assessing the fdic s premium and examination policies using soviet put options abstract the fdic s total liability for insuring a bank s deposits during a fixed period diminishes as the frequency of examinations increases since a marginally solvent bank can be closed while losses are small the paper develops a technique for pricing the insurance liability over a fixed period during which there are multiple examinations under current policy most banks are examined annually and reviewed every six months at which time the fees for insurance may be adjusted since the current schedule of fees allows only a narrow range and a few discrete levels the fdic typically retains some positive or negative residual liability in each six month period and for the entire year we show how to estimate this net liability the calculations of total and net liability are illustrated for a sample of large banks

majority voting and pareto optimality this investigation of the majority voting decision under various tax structures makes the following points first that majority voting cannot be relied upon to choose the pareto optimal level of output of the public good if the structure of taxes is predetermined what is chosen is an output level of the public good that is pareto optimal with respect to the particular tax structure another tax structure might exist that provides a better solution

pricing risk adjusted deposit insurance an option based model this paper presents a methodology for arriving at empirical estimates of deposit insurance premiums from market data by using isomorphic relationships betweeen equity and a call option and insurance and a put option the data utilizes the market value of equity to solve for the asset value and its volatility market perceptions of fdic bailout policies are explicitly modeled so as to eliminate the bias in inverted values of assets and their volatility sensitivity analyses are performed to show that rank orderings based on premiums are robust to changes in specification thus facilitating allocation of aggregate premium across banks while economists have long argued in favor of risk adjusted deposit insurance as both more equitable and more efficient than the current system of flatrate premiums various recent developments have further contributed to an increasing dissatisfaction with the current system first both the banking industry and the government seem to be tending to the view that deregulation of the banking industry would be necessary in order to meet more sophisticated future demands on the industry as well as desirable as a policy means of stimulating greater competition among banks moreover a sudden rise in the incidence of bank failures 1 and the vulnerability of the u s banks to the socalled international debt crisis have served to bring to the fore concern about the health of the banking industry in the absence of deposit insurance riskier banks will be able to attract deposits only at higher rates and these higher costs of funding serve as built in market regulated incentives to limit excessive risk taking by banks as introduction of deposit insurance makes deposits equally risk free across banks these incentives disappear and regulation and close supervision of the banking industry must necessarily replace them as deterrents to excessive risk taking thus when insurance is offered at a flat premium regulation is designed to ensure that the risk posed to the insurer both asset and financial risk is appropriately uniform

how efficient is the voting market it is by now well established that good macroeconomic conditions benefit the incumbent president and his congressional party confreres at the polls this result is not unanimous see for example stigler or arcelus and meltzer2 and may not be universal 3 however the basic results in kramer 4 the progenitor of the modern literature on the effect of economic conditions on elections seem to have stood the test of time the broad consensus of this literature is that voters in presidential and congressional elections 1 reward income growth and punish unemployment and inflation 2 probably give greater weight to income growth than to unemployment and inflation and 3 myopically ignore any information beyond the recent past say prior to the election year 5 so far however the data have outrun interpretation while economic conditions seem to matter we do not know why they matter or how plausibly to characterize the process by which voters translate information about economic conditions into voting decisions this article tries to fill that gap though it extends the empirical literature to gubernatorial elections its main con

ownership consolidation and product characteristics a study of the us daily newspaper market this paper develops a structural model of newspaper markets to analyze the effects of ownership consolidation taking into account not only firms price adjustments but also the adjustments in newspaper characteristics a new dataset on newspaper prices and characteristics is used to estimate the model the paper then simulates the effect of a merger in the minneapolis newspaper market and studies how welfare effects of mergers vary with market characteristics it finds that ignoring adjustments of product characteristics causes substantial differences in estimated effects of mergers jel g32 l13 l82 m37 do mergers affect product characteristics standard merger analyses typically study price effects only and ignore changes in product characteristics this paper endogenizes both it is likely that firms would adjust the features of their products after a merger ignoring this aspect of firm decisions in a merger analysis can lead to a bias in estimated welfare effects specifically i study how ownership consolidation affects product characteristics and welfare in the us daily newspaper market the newspaper market provides an ideal environment for analyzing the effect of mergers on product features for both econometric and economic reasons first of all individual newspapers often circulate in local markets there is substantial variation in demographics and ownership structure across these markets this variation is crucial for this study secondly the characteristics of newspapers are obviously important for welfare for example after an ownership consolidation do newspaper publishers improve or diminish the content quality do they enlarge or shrink the local news ratio do they increase or decrease content variety to address these questions i set up a structural model of the us daily newspaper

do media consumers really dislike advertising an empirical assessment of the role of advertising in print media markets this paper uses data on german consumer magazines observed between 1992 and 2004 to analyze the extent to which consumers dis like advertising we estimate logit demand models separately for the six most important magazine segments in terms of circulation we find little evidence for readers disliking advertising on the contrary we show that readers in many magazine segments appreciate advertising readers of women s magazines business and politics magazines as well as car magazines market segments where advertisements are relatively more informative appreciate advertising while advertising is nuisance to readers of adult magazines a segment where advertisements are particularly uninformative demand for interior design magazines is not well identified our logit demand estimates are confirmed by logit demand models with random coefficients and by magazine specific monopoly demand models

insuring banks against liquidity shocks the role of deposit insurance and lending of last resort it has long been recognized that banks simultaneous provision of monitoring and liquidity services is advantageous but leaves them susceptible to liquidity shocks that may culminate in a system failure because a system failure is costly this provides a rationale for adopting arrangements including a lender of last resort and deposit insurance di to insure banks against liquidity shocks these arrangements have proven themselves very successful but they have also been the source of problems researchers have identified some of the main sources of these problems and have suggested ways to improve the design of these arrangements but there are still many issues that remain unaddressed this paper reviews the literature on the two arrangements that most countries have adopted to insure banks against liquidity shocks a lender of last resort and di and compares the design of these arrangements across countries the paper ends with a brief summary of the key lessons learned about the design of these arrangements and the issues related to them that remain unaddressed copyright blackwell publishers ltd 2006

public subsidies and the location and pricing of sports using public choice analysis we determine how government subsidies affect location and pricing decisions of sports teams we explain how voter referendums can create suboptimal outcomes for local communities and identify winners and losers in sport team subsidies subsidy bidding leads to higher subsidies and fewer sport franchises but does not alter team location sport subsidies generate additional revenue for owners and players at taxpayer expense and non fan taxpayers subsidize both the team and fans to increase political support for subsidies teams lower ticket prices below the apparent profit maximizing level which may cause inelastic ticket prices and ticket shortages

platform competition in two sided markets many if not most markets with network externalities are two sided to succeed platforms in industries such as software portals and media payment systems and the internet must get both sides of the market on board accordingly platforms devote much attention to their business model that is to how they court each side while making money overall this paper builds a model of platform competition with two sided markets it unveils the determinants of price allocation and end user surplus for different governance structures profit maximizing platforms and not for profit joint undertakings and compares the outcomes with those under an integrated monopolist and a ramsey planner jel l5 l82 l86 l96

deposit insurance reform what are the issues and what needs to be fixed abstract the current problems in the commercial banking industry have led to widespread calls for reform of the deposit insurance contract on the grounds that it promotes moral hazard we review the empirical evidence for the significance of moral hazard as an important cause of the present crisis we then evaluate various reform proposals grouped into two broad classes proposals that seek to impose greater discipline on bank stockholders and proposals to increase the disciplinary role of bank debtholders finally we identify some issues that have received inadequate attention in the literature on bank regulation

quantifying the effects from horizontal mergers in european competition policy this paper starts from a recent case to study how merger analysis in europe may be potentially improved starting from the geographic market definition in the merger decision we formulate and estimate an oligopoly model with differentiated products based on the estimates we compare several alternative market power tests a hypothetical market power test an actual market power test and a comparative market power test our comparison of these alternative tests illustrates that the recently introduced empirical techniques need not be in conflict with traditional policy practices in europe but should be seen as a natural extension of commonly accepted principles furthermore we emphasize the importance of our dynamic comparative market power test in the european context according to this test the relevant point of comparison when assessing a merger is not the status quo but rather a relevant alternative merger scenario that is likely to happen in the event the merger is rejected in a european context the choice is often to accept a sequence of regionally based mergers or rather a sequence of pan european mergers finally we also emphasize the importance of constructing confidence intervals when computing the predicted merger effects especially if one is interested in testing the hypothesis that a merger has no effects

the distribution of foreign exchange price changes trading day effects and risk measurement this study investigates the nature of price changes in a variety of major and minor foreign exchange markets the results suggest that the log of price changes over one trading day intervals seems to follow a non normal stable distribution function different measures of location and to lesser extent scale are present for different days of the week dollar denominated price changes are high on mondays and wednesdays and low on thursdays and fridays for all currencies the wednesday thursday result is consistent with the settlement procedures used in foreign exchange transactions in the dollar the friday monday result is consistent with an increase in demand for the dollar prior to the weekend this study offers some previously unavailable results on the nature of price changes in a certain set of speculative markets in particular this is a study of the distributional characteristics of daily and weekly price changes for a number of major and minor foreign exchange markets the results document the existence of non normal stable distributions for price changes in foreign exchange markets these price change distributions differ by day of the week in ways that are only partly attributable to the institutional structure of the market the results of the study are interpreted within the context of understanding how foreign exchange markets operate and within the context of prior studies of stock market data concerned with summarizing the probability distribution of price changes for different intervals including days of the week since bachelier s 1 original treatise that contained the proposition that speculative market prices follow a process that could be described by a normal distribution there have been numerous alternative attempts to describe the stochastic processes which characterize speculative market prices these studies have not resulted in any generalized description of the probability distribution of price changes in such markets indeed the evidence suggests substantial differences in the process among various types of financial instruments the failure to achieve consensus can be traced to the lack of robustness in the statistical procedures employed to estimate processes and to differences in the underlying institutional or economic arrangements which are unique to that market the possibility of differences in the information set used to assess value or differences in technology for transmitting information makes it important to secure additional

market provision of broadcasting a welfare analysis this paper presents a theory of the market provision of broadcasting and uses it to address the nature of market failure in the industry advertising levels may be too low or too high depending on the nuisance cost to viewers the substitutability of programs and the expected benefits to advertisers from contacting viewers market provision may allocate too few or too many resources to programming and these resources may be used to produce programs of the wrong type monopoly ownership may produce higher social surplus than competitive ownership and the ability to price programming may reduce social surplus

reference dependent preferences team relocations and major league expansion abstract professional sports teams receive large subsidies some in excess of 500 million from local governments for the construction of new facilities these subsidies cannot be explained by tangible economic benefits and estimates of the value of intangible benefits also fall short of typical subsidies in this paper we incorporate fans reference dependent preferences into a model of the bargaining between local governments and teams the model predicts that teams use relocation threats to exploit fans utility loss from team departures a negative deviation from the status quo to extract large subsidies from local governments fans loss aversion provides an explanation of the current team distribution and observed team relocation and league expansion decisions in north america the model also highlights the importance of anti trust exemptions of the leagues in creating credible relocation threats for existing teams

risk shifting incentives of depository institutions a new perspective on federal deposit insurance reform abstract we characterize the risk shifting incentives of a depository institution as arising fundamentally from the existence of limited liability and the associated convex payoff to equity holders this risk incentive feature is unchanged by deposits being insured and hence excessive risk taking by depository institutions is not solely attributable to the flat rate insurance premium consequently the incentive problem cannot be resolved through a risk based insurance premium contrary to the prevailing view we propose a solution that eliminates risk shifting through an optimal tax structure and specify a corresponding insurance premium that is revenue neutral from the social planner s regulator s standpoint the solution is derived in the context of a social objective function that trades off the benefits of liquidity services by banks and the unique informational role of bank loans with the costs of investment distortions engendered by risk shifting

bank risk dynamics and distance to default we adapt structural models of default risk to take into account the special nature of bank assets the usual assumption of log normally distributed asset values is not appropriate for banks typical bank assets are risky debt claims which implies that they embed a short put option on the borrowers assets leading to a concave payoff this has important consequences for banks risk dynamics and distance to default estimation due to the payoff non linearity bank asset volatility rises following negative shocks to borrower asset values as a result standard structural models in which the asset volatility is assumed to be constant can severely understate banks default risk in good times when asset values are high bank equity payoffs resemble a mezzanine claim rather than a call option bank equity return volatility is therefore much more sensitive to big negative shocks to asset values than in standard structural models

identification in differentiated products markets using market level data we present new identification results for nonparametric models of differentiated products markets using only market level observables we specify a nonparametric random utility discrete choice model of demand allowing rich preference heterogeneity product market unobservables and endogenous prices our supply model posits nonparametric cost functions allows latent cost shocks and nests a range of standard oligopoly models we consider identification of demand identification of changes in aggregate consumer welfare identification of marginal costs identification of firms marginal cost functions and discrimination between alternative models of firm conduct we explore two complementary approaches the first demonstrates identification under the same nonparametric instrumental variables conditions required for identification of regression models the second treats demand and supply in a system of nonparametric simultaneous equations leading to constructive proofs exploiting exogenous variation in demand shifters and cost shifters we also derive testable restrictions that provide the first general formalization of bresnahan s 1982 intuition for empirically distinguishing between alternative models of oligopoly competition from a practical perspective our results clarify the types of instrumental variables needed with market level data including tradeoffs between functional form and exclusion restrictions

chicken and egg competition among intermediation service providers we analyze a model of imperfect price competition between intermediation service providers we insist on features that are relevant for informational intermediation via the internet the presence of indirect network externalities the possibility of using the nonexclusive services of several intermediaries and the widespread practice of price discrimination based on users identity and on usage efficient market structures emerge in equilibrium as well as some specific form of inefficient structures intermediaries have incentives to propose non exclusive services as this moderates competition and allows them to exert market power we analyze in detail the pricing and business strategies followed by intermediation services providers copyright 2003 by the rand corporation

can higher prices stimulate product use evidence from a field experiment in zambia the controversy over how much to charge for health products in the developing world rests in part on whether higher prices can increase use either by targeting distribution to high use households a screening effect or by stimulating use psychologically through a sunk cost effect we develop a methodology for separating these two effects we implement the methodology in a field experiment in zambia using door to door marketing of a home water purification solution we find evidence of economically important screening effects by contrast we find no consistent evidence of sunk cost effects jel c93 d12 i11 m31 o12

the market of academic journals evidence from data on french libraries this paper analyzes the demand and cost structure of the french market of academic journals after merging several databases we estimate an aggregated nested logit demand system combined simultaneously with a pricing equation taking into account the evolution of impact factors of journals we identify the structural parameters of this market and find that price elasticities of demand are relatively high indicating that this industry experiences competitive constraints we conjecture that the two sidedness feature of academic journals could be a rationale for our results jel l11 l13 l82 c35

how does the stock market view bank regulatory capital forbearance policies during the subprime crisis the fdic has shown once again laxity in resolving and closing insolvent institutions ronn and verma 1986 call the tolerance level below which a bank closure is triggered the regulatory policy parameter we derive a model in which we make this parameter stochastic and bank specific to infer the stock market view of the regulatory capital forbearance value for 565 u s listed banks during 1990 to 2012 the countercyclical forbearance fraction in capital most substantial in recessions could represent 17 on average of the market valuation of bank equity and could go as high as 100

mergers with differentiated products the case of the ready to eat cereal industry traditional merger analysis is difficult to implement when evaluating mergers in industries with differentiated products i discuss an alternative which consists of demand estimation and the use of a model of postmerger conduct to simulate the competitive effects of a merger i estimate a brand level demand system for ready to eat cereal using supermarket scanner data and use the estimates to 1 recover marginal costs 2 simulate postmerger price equilibria and 3 compute welfare effects under a variety of assumptions the methodology is applied to five mergers two of which occurred and for which i compare predicted to actual outcomes

political equilibrium and the provision of public goods this paper treats interest groups peoplein their role as consumers of a public goodand people in their role as taxpayers asthe unit of account for representativevoting each group is allowed to make aneffort to support its preferred candidateand at the margin the effort benefitratio is the political price the group iswilling to pay to secure an additionaldollar of benefits

banks and loan sales marketing nonmarketable assets theories of financial intermediation predict that bank loans should not be marketable because of moral hazard problems banks will not conduct credit risk analysis or monitor borrowers if they are not at risk for failing to perform these services throughout most of history bank loans have not in fact been marketable yet by the end of the 1980 s the amount of commercial and industrial loan sales outstanding had grown to over 250 billion from trivial amounts at the beginning of the decade to explain the opening of this loan sales market we present a model of incentive compatible loan sales that allows for implicit contractual features between loan sellers and loan buyers we then test for the presence of these features using a sample of over 800 recent loan sales

regulatory arbitrage in cross border banking mergers within the eu expanding the cross country footprint of an organization s profit making activities changes the geographic pattern of its exposure to loss in ways that are hard for regulators and supervisors to observe this paper tests and confirms the hypothesis that differences in the size and character of safety net benefits available to banks in individual eu countries help to account for cross border merger activity our results suggest that central bankers need to develop statistical procedures for assessing the consequences of differences in supervisory strength and weakness in partner countries we believe that the methods used here can help in this task

circulation versus advertiser appeal in the newspaper industry an empirical investigation advertising space is not a homogeneous commodity but something whose value depends on the characteristics of a newspaper s readership it is suggested in particular that the proportion of readers belonging to the more affluent social categories will exert a strong positive influence on advertising this paper investigates the circulation readership profile relation using a simple simultaneous equation framework the model is then estimated across a sample of british and irish daily and sunday newspapers using data collected from industry sources the paper then seeks to quantify the trade off between circulation and the proportion of high income readers copyright 1989 by blackwell publishing ltd

measuring market power in the ready to eat cereal industry the ready to eat cereal industry is characterized by high concentration high price cost margins large advertising to sales ratios and numerous introductions of new products previous researchers have concluded that the ready to eat cereal industry is a classic example of an industry with nearly collusive pricing behavior and intense nonprice competition this paper empirically examines this conclusion in particular i estimate price cost margins but more importantly i am able empirically to separate these margins into three sources i that which is due to product differentiation ii that which is due to multi product firm pricing and iii that due to potential price collusion the results suggest that given the demand for different brands of cereal the first two effects explain most of the observed price cost margins i conclude that prices in the industry are consistent with noncollusive pricing behavior despite the high price cost margins leading firms are able to maintain a portfolio of differentiated products and influence the perceived product quality it is these two factors that lead to high price cost margins

estimating market power in a two sided market the case of newspapers the newspaper industry is a two sided market the readers market and the advertising market are closely linked by inter market network externalities we estimate market power in the italian newspaper industry by building a structural model which encompasses a demand estimation

ownership structure market discipline and banks risk taking incentives under deposit insurance the paper studies the effects of market discipline by creditors and ownership structure on banks risk taking in the presence of partial deposit insurance an agency cost model explains how the effects of creditor discipline and shareholder control arc interdependent the non monotonic effect of shareholder control and the role of leverage panel regressions on several hundred banks worldwide 1995 2005 confirm a negative individual risk effect of creditor discipline and the expected convex effect of shareholder control increased shareholder control significantly strengthens the negative effect of market discipline on asset risk but joint effects on overall default risk are limited c 2011 elsevier b v all rights reserved

three paradigms for the role of capitalization requirements in insured financial institutions standard models for deposit insurance strike analogies to more familiar financial contracts and conceive of risk as exogenous the oldest model of deposit insurance likens it to passively underwriting casualty insurance a more sophisticated but still bilateral model likens deposit insurance to writing a passive put option on the enterprise whose funding is insured delays in acknowledging the wreck of the s l industry and its federal insurer fslic discredit these models as guides to managing a deposit insurance fund deposit insurance is better interpreted as a trilateral performance bond that enhances the credit of an insured institution this interpretation endogenizes risk emphasizes incentive conflict and underscores the need to optimize loss control activity the bonding model clarifies that a subset of the monitoring and disciplinary activities traditionally undertaken by government officials can usefully be privatized

capital controls and international interest rate differentials since the asian crises it is often taken as granted that capital markets have significant functional deficits often these deficits are believed to be so very strong that the ability of free capital markets to guarantee a more or less correct international allocation of capital is denied it is argued that speculation dominates capital markets so much that capital allocation is purely random this is one of the major arguments backing the present trend to re establish capital controls which emerged after the capital market distortions observed during the asian flu in the present article it is shown that capital markets while certainly prone to many distortions are well capable of roughly guiding capital to the proper place though allocation is not model like perfect this steals the thunder from the idea that closed or government guided capital markets were able to perform better

competition between networks a study of the market for yellow pages this paper estimates the importance of network effects in the market for yellow pages i estimate three simultaneous equations consumer demand for usage of a directory advertiser demand for advertising and a publisher s first order condition derived from profit maximizing behaviour estimation shows that advertisers value consumer usage and that consumers value advertising implying a network effect i find that internalizing network effects would significantly increase surplus as an application i consider whether the market benefits from monopoly which takes advantage of network effects or oligopoly which reduces market power i find that a more competitive market is preferable copyright 2004 wiley blackwell

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

price structure in two sided markets evidence from the magazine industry we present and estimate a model of competition in a two sided market the market for magazine readership and advertising using data on magazines in germany we find evidence that magazines have properties of two sided markets the results are consistent with the perception that prices for readers are subsidized and that magazines make all their money from advertisers consistent with advertisers valuing readers more than readers value advertisements our results imply that higher demand on the reader side increases ad rates but that higher demand on the advertising side decreases cover prices

fair value disclosures by bank holding companies abstract this paper examines the value relevance of fair value data disclosed under sfas 107 by banks for 1992 and 1993 collectively the evidence suggests differences between fair and book values of financial instruments are associated with market to book ratios however fair value disclosures for financial instruments other than securities are value relevant only in limited settings in addition only in 1992 are fair value variables associated with market to book ratios after incorporating existing historical cost information further analysis suggests the weaker 1993 results are not necessarily due to increased measurement error in fair value numbers

market based risk adjusted examination schedules for depository institutions abstract among deposit insurance reforms considered by economists and policymakers have been prompt resolution of problem institutions risk adjusted deposit insurance premiums and risk adjusted capital requirements some economists have further suggested that risk adjusted deposit insurance premiums or capital ratios be calculated by applying option pricing models to stock market data alternatively the option methodology could be used to establish a risk based examination schedule whereby riskier banks would be examined on a more frequent basis such an examination schedule would be consistent with prompt resolution strategies since it would relate the frequency of examination and closeness of supervision to banks riskness this paper demonstrates how a risk adjusted examination schedule could be derived the paper also considers alternatives to the assumptions regarding examination policies made in standard applications of the option model which may not be valid for the sample periods previously used it discusses potential resulting biases and ways to mitigate their effects

bank capital regulation in a barrier option framework abstract the barrier options theory of corporate security valuation is applied to the contingent claims of a regulated bank the regulator insurer of a bank owns a down and in call option on the bank assets which can be balanced against the expected coverage cost raising the regulatory barrier critical asset level triggering bank closure leads to a transfer of wealth from stockholders to the insurer and reduces stockholder incentives to increase asset risk empirical tests on a sample of 152 one bank holding companies show that regulatory barriers are priced in the stock market and are inversely related to tier 1 leverage ratios

economic effects of media concentration estimates from a model of the newspaper firm by specifying and estimating a 5 equation model of newspaper operations this paper provides evidence useful for addressing several issues concerning media concentration on the cost side the results indicate that there exist significant scale economies in the production of circulation and space on the other hand the evidence suggests that chain newspapers can not produce output more efficiently than independents all things equal on the demand side rival newspapers located in contiguous geographic markets appear to have an important competitive effect on the demand for circulation however broadcast stations do not seem to affect demand for newspaper advertising and circulation

the managerial regulatory and financial determinants of bank merger premiums this paper analyzes the managerial regulatory and financial determinants of us bank merger premiums we use both individual acquirer and target bank characteristics we also examine state regulation of acquirer and target banks from a geographically dispersed population allowing us specifically to test the effect of a varied state regulatory menu the study finds merger premiums to be related to the characteristics of both acquirer and target banks and the regulatory environments in both acquirer and target bank states we also find evidence that the separation of ownership and control in acquirer and target banks has a significant effect on merger premiums in the last decade the pace of mergers in the us banking industry has been impressive this growth in the number of bank mergers has largely been due to the changing economic and regulatory environment with the reduction in the severity of enforcing strict antitrust guidelines by the reagan administration and more importantly the gradual removal of geographical restrictions by individual states on bank expansion the environment for bank mergers has never been so conducive since the regulatory restrictions are likely to be further relaxed with an increasing number of states permitting interstate banking in the early 1990s the number and dollar value of bank mergers is certain to accelerate accordingly it is important to improve our understanding of bank mergers this paper examines the financial regulatory and managerial determinants of bank merger premiums in examining the financial determinants of the merger premiums we include the financial characteristics of the target banks and the franchise value of its banking market because bank mergers are carefully regulated by state laws we also analyze the regulation in the banks states we examine the state regulation of acquirer and target banks

the valuation of fdic deposit insurance using option pricing estimates when congress set the premium rate for fdic deposit insurance in the banking act of 1935 which authorized a permanent federal insurance system neither experience nor theory could offer much guidance regarding an appropriate fee structure although rates have since been periodically revised the fdic has yet to attempt to set the insurance rate at a ifair level that is a level equal to administrative costs plus the ex ante value of the insurance such a premium is the rate that would be charged by competitive private insurers however7 the garn st germain act of 1982 directed the fdic to consider the feasibility of a risk based premium structure in response the fdic has suggested a trial system in which each insured bank will be placed in one of three risk classes based on credit and interest rate risk relative to capital and a premium rate will be assigned to each group those rates will be determined in part by the loss experience of the entire banking system fdic 1983 another approach to the determination of the appropriate insurance premium has been offered by merton 1977 who suggested using the analogous relationship between deposit guarantees and put options to value fdic insurance in this paper we follow merton s suggestion and calculate bank specific estimates of the proper premium for deposit insurance for the banks in our sample we find that fdic rates greatly exceed estimates of the fair value of the insurance derived from the blackscholes 1972 option pricing model

bank regulation and monetary policy the depository institutions deregulation and monetary control act 1980 and the garn st germain depository institutions act 1982 are the two most significant pieces of bank legislation since the 193os their significance stems from the fact that they have sought to roll back a number of the regulations and restrictions imposed on bank activity and competition in the 1933 80 period among the important provisions of these acts are a gradual elimination of regulation q ceilings on time and savings deposits by march 1986 the amelioration of state imposed usury ceilings on loans the nationwide provision of interest bearing transaction type accounts negotiable order of withdrawal now and super now accounts permission for thritts to expand into bank like products such as commercial and industrial loans consumer loans and credit cards and the development of new types of savings accounts such as mmdas l in addition to legislative deregulation we have also witnessed homemade deregulation as banks have sought to exploit often with great success loopholes in the bank holding

deregulation and bank financial policy the standard view that banks can value maximize by exploiting non risk rated deposit insurance ignores the potential loss of a valuable bank charter due to insolvency recognition of this effect changes the bank s optimal financial policy and can induce extreme risk averting as well as risk taking behavior however as the value of the bank charter falls the risk taking strategy is more apt to dominate therefore current deregulation of the banking industry by easing entry and devaluing charters holds the potential for increases in the incidence of insolvency unless offsetting policies are instituted

a framework for assessing credit risk in depository institutions toward regulatory reform abstract this paper develops and illustrates a new method for evaluating the credit risk borne by depository institutions that may prove to be an important element in a regulatory mechanism sensitive to risk in our framework depository institutions are forced to bear the costs of their risk exposure and hence to internalize this cost when extending loans using various loan portfolios and alternative macroeconomic scenarios we present numerical calculations demonstrating the ability of our framework to capture variations in risk exposure and highlighting the significance of portfolio concentrations these calculations are based on an important new source of information that permits an econometric analysis of loan losses by industry

correlated default risks and bank regulations bank regulatory design relies critically on bank risk modeling traditionally the bank s aggregate value is assumed to obey an exogenously specified process e g a lognormal diffusion we demonstrate that this assumption is generally invalid given the truncated and correlated payoff structure of individual bank loans instead the bank s aggregate terminal payoff is significantly left fat tailed this skewness remains even when the bank holds an infinitely large number of loans in its portfolio unless they are uncorrelated by ignoring skewness in bank payoffs deposit insurance premia and capital requirements have traditionally been significantly mis calculated

the implied reserves of the bank insurance fund abstract option models of deposit insurance pricing view assessment rates as put option premiums however such models ignore the risk of guaranty fund default this paper attempts to link risk based premiums with guaranty fund reserves in a partial equilibrium setting by employing a methodology based on options with credit risk the value of full insurance per coverage period is expressed as a standard options premium and is decomposed into two parts the explicit part is due to the available assets reserves of the guaranty fund while the implicit part comes from federal support contingent on the adequacy of reserves at the end of the coverage period implied reserves are derived under an exogenous insurance coverage rate as a policy parameter the method is illustrated on a sample of 40 large bank holding companies and an extension to the case of several insured banks is provided

network effects in the german magazine industry this paper examines the two sided network effects in the german magazine industry we specify and estimate the network effect functions for readers and advertisers nonparametrically and find that they are neither linear nor monotonic

a simple approach to better deposit insurance pricing abstract we examine the ability of simple insurance pricing schedules to match premiums with the values derived from a contingent claim model of deposit insurance we use a quadratic loss function to compare a flat rate pricing system to alternative pricing schedules incorporating measures of risk a simple two bracket schedule that distinguishes between high and low capitalization is a substantial improvement a pricing schedule under which the rate paid by low capital banks depends on their degree of undercapitalization is better still in addition the gains from using market value measures of capital rather than book value are great

two sided markets a progress report the paper provides a road map to the burgeoning literature on two sided markets and presents new results it identifies two sided markets with markets in which the structure and not only the level of prices charged by platforms matters the failure of the coase theorem is necessary but not sufficient for two sidedness the paper builds a model integrating usage and membership externalities that unifies two hitherto disparate strands of the literature emphasizing either form of externality and obtains new results on the mix of membership and usage charges when price setting or bargaining determine payments between end users

optimal bank reorganization policies and the pricing of federal deposit insurance optimal dynamic regulatory policies for closing ailing banks and for deposit insurance premia are derived as functions of the rate of flow of bank deposits and interest rate on deposits the economy s risk free interest rate and the regulators bank audit administration costs under competitive conditions the threshold assets to deposits ratio below which a bank should be optimally closed is shown to be greater than or equal to one optimal deposit insurance premia and probabilities of bank closure are shown to be nondecreasing in the bank s risk on investment and nonincreasing in the bank s current assets to deposits ratio should regulatory agencies close reorganize an ailing federally insured financial institution if so when the recent record rate of failures of savings and loans associations s ls has renewed the urgency of this question the regulatory agencies are empowered but not required to reorganize financial institutions that are statutorily insolvent i e have zero or negative regulatory net worth recently regulators have in many instances permitted insolvent financial institutions to remain in operation 2 also while debating on the increase of the proposed funding of the federal deposit insurers the u s congress argued whether it would be desirable and if so when to close more s ls thus when regulators should close a troubled financial institution has become a major question of bank regulatory policy while the existing academic literature provides powerful insights into the structure and pricing of the insurers liability this literature offers very little guidance regarding the timing of bank reorganizations 3 indeed to the best of our knowledge the value of the federal

risk based capital adequacy standards for a sample of 43 major banks abstract the paper extends the option theoretic framework for the estimation of risk adjusted deposit premiums to the calculation of risk based capital adequacy standards based on market data for equity and the book value of debt the model solves for the market value of the capital infusion required to lower the implied deposit premium to acceptable levels of risk this capital infusion can then be translated into market value capital adequacy standards and book value capital asset ratios the determination of which is within the current statutory discretion of regulatory agencies the model is empirically applied to a sample of 43 major u s banks

is fairly priced deposit insurance possible we analyze risk sensitive incentive compatible deposit insurance in the presence of private information and moral hazard without deposit linked subsidies it is impossible to implement risk sensitive incentive compatible deposit insurance pricing in a competitive deregulated environment except when the deposit insurer is the least risk averse agent in the economy we establish this formally in the context of an insurance scheme in which privately informed depository institutions are offered deposit insurance premia contingent on reported capital the result holds for alternative sorting instruments as well this suggests a contradiction between deregulation and fairly priced risk sensitive deposit insurance this paper exposes a conflict between a deregulated competitive financial services industry on the one hand and fairly priced risk sensitive deposit insurance on the other we show that if depository institutions dis are perfectly competitive i e each makes zero profits on average then it is impossible to implement incentive compatible risk sensitive deposit insurance pricing recent distress among dis has fueled debate about reform of the existing deposit insurance system many believe that the prevailing risk insensitive premium structure encourages dis to choose excessively risky assets and that it should be replaced by deposit insurance premia linked to the dis choices of risk 2 risk sensitive deposit insurance pricing however imposes greater informational demands on the deposit insurer and runs afoul of both

a market evaluation of the risk based capital standards for the u s financial system abstract this paper evaluates u s risk based capital guidelines by comparing stock market measures of institutions risk with current regulatory risk based capital measures the first part of the evaluation compares overall market and regulatory risk based capital measures of current capital adequacy required capital and the capital infusion required to meet the capital requirement the second part compares regulatory risk weights on individual risk categories with market determined risk weights the results suggest that the market and risk based capital standards agree to some extent on the adequacy of institutions current capital and required capital infusion but that their measures of asset risk are not positively correlated further the 100 percent risk category for banks and the 50 and 200 percent categories for s ls do distinguish activities that are riskier by market measures however the market model makes limited distinctions among the other categories in addition the results suggest that some off balance sheet activities for banks may reduce asset risk

new empirical evidence on the effects of capital controls on composition of capital flows in malaysia this study aims to examine the effect of capital controls on composition capital flows in malaysia under predetermined exchange rate rules the contribution of selective controls is to increase monetary autonomy without taxing private long term capital flow or foreign direct investment although the selective capital controls in malaysia tax only some components of capital flows the study shows after controlling other factors the controls not only reduce the total flows hence increase monetary autonomy but to some extent affected the private long term flows

liberalizing a distribution system the european car market we quantify the competitive effects of liberalizing the selective and exclusive distribution system in the european car market based on a model of oligopoly pricing with differentiated products we consider two possible competitive effects from liberalization i the creation of international intrabrand competition cross border trade which will result in a reduction of international price discrimination and ii a possible cumulative effect arising from a strengthening of national intrabrand competition which would result in reduced double marginalization we find that the reduction in international price discrimination mainly redistributes consumer gains across countries it has a positive but modest effect on total welfare if liberalization also has the cumulative effect of reducing double marginalization the welfare effects are much higher finally we find that the effects of liberalization on the manufacturers profits are either small or positive this finding implies that international price discrimination and softening competition through a double marginalization mechanism should not be interpreted as main profit motives for the previous distribution system but only as unintended side effects hence the industry rationale for maintaining the previous distribution system should be sought in other areas jel f15 l42

games of survival in the us newspaper industry 1989 games of survival in the us newspaper industry applied economics vol 21 no 5 pp 631 649

does the debt market assess large banks risk time series evidence from money center cds abstract uninsured bank liabilities should offer a promised yield that compensates depositors for their expected default losses however the conjectural guarantees available to large u s banking firms makes it questionable whether large depositors should or do feel themselves exposed to credit risk prior papers have evaluated the determinants of bank risk premia using cross sectional data with relatively inconclusive results this paper investigates the same issue in a methodologically independent fashion using time series data on specific banks daily offering rates during the period may 1982 through july 1988 we find that cd rates paid by large money center banks include significant default risk premia

a semi parametric analysis of two sided markets an application to the local daily newspapers in the usa summary this paper considers an empirical semiparametric model for two sided markets contrary to existing empirical literature on two sided markets we specify network effects and probability distribution functions of net benefits of the two sides nonparametrically we then estimate the model by nonparametric instrumental variables regression for local daily newspapers from the usa we show that semiparametric specification is supported by the data and the network effects are neither linear nor monotonic with a numerical illustration we demonstrate that the mark up of the newspaper on each side changes drastically with the nonlinearly specified network effects from the case with linear network effects copyright 2015 john wiley sons ltd

charter value minimum bank capital requirement and deposit insurance pricing in equilibrium abstract this paper shows that leaving insolvent banks with large enough charter values open can be optimal and derives normative bank closure reorganization policies based on the liquidation value of assets and the charter value the charter value of a bank is broadly defined as the value that would be foregone due to a closure our simulations of risk taking show that an optimal forbearance for an insolvent bank with a large enough charter value alleviates the moral hazard problem this is because increasing the risk raises the probability of losing the charter value although it generates a moral hazard gain

deposit insurance and risk taking behavior in the credit union industry abstract this paper examines the relationship between deposit insurance and risk taking behavior within the credit union industry time series tests employing industry average financial ratios for federal and state credit unions did not support the increased risk taking hypothesis although federal credit union capital declined immediately following the adoption of deposit insurance this was most likely the result of reduced capital requirements not deposit insurance liquidity and loan delinquency ratios had a negative time trend coefficient implying a decline in risk taking behavior during the post insurance period cross sectional test results employing iowa state chartered credit union data indicated that insured credit unions were better capitalized and more liquid than their uninsured counterparts overall there was no evidence that the adoption of deposit insurance increased the risk taking behavior of credit unions

aggregate deposit insurance funding and taxpayer bailouts abstract recent events have focused attention on the fragility of the federal deposit insurance funds and made redesign of the insurance system an active policy issue this paper explores the implications of different rate structures for the long term solvency of the fund using two simulation techniques based on historical loss distributions three findings stand out 1 under the former 8 33 bp premium rate as well as under the 15 bp premium rate mandated as the new long run target or default premium rate by both firrea and the fdic assesment rate act of 1990 the probability that the fund could become insolvent over a given 55 year period is higher than previously recognized 2 raising the effective cap on the fund to as low as 2 5 of deposits can substantially reduce the probability of insolvency without further increasing the premium rate and 3 the anticipated temporary 1991 premium rate of 19 5 bp implies a quite low probability of insolvency

an experimental exploration of self fulfilling banking panics their occurrence persistence and prevention this article tests the possibility and the degree of persistence of self fulfilling banking panics through an experimental protocol panics are proved to be persistent phenomena that are difficult to prevent however it seems possible to curb them through a learning effect caused by a temporary but sufficient suspension of the deposit availability combined with a narrow banking solution which makes banks more liquid additionally panic prevention requires a full deposit coverage to be effective this suggests that the moral hazard issue should not be tackled through a lower deposit coverage especially in emerging countries banking systems where depositors are likely to lose confidence

moving toward risk based deposit insurance premiums in the european union the case of spain this article provides a scenario based analysis of how the european union proposal for a new funding model for deposit insurance systems diss would affect the spanish banking sector we examine the risk profiles of commercial banks savings banks and credit cooperatives over the period 2007 to 2011 and compare the contributions to the deposit insurance fund dif under the current flat rate regime with those that would have occurred under the new risk sensitive system we find that a risk based scheme could provide an incentive for sound management by reducing the premiums for credit institutions with better risk profiles we also conclude that the proposed reform may help to mitigate the moral hazard associated with larger credit institutions

a multi attribute comparative evaluation of relative risk for a sample of banks abstract this paper proposes a comparative analysis of five different attributes of commercial banks liabilities that may be thought of as either directly measuring the default risk or are perceived by the market as impacting upon that default risk two of these attributes are credit ratings assigned by moody s and standard and poor s to debt issues the third attribute that we consider is yield to maturity which is typically assumed to be positively related to default risk the fourth attribute that is proposed is the fair value risk adjusted deposit insurance premium derived from option theoretic modeling and estimated from the daily data on equity prices finally we propose a term structure adjusted difference in yield between the risky debt and default free government debt as a more precise and theoretically sound measure of the default risk premium and develop a methodology for eliciting it on a composite basis for a given bank from the market prices of its various bond issues this term structure adjusted risk premium provides an analytical approximation to the valuation of corporate bonds call features and sinking fund provisions in view of the ordinality of the credit ratings given by the investment agencies spearman s rank correlation coefficient is employed as an analytical tool the analysis

the distributional impact of foreign deposits on federal deposit insurance premia abstract rapid growth of deposits in u s foreign bank branches and current u s government policies have combined to create a new inequality in the deposit insurance system our research shows that smaller banks are substantially subsidizing the insurance costs of the larger multinational institutions when insurance premiums are viewed in the context of an implicit tax it is highly regressive with the wealth transfer growing over time recent reform proposals do not fully address important international influences and therefore underestimate the scope of the problem

a note on the existence and characteristics of fair deposit insurance premia abstract this paper treats the fair deposit insurance premium as a fixed point of the value of insurance per dollar of deposits using the standard model of the value of deposit insurance and treating the premium as an up front cost to a bank it is shown that the fixed point premium exists and is unique under fairly general conditions it is shown that ignoring the premium as an up front cost may lead to underestimation of the fair premium in addition the fixed point model suggests that premium rates should vary with the ratio of deposits to total liabilities

optimal bank interest margin under capital regulation and deposit insurance this paper examines the relationships among capital regulation deposit insurance and the optimal bank interest margin in a model where loan losses are the source of uncertainty changes in capital regulation or deposit insurance premiums have direct effects on the bank s interest margin an increase in bank capital requirement or in deposit insurance premiums results in a reduced interest margin under nonincreasing risk aversion comparative static analysis also explores the relation between asset quality and interest margin it is shown that a mean preserving spread of the distribution of loan losses results in a reduced margin

stopping hot money abstract while high interest rates and foreign exchange sales are the most common way of dealing with a speculative attack in the foreign exchange market several countries resorted to capital controls during recent periods of currency market turbulence the purpose of this study is to use daily financial data to examine three of these capital controls episodes brazil 1999 malaysia 1998 and thailand 1997 we aim to assess the extent to which the capital controls were effective in delivering the outcomes that motivated their inception in the first place we conclude that in two of the three cases brazil and thailand the controls did not deliver much of what was intended although one does not observe the counterfactual by contrast in the case of malaysia the controls did align closely with the priors of what controls are intended to achieve greater interest rate and exchange rate stability and more policy autonomy

interest risk sensitive deposit insurance premia stable ach estimates abstract the parameters of interest rate uncertainty are estimated by maximum likelihood for the period 1952 1982 and used to evaluate bank or thrift deposit insurance as a function of duration mismatching capital asset ratio and the recent history of interest rate forecasting errors homoskedasticity is overwhelmingly rejected in favor of adaptive conditional heteroskedasticity ach even after removing this heteroskedasticity normality gives much lower likelihood than paretian stable distributions with characteristic exponent in the range 1 614 to 1 714 the conditional deposit insurance values fluctuate by factors in excess of 300 for some duration gaps over the past three decades

controls on capital inflows do they work abstract this paper analyzes the effectiveness of controls on capital inflows in particular we analyze in great detail the chilean experience with the use of the unremunerated reserve requirement we examine the effects of the controls applied in chile in 1991 1998 on interest rates real exchange rate and the volume and composition of capital inflows the effects are elusive and it is difficult to pin down long run effects although after the unremunerated reserve requirement was introduced there was an increase in the interest rate differential the econometric evidence does not show it has a significant long run effect also we detect very small effects on the real exchange rate however the more persistent and significant effect is on the composition of capital inflows tilting composition toward longer maturity

pricing decisions of the newspaper monopolist in nearly every city in the united states there is only one daily newspaper of general interest given the prevalence of monopoly it seems anomalous that newspapers are typically sold well below cost compaine 5 19 for example reports that sales revenue is only 28 7 percent of total cost moreover it appears that price is below marginal cost since the sales revenue does not cover the cost of the ink and paper used in producing the newspaper 2 if the newspaper publisher were selling only newspapers he or she would be in dire straits but in reality the publisher has two products to sell the newspaper itself and advertising space within the newspaper although very few newspaper customers are also purchasers of advertising space there is an important interaction between the circulation of the newspaper and the sale of advertising space the higher the circulation of the newspaper the greater the demand for advertising and the more advertising there is in the newspaper the greater the circulation of the newspaper 3 as a consequence the publisher has a more complicated pricing problem since the prices of advertising space and of the newspaper have feedback effects upon one another in the next section of this paper we shall derive the publisher s optimal prices for advertising space and for the newspaper under fairly general conditions one purpose of this analysis is to show that there are two meaningful measures of demand elasticity in section iv we discuss some of the associated empirical problems that this poses and relate this to two existing newspaper demand studies

the pricing of deposit insurance considering bankruptcy costs and closure policies the paper aims to study the pricing issue of deposit insurance with explicit consideration of bankruptcy costs and closure policies full coverage from deposit insurance is imposed by many regulators to stabilize the banking system in the current financial crisis despite of the potential moral hazard problems we argue that bankruptcy cost is an important factor in pricing deposit insurance especially when the insured institution is insolvent applying the isomorphic relationship between deposit insurance and put option we first derive a closed form solution for the pricing model with bankruptcy costs and closure policies then we modify the barrier option approach to price the deposit insurance in which the bankruptcy cost is set as a function of asset return volatility and more realistic closure policies considering possible forbearance can be accounted for the properties of the models are supported by numerical simulations and are consistent with the risk based pricing scheme

quantifying equilibrium network externalities in the ach banking industry we seek to estimate the causes and magnitudes of network externalities for the automated clearinghouse ach electronic payments system using a panel data set on individual bank usage of ach we construct an equilibrium model of consumer and bank adoption of ach in the presence of a network the model identifies network externalities from correlations of changes in usage levels for banks within a network from changes in usage following changes in market concentration or sizes of competitors and from adoption decisions of banks outside the network with small branches in the network and can separately identify consumer and bank network effects we structurally estimate the parameters of the model by matching equilibrium behavior to the data using simulated maximum likelihood and a data set of localized networks and use a bootstrap to recover confidence intervals the parameters are estimated with high precision and fit various moments of the data reasonably well we find that most of the impediment to ach adoption is due to large consumer fixed costs of adoption the deadweight loss from the network externality is moderate the optimal number of ach transactions is about 16 higher than the equilibrium level

market valuation of bank assets and deposit insurance in canada we examine a sample of canadian banks and use option pricing theory to infer the market value of a bank s assets from the observed market value and volatility of its equity we find that market value estimates are significantly different from corresponding book values these differences vary significantly across banks suggesting that market values provide bank specific information not found in book values we also derive that risk adjusted deposit insurance premia for these banks our results suggest that the current fixed rate deposit insurance premium system has resulted in significant