screening ethics when honest agents care about fairness we analyze a principal s ability to discriminate between honest and dishonest agents who have private information about the circumstances of the exchange honest agents reveal circumstances truthfully as long as the mechanism is suciently fair the probability that an equilibrium allocation is chosen by an agent who is lying should not be too large without intolerance for lying the agent is given proper incentives if dishonest and zero rent if honest with even a small intolerance for lying the optimal mechanism is discontinuously altered it may still involve ethics screening whereby some allocation chosen by a dishonest agent is never chosen by an honest agent it happens either when the dishonest is overstating circumstances or when the principal is forced to allow for some suboptimal announcements due to an excessive intolerance for lying with limited intolerance for lying ethics screening allows for doing better than in the standard setup where the agent is dishonest with certainty even if honesty is unlikely however if intolerance for lying is too strong the principal cannot improve upon the standard setup

investigating the cost performance of uk credit unions using radial and non radial efficiency measures abstract this paper examines the relative efficiency of uk credit unions radial and non radial measures of input cost efficiency plus associated scale efficiency measures are computed for a selection of input output specifications both measures highlighted that uk credit unions have considerable scope for efficiency gains it was mooted that the documented high levels of inefficiency may be indicative of the fact that credit unions based on clearly defined and non overlapping common bonds are not in competition with each other for market share credit unions were also highlighted as suffering from a considerable degree of scale inefficiency with the majority of scale inefficient credit unions subject to decreasing returns to scale the latter aspect highlights that the uk government s goal of larger credit unions must be accompanied by greater regulatory freedom if inefficiency is to be avoided one of the advantages of computing non radial measures is that an insight into potential over or under expenditure on specific inputs can be obtained through a comparison of the non radial measure of efficiency with the associated radial measure two interesting findings emerged the first that uk credit unions over spend on dividend payments and the second that they under spend on labour costs

detecting abnormal credit union performance abstract credit unions are an important financial intermediary but little credit union research is done a primary reason for the lack of research is the cooperative nature of the industry making traditional methods of detecting abnormal performance inappropriate this paper proposes two methods of detecting abnormal performance one parametric the other non parametric instead of testing the efficiency of the institution this paper proposes testing the return vector as indicated in the theoretical objective function of the member simulations demonstrate that both methods are correctly specified and powerful

commitment and fairness in a dynamic regulatory relationship this paper considers a multiperiod model of a regulated firm that has stationary private information which may be revealed through performance if it cannot make commitments to future policies the regulator has an incentive to exploit any information the firm reveals and laffont and tirole show that there is no regulatory policy that is separating over any closed interval a fairness arrangement is proposed in which the firm agrees not to quit if in future periods the regulator allows it to earn a nonnegative profit given the type it revealed in earlier periods the properties of such arrangements are studied and an example is presented in which both the firm and the regulator prefer a fairness arrangement to a policy feasible without commitment

portfolio separation for stockholder owned depository financial intermediaries abstract the conditions leading to separation of asset composition and financing decisions for depository financial intermediaries have received considerable attention in the literature although research to date provides useful insights into the issue of separation none analyze separation from the point of view of shareholder approval in this paper a single period model of investor behavior is developed and analyzed based on market equilibrium the impetus for the existence of intermediaries is random cash payments of investors and liquidation costs the conditions for shareholder unanimity and optimal rules for intermediary decisions are derived the optimality conditions are then analyzed for separation

credit union rate and earnings retention decisions under uncertainty and taxation this paper presents a model of credit union loan and deposit rate setting when net income flows are uncertain and subj ect to taxation optimal rates are chosen to maximize the expected va lue of a performance measure based on a comparison of the credit unio n s rates to alternative rates subject to a probabilistic constraint on the net change in capital reserves relative to a capital adequacy standard taxation will alter the end of period trade off between th e change in capital reserves and the immediate distribution of surplu s and would likely affect credit unions in a nonuniform manner and p erhaps be regressive in nature copyright 1988 by ohio state university press

catching the agent on the wrong foot ex post choice of monitoring abstract in a principal agent model with multiple performance measures we show that the principal benefits by choosing ex post which variables will be monitored if it is too costly for one type of agent to mimic all performance measures expected from another type the principal can hope to catch the agent on the wrong foot if the agent tries to misrepresent his type for cases of small asymmetry of information the principal can implement the first best contract for more serious asymmetries of information the first best is not implementable then the low type may be required to overproduce which is in contrast to the traditional result of second best contracting we also obtain a ranking of monitoring instruments according to the frequency of their use

competing vertical structures precommitment and renegotiation we consider a model where two agents privately informed about their own characteristics play a normal form game on behalf of two uninformed principals we analyze the existence of precommitment effects through public announcements of contracts in a model where agency contracts designed ex ante can always be secretly renegotiated at the ex ante and interim stages we show that the existence of precommitment effects depends both on the strategic complementarity of the agents actions and on the direct effect of the opponents actions on each principal s welfare in our model the possibility of renegotiation is crucial for the existence of precommitment effects the results are introduced through an example of cournot and bertrand competition between firms viewed as vertical structures

consumer biases and mutual ownership abstract we show how ownership of the firm by its customers as well as nonprofit status can prevent firms from using contractual terms that take advantage of consumer biases by eliminating an outside residual claimant with control over the firm these alternatives to investor ownership reduce the incentive of the firm to offer such terms however customers who are unaware of their behavioral biases may fail to recognize this advantage of non investor owned firms we present evidence from the consumer financial services market that supports our theory comparing contract terms we find that mutually owned firms offer lower penalties such as default interest rates and higher up front prices such as introductory interest rates than do investor owned firms however consumers most vulnerable to these penalties are no more likely to use mutually owned firms

ownership effects among native american banks 2001 2016 abstractminority depository institutions mdis including native american banks natbs play an integral role in providing financial services to the under served natbs are split between those th

accounting window dressing and template regulation a case study of the australian credit union industry this article documents the response of cooperative institutions that were required to adhere to new capital adequacy regulations traditionally geared for profit maximising organisations using data from the australian credit union industry we demonstrate that the cooperative philosophy and internal corporate governance structure of cooperatives will lead management to increase capital adequacy ratios through the application of accounting window dressing techniques this is opposite to the intended purpose of template regulation aimed at efficiently increasing operating margins and lowering risk our results raise several debatable issues regarding the ethics of accounting management and the imposition of one shoe fits all external regulation

the economics of crime and punishment an analysis of optimal penalty this paper demonstrates the optimality of a non maximal penalty in a hierarchical enforcement structure the penalty is chosen by the social planner to maximize the probability of monitoring and to minimize the probability of transgression we compare the optimal penalty levels with and without ex post flexibility wherein the players are allowed to alter their decision after they observe the social planner s choice 2000 elsevier science s a all rights reserved

deductible contracts against fraudulent claims evidence from automobile insurance insurance fraud is now recognized as a significant resource allocation problem in many markets the object of this study is to verify how straight deductible contracts may affect the equilibrium level of falsification in automobile insurance this type of contract is observed in many markets even if it is not optimal under costly state falsification a higher deductible may create incentives to fraud or cheat particularly when the insured anticipates that the claim has a small probability of being audited to verify this proposition we estimate a loss equation for which one of the determinants is the amount of the deductible using a data set of claims filed for damages following an automobile accident with twenty insurance companies in quebec in 1992 because we have access only to reported losses a higher deductible also implies a lower probability of reporting small losses to isolate the fraud effect related to the presence of a deductible in the contract we jointly estimate a loss equation and a

the discount window and credit availability abstract this paper models the impact of the discount window on decisions of individual banks facing regulatory capital requirements and stochastic deposit supply a central result is that banks may choose a larger lending capacity if the discount window is available than if it is not moreover if the cost of capital is higher during recessions banks may then avoid the window contributing to the downturn a discontinuous interaction emerges between risk based capital requirements and use of the discount window with a more stringent capital requirement inducing some banks to hold less capital

the evolution of cost productivity and efficiency among us credit unions abstract advances in information processing technology have eroded the advantages of small scale and proximity to customers that traditionally enabled small lenders to thrive nonetheless the membership and market share of us credit unions have increased though their average size has also risen we investigate changes in the efficiency and productivity of us credit unions during 1989 2006 by benchmarking the performance of individual firms against an estimated order quantile lying near the efficient frontier we construct a cost analog of the malmquist productivity index which we decompose to estimate changes in cost and scale efficiency and changes in technology we find that cost productivity fell on average across all credit unions but especially among smaller credit unions smaller credit unions confronted a shift in technology that increased the minimum cost required to produce given amounts of output all but the largest credit unions also became less scale efficient over time

optimal credit rationing in not for profit financial institutions we examine the dynamic optimization problem for not for profit financial institutions nfps that maximize consumer surplus not profits we characterize the optimal dynamic policy and find that it involves credit rationing interest rates set by mature nfps will typically be more favorable to customers than market rates as any surplus is distributed in the form of interest rate subsidies with credit rationing being required to prevent these subsidies from distorting loan volumes from their optimal levels rationing overcomes a fundamental problem in nfps it allows them to distribute the surplus without distorting the volume of activity from the efficient level

credit union policies and performances in latin america this paper presents a conceptual framework for explaining credit unions cus loan delinquency and profitability in developing countries it also offers an empirical estimation for a unique sample of cus in latin america

an economic theory of a credit union the majority of research to date on cus has been empirical cf cargill 1 and kidwell and peterson 7 yet there is serious need to develop a theoretical framework of cu behavior that incorporates their unique characteristics a cu is essentially a financial intermediation cooperative however the standard theoretical treatments of financial intermediaries cf meyer 8 and cooperative enterprises cannot be directly applied to model credit union behavior there are two principal characteristics of cus that prevent this first in a cu and cooperatives in general the members are both the owners of the organization and the consumers of its output or suppliers of its input one cannot simply assume that the members seek to maximize the profit generated by their transactions with the cu irrespective of the price and quantities of those same transactions thus models of a financial firm based on profit maximization cannot be directly translated to a cu environment second in a cu the membership provides both the demand for and supply of loanable funds the cu then intermediates between its member savers and member borrowers this heterogeneity is an inherent source of conflict between members clearly a cu cannot simultaneously maximize its dividend rate for savers and minimize its loan rate for borrowers since most theoretical models of cooperative enterprises assume a homogeneous member objective they are not generally applicable to cus there are two basic requirements for a framework to model cu behavior first the specification of the objective function should focus on the value of cu participation to the members this value should include the prices and quantities of transactions as well as any profit that results second the analysis should explicitly consider the possibility of conflict among members and the resolution of that conflict being a preference to either the borrowers or savers the existing literature on cus contains a wide variety of objective functions hempel and yawitz 5 ignore the owners are consumers issue and simply contend that cus like other financial intermediaries should maximize profit most writers however recognize that profit maximization would be a somewhat incongruous objective for an organization that typically labels itself not for profit murray and white 9 use cost minimization subject to an output constraint keating 6 employs the managerial discretion approach by maximizing the manager s utility function subject to minimum member benefit constraints taylor 11 12 suggests that the cu should minimize the difference between its average loan rate and savings rate paid smith 10 argues that the cu should

rural finance and agricultural technology adoption in ethiopia does the institutional design of lending organizations matter summary it has now become almost a stylized fact that sustained agricultural growth is central to rapid poverty reduction and economic development yet world poverty is largely concentrated in the agrarian societies which have the potential for agricultural productivity growth this is particularly true for sub saharan african countries where the gaps between potential and actual yields remain high minimizing this gap through the promotion of modern inputs such as fertilizer and modern seeds has been at the core of almost all development strategies in ethiopia among other initiatives the country has promoted microfinance institutions and member owned financial cooperatives to alleviate credit constraints of the smallholder farmers this paper analyzes the impacts of these institutions using household survey data and a propensity score matching technique we examine the effects that institutional financial services have on farmers adoption of agricultural technology in ethiopia the results suggest that access to institutional finance has a significant positive impact on both the adoption and extent of technology use however when impacts are disaggregated by type of financial institution and farm size heterogeneities are observed in particular financial cooperatives have a greater impact on technology adoption than microfinance institutions and the results appear to vary depending on farm size and types of inputs the paper concludes with implications for policies to promote adoption of modern agricultural inputs

on dfis liability management beyond reference rate setting strategies derived in a capm framework the paper addresses two related questions i limited deposit accommodation under capital regulation and ii characterization of rate differentials in correlated uncorrelated multideposit markets under certain circumstances an optimal rate capacity choice policy will imply deposit capacity is not fully utilized all the time since capacity is not costless excess liability capacity may be an optimal financial decision when the intermediary must meet adequacy test assorted with financial penalties or with enforceable limitations on its balance sheet growth in the other case the intermediary is likely to introduce risky rate differentials to the extent risk is actually reduced enough to increase its market valuation for correlated multideposit markets this obtains whenever pairs of supplies are sufficiently negative to make their weighted covariance sum larger than the segment own variance alternatively for uncorrelated segments higher rates will be offered to steady depositors whose standard deviation of class supply contributes little to total risk

tax evasion and the optimum general income tax abstract this paper incorporates tax evasion into an optimum general income tax problem with endogenous labor supply it posits a two group model with high and low wage individuals to investigate the properties of optimal audit and tax structures the following main results are obtained first high wage persons are never audited while low wage persons are audited with a probability strictly less than one secondly high wage persons should face a zero marginal tax rate thirdly low wage individuals who have been audited and found innocent should pay a lower tax than those who are not audited fourthly there are two possible tax regimes low wage persons face a positive marginal tax rate under one regime and a zero rate under the other fifthly even if honesty cannot be rewarded the other results of the paper continue to hold

optimal insurance design under narrow framing abstract in this paper we study insurance decisions when the policyholder evaluates insurance with narrow framing we show that due to aversion to risk on the net insurance payoff i e insurance indemnity minus insurance premium narrow framing reduces insurance demand this helps explaining the observed low insurance demand in many insurance markets we also show that the optimal insurance contract involves a deductible and the coinsurance of losses above the deductible when transaction costs depend on the actuarial value of the policy moreover when the policyholder is loss averse over the net insurance payoff a fixed indemnity equal to insurance premium should be paid for a range of intermediate losses

delegation in a general equilibrium model of customs unions abstract a difference in the objectives of members of a customs union may be a unifying rather than a divisive force if countries outside the union behave strategically one union member may want to delegate to its partner the ability to set the common external tariff we demonstrate these results in the context of a pure exchange general equilibrium trade model we show that if tariffs are strategic substitutes the union country which is relatively less well endowed in the exported good may be willing to delegate to its partner which behaves more aggressively in setting the union s policy the delegation decision is reversed if tariffs are strategic complements the model extends the standard results on the appropriate level of the union policy by adding another dimension that of the optimal decision making agent

a theoretic framework for the analysis of credit union decision making this paper presents a formal theoretic framework to analyze credit union interest rates on loans and savings deposits the unique motivational and institutional features of a credit union in particular its structure as a financial service cooperative are used to develop the objective function this is based on a comparison of the credit union s rates to alternatively available market rates and includes parameters to recognize the possibility of borrower saver conflict the principal result is that the optimal rates and reactions to exogenous changes depend critically on the preference of the organization toward financial gain to the borrowing and saving members

the commercial banking firm a simple model a commercial bank must decide its volume of illiquid loans and investments without full knowledge of its deposits in case withdrawals exceed its defensive position in liquid assets the bank incurs extra costs in meeting reserve requirements penalties in borrowing or losses in disposing of illiquid assets in case of good luck on deposits an unnecessarily large defensive position sacrifices profits from more remunerative but less liquid assets the paper presents a simple model of this precautionary portfolio decision by a profit maximizing bank the effects of variations in monetary policy banking regulations and competitive structure are traced reserve requirements access to central bank credit deposit interest rate ceilings monopolistic power in loan and deposit markets relative importance of capital and time deposit liabilities size and nature of illiquidity penalties and degree of deposit uncertainty commercial banks are the most important kind of financial intermediary their liabilities are the closest privately issued substitutes for government currency demand deposits serve as means of payment generally acceptable for most transactions for several reasons depositors bear very little of the risks of the loans the banks make there are economies of scale in pooling of default risks specific to borrowers and in specialized administration and appraisal of the loans the banks shareholders assume the residual risk only after their equity is wiped out would depositors claims be jeopardized finally the government stands behind bank deposit liabilities both as lender of last resort to tide banks over crises of illiquidity and as insurer of deposits against the contingency of insolvency government monetary and credit policy operates mainly through the commercial banking system and this is the main reason today to give special attention to commercial banks historically the first reason for government intervention in the banking business was to protect depositors or in older times bank note holders against the risks of bank illiquidity and insolvency but the public regulations and institutions established for this purpose can also be used to regulate credit markets in the interests of economic stabilization maintenance of the value of the currency or other government objectives as the protective purpose of government intervenscand j of economics 1982 this content downloaded from 207 46 13 172 on fri 07 oct 2016 06 13 42 utc all use subject to http about jstor org terms

optimal auditing with scoring theory and application to insurance fraud this article makes a bridge between the theory of optimal auditing and the scoring methodology in an asymmetric information setting our application is meant for insurance claims fraud but it can be applied to many other activities that use the scoring approach fraud signals are classified based on the degree to which they reveal an increasing probability of fraud we show that the optimal auditing strategy takes the form of a red flags strategy which consists in referring claims to a special investigative unit siu when certain fraud indicators are observed the auditing policy acts as a deterrence device and we explain why it requires the commitment of the insurer and how it should affect the incentives of siu staffs the characterization of the optimal auditing strategy is robust to some degree of signal manipulation by defrauders as well as to the imperfect information of defrauders about the audit frequency the model is calibrated with data from a large european insurance company we show that it is possible to improve our results by separating different groups of insureds with different moral costs of fraud finally our results indicate how the deterrence effect of the audit scheme can be taken into account and how it affects the optimal auditing strategy

evading auditing and taxing the equity compliance tradeoff tax evasion and auditing are analyzed in a model of linear income taxation taxpayers minimize expected tax payments including penalty for underreporting while the tax administration sets its audit policy to maximize expected net revenue under the restriction of only two audit rates per class of taxpayers given the reaction of taxpayers and tax administration we derive the optimal income tax that the government should adopt to maximize social welfare there are several classes of taxpayers each characterized by a given distribution of pretax income and specific audit policy parameters

guilty until proven innocent regulation with costly and limited enforcement abstract we consider optimal regulations for a polluting firm when regulators cannot observe emission control costs and can only observe emissions via costly monitoring fines or subsidies for enforcing compliance are also limited the optimal regulations resemble a deposit refund system the firm reports its emissions and pays an initial tax based on this report if the firm is monitored it receives a rebate when actual and reported emissions coincide the enforcement constraints and the firm s rights determine whether the incentives to reduce emissions are optimally provided by varying the rebate for compliance the monitoring probability or the initial tax

the economics of workout lending lenders are forced to consider a workout loan when a borrower loses access to financial markets and must seek loans from existing creditors to continue servicing outstanding loans a model of the loan decision is developed that distinguishes socially useful from socially wasteful workout loans the analysis is extended to examine two collective action problems that may arise when many lenders have claims on a troubled borrower the paper concludes with a consideration of the implications of the model for the establishment of prudential lending limits and of policies to stimulate new lending to troubled debtor countries copyright 1989 by ohio state university press

regulatory errors optimal fines and the level of compliance abstract this paper shows that with a hierarchical structure of enforcement regulatory errors cause the optimal penalty to be non maximal even if offenders are risk neutral and fines are pure transfers and the private benefit from violation is strictly less than the social cost for all individuals in contrast with error free monitoring no finite fine is optimal within the same hierarchical structure also full compliance is an equilibrium outcome in the presence of errors whereas in the absence of errors the regulator can achieve only partial compliance

credit rationing and effective supply failures the topic of this paper is among the oldest and most fundamental in monetary theory how and why does monetary policy affect real economic activity traditional answers hold that the central bank can manipulate aggregate demand by engineering expansions or contractions of the medium of exchange in its monetarist variant this story posits a direct link between something called m and aggregate spending in its keynesian variant the story holds that adjustments in asset prices brought about by a change in m lead to more spending especially on capital goods in either case short run stickiness of prices is needed to translate some of the changes in demand into movements of real output in recent years these conventional stories have become increasingly implausible as stiglitz and i blinder and stiglitz i 983 have argued elsewhere with money becoming more and more difficult to define it is becoming increasingly difficult to believe that the central bank can cause a recession by contriving a shortage of an arbitrary subset of assets called m put differently the point seems both simple and compelling if there are ready substitutes for money control of money will not give the authorities much leverage over the real economy hence this paper develops an explanation for how central bank policy affects

valuation capital structure and shareholder unanimity for depository financial intermediaries the theory of corporate finance is not directly applicable to financial intermediary decision making the lack of applicability stems largely from the particular conditions that distinguish intermediary operations from those of the nonfinancial firm first when intermediaries accept deposit financing they must produce services such as liquidity and convenience at considerable expense for real resources second the introduction of intermediation is likely to be accompanied by incomplete markets so that shareholder unanimity is not in general valid in this paper a model with incomplete markets is developed and a shareholder approved rule for intermediary capital structure decisions is derived

the new economics of organization over the last ten years or so an important new approach to the study of organizations has emerged within economics it is perhaps best characterized by three elements a contractual perspective on organizational relationships a theoretical focus on hierarchical control and formal analysis via principal agent models this paper provides political scientists with an overview of the new economics of organization and explores its implications for the study of public bureaucracy so far positive political theory has not contributed much to our understanding of public bureaucracy in part this is due to the unsympathetic treatment that rational modeling and most other modes of quantitative analysis have long received from students of public administration the other side of the coin however is that positive theorists have not made much of an effort to develop theories of bureaucracy their concerns have centered around two basic mechanisms of social choice voting and markets and they have devoted little systematic attention to a third mechanism that is clearly important for understanding how societies and other aggregates make collective decisions this third and relatively unexplored mechanism is hierarchy movement toward a positive theory of hierarchies would fill a serious gap in the social choice literature while at the same time making a theoretical contribution that strikes to the essence of public bureaucracy indeed of all organizations in fact significant steps toward a positive theory of hierarchies have very recently been taken but by economists not political scientists in small numbers of course economists made contributions to the study of public bureaucracy some time ago with the pioneering works of downs 1967 tullock 1965 and niskanen 1971 but this new wave of theoretical work is different it is already a large complex body of literature that is the focus of innovation and excitement among a growing number of economists and it reflects an unusual degree of theoretical coherence and cumulative effort work in this tradition tends to receive orientation from a distinctive economic approach to the analysis of organizations an approach perhaps best characterized by three elements a contractual perspective on organizational relationships a focus on hierarchical control and formal analysis via principal agent models this approach has emerged from recent attempts to move beyond the neoclassical theory of the firm which assumes away all organizational considerations to a theory of economic organizations that can explain why firms corporations and other enterprises behave as they do propo

bureaucrats legislators and the size of government some recent theories have blamed the growth of government on budget maximizing bureaucrats who are assumedly capable of imposing their most preferred budget output combination on legislatures subject to cost and demand constraints however theoretical examination of the range of bargaining outcomes that might occur between bureau and legislature shows that budget maximizing behavior does not necessarily lead to super optimal levels of production nor do the suggested reforms of competition and privatization necessarily improve the situation in this bargaining model the central determinants of governmental growth are not budget maximizing bureaucrats but the legislature s decisions regarding mode of oversight and form of internal organization

the federal deposit insurance fund that didn t put a bite on u s tax payers abstract unlike the federal savings and loan insurance corporation and the bank insurance fund the national credit union share insurance fund ncusif survived the 1980s without falling into a state of accounting insolvency this paper analyzes how differences in incentive structure constrain the attractiveness of interest rate speculation and other risk taking opportunities to managers and regulators of credit unions despite these better incentives robust present value calculations establish that ncusif fell into economic insolvency during the mid 1980s besides calculating the extent of this insolvency the paper also seeks to explain why after ncusif became insolvent it could rebuild its reserves without an explicit or implicit taxpayer bailout our explanation turns on cross industry coinsurance responsibilities and the shallowness of the fund s observed insolvency relative to industry net worth we identify forces in the decisionmaking environment tending to limit the depth and duration of unresolved insolvencies at individual credit unions managerial opportunities to benefit personally from taking risks that would flow through to ncusif are constrained by difficulties in converting a credit union to stockholder form and by the intensity of proactive monitoring of troubled credit unions by sister institutions and other private coinsurers we conjecture that expanded use of coinsurance and private monitoring could reduce taxpayer loss exposure elsewhere in government deposit insurance systems

commitment through renegotiation proof contracts with third parties the paper analyzes contracts as means of strategic commitment that is commitment against outside parties to the agreement it considers the example of an incumbent firm which enters a contractual relationship with its workers in order to deter entry it assumes away the possibility for the parties to precommit not to make pareto improving renegotiations of the agreement once entry has taken place under symmetric information the contract is thus found to be useless for entry deterrence if the incumbent firm or workers possess some private information excessive post entry production levels can however be sustained ex post since output reductions may not be incentive compatible while information asymmetries are usually welfare decreasing when the goal is optimal risk sharing they can thus be welfare improving for the contracting parties when commitment against outsiders is the goal of the contract the role of the renegotiation process as a constraint on sustainable agreements is stressed in the paper and the general relevance of strategic contractual commitment is discussed

the dynamics of incentive contracts the paper studies a simple two period principal agent model in which the principal updates the incentive scheme after observing the agent s first period performance the agent has superior information about his ability the principal offers a first period incentive scheme and observes some measure of the agent s first period performance cost or profit which depends on the agent s ability and unobservable first period effort the relationship is entirely run by short term contracts in the second period the principal updates the incentive scheme and the agent is free to accept the new incentive scheme or to quit the strategies are required to be perfect and updating of the principal s beliefs about the agent s ability follows bayes rule the central theme of the paper is that the ratchet effect leads to much pooling in the first period first for any first period incentive scheme there exists no separating equilibrium second when the uncertainty about the agent s ability is small the optimal scheme must involve a large amount of pooling the paper also gives necessary and sufficient conditions for the existence of partition equilibria and looks at the effect of cost uncertainty

efficient committed budget for implementing target audit probability for many inspectees strategic models of auditor inspectee interaction have neglected implementation details in multiple inspectee settings with multiple inspectees the target audit probability derived from the standard analysis can be implemented with sampling plans differing in the budgets committed to support them overly committed audit budgets tie up unneeded resources that could have been allocated for better uses this paper studies the minimum committed budget required to implement a target audit probability when i the audit sample can be contingent on red flags due to signals of inspectees private information e g from self reporting and ii the number of inspectees is large it proposes an audit rule called bounded simple random sampling srs which is shown to require no more committed budget to support than two other rules naturally generalized from the one to one analysis when the number of inspectees is large enough bounded srs is nearly as good as any efficient audit rule which demands the lowest committed budget necessary to implement the target audit probability the results offer insights on how audit sampling plans may be formulated to reduce inefficiency and what budget usage ratios should be expected accordingly

costly state verification with varying risk preferences and liability abstract in the scenario of loan contracts with costly state verification we examine how the properties of the set of states different risk preferences of debtors and varying liability of lenders affect the structure of optimal repayments in particular we show that with risk averse debtors a general set of states a constant observation cost and both unlimited and limited lender liability the debtor is strictly better off revealing the true state of nature when his realized revenue is low which implies that optimal debtor consumption has a downward jump around the single switch from observed to unobserved states if the debtor can destroy revenue or if the debtor is risk neutral this non monotonicity of consumption disappears moreover given the loan size there is more monitoring under debtor risk aversion than risk neutrality we present simulations showing that a contract with unlimited lender liability and debtor risk aversion has a higher expected observation cost but a lower variance of consumption than a contract with limited lender liability finally we discuss the problems of commitment to verification and contract renegotiation in this framework

hardball and the soft touch the economics of optimal insurance contracts with costly state verification and endogenous monitoring costs abstract we examine an environment of costly state verification in which insureds possess private information about the magnitude of an insurable loss insurers can verify the actual loss suffered only by incurring a positive resource cost and insureds may verification and may lead to more generous settlements optimal insurance contracts are shown to mitigate the incentives to evade by a combination of incentives which include the overpayment of easily monitored losses and undercompensation for claims exhibiting higher verification costs

honesty on the streets a field study on newspaper purchasing many publishers use an honor system for selling newspapers in the street we conducted a field experiment to study honesty in this market finding that a moral reminder increases the level of honesty in payments whereas the same message has no effect on whether one is honest reminding customers of the legal norm has no effect we argue that these results are consistent with a preference for honesty based on an internalized social norm auxiliary evidence suggests that the moral message remains effective when it is posted for longer periods and even when it is removed again authors abstract

optimal insurance under costly falsification and costly inexact verification abstract this paper integrates the often dichotomized models of costly state verification and costly claim falsification it is found that when verification is inexact it is possible for an optimal insurance contract to consist of both positive claim falsification and positive insurer verification provided that falsification cost and verification cost are sufficiently low and the insured is risk averse satisfying constant absolute risk aversion this result certainly contrasts with the common belief that falsification and verification are mutually exclusive in an optimal insurance contract some characteristics of the optimal falsification verification and indemnification profiles including implementability are analyzed

honesty and evasion in the tax compliance game conventional models of tax compliance emphasize that taxpayers make strategic tax reports underreporting income to the extent that this behavior is functionally rewarded in contrast to this view considerable empirical evidence suggests that many taxpayers are inherently honest reporting truthfully regardless of the incentive to cheat in this article we build a game theoretic model of tax compliance that includes both honest and potentially dishonest taxpayers we show that including honest taxpayers significantly alters the model leading to much improved empirical predictions and somewhat different and novel policy implications

comment on what drives bank competition some international evidence the question of bank competition is vitally important for a number of reasons the essential role of bank credit and other financial services as an input in the production of most other goods and services places banks in a unique and influential position such that any allocative inefficiency or other market distortions in banking are almost certain to be felt throughout the economy moreover recent history has provided numerous instances where the textbook paradigm of atomistic competition has proven inadequate as a policy guide for efficient banking either because there are simply too few banks to rely on sheer numbers as a guarantee of vigorous competition as in canada or because of evidence that there can be such a thing as too much competition in banking as suggested by several studies or because of instances where nearly competitive pricing has been observed in markets containing only one or two banks or because conversely substantially noncompetitive pricing has sometimes been deduced in banking products such as credit cardswith thousands of suppliers thus the study of bank competition remains an urgent field of research claessens and laeven 2004 this issue of jmcb make two key contributions here first they extend a proven empirical method to an unprecedentedly large and varied crosscountry sample second they offer the logical and policy relevant additional step of seeking to identify factors associated with variations in measured conduct this step is needed to assess the empirical validity of the traditional structure conductperformance paradigm in their sample and is especially important where that paradigm is found lacking as a predictor of bank conduct indeed although the authors

costly risk verification without commitment in competitive insurance markets abstract this paper analyzes the equilibrium of an insurance market where applicants for insurance have a duty of good faith when they reveal private information about their risk type insurers can at some cost verify the type of insureds who file a claim and they are allowed to retroactively void the insurance contract if it is established that the policyholder has misrepresented his risk when the contract was taken out however insurers cannot precommit to their risk verification strategy the paper analyzes the relationship between second best pareto optimality and the insurance market equilibrium in a game theoretic framework it characterizes the contracts offered at equilibrium the individuals contract choice as well as the conditions under which an equilibrium exists

income tax compliance in a principal agent framework previous analyses have modeled income tax evasion as a portfolio problem deriving the optimal consumption of the risky asset unreported income under the assumption of a fixed probability of detection the purpose of this paper is to examine some of these issues in tax compliance starting from a different set of assumptions in particular we compare alternative audit policies to the standard random audit policy we focus on an audit cutoff policy in which an agent triggers an audit if his or her reported income is too low and is not audited if reported income is sufficiently high this paper establishes two major results first random audit rules are weakly dominated by audit cutoff rules it can be shown given lump sum taxes and fines that these audit cutoff rules are the least cost policies which induce truthful reporting of income second the dominance of audit cutoff rules over random audit rules holds for lump sum as well as proportional taxation in fact the equilibrium consequences of the two are equivalent

credit rationing as a temporary suboptimal equilibrium with imperfect information abstract jaffee and russell 1976 characterized partial rationing as a contract rate and contract size below those of the no rationing equilibrium their non price rationing here obtains as a suboptimal equilibrium for a risk averse rate setting intermediary with marginal increasing cost and a monopolistically competitive loan demand the temporary dis equilibrium corresponds to a dominated strategy and the wider class of models of which j r s solution is but a singular case is touched upon

providers affiliation insurance and collusion abstract this paper provides a theoretical analysis of the benefits for an insurance company to develop its own network of service providers when insurance fraud is characterized by collusion between policyholders and providers in a static framework without collusion exclusive affiliation of providers allows insurance companies to recover some market power and to lessen competition on the insurance market this entails a decrease in the insured s welfare however exclusive affiliation of providers may entail a positive effect on customers surplus when insurers and providers are engaged in a repeated relationship in particular while insurers must cooperate to retaliate against a fraudulent provider under non exclusive affiliation no cooperation is needed under exclusive affiliation in that case an insurer is indeed able to reduce the profit of a malevolent provider by moving to collusion proof contracts when collusion is detected and this threat may act as a deterrent for fraudulent activities this possibility may supplement an inefficient judicial system it is thus a second best optimal anti fraud policy

optimal bank behavior under uncertain inflation in this paper we derive a model of the individual banking firm facing stochastic inflation the bank is considered as a depository financial intermediary operating in the primary market as a multiproduct price discriminating firm a secondary market is also considered where liquidity surpluses and deficits are traded two types of assets and liabilities are assumed deposits and loans linked to a general price level and nonlinked instruments effects of changes in the parameters such as inflation rate and

utilitarianism and horizontal equity the case for random taxation this paper establishes that far from being able to derive the principle of horizontal equity from utilitarianism the principle is actually in consistent with utilitarianism in a variety of circumstances we derive conditions under which a it is optimal to impose random tax schedules ex post randomization and b it is optimal to randomize the tax schedules imposed on a set of otherwise identical individuals ex ante randomization the implications for optimal tax theory are discussed more generally it is shown that there are a number of potentially important economic situations with which the principle of horizontal equity may be inconsistent not only with utilitarianism but even with pareto optimality this abstract was borrowed from another version of this item

estimating the prevalence and cost of yield switching fraud in the federal crop insurance program producers who manipulate and switch their reported crop yields between separately insured units can increase their insurance indemnities substantially a statistical model that identifies potential yield switching is developed the unrestricted statistical model is singular and is identified by imposing a mixture of system estimable and system nonestimable restrictions lower bound estimates of yield switching fraud incidence and costs are obtained by applying the model to 207 067 multiple unit producers who purchased crop insurance in 1998

a contingent claim analysis of a regulated depository institution abstract a model of financial intermediation to determine the market value of bank equity deposits and deposit insurance is developed the implicit equilibrium interest rate on deposits is derived and analyzed three types of risks are considered in the model interest rate risk financial risk and default risk the effect of different regulatory measures such as capital adequacy reserve and liquidity requirements deposit insurance and interest rate ceilings is analyzed and their impact on the bank behavior is also assessed moreover we investigate the interactions among these measures to determine which are dominant under alternative circumstances and which are redundant

partially verifiable information and mechanism design in a principal agent model with adverse selection we study the implementation of social choice functions when the agent s message space is a correspondence which depends on this true characteristic we characterize such correspondence for which the revelation principle is valid returns must not contradict easily observable elements of the taxpayer s lifestyle in this paper we present a model of two person organizations in which these considerations are important we ask whether the restrictions on fallacious statements inherent in the system are sufficient to achieve the goals of the organization we show that the optimal way of eliciting the agent s response may not be to establish incentives for truthtelling in all instances in our model there is one player the agent who observes the state of the economic system another player the principal takes an action based on the information presented to him by the agent this class of models is often referred to as the principal agent problem in the extensive and growing literature on this problem it has always been assumed that the agent could lie to the principal and therefore that he had to be properly motivated to act at least partially in the principal s interest our formal way of modelling the partial verifiability of information is to introduce the restriction that the agent s responses must lie in a set m o that varies with the true state 0 it is assumed that this set always admits the possibility of responding with the true state the way in which the allowable response set varies with the true state is known to the principal in other respects we retain the usual principal agent formalization in particular the principal is the stackelberg leader in this game he can commit himself to choose a collective action as a function of the message transmitted by the agent whether the variation of the message space with the true observation is purely technological or whether it is induced by the severity of potential actions of the principal

endogenous punishments in agency with verifiable ex post information the article studies an adverse selection model in which a contractible imperfect signal on the agent s type is revealed ex post the agent is wealth constrained which implies that the maximum penalty depends on the contracted transaction e g the volume of trade first we show that the qualitative effects of the signal can be unambiguously tied to the nature of the problem e g whether the agent is in a buyer or a seller position second the distortions caused by informational asymmetries may become more severe although more information is now available finally the signal can actually serve to increase the agent s informational rents

determinants of margin in microfinance institutions abstractmicrofinance institutions mfis lend to the poor however microfinance clients suffer from high interest rates a type of poverty penalty this article analyses the margin determinants in mfis a banking model has been adapted to microfinance this model has been tested using 9 year panel data some factors explaining bank margin also explain mfi margin with operating costs being the most important factor specific microfinance factors are donations and legal status as regulated mfis can collect deposits it has also been found that mfis operating in countries with a high level of financial inclusion have low margins

performance based wages in tax collection the brazilian tax collection reform and its effects we use panel data from the brazilian tax collection authority to examine the effects of a major incentive reform instituted in 1989 to improve tax enforcement beforehand fine collections per inspection were relatively stable however a striking trend break occurred afterwards which we attribute to the incentive reform not to changes in the macroeconomy or personal and corporate income tax rates our estimates suggest the growth in fines per inspection after the reform is about 75 above what it would have been without it and that there is substantial heterogeneity in the impact of the reform across tax regions

self reporting investigation and evidentiary standards abstractself reporting schemes have become a substantial part of law enforcement this paper analyzes the optimal use of such schemes when the authority cannot commit to an ex post investigation effort i show that this leads to a negative relationship between self reporting incentives and investigation effort three main conclusions arise first violators self report with a probability of 1 if and only if full amnesty is offered second self reporting schemes are not efficient when the level of harm of the act is high finally authorities can increase the incentives to self report when they convict without hard evidence however a hard evidence standard provides more deterrence and is weakly welfare superior

workers compensation and moral hazard two types of moral hazard have been determined the first type is related to self prevention activities affecting probabilities of accidents the second type relates to the agent s activities whenever the accident occurs the authors objective consists of presenting an empirical measure of the significance of this second type of moral hazard in the workers compensation market the main challenge in isolating moral hazard consists of dividing into two parts the total variation in recovery time with respect to changes in insurance coverage 1 the variation of consumption corresponding to a given level of information and 2 the variation of consumption due to greater asymmetrical information the methodology used in this study separates these two variations copyright 1991 by mit press

auditing claims in the insurance market with fraud the credibility issue abstract this paper characterizes the equilibrium of an insurance market where opportunist policyholders may file fraudulent claims we assume that insurance policies are traded in a competitive market where insurers cannot distinguish honest policyholders from opportunists the insurer policyholder relationship is modelled as an incomplete information game in which the insurer decides to audit or not the market equilibrium depends on whether insurers can credibly commit or not to their audit strategies we show that a no commitment equilibrium results in a welfare loss for honest individuals which may even be so large that the insurance market completely shuts down we also show that transferring monitoring costs to a budget balanced common agency would mitigate the commitment problem

liability management of financial intermediaries in a dynamic and uncertain perspective this paper examines the effect of rate uncertainty first for the loan rate alone next for both asset and liability rates on the liability funding decisions of a risk neutral intermediary in this model a la pindyck rates evolve according to stochastic processes convex adjustment costs arise from the dichotomy of existing core deposits and new savings balances and the intermediary s cash flow is embedded into capital market theory then we show that the stationary equilibrium obtains at the intersection of the locus of no change in deposit holdings with the isocline of zero change in savings balances loan rate uncertainty alone shifts the savings isocline outward when marginal adjustment costs are rising at an increasing rate but when asset and liability rates are uncertain their impact on the mean intermediation spread core deposit holdings and adjustment costs depends on whether they are correlated or not

avoiding tax avoidance a repeated game theoretic approach abstract we propose an optimal auditing scheme for the tax authorities who face a given tax and penalty functions and a given budget constraint under our proposed strategy individuals can be classified into one of three groups each group is characterized by two parameters i the probability of being audited in that group and ii into which group will an individual move if ii a he reported truthfully ii b he cheated it is then shown that there is a choice of these parameters so that in equilibrium i e when every individual maximizes his payoff given the auditing strategy the percentage of individuals that cheat is arbitrarily small

samurai accountant a theory of auditing and plunder a risk neutral principal wishes to exact a payment from a risk neutral agent whose wealth he does not know but may verify through a costly auditing procedure we characterize efficient schemes for the principal when he is allowed to choose schedules for preaudit and postaudit payments and audit probabilities subject to the constraint that only monetary incentives can be used and that the principal may never make a net payment to the agent the main results are that efficient schemes involve preaudit payments which are increasing in the agent s wealth audit probabilities are decreasing in the agent s wealth and also satisfy certain constraints as equalities in general such schemes involve stochastic auditing and rebates after an audit in this paper we analyse the problem of a principal extracting wealth from an agent who is reluctant to part with it and is also better informed than the principal as to the amount he owns we assume that the principal has a costly means of discovering the agent s

the effects of parent company business on occupational credit union behaviour 1986 the effects of parent company business on occupational credit union behaviour applied economics vol 18 no 12 pp 1311 1321

delegation as commitment the case of income tax audits in this article we study the value of delegating authority over income tax audit policy arising from the incompleteness of contracts consider a utilitarian government whose ability to commit is limited to aggregate dimensions of its audit policy as publicly verifiable information about detailed allocations of audit budgets is not available we show that the welfare level associated with the full commitment solution can be attained by delegating authority over audit policy to a manager the latter is offered a simple incentive scheme based only on the aggregate variables which are publicly observable in contrast if the government retains authority direct commitment to these same variables does not allow the full commitment welfare level to be achieved thus despite sharing a common informational basis delegation may perform better than centralized arrangements in the presence of incomplete contracts

the demand for and supply of deposits by credit unions the caisses populaires case reply and comments abstract smith points out rightly that the symbol r refers to two different though each time well defined concepts in chateau s 1980 article in this journal his claim however that this leads to a misspecification of the theoretical model is erroneous and is refuted further it is shown explicitly under which conditions the maximization of expected utility of reserves is consistent with balance sheet growth for the caisses system acting within the quebec institutional and regulatory environment the growth cum managerial discretion model is theoretically appealing as well as supported by the available empirical evidence

benefit imbalances among credit union member groups evidence of borrower dominated saver dominated and neutral behaviour theoretical models of credit union cu behaviour suggest that cus may be saver dominated borrower dominated or neutral a cu is dominated if it is operated for the benefit of one member group at the expense of the other neutral behaviour occurs when a cu is managed so that both member groups are equally benefited this empirical study develops a direct measure of the monetary benefits to each member group and tests for the existence of dominated behaviour among us cus in 1984 and 1985 evidence of dominated and neutral behaviour is found and the operating characteristics of these distinct organizational forms are generally consistent with theoretical expectations