default correlation an empirical investigation of a subprime lender in recent years subprime lending has grown substantially as an important sector of the credit markets this paper is concerned with the risk management of subprime loan portfolios and the importance of default correlation in measuring that risk using a large portfolio of residential subprime loans from an anonymous subprime lender we show that default correlation is substantial for this lender in particular the significance of default correlation increases as the internal credit rating declines our results suggest that lenders and regulators would be well served investing in the understanding of default correlation in subprime portfolios

institutional selection in international relations state anarchy as order by the end of the medieval era three new competing institutions attempted to capture gains from trade and reduce feudal particularism sovereign territorial states cityleagues and city states by the middle of the seventeenth century city leagues and city states had declined markedly territorial states survived as the dominant form because they were able to reduce free riding lower transaction costs and credibly commit their constituents the selection process took place along three dimensions first sovereign territorial states proved competitively superior in the economic realm second states increasingly recognized only other sovereign territorial states as legitimate actors in the international system third other actors defected to or copied the institutional makeup of sovereign territorial organization the emergence of discrete territorial units in which only sovereign authorities represented their citizens as the predominant type of organization in international affairs created a new solution to the problem of markets and hierarchies

dynamics of dyadic competitive interaction in this study of firms entries into and exits from each other s markets we link research on multipoint competition to the emerging action oriented dyadic approach to interfirm rivalry by specifying market interdependencies between pairs of firms that condition their potential for rivalry over time our dynamic analysis of competitive interactions between pairs of commuter airlines in california reveals the idiosyncratic and asymmetric market microstructures that characterize dyadic competitive relationships and helps explain why firms grapple vigorously with some of their competitors while being passive toward others we show that there is an inverted u shaped relationship between firms rates of entry into and exit from each other s markets and the level of multimarket contact in competitor dyads we also show how this basic curvilinear effect varies from dyad to dyad as a function of relative levels of multimarket contact with competitors in other dyads and the relative sizes of competitors in a focal dyad copyright 1999 john wiley sons ltd

do european banks with a covered bond program issue asset backed securities for funding abstract the decline in the issuance of asset backed securities abss since the financial crisis and the comparative advantage of covered bonds cbs as a funding alternative to abss raise the question of whether banks still issue abss as a way to receive funding by applying double hurdle regression models to a dataset of 134 european banks observed during the period from 2007 to 2013 this study reveals that banks with a covered bond program cbp securitize ceteris paribus less of their assets the estimated difference in abs issuance is driven mainly by banks being more likely to issue abss as a funding tool rather than trying to manage their credit risk exposure or to meet regulatory capital requirements consistently a worse liquidity funding position results in higher levels of securitization only for banks without a cbp

quantile regression for modelling distributions of profit and loss quantile regression is applied in two retail credit risk assessment exercises exemplifying the power of the technique to account for the diverse distributions that arise in the financial service industry the first application is to predict loss given default for secured loans in particular retail mortgages this is an asymmetric process since where the security such as a property value exceeds the loan balance the banks cannot retain the profit whereas when the security does not cover the value of the defaulting loan then the bank realises a loss in the light of this asymmetry it becomes apparent that estimating the low tail of the house value is much more relevant for estimating likely losses than estimates of the average value where in most cases no loss is realised in our application quantile regression is used to estimate the distribution of property values realised on repossession that is then used to calculate loss given default estimates an illustration is given for a mortgage portfolio from a european mortgage lender a second application is to revenue modelling while credit issuing organisations have access to large databases they also build models to assess the likely effects of new strategies for which by definition there is no existing data certain strategies are aimed at increasing the revenue stream or decreasing the risk in specific market segments using a simple artificial revenue model quantile regression is applied to elucidate the details of subsets of accounts such as the least profitable as predicted from their covariates the application uses standard linear and kernel smoothed quantile regression

a comparative analysis of current credit risk models the new bis 1998 capital requirements for market risks allows banks to use internal models to assess regulatory capital related to both general market risk and credit risk for their trading book this paper reviews the current proposed industry sponsored credit value at risk methodologies first the credit migration approach as proposed by jp morgan with creditmetrics is based on the probability of moving from one credit quality to another including default within a given time horizon second the option pricing or structural approach as initiated by kmv and which is based on the asset value model originally proposed by merton merton r 1974 journal of finance 28 449 470 in this model the default process is endogenous and relates to the capital structure of the firm default occurs when the value of the firm s assets falls below some critical level third the actuarial approach as proposed by credit suisse financial products csfp with creditrisk and which only focuses on default default for individual bonds or loans is assumed to follow an exogenous poisson process finally mckinsey proposes creditportfolioview which is a discrete time multi period model where default probabilities are conditional on the macro variables like unemployment the level of interest rates the growth rate in the economy which to a large extent drive the credit cycle in the economy 2000 elsevier science b v all rights reserved

social approval values and afdc a re examination of the illegitimacy debate this paper models the fertility decision of individuals who differ in their wage rate and their intensity of preferences for rearing children and whose utility of having a child out of wedlock depends on the level of social approval associated with doing so this social approval in turn is a function of the fraction of individuals in previous generations that chose to have children out of wedlock the model is a straightforward extension of the typical rational choice model that motivates much of the empirical literature a literature that has cast doubt on a strong link between afdc and illegitimacy however the model introduces elements from epidemic models that many have in mind when arguing for such a link as a result the predictions of this extended model are consistent with empirical findings while at the same time linking the rise in illegitimacy solely to government welfare programs specifically a program similar to afdc is introduced into an economy with low illegitimacy rates and a trans

charter value risk taking incentives and emerging competition for fannie mae and freddie mac this paper examines two forces that may soon increase competition in the u s secondary conforming mortgage market 1 the federal home loan bank mortgage purchase programs and 2 the adoption of revised risk based capital requirements for large u s banks basel ii we argue that this competition is likely to reduce the growth and relative importance of fannie mae and freddie mac and hence reduce their charter values and effective capital such developments could in turn lead to more risky behaviors by these two companies this last consequence warrants greater supervisory awareness and legal authorities

unfair trade practices the case for a differential response trade distorting practices by other states did not seriously affect u s commercial interests until the mid 1960 s however growing overall and sectoral trade deficits as well as rapid changes in trading patterns have made such practices a more salient political issue the modal and preferred american policy response has been to rely on u s supported liberal institutions notably the general agreement on tariffs and trade gatt to provide a framework for multilateral negotiations designed to eliminate

diversification multi market contact and profitability this paper analyses the relationships between diversification multi market contact and industry profitability it focuses on the link between diversification and multi market contact to show that when diversification establishes or increases the extent to which firms meet in more than one market the effect of such multi market contact is to increase the possibility that collusion emerges as an evolutionary stable strategy as a result multi market contact may increase the potential for tacit collusion and so lead to higher profitability the effects of diversification and multi market contact on the price cost margin and the rate of return to capital are estimated using a specially constructed new database for uk manufacturing industry in 1979 this database provides information on the diversification and multi market contact of 418 firms across 134 manufacturing industries thus linking firm and industry level data the results show a clear positive effect of multi market contact on industry profitability

in good times and bad reciprocity in an uncertain world axelrod s work has demonstrated that tit for tat is an extremely robust strategy in the repeated two person prisoner s dilemma however most analyses and experiments of the repeated game have assumed perfect monitoring each player either can observe his partner s choice directly or can infer it perfectly after observing the outcome yet in many real dilemmas outcomes are functions of exogenous events as well as the players moves and it is often difflcult to disentangle intended and unintended effects with certainty in the first model of this paper the performance of tit for tat under uncertainty is compared to the performance of other behaviorally plausible backward looking strategies the second model uses game theory to analyze the equilibrium properties of tit fortat in a game with incomplete information in both models introducing a small amount of uncertainty makes a big difference

designing payments for environmental services in theory and practice an overview of the issues abstract payments for environmental services pes have attracted increasing interest as a mechanism to translate external non market values of the environment into real financial incentives for local actors to provide environmental services es in this introductory paper we set the stage for the rest of this special issue of ecological economics by reviewing the main issues arising in pes design and implementation and discussing these in the light of environmental economics we start with a discussion of pes definition and scope we proceed to review some of the principal dimensions and design characteristics of pes programs and then analyze how pes compares to alternative policy instruments finally we examine in detail two important aspects of pes programs their effectiveness and their distributional implications pes is not a silver bullet that can be used to address any environmental problem but a tool tailored to address a specific set of problems those in which ecosystems are mismanaged because many of their benefits are externalities from the perspective of ecosystem managers pes is based on the beneficiary pays rather than the polluter pays principle and as such is attractive in settings where es providers are poor marginalized landholders or powerful groups of actors an important distinction within pes is between user financed pes in which the buyers are the users of the es and government financed pes in which the buyers are others typically the government acting on behalf of es users in practice pes programs differ in the type and scale of es demand the payment source the type of activity paid for the performance measure used as well as the payment mode and amount the effectiveness and efficiency of pes depends crucially on program design

the relative termination experience of adjustable to fixed rate mortgages our study uses a multinomial logit model to analyze the concurrent termination experience of adjustable rate and fixed rate mortgages a new set of arm specific interactive determinants expands the conventional frm specification to isolate the unique termination behavior of arms we find that expected rate adjustments and large lifetime caps are positively related to arm termination probabilities while long adjustment frequencies are inversely related caps both periodic and lifetime have a secondary inverse effect on termination probabilities when interest rate movements exceed cap limits the model also shows that interest rate expectations affect frm terminations more strongly than arm terminations in september 1981 commitment rates on fixed rate mortgages frms peaked at 18 after a 3 year 850 basis point rise lenders encumbered with losses from devalued frm portfolios faced insolvency while mortgage applicants constrained by large payment burdens contended with disqualification adjustable rate mortgages arms emerged as a solution to both problems the adjusting note rate allowed lenders to hedge their portfolios against rising interest rates and the discounting of initial arm rates kept household payment ratios within underwriting guidelines the benefit of arms remains questionable however because of the uncertainty surrounding their future payment streams in particular the shift of interest rate risk to borrowers may result in higher default and prepayment risks to lenders uncertainty is further compounded by nonstandard contracts for buydown terms period caps life caps indexes and adjustment periods originators and insurers of arms as well as investors in the emerging market for arm backed securities need arm specific methods for evaluating the cashflow risks of these unique instruments in this paper we address these issues by examining the concurrent default and prepayment experience of arms

the function of authority in transaction cost economics abstract this paper questions the transaction cost characterization of observed authority relations as efficient governance structures various inadequacies in the transaction cost account of work organization and the limits of firm size are traced to its neglect of the possibility that authority may be abused opportunistically this exemplifies a more general propensity in the transaction cost literature that of explaining economic organization in functionalist terms with little attention to the causal mechanisms through which efficient governance structures might actually arise three such mechanisms are considered but none is found to provide an adequate rationale for the imputation of efficiency to observed structures

the evolutionary stability of cooperation is cooperation without central authority stable if so how robust is it despite what might be the conventional wisdom the evolution of cooperation did not solve this problem deductively in fact results obtained later by others seem to have contradicted the book s main message reexamining this exceptionally influential work yields a new picture part of axelrod s evolutionary story turns out to be false but the main intuition that retaliatory strategies of conditional cooperation are somehow advantaged proves correct in one specific and significant sense under a standard evolutionary dynamic these strategies require the minimal frequency to stabilize hence they support the most robust evolutionary equilibrium the easiest to reach and retain moreover the less efficient a strategy the larger is its minimal stabilizing frequency hobbesian strategies of pure defection are the least robust our main theorems hold for a large class of games that pose diverse cooperation problems prisoner s dilemma chicken stag hunt and many others

subprime mortgage design abstract this paper offers evidence on the design of subprime mortgages as bridge financing products we show that the viability of subprime mortgages was uniquely predicated on the appreciation of house prices over short horizons high rates of early prepayments on subprime mortgages suggest the use of prepayments as an exit option this paper argues that high early defaults on post 2004 originations can be explained when one considers high early prepayment rates for pre 2004 originations

loss given default of residential mortgages in a low ltv regime role of foreclosure auction process and housing market cycles abstract using loan level foreclosure auction data we study the loss given default lgd of defaulted residential mortgages originated in korea a low ltv regime we find that senior mortgages generate very low loss rates 5 10 while losses of subordinated claims are in 30 50 range we document the effects of housing market cycles on loss severity by showing that collateral characteristics that are overvalued during the boom increase loss severity during the market downturn we also investigate how a broad set of time of origination and post origination information on loan collateral and borrower characteristics and foreclosure auction process influence the lgd of residential mortgages

firms and tariff regime change explaining the demand for protection although it is commonly argued that there is a connection between tariff levels and business conditions this hypothesis has not been subjected to systematic empirical analysis or given any theoretical basis the author presents two complementary theories of the movement of tariff levels in response to changing business conditions both explain tariff changes in terms of the changing political demands of business firms and both rely on the business cycle to drive these changing demands one theory is a conventional argument about changing opportunities for entry and exit the other treats firms as satisficers the theories yield similar predictions preliminary empirical analysis while consistent with both does not differentiate between them

a generalized valuation model for fixed rate residential mortgages this paper uses option pricing techniques to rationally price mortgage instruments subject to both default and prepayment risk attention is given to terminations due to purely financial consideration of the mortgage contract itself as well as to personally induced terminations explicit inclusion of default in the mortgage valuation procedure also permits the valuation of insurance against such default qualitatively it is found that default differs significantly in the behavior from either prepayment or nonfinancial termination quantitatively however there is significant substitution between prepayment and default so that the addition of a default feature to the contract has only a modest impact on mortgage values unless there is substantial price volatility in the housing market or a high loan to value ratio copyright 1992 by ohio state university press

mortgage terminations heterogeneity and the exercise of mortgage options as applied to the behavior of homeowners with mortgages option theoiy predicts that mortgage prepayment or default will be exercised if the call or put option is in the money by some specific amount our analysis tests the extent to which the option approach can explain default and prepayment behavior evaluates the practical importance of modeling both options simultaneouisly and models the unobserved heterogeneity of borrowers in the home mortgage market the paper presents a uinified model of the competing risks of mortgage termination by prepayment and default considering the two hazards as dependent competing risks that are estimated jointly it also accounts for the unobserved heterogeneity among borrowers and estimates the unobserved heterogeneity simultaneously with the parameters and baseline hazards associated with prepayment and default functions our results show that the option model in its most straightfolward version does a good job of explaininig default and prepayment but it is not enouigh by itself the simultaneity of the options is very important empirically in explaining behavior the results also show that there exists significant heterogeneity among mortgage borrowers ignoring this heterogeneity results in serious errors in estimating the prepayment behavior of homeowners

coordination and collaboration regimes in an anarchic world the study of regimes can contribute to our understanding of international politics only if regimes represent more than international organizations and less than all international relations the conceptualization of regimes developed here accepts the realist image of international politics in which autonomous self interested states interact in an anarchic environment yet there are situations in which rational actors have an incentive to eschew unconstrained independent decision making situations in which individualistic self interested calculation leads them to prefer joint decision making regimes because independent self interested behavior can result in undesirable or suboptimal outcomes these situations are labeled dilemmas of common interests and dilemmas of common aversions to deal with these states must collaborate with one another or coordinate their behavior respectively thus there are different bases for regimes which give rise to regimes with different characteristics coordination is self enforcing and can be reached through the use of conventions collaboration is more formalized and requires mechanisms both to monitor potential cheating and to insure compliance with the regime the article elucidates the assumptions of such an interest based approach to regimes assimilates alternative explanations into this framework and develops the implications for regime maintenance and change

using game theory to model competition the article is an exposition of the basic concepts of noncooperative game theory and their application to advertising product and price competition

nature in economics nature has been ill served by 20th century economics when asked economists acknowledge nature s existence but most would appear to deny that she is worth much if ecologists worry about the contemporary nexus between population size and growth the standard of living and the natural environment we economists point to the accumulation of capital and technological progress and say malthus got it wrong in this paper i show by an appeal to theory that economics has been so badly misused that it has deflected attention from deep problems at the nexus that are faced both regionally and globally

agent based analysis of capacity withholding and tacit collusion in electricity markets this paper employs agent based simulation to study energy market performance and in particular capacity withholding and the emergence of tacit collusion among the market participants the energy market is formulated as a repeated game where each stage game corresponds to an hourly energy auction each hourly energy auction is cleared using locational marginal pricing generators are modeled as adaptive agents capable of learning through the interaction with their environment following a reinforcement learning algorithm the sa q learning algorithm a modified version of the popular q learning is used test results on a two node power system with two and eight competing generator agents demonstrate the development of tacit collusion among generators even under competitive conditions

political quid pro quo agreements an experimental study we experimentally study the common wisdom that money buys political influence in the game one special interest i e a corporate firm has the opportunity to influence redistributive tax policies in her favor by transferring money to two competing candidates the success of the investment depends on whether or not the candidates are willing and able to collude on low tax policies that do not harm their relative chances in the elections in the experiment successful political influence never materializes when the firm and candidates interact just once by contrast it yields substantially lower redistribution in about 40 of societies with finitely repeated encounters however investments are not always profitable and profit sharing between the firm and candidates depends on prominent equity norms our experimental results shed new light on the complex process of buying political influence in everyday politics and help explain why only relatively few firms do actually attempt to influence policymaking

public choice and the economic analysis of anarchy a survey public choice economists began studying anarchy in the 1970s since then the amount of research on anarchy has burgeoned this article surveys the important public choice contributions to the economics of anarchy following early public choice economists many economists are researching how individuals interact without government from non public interested explanations of the creation of government to historical studies of internalizing externalities under anarchy public choice scholars are arriving at a more realistic perspective of human interaction with and without government although the economics of politics receives more attention the economics of anarchy is an important area of research in public choice

credit risk in the leasing industry abstract this paper is devoted to the credit risk modeling issues of retail lease portfolios using a re sampling method i estimate the probability density function of losses and var measures in a portfolio of 46 732 leases issued between 1990 and 2000 by a major european financial institution my results show that physical collaterals play a major role in reducing the credit risk associated with lease portfolios however because of insufficient recognition of such collaterals under the new regulatory capital framework basel ii significant differences are observed between the estimated capital requirements and those calculated in accordance with the various basel ii approaches

commitment deference and legislative instutions j nformational theories of legislative institutions have demonstrated the potential collective gains from committee specialization due to the use of restrictive amendment procedures for these 5 benefits to be realized however the floor majority must overcome a commitment problem i demonstrate that in a multistage game majority rule combined with the fact that generations of legislators overlap allows the legislature to solve the commitment problem and to sustain legislative norms and institutions even if legislators are finitely lived the model suggests that rather than restrictive amendment procedures it is the committee s expectation of floor deference that sustains committee specialization as a consequence legislative norms may collapse due to an unexpected influx of new members even if the distribution of preferences in the legislature does not change finally i discuss consequences for a comparative study of legislative institutions

emerging problems with the basel capital accord regulatory capital arbitrage and related issues in recent years securitization and other financial innovations have provided unprecedented opportunities for banks to reduce substantially their regulatory capital requirements with little or no corresponding reduction in their overall economic risks a process termed regulatory capital arbitrage these methods are used routinely to lower the eaective risk based capital requirements against certain portfolios to levels well below the basel capital accord s nominal 8 total risk based capital standard this paper discusses the principal techniques used to undertake capital arbitrage and the diaculties faced by bank supervisors in attempting to deal with these activities under the current capital framework 2000 elsevier science b v all rights reserved

strategizing niceness in co opetition the case of knowledge exchange in supply chain innovation projects abstract in this paper we take a novel approach to address the dilemma of innovation sharing versus protection among supply chain partners the paper conducts an exploratory study that introduces factors affecting a firm s optimum supply chain innovation strategy we go beyond the conventional prisoners dilemma with its limiting assumptions of players preferences and symmetry to explore a larger pool of 2 2 games that may effectively model the problem after classifying firm types according to collaboration motive and relative power we use simulation to explore the effects of firm type opponent type and payoff structure on repeated innovation interactions or equivalently long term relations and optimality of niceness surprisingly we find that opponent type is essentially irrelevant in long term innovation interactions and focal firm type is only conditionally relevant the paper contributes further by introducing reciprocation of strategy type nice versus mean showing that reciprocation is recommended while identifying and explaining the exceptions to this conclusion

on the formation of industry lobby groups abstract this paper provides a step towards a more complete theory of lobbying extending the menu auction model of grossman and helpman grossman g m helpman e 1994 american economic review 84 833 850 a new explanation is proposed for why more concentrated industries more easily overcome the free rider problem inherent in political collective action instead of focusing on transactions costs as olson olson m 1965 the logic of collective action harvard university press cambridge ma we show that more collusive industries with higher collusive profits have a greater incentive to form lobby groups and to contribute to industry lobbying moreover more polluting industries also have a greater incentive to form and contribute to a lobby group

payments for environmental services in costa rica costa rica pioneered the use of the payments for environmental services pes approach in developing countries by establishing a formal country wide program of payments the psa program the psa program has worked hard to develop mechanisms to charge the users of environmental services for the services they receive it has made substantial progress in charging water users and more limited progress in charging biodiversity and carbon sequestration users because of the way it makes payments to service providers using approaches largely inherited from earlier programs however the psa program has considerable room for improvement in the efficiency with which it generates environmental services with experience many of these weaknesses are being gradually corrected as the psa program evolves towards a much more targeted and differentiated program an important lesson is the need to be flexible and to adapt to lessons learned and to changing circumstances

samsung card lending model samsung card lending model sclm analyzes cash flow in individual accounts and measures the level of company wide risk serving as a risk and portfolio management model in the consumer lending business the main features of sclm are as follows default ratios such as intrinsic balance default probability and annual default ratio are computed using the past present and future cash flows of accounts the provision is shown as the total sum of write offs the size of capital required is determined by default probability distribution the price for new accounts is quoted based on cash flow simulations reflecting future business environments sclm has shown good performance in samsung card consumer lending business since the korean credit card crisis of 2003

a dynamic ecological economic modeling approach for aquaculture management article i nfo sustainable aquaculture ecosystem approach to aquaculture eaa ecological economic modelling integrated coastal management icm market model this paper presents a modeling approach to resource economics decision making in ecoaquaculture market model the market model was developed as a scenario testing tool to provide insights on the ecological and economic interactions which is a critical issue for sustainable aquaculture management as a case study the model was applied to simulate shellfish production in an embayment located in the east china sea a set of scenarios was used to compare the model outputs with expected trends and to test its capability to simulate relevant management scenarios the comparison of simulated scenarios indicates that the market model outputs followed the expected trends regarding both standard economic theory for consumption and production and ecological economic theory in all the scenarios we tested the area available for aquaculture was found to impose a limitation on production before it became less profitable to expand production as such in this case study the production in the long run does not meet increasing demand reduction of the maximum cultivation area was simulated in one of the scenarios as an example of a conservation measure as expected there was a reduction of the net profit of the farmers compared with the standard simulation on the other hand this scenario combined with an increase in price growth rate simulates a compensatory measure that led to a net profit in the same range as observed in the standard simulation overall the market model provides insights and raises questions useful for the implementation of an ecosystem approach to aquaculture further developments include the simulation of waste generated by cultivated species in order to better support sustainable management objectives

tacit bargaining and arms control astate bargains tacitly with another state when it attempts to manipulate the latter s policy choices through its behavior rather than by relying on formal or informal diplomatic exchanges the process is tacit because actions rather than rhetoric constitute the critical medium of communication it is bargaining and not coercion because the actions are aimed at influencing an outcome that can only be achieved through some measure of joint voluntary behavior obviously states rarely rely on either purely tacit or purely formal negotiation however the theory of tacit bargaining does not become totally inapplicable when there is verbal or written communication between the principals it simply becomes increasingly relevant as states rely more on actions than on conventional negotiation examples of tacit bargaining are plentiful in international relations a retaliatory tariff is announced in response to trade barriers a state at war refrains from using chemical weapons or from bombing nonmilitary targets in the hope that its opponent will behave similarly an austerity program is implemented by a financially troubled government in order to convince foreign banks that they should continue to extend credit

the emergence of cooperation among egoists this article investigates the conditions under which cooperation will emerge in a world of egoists without central authority this problem plays an important role in such diverse fields as political philosophy international politics and economic and social exchange the problem is formalized as an iterated prisoner s dilemma with pairwise interaction among a population of individuals results from three approaches are reported the tournament approach the ecological approach and the evolutionary approach the evolutionary approach is the most general since all possible strategies can be taken into account a series of theorems is presented which show 1 the conditions under which no strategy can do any better than the population average if the others are using the reciprocal cooperation strategy of tit for tat 2 the necessary and sufficient conditions for a strategy to be collectively stable and 3 how cooperation can emerge from a small cluster of discriminating individuals even when everyone else is using a strategy of unconditional defection

paying for the hydrological services of mexico s forests analysis negotiations and results abstract mexico faces both high deforestation and severe water scarcity the payment for hydrological environmental services psah program was designed to complement other policy responses to the crisis at the interface of these problems through the psah the mexican federal government pays participating forest owners for the benefits of watershed protection and aquifer recharge in areas where commercial forestry is not currently competitive funding comes from fees charged to water users from which nearly us 18 million are earmarked for payments of environmental services applicants are selected according to several criteria that include indicators of the value of water scarcity in the region this paper describes the process of policy design of the psah the main actors involved in the program its operating rules and provides a preliminary evaluation one of the main findings is that many of the program s payments have been in areas with low deforestation risk selection criteria need to be modified to better target the areas where benefits to water users are highest and behavior modification has the least cost otherwise the program main gains will be distributive but without bringing a pareto improvement in overall welfare

rational actors tit for tat types and the evolution of cooperation abstract evolutionary models in economics have often been criticized for failing to allow for rational maximizing behavior the present paper represents a step toward correcting this deficiency by introducing rational actors into an evolutionary model of the finitely repeated prisoners dilemma at the same time the model endogenizes the uncertainty postulated in the classic model of kreps et al 1982 thus explaining cooperation by rational actors in the finitely repeated prisoners dilemma a testable implication of the model is that the level of voluntary cooperation in a society will be relatively high where geographical mobility is relatively low

the coexistence of conventions abstract the paper presents a model of repeated anonymous play of a 2 2 game with two strict nash equilibria one of which risk dominates the other stage games differ according to their location in a social space players receive noisy signals of these locations the dynamics of the model are such that strategy choices conditional on any signal gravitate towards whichever strategy maximizes expected utility social space need not be uniform certain kinds of non uniformity in social space can allow stationary states in which the two equilibria coexist each being played in a different region

strategy complexity and economic rent this paper discusses important friction forces that future theories of strategy must incorporate some of these are technological and environmental but the most important ones it is argued are psychological the view is developed that strategy at its core concerns the development and testing of heuristics for high stake decisions in environments too unstable and complex to be optimized the paper especially highlights the behavioral dimension in the belief that strategies should incorporate both the rational and suboptimal aspects of human behavior the rational approach is in many ways the easier as there may be only one way to be right yet the great variety in which people and companies can err gives strategy its creative and real world challenge the tension between the rational and behavioral components is what the field of strategy should seek to exploit

internal ratings systems implied credit risk and the consistency of banks risk classification policies abstract this paper aims at improving our understanding of internal risk rating systems irs at large banks of the way in which they are implemented and at verifying if irs produce consistent estimates of banks loan portfolio credit risk an important property of our work is that the size of our data set allows us to derive measures of credit risk without making any assumptions about correlations between loans by applying carey s carey mark 1998 credit risk in private debt portfolios journal of finance liii 4 1363 1387 non parametric monte carlo re sampling method we find substantial differences between the implied loss distributions of two banks with equal regulatory risk profiles both expected losses and the credit loss rates at a wide range of loss distribution percentiles vary considerably such variation will translate into different levels of required economic capital our results also confirm the quantitative importance of size for portfolio credit risk for common parameter values we find that tail risk can be reduced by up to 40 by doubling portfolio size our analysis makes clear that not only the formal design of a rating system but also the way in which it is implemented e g a rating grade composition the degree of homogeneity within rating classes can be quantitatively important for the shape of credit loss distributions and thus for banks required capital structure the evidence of differences between lenders also hints at the presence of differentiated market equilibria that are more complex than might otherwise be supposed different lending or risk management styles may emerge and banks strike their own balance between risk taking and the cost of monitoring that risk

cooperation among egoists in prisoners dilemma and chicken games axelrod has developed an evolutionary approach to the study of repeated games and applied that approach to the prisoners dilemma we apply this approach with some modifications in the treatment of clustering to a game that has the prisoners dilemma and chicken as special cases to analyze how the evolution of cooperation differs in the two games we find that the main barrier to the evolution of cooperation in chicken is that cooperation may not always be correctly thought of as socially optimal but that strong forces do push the players toward socially optimal action we derive some of the results on mixed populations for any game with pairwise interaction

cooperation in prices and capacities trade associations in brewing after repeal this study s main contribution is examination of the excess capacity held by brewers during a period in which they tacitly cooperated on price the analysis covers the industry in the united states between repeal of prohibition in 1933 and wartime rationing of raw materials in 1942 from april 1933 to may 1935 destructive price cutting among brewers was illegal under the national industrial recovery act subsequent rivalry among trade associations facilitated the development of tacitly cooperative pricing arrangements the trade associations appear to have adopted a different agenda as cooperation spread among all brewers instead of just facilitating cooperation on price the associations may have facilitated cooperation in the distribution of responsibility for enforcement members apparently distributed responsibility by coordinating the allocation of excess capacity these and other results are interpreted to suggest additional avenues for research on the distribution of responsibility for punishme

adaptive behavior and economic theory the relationship between psychological and economic views of behavior once a subject of heavy dispute is now understood in a very similar way by practitioners of both these disciplines and of our sister social sciences in general terms we view or model an individual as a collection of decision rules rules that dictate the action to be taken in given situations and a set of preferences used to evaluate the outcomes arising from particular situation action combinations these decision rules are continuously under review and revision new decision rules are tried and tested against experience and rules that produce desirable outcomes supplant those that do not i use the term adaptive to refer to this trial anderror process through which our modes of behavior are determined if one is interested in modeling particular decisions in any very explicit way it is obviously necessary to think about rather narrow aspects of an individual s entire set of decision rules his or her personality experimental psychology has traditionally focused on the adaptive process by which decision rules are replaced by others in this tradition the influence of the subject s or as an economist says the agent s preferences this essay uses a series of examples to illustrate the use of rationality and adaptation in economic theory it is argued that these hypotheses are complementary and that stability theories based on adaptive behavior may help to narrow the class of empirically interesting equilibria in certain economic models an experiment is proposed to test this idea

securitization risk transferring and financial instability the case of spain abstract the 2007 2010 financial crisis has hit a variety of countries asymmetrically the case of spain is particularly illustrative as it exemplifies in a vivid manner most of the core issues largely responsible for the crisis this country experienced a pronounced housing bubble partly funded via spectacular developments in its securitization markets leading to looser credit standards and subsequent financial stability problems we analyze the sequential deterioration of credit in spain considering rating changes in securitized deals using a sample of 20 286 observations on securities and rating changes from 2000q1 to 2010q1 we build a model in which loan growth on balance sheet credit quality and rating changes are estimated simultaneously our results suggest that loan growth significantly affects on balance sheet loan performance with a lag of at least two years additionally loan performance is found to explain rating changes with a lag of four quarters importantly bank characteristics in particular observed solvency cash flow generation and cost efficiency also affect ratings considerably additionally these other bank characteristics seem to a higher weight in the rating changes of securities issued by savings banks as compared with commercial banks

predicting loss severities for residential mortgage loans a three step selection approach abstract this paper develops a novel framework to model the loss given default lgd of residential mortgage loans which is the dominant consumer loan category for many commercial banks lgds in mortgage lending are subject to two selection processes default and cure where the collateral value exceeds the outstanding loan amount we propose a three step selection approach with a joint probability framework for default cure i e zero lgd and non zero loss severity information the proposed methodology demonstrates improved performance in out of time predictions compared to widely used ols regressions

environmental ethics and information asymmetry among organizational stakeholders this paper addresses the conflicting environmental interests of a firm and the community an important stakeholder the short term profit maximization objective of a firm may stand in contrast with what the community wants a safe and clean environment this paper argues that the information regarding the environmental impact of a firm s products processes and waste may be asymmetrically distributed between the firm and the community the resultant information asymmetry may influence the probability of a firm acting opportunistically and ultimately a firm s ethical behavior the paper identifies information asymmetry between a firm and community as well as that within the community the perceived information asymmetry across various community segments may perhaps be a determinant of environmental discrimination the paper further contends that information asymmetry may diminish in the long run finally it examines the implications of information asymmetry for firms and government policy

the management of common property resources collective action as an alternative to privatisation or state regulation can locally based collective action be a viable way to manage common property resources many writers on collective action and common property are sweepingly pessimistic about the ability of the people who face problems of common property to organize sustainable patterns of use for themselves this paper shows with reference to prisoners dilemma garett hardin s tragedy of the commons and mancur olson s logic of collective action that the analytical basis for this pessimism is weak in many situations of village based common property resource use there can thus be no general presumption that the collective action route to common property resource management will fail any more than there can be a general presumption that it will work the paper suggests a number of general factors to do with the characteristics of the resources the user group and group state relations on which chances of success depend

the determinants of default on insured conventional residential mortgage loans this paper presents empirical evidence on the determinants of default for insured residential mortgages a multinomial logit model is specified and estimated for regional aggregates constructed from cross sectional and time series data the results document the independent statistical significance of contemporaneous payment income and loan value ratios and unemployment rates as well as more commonly studied determinants of default such as age and the original loan value ratio

uncertainty and open access implications from the repeated prisoners dilemma game open access refers to situations in which individuals are not excluded from using a scarce resource where natural resources are concerned open access is usually believed to promote depletion as individuals rush to obtain as much as they can before other claims are made this phenomenon has been blamed for many important natural resource problems including overexploitation of fisheries johnson and libecap decimation of tropical forests by wood gatherers eckholm and excessive grazing on rangeland libecap and johnson in such cases the exercise of selfinterest runs counter to the collective interest of all resource users and if pursued generally is self defeating solutions to such problems must begin with restraints on the actions of interested parties but what will lead fishers or woodgatherers or shepherds to develop such restraints are the incentives for voluntary restraints sufficiently strong or must the restraints be imposed by authoritarian rules that can override individual interests i am interested here in whether uncertainty encourages or discourages voluntary restraint in the use of open access resources two types of uncertainty may influence the emergence of voluntary restraints first there is behavioral or strategic uncertainty individuals who are interdependent as in open access situations may be presumed to act based on their expectations of others actions if those actions cannot be perfectly predicted and assured each participant must plan according to some probability distribution over the actions available to others it has been argued that uncertainty may facilitate voluntary agreements among parties for whom noncooperative behavior is clearly rational and whose interactions are repeated axelrod and kreps et al this argument and its implications for open access resource problems are examined critically in the next section of this paper the second type of uncertainty stems from ature and markets for example forage or ish stocks may fluctuate from season to season from natural causes prices of livestock or fish may vary because of economic forces these exogenous sources of variability create uncertainty of outcomes apart from behaviors of others the importance of this kind of uncertainty is considered in the third section of this paper to assess the consequences of these sources of uncertainty i refer to the repeated prisoners dilemma game e g axelrod kreps et al and taylor in this framework pursuit of self interest is always dominant economically in the short term although it results in suboptimal collective returns the stark conflict between individual and collective interests appears to reflect conditions with open access however three major limitations of the model should be noted at the outset first it allows only for binary choices and a fixed number of players many open access problems involve continuous choices and an unrestricted number of players second the game does not permit forward contracting or side payments between individuals this precludes many devices used in reality to facilitate voluntary transactions third the game remains the same period after period no intertemporal externalities are reflected these john b braden is an associate professor department of agricultural economics university of illinois this research has been supported by grants from the illinois agricultural experiment station no 1 6 53491 and the illinois water resources center no 1 11381 uncertainty is used here interchangeably with risk both refer to variability of outcomes due to forces beyond an individual s control

internationalization of the renminbi what it means for the stability and flexibility of the international monetary system the central question this paper addresses is whether internationalization of the rmb would be sufficient for the international monetary system ims to provide greater stability and flexibility than today s ims whether chinese efforts to internationalize the rmb culminate in the currency achieving reserve status will be for china to realize the path to reserve currency status however is not one that the chinese can pursue unilaterally internationalization entails an interaction between private and public decision making and is a function of private sector confidence as much as public policy the outcome will be the result of strategic interplay involving public policies across systemically important countries and confidence building among global savers and investors the paper argues that international cooperation especially among reserve currency countries on policy frameworks to achieve the common objectives of economic growth full employment price stability and sustainable fiscal positions will define a coherent and well functioning ims copyright 2013 oxford university press

credit risk in private debt portfolios default loss severity and average loss rates for a large sample of privately placed bonds are presented and compared with loss experience for publicly issued bonds the chance of very large portfolio losses is estimated and some determinants of such losses are analyzed results show ex ante riskier classes of private debt perform better on average than public debt both diversification and the riskiness of individual portfolio assets influence the bad tail of the portfolio loss distribution private placements are similar to corporate loans in that both are monitored private debt the results are thus relevant to management and securitization of private debt portfolios generally more than half of nonfinancial corporate debt finance is iss ued privately and decisions of the financial intermediaries that invest in such debt depend importantly on its credit risk regulators of such institutions are similarly attentive to portfolio credit risk and it is an important consideration in the design of securitizations of pools of private debt in spite of its importance little is known empirically about private debt credit risk especially ex ante risk as a function of portfolio characteristics many studies have examined the loan portfolio performance of banks thrifts and insurance companies but the ex ante risk characteristics of the portfo

arms versus allies trade offs in the search for security nations have two methods of increasing their security building arms and forming alliances both methods present different political costs that must be incurred to raise security building arms requires shifting economic resources to the military forming alliances requires abandoning interests that conflict with those of the ally each of these strategies produces domestic opposition a nation s response to a threat to its security must weigh the relative attractiveness of arms versus allies both in terms of their effects on internal politics and on their external benefits three cases are examined in the light of this argument the response of austria and france to the unification of germany in the 1860s is the central case theories of alliance formation based on neorealism and the offense defense balance predict that austria and france should have allied against the mutual threat of prussia this article argues that they did not form an alliance because arming separately presented lower political costs world wars i and ii likewise are analyzed from the perspective of the argument above

loss severities on residential real estate debt during the great recession abstract this study develops estimates of expected loss severities on mortgage exposures using data from florida during the great recession this paper marks the first attempt at addressing sample selectivity in the context of loss models we also construct measures of home equity that are more accurate than those employed in previous studies we find that failing to address sample selection and the use of noisy equity measures in loss models can bias loss estimates significantly we also find significantly higher loss severities and a greater sensitivity of loss severity to equity than what previous studies report

environmental norms society and economics abstract environmental norms seem to be on the upsurge everywhere norm orientation is however neglected in neoclassical economics which is fixed on homo economicus as the model of human behaviour the paper addresses the question whether homo economicus needs to give way to a norm oriented concept in environmental economics this question is tackled in an interdisciplinary and evolutionary approach using economics concepts forces are identified which are detrimental to or which promote environmental norms in the process of civilisation this investigation provides some clues on the likely importance of environmental norms in a future ecologically oriented society these clues provide in turn one answer to the fundamental question posed whether the neoclassical concept of human behaviour will likely remain or cease to be the standard tool in environmental economics rather than tackling the question in greatest generality the analysis takes recourse to an example the problem of the commons the commons is particularly suited for this investigation because it is well roamed by all the disciplines which are of relevance for the undertaking

risk based capital requirements for mortgage loans abstract we contribute to the debate over the reform of the basel accord by developing risk based capital requirements for mortgage loans held in portfolio by financial intermediaries our approach employs simulation of both economic variables that affect default incidence and conditional loss probability distributions results indicate that appropriate capital charges for credit risk vary substantially with loan characteristics and portfolio geographic diversification hence rules that offer little risk differentiation including the current basel i regime and standardized approach proposed in basel ii result in significant divergence between regulatory and economic capital these results highlight the incentive problems inherent in simplified methods of capital regulation

integrating ecology and economics in understanding responses in securing land use externalities internalization in water catchments securing sustainable upstream land use externalities internalization in developing countries water catchments continues to be a serious challenge uluguru water catchment in tanzania presents a compelling case for analysis the catchment is currently under downstream upstream conservation subsidy arrangement however lack of information on the long term impacts of the approach on the functioning and distribution of benefits threatens its sustainability based on system dynamics framework this study developed an integrated ecological economic model to evaluate the long term impacts of this arrangement on the functioning and distribution of benefits the model was also used to compare the arrangement with other economic instruments in the same respect simulation results indicate that the scheme has a potential of securing conservation goals without compromising upstream well being taxing crop inputs and outputs also has a potential securing conservation goal but at the expense of upstream well being tax cuts on inputs to tree fruit and basic domestic goods also secure conservation goals without compromising upstream well being these results show that a downstream upstream subsidy scheme is better for achieving upstream land use externalities internalization without compromising distribution of benefits among beneficiaries and well being of upstream land holders than taxing crop inputs and outputs

defaults on mortgage obligations and capital requirements for u s savings institutions abstract this paper analyzes credit risk for residential mortgages estimates of the hazard of mortgage default are presented based upon a large sample of conventional loans issued in the late 1970s mean returns are estimated together with variances and covariances for various loan to value ltv ratios and geographic groups these results are then used to analyze capital requirements for institutions holding mortgages we ask for a given bankruptcy risk how should capital requirements vary by ltv and geographical diversification the empirical results indicate that both factors have powerful effects upon bankruptcy risk thus capital requirements should vary substantially along these dimensions

the main determinants of subprime securitization in the spanish rmbs securities this article is a model to identify the determinants of subprime securitizations in several countries there is no classification of the underlying assets consequently investors have fewer tools to identify which securitizations are subprime using a sample of mortgage securitization transactions issued in spain from 1998 until the first half of 2009 we analyse the effects of a great securitization expansion according to previous literature we identify main determinants of residential mortgage backed security default rate and construct a prediction model of default rate by means of different probit models our results show the importance of loan to value and seasoning among other determinants as predictive indicators of default rates the results obtained point to more relaxed lending standards due to higher securitization levels our findings help to gain a more accurate perspective of the true effects of the mortgage securitization process and reinforce the role of certain determinants as defau