limited liability and incentive contracting with ex ante action choices abstract this article examines a principal agent model of financial contracting in which a risk neutral entrepreneur agent makes an unobservable ex ante effort choice while employing the investment funds of a risk neutral investor principal the key innovation is that the investment contract is subject to statutory liability limits given these liability limits two settings are considered one in which the investor payoff function is also constrained to be monotonically nondecreasing in firm profit and another in which no such monotonic contract constraint is imposed in the former case a standard debt contract is shown to emerge and a first best effort choice is not achieved in the latter setting the optimum is characterized by a live or die payoff function and a first best effort level may or may not be realized

price changes in the euro area and the united states some facts from individual consumer price data prices of goods and services do not adjust immediately in response to changing demand and supply conditions this paper characterizes the average frequency and size of price changes in the euro area and its member countries investigates the determinants of the probability of price changes and compares the evidence for the euro area with available u s results the facts documented in this paper are based on evidence from individual price data recorded at the store level in all euro area countries except ireland and greece that is in datasets covering austria belgium finland france germany italy luxembourg the netherlands portugal and spain which together account for around 97 percent of euro area gdp the data used are the monthly price records underlying the computation of national consumer price indices and harmonized consumer price indices these data cover a large number of products selected on the basis of extensive household budget surveys

the economy impacts of korean ets with an emphasis on sectoral coverage based on a cge approach abstract south korea initiated an emissions trading scheme ets on january 1 2015 based on this environmental policy at the 21st conference of parties cop meeting the korean government announced that it would decrease carbon emissions 37 from business as usual bau levels by 2030 since this target is too ambitious for the korean economy a number of studies have analyzed the economic impacts of emissions trading in korea but few have distinguished between industries covered and not covered by the ets notwithstanding the lack of industry level data on quotas and emissions this study overcomes such shortcomings by converting a dataset of 525 firms covered by the south korea ets sk ets into a 28 sector database consistent with the global trade analysis project gtap classifications we implement a simulation of the sk ets with a computational general equilibrium cge model simulation results suggest that while sk ets has significant abatement effects 2 56 from the base case it only has mild negative impacts on gdp 0 41 and household consumption 0 11 industry output on average falls by 0 54 with the gas and air transport sectors most adversely affected the most noticeable price changes are from the electricity sector whose output price goes up by 3 75 it is noteworthy that because of the export oriented economy many global business leaders and politicians have argued that the ets will disadvantage exporting companies while the simulation results showed a higher trade surplus based on enhanced competitiveness

public capital asymmetric information and economic growth we investigate the provision of public capital in an endogenous growth model with asymmetric information in a credit market with costly screening we show that the equilibrium contracts are characterized by the self selection of borrowers through identifying an additional adverse effect of taxation on growth we show that the optimal tax rate in our model is smaller than the output elasticity of public capital therefore our analysis justifies a more conservative tax policy in the presence of asymmetric information furthermore our model suggests a number of implications that appear to be well supported by preliminary evidence in cross country data jel classification d82 h21 041

symmetrical information and credit rationing graphical demonstrations as this article shows the pro debtor u s bankruptcy code alone can cause credit rationing even without asymmetrical information in the market because the code entails substantial costs to lenders if borrowers file for bankruptcy in the absence of bankruptcy cost lenders are always justified in raising interest rates and clearing markets if the bankruptcy cost is nontrivial however lenders profits are concave in the relevant range of interest rates thus lenders cannot always clear the market by using higher rates the study reported here also found that the use of collateral in debt contracts can reduce rationing but that even 100 percent collateral does not eliminate all rationing possibilities a positive relationship was found between credit risk and the amount of pledged collateral which is not necessarily true with models based on asymmetrical information

bank lending policy credit scoring and the survival of loans to evaluate loan applicants banks increasingly use credit scoring models the objective of such models typically is to minimize default rates or the number of incorrectly classified loans thereby they fail to take into account that loans are multiperiod contracts for which reason it is important for banks not only to know if but also when a loan will default in this paper a bivariate tobit model with a variable censoring threshold and sample selection effects is estimated for 1 the decision to provide a loan or not and 2 the survival time of granted loans the model proves to be an effective tool to separate applicants with short and with long survival times the bank s loan provision process is shown to be inefficient loans are granted in a way that conflicts with both default risk minimization and survival time maximization there is thus no trade off between higher default risk and higher return in the lending policy

asymmetric information auditing commitment and economic growth we analyze in this paper the growth and welfare consequences arising from the lack of auditing commitment in a credit market with costly state verification specifically two endogenous growth models of which one allows lenders to commit to costly auditing strategies to identify borrowers investment returns and the other does not are compared we show that the inability to commit acts as an additional source of informational friction that leads to more stringent contractual terms which in turn result in lower capital accumulation growth and welfare in addition when a tax on capital is considered the tax induced investment distortions are amplified by the absence of auditing commitment from the policy perspective our analysis can be interpreted as suggesting a new micro economic channel through which institutional failings hinder economic growth and social welfare

synergetic effects of water and climate policy on energy water nexus in china a computable general equilibrium analysis abstract a unified policy framework for energy and water would be beneficial considering the high interdependence of the two resources in china in this paper a recursive dynamic computable general equilibrium model is established to examine the existence of synergetic effects within water fee policy and energy related climate policy i e carbon tax and provide insights for chinese integrative policy making the results show that water fee can contribute to industrial water conservation whereas its effect is limited under current water fee level the adoption of a carbon tax in addition to it might further improve its water saving benefits furthermore water fee can also promote the enhancement of china s emission reduction goal and a higher carbon tax and water fee rate can achieve greater emission reduction effects at this point the synergetic spillover effects that water conservation benefits will be achieved simultaneously via the transition of industry into a more low carbon form is critical for elaborating an effective strategy of environmental policy besides our results suggest that giving priority to renewable power is regarded as the silver bullet to address the water and emission constraints on energy system as it can optimize the water conservation benefits of emission reduction

credit rationing and the demand for owner occupied housing abstract this study applies cross sectional data to test whether default risk induced credit constraints affect the demand for owner occupied housing credit constrained households are argued to exhibit different elasticities of demand for housing than less constrained households housing demand elasticities are then estimated separately for households obtaining va insured and non va loans the government guarantee on va loans insures lenders against default enabling lenders to apply easier nonprice terms of credit results indicate that observed demand elasticities differ significantly across va and conventional mortgage holders that marginal changes in credit constraints affect housing demand and that fha financing mitigates the effect of mortgage constraints

how good are standard debt contracts stochastic versus nonstochastic monitoring in a costly state verification environment the authors investigate ex ante efficient contracts in an environment in which implementation is costless in this environment standard debt contracts will typically not be optimal optimal contracts may involve defaults even in states in which the borrower is fully able to repay the authors then examine the welfare costs of arbitrarily restricting the set of feasible contracts to standard debt contracts when model parameters are calibrated to realistic values the welfare loss from exogenously imposing this restriction is extremely small thus if implementation costs are actually nontrivial as seems likely standard debt contracts will be very close to optimal copyright 1994 by university of chicago press

costly monitoring financial intermediation and equilibrium credit rationing abstract this paper establishes a link between equilibrium credit rationing and financial intermediation in a model with asymmetrically informed lenders and borrowers costly monitoring and investment project indivisibilities intermediation is shown to dominate borrowing and lending between individuals and these financial intermediaries exhibit several of the important features of intermediaries as we know them equilibrium interest rates and the aggregate quantity of loans respond quite differently to changes in taste and technology parameters depending on whether or not there is rationing in equilibrium

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

new insights into price setting behaviour in the uk introduction and survey results this article introduces the other contributions in this feature which use individual price data to investigate the extent of pricing rigidities in the uk it also reports the most relevant results of a new survey of the price setting behaviour that we have conducted for the uk including details about why prices are sticky the articles consider whether the microdata or survey results are consistent with particular theories of price setting our results suggest that there is heterogeneity in price setting behaviour which is ignored in typical representative agent models

policy and institutional dimensions of the water energy nexus energy and water are interlinked the development use and waste generated by demand for both resources drive global change managing them in tandem offers potential for global change adaptation but presents institutional challenges this paper advances understanding of the water energy nexus by demonstrating how these resources are coupled at multiple scales and by uncovering institutional opportunities and impediments to joint decision making three water energy nexus cases in the united states are examined 1 water and energy development in the water scarce southwest 2 conflicts between coal development environmental quality and social impacts in the east and 3 tensions between environmental quality and economic development of shale natural gas in the northeast and central u s these cases are related to eastern central and western regional stakeholder priorities collected in a national effort to assess energy water scenarios we find that localized challenges are diminished when considered from broader perspectives while regionally important challenges are not prioritized locally the transportability of electricity and to some extent raw coal and gas makes energy more suitable than water to regionalized global change adaptation because many of the impacts to water availability and quality remain localized we conclude by highlighting the need for improved coordination between water and energy policy

rent seeking bureaucracies and oversight in a simple growth model abstract following recent cross country empirical work research on public policy and growth has come to examine the impact of inefficient or corrupt bureaucracies most of this work has emphasized the interactions of bureaucracies with private markets by contrast this paper focuses on the relationship between rent seeking bureaucracies and their political authority we show that when oversight is relatively costly as in many developing economies the political authority exercises little monitoring of its agencies which reduces the effectiveness of productive government spending moreover when the technology used to provide public services is poor bureaus better succeed in requesting overly large budgets before triggering any monitoring both of these characteristics contribute to reducing the growth rate of already poor economies

imperfect information and the theory of government intervention in farm credit markets this paper describes some possible economic motivations for government intervention in farm credit markets these motivations are made possible by explicit departures from the perfect information and complete market assumptions that underlie both the neoclassical competitive paradigm and the fundamental theorems of welfare economics to be more precise the analysis focuses on three types of asymmetric information between farmers and prospective outside investors both of whom are assumed to be risk neutral arguably the three informational asymmetries examined here represent natural departures from perfect markets in that unlike the unencumbered neoclassical model each elicits farmers optimal use of debt contracts rather than equity instruments or other contractual forms to raise investment capital despite their consistency with observed contractual choices all three of the models analyzed below yield free market equilibria that diverge from first best perfect information outcomes given the inefficiency of these market equilibria the key question raised and discussed here is can government improve upon the derived competitive outcomes and if so how despite the enormity of the credit rationing literature only a few extant studies address this question in models that are consistent with debt contracts among them are demeza and webb 1987 1988 1989 and innes 1988 which focus on the third type of informational asymmetry considered below the other two information structures posited in this paper have been studied in several analyses of credit markets but with attention focused on positive attributes of the unfettered competitive equilibrium rather than on prospective implications for welfare enhancing government intervention in what follows th s literature is surveyed and for the first two information structures some new policy results a e presented a critical discussion of the paper s limitations concludes the article

asymmetric information in the credit market and discount rates for public investment abstract with asymmetric information in the credit market the optimal discount rate for public investment differs from the market interest rate this paper obtains the optimal discount rate for the two state case where returns on private projects can take only two values depending on the magnitudes of collateral costs screening through collateral requirements may or may not occur it is shown that the optimal discount rate is higher than the market interest rate in either case

a theory of corporate capital structure and investment this article uses a general equilibrium framework to explore the origins and limitations of financial intermediaries in the model investors have a generic lending technology that they can improve at a cost those who upgrade become intermediaries to exploit their advantage however conflicts with depositors will limit the banks market presence and they will only lend to moderately endowed firms while bondholders will finance cash rich corporations the article also analyzes the extent to which investors adopt the superior lending technique the nature of bank competition and how corporate and bank conditions affect interest rates and investment copyright 2004 oxford university press

why are prices sticky preliminary results from an interview study this paper reports preliminary results from a large research project on business pricing which is currently underway the idea is to use interviews with actual price setters to assess the validity of a dozen theories of price stickiness the rather unorthodox for economists methodology is defended the research design is described briefly and a few results based on the first 72 interviews out of a projected 200 are presented this sample suggests that the median firm changes its price annually and that price adjustments typically lag 3 4 months behind shocks to demand or cost this abstract was borrowed from another version of this item

the availability doctrine abstract this paper develops a general equilibrium model in which monetary disturbances have effects reminiscent of roosa s classic description of the availability doctrine the model is a marriage of the modern credit rationing literature and the recent sluggish cash flow models of monetary transmission both elements are crucial the credit rationing aspect leads to a focus upon the quantity or availability of credit however the rationing model in and of itself is a real model and there is no reason for fluctuations in the nominal quantity of fiat money to have any effect on the availability of real credit this is where the sluggish cash flow assumption enters into the analysis under this assumption changes in the nominal supply of fiat money do affect the real supply of credit because a subset of the economy absorbs a disproportionate share of the monetary injection

rigidities and adjustments of daily prices to costs evidence from supermarket data we assess the extent of inertia in grocery retail prices using data on prices and costs from a large supermarket chain in colombia relative to previous work our analysis benefits from encompassing a wide variety of products availability of reliable replacement cost data and the daily frequency of the data we confirm the existence of significant nominal rigidities in reference prices three months and even more so in reference costs about six months but differing depending on the type of product being on average smaller in the case of perishable goods using a non linear autoregressive distributed lag nardl approach to cointegration we examine the path of prices relative to costs and determine the speed of adjustment of prices to shocks we find significant mean reversion but also uncover asymmetries in response to positive and negative changes in costs as a novel finding we uncover evidence of the effect of market concentration input price volatility along with own labels and the perishable nature of products on the likelihood of price asymmetry in response to costs changes

monetary policy bank leverage and financial stability abstract this paper shows that with limited liability banks lever up excessively to finance new loans lower monetary policy rates can worsen or reduce these incentives depending on the size of the shock when equity financing is ruled out when this constrained is relaxed but the bank faces costly dividend adjustment lower monetary policy rates always worsen risk taking incentives and the effect is persistent the reason is that costly dividend adjustment lowers the opportunity cost of lending in this model capital requirements are closer to the source of the distortion and thus work better than loan to value caps in reducing excessive risk taking

credit rationing concessionary lending and debt maturity abstract a firm raises capital for a two period investment while creditors observe the project status midstream unobservable managerial perks may consume capital each period when the firm is unfortunate early on short term financing results in either concessionary lending or costly liquidation rolling over short term debt may be problematic because the high risk premium creditors demand when asset value is low relative to debt impares managerial motivation precisely when the incentive to defer perk consumption is weakest long term financing may reduce total agency costs be enabling lenders to charge higher initial premia in effect shifting loan repayments to states in which incentive constraints are non binding

will export rebate policy be effective for co2 emissions reduction in china a ceepa based analysis china has adopted cancellation of export tax rebate policies on many occasions to push ahead energy conservation and emission reduction since 2007 by applying a ceepa china energy environmental policy analysis system model this paper simulates the impacts of the cancellation of export rebates on co2 emissions and socio economic consequences in different scenarios so as to figure out whether it works this paper covers three export rebate scenarios and makes comparisons between the impacts of export rebates on emission reduction effects and that of carbon tax policies the conclusions are 1 the current policy which cancels export rebates for key sectors can cut emissions at huge economic cost yet it is unsustainable 2 the policy which cancels export rebates for key sectors and meanwhile subsidizes sectoral outputs yields double dividends in the short term thus can facilitate emission reduction yet the boost is limited 3 the policy which cancels export rebates and boosts domestic demand helps improving residents welfare in the short term while it may inflict pronounced social and economic impacts in the long run so policy of this kind should be adopted with great caution 4 export rebates generate far more economic costs than carbon tax policies in the long term and don t contribute to optimizing the energy mix as well as the latter in summary canceling export rebates should not be regarded as a priority to encourage emission reduction

menu costs and the neutrality of money a model of endogenous price adjustment under money growth is presented firms follow s s pricing policies and price revisions are imperfectly synchronized in the aggregate price stickiness disappears and money is neutral the connection between firm price adjustment and relative price variability in the presence of monetary growth is also investigated the results contrast with those obtained in models with exogenous fixed timing of price adjustment

moral hazard under commercial and universal banking many claims have been made about the potential benefits and the potential costs of adopting a system of universal banlcing in the united states we evaluate these claims using a model where there is a moral hazard problem between banks and borrowers a moral hazard problem between banks and a deposit insurer and a costly state verification problem under conditions we describe allowing banks to take equity positions in firms strengthens their ability to extract surplus and exacerbates problems of moral hazard the incentives of universal banks to take equity positions will often be strongest when these problems are most severe for many decades commercial banks in the united states have been prohibited from making equity investments in the firms they serve rather they are restricted to providing them with loans in the form essentially of debt contracts this longstanding regulatory restriction1 results in distinctly different roles for bank lenders and equity investors and has had important implications for the entire financial sector the american system of commercial banking presents a sharp contrast with the banking systems of some other countries most notably germany in which banks are permitted to take equity positions under such universal banking arrangements banks can make equity investments as well as loans vote their equity shares and even hold seats on the boards of directors of nonfinancial firms in general they can be actively involved in all aspects of firm decision malqing in germany the control rights the authors have benefitted from the helpful comments of doug diamond joe haubrich ross levine stan longhofer joao santos and an anonymous referee the views expressed herein are those of the authors and not necessarily those of the federal reserve bank of minneapolis or the federal reserve system 1 the key legislation which constrains u s banks equity investments is the glass steagall act of 1933 however a number of other laws also pertain to this issue particularly the bank holding company act of 1956 and its 1970 amendments incidentally there are some important exceptions to the equity investment prohibition in default situations banks are perrnitted to restructure loans into equity positions with the requirement of divestiture after a few years see james 1993 also bank holding companies are permitted to form separately capitalized venture capital subsidiaries for the expressed purpose of investing in start up enterprises john h boyd is a professor of finance in the carlson school of management at the university of minnesota and an adjunct consultant with the federal reserve bank of minneapolis chun chang is an associate professor of finance in the carlson school of management at the university of minnesota bruce d smith is a professor of economics at the university of texas ataustin

regulation by prices quantities or both a review of instrument choice choosing appropriate policy instruments is an important part of successful regulation once objectives are agreed and suitable targets adopted policy makers can employ command and control regulation and or economic instruments and choose between fixing a price or a quantity this paper examines the relative advantages of price quantity and hybrid instruments according to their efficiency under uncertainty the trade off between credible commitment and flexibility implementation international considerations and political economy various illustrations of the theory are provided with two detailed applications to climate change and transport policy specifically congestion and safety pricing

capital requirements monetary policy and aggregate bank lending theory and empirical evidence capital requirements linked solely to credit risk are shown to increase equilibrium credit rationing and lower aggregate lending the model predicts that the bank s decision to lend will cause an abnormal runup in the borrower s stock price and that this reaction will be greater the more capital constrained the bank i provide empirical support for this prediction the model explains the recent inability of the federal reserve to stimulate bank lending by increasing the money supply i show that increasing the money supply can either raise or lower lending when capital requirements are linked only to credit risk the motivation of this article is first to examine the impact of risk based capital requirements namely those that link mandatory capital to asset ratios for banks to their loans on aggregate bank lending these requirements called the basle capital rules or bis guidelines went into effect in march 1989 for banks in the leading industrialized nations these rules initially required banks to maintain capital equal to 7 25 percent of business and most consumer loans with the requirement increasing to 8 percent by the end of 1992 secondly i wish to understand the link between monetary policy and aggregate bank credit in the presence of risk based capital requirements my curiosity is sparked in part by two recent phenomena one is the experience of the u s economy which displayed sluggish growth during 1989 93 despite a monetary policy that attempted to spur bank lending and economic activity and the other is the striking decline in loans relative to security holdings mostly government bonds in the asset portfolios of u s

credit rationing race and the mortgage market abstract this study applies microdata from the 1983 survey of consumer finances to evaluate the effects of borrower race and default risk in mortgage lending the empirical analysis is based on a probit model of whether borrowers obtain fha or conventional mortgages the former are fully insured and are characterized by easier downpayment constraints but are typically more expensive hence households borrowing through the fha will tend to be credit constrained in the conventional market results of the analysis indicate that variables which proxy lender concerns about default risk and cost have an important effect on the type of loan borrowers obtain empirical estimates also suggest that minority households are significantly less likely to obtain conventional financing than whites even after controlling for various proxies of default risk these results suggest that race effects in mortgage lending may persist for reasons unrelated to borrower default risk

the nature of credit market failure abstract hidden knowledge gives rise to over lending if as evidence suggests the returns distributions preferred by borrowers are also favoured by lenders even the stiglitz weiss model yields over lending when entrepreneurs are sufficiently risk averse

trade openness and inflation the role of real and nominal price rigidities the paper revisits the long standing question of the impact of trade openness on the inflation output trade off by accounting for the effects of product market competition on price flexibility the study develops a new keynesian open economy dynamic stochastic general equilibrium model with non constant price elasticity of demand and calvo price setting in which the frequency of price adjustment is endogenously determined it demonstrates that trade openness has two opposing effects on the sensitivity of inflation to output fluctuations on the one hand it raises strategic complementarity in firms pricing decisions and the degree of real price rigidities which makes inflation less responsive to changes in real marginal cost on the other hand it strengthens firms incentives to adjust their prices thereby reducing the degree of nominal price rigidities and increasing the sensitivity of inflation to changes in marginal cost the study explains the positive relationship between competition and the frequency of price adjustment observed in the data it also provides new insights into the effects of global economic integration on the phillips curve

debt contracts and financial intermediation with costly screening we develop a credit market model with adverse selection where risk neutral bor rowers self select because lenders make use of a costly screening technology equilibrium contracts are debt contracts and this is robust to randomization in contrast to results for the costly state verification model this framework permits optimal financial intermediary structures in that there is delegated screening in equilibrium if many borrowers are required to fund individual investment projects contrats de dette et internendiation financiere quand le tamisage est couteux les auteurs developpent un modele de marche du credit avec selection adverse otu les emprunteurs qui sont neutres par rapport au risque se selectionnent eux memes parce que les pr6teurs utilisent une technologie de tamisage qui est cohteuse les contrats d equilibre sont des contrats de dette et ces resultats s averent robustes meme quand on utilise des processus au hasard contrairement a ce qui se passe dans le cas du modele cooteux de verification par l etat ce cadre d analyse suggere des structures d intermediation financiere optimales en ce que en equilibre il y a delegation du tamisage si plusieurs emprunteurs sont necessaires pour

the relative rigidity of monopoly pricing this paper seeks to explain why monopolies keep their nominal prices constant for longer periods than do tight oligopolies the authors show that cost changes create a larger incentive for duopolists to change their prices while demand changes tend to have a greater effect on a monopolist when both costs and demand are affected by small changes in the overall price level the cost effect dominates in the presence of a small fixed cost of changing prices therefore duopolists change their prices in response to smaller perturbations in underlying conditions copyright 1987 by american economic association

financial market frictions monetary policy and capital accumulation in a small open economy abstract we consider a small open economy with a costly state verification problem and binding reserve requirements the presence of these frictions leads to the existence of two steady states with credit rationing an increase in the money growth rate the world interest rate or reserve requirements raises lowers gdp in the high low activity steady state however sufficiently large increases in money growth or the world interest rate can transform the high activity steady state from a sink to a source the model also delivers prescriptions for restoring the stability of this steady state in such an eventuality journal of economic literatureclassification numbers e5 f4

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

price level targeting and the delegation issue in an open economy a weight conservative central banker setting policy with discretion and stabilizing the real exchange rate adjusted rex price level and the output gap can replicate the behavior of the rate of rex inflation and the output gap under policy from a timeless perspective

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

price setting in the euro area some stylized facts from individual producer price data this paper summarizes the microevidence on the setting of producer prices in the euro area the main findings are i 21 of producer prices are adjusted each month ii producer prices are changed more frequently and by smaller amounts than consumer prices even after controlling for product characteristics iii price decreases are relatively frequent iv inflation correlates positively with the difference between the frequency of price increases and decreases and v there is substantial variation in price flexibility across sectors which can be explained in part by differences in the cost structure the degree of competition and the level of sectoral inflation

five facts about prices a reevaluation of menu cost models are price decreases 3 the frequency of price increases covaries strongly with inflation whereas the frequency of price decreases and the size of price increases and price decreases do not 4 the frequency of price change is highly seasonal it is highest in the first quarter and then declines 5 we find no evidence of upwardsloping hazard functions of price changes for individual products we show that the first second and third facts are consistent with a benchmark menu cost model whereas the fourth and fifth facts are not

sticky prices in the euro area a summary of new micro evidence this paper summarises the vast evidence on micro price setting recently obtained for euro area countries we consider studies with micro data on consumer and producer prices as well as survey information the main findings are 1 prices in the euro area are sticky and stickier than in the us 2 downward price rigidity is only slightly more marked than upward price rigidity 3 heterogeneity and asymmetries are observed in price setting and 4 the relevance of theories that explain price stickiness such as implicit or explicit contracts marginal costs and coordination failure is confirmed whereas menu costs pricing thresholds and costly information explanations are judged much less relevant by firms jel c25 d40 e31

factor income taxation and growth under asymmetric information abstract this paper studies the growth effects of factor income taxation on capital and labor in an endogenous growth model with overlapping generations capital accumulation in our model takes place through credit financed investments in a market with asymmetric information between lenders and borrowers we show that in the presence of asymmetric information capital income taxation worsens the adverse selection problem in the credit market which in turn introduces an additional adverse effect on growth in so doing our analysis provides a new argument in favor of a lower higher capital labor income taxation in funding public expenditures

loan size as a commitment device the authors model risky lending with costly state verification but without commitment to an audit strategy the borrower underreports with a positive probability in the successful state and the lender audits with a positive probability after a report of failure under lack of commitment to audit probabilities an increase in loan size convinces the borrower that the lender has a high stake in an audit this reduces the probability of underreporting and leads to overinvestment relative to the commitment case however there is underinvestment relative to the level under full information copyright 1998 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

the beliefs of borrowers and lenders and investment decisions abstract this paper examines the role of beliefs in the determination of equilibrium in a standard model of credit markets and investment project choice with asymmetric information it is shown that with ex ante asymmetric information the beliefs of entrepreneurs are important for the equilibrium level of aggregate investment and with ex post asymmetric information the beliefs of creditors are important for the types of projects selected by entrepreneurs

financial crises and recapitalizations we develop a dynamic stochastic general equilibrium model with financial frictions on both financial intermediaries and goods producing firms since financial intermediaries are highly leveraged we show that the welfare gains from their recapitalization in response to large but rare net worth losses are as large as those from eliminating typical business cycle fluctuations we also find that these gains are increasing in the size of the net worth loss are larger when recapitalization funds are raised from the household rather than the real sector and can be larger when lower idiosyncratic risk leads to higher leverage

contracting with imperfect commitment and the revelation principle the single agent case this paper extends the revelation principle to environments in which the mechanism designer cannot fully commit to the outcome induced by the mechanism we show that he may optimally use a direct mechanism under which truthful revelation is an optimal strategy for the agent in contrast with the conventional revelation principle however the agent may not use this strategy with probability one our results apply to contracting problems between a principal and a single agent by reducing such problems to well defined programming problems they provide a basic tool for studying imperfect commitment

costly monitoring loan contracts and equilibrium credit rationing this paper develops a model with asymmetrically informed agents and costly monitoring of loan contracts where an equilibrium can exhibit credit rationing borrowers are identical ex ante but some receive loans and others do not in contrast to existing credit rationing theories rationing does not occur here due to inflexible prices adverse selection or moral hazard optimizing behaviour produces a standard debt contract in equilibrium the aggregate quantity of loans and equilibrium interest rates respond differently depending on whether there is rationing in equilibrium

state dependent or time dependent pricing does it matter for recent u s inflation in the 1988 2004 micro data collected by the u s bureau of labor statistics for the cpi price changes are frequent every 4 7 months depending on the treatment of sale prices and large in absolute value on the order of 10 the size and timing of price changes varies considerably for a given item but the size and probability of a price change are unrelated to the time since the last price change movements in aggregate inflation reflect movements in the size of price changes rather than the fraction of items changing price due to offsetting movements in the fraction of price increases and decreases neither leading time dependent models taylor or calvo nor 1 st generation state dependent models match all of these facts some 2 nd generation state dependent models however appear broadly consistent with the empirical patterns

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

liquidity provision interest rates and unemployment abstract the effective liquidity supply of the economy the weighted sum of all assets that serve as media of exchange matters for interest rates and unemployment we formalize this idea by adding an over the counter market with collateralized trades to the mortensen pissarides model an increase in public liquidity through a higher supply of real government bonds raises the real interest rate crowding out private liquidity and increasing unemployment if unemployment is inefficiently high keeping liquidity scarce can be socially optimal a liquidity crisis affecting the acceptability of private assets as collateral widens the rate of return difference between private and public liquidity also increasing unemployment

the macroeconomic implications of financial deregulation abstract this paper explores the possible macroeconomic consequences of financial deregulation in an institutional environment where deregulation raises risks in banking the central bank is supposed to maximize an objective function in which the probability of bank failure is an argument it is then shown that the usual tradeoffs between policy objectives imply that financial deregulation will lead to more interest rate smoothing than would otherwise take place and further that because of restricted entry into banking deregulation will call for some inflation the transition toward deregulation raises special problems which are likely to require a more gradual approach toward the stationary equilibrium

moneylenders and bankers price increasing subsidies in a monopolistically competitive market abstract in many areas of the world a significant part of the cost of obtaining a good or service is the cost of enforcing the contracts entailed in its provision we present models of markets with endogenous enforcement costs motivated by studies of rural credit markets we show that subsidies may have perverse effects under monopolistic competition increasing prices or inducing exit higher prices interest rates result from the loss of scale economies or from negative externalities among suppliers the models are consistent with the puzzling evidence that infusions of government subsidized formal credit have not improved the terms offered by moneylenders

optimal contracts under costly state falsification we examine an exchange economy with two agents one risk neutral with a certain endowment and a second risk averse with a random endowment the realization of the endowment is public but can be falsified by the second agent at a cost for a broad class of falsification cost functions the optimal no falsification contract is noncontingent on a left hand interval and strictly increasing with a slope strictly less than one on a right hand interval under a mild further restriction optimal no falsification contracts are in addition piece wise linear optimal contracts may in general require falsifying the state but for a set of the highest endowment realizations there is no falsification we find simple conditions under which the optimal contract is a no falsification contract the model has applications that include financial insurance and employment contracts and tax policy

assessment of china s climate commitment and non fossil energy plan towards 2020 using hybrid aim cge model china made a commitment in copenhagen to reduce its carbon dioxide emissions per unit of gdp from 40 to 45 compared with the 2005 level by 2020 and is determined to vigorously develop non fossil fuels this study analyzes the effects and impacts of policies that could help to achieve china s copenhagen commitments with a hybrid static cge model in which the electricity sector is disaggregated into 12 generation technologies four scenarios are developed including the reference scenario a the reference scenario b and two carbon constraint scenarios the results show that carbon intensity in terms of gdp will fall by 30 97 between 2005 and 2020 in the reference scenario a and will be reduced further by 7 97 if china s targeted non fossil energy development plans can be achieved in the reference scenario b however the rest of the 40 45 target must be realized by other measures such as carbon constraint it is also observed that due to carbon intensity constraints gdp loss would be from 0 032 to 0 24 compared to the reference scenario b and co2 emission reductions are due mainly to decreases in coal consumption in the electricity sector and manufacturing sector

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

should courts enforce credit contracts strictly the intimate linkages between law and nance are currently the centre of wide rangingempirical investigations this article presents a simple banking model with informationasymmetries concerning borrowers entrepreneurial talent it is shown that improvements inthe enforcement of contract by courts reduce agency problems but can also reduce the bank sincentive to screen borrowers adequately thus worsening credit allocation a stricterenforcement of credit contracts therefore may be socially harmful even if costlessly achieved improvements in accounting standards however always make bank screening of borrowers lesscostly and improve credit allocation and social welfare

china s energy water nexus assessment of the energy sector s compliance with the 3 red lines industrial water policy abstract increasing population and economic growth continue to drive china s demand for energy and water resources the interaction of these resources is particularly important in china where water resources are unevenly distributed with limited availability in coal rich regions the 3 red lines water policies were introduced in 2011 one of their aims is to reduce industrial water use of which the energy sector is a part this paper analyses current water withdrawals and consumption for all energy processes and assesses the sector s compliance with the industrial water policy under different scenarios considering potential future policy and technological changes the results show that future energy plans could conflict with the industrial water policy but the amount of water used in the energy sector is highly dependant on technology choices especially for power plant cooling high electricity demand in the future is expected to be met mainly by coal and nuclear power and planned inland development of nuclear power presents a new source of freshwater demand taking a holistic view of energy and water for energy enables the identification of co benefits and trade offs between energy and water policies that can facilitate the development of more compatible and sustainable energy and water plans

investment and government intervention in credit markets when there is asymmetric information abstract this paper models private firm investment choices and government credit policy in an entrepreneurial firm financial market wherein firm owners have better information about the quality of their return distributions than do external financiers the analysis shows that despite the absence of an informational advantage the government can often increase social welfare by offering subsidized debt contracts however the paper also finds that some common credit subsidy policies including loan guarantees and government backing of targeted lending institutions yield constrained inefficient outcomes in general

dynamic model for market competition and price rigidity abstractthis article presents a price floor model in which durability unit costs and production period are factors in explaining price rigidity this article elaborates that cost structure plays an essential role in resolving the inconclusive relationship between market concentration and price rigidity when the industry is characterized by decreasing returns of scale the degree of price flexibility decreases as market competition intensifies the reverse is true when the industry exhibits increasing returns of scale the factors that cause price rigidity also foster price adjustment asymmetry and price adjustment lag during times of recession the model exhibits upward price flexibility as costs increase but downward price rigidity as costs decrease even under forward looking expectations the way in which firms adjust prices could look as though they have adaptive expectations if price stickiness is a characteristic of market competition then public policies determined by price level could be too

optimum pricing policy under stochastic inflation we describe aggregate inflation as a stochastic process in which the rate of change of the price level can be positive or zero where the times spent in each state are of random duration this class of processes includes two state markov chains and renewal processes as special cases it is shown that the optimal pricing policy of a monopolistic firm with non convex costs of price adjustment is s s in its real price i e its nominal price relative to the price level a basic certainty equivalence result is proved i e the firm behaves as if it faces a certain and fixed rate of inflation higher than the actual expected rate the difference between the two rates being a risk premium which depends on the real interest rate and the parameters of the stochastic process one can thus apply previous results from the case of certainty sheshinski and weiss review of economic studies 1977 to obtain comparative static results in particular one finds that an increase in the variance of expected inflation leads firms to choose a pricing policy with larger amplitude in real price the paper also addresses the question of consistency in firms expectations when the price level is determined by the firms actions in this paper we consider pricing policies of individual firms in an inflationary environment each firm expects the general price level to increase and must determine the rate of increase of its own price it is assumed that the firm incurs an adjustment cost when it changes its nominal price consequently firms choose to change prices occasionally rather than continuously

loan performance and race r carter hill recent studies find evidence of racial discrimination in mortgage markets although these studies explore loan approval rates for whites versus minorities they do not specifically consider loan performance either in the form of default rates or loan administration costs this study considers discrimination in the used car credit market where the collateral is not subject to location externalities collateral value and quality do not vary as much as in real estate and the loan terms are shorter we find administration costs and default rates are higher for minorities than for whites controlling for age income home ownership wealth occupation loan terms and geographic location jel k2 i introduction credit discrimination occurs whenever minorities are denied credit on the basis of race or are offered loans at terms different than the terms offered similarly situated whites 1 economists identify two types of discrimination preference taste based discrimination and information statistical based discrimination 2 the legal definition of discrimination makes no such distinction in their statistical studies munnell brown mceneaney and tootell 1996 carr and megbolugbe 1994 and gabriel and rosenthal 1991 find evidence of discrimination whereas most economic theorists such as becker 1993 and commentators such as brimelow 1993 and brimelow and spencer 1993 argue competition will greatly reduce if not eliminate discrimination in section iii we demonstrate why under regulation statistical discrimination may increase with increasing competition this anomalous result occurs because the legal definition does not distinguish between the two types of discrimination some economists implicitly assume credit markets are unregulated when considering the effect of competition on discrimination antidiscrimination regulation changes the effect of competition in unregulated markets taste based discrimination is unprofitable and increasing competition will reduce this form of discrimination if the industry s employees or white borrowers have a taste for discrimination competition will not necessarily eliminate taste based discrimination when regulation is binding and the economic foundation for statistical discrimination exists discrimination is profitable and increasing competition may increase discrimination the effect of regulation and competition on discrimination depends critically on the information basis for discrimination the relationship between loan performance and race therefore the appropriate empirical question is does a statistical basis for discrimination exist this question cannot be answered by loan approval studies rather it must be addressed by evaluating how loans perform after they are approved further the appropriate public policy issue is should society regulate statistical discrimination this article is an empirical inquiry into the relationship between race and loan performance we measure loan performance by estimating the same marginal default rates that lenders use to score credit applications and by the variables that have the most impact on loan administration costs we find that race matters regrettably in the fashion suggested by stereotypes in general minorities have higher default rates and contribute to higher administration costs in other words the foundation for statistical discrimination appears to exist section ii contains a review of the extant literature a theoretical model of credit scoring with both taste and statistical discrimination is contained in section iii the data are discussed in section iv and the empirical models are presented in section v ii literature as in arrow 1973 and becker 1957 an individual is said to have a preference or taste for discrimination if he is willing to pay a price or forgo income in order to practice discrimination

monetary policy in a dollarized economy where balance sheets matter abstract does the dollarization of liabilites and the resulting balance sheet vulnerability prevent monetary policy from serving its conventional countercyclical role we study this question in a model of a small open economy in which domestic firms face an imperfect capital market with risk premia depending on net worth as in bernanke and gertler am econ rev 79 1989 14 in spite of the financial fragility channels present in the model the conventional wisdom still holds under a floating exchange rate countercyclical monetary policy does help cushion the impact of foreign real shocks

the growth effects of property rights the role of finance summary using a variety of statistical approaches we show that the relationship between property rights and growth is nonlinear stronger enforcement of property rights raises growth up to a point before growth begins to decline we provide a simple theoretical rationale for this conclusion using a model with informational asymmetries in the financial sector stronger property rights have two opposing effects on the one hand it increases capital formation and growth on the other hand it encourages bad borrowing practices thus there exists an optimal level of property rights which maximizes growth however as financial markets mature the negative effects associated with stronger property rights become weaker

on the possibility of credit rationing in the stiglitz weiss model contrary to what is consistently assumed in the literature the return function cannot be hump shaped in the stiglitz weiss 1981 model this has important consequences for the possible occurrence of credit rationing and redlining with a single class of borrowers banks offer credit in two stages demand possibly exceeds supply in stage one but not in stage two with several observationally distinguishable borrower classes the firms in a borrower class are redlined only under circumstances which imply that they would not get credit in a perfect capital market either die rendite funktion kann im stiglitz weiss 1981 modell nicht so wie das in der literatur durchgangig angenommen wird hugelformig sein das hat wichtige implikationen fur die moglichkeit von kreditrationierung einerseits und fur die moglichkeit des ausschlusses ganzer kreditnehmergruppen vom kapitalmarkt andererseits mit nur einer klasse von kreditnehmern erfolgt die kreditvergabe in zwei stufen wahrend auf der ersten stufe eine ubernachfrage vorliegen kann herrscht auf der zweiten stufe marktraumung bei mehreren unterscheidbaren kreditnehmerklassen wird eine klasse nur unter den bedingungen vom kreditmarkt ausgeschlossen bei deren vorliegen sie auch in einem vollkommenen kreditmarkt keinen kredit erhalten wurde

microfoundations of macroeconomic price adjustment survey evidence from swedish firms this paper presents the results of a survey on price setting behavior conducted on a large random sample of swedish firms the median firm adjusts the price once a year state and time dependent price setting are about equally important the four highest ranked explanations for price rigidity in this study implicit contracts sluggish costs explicit contracts and the kinked demand curve have close correspondents among the top five places in two similar large scale surveys carried out in the uk and the u s the results point to the importance of the long term relations with customers for the rigidity of prices the estimated share of sales that go to regular customers is more than 80

deposit insurance a reconsideration abstract this paper undertakes a simple general equilibrium analysis of the consequences of deposit insurance programs the way in which they are priced and the way in which they fund revenue shortfalls in our economy the central issue in analyzing deposit insurance is how the government will make up any fdic losses deposit insurance premia matter only in so far as they affect the level of implied fdic revenue shortfalls moreover local variations in the magnitude of fdic losses will generically be irrelevant for the determination of any equilibrium quantities that affect agent welfare however large enough changes in these losses can matter there is no presumption that keeping these shortfalls low is a good idea finally we show that multiple pareto ranked equilibria can be observed the potential for multiplicity of equilibria may depend on components of fdic policy our analysis provides counterexamples to the following propositions 1 actuarially fair pricing of deposit insurance is always desirable 2 implicit fdic subsidization of banks through deposit insurance is always undesirable 3 large fdic losses are necessarily symptomatic of a poorly designed deposit insurance system 4 risk based deposit insurance premia can easily be used to reduce moral hazard problems associated with deposit insurance provision

state dependent pricing and the general equilibrium dynamics of money and output economists have long suggested that nominal product prices are changed infrequently because of fixed costs in such a setting optimal price adjustment should depend on the state of the economy yet while widely discussed statedependent pricing has proved difficult to incorporate into macroeconomic models this paper develops a new tractable theoretical state dependent pricing framework we use it to study how optimal pricing depends on the persistence of monetary shocks the elasticities of labor supply and goods demand and the interest sensitivity of money demand

investor protection optimal incentives and economic growth does investor protection foster economic growth to assess the widely held affirmative view we introduce investor protection into a standard overlapping generations model of capital accumulation better investor protection implies better risk sharing because of entrepreneurs risk aversion this results in a larger demand for capital this is the demand effect a second effect the supply effect follows from general equilibrium restrictions better protection i e higher demand increases the interest rate and lowers the income of entrepreneurs decreasing current savings and next period s supply of capital the supply effect is stronger the tighter are the restrictions on capital flows our model thus predicts that the positive effect of investor protection on growth is stronger for countries with lower restrictions cross country data provide support for this prediction as does the detailed examination of the growth experiences of south korea and india

capital accumulation under different financial agreements abstract this paper develops a simple overlapping generations model where agents income is given both by a stochastic endowment and by the profits generated by a production activity the purpose is to analyze the consequences of different forms of financial agreements on capital accumulation in this model pareto optimality requires that the capital stock is a deterministic function of the previous level of capital agents can eliminate any randomness in the capital accumulation process when contingent claims markets are available when standard loan contracts prevail because of asymmetric information the economy incurs an efficiency loss due to capital stock fluctuations the expected level of capital under this last regime is always smaller than the one achieved when markets for contingent claims exist

some evidence on the empirical significance of credit rationing this paper examines the credit rationing debate using detailed contract information on over one million commercial bank loans from 1977 to 1988 while commercial loan rates are sticky consistent with rationing this stickiness varies with loan contract terms in ways that are not predicted by equilibrium credit rationing theory in addition the proportion of new loans issued under commitment does not increase significantly when credit markets are tight despite the fact that borrowers without commitments can be rationed whereas commitment borrowers are contractually insulated from rationing overall the data suggest that equilibrium rationing is not a significant macroeconomic phenomenon

credit and equity rationing in markets with adverse selection previous theories of financial market rationing focussed on a single market either the credit or the equity market an interesting question is whether credit and equity rationing are mutually compatible and how they interact we consider a model with two dimensional asymmetric information where entrepreneurs have private information about both the expected returns and the risk of their projects we show that credit and equity rationing may occur individually or simultaneously moreover competition between the two markets may generate the adverse selection that leads to rationing outcomes

equilibrium subprime lending this paper develops an equilibrium model of a subprime mortgage market our goal is to offer a benchmark with which the recent subprime boom and bust can be compared the model is tractable and delivers plausible orders of magnitude for borrowing capacities as well as default and trading intensities we offer simple explanations for several phenomena in the subprime market such as the prevalence of teaser rates and the clustering of defaults in our model both nondiversifiable and diversifiable income risks reduce debt capacities thus debt capacities need not be higher when a larger fraction of income risk is diversifiable

relationship between energy production and water resource utilization a panel data analysis of 31 provinces in china abstract the systematic study of the relationship between energy production and water resource utilization is crucial for china to relieve the energy water crisis and achieve sustainable use of them this work explores the causal relationship between energy production and water resource utilization in china using panel data of 31 provinces over the period 2000 2014 this study have applied a panel unit root test cointegration test vector error correction model vecm and granger causality approaches to examine the long run and short run relationship between the variables the results show that 1 there is a long run bidirectional granger causality relationship between energy production and water resources utilization but a short run unidirectional relationship between two variables i e the water resource utilization is the short run granger reason for the change in energy production 2 the increases in industrial added value population and ratio of the secondary industry value added to gdp have a positive effect on both energy production and water resource utilization 3 industrial water use will fall by about 0 12 if the rate of industrial waste water reuse increases by 1 which shows that the progress of water saving technology can reduce industrial water usage effectively our findings indicate that government should implement strict water constraint strategies and promote water conservation technology for the sustainable development of energy and water resources in china