endogenous communication among lenders and entrepreneurial incentives if banks have an informational monopoly about their clients borrowers may curtail their effort level for fear of being exploited via high interest rates in the future banks can correct this incentive problem by committing to share private information with other lenders the fiercer competition triggered by information sharing lowers future interest rates and future profits of banks but provided banks retain an initial informational advantage their current profits are raised by the borrowers higher effort this trade off determines the banks willingness to share information their decision affects credit market competition interest rates volume of lending and social welfare article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

corporate tax avoidance and firm value abstract do corporate tax avoidance activities advance shareholder interests this paper tests alternative theories of corporate tax avoidance using unexplained differences between income reported to capital markets and to tax authorities ols estimates indicate that the effect of tax avoidance on firm value is a function of firm governance as predicted by an agency perspective on corporate tax avoidance instrumental variables estimates based on exogenous changes in tax regulations yield larger overall effects and reinforce the basic result as do several robustness checks the results suggest that the simple view of corporate tax avoidance as a transfer of resources from the state to shareholders is incomplete given the agency problems characterizing shareholder manager relations

does deposit insurance increase banking system stability an empirical investigation based on evidence of 61 countries in 1980 97 the authors find that explicit deposit insurance tends to be detrimental to bank stability the more so where bank interest rates are deregulated and the institutional environment is weak the adverse impact of deposit insurance on bank stability tends to be stronger the more extensive is the coverage offered to depositors and where the scheme is funded and run by the government rather than the private sector

monetary policy under alternative bank market structures abstract the purpose of this paper is to derive and compare the short run effects of monetary policy under both perfectly and imperfectly competitive banking markets within the context of a general equilibrium framework which emphasizes the demands for and supplies of financial assets it is demonstrated that the structure of banking markets can have a bearing on the appropriate choice of policy targets and instruments specifically the federal funds rate is shown to be a potentially ineffective target instrument for policy under a competitive banking system although it can be used to produce conventional short run effects when banking markets are imperfect in contrast the level of currency and unborrowed reserves can be utilized as an effective target instrument under either form of bank market structure

financial dependence and growth revisited we revisit an earlier highly influential paper on financial dependence and growth by rajan and zingales 1998 we re examine their assumptions and the robustness of their results to alternative theories and interpretations we first show that they may be implicitly testing whether financial intermediaries allow firms to better respond to global shocks to growth opportunities rather than the extent that financial intermediaries allow firms to grow in industries with an inherent technological financial dependence we propose a more direct measure of growth opportunities if u s capital markets are perfect then actual growth in the u s is a good proxy for global growth opportunities we test this directly by including u s industry growth in rajan and zingales s original specification and find that our direct growth measure outperforms their financial dependence measure and is less vulnerable to controlling for outliers and level of development this still suggests an important role for finance in the allocation of resources but shifts the emphasis from financial dependence to global growth opportunities jel f3 g1 o4

financial and legal constraints to growth does firm size matter using a unique firm level survey database covering 54 countries we investigate the effect of financial legal and corruption problems on firms growth rates whether these factors constrain growth depends on firm size it is consistently the smallest firms that are most constrained financial and institutional development weakens the constraining effects of financial legal and corruption obstacles and it is again the small firms that benefit the most there is only a weak relation between firms perception of the quality of the courts in their country and firm growth we also provide evidence that the corruption of bank officials constrains firm growth

law finance and firm growth we investigate how differences in legal and financial systems affect firms use of external financing to fund growth we show that in countries whose legal systems score high on an efficiency index a greater proportion of firms use long term external financing an active though not necessarily large stock market and a large banking sector are also associated with externally financed firm growth the increased reliance on external financing occurs in part because established firms in countries with well functioning institutions have lower profit rates government subsidies to industry do not increase the proportion of firms relying on external financing the corporate finance literature suggests that market imperfections caused by conflicts of interest and informational asymmetries between corporate insiders and investors constrain firms in their ability to fund investment projects the magnitude of these imperfections depends in part on the effectiveness of the legal and financial systems because these systems differ across countries the literature implies that there should exist systematic cross country differences in firms ability to obtain external capital to finance investment in this paper we examine whether the underdevelopment of legal and financial systems does prevent firms in some countries from investing in potentially profitable growth opportunities in particular we focus on the use of long term debt or external equity to fund growth see our earlier work demirgut kunt and maksimovic 1996a which compares firms financial structures in developed and developing countries and finds the greatest difference to be in the provision of long term credit we estimate a financial planning model to obtain the maximum growth rate that each firm in our thirty country sample could attain without access to long term financing we then compare these predicted growth rates to growth rates realized by firms in countries with differing degrees of development in their legal and financial systems our approach enables us to identify specific characteristics of the legal and financial systems that are associated with long term financing of firm growth thus we provide a micro level test of the hypoth

equilibrium loan contracts and endogenous growth in the presence of asymmetric information abstract this paper considers an endogenous growth model in which an informational asymmetry exists between capital producing borrowers and lenders as to the borrower s ability to successfully operate an investment project in contrast to previous models of this genre the lender can induce self selection either by rationing a fraction of borrowers or by using a costly screening technology or by a mix of the two the equilibrium contract s form and the growth rate of output are mutually dependent and are jointly determined the effect of the lower cost of screening on the growth rate of output has been considered we show that a decline in the screening cost paradoxically may lower the growth rate of output only when a threshold level of sophistication is crossed will the benefit of an advanced financial sector become evident in a higher growth rate

the impact of delivery lags on irreversible investment under uncertainty abstract we consider the valuation and rational exercise of irreversible investment opportunities in the presence of revenue uncertainty and delivery lags in order to capture supply side market imperfections in the markets for investment goods we assume that the lag depends on the revenue process faced by the investor we show that such imperfections have a pronounced decelerating impact on rational investment demand as they may increase the value of waiting in excess of the exercise payoff even for projects which otherwise would be perceived as highly remunerative we also consider the comparative static properties of the optimal investment policy and its value and demonstrate that typically increased uncertainty decreases the investment incentives by increasing the value of waiting

some consequences of credit rationing in an endogenous growth model an endogenous growth model is developed where all investment is financed via credit extension there is also an adverse selection problem in loan markets so that in equilibrium credit rationing arises endogenously the result is that equilibrium levels of credit rationing and real growth rates are jointly determined in this context several changes in the environment can have unusual consequences for instance improvements in the technology for producing capital can reduce growth because of their adverse impacts on credit rationing for similar reasons various government investment subsidies can be growth reducing this phenomenon is often observed empirically

bank market structure and monetary control financial innovations and regulatory actions together have acted to produce sweeping changes in the u s financial environment much of the recent literature in the area of money and banking has been concerned with the implications of these developments for monetary policy however one major aspect of this issue which has been relatively ignored is the relationship between the competitive structure of banking markets and the capability of the federal reserve to exercise control over its intermediate or ultimate policy goals given that deregulation of banking and various forms of financial innovations e g technological innovations in the provision of financial services the proliferation of various near money financial assets and the growth of nonbank financial intermediaries have altered the competitive environment in banking it seems clear that this relationship should be investigated two previous efforts to examine the monetary policy implications of different bank market structures are aftalion and white 1977 and vanhoose 1983 in each of those papers the short run real sector effects of potential policy instruments under the structural extremes of perfect competition and monopoly are derived and contrasted however the analysis in each case is based upon models in which perfect certainty is assumed and no interactions are allowed between the real and

why do developing countries tax so little the power to tax is taken for granted in a great deal of mainstream public finance in considering limits to taxation traditional research in the field focuses on limits imposed by incentive constraints which are tied to asymmetric information or to politics and political institutions the limits to taxation are rarely tied to the administrative capacity of the state but incentive constraints alone cannot explain the vast differences in the levels of taxation that we see across the world and across time low income countries typically collect taxes of between 10 to 20 percent of gdp while the average for high income countries is more like 40 percent in essence our view on these patterns is similar to that taken by joseph schumpeter 1918 almost a century ago when he noted the fiscal history of a people is above all an essential part of its general history an enormous influence on the fate of nations emanates from the economic bleeding which the needs of the state necessitates and from the use to which the results are put in order to understand taxation economic development and the relationships between them we need to think about the forces that drive the development process poor countries

monetary policy in a model with a federal funds market fixed versus flexible deposit rates this paper examines the comparative static effects of various monetary policy instruments under the assumption of a market determined interest rate on demand deposits and alternatively for the case of an exogenously fixed demand deposit rate in both cases monetary policy effects are analyzed where the monetary policy operating target is either the federal funds rate or a reserve aggregate the aim of the paper is to assess the differences in monetary policy effects for each operating procedure between the flexible and fixed deposit rate cases we extend previous analyses of this subject by incorporating an explicit federal funds market in our model and providing a detailed analysis of monetary policy with a federal funds rate operating target with both a flexible and a fixed deposit rate additionally we consider the differences in the role of secondary monetary policy instruments such as the discount rate and the required reserve ratio in the different regimes finally the paper considers the implications of flexibility of the deposit rate for the feasibility of the current monetary policy strategy of using a short run operating target either the federal funds rate or a reserve aggregate to attain target

home is where the equity is mortgage refinancing and household consumption applying a permanent income model with exogenous liquidity constraints and mortgage behavior household refinancing when mortgage interest rates are historically high and rising a persistent empirical puzzle is explained using data from the panel study of income dynamics households experiencing an unemployment shock and having limited initial liquid assets to draw upon are shown to have been 25 more likely to refinance 1991 94 on average such liquidity constrained households converted over two thirds of every dollar of equity they removed into current consumption as mortgage rates plummeted 1991 94 producing an estimated expenditure stimulus of at least 28 billion

finance and the sources of growth the authors evaluate whether the level of development in the banking sector exerts a causal impact on economic growth and its sources total factor productivity growth physical capital accumulation and private saving they use 1 a pure cross country instrumental variable estimator to extract the exogenous component of banking development and 2 a new panel technique that controls for country specific effects and endogeneity they find that banks do exert a large causal impact on total factor productivity growth which feeds through to overall gdp gross domestic product growth the long run links between banking development and both capital growth and private savings are more tenuous

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

the origins of state capacity property rights taxation and politics economists generally assume that the state has sufficient institutional capacity to support markets and levy taxes this paper develops a framework where policy choices in market regulation and taxation are constrained by past investments in legal and fiscal capacity it studies the economic and political determinants of such investments demonstrating that legal and fiscal capacity are typically complements the results show that among other things common interest public goods such as fighting external wars as well as political stability and inclusive political institutions are conducive to building state capacity some correlations in cross country data are consistent with the theory

optimal bank capital with costly recapitalization we study optimal bank capital choice as a dynamic trade off between the opportunity cost of equity the loss of franchise value following a regulatory minimum capital violation and the cost of recapitalization we introduce a recapitalization delay that results in a strictly positive probability of capital adequacy violation we calibrate the model to bank accounting return data and evaluate the model s ability to explain observed bank capital ratios differences in return volatility explain a significant fraction of the cross sectional variation in bank capital ratios differences in the level of capital market imperfections across banks constitute a secondary explanation

pareto efficient income taxation under costly monitoring abstract this paper studies the problem of pareto efficient fiscal policies when labour supply is elastic and the government has no a priori information on income earned the model is a two class economy with an official and an unofficial labour market official income is taxed non linearly while unofficial income is only observable after a costly audit upon which it is taxed at an exogenous penalty rate after characterisation of the pareto efficient audit and tax policies it is verified how these policies react to a higher government revenue requirement an increase in the penalty rate a stronger ambition to redistribute in the two last scenarios the effect on the marginal tax and the audit rate is shown to decompose into a government revenue effect and a substitution effect a numerical example shows that the substitution effects are of minor importance suggesting that first intuition about the best way for a government to cope with increased evasion opportunities substituting auditing effort for high marginal tax rates sketches only part of the picture

why can modern governments tax so much an agency model of firms as fiscal intermediaries we develop an agency model explaining why third party information reporting by firms makes tax enforcement successful while third party reporting would be ineffective with frictionless collusion between firms and employees collusive evasion is impossible to sustain in firms with many employees and accurate business records as any single employee may reveal evasion we embed our agency model into a macro model where the number of employees grows with development showing that the tax take evolves as an s shape driven by changes in third party information we show that our model is consistent with a set of stylized facts on taxation and development

reaching out access to and use of banking services across countries the authors 1 present new indicators of banking sector penetration across 99 countries based on a survey of bank regulatory authorities 2 show that these indicators predict household and firm use of banking services 3 explore the association between the outreach indicators and measures of financial institutional and infrastructure development across countries and 4 relate these banking outreach indicators to measures of firms financing constraints in particular they find that greater outreach is correlated with standard measures of financial development as well as with economic activity controlling for these factors the authors find that better communication and transport infrastructure and better governance are also associated with greater outreach government ownership of financial institutions translates into lower access while more concentrated banking systems are associated with greater outreach finally firms in countries with higher branch and atm penetration and higher use of loan services report lower financing obstacles thus linking banking sector outreach to the alleviation of firms financing constraints

bank collapse and depression the recurrent banking panics of the 19th century and the great depression of the 1930s are widely viewed as failures of our economic system a simple version of samuelson s overlapping generations model is used to generate such failures of walrasian equilibrium the spontaneous panics generated involve a collapse of bank credit causing in turn a drop in investment demand the model suggests that both the recent technological advances in the intermediation industry and the current move towards deregulation of that industry are ominous developments

finance and growth for microenterprises evidence from rural china using a survey dataset of chinese rural households we find that access to external finance is positively associated with the decision to become entrepreneur and the initial investment for microenterprises also we find that use of informal finance especially financing from friends and family is positively associated with sales growth of microenterprises with employees but not of self employed we do not find any significant relationship between the use of formal finance and firm growth our findings underline the importance of finance for entrepreneurship and microenterprise growth and the role of informal finance in the absence of efficient formal financial institutions

tax evasion and financial development under asymmetric information in credit markets abstract recent empirical studies have documented that after controlling for variables related to state capacity the incidence of firms tax evasion on their sales is negatively correlated with the level of a country s financial development motivated by this stylized fact our paper takes state capacity as given and provides an alternative theory that is built upon asymmetric information in credit markets particularly within developing economies we analytically show that with a more developed financial sector that exhibits smaller agency costs the government of a rich small open economy country will raise its optimal tax auditing probability which in turn leads to more tax compliance our baseline model also yields an empirically realistic positive correlation between financial development and the ratio of tax revenue over gdp in an extended setting which allows for size dependent probabilities of tax detection we find that consistent with the empirical evidence large firms comply with taxes whereas small firms evade taxes

fighting corruption to improve schooling evidence from a newspaper campaign in uganda what are the most effective ways to increase primary school enrollment and student learning we argue that innovations in governance of social services may yield the highest return since social service delivery in developing countries is often plagued by inefficiencies and corruption we illustrate this by using data from an unusual policy experiment a newspaper campaign in uganda aimed at reducing capture of public funds by providing schools parents with information to monitor local officials handling of a large education grant program the campaign was highly successful and the reduction in capture had a positive effect on enrollment and student learning jel d73 i22 o12

tax revenue and or trade liberalization abstract with the public finances of many developing and emerging market countries still heavily dependent on trade tax revenues further trade liberalization may be hindered unless they are able to develop alternative sources of revenue against a background of and to inform heightened theoretical controversy as to the appropriate balance between trade and other taxes not least the vat this paper uses panel data for 117 countries over 32 years cleaned for a variety of problems in standard data sources to address a central question of fact have countries recovered from domestic taxes the revenues they have lost from past episodes of trade liberalization for high income countries the answer is clearly yes for middle income countries there are robust signs of strong replacement both concurrently with the revenue loss and essentially dollar for dollar in the long run signs of significant recovery by low income countries are flimsier however and their experiences appear to have varied widely the picture that emerges for low income countries is thus that replacement has been and become higher than previous studies have suggested but sufficiently incomplete in many cases to give cause for concern

credit market consequences of improved personal identification field experimental evidence from malawi we implemented a randomized field experiment in malawi examining borrower responses to being fingerprinted when applying for loans this intervention improved the lender s ability to implement dynamic repayment incentives allowing it to withhold future loans from past defaulters while rewarding good borrowers with better loan terms as predicted by a simple model fingerprinting led to substantially higher repayment rates for borrowers with the highest ex ante default risk but had no effect for the rest of the borrowers we provide unique evidence that this improvement in repayment rates is accompanied by behaviors consistent with less adverse selection and lower moral hazard jel d14 d82 g21 o12 o16

partisan effects in economies with variable electoral terms in fixed time electoral economies partisan surprises are associated with a change in government as in alberto alesina 1987 this paper models additional partisan surprises present in variable electoral term economies due to the timing of the change in government two versions of the model are presented one in which the timing of the change is exogenous and one in which it is endogenous the model is interesting as it provides an explanation of movements in expected inflation output and employment in all periods not just those immediately after an election as in fixed electoral term models copyright 1991 by ohio state university press

a noncooperative theory of legislative coalitions this noncooperative theory is based on a model that incorporates an institutional structure that reflects the sequential process of agenda formation and voting in a legislature that has the task of allocating particularistic benefits among legislative districts the theory is intended to identify the incentives for the formation of proposal coordinating coalitions as a function of characteristics of the political system and the rules that govern agenda formation coalition proposals allocate all the benefits to their districts and whenever the coalition has discipline or controls the chair it will be of minimal winning size when proposals are governed by a closed rule when coalition discipline is absent and the chair is neutral the coalition will be comprised of approximately 70 of the legislature a legislative rule that allows amendments may result in larger coalitions coalition composition is also considered

optimal self employment income tax enforcement abstract most models of optimal income tax enforcement assume that income is either random or solely remunerates labor neglecting that auditing strategies may depend on observable inputs this paper outlines a model to optimally monitor self employed entrepreneurs when in addition to reported profits the tax collection agency also observes the number of workers employed or any other input variable at each firm we show that by conditioning the monitoring strategy only on labor input it is optimal for the irs to audit firms in a way that generates some empirical regularities like the missing middle we also show that the optimal direct mechanism can be implemented by an indirect monitoring strategy that is consistent with actual irs practices in particular the irs calculates inputted income as function of labor whenever an entrepreneur reports profits that are lower than inputted income she is randomly monitored finally we formalize a model of optimal presumption taxation in which inputted income is the tax base to compare revenue collection across tax systems

corruption in bank lending to firms cross country micro evidence on the beneficial role of competition and information sharing abstract building on the important study by beck demirguc kunt and levine 2006 bank supervision and corruption in lending journal of monetary economics 53 2131 2163 we examine the effects of both borrower and lender competition as well as information sharing via credit bureaus registries on corruption in bank lending using the unique world bank data set wbes covering more than 4 000 firms across 56 countries with information on credit bureaus registries assembled by djankov mcliesh and shleifer 2007 private credit in 129 countries journal of financial economics 84 299 329 and bank regulation data collected by barth caprio and levine 2006 rethinking bank regulation till angels govern cambridge university press new york to measure bank competition and information sharing we find strong evidence that both banking competition and information sharing reduce lending corruption and that information sharing also helps enhance the positive effect of competition in curtailing lending corruption we also find that the ownership structure of firms and banks legal environment and firm competition all exert significant impacts on lending corruption

financial development and economic growth views and agenda this critique argues that the preponderance of theoretical reasoning and empirical evidence suggests a positive first order relationship between financial development and economic growth the body of work would push even most skeptics toward the belief that the development of financial markets and institutions is a critical and inextricable part of the growth process and away from the view that the financial system is an inconsequential sideshow responding passively to economic growth many gaps remain however and the paper highlights areas in acute need of additional research

optimal electoral timing exercise wisely and you may live longer using insights from option pricing in finance we explore the electoral timing problem in a flexible term democracy we assume that politic ally heterogeneous voters continuously learn over time about the evolving party merits this yields a mean reverting stochastic process for the support of the parties the incumbent sees its poll support and must call an election within five years o f the last election we assume that it wishes to maximize its expected total time in office so that this resembles the optimal exercise rule for an american financial o ption we characterize how the renewable election option behaves as waiting and stopping values interact we then calibrate our model to the labour tory rivalry in the u k with polling data from 1943 2005 and the 16 elections after 1945 excluding three elections essentially forced by weak governments our maximizing story explains when the elections were called quite well we also measure the value of election options finding that over the long run they should more than double the expected time in power of a fixed term electoral cycle

tax evasion the underground economy and financial development abstract we study the relationship between the underground economy and financial development in a model of tax evasion and bank intermediation agents with heterogeneous skills seek loans in order to undertake risky investment projects asymmetric information between borrowers and lenders implies a menu of loan contracts that induce self selection in a separating equilibrium faced with these contracts agents choose how much of their income to declare by trading off their incentives to offer collateral against their disincentives to comply with tax obligations the key implication of the analysis is that the marginal net benefit of income disclosure increases with the level of financial development thus in accordance with empirical observation we establish the result that the lower is the stage of such development the higher is the incidence of tax evasion and the greater is the size of the underground economy

concessions of infrastructure in latin america government led renegotiation this paper analyzes government led renegotiations in infrastructure concession contracts in latin america based on the same sample used in guasch laffont and straub 2003 to examine firm led renegotiations after extending the theoretical framework to a multiple period context in which both pareto improving and rent shifting renegotiations at the initiative of the government can occur we develop an original instrumental variable strategy to address the issue of contract endogeneity and derive empirical results while some of the main insights concerning the importance of having a regulator in place when awarding concessions and the fragility of price cap regulatory schemes are unchanged significant differences arise with respect to the effect of investment and financing as well as the corruption variables we provide evidence that a good regulatory framework is especially important in contexts with weak governance and political opportunism copyright 2007 john wiley sons ltd

deposit market deregulation and interest rates the evolving deregulation of financial markets has sparked interest in the economic implications of increased flexibility in previously regulated markets much of the analysis has focused on deposit markets in which legislated maximum rates are being replaced by market determined equilibrium rates moreover because changes in deposit rates imply changes in the cost of funds to financial intermediaries concern has been voiced about the implications of deposit rate deregulation on the overall structure of interest rates specifically deregulation has been cited as one reason for the currently high rates of interest 2 in this paper we argue that this view of deregulation is flawed and we suggest that deregulation of deposit markets will lead to lower not higher loan and deposit rates furthermore we argue that previous analysis indicating that deposit deregulation leads to higher loan rates based on higher costs of funds to financial intermediaries depends on inadequate consideration of the role of implicit payments to depositors appropriate consideration of these implicit payments leads to results suggesting that deposit market deregulation should ceterus paribus lower loan rates the total cost of funds to banks falls as the interest rate ceiling is relaxed our theoretical results previewed here are admittedly at odds with some of the prior theoretical and empirical work on this issue our assumptions that the implicit deposit rate is flexible market determined and adjusts to clear the deposit market are crucial to our results

informality and development in developing countries informal firms account for up to half of economic activity they provide livelihood for billions of people yet their role in economic development remains controversial some like hernando de soto 1989 2000 see informal firms as an untapped reservoir of entrepreneurial energy held back by government regulations in this view unleashing this energy by reducing entry regulations or improving property rights would fuel growth and development others like levy 2008 take a more cynical view stressing the advantages enjoyed by informal firms and workers from avoiding taxes and regulations a report from the mckinsey global institute describes informal firms as parasites competing unfairly with law abiding formal firms farrell 2004 in this view informality should be suppressed not unleashed still others follow the development tradition of lewis 1954 harris and todaro 1970 and more recently rauch 1991 and see informality as a byproduct of poverty from this dual perspective formal and informal firms are fundamentally different productive formal entrepreneurs pay taxes and bear the cost of government regulation to reach new customers raise capital and access public goods these entrepreneurs are often educated and find it more profitable to run bigger formal firms rather than the smaller informal ones in contrast informal entrepreneurs are typically uneducated and unproductive and they run small businesses producing low quality products for low income customers using little capital and

individual morality and reputation costs as deterrents to tax evasion abstract empirical evidence suggests some taxpayers never evade evasion increases with the tax rate and evasion decisions are interdependent these findings are not easily explained by the existing theory which models evasion as an independently made amoral gamble this paper uses nonpecuniary costs of evasion to reconcile theory with evidence once individuals are assumed to differ by an honesty characteristic taxpayers dichotomise into groups the more honest of which responds to a tax change as the evidence suggests a further extension is to introduce an endogenous reputation cost this suggests a positive relationship between the number of evaders and the tax rate

taxpayer response to an increased probability of audit evidence from a controlled experiment in minnesota abstract in 1995 a group of 1724 randomly selected minnesota taxpayers was informed by letter that the returns they were about to file would be closely examined compared to a control group that did not receive this letter low and middle income taxpayers in the treatment group on average increased tax payments compared to the previous year which we interpret as indicating the presence of noncompliance the effect was much stronger for those with more opportunity to evade in fact the difference in differences is not statistically significant for those who do not have self employment or farm income and do not pay estimated tax surprisingly however the reported tax liability of the high income treatment group fell sharply relative to the control group

financial institutions and markets across countries and over time the updated financial development and structure database this article introduces the updated and expanded version of the financial development and structure database the database includes indicators on the size efficiency and stability of banks nonbank financial institutions and equity and bond markets over 1960 2007 it also contains indicators of financial globalization

shadow economies size causes and consequences using various methods the size of the shadow economy in 76 developing transition and oecd countries is estimated average size varies from 12 percent of gdp for oecd countries to 23 percent for transition countries and 39 percent for developing countries increasing taxation and social security contributions combined with rising state regulations are driving forces for the increase of the shadow economy especially in oecd countries according to some findings corruption has a positive impact on the size of the shadow economy and a growing shadow economy has a negative effect on official gdp growth

federal deposit insurance regulatory policy and optimal bank capital this paper seeks to explain the combination of explicit and implicit pricing for deposit insurance employed by the fdic essentially the fdic sells two products insurance and regulation to span the product space it must and does set two prices we argue that the need to establish regulatory disincentives to bank risk taking is the heart of the controversy over the adequacy of bank capital and that the ability to close risky banks before exhausting their charter value i e the value of their right to continue in business stands at the center of these disincentives and in front of the fdic s insurance reserves just as a book shouldn t be judged by its cover a government agency shouldn t be judged by the words behind its initials with the fdic federal deposit insurance corporation the agency s name describes only part of its formal operations the fdic is quasi governmental has a regional structure and sells deposit insurance however the initials fail to convey the fdic s critical place in the governmental regulatory structure as the sole federal overseer of the approximately 8900 state chartered commercial banks that have chosen not to belong the federal reserve system reflecting the federal reserve s membership problem the number of these banks is growing year by year besides selling deposit insurance at bargain explicit rates the fdic performs four regulatory functions 1 entry regulation it passes on new banks applications for deposit insurance and on branch and merger proposals as well thereby protecting the value of existing bank charters 2 examination two thirds of fdic employees are concerned with inspecting bank records and supervising managerial activity 3 regulation of deposit rates and conditions for withdrawal by tradition fdic policies on these matters conform entirely with regulations applicable to federal reserve member banks and 4 disposition of failed banks when an insured bank fails the fdic usually chooses not to liquidate it 2

state capacity conflict and development the absence of state capacities to raise revenue and to support markets is a key factor in explaining the persistence of weak states this paper reports on an ongoing project to investigate the incentive to invest in such capacities the paper sets out a simple analytical structure in which state capacities are modeled as forward looking investments by government the approach highlights some determinants of state building including the risk of external or internal conflict the degree of political instability and dependence on natural resources throughout we link these state capacity investments to patterns of development and growth

tirole s industrial regulation and organization legacy in economics jean tirole was awarded the 2014 sveriges riksbank prize in economic sciences in memory of alfred nobel for his analysis of market power and regulation this paper provides an overview of some of that work and of his related contributions to game theory

optimal experimentation in a changing environment this paper studies optimal experimentation by a monopolist who faces an unknown demand curve subject to random changes and who maximizes profits over an infinite horizon in continuous time we show that there are two qualitatively very different regimes determined by the discount rate and the intensities of demand curve switching and the dependence of the optimal policy on these parameters is discontinuous one regime is characterized by extreme experimentation and good tracking of the prevailing demand curve the other by moderate experimentation and poor tracking moreover in the latter regime the agent eventually becomes trapped into taking actions in a strict subset of the feasible set

cheating ourselves the economics of tax evasion no government can announce a tax system and then rely on taxpayers sense of duty to remit what is owed some dutiful people will undoubtedly pay what they owe but many others will not over time the ranks of the dutiful will shrink as they see how they are being taken advantage of by the others thus paying taxes must be made a legal responsibility of citizens with penalties attendant on noncompliance but even in the face of those penalties substantial tax evasion exists and always has the history of taxation is replete with episodes of evasion often notable for their inventiveness during the third century many wealthy romans buried their jewelry or stocks of gold coin to evade the luxury tax and homeowners in eighteenth century england temporarily bricked up their fireplaces to escape notice of the hearth tax collector webber and wildavsky 1986 p 141 this essay reviews what is known about the magnitude nature and determinants of tax evasion with an emphasis on the u s income tax alm 1999 andreoni erard and feinstein 1998 and slemrod and yitzhaki 2002 offer more comprehensive recent reviews of the literature it then places this information into a conceptual and policy context

why do firms evade taxes the role of information sharing and financial sector outreach tax evasion is a widespread phenomenon across the globe and even an important factor in the ongoing sovereign debt crisis we show that firms in countries with better credit information sharing systems and higher branch penetration evade taxes to a lesser degree this effect is stronger for smaller firms firms in smaller cities and towns firms in industries relying more on external financing and firms in industries and countries with greater growth potential this effect is robust to instrumental variable analysis controlling for firm fixed effects in a smaller panel data set of countries and many other robustness tests

information sharing in credit markets we present a model with adverse selection where information sharing between lenders arises endogenously lenders incentives to share information about borrowers are positively related to the mobility and heterogeneity of borrowers to the size of the credit market and to advances in information technology such incentives are instead reduced by the fear of competition from potential entrants in addition information sharing increases the volume of lending when adverse selection is so severe that safe borrowers drop out of the market these predictions are supported by international and historical evidence in the context of the consumer credit market a large body of literature on credit markets has shown that asymmetric information may prevent the efficient allocation of lending leading to credit rationing e g jaffee and russell 1976 stiglitz and weiss 1981 or to a wedge between lending and borrowing rates e g king 1986 in this literature informational asymmetries are taken to be exogenous lenders fail to observe some relevant characteristic or action of potential borrowers and have no way of learning about it in some countries however lenders can improve their knowledge about new customers by exchanging information with other lenders through information brokers generally known as credit bureaus the latter collect file and distribute the information voluntarily supplied by their members and operate on the principle of reciprocity lenders who do not provide data are denied access to the bureau s files in other countries instead these institutions do not exist the literature offers no guide to identify the factors that lead to endogenous communication between lenders this paper is an attempt to fill the gap information sharing is important for a number of reasons it may increase the degree of competitiveness within credit markets vives 1990 improve

unorganized loan markets and monetary policy instruments abstract the paper uses a portfolio balance model to examine the relationship between monetary policy instruments and the unorganized loan rate predicting the direction of the change in this rate as a result of varying a policy instrument is important since this rate is one channel through which a change in a policy instrument transmits to real activity and since the demand side of the money market is partially re equilibrated through this change studies have not clearly emphasized the relationship between each of the policy instruments and this rate the findings depart in some cases from existing studies and shed more light on the relationships among policy instruments monetary aggregates and real activity

does inclusive financial development matter for firms tax evasion evidence from developing countries we find that firms in developing countries with more inclusive financial sector evade taxes to a lesser extent this effect is stronger for the countries with stronger legal rights and a smaller share of the informal economy the results suggest that the growing public policy emphasis on achieving inclusive financial development may also help reduce tax evasion in developing countries

dodging the grabbing hand the determinants of unofficial activity in 69 countries across 69 countries higher tax rates are associated with less unofficial activity as a percent of gdp but corruption is associated with more unofficial activity entrepreneurs go underground not to avoid official taxes but to reduce the burden of bureaucracy and corruption dodging the grabbing hand in this way reduces tax revenues as a percent of both official and total gdp as a result corrupt governments become small governments and only relatively uncorrupt governments can sustain high tax rates 2000 elsevier science s a all rights reserved

employee reload options pricing hedging and optimal exercise reload options call options granting new options on exercise are popularly used in compensation although the compound option feature may seem complicated there is a distribution free dominant policy of exercising reload options whenever they are in the money the optimal policy implies general formulas for numerical valuation simpler formulas for valuation and hedging follow from black scholes assumptions with or without continuous dividends time vesting affects the optimal policy but numerical results indicate that it is nearly optimal to exercise in the money whenever feasible the results suggest that reload options produce similar incentives as employee stock options and share grants the valuation of options in compensation schemes is important for several reasons valuations are needed for preparing accounting statements and tax returns and more generally for understanding what value has been promised to the employees and what residual value remains with the shareholders furthermore understanding the hedge ratios and the overall shape of the valuation function clarifies the employee s risk exposure and incentives this article studies the optimal exercise and valuation of a relatively new but increasingly commonplace type of employee stock option the reload option these options have attracted a fair amount of controversy we believe that in large part this controversy is due to a seemingly complex structure in the statement of financial accounting standards sfas 123 financial accounting standards board 1995 paragraph 186 concludes the board continues to believe that ideally the value of a reload option should be estimated on the grant date taking into account all of its features however at this time it is not feasible to do so on close examination however these options are in fact comparatively simple to analyze and understand moreover under black and scholes 1973 assumptions on the stock price we are able to provide explicit valuation and hedging formulas we hope our analysis helps to demystify reload options and permit a more focused debate

renegotiation of concession contracts in latin america evidence from the water and transport sectors abstract high rates of contract renegotiation have raised serious questions about the viability of the concession model to attract private participation in infrastructure in developing countries after extending in reduced form a standard regulation model in which renegotiation occurs due to the imperfect enforcement of concession contracts we use a unique data set of 307 concessions awarded in latin america from 1989 to 2000 covering the sectors of transport and water to analyze the determinants of this high incidence of renegotiations of infrastructure contracts we look in details at the impact on the probability of renegotiation of a concession of regulatory institutions institutional features economic shocks and of the characteristics of the concession contracts themselves we then derive some policy implications of our work

sharing default information as a borrower discipline device abstract creditors often share information about their customers credit records besides helping them to spot bad risks this acts as a disciplinary device if creditors are known to inform one another of defaults borrowers must consider that default on one lender would disrupt their credit rating with all the other lenders this increases their incentive to perform however sharing more detailed information can reduce this disciplinary effect borrowers incentives to perform may be greater when lenders only disclose past defaults than when they share all their information in some instances by fine tuning the type and accuracy of the information shared lenders can raise borrowers incentives to their first best level

how do banks respond to shocks a dynamic model of deposit taking institutions abstract this paper proposes a dynamic model of the optimal choices of a bank that benefits from market power and takes into account the impact of the deposit generation process interbank lending borrowing emerges as a buffer that assists the bank in smoothing intertemporal adjustments in interdependent loan and deposit choices the bank smooths the impact of interest rates shocks on its customers to minimize the adjustments over time of the stocks of deposits and loans it does not however provide insurance against negative shocks of real origin that increase its expected default costs the predictions of the model help to shed light on the available empirical evidence and to analyze some recent developments of the banking industry

the theory of taxation for developing countries tax policy has far reaching implications for economic development and public administration this book which presents a modern theory of public finance brings together many of the most distinguished economists who have written on the subject they provide coherent principles for tax design and a systematic framework for the analysis of practical questions of tax reform and pricing policy in developing countries the book is especially timely as countries experience increasing shortages of government revenue and the distortions brought about by poorly designed tax systems it pays particular attention to the special problems of developing countries such as the taxation of agriculture the aim throughout is to develop techniques that can be quantitatively applied given the data available and empirical case studies illustrate the methods in action the authors analyze the links between tax theory social cost benefit analysis and the pricing of publicly supplied goods and services they also explore the empirical and econometric problems of identifying the tradeoffs between equity and efficiency other topics treated include the analysis of labor markets the taxation of foreign private investment and of fuel and the pricing of education although the models used concentrate on developing countries most of the methods and discussion apply as well to the problems of more affluent countries

why do firms hide bribes and unofficial activity after communism abstract our survey of private manufacturing firms finds the size of hidden unofficial activity to be much larger in russia and ukraine than in poland slovakia and romania a comparison of cross country averages shows that managers in russia and ukraine face higher effective tax rates worse bureaucratic corruption greater incidence of mafia protection and have less faith in the court system our firm level regressions for the three eastern european countries find that bureaucratic corruption is significantly associated with hiding output

the effect of the expansion of the voting franchise on the size of government this paper examines the claim that expansion of the voting franchise has been an important factor in the growth of government state government spending and state and local spending are explained using a panel of 46 states for 1950 88 elimination of poll taxes and literacy tests led to higher turnout particularly among the poor and a poorer pivotal voter as predicted we find that these changes a fall in the income of voters relative to state income and the ouster of republicans from state government led to a sharp rise in welfare spending but no change in other spending

government turnover in parliamentary democracies in this paper we consider a dynamic model of government formation and termination in parliamentary democracies that accounts for the following phenomena 1 cabinet terminations due to replacement or early election 2 cabinet reshuf es 3 minority and surplus governments 4 the relative instability of minority governments

competition in banking and the lending channel evidence from bank level data in asia and latin america abstract this paper examines how banking competition affects the transmission of monetary policy through the bank lending channel we apply a two step estimation procedure using bank level panel data for commercial banks in 10 asian and 10 latin american countries during the period from 1996 to 2006 in the first step we measure the degree of banking competition by applying the methodology proposed by panzar and rosse 1987 in the second step we estimate a loan growth equation where the explanatory variables include the panzar rosse measure of banking competition the estimation results provide consistent evidence that increased competition in the banking sector weakens the transmission of monetary policy through the bank lending channel this is especially true for banks in latin american countries and banks of small size low liquidity and low capitalization we also discuss the policy implications of the main findings of this paper

global growth opportunities and market integration we propose an exogenous measure of a country s growth opportunities by interacting the country s local industry mix with global price to earnings pe ratios we find that these exogenous growth opportunities predict future changes in real gdp and investment in a large panel of countries this relation is strongest in countries that have liberalized their capital accounts equity markets and banking systems we also find that financial development external finance dependence and investor protection measures are much less important in aligning growth opportunities with growth than is capital market openness finally we formulate new tests of market integration and segmentation by linking local and global pe ratios to relative economic growth in a perfectly integrated world economy capital should be invested where it

informal sector the credit market channel abstract we build a model of firms choice between formality and informality complying with costly registration procedures allows the firms to benefit from key public goods enforcement of property rights and contracts that make the participation in the formal credit market possible in a moral hazard framework with credit rationing their decision is shaped by the interaction between the cost of entry into formality and the relative efficiency of formal versus informal credit mechanisms and their related institutional arrangements the model is consistent with existing stylized facts on the determinants of informality

the regulation of labor author s botero juan djankov simeon la porta rafael lopez de silanes florencio shleifer andrei abstract we investigate the regulation of labor markets through employment collective relations and social security laws in 85 countries we find that the political power of the left is associated with more stringent labor regulations and more generous social security systems and that socialist french and scandinavian legal origin countries have sharply higher levels of labor regulation than do common law countries however the effects of legal origins are larger and explain more of the variation in regulations than those of politics heavier regulation of labor is associated with lower labor force participation and higher unemployment especially of the young these results are most naturally consistent with legal theories according to which countries have pervasive regulaory styles inherited from the transplantation of legal systems

the rational timing of parliamentary elections this paper presents a rational choice model for the timing of parliamentary elections in political systems where the government has the option of calling an early election the optimal timing of elections involves the government weighing the benefits of calling an election versus the costs and is modelled mathematically as an optimal stopping problem the model implies that the timing of elections depends upon time left in the government s term the degree of electoral uncertainty the volatility of government popularity the government s time rate of discount and institutional constraints such as the length of term and whether the government is likely to be forced from power by a vote of no confidence

who surfs who manipulates the determinants of opportunistic election timing and electorally motivated economic intervention in this paper i develop a career concerns model of government policy choice within a dynamic optimal stopping framework to predict the degree of surfing opportunistic timing and manipulation politically motivated economic intervention under alternate institutional structures and voter characteristics among other results i find that the likelihood of opportunistic elections rises with exogenous economic performance with longer maximum term lengths with future electoral uncertainty and with economic volatility but diminishes in the value of office holding manipulation increases with the maximum term length and with the value of office holding but decreases with exogenous economic performance and with economic volatility the model suggests that single party governments should be highly opportunistic in calling elections and that countries that allow opportunistic election timing should experience less economically distortionary political intervention than their fixed timing counterparts

should we pay for ecosystem service outputs inputs or both payments for ecosystem service outputs have recently become a popular policy prescription for a range of agri environmental schemes the focus of this paper is on the choice of contract instruments to incentivise the provision of ecosystem service outputs from farms the farmer is better informed than the regulator in terms of hidden information about costs and hidden actions relating to effort the results show that with perfect information the regulator can contract equivalently on inputs or outputs with hidden information input based contracts are more cost effective at reducing the informational rent related to adverse selection than output based contracts mixed contracts are also cost effective especially where one input is not observable such contracts allow the regulator to target variables that are costly to fake as opposed to those prone to moral hazard such as effort further results are given for fixed price contracts and input based contracts with moral hazard the model is extended to include a discussion of repeated contracting and the scope that exists for the regulator to benefit from information revealed by the initial choice of contract the models are applied to a case study of contracting with farmers to protect high biodiversity native vegetation that also provides socially valuable ecosystem services

financial institutions and markets across countries and over time this article introduces the updated and expanded version of the financial development and structure database the database includes indicators on the size efficiency and stability of banks nonbank financial institutions and equity and bond markets over 1960 2007 it also contains indicators of financial globalization

is financial inclusion good for bank stability international evidence abstract financial inclusion has become an important public policy priority following the recent global financial crisis yet we know very little of how it impacts soundness of the providers of financial services using an international sample of 2635 banks in 86 countries over the period 2004 12 we find that higher level of financial inclusion contributes to greater bank stability the positive association is particularly pronounced with those banks that have higher customer deposit funding share and lower marginal costs of providing banking services and also with those that operate in countries with stronger institutional quality the results are robust to instrumental variables analysis controlling for bank fixed effects alternative measures of financial inclusion among several other robustness tests our results highlight that the importance of ensuring inclusive financial system is not only a development goal but also an issue that should be prioritised by banks as such a policy drive is good for their stability

informality and rent seeking bureaucracies in a model of long run growth abstract this paper explores the links among growth the informal economy and rent seeking bureaucracies the presence of congestion associated with the enforcement of property rights implies that informality can be useful whether bureaucratic rent seeking is detrimental to growth then depends on how good a substitute informality is to production in the formal sector in order to create profits which can be appropriated rent seeking bureaucrats limit entry into the formal economy as a result firms operate in the informal sector even when the cost of informality is high in which case lower growth emerges however when the cost of informality is low a large number of firms choose to operate informally irrespective of entry conditions in the latter case growth is unaffected by a rent seeking bureaucracy as entry restrictions in the formal economy do not bind

american option pricing under garch by a markov chain approximation abstract we propose a numerical method for valuing american options in general and for the garch option pricing model in particular the method is based on approximating the underlying asset price process by a finite state time homogeneous markov chain since the markov transition probability matrix can be derived analytically the price of an american option can be computed by simple matrix operations the markov transition probability matrix is typically sparse the use of a sparse matrix representation can substantially increase the dimension of the markov chain to obtain better numerical results the markov chain method works well for the garch option pricing framework and it serves as an alternative to the existing numerical methods for the valuation of american options in other pricing settings we provide a convergence proof for the markov chain method and analyze its numerical performance for the black scholes 1973 and garch option pricing models

bank supervision and corruption in lending abstract which commercial bank supervisory policies ease or intensify the degree to which bank corruption is an obstacle to firms raising external finance based on new data from more than 2500 firms across 37 countries this paper provides the first empirical assessment of the impact of different bank supervisory policies on firms financing obstacles we find that the traditional approach to bank supervision which involves empowering official supervisory agencies to monitor discipline and influence banks directly does not improve the integrity of bank lending rather we find that a supervisory strategy that focuses on empowering private monitoring of banks by forcing banks to disclose accurate information to the private sector tends to lower the degree to which corruption of bank officials is an obstacle to firms raising external finance in extensions we find that regulations that empower private monitoring exert a particularly beneficial effect on the integrity of bank lending in countries with sound legal institutions

the swing voter s curse the authors analyze two candidate elections in which some voters are uncertain about the realization of a state variable that affects the utility of all voters they demonstrate the existence of a swing voter s curse less informed indifferent voters strictly prefer to abstain rather than vote for either candidate even when voting is costless the swing voter s curse leads to the equilibrium result that a substantial fraction of the electorate will abstain even though all abstainers strictly prefer voting for one candidate over voting for another copyright 1996 by american economic association

intertemporal discounting and tenurial contracts a simple two period model without uncertainty and strategic complementarity in the labor market or asymmetric information of any kind is employed to study the nature of contracts signed between a landlord and a tenant in a rural economy the paper provides conditions under which different types of contracts may prevail q 2001 elsevier science b v all rights reserved

lies damn lies and pre election polling in this paper we ask the question how well do pre election polls forecast the actual results of elections in the united states 1 the question is interesting for a number of reasons first even polling data suggest about one third of polling respondents do not believe that polls work in the best interests of the general public 2 the situa tion is such that even many national governments have undertaken to restrict some aspect of pre election polling a 1997 international survey of governments found 30 of 78 surveyed nations had some kind of ban on publication of poll results second there is a strong presumption in the lit erature on professional forecasting in other con texts such as interest rate forecasting which do not rely on sampling per se that forecasts will be biased there is a variety of explanations for why forecasts will be biased one honest motivation is that pollsters may avoid reporting results from the unavoidable atypical polls third in the literature in economics it is sometimes assumed