network models and financial stability abstract systemic risk is a key concern for central banks charged with safeguarding overall financial stability in this paper we investigate how systemic risk is affected by the structure of the financial system we construct banking systems that are composed of a number of banks that are connected by interbank linkages we then vary the key parameters that define the structure of the financial system including its level of capitalisation the degree to which banks are connected the size of interbank exposures and the degree of concentration of the system and analyse the influence of these parameters on the likelihood of knock on defaults first we find that the better capitalised banks are the more resilient is the banking system against contagious defaults and this effect is non linear second the effect of the degree of connectivity is non monotonic i e initially a small increase in connectivity increases the contagion effect but after a certain threshold value connectivity improves the ability of a banking system to absorb shocks third the size of interbank liabilities tends to increase the risk of knock on default even if banks hold capital against such exposures fourth more concentrated banking systems are shown to be prone to larger systemic risk all else equal in an extension to the main analysis we study how liquidity effects interact with banking structure to produce a greater chance of systemic breakdown we finally consider how the risk of contagion might depend on the degree of asymmetry tiering inherent in the structure of the banking system a number of our results have important implications for public policy which this paper also draws out

a theory of voting equilibria a voting equilibrium arises when the voters in an electorate acting in accordance with both their preferences for the candidates and their perceptions of the relative chances of various pairs of candidates being in contention for victory generate an election result that justifies their perceptions voting equilibria always exist and the set of equilibria can vary substantially with the choice of voting system we compare equilibria under the plurality rule approval voting and the borda system we consider a candidate positioning game and find that the plurality rule imposes little restriction on the position of the winning candidate in three candidate races while approval voting leads to a winner positioned at the median of the voter distribution we contrast campaign activities intended to influence voter preferences with activities meant to influence only perceptions of candidate viability

hedging and coordinated risk management evidence from thrift conversions we provide an explanation for hedging as a means of allocating rather than reducing risk we argue that when increases in total risk are costly firms optimally allocate risk by reducing increasing exposure to risks that provide zero positive economic rents our evidence shows that mutual thrifts that convert to stock institutions increase total risk following conversion consistent with their increased abilities and incentives for risk taking they achieve this increase by hedging interest rate risk and increasing credit risk we provide some evidence that risk management activities are related to growth capacity and management compensation structure attained at conversion

why does overnight liquidity cost more than intraday liquidity abstract in this paper we argue that the observed difference in the cost of intraday and overnight liquidity is part of an optimal payments system design in our environment overnight liquidity affects output while intraday liquidity affects only the distribution of resources between money holders and non money holders the low cost of intraday liquidity is explained by the friedman rule the optimal cost differential achieves the twin objective of reducing the incentive to overuse money at night and encouraging payment risk sharing during the day

trade credit bank lending and monetary policy transmission this paper investigates the role of trade credit in the transmission of monetary policy most models of the transmission mechanism allow the firm to access only financial markets or bank lending according to some net worth criterion in our model we introduce trade credit as an additional source of funding we predict that when monetary policy tightens there will be a reduction in market and bank lending and an increase in trade credit this is confirmed with an empirical investigation of 16 000 manufacturing firms

sulfur dioxide control by electric utilities what are the gains from trade title iv of the 1990 clean air act amendments caaa established a market for transferable sulfur dioxide so2 emission allowances among electric utilities this market offers firms facing high marginal abatement costs the opportunity to purchase the right to emit so2 from firms with lower costs and this is expected to yield cost savings compared to a command and control approach to environmental regulation this paper uses econometrically estimated marginal abatement cost functions for power plants affected by title iv of the caaa to evaluate the performance of the so2 allowance market specifically we investigate whether the much heralded fall in the cost of abating so2 compared to original estimates can be attributed to allowance trading we demonstrate that for plants that use low sulfur coal to reduce so2 emissions technical change and the fall in prices of low sulfur coal have lowered marginal abatement cost curves by over 50 percent since 1985 the flexibility to take advantage of these chan

liquidity risk and policy options abstract on the basis of a liquidity management model liquidity risks defined as the probability of payment failures in a real time gross settlement rtgs payment system may either stem from liquidity management inefficiencies or insufficient cash balances i will show that penalties charged on the amount of payment failures minimise liquidity risks without interfering with the bank s technology preferences i will instead show that liquidity requirements although as effective as penalties to contain the risk of liquidity shortage may distort the bank s technology preferences and cannot stem liquidity management inefficiencies i will also show that liquidity risks within rtgs payment systems are potentially smaller because they depend more on the liquidity management efficiency than on the randomness of cash inflows and outflows

cooperation in international environmental negotiations due to a preference for equity this paper demonstrates that cooperation in international environmental negotiations can be explained by preferences for equity within a n country prisoner s dilemma in which agents can either cooperate or defect in addition to the standard non cooperative equilibrium cooperation of a large fraction or even of all countries can establish a nash equilibrium in an emission game however where countries can choose their abatement level continuously equity preferences cannot improve upon the standard inefficient nash equilibrium finally in a two stage game on coalition formation the presence of equity interested countries increases the coalition size and leads to efficiency gains here even a stable agreement with full cooperation can be reached

collective choice in the commons experimental results on proposed allocation rules and votes we analyse and empirically examine a multi level common pool resource cpr game consisting of a collective choice level game and an operational level game in the collective choice game participants anonymously propose allocation rules to be used in the operational game and vote anonymously on the proposed rules majority and unanimity rules are investigated our major finding is that both types of voting rules substantially increase efficiency relative to a baseline with no opportunity for collective choice but the distributional consequences of the rules differ to understand the process by which efficiency is improved better we examine four predictive theories related to proposals votes and outcomes

spatial equilibrium with entry this paper examines spatial equilibrium in political competition when established parties choose their platforms competitively while rationally anticipating entry of a vote maximizing third party the resulting equilibrium is substantially different from the hotelling median equilibrium established parties are spatially separated and third parties will generally lose the election this provides one theoretical explanation for the stability of two party systems namely that non cooperative behavior between established parties can effectively prevent third parties from winning

financial intermediation as a beliefs bridge between optimists and pessimists this paper proposes a new framework for understandingnancial intermediation in contrast to previous research we consider a setting in which intermediaries possess no inherent information processing or monitoring advantages instead in an economy with overly optimistic entrepreneurs who require funding from overly skeptical pessimistic investors we show that intermediaries can arise endogenously in such a setting only a rational intermediary will be su ciently optimistic tond it worthwhile to invest in a technology for screening entrepreneurs projects and yet be pessimistic enough to use this technology our framework produces implications consistent with heretofore unexplained stylized facts and a number of others which are as of yet untested

knowledge and venture funding complementarities and financial contracts in this article i analyse venture capital finance using the tools provided by the literature on the economics of innovation in particular the notion of localised technological knowledge and the resource based theory of the firm to build a model of financial contracting this entails that instead of looking exclusively at financial indicators or monetary incentives i will deepen the knowledge connection between the venture capitalist and the financed firm as the benchmark to understand the potential of this source of finance consistent with evidence regarding venture funding the model portrays a separation between a financial and a non financial part of the venture investment which is reflected in a dichotomy among the investors in fact the model shows that the success of a venture program is strictly linked to the knowledge flow inspired and reinforced by the complementarities between the knowledge bases of entrepreneur and venture capitalist instead to a particular financing scheme as sustained by most of the literature the model can also suggest a new methodology to analyse other intermediaries always exploiting the central role of knowledge in designing financial contracts copyright 2007 oxford university press

the information content of corporate merger and acquisition offers this paper explores the implications for the information content of acquisition offers in an economy with asymmetric information it is shown that mergers can be socially beneficial due to risk reduction and information asymmetry even when there are no productive syn ergies and when positive premia are paid the properties of equilibria with and without mergers are derived and contrasted in order to obtain a quantitative bound on potential merger premia theory is related to empirical evidence where our results show that ag gregate valuation gains can accrue on a purely informational basis moreover the model developed here has important implications for the reported differences in tender offer and merger studies

precautionary reserves and the interbank market large excess reserve balances are held by banks in the u s despite the ability of large banks to closely target end of day balances close to zero we show that the friction faced by small banks to participate in the fed funds market leads to all banks holding precautionary reserves the precautionary motive for reserves can explain that small banks hold relatively large amounts of excess reserves overnight while at the same time lending large amounts to large banks small banks are large net lenders despite their reluctance to lend as large of a percentage of available balances during the day as large banks we also explain an increase in the volatility of the fed funds rate late in the day

financial intermediary capital we propose a dynamic theory of financial intermediaries that are better able to collateralize claims than households that is have a collateralization advantage intermediaries require capital as they have to finance the additional amount that they can lend out of their own net worth the net worth of financial intermediaries and the corporate sector are both state variables affecting the spread between intermediated and direct finance and the dynamics of real economic activity such as investment and financing the accumulation of net worth of intermediaries is slow relative to that of the corporate sector the model is consistent with key stylized facts about macroeconomic downturns associated with a credit crunch namely their severity their protractedness and the fact that the severity of the credit crunch itself affects the severity and persistence of downturns the model captures the tentative and halting nature of recoveries from crises

analyzing alternative intraday credit policies in real time gross settlement systems this paper examines a central bank s choice of intraday credit policy for real time gross settlement systems formal analysis of central bank objectives and commercial bank payment activity provides insight into both the choice and effects of several possible intraday credit policies observed intraday credit policies are interpreted within the context of the model among g 10 central banks different combinations of prices collateral and quantity limits have been chosen to manage the supply of intraday credit conditions that rationalize these choices are shown to rely on central bank preferences regarding credit risk and systemic risk liquidity management technologies and the cost of collateral

endogenous minimum participation in international environmental agreements an experimental analysis almost all international environmental treaties require a minimum number of countries to ratify the treaty before it enters into force despite the wide spread use of this mechanism little is known about its effectiveness at facilitating cooperation we analyze an agreement formation game that includes an endogenously determined minimum participation constraint and then test the predictions using economic experiments we demonstrate theoretically that players will vote to implement an efficient coalition size as the membership requirement and this coalition will form experimental tests of the theory demonstrate that the minimum participation mechanism is highly effective at facilitating cooperation when efficiency requires the participation of all players however when efficiency requires only a subset of players to participate profitable coalitions are often deliberately blocked in light of our results it is possible that equity concerns can impede the formation of international agreements when membership requirements allow free riders

the intraday liquidity management game abstract we use a game theoretical framework to analyze the intraday behavior of banks with respect to settlement of interbank claims in a real time gross settlement setting the game played by banks depends upon the intraday credit policy of the central bank and it encompasses two well known game theoretical paradigms the prisoner s dilemma and the stag hunt the former arises in a collateralized credit regime where banks have an incentive to postpone payments when daylight liquidity is costly an outcome that is socially inefficient the latter arises in a priced credit regime where the postponement of payments can be socially efficient banks are risk neutral but we show that most of the results are unaffected by risk aversion

variations in market liquidity and the intraday interest rate most central banks offer banks participating in large value real time gross settlement rtgs systems a free intraday overdraft facility to discourage banks from actively managing their daylight liquidity in this paper we ask whether this facility has kept the intraday interest rate at zero using a unique transaction level data set on collateralized interbank loans for 2006 12 we find that during periods of financial distress rates for morning transactions are higher than those in the afternoon moreover this intraday rate correlates with market liquidity suggesting that rates contain a liquidity premium this intraday pattern is reduced but not eliminated by the eurosystem s accommodative liquidity provision

the intraday price of money evidence from the e mid interbank market we provide empirical evidence based on tick by tick data for the e mid euro area interbank market covering 2003 and 2004 that the overnight interest rate shows a clear downward pattern throughout the operating day thus a positive hourly interest rate half basis point implicitly emerges from the intraday term structure of the overnight rate such a pattern was not detected in the mid 1990s we explain this evolution as an outcome of the recent trend toward real time settlement the estimated intraday interest rate is lower than in the united states this is due to the different cost of central bank daylight credit

disproportional control rights and the governance role of debt we examine the governance role of debt in the context of u s based dual class ownership structures we hypothesize that the use of debt alleviates the conflict between shareholder classes by balancing the power of controlling insiders we document that dual class firms have higher leverage and a greater propensity to issue private debt they also more frequently use cash sweeps and performance based covenants dual class firms with greater agency conflicts and a greater need to access the capital market appear to rely more extensively on debt these findings are consistent with controlling insiders bonding against the agency costs associated with dual class ownership the governance role of debt is further corroborated by the valuation effect of debt for dual class companies private debt issuances trigger greater positive market reactions to the inferior dual class stock in relation to both the superior dual class stock and a matched sample of single class firms further leverage attenuates the previou

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

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

securitization and bank performance theory suggests that securitization provides financial institutions with an opportunity to lower the cost of funding improve credit risk management and increase profitability in practice however it might lead to adverse consequences through a number of indirect channels therefore the net impact of securitization on bank performance is ambiguous this study aims to evaluate whether banks improve their performance through the use of the securitization market by applying a propensity score matching approach in other words we build a counterfactual group of banks to assess what would have happened to the securitizing banks had they not securitized using us commercial banking data from 2001 to 2008 we first test these hypotheses using univariate analysis and find that securitizing banks are on average more profitable institutions with higher credit risk exposure and higher cost of funding however the propensity score matching analysis does not provide evidence of significant causal effects of securitization on the performance of banks therefore securitization does not seem to outperform alternative funding risk management and profitability improvement techniques used by banks that have ex ante similar characteristics to those securitizing our evidence raises important questions about the motives for banks increasing securitization activities and consequent implications for the banking system

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

farming the tax code the impact of high marginal tax rates on agricultural tax shelters surprisingly little scholarly work has examined the practice of farming the tax code in which accounting losses on agricultural investments are used to shelter other income from taxation economic theory suggests that the amount of investment in agricultural tax shelters is positively related to the marginal tax rate this hypothesis is empirically investigated using a sample of federal individual income tax returns filed for 1983 both the probability of reporting a farm tax loss and the amount of farm losses are increased by a rise in the marginal tax rate especially among upper income taxpayers

do capital market imperfections exacerbate output fluctuations abstract we develop a dynamic general equilibrium macroeconomic model where a proportion of firms are credit constrained due to asymmetric information in general a macroeconomic shock has additional effects created by a reallocation of funds between credit constrained and unconstrained firms as they have different marginal productivities we show however that the output response to shocks is not necessarily amplified and can be dampened by the presence of asymmetric information this depends on the impact of the shock on the composition of external and internal funds for credit constrained firms

emerging stock markets portfolio capital flows and long term economie growth micro and macroeconomic perspectives abstract the paper examines two major components of financial liberalization stock market development and portfolio capital flows in the context of less developed countries the paper considers microeconomic and macroeconomic perspectives on their implications for long term development and economic growth it concentrates on 1 a the role of stock markets in financing corporate growth 2 b the implications of stock market volatility for resource allocation and productive efficiency and 3 c the interactions between the foreign exchange and stock markets in the context of economic shocks its policy recommendations are that ldcs should promote bank based systems influence the scale and composition of capital inflows and prevent a market for corporate control from emerging

optimal managerial contracts and equilibrium security prices recent developments in economic theory have focused attention on efficient methods for providing incentives within a corporation especially to top management jensen meckling 12 have examined some implications of incentive or agency problems for corporate finance in this paper we combine a simple model of security market equilibrium with that of an optimal managerial incentive contract using results of harris raviv 8 and holmstrom 9 we provide a rationale for including security prices in the managerial incentive contracts of publicly held firms in this model we also show that non systematic diversifiable risks will be considered in the capital budgeting decisions of a managerial firm operated in the interests of its stockholders this is in contrast to the implication of the arbitrage pricing theory a similar result follows from the capital asset pricing model which abstracts from incentive problems and suggests that only systematic risks ought to be considered the optimal contract model of the corporation takes the following view of the firm since decision makers within a firm are not sole owners of the business but employed agents the decisions which they make depend on the incentives which the organization provides these incentives are embodied explicitly in employment contracts and implicitly through the threat of dismissal or effect on reputation the contract whether explicit or not describes the decision maker s anticipation of the consequences to him conditional on various observable outcomes these outcomes are used to provide information useful in determining whether he did his job properly in the simplest optimal contract scenario there is a single principal and a single agent whose decision concerns the level of effort he expends the level of effort affects the level of output of the firm but not unambiguously because the output is also governed by other stochastic elements as a result some information about the agent s level of effort can be inferred

financial development and economic growth the role of stock markets utilizing time series methods and data from five developed economies we examine the relationship between stock market development and economic growth controlling for the effects of the banking system and stock market volatility our results support the view that although both banks and stock markets may be able to promote economic growth the erects of the former are more powerful they also suggest that the contribution of stock markets on economic growth may have been exaggerated by studies that utilize cross country growth regressions

social connections and group banking lending to the poor is expensive due to high screening monitoring and enforcement costs group lending advocates believe lenders overcome this by harnessing social connections using data from finca peru i exploit a quasi random group formation process to find evidence of peers successfully monitoring and enforcing joint liability loans individuals with stronger social connections to their fellow group members i e either living closer or being of a similar culture have higher repayment and higher savings furthermore i observe direct evidence that relationships deteriorate after default and that through successful monitoring individuals know who to punish and who not to punish after default

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

minimal settlement assets in economies with interconnected financial obligations a model is developed where firms belonging to a group are obliged to make payments to one another by using a liquid asset the paper studies the exogenous endowments of this asset that are necessary to assure that all obligations are met conditions are presented under which the degree to which firms are interconnected so that each creditor has more debtors and each debtor has more creditors increases the number of firms that must be endowed with the liquid asset interconnectedness then makes payment defaults more likely by acquiring too many payment obligations firms may also become too interconnected

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

flexible integration mandatory and minimum participation rules should a subset of the eu members be allowed to form inner clubs and enhance cooperation or should integration proceed at the same speed for all while flexible cooperation allows members to participate if and only if they benefit it also generates a free rider problem if potential members choose to opt out the analysis shows that flexible cooperation is better only if the heterogeneity is large and the externality small but rigid cooperation will be the political equilibrium too often flexibility and rigidity can be combined by i mandatory participation rules where participation is voluntary unless a super majority requires everyone to participate and ii minimum participation rules where inner clubs must be sufficiently large the combination of mandatory and minimum participation rules may implement the best possible mechanism

financial development growth and the distribution of income a paradigm is presented in which both the extent of financial intermediation and the rate of economic growth are endogenously determined financial intermediation promotes growth because it allows a higher rate of return to be earned on capital and growth in turn provides the means to implement costly financial structures thus financial intermediation and economic growth are inextricably linked in accord with the goldsmith mckinnon shaw view on economic development the model also generates a development cycle reminiscent of the kuznet hypothesis in particular in the transition from a primitive slow growing economy to a developed fast growing one a nation passes through a stage in which the distribution of wealth across the rich and poor widens

do bank loan relationships still matter james 1987 and lummer and mcconnell 1989 find that during the 1970s and 1980s the market responded positively to announcements of bank lending agreements however many of the advantages associated with bank lending relationships have largely disappeared since the 1980s due to financial system changes and greater availability of and less costly financial information we find that bank loan announcements produced positive abnormal returns in the 1980s but by the latter part of our sample period those announcement returns disappear entirely we do find that bank loan relationships may still be valuable to smaller poorer performing firms or during periods of high credit risk spreads

liquidity saving mechanisms abstract this paper studies the incentives of participants in a real time gross settlement system with and without the addition of a liquidity saving mechanism lsm participants in the model face a liquidity shock and different costs for delaying payments they trade off the cost of delaying a payment against the cost of borrowing liquidity from the central bank the main contribution of the paper is to show that the design of an lsm has important implications for welfare in particular parameters determine whether the addition of an lsm increases or decreases welfare

payment system settlement and bank incentives in this article we consider the relative merits of net versus gross settlement of interbank payments net settlement economizes on the costs of holding non interest bearing reserves but increases moral hazard problems the put option value of default under net settlement can also distort banks investment incentives absent these distortions net settlement dominates gross although the optimal net settlement scheme may involve a positive probability of default article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

efficient redistribution through commodity markets efficiency in redistribution is measured in terms of deadweight loss generated per dollar of economic surplus transferred between consumers and producers of a commodity by means of market intervention the implications of supply and demand elasticities for efficiency in redistribution are examined with special attention to the comparison of production control and deficiency payment programs the results may be used to aid in the evaluation of commodity programs and as a basis for consideration of the hypothesis that observed policies are efficient given the political power of interest groups

bank acquisition and stockholders wealth abstract bank mergers are a control mechanism for reallocating resources because regulation has a pervasive influence on bank decision making unlike industrial firms bank mergers are subject to regulatory approval bank shareholder returns are analyzed at the time of federal reserve approval of mergers to assess whether regulation reduces differential information between bank managers and outsiders or reduces managers ability to take advantage of differential information empirical tests indicate there are negative returns to acquiring banks for external mergers but normal returns for internal mergers emergency mergers generate positive returns before and upon announcement more negative results occur in states with branching restrictions and in cases when equity financing is used

information asymmetries and spillover risk in settlement systems abstract i show how information asymmetries between agents in different settlement systems can increase the risk that a problem in one may spill over to another i focus on the strategic behavior of participants who operate in multiple systems as they choose how best to manage their liquidity across the systems in the event of an operational shock in one system these participants may continue to make payments in order to avoid delay costs thereby risking a liquidity sink if they believe they can recycle liquidity from the other unaffected system they are more likely to risk a liquidity sink if they believe banks in the unaffected system will continue making payments early unaware of the operational problem i show that a liquidity saving mechanism lsm in one system may reduce the probability of spillover into the other in this sense i identify a positive externality from the introduction of an lsm

on the positive role of financial intermediation in allocation of venture capital in a market with imperfect information this paper develops a theory of financial intermediation that highlights the contribution of intermediaries as informed agents in a market with imperfect information we consider a venture capital market where the entrepreneurs select the qualities of projects and their perquisite consumptions about which the investors are imperfectly informed it is shown that when all investors have positive search costs the entrepreneurs are induced to offer the unacceptable inferior projects lemons only and the investors will not enter the venture capital market but put their funds in other low return investments an undesirable allocation of resources beginning with an initial undesirable situation the financial intermediaries may evolve as informed agents that induce a pareto preferred allocation leading the investors to a higher welfare state we focus our analysis on the existence of intermediation equilibra when the market for intermediation services is competitive the distribution of returns on projects the fees charged by intermediaries and the fraction of institutional holdings are all endogenous in equilibrium it is shown that i there cannot be a competitive intermediation equilibrium with very high institutional holdings and ii in other cases multiple equilibra may exist but the one with the highest institutional holdings dominates the others in a pareto sense

distributional impacts of the 1986 tax reform act the 1986 tax reform act tra contains the most sweeping changes in tax laws in the last thirty years affecting virtually every sector of the u s economy evaluations of its impacts on agriculture appearing in the farm and nonfarm press have been concerned primarily with commodityand or producer specific issues in this paper we provide a broader perspective on the interand intrasectoral effects of tra first we examine equity versus efficiency effects of tra next we identify major changes wrought by tra and explain briefly how they may alter tax obligations for the farm sector relative to the rest of the economy finally we consider the distributional effects of tra within the agricultural production sector with a focus on differences by size type tenure patterns and debt level

settlement risk under gross and net settlement previous comparative analyses of gross and net settlement have focused on the credit risk of the central counterparty in net settlement arrangements and on the incentives for participants to alter the risk of their portfolios under net settlement by modeling the trading economy that generates the demand for payment services we are able to show some largely unexplored advantages of net settlement we find that net settlement can prevent certain gridlock situations which may arise in gross settlement in the absence of delivery versus payment requirements in addition we show that net settlement can economize on collateral requirements and avoid trading delays

some stronger measures of risk aversion in the small and the large with applications the arrow pratt measures of risk aversion for von neumann morgenstern utility functions have become workhorses for analyzing problems in the microeconomics of uncertainty they have been used to characterize the qualitative properties of demand in insurance and asset markets to examine the properties of risk taking in taxation models and to study the interaction between risk and life cycle savings problems to name just a few applications equally importantly they have generated the linear risk tolerance class of utility functions which has provided canonical examples in such diverse areas as portfolio theory and the theory of teams despite these successes there have been a number of areas for which the results have been weaker than hoped it is natural to use the risk aversion measures to compare the behavior of individuals in risky choice situations for example consider the individual portfolio choice problem in a two asset world with a riskless asset and a risky asset if individual a has a uniformly higher arrow pratt coefficient of risk aversion than individual b then b will always choose a portfolio combination with more wealth invested in the risky asset but suppose that both assets are risky now there is no obvious sense in which the more risk averse individual can be said to hold a less risky portfolio but it seems strange that such a simple alteration should destroy the analytics which support the basic intuition similarly consider the basic insurance problem if one individual a is more risk averse than another b in the arrow pratt sense it follows that a will pay a larger premium to insure against a random loss than will b typically though an individual evaluates partial rather than total insurance that is only some gambles can be insured against and others must be retained in this case even when the gambles which are retained are independent from those which are insured it is no longer true that the individual whose arrow pratt measure of risk aversion is higher will pay a larger insurance premium the situation is no better when we consider comparative statics exercises for a single individual decreasing absolute risk aversion in the sense of arrow and

an agent based model of payment systems abstract we lay out and simulate a multi agent multi period model of an rtgs payment system at the beginning of the day banks choose how much costly liquidity to allocate to the settlement process then they use it to execute an exogenous random stream of payment orders if a bank s liquidity stock is depleted payments are queued until new liquidity arrives from other banks imposing costs on the delaying bank we study the equilibrium level of liquidity posted in the system performing some comparative statics and obtaining insights on the efficiency of alternative system configurations

temporal risk and the nature of induced preferences abstract it has been known since the work of h markowitz portfolio selection efficient diversification of investments yale univ press 1959 and j mossin amer econ rev 59 1969 172 174 that even an individual whose underlying preferences satisfy the von neumann morgenstern axioms will not choose over delayed i e temporal risky prospects in a manner which can be modelled as expected utility maximizing since most economically important instances of risk taking insurance real investment agriculture career training involve delayed as opposed to immediately resolved risk the standard use of expected utility theory to model such decisions must be questioned in this paper the technique of generalized expected utility analysis m j machina econometrica 50 1982 277 323 and the theory of support functions r t rockafellar convex analysis princeton univ press 1970 are applied to exactly model and hence determine the nature of preferences over temporal risky prospects

the intraday interest rate under a liquidity crisis the case of august 2007 by analyzing high frequency data for the european interbank market we show that the intraday interest rate implicitly defined by the term structure of the on rate jumped by more than ten times at the outset of the financial turmoil in august 2007 resulting in an inefficiency of the money market this took place despite the provision of unlimited free daylight overdrafts by the ecb on a collateralized basis we suggest that such result may be attributed to an increase of the liquidity premium and of the cost of collateral

systemic risk in financial systems we consider default by firms that are part of a single clearing mechanism the obligations of all firms within the system are determined simultaneously in a fashion consistent with the priority of debt claims and the limited liability of equity we first show via a fixed point argument that there always exists a clearing payment vector that clears the obligations of the members of the clearing system under mild regularity conditions this clearing vector is unique next we develop an algorithm that both clears the financial system in a computationally efficient fashion and provides information on the systemic risk faced by the individual system firms finally we produce qualitative comparative statics for financial systems these comparative statics imply that in contrast to single firm results even unsystematic nondissipative shocks to the system will lower the total value of the system and may lower the value of the equity of some of the individual system firms

the certification value of private debt renegotiation and the design of financial contracts empirical evidence from europe abstract by using a sample of bank loan renegotiations by european firms i show that the renegotiation of financial contracts bears a certification value while deeply changing the contractual features of the loan over time to the benefit of shareholders i find that amendments to financial covenants and to loan amounts increase the cumulative abnormal returns of a borrowing firm by 10 15 early and less frequent renegotiations of bilateral loans with short maturities also imply a positive stock market reaction amendments signaling the early accrual of new and positive information allow increasing firm value

illiquidity in the interbank payment system following wide scale disruptions we show how the interbank payment system can become illiquid following wide scale disruptions two forces are at play in such disruptions operational problems and changes in participants behavior if the disruption is large enough hits a key geographic area or hits a too big to fail participant then the smooth processing of payments can break down and central bank intervention might be required to reestablish the socially efficient equilibrium the paper provides a theoretical framework to analyze the effects of events such as the september 11 attack in addition the model can be reinterpreted to analyze shocks to fundamentals that affect the parameters of the intraday liquidity management game we demonstrate this by showing how processing behavior changed in response to heightened credit risk at the time of the lehman brothers failure

laboratory experimentation in economics six points of view 1 introduction and overview alvin e roth 2 bargaining phenomena and bargaining theory alvin e roth 3 equity and coalition bargaining in experimental three person games reinhard selten 4 the psychology of choice and the assumptions of economics richard thaler 5 hypothetical valuations and preference reversals in the context of asset trading marc knez and vernon l smith 6 economics according to the rats and pigeons too what have we learned and what can we hope to learn john h kagel 7 dimensions of parallelism some policy applications of experimental methods charles r plott

production hidden action and the payment system abstract using a modified version of freeman s 1996 payment system model the optimal intraday rate is examined the production set is modified to account for a non degenerate distribution of settlements within a day in addition to the modified production set the consumption set is modified a positive intraday interest rate may be able to implement the planner s allocation

a model of political competition with citizen candidates the authors develop a model of electoral competition in which citizens choose whether or not to run as candidates a winner implements her favorite policy the equilibrium number of candidates depends negatively on the cost of running and positively on the benefits of winning for some parameter values all equilibria under plurality rule have exactly two candidates whose positions are distinct two candidate elections are more likely under plurality rule than under a runoff system the candidates positions are less differentiated under a runoff system there exist equilibria under both systems in which some candidates have no chance of winning

nonlinear pricing and the market for settling payments fedwire funds is a real time gross settlement system that uses a decreasing block pricing scheme to attract nonurgent payments a bank s optimal response to fedwire s pricing depends on its perceived benefits to settling nonurgent payments quickly if the urgency for immediate settlement is great enough a bank responds to marginal price otherwise it responds to average price we find banks respond to average price suggesting that fedwire s advantage over competing services of being able to provide immediate settlement is small moreover attempts to increase demand for fedwire services by lowering the cost of banks final block of payments may be ineffective if there is not a corresponding decrease in average cost

minimum participation rules in international environmental agreements empirical evidence from a survey among delegates in international climate negotiations recent contributions to the theoretical and experimental literature suggest that minimum participation rules mprs are able to reduce free riding incentives and may facilitate cooperation or at least coordination at the extensive margin of international environmental agreements based on a dataset from a world wide survey among delegates in international climate negotiations this paper assesses preferences for different mprs for a future climate treaty among key players the empirical findings provide evidence that small countries with low bargaining power rather opt for large minimum membership requirements while industrialized countries push forward the idea of a small carbon club of the largest emitters only in contrast delegates from countries in transition try to keep emission thresholds rather low which would allow a future agreement to come into force without their signature

refinancing mfis with market power theory and evidence this paper presents a model of the complete microcredit financing chain investor miv mfi micro borrower in which social minded mivs provide funds only to those mfis which do not exploit their bargaining power towards micro borrowers the mfis with the highest bargaining power do not use miv capital since eschewing their market power is most costly for them consistent with this prediction of the theoretical model we find empirically that the net interest margin as a measure of mfi market power negatively affects the likelihood of using miv finance this lends support to the view that social criteria play an effective role in mivs investment policies thereby also impacting mfis lending behavior