an efficiency theorem for incompletely known preferences there are n agents who have von neumann morgenstern utility functions on a finite set of alternatives a each agent i s utility function is known to lie in the nonempty convex relatively open set ui suppose l is a lottery on a that is undominated meaning that there is no other lottery that is guaranteed to pareto dominate l no matter what the true utility functions are then there exist utility functions ui ui for which l is pareto efficient this result includes the ordinal efficiency welfare theorem as a special case

nonmonetary effects of the financial crisis in propagation of the great depression this paper examines the effects of the financial crisis of the 1930s onthe path of aggregate output during that period our approach is complementary to that of friedman and schwartz who emphasized the monetary impact of the bank failures we focus on non monetary primarily credit related aspects of the financial sector output link and consider the problems of debtors as well as those of the banking system we argue that the financial disruptions of 1930 33 reduced the efficiency of the credit allocation process and that the resulting higher cost and reduced availability of credit acted to depress aggregate demand evidence suggests that effects of this type can help explain the unusual length and depth of the great depression this abstract was borrowed from another version of this item

matching markets with mixed ownership the case for a real life assignment mechanism we consider a common indivisible good allocation problem whose popular applications include on campus housing kidney exchange and school choice we show that the so called new house 4 nh4 mechanism which has been in use at mit since the 1980s is equivalent to a natural adaptation of the well known gale shapley gs mechanism we run two experiments comparing nh4 with the prominently advocated top trading cycles ttc mechanism and nh4 with gs we find that under nh4 the participation rate is significantly higher than under ttc based on a new ordinal test of efficiency nh4 is more likely to pareto dominate ttc

globalization and its challenges rudi was born and grew up in krefeld germany he was an undergraduate at the university of geneva and completed his ph d at the university of chicago in 1971 which is where we met he was a student of robert mundell and both the subject matter the development of the mundell fleming model and the elegance and insights of his early work reflected mundell s influence he taught at the university of rochester and at the university of chicago before accepting an offer from mit in 1975

the equitable top trading cycles mechanism for school choice the equitable top trading cycles mechanism a particular adaptation of gale s top trading cycles ttc procedure applied to school choice the so called ttc mechanism has attracted much attention both in theory and practice due to its superior efficiency and incentive features we discuss and introduce alternative adaptations of gale s original procedure that can offer improvements over ttc in terms of equity along with various other distributional considerations instead of giving all the trading power to those students with the highest priority for a school we argue for the distribution of the trading rights of all slots of each school this allows them to trade in a thick market where additional constraints can be accommodated by choosing an appropriate pointing rule we propose a particular mechanism of this kind the equitable top trading cycle ettc mechanism which is also pareto efficient and group strategy proof just like ttc and eliminates avoidable justified envy situations ettc generates significantly fewer justified envy situations than ttc both in simulations and the lab

information reliability and a theory of financial intermediation this paper is an analysis of when it will be beneficial for agents engaged in the production of information to form coalitions the model is cast in a financial market framework thus leading to an identification of conditions sufficient for the existence of financial intermediaries intermediation is shown to improve welfare if informational asymmetries are present and the information generated to rectify these asymmetries is potentially unreliable the usual appeal to transactions costs to explain intermediation is not needed

is relationship lending special evidence from credit file data in germany the german financial market is often characterized as a bank based system with strong bank customer relationships the corresponding notion of a housebank is closely related to the theoretical idea of relationship lending it is the objective of this paper to provide a direct comparison between housebanks and normal banks as to their credit policy therefore we analyze a new data set representing a random sample of borrowers drawn from the credit portfolios of five leading german banks over a period of five years we use credit file data rather than industry survey data and thus focus the analysis on information that is directly related to actual credit decisions in particular we use bank internal borrower rating data to evaluate borrower quality and the bank s own assessment of its housebank status to control for information intensive relationships the major results of our study support the view that housebanks are able to establish a distinct behavioral pattern consistent with the idea of long term commitment we find that housebanks do provide liquidity insurance in situations of unexpected deterioration of borrower ratings with respect to loan pricing we find no evidence for intra or intertemporal price differentiation related to housebanking

the impact of liberalization and foreign investment in colombia s financial sector abstract this study analyzes financial liberalization measures undertaken in 1990 of which an opening to foreign investment was a major component after a brief description of the major changes in legislation on foreign investment we compare performance of foreign owned vs domestic banks first using a descriptive approach then in a more systematic manner using econometric analysis panel data estimations reveal that financial liberalization in general had a beneficial impact on bank behavior in colombia by increasing competition lowering intermediation costs and improving loan quality although the positive contribution of foreign entry may be overstated in recent studies by not controlling for other liberalization factors foreign and domestic entry beginning in 1990 did improve bank behavior by enhancing operative efficiency and competition however the greater competition may have resulted in increased risk and a subsequent deterioration in loan quality particularly among domestic banks

relationship lending during a financial crisis this paper studies whether relationship lending mitigates the transmission of the lehman default shock to the supply of credit in italy exploiting the presence of multiple banking relationships we control for banks and firms unobserved characteristics results show that the growth of credit itself is higher and its cost lower the shorter the distance between the bank and the firm the longer the relationship and the higher the share of credit held by the bank credit growth by relationship lenders is 4 6 higher than that by transactional lenders the increase in the cost of credit is 50 basis points lower the positive effect of relationship lending on credit supply increased during the crisis compared to a pre crisis period the beneficial effect of relationship lending is weaker if the relationship lender is more exposed to the financial crisis especially when lending to weaker borrowers

survey measures of family decision processes for econometric analysis of schooling decisions in this article we consider the collection of novel subjective data on family processes of schooling decisions in particular we review recent progress on survey measurement of expectations information and locus of decision of american families within the context of secondary schooling and we discuss possible future developments by providing concrete examples from recent exploratory efforts we argue that collection of data on adolescents and parents perceptions of the available school options and the application and admission rules their subjective expectations about short and long term consequences of alternative choices and their assessments of the locus of decision making within families could greatly enhance economic modeling and contribute to effective econometric analysis of schooling decisions jel c83 d19 d79 d83 d84 i21 i26 j24

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

affirmative action through minority reserves an experimental study on school choice abstract minority reserves are an affirmative action policy proposed by hafalir et al 2013 in the context of school choice in a laboratory experiment we find that adding minority reserves to the gs and ttc mechanisms has positive effects on stability but is quite disappointing in terms of efficiency also gs induces higher rates of truth telling by minority students and thus outclasses ttc

distinguished lecture on economics in government reflections on managing global integration the language of public policy is increasingly the language of economics and sophisticated policy formulation depends to an ever greater extent on an understanding of economic concepts over the last six years i have spent at the u s department of the treasury i have had the chance to be present when concepts ranging from superlative price indices to multiple equilibrium to the liquidity trap to dynamic hedging to shadow pricing were discussed with the president of the united states where it was once the case that the president s council of economic advisers waged a lonely battle for good economics in the federal government today first rate economists staff departments ranging from treasury to labor to commerce to justice to the environmental protection agency and they hold line as well as advisory positions while academic interlopers serving as political appointees like myself may get a majority of the attention a majority of the greater economic literacy of government policy in areas ranging from tax policy to telecommunications policy from monetary policy to manpower policy from financial policy to forestry policy is the result of the steady perseverance of career government economists as remarkable as the penetration of economics and economists into the american government has been their penetration into even higher levels of governments around the world is even more notable a decade ago mexican president zedillo was a practicing monetary economist in the bank of mexico two recent italian prime ministers romano prodi and lamberto dini have distinguished records as economic thinkers lest anyone think all those trained in economics think alike russian prime minister primakov holds a doctorate in political economy there are too many examples to catalogue of economists at the level of finance minister and central bank governor consider the influence of

reserve design unintended consequences and the demise of boston s walk zones we show that in the presence of admissions reserves the effect of the precedence order i e the order in which different types of seats are filled is comparable to the effect of adjusting reser

bank credit rates across the business cycle evidence from a french cooperative contracts database abstract financial theory indicates that bank firm relationships can induce a hold up problem resulting in higher interest rates yet only weak empirical confirmation of this result exists moreover the potential influence of the business cycle on the bank firm relationship still requires empirical consideration with a unique contracts data set collected from a french cooperative bank between 1996 and 2009 this study shows that the effects of bank firm relationships on the credit rate depend on economic conditions and that the hold up problem is at play only during economic recessions

international financial integration and economic growth abstract this paper uses new data and new econometric techniques to investigate the impact of international financial integration on economic growth and also to assess whether this relationship depends on the level of economic development financial development legal system development government corruption and macroeconomic policies using a wide array of measures of international financial integration for 57 countries and an assortment of statistical methodologies we are unable to reject the null hypothesis that international financial integration does not accelerate economic growth even when controlling for particular economic financial institutional and policy characteristics

what parents want school preferences and school choice we investigate parents preferences for school attributes in a unique data set of survey administrative census and spatial data using a conditional logit incorporating characteristics of households schools and home school distance we show that most families have strong preferences for schools academic performance parents also value schools socio economic composition and distance which may limit the potential of school choice to improve academic standards most of the variation in preferences for school quality across socio economic groups arises from differences in the quality of accessible schools rather than differences in parents preferences although more advantaged parents have stronger preferences for academic performance

capital control liberalization and stock market development the authors address two questions what happens to stock market size liquidity volatility and integration with world capital markets after capital controls are liberalized and what is the relationship between those indicators of stock market development and regulations about information disclosure accounting standards and investor protection an analysis of data on stock markets in 16 developing countries suggests the following a stock markets become larger more liquid more integrated internationally and more volatile after controls on capital and dividend flows are liberalized b easy access to information about firms is positively associated with the size and liquidity of stock markets and c countries that officially establish internationally accepted accounting standards and laws to protect investors do not have substantially better functioning stock markets than countries that do not adopt those official standards

priorities in school choice the case of the boston mechanism in barcelona abstract the boston mechanism is a school allocation procedure that is widely used around the world and has been criticized for its incentive problems in order to resolve overdemands for a given school most often priority is given to families living in the neighborhood of the school using a very rich data set on school applications for the case of the boston mechanism in barcelona we exploit an unexpected change in the definition of neighborhood this change allows us to identify that a large fraction of families systematically ranks first high priority schools neighborhood schools in this case additional data on school enrollment decisions and census data shows that some seemingly unsophisticated parents are high income families that can rank hard to get schools because they can afford the outside option of a private school in case they do not get in this sheds light on important inequalities beyond parents lack of sophistication found in the literature

structural estimation of a model of school choices the boston mechanism vs its alternatives we model household choice of schools under the boston mechanism bm and develop a new method applicable to a broad class of mechanisms to fully solve the choice problem even if it is infeasible

relationship banking and escalating commitments to bad loans the relationship banking literature suggests that business relationships play an important role in the loan decisions of small banks we test one aspect of this hypothesis using a cross sectional panel dataset of small banks located in texas from 1994 to 2002 our results suggest that small banks located in smaller counties escalate their commitment to bad loans when compared with those located in larger counties even after controlling for psychological and social factors that influence escalation tendencies these results highlight the need for small banks to trade off the positive benefits of adopting a relationship banking strategy against its unintended negative consequence we provide some suggestions on how small banks may lessen their escalation tendencies despite adopting a relationship banking strategy the results of this study also suggest that small and medium sized enterprises smes that develop strong relational bonds with small banks may benefit from continued access to credit facilities especially during periods when they experience financial distress

the benefits of lending relationships evidence from small business data this paper empirically examines how ties between a firm and its creditors affect the availability and cost of funds to the firm we analyze data collected in a survey of small firms by the small business administration the primary benefit of building close ties with an institutional creditor is that the availability of financing increases we find smaller effects on the price of credit attempts to widen the circle of relationships by borrowing from multiple lenders increases the price and reduces the availability of credit in sum relationships are valuable and appear to operate more through quantities rather than prices

mistaken play in the deferred acceptance algorithm implications for positive assortative matching abstract recent literature has documented failures of truthful preference reporting in the strategy proof deferred acceptance algorithm i consider the implications of these strategic mistakes for a common welfare consideration the ability of the mechanism to sort the best students to the best schools i find that these mistakes have the potential to significantly help or significantly hinder sorting through this channel the presence of mistaken play may have widely varying welfare effects i discuss related considerations in the welfare evaluation of mistaken play in the deferred acceptance algorithm and the implications for nudges that correct these mistakes

collateral relationship lending and family firms prior research suggested that relationship lending could play a role in solving asymmetric information problems between borrower and lender other studies suggest a relationship between family ownership and the shareholder bondholder agency conflict the present paper investigates the impact of relationship characteristics family ownership and their interaction effects upon the use of collateral in sme lending we examine the determinants of collateral as well as the determinants of the choice between business and personal collateral using decision tree analysis the results reveal that relationship characteristics have a significant influence but not always in the direction as expected moreover they do not seem to be the primary determinants in our classification models the most important determinants in both classification models seem to be the loan amount total assets and the family versus non family firm distinction in addition we differentiate between line of credit and non line of credit loans and find significant differences between these decision trees

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

on the existence of a strictly strong nash equilibrium under the student optimal deferred acceptance algorithm abstract this study analyzes a preference revelation game in the student optimal deferred acceptance algorithm in a college admission problem we assume that each college s true preferences are known publicly and analyze the strategic behavior of students we demonstrate the existence of a strictly strong nash equilibrium in the preference revelation game through a simple algorithm that finds it specifically i the equilibrium outcome from our algorithm is the same matching as in the efficiency adjusted deferred acceptance algorithm and ii in a one to one matching market it coincides with the student optimal von neumann morgenstern vnm stable matching we also show that i when a strict core allocation in a housing market derived from a college admission market exists it can be supported by a strictly strong nash equilibrium and ii there exists a strictly strong nash equilibrium under the college optimal deferred acceptance algorithm if and only if the student optimal stable matching is pareto efficient for students

on two competing mechanisms for priority based allocation problems we consider the priority based allocation problem there is a set of indivisible objects with multiple supplies e g schools with seats and a set of agents e g students with priorities over objects e g proximity of residence area we study two well known and competing mechanisms the agentoptimal stable mechanism aosm allots objects via the deferred acceptance algorithm the top trading cycles mechanism ttcm allots objects via gale s top trading cycles algorithm we show that the two mechanisms are equivalent or ttcm is fair i e respects agents priorities or resource monotonic o rpopulation monotonic if and only if the priority structure is acyclic furthermore if aosm fails to be efficient consistent for a problem ttcm also fails to be fair consistent for it however the converse is not necessarily true

boston versus deferred acceptance in an interim setting an experimental investigation abstract while much of the school choice literature advocates strategyproofness recent research has aimed to improve efficiency using mechanisms that rely on non truthtelling equilibria we address two issues that arise from this approach we first show that even in simple environments with ample feedback and repetition agents fail to reach non truthtelling equilibria we offer another way forward implementing truth telling as an ordinal bayes nash equilibrium rather than as a dominant strategy equilibrium we show that this weaker solution concept can allow for more efficient mechanisms in theory and provide experimental evidence that this is also the case in practice in fact truth telling rates are basically the same whether truthtelling is implemented as an ordinal bayes nash equilibrium or a dominant strategy equilibrium this provides a proof of concept that ordinal bayes nash design might provide a middle path achieving efficiency gains over strategy proof mechanisms without relying on real life agents playing a non truth telling equilibrium

nonstationary relational contracts with adverse selection i develop a model of nonstationary relational contracts in order to study internal wage dynamics workers are heterogeneous and each worker s ability is both private information and fixed for all time learning therefore occurs within employment relationships the inferences however are confounded by moral hazard incentive provision is restricted by an inability to commit to long term contracts relational contracts which must be self enforcing must therefore be used the wage dynamics in the optimal contract which are pinned down by the tension between incentive provision and contractual enforcement are intimately related to the learning effect

efficient resource allocation under multi unit demand abstract we study resource allocation with multi unit demand such as the allocation of courses to students in contrast to the case of single unit demand no stable mechanism not even the student proposing deferred acceptance algorithm achieves desirable properties it is not strategy proof and the resulting allocation is not even weakly efficient under submitted preferences we characterize the priority structure of courses over students under which stability is consistent with strategy proofness or efficiency we show that stability is compatible with strategy proofness or efficiency if and only if the priority structure is essentially homogeneous this result suggests that efficient allocation under multi unit demand is difficult and that the use of stable mechanisms may not deliver desirable outcomes

is financial globalization beneficial this lecture examines whether financial globalization is beneficial to developing countries by first examining the evidence on financial development and economic growth and concludes that financial development is indeed a key element in promoting economic growth it then asks why if financial development is so beneficial it often does not occur it then goes on to examine whether globalization particularly of the financial kind can help encourage financial and economic development and argues that it can however financial globalization does not always work to encourage economic development because it often leads to devastating financial crises the issue is thus not whether financial globalization is inherently good or bad but whether it can be done right

global financial instability framework events issues two of the key questions facing policymakers today are how to reduce the risk of global financial instability and how to cope with it when it occurs this paper starts by defining financial instability and then showing how it harms economic activity it then uses this framework to describe what happened during the recent financial crises in mexico and east asia the paper ends by raising several key policy issues not coincidentally these issues are addressed in the remaining papers in the symposium

unraveling reduces mobility in a labor market gastroenterology with and without a centralized match the entry level market for american gastroenterologists was organized by a centralized clearinghouse from 1986 to 1996 before and since it has been conducted via a decentralized market in which appointment dates have unraveled to well over a year before the start of employment we find that both before and after the years in which the centralized clearinghouse was used gastroenterologists are less mobile and more likely to be employed at the same hospital in which they were internal medicine residents than when the clearinghouse was in use this suggests that the clearinghouse not only coordinates the timing of appointments but also increases the scope of the market compared to a decentralized market with early appointments

the past and future of commercial banking viewed through an incomplete contract lens commercial banks emerged at a time when contracts were quite incomplete and property rights insecure they typically offered demand deposits made loans on demand and were regulated each of these aspects of the institutional structure were essential in helping the bank provide the twin functions of liquidity and safety i argue that recent theories of banking which i collectively refer to as incomplete contract theories of banking explain well the origins of banking i also claim that they can explain recent changes in banking as th e informational legal and property rights environment has improved there appear to be fewer synergies between various aspects of the traditional institutional structure of the bank it is now time to think whether there is anything special about the institutional form of the bank or whether all that is special is that it is regulated

capital account liberalization what do cross country studies tell us capital account liberalization it is fair to say remains one of the most controversial and least understood policies of our day one reason is that different theoretical perspectives have very different implications for the desirability of liberalizing capital flows another is that empirical analysis has failed to yield conclusive results the answer another influential strand of thought contends is that this efficient markets paradigm is fundamentally misleading when applied to capital flows limits on capital movements are a distortion it is an implication of the theory of the second best that removing one distortion need not be welfare enhancing when other distortions are present

the role of personal wealth in small business finance abstract this paper provides new empirical evidence on the relationship between personal commitments and the allocation of small business credit the data suggest that personal commitments are important for firms seeking certain types of loans guarantees are more prevalent than collateral and organization type corporate versus noncorporate status appears to be particularly important in determining commitment use no systematic relationship is observed between commitment use and owner wealth personal commitments appear to be substitutes for business collateral at least for lines of credit while personal collateral and personal guarantees do not seem to substitute for each other personal commitments have generally become more important to small business lending since the late 1980s

firm heterogeneity internal finance and credit rationing this paper assesses the role of internal net worth holding constant investment opportunities in the allocation of credit in the presence of asymmetric information in the capital market the authors consider an economy in which both symmetric information and information intensive entrepreneurs seek funds from the capital market and they develop a simple general equilibrium model of credit allocation their emphasis is on shocks to borrower net worth depending on levels of net worth the symmetric information allocation a credit collapse or intermediate allocations are possible the model yields predictions corresponding to accelerator effects on investment and output as well as real effects of collateral redistributions copyright 1990 by royal economic society

does information sharing reduce the role of collateral as a screening device this is the authors accepted refereed and final manuscript to the article publisher s version available at http dx doi org 10 1016 j jbankfin 2014 02 010

short term loans and long term relationships relationship lending in early america recent banking theory holds that durable firm bank relationships are valuable to both parties this paper uses the contract specific loan records of a 19th century u s bank and shows that firms with extended relationships received three principal benefits first firmswith extended relationships had lower credit costs second long term customers provided fewer personal guarantees which were an alternative to collateral third long term customers were more likely to have loan terms renegotiated during a credit crunch these findings support theories that banks realize cost advantages through the use of proprietary information

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

economic development legality and the transplant effect abstract we analyze the determinants of effective legal institutions legality using data from 49 countries we show that the way the law was initially transplanted and received is a more important determinant than the supply of law from a particular legal family countries that have developed legal orders internally adapted the transplanted law and or had a population that was already familiar with basic principles of the transplanted law have more effective legality than countries that received foreign law without any similar predispositions the transplanting process has a strong indirect effect on economic development via its impact on legality while the impact of particular legal families is weaker and not robust to alternative legality measures

matching with branch of choice contracts at the united states military academy branch selection is a key decision in a cadet s military career cadets at usma can increase their branch priorities at a fraction of slots by extending their service agreement this real life matching problem lls an important gap in market design literature although priorities fail a key substitutes condition the agent optimal stable mechanism is well dened and in contrast to the current usma mechanism it is fair stable and strategy proof adoption of this mechanism benets cadets and the army this new

demand analysis using strategic reports an application to a school choice mechanism several school districts use assignment systems that give students an incentive to misrepresent their preferences we find evidence consistent with strategic behavior in cambridge such strategizing can complicate preference analysis this paper develops empirical methods for studying random utility models in a new and large class of school choice mechanisms we show that preferences are non parametrically identified under either sufficient variation in choice environments or a preference shifter we then develop a tractable estimation procedure and apply it to cambridge estimates suggest that while 82 of students are assigned to their stated first choice only 72 are assigned to their true first choice because students avoid ranking competitive schools assuming that students behave optimally the immediate acceptance mechanism is preferred by the average student to the deferred acceptance mechanism by an equivalent of 0 08 miles the estimated difference is smaller if beliefs are biased and reversed if students report truthfully

the effect of financial development on convergence theory and evidence we introduce imperfect creditor protection in a multicountry schumpeterian growth model the theory predicts that any country with more than some critical level of financial development will converge to the growth rate of the world technology frontier and that all other countries will have a strictly lower long run growth rate we present evidence supporting these and other implications in the form of a cross country growth regression with a significant and sizable negative coefficient on initial per capita gdp relative to the united states interacted with financial intermediation in addition we find that other variables representing schooling geography health policy politics and institutions do not affect the significance of the interaction between financial intermediation and initial per capita gdp and do not show any independent effect on convergence in the regressions our findings are robust to removal of outliers and to alternative conditioning sets estimation procedures and measures of financial development

recombinant estimation for normal form games with applications to auctions and bargaining abstract when analyzing economic games researchers frequently estimate quantities describing group outcomes such as the expected revenue in an auction for such applications we propose an improved statistical estimation technique called recombinant estimation the technique takes observations of players strategies and recombines them to compute all possible group outcomes that could have resulted from different player combinations in applications to an auction and a bargaining game the improved efficiency of our estimator is equivalent to increasing the sample size between 25 and 200 we discuss how to design experiments in order to utilize recombinant estimation we also discuss practical computational issues and provide software for computing estimates and standard errors

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

occupational choice and the process of development this paper models economic development as a process of institutional transformation by focusing on the interplay between agents occupational decisions and the distribution of wealth because of capital market imperfections poor agents choose working for a wage over self employment and wealthy agents become entrepreneurs who monitor workers only with sufficient inequality however will there be employment contracts otherwise there is either subsistence or self employment thus in static equilibrium the occupational structure depends on distribution since the latter is itself endogenous we demonstrate the robustness of this result by extending the model dynamically and studying examples in which initial wealth distributions have long run effects in one case the economy develops either widespread cottage industry self employment or factory production employment contracts depending on the initial distribution in the other example it develops into prosperity or stagnation

the quality effect does financial liberalization improve the allocation of capital abstract we document evidence of a quality effect of financial liberalization on allocative efficiency as measured by dispersion in tobin s q across firms we predict that financial liberalization by equalizing access to credit is associated with reduced variation in expected marginal returns we test this prediction using a new financial liberalization index and firm level data for five emerging markets india jordan korea malaysia and thailand we find robust evidence that financial liberalization rather than financial deepening is associated with improved allocative efficiency

the allocation of credit and financial collapse this paper examines the allocation of credit in a market in which borrowers have greater information concerning their own riskiness than do lenders it illustrates that 1 the allocation of credit is inefficient and at times can be improved by government intervention and 2 small changes in the exogenous risk free interest rate can cause large discontinuous changes in the allocation of credit and the efficiency of the market equilibrium these conclusions suggests a role for government as the lender of last resort

the economics of small business finance the roles of private equity and debt markets in the financial growth cycle abstract this article examines the economics of financing small business in private equity and debt markets firms are viewed through a financial growth cycle paradigm in which different capital structures are optimal at different points in the cycle we show the sources of small business finance and how capital structure varies with firm size and age the interconnectedness of small firm finance is discussed along with the impact of the macroeconomic environment we also analyze a number of research and policy issues review the literature and suggest topics for future research

the countercyclical role of italian local banks during the financial crisis abstractthe article analyses the role of local banks in italy during the 2008 2009 crisis from the perspective of the relationship lending model during the crisis the risk of cascading failures of financial organizations has dramatically increased thus causing a return of attention to local banking as a possible source of countercyclical behaviours in the financial markets thanks to their ability to establish fiduciary long term relationships with small businesses the purpose of this article is to test this hypothesis and to disentangle the response of local banks during the financial turmoil according to their governance structure and location our results show that non independent local banks and to a limited extent cooperative banks located in the rural area actually played a significant countercyclical role across the crisis policy implications suggest that prudential supervision should rethink the indicators of systemic risk in order to differentiate banks according to their capability of mitig

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

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

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

good bye financial repression hello financial crash some unintended consequences of financial liberalization in latin america are analyzed in this paper intrinsic imperfectious in financial markets and the policy dilemmas they pose are reviewed first the stylized facts of southern cone experiments in financial liberization are then presented alternative ways of organlzing domestic capital markets under latin american conditions are discussed and an eclectic reform mongering program is proposed

leveling the playing field sincere and sophisticated players in the boston mechanism empirical and experimental evidence suggests different levels of sophistication among families in the boston public school student assignment plan we analyze the preference revelation game induced by the boston mechanism with sincere players who report their true preferences and sophisticated players who play a best response we characterize the set of nash equilibrium outcomes as the set of stable matchings of a modified economy where sincere students lose priority to sophisticated students any sophisticated student weakly prefers her assignment under the pareto dominant nash equilibrium of the boston mechanism to her assignment under the recently adopted student optimal stable mechanism jel d82 i21

financial structure and aggregate economic activity an overview this paper surveys literature that explores the possible links between the financial system and aggregate economic behavior the survey is in two parts the first reviews the traditional work and the second discusses new research copyright 1988 by ohio state university press

a model of crises in emerging markets this paper presents a perfect foresight model of speculative attacks on emerging markets credit constrained governments are assumed to have two objectives to accumulate liquid assets in order to self insure against shocks to national consumption and to insure poorly regulated domestic financial markets this policy regime generates endogenous fiscal deficits defined to include the growth of contingent liabilities the model sets out a sequence of yield differentials consistent with capital inflows followed by anticipated speculative attacks the model suggests that a common shock generated capital inflows to emerging markets in asia and latin america after 1989

an experimental study on decentralized networked markets abstract we design a laboratory experiment to investigate matching in a decentralized market of deferred acceptance agents are undifferentiated and may have multiple partners their payoff depends on who they match with the experiment is designed in such a way that a stable configuration exists but cannot be eyeballed by the participants due to the computational complexity of the game in spite of this subjects are remarkably good at reaching a stable match even when the payoffs of others are not publicly observed more information does however speed up convergence thanks to self censoring we trace irrational matching choices mostly to two sources the tendency of over think in a setting where strategic thinking is not necessary and the reluctance to accept matching offers from those who have been disloyal in the past

do non intermediation services tell us more in the finance growth nexus causality evidence from eight oecd countries abstractthis paper provides new evidence on a traditional finance growth nexus through dividing financial services into financial intermediation and non intermediation services and examining their

a theory of trickle down growth and development this paper develops a model of growth and income inequalities in the presence of imperfect capital markets and it analyses the trickle down effect of capital accumulation moral hazard with limited wealth constraints on the part of the borrowers is the source of both capital market imperfections and the emergence of persistent income inequalities three main conclusions are obtained from this model first when the rate of capital accumulation is sufficiently high the economy converges to a unique invariant wealth distribution second even though the trickle down mechanism can lead to a unique steady state distribution under laissez faire there is room for government intervention in particular redistribution of wealth from rich lenders to poor and middle class borrowers improves the production efficiency of the economy both because it brings about greater equality of opportunity and also because it accelerates the trickle down process third the process of capital accumulation initially has the effect of widening inequalities but in later stages it reduces them in other words this model can generate a kuznets curve

resolving conflicting preferences in school choice the boston mechanism reconsidered the boston mechanism is among the most popular school choice pro cedures in use yet the mechanism has been criticized for its poor incentive and welfare performances which led the boston public schools to recently replace it with gale and shapley s deferred acceptance algorithm henceforth da the da elicits truthful revelation of ordinal preferences whereas the boston mechanism does not but the latter induces participants to reveal their cardinal preferences i e their relative preference intensities whereas the former does not we show that cardinal preferences matter more when families have similar ordinal preferences and schools have coarse priorities two common features of many school choice environ ments speci cally when students have the same ordinal preferences and schools have no priorities the boston mechanism pareto dominates the da in ex ante wel fare the boston mechanism may not harm but rather bene t participants who may not strategize well in the presence of school priorities the boston mechanism also tends to facilitate a greater access than the da to good schools by those lack ing priorities at those schools these results contrast with the standard view and cautions against a hasty rejection of the boston mechanism in favor of mechanisms such as the da

banks free banks and u s economic growth the federalist financial revolution may have jump started the u s economy into modern growth but the free banking system 1837 1862 did not play a direct role in sustaining it despite lowering entry barriers and extending banking into developing regions we find in county level data that free banks had little or no effect on growth the result is not just a symptom of the era as state chartered banks seem to have strong and positive effects on manufacturing and urbanization jel g21 n21 o43

explaining international and intertemporal variations in income inequality this paper explores the propositions that income inequality is relatively stable within countries and that it varies significantly among countries a new and expanded data set provides broad support for both propositions drawing on a political economy and capital market imperfection arguments to explain the intertemporal and international variation in inequality the empirical analysis shows that the predicted variables associated with the first argument a measure of civil liberties and the initial level of secondary schooling and the second argument a measure of financial depth and the initial distribution of land are indeed important determinants of inequality this paper explores two propositions regarding income inequality they are first income inequality is relatively stable within countries and second it varies significantly across countries to illustrate note that the gini coefficient in india remained almost constant for forty years 1951 92 with mean 32 6 and standard deviation 2 0 2 in contrast the variation in gini coefficients across countries is large 61 9 in honduras in 1968 compared with 17 8 in bulgaria in 1976 if substantiated these propositions have potentially significant implications for poverty the significance of the first is obvious barring any fundamental socio political change poverty reduction will depend crucially on the rate of economic growth given this the significance of the second is that in inegalitarian economies the poor will enjoy a smaller share of any national increment in income than in more egalitarian ones drawing on a new and expanded data set on inequality deininger and squire 1996a the first of the paper s three sections conducts standard statistical tests of the two propositions the sample comprises 573 observations on the most common measure of inequality the gini coefficient for 49 developed and developing countries covering the period 1947 94 the results broadly confirm our two propositions specifically analysis of variance anova shows that about 90 of the total variance in the gini coefficients

capital account liberalization financial depth and economic growth abstract we show a statistically significant and economically relevant effect of open capital accounts on financial depth and economic growth in a cross section of countries over the periods 1986 1995 and 1976 1995 countries having open capital accounts had a significantly greater increase in financial depth and over the 20 year period greater economic growth these results however are largely driven by the developed countries included in the sample the observed failure of capital account liberalization to promote financial deepening among developing countries suggests potentially important policy implications concerning the desirability of opening up the capital account

financial integration and business cycles in a small open economy abstract the purpose of this study is to examine a dynamic stochastic general equilibrium framework with financial and informational frictions and foreign borrowing in the case of money growth and technology shocks for a small open economy and to analyze the implications of varying degrees of financial integration for aggregate fluctuations and propagation mechanisms in the economy the existence of informational asymmetries among the agents in the model necessitates financial intermediation in the economy moreover there is uncertainty involved in the production process which leads to collateralized borrowing by firms and therefore has to be taken into account in the design of the loan contracts between firms and financial intermediaries it is shown that increasing financial integration amplifies the effect of a positive temporary monetary shock on output consumption investment labor demand and loans whereas it has barely any implication for the impact of a positive temporary technology shock on the economy

constrained school choice an experimental study 31 pages 18 tables jel classification c72 c78 d78 i20 trabajo publicado como articulo en american economic review 100 4 1860 1874 2010 http dx doi org 10 1257 aer 100 4 1860

price flexibility credit availability and economic fluctuations evidence from the united states 1894 1909 the importance of disturbances in financial markets for real economic activity and the positive association between price level and output movements typically are explained by appeal to a combination of nominal aggregate demand shocks particularly money supply shocks and rigid prices we argue that this view is inconsistent with evidence for short run responsiveness of prices and gold flows to nominal disturbances during the pre world war i gold standard era we offer an alternative explanation that connects financial markets and real activity through disturbances to the availability of credit this approach links comovements in prices and output through real effects in credit markets associated with price level shocks empirical analysis using monthly data for the pre world war i period supports the assumption of rapid price adjustment and the credit supply interpretation of the transmission of financial shocks disturbances to credit availability including price shocks contribute substantially to our empirical explanation of output fluctuations during this period

are financial development and trade openness complements or substitutes this article studies the long and short run relationships between financial development and trade openness using the pooled mean group estimator of pesaran shin and smith 1999 for unbalanced panel data for 87 countries over the 1960 2005 period our empirical results indicate that long run complementarity between financial development and trade openness coexists with short run substitutionarity between the two policy variables but when splitting the data into oecd and non oecd country groups this finding can be observed only in non oecd countries for oecd countries financial development has negligible effects on trade in addition we find nonlinearity in the relationship in that long run responses of trade decrease with financial development the article further finds coexistence of negative trade effects of financial fragility and positive trade impacts of financial depth

explaining loan rate differentials between small and large companies evidence from switzerland the lending rate differentials between loans to small and large companies are striking according to several studies these disparities of loan rates are primarily a result of a lower informational efficiency at small companies this study examines to what extent such differences in loan rates are caused not only by informational inefficiencies but also by operational costs and the borrower s negotiation power by using unique hand collected data from the credit pricing models of 15 swiss regional banks we provide new empirical evidence that operational costs are a key factor in explaining differences in lending rates between small and large enterprises furthermore we also found that the lack of negotiation power of small enterprises expressed in the profit margin amount of the bank has significant explanatory power

collateral loan quality and bank risk abstract most commercial loans are made on a secured basis yet little is known about the relationship between collateral and credit risk several theoretical studies find that when borrowers have private information about risk the lowest risk borrowers tend to pledge collateral in contrast conventional wisdom holds that when risk is observable the highest risk borrowers tend to pledge collateral an additional issue is whether secured loans as opposed to secured borrowers tend to be safer or riskier than unsecured loans empirical evidence presented here strongly suggests that collateral is most often associated with riskier borrowers riskier loans and riskier banks

income distribution and macroeconomics this paper analyzes the role of wealth distribution in macroeconomics through investment in human capital it is shown that in the presence of credit markets imperfections and indivisibilities in investment in human capital the initial distribution of wealth affects aggregate output and investment both in the short and in the long run as there are multiple steady states this paper therefore provides an additional explanation for the persistent differences in per capita output across countries furthermore the paper shows that cross country differences in macroeconomic adjustment to aggregate shocks can be attributed among other factors to differences in wealth and income distribution across countries

stable and strategy proof matching with flexible allotments we introduce a framework of matching with flexible allotments that can be used to model firms with cross division hiring restrictions our framework also allows us to nest some prior models of matching with distributional constraints building upon our recent work on observable substitutability we show that multi division choice functions with flexible allotments enable stable and strategy proof matching these results illustrate the value of clearly mapping when stable and strategy proof matching is possible

the welfare effects of coordinated assignment evidence from the new york city high school match abstract coordinated single offer school assignment systems are a popular education reform we show that uncoordinated offers in nyc s school assignment mechanism generated mismatches one third of

markets for risk and openness to trade how are they related if protectionist trade policies aim to insure domestic industries against swings in world market prices the development of financial markets could lead to trade liberalization likewise trade lib

latin america in the rearview mirror abstract latin american countries are the only western countries that are poor and that are not gaining ground on the u s this paper evaluates why latin america has not replicated western economic success we find that this failure is primarily due to tfp differences latin america s tfp gap is not plausibly accounted for by human capital differences but rather reflects inefficient production we argue that competitive barriers are a promising channel for understanding low latin tfp we document that latin america has many more international and domestic competitive barriers than do western and successful east asian countries we also document a number of microeconomic cases in latin america in which large reductions in competitive barriers increase latin american productivity to western levels

strategy proofness and stability of the boston mechanism an almost impossibility result abstract public school systems generally use one of the three competing mechanisms the boston mechanism the deferred acceptance mechanism and the top trading cycle mechanism for assigning students to specific schools although the literature generally claims that the boston mechanism is pareto efficient but neither stable nor strategy proof this study delineates a subset of school priority structures for which it fulfills all three criteria we show that the boston mechanism is stable if and only if it is strategy proof if and only if the priority structure is strongly acyclic however we find that the condition of strong acyclicity is nearly impossible to satisfy any priority structure is quasi cyclic whenever there are two schools whose admission quotas are less than the number of students seeking admission

lending constraints real estate prices and business cycles in emerging economies abstract we investigate a small open economy with constraints in both the domestic and the international credit market the informational opaqueness of the domestic market hinders foreign lenders activity so that entrepreneurs face looser borrowing constraints vis a vis domestic financiers however limited capitalization constrains domestic lenders calibrating the model to data from argentina we find that the interaction between lending and borrowing constraints is a channel through which real interest rate shocks generate fluctuations in output real estate prices and consumption external financial liberalization increases volatility and affects welfare more than domestic liberalization but also mitigates the destabilizing impact of domestic deregulation