the cost of market versus regulatory discipline in banking1 abstract we present evidence that insured deposit financing shields banks from the full costs of market discipline moody s downgrades indicators of increasing risk are associated with negative abnormal equity returns that are increasing in the bank s reliance on insured deposits moreover banks raise their use of insured deposits following increases in risk these findings cast doubt on the ability of capital market participants to effectively discipline bank behavior within the current regulatory environment more generally our findings highlight the potential for regulation to undermine market discipline in regulated industries

which fiscal multipliers are regime dependent a meta regression analysis we analyse whether estimated multiplier effects are systematically higher if the economy suffers a downturn for that purpose we conduct a meta regression analysis on a unique data set of 98 empirical studies with more than 1800 observations on multiplier effects and control for regime dependence of the multiplier we find that spending multipliers are much higher by about 0 7 0 9 units during a downturn tax multipliers are not sensitive to the economic regime and generally lower than spending multipliers finally for all spending categories other than government consumption the multiplier significantly exceeds one during downturns

bank runs liquidity costs and investment distortions abstract in this paper we extend the diamond and dybvig 1983 model of intermediation to study further the conditions under which bank runs can occur and to consider how private parties might adjust to the existence of bank run equilibria we provide weaker necessary conditions for runs we then characterize how banks respond to the possibility of runs in their design of deposit contracts and investment decisions banks might choose to offer contracts that prevent runs but under some conditions the second best contracts will involve accepting some risk of runs in order to achieve higher expected returns from their investments

the evolving landscape of banking the structure of the financial services industry is in flux liberalization deregulation and advances in information technology have changed the financial landscape dramatically interbank competition has heated up and banks face increasing competition from nonbanking financial institutions and the financial markets the predictability of the industry with low levels of financial innovation little innovation in distribution channels and well defined and rigid institutional structures is gone product innovations new distribution channels and emerging new competitors are in abundance moreover the subprime crisis that has hit the financial sector in 2007 2008 appears to have a major impact on the structure of the industry this article emphasizes the importance of understanding the economics of banking for assessing the changes in the industry in particular we point at relationship banking as a prime source of the banks comparative advantage the proliferation of transaction oriented banking trading and financial market activities does however seriously challenge relationship banking in order to focus on these issues in a rigorous way we will evaluate the key insights from the relationship banking literature including the potential complementarities and conflicts of interest between intermediated relationship banking activities and financial market underwriting securitization etc activities we also address the issue of the optimal conglomeration of bank activities including the empirical evidence on scope and scale economies we analyze the strategic positioning of banks in the currently highly uncertain competitive arena and link this to the theory of the firm and particularly firm boundaries and learning

banking panics information and rational expectations equilibrium this paper shows that bank runs can be modeled as an equilibrium phenomenon we demonstrate that some aspects of the intuitive story that bank runs start with fears of insolvency of banks can be rigorously modeled if individuals observe long lines at the bank they correctly infer that there is a possibility that the bank is about to fail and precipitate a bank run however bank runs occur even when no one has any adverse information extra market constraints such as suspension of convertibility can prevent bank runs and result in superior allocations banking panics were a recurrent phenomenon in the united states until the 1930s they have re emerged as a source of public concern and much theoretical research recently in this paper we provide an information theoretic rationale for bank runs the traditional story is that contagion is an important aspect of bank runs the idea seems to be that when the general public observes large withdrawals from the banking system fears of insolvency grow resulting in even larger withdrawals of deposits in our model some individuals withdraw because they get information that future returns are likely to be low uninformed individuals observing this also have an incentive to liquidate their investments in addition some individuals need to withdraw deposits for other than informationally based reasons thus if the random realization of such a group of individuals is unusually large then the uninformed individuals will be misled and will precipitate a run on the bank the technology is such that a large volume of withdrawals involves liquidation costs consequently runs on the bank do impose social costs a mechanism that may reduce these costs in our model is to suspend convertibility if withdrawals are high however those individuals who need to withdraw their assets for liquidity reasons are worse off ex post our model provides a rationalization for restrictions in demand deposits that were widespread prior to 1929 friedman and schwartz 7 suggest that restrictions of payments ensured

retail bank deposits as quasi fixed factors of production neoclassical models of the banking firm for example michael klein 1971 treat all deposit liabilities as fully variable factors of production banks then maximize profits minimize liability costs by equating the marginal costs of all liability types during each period the empirical relevance of these models is difficult to establish because binding deposit rate ceilings regulation q force bank competition for many retail deposits into implicit interest channels that are not readily measured it is therefore noteworthy that during two recent periods when deposit rate ceilings were not binding banks paid retail deposit rates considerably in excess of the rate at which they could borrow via large unregulated certificates of deposit such behavior seems inconsistent with the cost minimization prescribed by neoclassical bank models however if retail deposit accounts are interpreted as quasi fixed gary becker 1962 walter oi 1962 donald parsons 1972 sherwin rosen 1968 inputs to the banking firm these important historical observations can be reconciled with bank profit maximization this paper first describes two historical episodes during which the bank retail deposit rate exceeded the negotiable certificate of deposit rate for substantial periods of time while no profit maximizing cost minimizing bank would pay such a rate differential if retail deposit quantities are costlessly variable interpreting retail deposit accounts as quasi fixed inputs to the bank explains the peculiar rate structures a simple two period model of bank liability selection formalizes the analysis i two puzzling historical episodes

who borrows from the lender of last resort understanding why banks borrow from the lender of last resort lolr during a nancial crisis is crucial to understanding the macroeconomic impact of such largescale interventions we document a strong divergence among banks take up of lolr assistance during the nancial crisis in the euro area as banks which borrowed heavily also used increasingly risky collateral we propose four explanations for this divergence

the who and why of lottery empirical highlights from the seminal economic literature lotteries operate today in many countries around the world this type of gambling is usually run by governments and is sometimes described as regressive lottery is an unfair bet so explaining the purchase of lottery tickets by risk averse consumers has been a challenge for economic theory lotteries can be analysed from either of two economic perspectives as a source of public revenue or as a consumer commodity in this paper the state of economic research on lotteries is reviewed focusing on its main empirical findings

management ownership and market valuation an empirical analysis we investigate the relationship between management ownership and market valuation of the firm as measured by tobin s q in a 1980 cross section of 371 fortune 500 firms we find evidence of a significant nonmonotonic relationship tobin s q first increases then declines and finally rises slightly as ownership by the board of directors rises for older firms there is evidence that q is lower when the firm is run by a member of the founding family than when it is run by an officer unrelated to the founder

a real options approach to bankruptcy costs evidence from failed commercial banks during the 1990s literature identifies three main aspects of liquidation costs firm size asset specificity and industry concentration this paper unifies the theory behind these aspects of bankruptcy costs by treating them as components of a broader option valuation problem faced by the liquidating trustee testing the hypothesized asset price relationships on fdic failed bank liquidation data yields the appropriate results furthermore it appears that liquidation time alone can be used as an effective second order proxy for asset value growth where market value estimates are unavailable

deposit insurance and money market freezes in the presence of deposit insurance a rise in counterparty risk may cause a freeze in interbank money markets we show this in a general equilibrium model with regionally segmented bank based retail financial markets in which money markets facilitate the reallocation of funds across banks from different regions counterparty risk creates an asymmetry between banks in savings rich regions which remain marginally financed by the abundant regional insured deposits and in savings poor regions which have to pay large spreads in money markets this asymmetry distorts the aggregate allocation of credit and in the presence of demand externalities can cause large output losses

lender screening and the role of securitization evidence from prime and subprime mortgage markets this article examines the link between mortgage securitization and lender screening during the boom and bust of the u s housing market using comprehensive data on both prime and subprime securitized and bank held loans we provide evidence that securitization affected lenders screening decisions in the subprime market for low documentation loans through two channels the securitization rate and the time it takes to securitize a loan the change in decision making by subprime lenders occurs on dimensions that are unreported to investors examining the time series evolution of the securitization market further reinforces these findings we exploit heterogeneity across subprime and prime markets to illustrate that the potential for moral hazard may be reduced with greater collection of hard information and increased monitoring of lenders our results suggest that the policy debate regarding securitization and lenders underwriting standards should separately evaluate the agency and non agency markets with special attention toward the extent of soft information in assets being securitized the author 2012 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

linking local business with global growth opportunities the role of infrastructure infrastructure is instrumental when it comes to linking local businesses with their global growth opportunities this paper shows that by making this link the transport network can act as a catalyst for regional economic growth using a novel approach we find that firms in regions with a more developed transport infrastructure are better placed to benefit from positive growth opportunities than those in regions with a less well developed transport network this advantage is most pronounced in times of economic slack making a better transport network a key ingredient for economic recovery it is against this background that the recent slowdown in infrastructure investment in europe is worrisome but it is through this channel among others that the substantial ramp up of activity by the european investment bank is expected to foster growth and enhance competitiveness in europe

the impact of contingent liability on commercial bank risk taking abstract from 1863 1935 regulators imposed contingent liability on bank shareholders to discourage risk taking using data from 1900 to 1915 i find that banks subject to stricter liability rules have lower equity and asset volatility hold a lower proportion of risky assets and are less likely to increase their investment in risky assets when their net worth declines consistent with the hypothesis that stricter liability discourages commercial bank risk taking these findings provide lessons for current bank regulatory policy and show that the shape of the residual claimant s payoff function has a significant impact on managerial incentives and firm performance

testing for efficiency in lotto markets state sponsored lotto games because they are pari mutuel and because jackpots with no winner are rolled over into the next drawing present an excellent opportunity to test for market efficiency using data from massachusetts kentucky and ohio we investigate bettors responses and test for weak form efficiency lotto bets do not have positive net expected returns thus weak form efficiency exists to evaluate strong form efficiency we utilize the concept of a rational expectations equilibrium we find that in general lotto bettors decisions to play generate a level of sales that conform to their original forecasts of expected value

regional transfer multipliers a series of discontinuities in the allocation mechanism of federal transfers to municipal governments in brazil allow us to identify the causal effect of public spending on local labour markets using a fuzzy regression discontinuity design rdd our estimates imply a cost per job of about 8 000 us dollars per year and a local income multiplier around two the effect comes mostly from employment in services and is more pronounced among less financially developed municipalities

measuring the impact of fiscal policy in the face of anticipation a structural var approach empirical estimates of the impact of government spending shocks disagree on central issues such as the size of output multipliers and the responses of consumption and the real wage one explanation for the disagreement is that fiscal shocks are often anticipated due to misspecification of the information set anticipation effects may invalidate svar estimates of impulse responses we use economic theory to derive a fiscal svar estimator that is applicable when fiscal shocks are anticipated we study its properties and apply it to us data we fail to find evidence that anticipation effects overturn the existing findings from the fiscal svar literature despite years of intensive research the empirical literature on fiscal policy has yet to reach consensus on the macroeconomic impact of fiscal policy shocks disagreements concern central issues such as the size of output multipliers and the impact of government spending shocks on consumption and the real wage clearly such level of disagreement constrains our ability to give simple guidelines for the operation of one of the most important stabilisation policies a key empirical obstacle is the measurement of innovations to fiscal policy one strand of the literature employs structural vector autoregressive svar methods and achieves identification based on the presence of decision lags or sign restrictions

how large is the government spending multiplier evidence from world bank lending this paper proposes a novel method of isolating fluctuations in public spending that are likely to be uncorrelated with contemporaneous macroeconomic shocks and can be used to estimate government spending multipliers the approach relies on two features unique to many low income countries 1 borrowing from the world bank finances a substantial fraction of public spending and 2 actual spending on world bank financed projects is typically spread out over several years following the original approval of the project these two features imply that fluctuations in spending on world bank projects in a given year are in large part determined by fluctuations in project approval decisions made in previous years and so are unlikely to be correlated with shocks to output in the current year world bank project level disbursement data are used to isolate the component of public spending associated with project approvals from previous years which in turn can be used to estimate government spending multipliers in a sample of 29 aid dependent low income countries the estimated multipliers are small reasonably precisely estimated and rarely significantly different from zero

does interbank borrowing reduce bank risk in this paper we investigate whether banks that borrow from other banks have lower risk levels we concentrate on a large sample of central and eastern european banks which allows us to explore the impact of interbank lending when exposures are long term and interbank borrowers are small banks the results of the empirical analysis generally confirm the hypothesis that long term interbank exposures result in lower risk of the borrowing banks

protectionist pressures and aggregate economic conditions comment on takacs this paper explores the influence of u s macroeconomic conditions and the international trade position on protectionist pressures as measured by escape clause cases brought before the international trade commission several possible difficulties with takacs pioneering empirical study of this topic are considered it is argued that while further support is found for her principal conclusion that the state of the domestic economy is a significant determinant of such protectionist pressures the quantitative strength of such aggregate factors is less than was suggested by takacs original study

the peculiar scale economies of lotto the best selling lottery game in the united states is lotto a parimutuel game of long odds and large jackpots unlike in the other popular lottery games numbers and instant there is a strong tendency for per capita lotto sales to increase with the size of the population base the fact that the jackpot also tends to increase with population size is not a complete explanation since the probability of winning tends to be inversely proportional to state population our explanation for why the games are more successful in large states is that players tend to judge the likelihood of winning based on the frequency with which someone wins then a larger state can offer a game at longer odds but the same perceived probability of winning as a smaller state this abstract was borrowed from another version of this item

discipline and liquidity in the interbank market using 20 years of panel data i demonstrate that high risk banks have consistently paid more than safe banks for interbank loans and have been less likely to use these loans as a source of liquidity the economic importance of this effect was relatively small until the mid 1990s when regulatory and institutional changes began to impose more of the costs of bank failure on uninsured creditors subsequently interbank market price discipline roughly doubled and risk based rationing effects increased by a factor of six in imposing this discipline lenders seem to care most about credit risk at borrowing institutions

the effects of business models on bank risk before during and after financial crisis evidence from china using chinese data from 2004 to 2016 we investigate the effects of business models on bank risk before during and after financial crisis three main results emerge first insolvency risk and roa

distinguishing panics and information based bank runs welfare and policy implications in this paper we contrast panics and information based bank runs in an effort to provide a robust and empirically plausible model of how bank runs are triggered the model of information based runs is characterized by two sided asymmetric information the bank cannot observe the true liquidity needs of the depositors while depositors are asymmetrically informed about bank asset quality we also examine the relative degrees of risk sharing provided by bank deposit contracts and traded equity contracts we show that the choice of deposit or equity depends on the attributes of and information about the underlying investment returns

the credibility revolution in empirical economics how better research design is taking the con out of econometrics since edward leamer s memorable 1983 paper let s take the con out of econometrics empirical microeconomics has experienced a credibility revolution while leamer s suggested remedy sensitivity analysis has played a role in this we argue that the primary engine driving improvement has been a focus on the quality of empirical research designs the advantages of a good research design are perhaps most easily apparent in research using random assignment we begin with an overview of leamer s 1983 critique and his proposed remedies we then turn to the key factors we see contributing to improved empirical work including the availability of more and better data along with advances in theoretical econometric understanding but especially the fact that research design has moved front and center in much of empirical micro we offer a brief digression into macroeconomics and industrial organization where progress by our lights is less dramatic although there is work in both fields that we find encouraging finally we discuss the view that the design pendulum has swung too far critics of design driven studies argue that in pursuit of clean and credible research designs researchers seek good answers instead of good questions we briefly respond to this concern which worries us little

the fragile capital structure of hedge funds and the limits to arbitrage abstract during a financial crisis when investors are most in need of liquidity and accurate prices hedge funds cut their arbitrage positions and hoard cash the paper explains this phenomenon we argue that the fragile nature of the capital structure of hedge funds combined with low market liquidity creates a risk of coordination in redemptions among hedge fund investors that severely limits hedge funds arbitrage capabilities we present a model of hedge funds optimal asset allocation in the presence of coordination risk among investors we show that hedge fund managers behave conservatively and even abstain from participating in the market once coordination risk is factored into their investment decisions the model suggests a new source of limits to arbitrage

the british gambler s fallacy people facing choices under uncertainty and gamblers in particular are often subject to statistical fallacies this paper explores the hypothesis that if lotto players were subject to the gambler s fallacy predictable fluctuations in the number of jackpots would occur evidence based on a poisson regression model in which the number of winning bets is conditional on the history of draws indicates that number selection in the uk is only marginally affected by the history of draws

a portfolio of nobel laureates markowitz miller and sharpe three pioneers of quantitative finance have now been justly honored harry markowitz merton miller and william sharpe received the nobel prize in economic science in 1990 from today s perspective it is hard to understand what finance was like before portfolio theory here i attempt to provide a very brief history of the quantitative revolution in finance drawing upon p bernstein s capital ideas 1992 and accounts of the three nobel laureates

reflections on northern rock the bank run that heralded the global financial crisis in september 2007 television viewers and newspaper readers around the world saw pictures of what looked like an old fashioned bank run that is depositors waiting in line outside the branch offices of a united kingdom bank called northern rock to withdraw their money the previous u k bank run before northern rock was in 1866 at overend gurney a london bank that overreached itself in the railway and docks boom of the 1860s bank runs were not uncommon in the united states up through the 1930s but they have been rare since the start of deposit insurance backed by the federal deposit insurance corporation in contrast deposit insurance in the united kingdom was a partial affair funded by the banking industry itself and insuring only a part of the deposits at the time of the run u k bank deposits were fully insured only up to 2 000 pounds and then only 90 percent of the deposits up to an upper limit of 35 000 pounds when faced with a run the incentive to withdraw one s deposits from a u k bank was therefore very strong for economists the run on northern rock at first seemed to offer a rare opportunity to study at close quarters all the elements involved in their theoretical models of bank runs the futility of public statements of reassurance the mutually reinforcing anxiety of depositors as well as the power of the media in galvanizing and channeling that anxiety through the power of television images however the storyline of the northern rock bank run does not fit the conventional narrative on september 13 2007 the bbc s evening television news broadcast first broke the news that northern rock had sought the bank of england s support the next morning the bank of england announced that it would provide emergency liquidity support it was only after that announcement that is after the

nonseparable preferences fiscal policy puzzles and inferior goods nonseparable preferences over consumption and leisure can generate an increase in private consumption in response to government spending as found in the data in a frictionless business cycle model however the conditions on preferences required for these result to obtain hold if and only if the consumption good is inferior similarly positive co movement of consumption and hours worked occurs if and only if either consumption or leisure is inferior

macroeconomic effects from government purchases and taxes for u s annual data that include world war ii the estimated multiplier for temporary defense spending is 0 4 0 5 contemporaneously and 0 6 0 7 over 2 years if the change in defense spending is permanent gauged by ramey s defense news variable the multipliers are higher by 0 1 0 2 since all estimated multipliers are significantly less than 1 greater spending crowds out other components of gdp particularly investment the lack of good instruments prevents estimation of reliable multipliers for nondefense purchases multipliers in the literature of two or more likely reflect reverse causation from gdp to nondefense purchases increases in average marginal income tax rates measured by a newly constructed time series have significantly negative effects on gdp when interpreted as a tax multiplier the magnitude is around 1 1 the combination of the estimated spending and tax multipliers implies that the balanced budget multiplier for defense spending is negative we have some evidence that tax changes affect gdp mainly through substitution effects rather than wealth effects

optimal financial crises empirical evidence suggests that banking panics are related to the business cycle and are not simply the result of sunspots panics occur when depositors perceive that the returns on bank assets are going to be unusually low we develop a simple model of this in this setting bank runs can be first best efficient they allow efficient risk sharing between early and late withdrawing depositors and they allow banks to hold efficient portfolios however if costly runs or markets for risky assets are introduced central bank intervention of the right kind can lead to a pareto improvement in welfare from the earliest times banks have been plagued by the problem of bank runs in which many or all of the bank s depositors attempt to withdraw their funds simultaneously because banks issue liquid liabilities in the form of deposit contracts but invest in illiquid assets in the form of loans they are vulnerable to runs that can lead to closure and liquidation a financial crisis or banking panic occurs when depositors at many or all of the banks in a region or a country attempt to withdraw their funds simultaneously prior to the twentieth century banking panics occurred frequently in europe and the united states panics were generally regarded as a bad thing and the development of central banks to eliminate panics and ensure financial stability has been an important feature of the history of financial systems it has been a long and involved process the first cerntral bank the bank of sweden was established more than 300 years ago the bank of england played an especially important role in the development of effective stabilization policies in the eighteenth and nineteenth centuries by the end of the nineteenth century banking panics had been eliminated in europe the last true panic in england was the overend gurney company crisis of 1866

do banks have a future abstract are banks special intermediaries do they play any unique role in the economy and if so will they retain their specialness in the ever faster changing world of finance the rapid evolution of finance over the last two decades and the breathtaking e age revolution have persuaded many that eventually banks will be indistinguishable from other financial intermediaries since all their functions can at least as efficiently be carried out by nonbanks this study re explores the issue of the specialness of banks in light of the large existing literature on the subject and presents an approach which identifies the banks specialness with their unique capacity to lend out claims on their own debt which the public accepts and uses as money the study discusses various structural and policy implications deriving from the approach and draws on it to point to the continuing relevance of banking in a world where nonbanks are taking business away from banks lending to production has become relatively less important and the use of e money may soon be dominating financial transactions

financial regulation and securitization evidence from subprime mortgage loans we examine the consequences of existing regulations on the quality of mortgage loans originations in the originate to distribute otd market the information asymmetries in the otd market can lead to moral hazard problems on the part of lenders we find using a plausibly exogenous source of variation in the ease of securitization that the quality of loan origination varies inversely with the amount of regulation more regulated lenders originate loans of worse quality we interpret this result as a possible evidence that the fragility of lightly regulated originators capital structure can mitigate moral hazard in addition we find that incentives which require mortgage brokers to have skin in the game and stronger risk management departments inside the bank partially alleviate the moral hazard problem in this setting finally having more lenders inside a mortgage pool is associated with higher quality loans suggesting that sharper relative performance evaluation made possible by more competition among contributing lenders can also mitigate the moral hazard problem to some extent overall our evidence suggests that market forces rather than regulation may have been more effective in mitigating moral hazard in the otd market the findings caution against policies that impose stricter lender regulations which fail to align lenders incentives with the investors of mortgage backed securities 2009 elsevier b v all rights reserved

using stock returns to identify government spending shocks this article explores a new approach to identifying government spending shocks which avoids many of the shortcomings of existing approaches the new approach is to identify government spending shocks with statistical innovations to the accumulated excess returns of large us military contractors this strategy is used to estimate the dynamic responses of output hours consumption and real wages to a government spending shock we find that positive government spending shocks are associated with increases in output hours and consumption real wages initially decline after a government spending shock and then rise after a year we estimate the government spending multiplier associated with increases in military spending to be about 1 5 over a horizon of 5 years

what factors drive systemic risk during international financial crises abstract we analyze the determinants of the contribution of international banks to both global and local systemic risk during prominent financial crises we find no empirical evidence supporting conjectures that bank size leverage non interest income or the quality of the bank s credit portfolio are persistent determinants of systemic risk across financial crises in contrast our results show that global systemic risk in particular is predominantly driven by characteristics of the regulatory regime we also confirm for the subprime crisis that the banks contribution to moderately bad tail events in the past predicts the financial sector s crash risk

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

uninsured deposits as a monitoring device their impact on bond yields of banks abstract we empirically analyze the impact of uninsured deposits on a bank s cost of public debt uninsured depositors can exert market discipline over a bank and potentially reduce its agency cost of debt through informed monitoring we use a sample of public bond issues by u s bank holding companies from 1994 to 2013 and find statistically strong evidence that banks with more uninsured deposits relative to their assets issue bonds with a lower interest rate findings suggest a one standard deviation increase in uninsured deposits is associated with a 46 64 basis point decrease in bond yield in addition we find that bonds issued by banks with higher default risk or lower reputation benefit more from uninsured savers our paper contributes to the literature that explores market discipline and provides evidence that banks can benefit from it through a lower borrowing cost

estimating the impact of welfare programs on agricultural output evidence from india rural welfare programs are implemented for a variety of reasons however of key importance is to understand how government spending under such programs affects local agricultural output which is a key measure of economic activity in developing economies this article estimates the local multiplicative effects of transfer spending by the government using a novel data set of state level expenditure under rural welfare programs in india using government records as narrative evidence i use the motivation to implement new programs at the national level to construct changes in transfer spending that are largely exogenous to fluctuations in agricultural output at the state level i estimate local multipliers using this narrative shock series and find government transfers to be quite consequential for local economic activity

delegated monitors large and small germany s banking system 1800 1914 banks play a greater role in the german financial system than in those of the united states or britain germany s large universal banks are admired by those who advocate bank deregulation in the united states others admire the universal banks for their supposed role in corporate governance and industrial finance many discussions distort the german banking system by overstressing one of several types of banks and ignore the competition and cooperation between the famous universal banks and other banking groups tracing the historical development of the german banking system from the early nineteenth century places the large universal banks in context

the role of demandable debt in structuring optimal banking arrangements demandable debt finance by banks warrants explanation because it entails costs of bank suspension liquidation and idle reserve holdings an explanation is developed in which demandable debt provides incentive compatible intermediation where the banker has comparative advantage in allocating investment funds but may act against the interests of uninformed depositors demandable debt attracts funds by giving depositors an option to force liquidation its usefulness in transacting follows from information sharing between monitors and nonmonitors copyright 1991 by american economic association

insider ownership and financial flexibility this study examines the cash flow sensitivity of external financing financial flexibility ff of firms from the perspective of the agency by focusing on whether and how insider ownership has a modifying effect on the ff of firms given the documented relationship between corporate governance and cost of external financing insider ownership an important proxy of corporate governance should affect ff via the agency cost channel a review of the us nonfinancial firms from 1992 to 2009 indicates that insider ownership aids in determining the ff of firms more specifically results indicate the existence of optimal insider ownership and any deviation from it causes ff to decrease in addition ff is higher when ceo ownership is lower 0 08 and this phenomenon is more pronounced for financially unconstrained firms furthermore ff is higher when non ceo insider ownership is in the middle range 0 12 0 43 for financially constrained firms whereas non ceo insider ownership has minimal impact on ff fo

on the economics of state lotteries s tate lotteries can be evaluated from either of two perspectives familiar to economists as a consumer commodity or as a source of public revenue l as a commodity the lottery is notable for its broad market penetration and rapid growth sixty percent of the adults in lottery states play at least once in a year the annual growth in real per capita sales in lottery states has averaged 12 percent rising in 1989 dollars from 22 in 1975 to 108 in 1989 as a source of public revenue lotteries account for a rather modest fraction of revenue in states that run them 3 3 percent in 1986 but they are nonetheless one of the most visible state government activities lottery sales exceed those of all other products sold directly by state governments to the public and are larger than all but three major activities of state government education public welfare and highways clotfelter and cook 1989 table 2 5 moreover lotteries are a qualitatively new activity for state governments in that they are a business operated in effect for profit state liquor stores are perhaps the closest analog but they were created to encourage temperate drinking practices and do not engage in the sales promotion and marketing activities that are characteristic of the lotteries lotteries enjoy an honored place in american history as a device for raising funds for public purposes funding for such institutions as the jamestown settlement harvard college and the continental army as well as hundreds of bridges fire houses and schools came from lotteries but after the

the shadow costs of repos and bank liability structure making use of a structural model that allows for optimal liquidity management we study the role that repos play in a bank s financing structure in our model the bank s assets consist of illiquid loans and liquid reserves and are financed by a combination of repos long term debt deposits and equity repos are a cheap source of funding but they are subject to an exogenous rollover risk we show that the use of repos inflicts two types of indirect shadow costs on the bank s shareholders first it induces the bank to maintain higher liquid reserves in order to alleviate the additional default risk second it adds to the cost of long term debt financing these shadow costs limit the bank s appetite for cheap but unstable repo funding this effect is however weakened under poor returns on risky assets access to deposit funding and the depositor preference rule we also analyze the impact of a liquidity coverage ratio payout restrictions and a leverage ratio on the bank s financing choices and show that all these tools are able to curb the bank s reliance on repos

the economic effects of public financing evidence from municipal bond ratings recalibration we show that the supply of local public financing can have important effects on local economies we identify these effects by exploiting exogenous variation on municipal bond ratings due to moody s recalibration of its scale in 2010 we find that local governments increase expenditures and employment due to an expansion of their debt capacity following an upgrade these increases in local government spending lead to multiplier effects on non tradable employment and income our findings suggest that debt financed increases in government spending can improve economic conditions during recessions

natural disasters growth and institutions a tale of two earthquakes abstract we examine the impact of natural disasters on gdp per capita by applying the synthetic control approach and using a within country perspective our analysis encompasses two large scale earthquakes that occurred in two different italian regions in 1976 and 1980 we show that the short term effects are negligible in both regions though they become negative if we simulate the gdp that would have been observed in absence of financial aid in the long term our findings indicate a positive effect in one case and a negative effect in the other largely reflecting divergent patterns of the tfp consistent with these findings we offer further evidence suggesting that a quake and related financial aid might either increase technical efficiency via a disruptive creation mechanism or reduce it by stimulating corruption distorting the markets and deteriorating social capital finally we show that the bad outcome is more likely to occur in regions with lower pre quake institutional quality as a result our evidence suggests that unanticipated local shocks are likely to change long run growth rates exacerbating territorial disparities

job creation in tight and slack labor markets abstract does investment create more jobs in slack than in tight labor markets we study this question using data from a photovoltaic investment scheme comparing counties with high and low unemployment over time and across space we find that 100 000 of investment created 1 2 job years in slack markets and fewer than 0 5 job years in tight markets this corresponds to labor earnings multipliers of 1 1 and below 0 5 respectively these differences are not driven by changes in investment composition capital labor substitution or regional migration consistent with crowding out as a mechanism investment leads to higher wage growth in tight than in slack markets

intertemporal diversification in financial intermediation abstract this paper examines the incentive problem between a bank and depositors or deposit insurer limited liability makes risk shifting lucrative we show how intertemporal diversification of lending decisions i e bank s loan portfolio consists of overlapping long term loans and is thus gradually renewed may solve the incentive problem of risk shifting a new or expanding bank sets a high equity level and acquires depositors confidence subsequently it can allow its equity to depreciate to a permanently lower level depositors can control the bank by monitoring equity and realized credit losses ex post they do not have to monitor bank s lending choices ex ante maturity mismatch illiquidity of long term loans and liquidity of deposits is optimal the analysis can be extended more generally to the borrower lender relationship

the savers spenders theory of fiscal policy the macroeconomic analysis of fiscal policy is usually based on one of two canonical models the barro ramsey model of infinitely lived families or the diamond samuelson model of overlapping generations this paper argues that neither model is satisfactory and suggests an alternative in the proposed model some consumers plan ahead for themselves and their descendants while others live paycheck to paycheck this model is easier to reconcile with the essential facts about consumer behavior and wealth accumulation and it yields some new and surprising conclusions about fiscal policy

the hazards of debt rollover freezes incentives and bailouts we investigate the trade o between incentive provision an di ne ient rollover freezes for a firm financed with short term debt first debt maturity that is too short term is ine cient even with incentive provision th eo ptimal maturity is an interior solution that avoids excessive rollover risk whil ep roviding su ient incentives for the manager to avoid risk shifting when the firm is in good health second allowing the manager to risk shift during a freeze actually increase sc reditor conf idence debt policy should not prevent the manager from holding what may appear to be otherwise low mean strategies that have option value during a freeze third a limited but not perfectly reliable form of emergency financing during a freeze a bailout may improve the terms of the trade o and increase total ex ante va lue by instilling confidence in the creditor markets our conclusions highlight the endogenous interaction between risk from the asset and liability sides of the balance sheet

free banking and information asymmetry a traditional argument against free banking is that it will collapse because of information externalities it is impossible for depositors to tell whether a high deposit rate offered by a bank is due to its high efficiency or risky lending strategy this paper shows that in a separating equilibrium a higher quality bank offers a lower deposit rate and holds a smaller proportion of risky loans than a lower quality bank to signal its underlying quality hence free banking is not inherently unstable the empirical results for the hong kong banking system during 1964 65 are consistent with the hypothesis of a separating equilibrium

financial flexibility and the cost of external finance for u s bank holding companies this paper models a bank with access to two segmented capital markets the market for insured deposits and the market for uninsured claims we illustrate how higher costs of accessing either market leads to lower firm values and a greater incentive to carry liquid assets we test our model on a sample of large banking firms and label banks with relatively lower costs of accessing the two markets as more financially flexible our two key findings are 1 banks with greater financial flexibility have greater value and 2 banks with greater financial flexibility devote a smaller percentage of assets to cash and marketable securities consistent with the notion that financial flexibility reduces the sensitivity of firm profits to internal wealth shocks thus reducing the firm s need to carry financial slack

mafia and public spending evidence on the fiscal multiplier from a quasi experiment a law issued to combat political corruption and mafia infiltration of city councils in italy has resulted in episodes of large unanticipated temporary contractions in local public spending using these episodes as instruments we estimate the output multiplier of spending cuts at provincial level controlling for national monetary and fiscal policy and holding the tax burden of local residents constant to be 1 5 assuming that lagged spending is exogenous to current output brings the estimate of the overall multiplier up to 1 9 these results suggest that local spending adjustment may be quite consequential for local activity jel d72 e62 h71 k42 the widespread resort to fiscal stimulus at the onset of the global crisis and more recently the emerging need to consolidate deficits in response to rising fiscal imbalances have revitalized the empirical debate on the transmission of fiscal policy the multiplier while the literature has mostly focused on aggregate effects at a national level several recent contributions reviewed below have called attention to the local dimension this shift in focus is motivated by specific policy questions combined with the opportunity to exploit institutional information to address econometric issues in identification 1

does a parent subsidiary structure enhance financing flexibility i examine whether firms exploit a publicly traded parent subsidiary structure to issue equity of the overvalued firm regardless of which firm needs funds and whether this conveys opposite information about firm values using 90 subsidiary and 37 parent seasoned equity offering seo announcements during 1981 2002 i document negative returns to issuers but insignificant returns to nonissuers in both samples and insignificant changes in combined firm value and parent s nonsubsidiary equity value in subsidiary seos firms issue equity to meet their own financing needs my evidence contrasts with previous studies and suggests that parent subsidiary structures

fiscal stimulus with spending reversals abstract the short run effects of fiscal policy depend not only on current tax and spending choices but also on expectations about future policy adjustment while general equilibrium models typically restrict medium term adjustment to taxation we highlight the importance of government spending dynamics first we provide time series evidence for the united states suggesting that an exogenous increase in government spending prompts a rise in public debt followed over time by a reduction in spending below trend second we show how expected spending reversals alter the short run impact of fiscal policy in a new keynesian model bringing it closer in line with the evidence

investigating efficiency in betting markets evidence from the greek 6 49 lotto abstract in this paper we investigate the existence of profit opportunities in the greek market for the 6 49 lotto under the assumption of random number selection we find evidence suggesting that the market is efficient because number selection is found to deviate from randomness we further investigate the existence of profit opportunities due to number unpopularity the evidence suggests that although unpopular numbers exist they are not sufficiently unpopular so as to generate positive expected payoffs

building an incentive compatible safety net abstract bank safety nets originally proposed as a means of stabilizing financial systems have become an important destabilizing influence government protection of bank debts encourages banks to undertake excessive risk particularly in response to adverse shocks to asset values reforms that would remove the destabilizing moral hazard consequences of government protection are considered both from the perspective of economic desirability and political feasibility requiring banks to maintain a minimal proportion of subordinated debt finance and restricting the means by which government recapitalization of insolvent banks occurs are the central features of promising reforms to the safety net

the attractions and perils of flexible mortgage lending a mortgage program that offered borrowers greater flexibility in the timing of repayments increased a bank s volume by over 35 loans in the program exhibited superior performance despite this a regression discontinuity analysis shows that the causal impact of offering flexibility was to attract borrowers to the bank who experienced quadruple the average delinquency rate these contrasting findings are driven by the fact that the bank engaged in ex post sorting of stronger borrowers into the flexible program this sorting masked the ex ante adverse selection effects that offering flexibility had on the entire borrowing pool the author 2013 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

accomplice witnesses and organized crime theory and evidence from italy we develop an agency model of organized crime accounting for the main trade offs involved in the introduction of an accomplice witness program we characterize the optimal policy and identify its main determinants in a framework where public officials can be dishonest our predictions are tested by using data for italy before and after the introduction of the 1991 accomplice witness program as predicted by the model and the earlier antitrust literature the program appears to have strengthened deterrence and enhanced prosecution moreover consistent with a novel prediction of our theory the evidence suggests that the program efficacy is affected by the judicial system efficiency

the role of interbank markets in monetary policy a model with rationing the empirical research on monetary transmission has reported a number of puzzles challenging extant theoretical models of the transmission mechanism in this paper we argue that asymmetric information in the interbank market may be important to have a better understanding of the mechanisms at work in the transmission process we show that asymmetric information may induce an equilibrium with rationing this in turn has two major implications first it reconciles the apparent irresponsiveness of business investment to the user cost of capital with the large impact of monetary policy magnitude puzzle and second it shows that this impact will not be limited to short term credit supply but will also affect long term lending even if the corresponding interest rate is unaffected composition puzzle

a fiscal stimulus and jobless recovery we analyze the effects of a government spending expansion in a dynamic stochastic general equilibrium model with mortensen pissarides labor market frictions deep habits in private and public consumption investment adjustment costs a constant elasticity of substitution ces production function and adjustments in employment at both intensive and extensive margins the combination of deep habits and ces technology is crucial the presence of deep habits magnifies the responses of macroeconomic variables to a fiscal stimulus while an elasticity of substitution between capital and labor in the range of available estimates allows the model to produce a scenario compatible with the observed jobless recovery

the life cycle of a microfinance institution the irish loan funds abstract ireland s loan funds were a long lived self sustaining large scale microfinance organization that made millions of loans without collateral to the poor during the first 100 years of their life cycle a period of growth ending in the 1840s they adapted constantly and obtained improvements to their legal structure because they were complementary to the banking system and seen as effective in relieving poverty in their 2nd century they became ossified in part because of competition with commercial banks the loan funds provide an example of sustainable microfinance under harsh economic conditions and illustrate how organizations change incrementally and when successful alter their institutional framework

bank runs deposit insurance and capital requirements diamond and dybvig provide a model of intermediation in which deposit insurance can avoid socially undesirable bank runs we extend the diamond dybvig model to evaluate the costs and benefits of deposit insurance in the presence of moral hazard by banks and monitoring by depositors we find that complete deposit insurance alone will not support the first best outcome depositors will not have adequate incentives for monitoring and banks will invest in excessively risky projects however an additional capital requirement for banks can restore the first best allocation

strategic loan defaults and coordination an experimental analysis this paper experimentally studies the impact of bank and borrower fundamentals on loan repayment we find that solvent borrowers are more likely to default strategically when the bank s expected strength is low although loan repayment is a pareto dominant nash equilibrium borrowers are also less likely to repay when other borrowers expected repayment capacity is low regardless of banks fundamentals we show that changes in expectations about bank and borrower fundamentals change the risk dominance properties of the borrowers coordination problem and that these changes subsequently explain strategic defaults for the individual borrower loss aversion and negative past experiences reduce repayment suggesting that bank failure can be contagious in times of distress

interbank contagion at work evidence from a natural experiment this article tests financial contagion due to interbank linkages for identification we exploit an idiosyncratic sudden shock caused by a large bank failure in conjunction with detailed data on interbank exposures first we find robust evidence that higher interbank exposure to the failed bank leads to large deposit withdrawals second the magnitude of contagion is higher for banks with weaker fundamentals third interbank linkages among surviving banks further propagate the shock finally we find results suggesting that there are real economic effects these results suggest that interbank linkages act as an important channel of contagion and hold important policy implications jel g01 g21 g28 e58 since the onset of the financial turmoil increased uncertainty reflected particularly in counterparty risk has led banks to hoard liquidity this has resulted in a significant decline of trading in the interbank money markets jean claude trichet president of the european central bank december 2008

debt financing in asset markets short term debt such as overnight repurchase agreements and commercial paper was heavily used by financial institutions to fund their investment positions during the asset market boom preceding the financial crisis of 2007 2008 and later played a major role in leading to the distress of these institutions during the crisis what explains the popularity of short term debt in financing asset market investments geanakoplos 2010 presents a dynamic model of the joint equilibrium of asset markets and credit markets in which optimistic buyers of a risky asset use the asset as collateral to raise debt financing from less optimistic creditors the asset s collateral value depends on the marginal creditor s asset valuation and determines the buyers purchasing capacity to bid up the asset price geanakoplos posits that short term debt allows the asset buyers to maximize riskless leverage 1 short term debt however exposes the asset buyers to rollover risk e g acharya gale and yorulmaker 2011 and he and xiong 2012 forthcoming which is reflected in the fact that the asset buyers in geanakoplos model may not be able to obtain refinancing after a negative fundamental shock as a result they are forced to transfer their asset holdings to the

does local financial development matter we study the effects of differences in local financial development within an integrated financial market we construct a new indicator of financial development by estimating a regional effect on the probability that ceteris paribus a household is shut off from the credit market by using this indicator we find that financial development enhances the probability an individual starts his own business favors entry of new firms increases competition and promotes growth as predicted by theory these effects are weaker for larger firms which can more easily raise funds outside of the local area these effects are present even when we instrument our indicator with the structure of the local banking markets in 1936 which because of regulatory reasons affected the supply of credit in the following 50 years overall the results suggest local financial development is an important determinant of the economic success of an area even in an environment where there are no frictions to capital movements

fiscal policy pricing frictions and monetary accommodation this paper empirically investigates whether the theoretical conditions for government expenditure expansions to be effective hold for the data we ask whether the necessary conditions for fiscal effectiveness are relevant on average and in special circumstances that capture features of the recent crisis fiscal policy can be an effective countercyclical tool if monetary policy accommodates the fiscal expansion if expectations about future output growth and inflation are constant and if structural relationships are invariant to the policy change recent expansions are unlikely to produce large output multipliers or have important debt or inflation effects credible deficit and debt reduction schemes can produce sizeable output multipliers fabio canova and evi pappa

deposit insurance and wealth effects the value of being too big to fail this paper investigates the effect on bank equity values of the comptroller of the currency s announcement that some banks were too big to fail and that for those banks total deposit insurance would be provided using an event study methodology we find positive wealth effects accruing to tbtf banks with corresponding negative effects accruing to non included banks we demonstrate that the magnitude of these effects differed with bank solvency and size we also show that the policy to which the market reacted was that suggested by the wall street journal and not that actually intended by the comptroller the role of deposit insurance has become a topic of increasing debate advocates argue that by removing the incentive to run deposit insurance protects individual financial institutions from instability in the intermediation process thereby providing stability to the financial system as a whole 1 the recent rise in bank failures and the concomitant crises in the s l industry however demonstrate that this stability is not guaranteed moreover critics note that deposit insurance may introduce incentive problems and wealth effects into the financial system both of which can impede the effective functioning of any deposit insurance system these problems have prompted concern about the structure of the current deposit insurance system and have led to numerous proposals regarding its restructuring 2 this paper investigates one aspect of this debate by analyzing the effect on bank equity values of the policy decision to insure completely some banks but not others specifically in september 1984 the comptroller of the currency testified before congress that some banks were simply too big to fail tbtf and that for those banks total deposit insurance would be provided while not explicitly naming the banks the comptroller admitted that this policy would apply to the eleven largest banks using an event study methodology we analyze