recursive equilibria in dynamic economies with stochastic production in this paper we prove the existence of recursive equilibria in stochastic production economies with infinitely lived agents and incomplete financial markets we consider a general dynamic model with several commodities which encompasses heterogeneous agent versions of both the lucas asset pricing model and the stochastic neo classical growth model as special cases our main assumption is that there are atomless shocks to fundamentals that have a purely transitory component and a component that does not depend on last period s shocks directly

natural resources and sub national economic performance does sub national democracy matter abstract the differentiation in the impact of resources on economic growth is often explained by the specifics of institutional factors the aim of this paper is to investigate how sub national political differences influence the effect of natural resources on economic growth using a dataset of russian regions this paper demonstrates that sub national democratization influences the growth effects of resources and considers possible mechanisms for this influence the paper finds that in russia natural resources are only capable of promoting growth in the regions with non democratic political systems that at the same time have an efficient and non corrupt bureaucracy

political and economic determinants of the likelihood of privatizing argentine public banks abstract this paper discusses the political economy of bank privatization in argentina following institutional changes related to the implementation of the convertibility plan and to the tequila crisis the empirical results strongly support the hypothesis that political incentives affect the likelihood of privatization we find 1 poorly performing banks were more likely to be privatized 2 overstaffing tended to reduce the probability of privatization 3 large banks were less likely to be privatized and 4 higher levels of provincial unemployment and higher shares of public employees reduced the probability of privatization although the hypotheses were tested for a specific industry in a specific country which makes it possible to control for enterprise performance and institutional characteristics it seems reasonable that similar results might hold in other industries and countries

the middle income trap more politics than economics economists have identified the existence of a middle income mi trap but have yet to analyze the politics of this trap the authors argue that countries in the mi trap face two major institutional and political challenges first the policies necessary to upgrade productivity as in human capital and innovation require enormous investment in institutional capacity second these institutional challenges come at a time when political capacity for building these institutions is weak due primarily to the fragmentation of potential support coalitions politics are stalled in particular by fractured social groups especially business and labor and more generally by inequality these conditions result in large measure from previous trajectories of growth the empirical analysis concentrates on nine of the larger mi countries

contra coercion russian tax reform exogenous shocks and negotiated institutional change the view of institutions as coercion rather than as contracts dominates the comparative politics literature on both institutional creation and the politics of economic reform the emergence of a collectively optimal tax code in russia demonstrates the limitations of this emphasis on coercion this new tax code was not imposed by a strong central leader mandated by international institutions or the result of state capture by powerful economic interest groups rather it is the product of a mutually beneficial exchange between the russian government and the russian oil companies russia s ability to negotiate an effective tax regime also suggests the conditions under which and the microcausal mechanism whereby exogenous shocks promote institutional change and economic reform owing to their mutual vulnerability and interdependence the august 1998 financial crisis generated widely shared perceptions among these actors that the payoffs of cooperation had changed yet the economic reform institution that resulted required a series of incremental strategic moves that established common knowledge

stock markets banks and growth panel evidence this paper investigates the impact of stock markets and banks on economic growth using a panel data set for the period 1976 98 and applying recent gmm techniques developed for dynamic panels on balance we find that stock markets and banks positively influence economic growth and these findings are not due to potential biases induced by simultaneity omitted variables or unobserved country specific effects

symposium on organizations and economics m t r ost production in modern economies occurs within organizations and this production is regulated only to a limited extent by prices the size of some of the largest organizations like general motors or ibm or att if managers didn t they would be replaced and firms that didn t maximize value wouldn t survive accordingly what went on inside the black box was mere detail the behavior of the firm could be described completely without knowledge of those details

stock markets corporate finance and economic growth during the past decade the capitalization of emerging markets increased twentyfold in 1994 trading on these markets accounted for about 17 percent of the 9 6 trillion of shares traded on the world s stock markets up from a mere 3 percent of the much smaller 1 6 trillion in 1985 this rapid growth in emerging stock market activity raises critical questions for developing country policymakers what effect do stock markets have on economic growth how does stock market development affect firms financing decision and if stock markets are good for growth what policies can governments adopt to foster their development this note summarizes answers to these questions drawn from a recent research project

the great east asian capital flow reversal reasons responses and ramifications the exodus of foreign capital combined with the flight of domestic funds abroad caused massive depreciations especially against the us dollar of the indonesian rupiah thai baht malaysian ringgit philippines peso and south korean won the currencies of the economies hereafter termed the asian 5 it also caused dramatic stockmarket falls in the greater east asian region including hong kong and singapore at times in us terms the indonesian rupiah was worth only one fifth of its june 1997 value while the thai baht and korean won lost around half their former values the philippines peso and malaysian ringgit fell some 40 per cent below pre crisis values this paper briefly examines the build up and subsequent sharp reversal of international investment in east asia in the 1990s before addressing the international public policy issue of whether international capital flows considered too unpredictable volatile and destablising by many economists should again be restricted finally the paper suggests that the impact of the redirection of international investment on the world economy should generate alternative export opportunities in other advanced and emerging regions thus minimising the contractionary effect of the asian crisis on the world economy

industry growth and capital allocation does having a market or bank based system matter are market based or bank based financial systems better at financing the expansion of industries that depend heavily on external finance facilitating the formation of new establishments and improving the efficiency of capital allocation across industries we find evidence for neither the market based nor the bank based hypothesis while legal system efficiency and overall financial development boost industry growth new establishment formation and efficient capital allocation having a bank based or market based system per se does not seem to matter much

same financial development yet different economic growth why we re study the relationship between financial development and real gdp per capita growth in 48 countries what we find is an interesting evidence that only stock market development has positive effects on growth and that banking development has an unfavorable if not negative effect on growth we examine whether or not these impacts are a product of various financial and economic conditional variables our conditional variables consist of financial liberalization two sets of country development dummies crises in banking and currency dummies the creditor protection index as well as the anti director and corruption indices our results clearly show that the conditional variables of financial liberalization high income level and good shareholder protection mitigate the negative impacts of banking development on growth in contrast the conditional variables of middle income level regional latin american sub saharan african and east asian dummies banking and currency crises good creditor protection and higher corruption strengthen the negative impacts of banking development on growth next the conditional variables of middle income level latin american sub saharan african and east asian dummies strengthen the positive impacts of stock market development on growth whereas the conditional variables of financial liberalization mitigate the positive impacts of stock market development on growth last we find that the relationship between growth and bank development is better described as a weak inverse ushape this inverse u shape becomes stronger when additional stock market variables are squared thus financial development and growth may in fact be in a nonlinear form

a note on the implementation of rational expectations equilibria abstract in a sequence economy the implementation of rational expectations equilibria requires an appropriate selection of temporary equilibria in each period the note shows that this selection requires more information than is available from current excess demand behaviours

competitive monies and the suffolk bank system a contractual perspective in recent years a number of monetary economists have begun to focus research on an old topic the economics of private money or free banking much of this literature is motivated by a sense that competitive markets may well prove superior to government regulation in coping with the problems inherent in a laissez faire monetary system noting this robert king in his recent survey paper suggests that the central focus of future research in this area must be the types of monetary institutions that the private market will deliver 10 123 by monetary institutions king presumably means the contractual mechanisms utilized in production and exchange relationships involving private money this paper examines one mechanism the so called suffolk bank system which the market did deliver in new england from around 1820 to just before the civil war while most historians have looked favorably on the suffolk mechanism almost all have mischaracterized the underlying rationale for the system in particular most analysts have interpreted the establishment of the suffolk bank s note redemption program as a response to gresham s law bad money drives out good money however the conditions of 19th century banking in new england and elsewhere as well prior to the establishment of the suffolk system rule out any application of gresham s law prior studies have also neglected the importance of evolutionary changes in the suffolk bank system over the first five years of its existence what we will label suffolk i was largely unsuccessful both in terms of its profitability and its capacity to control the behavior of the banks participating in the system several contract adaptations introduced in 1824 accounted for a sharp reversal in the fortunes of the suffolk bank system it is suffolk ii which has gained the accolades of bank historians ironically suffolk ii increased the prospects for a gresham s law kind of outcome of the sort emphasized by akerlof 1 however the contract structure of suffolk ii involved properties sufficient to allow that suffolk

incentives in principal agent relationships this article identifies some of the major issues that have been examined in the literature on incentives the article begins by discussing the frictions that lie at the heart of incentive problems next the principal s optimal response to these frictions is explored taking as given the characteristics of the agents with whom the principal interacts in a nonrepeated setting the design of individualized contracts contests and tournaments is analyzed then the principal s task of selecting the best agent is addressed and repeated agency relationships are considered

financial structure and economic growth recent empirical work on financial structure and economic growth analyzes multi country dataset in panel and or cross section frameworks and concludes that financial structure is irrelevant we highlight their shortcomings and re examine this issue utilizing a time series and a dynamic heterogeneous panel methods our sample consists of fourteen countries tests reveal that cross country data cannot be pooled financial structure significantly explains output levels in most countries the results are rigorously scrutinized through bootstrap exercises and they are robust to extensive sensitivity tests we also test for several hypotheses about the prospective role of financial structure and financial development on economic growth

employment entrepreneurship and 1992 microeconomic policy and european problems this essay has covered several areas which are not usually regarded as closely interrelated policy conclusions have been discussed briefly at various points and will now be developed more fully in this final section as evidence for the interrelatedness of such disparate fields as corporate finance and employment policy we start from the observation that many large firms are relatively inefficient particularly at product innovation and flexible organization and employment policies in part because top managerial compensation depends mainly on size this creates an incentive for excessive growth and empire building rather than payment to shareholders of the free cash flow which cannot be profitably invested internally more appropriate incentives for top management would increase dividend payments and hence the flow of funds into the capital market available for financing new start ups and small firms as venture capital even in the u s the cost of obtaining external capital often constrains small firms to invest only their internal cash flow fazzari et al 1988

risky debt investment incentives and reputation in a sequential equilibrium the agency relationship of corporate insiders and bondholders is modeled as a dynamic game with asymmetric information the incentive effect of risky debt on the investment policy of a levered firm is studied in this context in a sequential equilibrium of the model a concept of reputation arises endogenously resulting in a partial resolution of the classic agency problem of underinvestment the incentive of the firm to underinvest is curtailed by anticipation of favorable rating of its bonds by the market this anticipated pricing of debt is consistent with rational expectations pricing by a competitive bond market and is realized in equilibrium some empirical implications of the model for bond rating debt covenants and bond price response to investment announcements are explored

swallowing the bitter pill sources of popular support for neoliberal reform in latin america what accounts for the surprisingly widespread popular approval that painful neoliberal reforms elicited in several latin american countries this article compares the explanatory power of two rival hypotheses which draw on conventional rational choice and psychological decision theory the compensation hypothesis claims that governments can engineer support for costly reforms by compensating the losers through targeted social benefits the rescue hypothesis questions this claim and maintains that draconian adjustment only finds support if it promises to revert a deep crisis and avert further losses data from argentina bolivia brazil mexico peru and venezuela suggest that the rescue hypothesis accounts much better for the initial endorsement of neoliberal shock programs immediately after their enactment when these shock programs bring about economic stabilization and recovery targeted social benefits help consolidate support for neoliberalism which a statistical analysis of the impact of social s

the relation between earnings based measures in firm debt contracts and ceo pay sensitivity to earnings abstract i investigate how implicit incentives provided by earnings based debt covenants affect the structure of ceo compensation contracts this provides a new and unique view of how the ceo s incentives are shaped by not only his compensation contract but also debt contracts i find when debt contracts contain an earnings based covenant the ceo s pay sensitivity to earnings is muted additionally i find some evidence that pay sensitivity to earnings varies with earnings based covenant slack this study provides evidence consistent with shareholders rebalancing the ceo s earnings incentives in the presence of earnings based covenants thereby tilting incentives away from earnings performance

the loan contract mechanism of financial control industry banking the style of banking under which a single bank satisfies all the external financial needs of an industry was recognised by alfred marshall i9i9 as a positive force in the development of new industries today many of marshall s reference industries have reached maturity but their industry banks continue to play an active role not only in financing their production and expansion but also in their management cable i985 prais 198i to understand the economic impact of industry banking this paper explores one aspect of it bank directed industry coordination and control

european patterns of corporate ownership a twelve country study a number of qualitative studies have shown striking international differences in corporate governance systems this paper presents a quantitative analysis of ownership structures among the hundred largest companies in twelve european countries the existence of a highly significant nation effect is confirmed further statistical analysis indicates that the nation effect is party explained by institutional differences

testing the three roles of equity markets in developing countries the case of china abstract the role of equity markets in economic development has been increasingly recognized in recent years yet few studies have analyzed the transmission mechanisms between them this paper looks at this missing agenda by indirectly assessing whether the equity markets fulfill the following roles a financing firms investment b improving firms corporate governance and hence performance and c signaling information regarding issuers to public investors through stock prices all of which are essential in achieving economic growth for developing countries this paper assesses the development stages of china s equity markets by testing whether the above three roles are fulfilled

rethinking macroeconomics what failed and how to repair it the standard macroeconomic models have failed by all the most important tests of scientific theory they did not predict that the financial crisis would happen and when it did they understated its effects monetary authorities allowed bubbles to grow and focused on keeping inflation low partly because the standard models suggested that low inflation was necessary and almost sufficient for efficiency and growth after the crisis broke policymakers relying on the models floundered notwithstanding the diversity of macroeconomics the sum of these failures points to the need for a fundamental re examination of the models and a reassertion of the lessons of modern general equilibrium theory that were seemingly forgotten in the years leading up to the crisis this paper first describes the failures of the standard models in broad terms and then develops the economics of deep downturns and shows that such downturns are endogenous further the paper argues that there have been systemic changes to the structure of the economy that made the economy more vulnerable to crisis contrary to what the standard models argued finally the paper contrasts the policy implications of our framework with those of the standard models

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

wealth seeking reconsidered abstract if individuals are interested in their relative wealth position they engage in contests for wealth this leads to a steady state with overaccumulation in a simple growth model it is shown that if some individuals are engaged in wealth seeking activity but others are not the latter might benefit however wealth seeking is not welfare enhancing under usual assumptions concerning production technology the steady state equilibrium is characterized by a marginal productivity of capital that is below the steady state rate of time preference and by emergence of a class structure

financial market imperfections and productivity growth abstract this paper examines the impact of financial market imperfections on long term productivity growth it focuses on failures in markets for the sale of equity securities and hence on the failure of markets which help firms diversify the risks of real investment the paper examines separately situations in which productivity growth is driven by learning by doing in general a multiplicity of steady state growth paths exist with different growth rates along each path the particular path followed by any single economy and hence the growth rate of that economy will depend significantly on policy interventions which mitigate effects of financial market failures

corporate governance effects on innovation when both agency costs and asset specificity matter this article explores the question whether the relationship between corporate governance and innovation is affected by the extent to which the firm is exposed to agency problems and asset specificity issues in particular we argue that different combinations of asset specificity and agency costs are associated to firm age and sector of activity and predict heterogenous effects of ownership concentration on innovation across different types of firms we use a unique data set of about 35 000 italian manufacturing corporations over the 2002 2007 period and run a hurdle model distinguishing four subgroups of firms on the basis of their age greater or lower than 15 years and of whether they belong to a high technology or low technology sector we find that the effects of ownership concentration on innovation are coherent with the predictions of so called shareholder theory when agency cost effects dominate over asset specificity effects and that they are coherent with the predictions of so called stakeholder theory when asset specificity effects dominate over agency cost effects these findings are robust to a number of identification issues including the possible endogeneity of corporate ownership structures our results may allow to make sense of the contradictory findings of the literature on corporate governance and innovation especially as regards the role played by ownership concentration and may help policymakers to define more effective type specific initiatives to stimulate firm innovation

the contributions of the economics of information to twentieth century economics in the e eld of economics perhaps the most important break with the past one that leaves open huge areas for future work lies in the economics of information it is now recognized that information is imperfect obtaining information can be costly there are important asymmetries of information and the extent of information asymmetries is affected by actions of e rms and individuals this recognition deeply affects the understanding of wisdom inherited from the past such as the fundamental welfare theorem and some of the basic characterization of a market economy and provides explanations of economic and social phenomena that otherwise would be hard to understand i introduction the century coming to a close has seen vast changes in economics in both ideas and methodology upon ree ection it is remarkable however how many of the seeds of advances in this century were sowed in the previous i would argue that perhaps the most important break with the past one that leaves open huge areas for future work lies in the economics of information the recognition that information is imperfect that obtaining information can be costly that there are important asymmetries of information and that the extent of information asymmetries is affected by actions of e rms and individuals has had profound implications for the wisdom inherited from the past and has provided explanations of economic and social phenomena that otherwise would be hard to understand in this essay i wish to argue that information economics has had directly and indirectly a profound effect on how we think about economics today eighteenth and nineteenth century antecedents to be sure marshall and other nineteenth century economists talked about problems of imperfect information but with one exception discussions of information were obiter dicta caveats at the end of the analysis they were never at the center

adverse selection in dynamic moral hazard this paper studies a multiperiod moral hazard problem under two assumptions i contracts are subject to renegotiations ii the agent s action has long term effects the action is also interpreted as a choice of characteristic or type renegotiation proof contracts that implement various actions including random ones are characterized under appropriate conditions the equilibrium involves the principal implementing a random action therefore the equilibrium has standard properties of adverse selection models

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

the new economics of organization over the last ten years or so an important new approach to the study of organizations has emerged within economics it is perhaps best characterized by three elements a contractual perspective on organizational relationships a theoretical focus on hierarchical control and formal analysis via principal agent models this paper provides political scientists with an overview of the new economics of organization and explores its implications for the study of public bureaucracy so far positive political theory has not contributed much to our understanding of public bureaucracy in part this is due to the unsympathetic treatment that rational modeling and most other modes of quantitative analysis have long received from students of public administration the other side of the coin however is that positive theorists have not made much of an effort to develop theories of bureaucracy their concerns have centered around two basic mechanisms of social choice voting and markets and they have devoted little systematic attention to a third mechanism that is clearly important for understanding how societies and other aggregates make collective decisions this third and relatively unexplored mechanism is hierarchy movement toward a positive theory of hierarchies would fill a serious gap in the social choice literature while at the same time making a theoretical contribution that strikes to the essence of public bureaucracy indeed of all organizations in fact significant steps toward a positive theory of hierarchies have very recently been taken but by economists not political scientists in small numbers of course economists made contributions to the study of public bureaucracy some time ago with the pioneering works of downs 1967 tullock 1965 and niskanen 1971 but this new wave of theoretical work is different it is already a large complex body of literature that is the focus of innovation and excitement among a growing number of economists and it reflects an unusual degree of theoretical coherence and cumulative effort work in this tradition tends to receive orientation from a distinctive economic approach to the analysis of organizations an approach perhaps best characterized by three elements a contractual perspective on organizational relationships a focus on hierarchical control and formal analysis via principal agent models this approach has emerged from recent attempts to move beyond the neoclassical theory of the firm which assumes away all organizational considerations to a theory of economic organizations that can explain why firms corporations and other enterprises behave as they do propo

prelude to the resource curse explaining oil and gas development strategies in the soviet successor states and beyond the literature on resource rich states leaves a key and prior question unexplored why and how do states choose to develop their natural resources the authors address this gap by explaining the di

capital market imperfections high tech investment and new equity financing highly variable returns asymmetric information and a lack of collateral should cause small high tech firms to have poor access to debt new equity financing has several advantages over debt but may be costly compared to internal finance we examine an unbalanced panel of over 2 400 publicly traded us high tech companies over the period 1981 98 most small high tech firms obtain little debt financing new equity financing in the form of the initial public offering is very important and permits a major increase in firm size after going public comparatively few firms make heavy use of external finacing

the benefit of crises for economic reforms when expenditures consistently outrun revenue the resulting inflation may have the effect of convincing the public and government that taxes must be raised to finance public investment in the advanced industrial countries income taxation and big spurts in taxation generally have become possible only under the impact of major emergency and crisis mostly in wartime in a number of developing countries in

sequentially complete markets remain incomplete we show by means of an example that the result of arrow arrow k j 1953 le role des valeurs boursieres pour la repartition la meilleure des risques econometrie 41 47 cnrs paris translated as the role of securities in the optimal allocation of risk bearing review of economic studies 31 91 96 is problematic when there exist multiple equilibrium continuations to the initial period component of an intertemporal equilibrium

credit markets and the control of capital traditional discussions of the role of capital markets have identified a number of distinct functions which they perforrn they allocate scarce capital among competing users and uses l and they provide signals to guide managers in making their investment decisions 2 in this lecture i wish to focus on a rather different function of the capital market what i shall refer to as the control of capital 3 conventional theory treats the typical firrn in an anthropomorphic manner it acts as a single rational individual doing what it is supposed to be doing maximizing stock market value that may have been well and good in those nostalgic bygone days of small firrns each run tightly by their owners who were single mindedly pursuing their lust for wealth but today a majority of production occurs in large corporations in which no shareholder owns more than a small fraction of the shares in which the separation of ownership and control that frank knight was so concerned with in his writings some sixty five years ago has become a reality those

the allocational role of takeover bids in situations of asymmetric information have special information about the target firm s resources which indicates that the target is really worth more than its current market valuation hence the acquiring firm by paying only a small premium is able to acquire these resources at a price below the true worth to shareholders indicated by the inside information thus shareholders are unable to capture the true benefits of their investments and an inefficient amount of investment will take place therefore the government should restrict takeover bids the above argument is clearly wrong if there is competition among informed bidders for the target firm s assets however proponents of the argument claim that some takeover bids occur exactly because only one agent has special inside information about the target company s resources in this paper we show that

money credit constraints and economic activity when government expenditures exceed current tax revenues the resulting deficit must be financed either by issuing bonds which imply obligations to levy future taxes or by creating high powered money the choice between money and bonds is often thought to be of great moment for both real and nominal variables that is monetary policy matters there is by now a wide empirical consensus that monetary policy has effects on real variables like output and employment but there is far less agreement about why this is so the purpose of this paper is to take issue with some currently fashionable views of why money has real effects and to suggest a new theory or rather resurrect an old one the loanable funds theory and give it new improved microfoundations this abstract was borrowed from another version of this item

finance innovation and industrial change abstract this paper investigates the impact financial structures upon industrial dynamics whenever the system is permanently characterized by unexploited opportunities for innovation highly bounded rationality and trial and error search processes in these circumstances it is argued specific financial set ups such as market based vs credit based mechanisms of allocation control and ownership transfer are likely to exert different influences on the rates and modes of industrial innovation relatedly one suggests some hypotheses on the links between financial systems and features of industrial evolution and some tentative taxonomies

credit layering in informal financial markets abstract informal lenders with access to markets or capital often find it attractive to delegate loan provision to downstream lenders who have an information or enforcement advantage in dealing with particular borrowers in this paper we examine the conditions under which such an arrangement is preferred by two informal lenders a landlord and a merchant who compete in loan provision to tenant farmers differentiated by wealth we show that credit layering is preferred only when tenants are sufficiently poor in this case the trader lends to tenant farmers via a contract with their landlord otherwise only the trader lends as a consequence a pattern of borrowing emerges in which relatively wealthy tenants borrow from merchants while poor tenants borrow mainly from their landlords interlinkage between land and credit thus arises only for a subset of tenants and purely as a consequence of credit layering this pattern is shown to be supported empirically

environmental accidents under moral hazard and limited firm liability we study optimal government policy when firms operations involve a risk of a large environmental accident firms do not have sufficient assets to cover such costs and the risk is affected by firms efforts which are unobservable to outsiders when firms profits and government revenues have equal weights in the social welfare function a first best can be implemented and requires that the firm be subsidized heavily when operating with no accident and all its assets confiscated in the event of an accident with a lower weight on firm profits the solution is always second best with lower subsidies to the firm and a firm effort lower than at the first best solution when firm investments affect both the required accident preventing effort for given risk and the work effort required for a given output the first best never involves specific investment subsidies while a second best solution generally always does

redefining the role of the state an interview with introduction by brian snowdon professor joseph stiglitz is without question one of the world s leading economists in his extensive research he has made seminal contributions to the analysis of the economic consequences of incomplete information and uncertainty this work has greatly enhanced economists understanding of the welfare properties of markets and the sources of market failure his research has also contributed to the development of better microeconomic foundations for keynesian macroeconomic models most recently professor stiglitz has been heavily involved in controversial public policy debates relating to the east asian crisis problems of transition from communism to capitalism the limitations of the washington consensus and globalisation and development a common theme in all of these debates relates to the role of government and legitimate borders of the state in both developed and developing economies in this article interview professor stiglitz gives his views on these and several other important global issues

ownership concentration corporate control activity and firm value evidence from the death of inside blockholders we analyze how ownership concentration affects firm value and control of public companies by examining effects of deaths of inside blockholders we find shareholder wealth increases ownership concentration falls and extensive corporate control activity ensues share price responses are related to the deceased s equity stake control group holdings fall for two thirds of the firms due to either the estate s dispersal or inheritors selling stock a majority of firms become targets of control bids three quarters of bids are successful one third are hostile our evidence is broadly consistent with stulz s 1988 model of the relationship between ownership concentration and firm value the objective of this paper is to assess how changes in insider ownership concentration affect firm value corporate governance and the control of public companies we obtain our evidence on these issues by examining the effects of the death of an inside blockholder that is a member of the firm s control group as defined by securities and exchange commission sec disclosure rules who holds 5 percent or more of a firm s equity overall we find that the death of an inside blockholder an exogenous event is value enhancing reduces ownership concentration and leads to extensive corporate control activity our analysis has three components one we use market based evidence to evaluate how changes in ownership concentration affect firm value by analyzing the share price response to the death of an inside blockholder financial market efficiency implies that share prices capitalize gains or losses from changes in ownership concentration and future control events expected to ensue from an inside blockholder s death thus such valuation effects provide a test of the continuing controversy as to whether ownership concentration promotes managerial entrenchment or aligns insider and noninsider interests we find that the share price response to the death of an inside blockholder is significantly positive when the level of ownership concentra

stock markets corporate finance and economic growth an overview the research presented here focuses on four issues first it constructs more measures or criteria of stock market development than any previous study it compares liquidity concentration volatility institutional development and international integration across forty four industrial and developing countries from 1976 to 1993 besides identifying general characteristics of these measures and defining stock market development empirically these data facilitate further research into the relationship between stock market development and financial intermediaries corporate finance decisions and economic growth these measures ranked for each country can be used for inter country comparisons of the level of stock market development in addition the data provide a basis for gauging the success of capital market development projects using objective criteria second with these new data the research investigates the relationships between stock markets and financial intermediaries third the research analyzes the relationship between stock market development and long run economic growth fourth the research studies the ties between stock market development and financing choices of firms this overview puts this research in context and reviews the main results of the study section i provides a brief review of the role of stock markets in economic development and documents the evolution of debt and equity markets during the growth process section ii defines stock market development and presents summary data on the development of financial intermediaries and stock markets section iii presents evidence on the effect of stock market development on economic growth section iv summarizes the empirical results on how stock market development affects firm financing decisions section v concludes by discussing policy implications

the role of the state in financial markets this paper reexamines the role of the state in financial markets and identifies seven major market failures that provide a potential rationale for government intervention in practice government interventions in capital markets even in industrial countries have been pervasive the paper provides a taxonomy of those interventions with respect to both the objectives they serve and the instruments they employ there is a role for the government in financial markets but the success of government interventions has been mixed it is important that interventions be well designed the paper sets out principles for government regulatory interventions and applies them to prudential regulation it then examines three other areas of intervention directed credit finanical repression and competition policy and identifies circumstances in which some amount of financial repression may actually be beneficial

on the determinants of credit rationing firm level evidence from transition countries abstract using survey data for firms from eastern european transition economies we investigate the determinants of credit rationing our rationing definition incorporates firms whose loan application was rejected but also discouraged potential borrowers we employ a bivariate probit with censoring approach that accounts for the underlying selectivity since rationed firms are a subset of those without a loan we include firm specific attributes related to the alleviation of informational asymmetries and therefore expected to affect credit rationing we find that credit rationing depends on firm size profitability sales growth ownership type legal status sectoral heterogeneity and the country specific level of domestic credit

optimal financing mode selection for a capital constrained retailer under an implicit bankruptcy cost abstract in the context of the capital constrained newsvendor problem under an implicit bankruptcy cost we explore how such a cost affects a capital constrained retailer s financing mode selection decision between bank credit financing bcf and trade credit financing tcf we first study the problem in a single credit channel where the retailer can choose only one of the two financing modes we find that the retailer prefers tcf to bcf only when the tcf interest rate tcf ir is lower than a threshold and the dominant area of tcf expands with increasing bankruptcy cost we then study the problem in a dual credit channel where the retailer can choose a portfolio comprising bcf and tcf and examine two repayment sequences i e repaying bcf first and vice versa we propose two approaches to solve the problems we find that if bcf is repaid first as the tcf ir increases from zero the retailer first chooses only tcf then a portfolio comprising bcf and tcf and finally only bcf on the other hand if tcf is repaid first the retailer always chooses the single credit channel bcf or tcf if the tcf ir is not greater than a threshold or the bankruptcy cost is higher than a threshold otherwise a portfolio comprising bcf and tcf or only bcf finally we conduct numerical experiments to verify our main theoretical findings and examine the effects of the retailer s internal capital endowment on its financing mode selection decision showing that a wealthier retailer is more likely to prefer bcf to tcf

multiple banking relationships and the fragility of corporate borrowers abstract the widespread italian practice of multiple borrowing has been studied with respect to the continuity of bank lending and to the interest rates charged to individual borrowers however there is a lack of empirical evidence on the effects of multiple credit relationships over the fragility of the corporate borrowers two theses are competing one asserts that multiple borrowing results in a desirable sharing of risks the other that the parcellization of loans substantially weakens the discipline exercised by the banks and makes corporate borrowers more fragile through multivariate techniques we check whether the indicators describing the structure of lending relationships can help along with balance sheet variables to separate healthy from failed firms this exercise shows that multiple banking relationships are associated with a higher riskiness of the borrowers even though the impact is moderate in comparison with the importance of real and financial variables derived from balance sheets

fighting inflation in a transitional regime russia s anomalous stabilization russia s recent experience fighting inflation dramatic success in 1995 96 after repeated failures in 1992 94 poses a challenge for existing theories of the politics of macroeconomic stabilization monthly inflation rates fell to close to zero despite a deeply unpopular president distracted by heart disease a government penetrated by economic lobbies a far from independent central bank a parliament dominated by opposition factions a lively election season and the fiscal pressures of fighting a regional war the article reviews this experience shows its incompatibility with existing political economy theories and proposes an explanation with implications for other reforming regimes success was achieved by offering previous beneficiaries from inflation major commercial banks and subsidized sectors other sources of government protected rents that did not increase the money supply even when expropriating powerful rent seekers is politically infeasible it is sometimes possible to trade them less inflationary rents for ones that are more inflationary

dynamic microlending under adverse selection can it rival group lending we derive an optimal lending contract in a two period adverse selection model with limited commitment on the borrower side the contract involves penalty interest rates after default and favorable rates after success under some conditions it also charges first time borrowers higher rates than repeat borrowers as in relationship lending because the lender is constrained to keep borrowing attractive while using revealed information to price for risk we compare the efficiency of a group lending contract of the kind popularized by the microcredit movement to the dynamic individual contract both types of contracts reveal the same information but the contracts face different constraints on using the information to improve risk pricing as a result either type of contract can lead to greater efficiency depending on specifics of the environment opening the possibility that dynamic lending has played a role comparable to that of group lending in the success of microcredit we also characterize the optimal dynamic group contract when both lending techniques are feasible and find that it combines both approaches but with varying emphases a recurrent theme is that in more marginal environments dynamic lending performs relatively better than and is prioritized over group lending we also discuss a number of extensions including spatially and serially correlated risk and the effect of competition

bank firm relationships and allocative efficiency in northeastern and central italy and in the south abstract we make two contributions on the extent and impact of relationship banking based on close and long lasting bank firm customer relationships in the three sub systems in which italy may be subdivided first we show that relationship banking is more extensive in both sub systems where small businesses prevail the fast growing northeast and center nec and the south the marginal area of dependent development second we demonstrate that relationship banking improves the allocation of credit in the nec but worsens it in the south this evidence suggests that relationship banking may be beneficial or detrimental depending on the socio economic structure

sharecropping and the interlinking of agrarian markets one of the often noted features of less developed agrarian economies is the existence of interlinkages among the land labor credit and product markets the landlord is often the supplier of credit he frequently purchases and markets the output of the tenant farmers and often sells raw materials and even consumption goods to his tenant farmers how can this phenomenon be explained what are the welfare consequences of attempts to restrict these practices which often seem to constitute restraints on free trade these are the questions to which this paper is addressed a general set of arguments applicable to both competitive and noncompetitive environments are presented to situations where all the terms of the contract are determined in an optimal way as well as to situations where many of the terms are specified institutionally section i examines interlinked credit and tenancy contracts section ii examines interlinked marketing and tenancy contracts section iii points out the possible interlinking between labor contracts and consumption goods markets and section iv presents the different equilibrium frameworks discussed in the paper such as monopoly monopsony competition and equilibria with surplus labor

the political economy of domestic tax reform in bangladesh political settlements informal institutions and the negotiation of reform abstractthis paper explains the persistence of a tax system characterised by low revenue collection and extensive informality in bangladesh it combines analysis of long term formal and informal institutions and of micro level incentives shaping negotiation of short term reform the system is unusually informal discretionary and corrupt but remains resistant to change because it delivers low and predictable tax rates to business extensive opportunities for corruption to the tax administration and an important vehicle for fundraising by political leaders and rent distribution to their elite supporters we then explore the dynamics of micro level reform and external pressure within the constraints of this overarching political bargain

institutional change in contemporary capitalism coordinated financial systems since 1990 what happens when the unstoppable force of liberalization collides with the immovable object of national financial institutions in the advanced industrial democracies to answer this question and evaluate alternative mechanisms to explain institutional change this article examines the cases of the three large european economies with concentrated share ownership france germany and italy in the formal legal mechanism interest coalitions adopt new laws leading actors to deviate from formerly stable patterns of behavior in shareholding in the joint belief shift mechanism collective actors use a triggering event to jointly reevaluate their views of how the world works and thus how their interests can best be pursued using the metric of patient capital this article shows that institutional change took place in france but not in germany or italy despite the fact that germany and italy experienced significant regulatory change in the area of corporate governance while france did not this evidence fits joint belief shift and is inconsistent with the formal legal mechanism it is likely that the importance of the two mechanisms of institutional change depends on the degree of strategic interdependence among institutional actors where it is high the joint belief shift mechanism is likely to precipitate change and where it is low the formal legal mechanism is likely to precipitate change

new market socialism a case for rejuvenation or inspired alchemy the aim of this paper is to examine the relative merits and drawbacks of two recent models of market socialism proposed by bardhan and roemer this is done first by putting these models into the perspective of the history of economic thought thus after presenting the basic elements of the early lange model as well as the austrian and new information economics critiques the necessary comparisons and contrasts are made to see what new light these new models bring into this debate in addition the internal consistency and coherence of these models is checked in terms of their own proclaimed goals last a more radical methodological critique is provided copyright 2003 oxford university press

information sharing in common agency when is transparency good when should principals dealing with a common agent share their individual performance measures about the agent s unobservable effort for producing a public good in a model with two principals who offer linear incentive schemes we show that information sharing always increases total expected welfare if the principal who is less informed about the agent s effort also cares more about the agent s output if the less informed principal cares somewhat but not too much less than the other principal about the agent s output information sharing reduces total expected welfare in our model the efficient information regime emerges as an equilibrium outcome

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

market socialism a case for rejuvenation in this paper we will outline a feasible economic mechanism of competitive socialism our claim is that competitive markets are necessary to achieve an efficient and vigorous economy but that full scale private ownership is not necessary for the successful operation of competition and markets contrary to popular impression this claim has not yet been disproved by either history or economic theory it is the failure of both the political right and the left to disentangle the concepts of private ownership and the competitive market that has led to the premature obituaries for socialism in the second section we look at the question of the soft budget constraint as an agency problem under market socialism we then propose two variants of a bank centric system of insider monitoring as a viable solution to the agency problem the next section discusses the essential problem of political accountability and the difficulty of credible pre commitment in avoiding the soft budget constraint problem and suggests ways of minimizing this problem in our proposed system we then conclude by addressing some of the other standard objections to a proposal for market socialism

corporate financial policy and the theory of financial intermediation this paper examines the optimal structure of financial contracts in an economy subject to two forms of moral hazard multiple information problems are shown to generate a role for multiple classes of financial claimants we then show that economic efficiency is enhanced if the financial structure of the economy consists of both direct and intermediated financial contract markets consequlently our results demonstrate a motivation for the complementarity between capital markets and depository financial institutions the purpose of this paper is to provide an analysis of the complementary roles of direct financial contract markets and intermediated financial contract markets in the modern theory of corporate finance the need to formulate such a model has been emphasized elsewhere by stiglitz 1985 and fama 1985 among others however an adequate explanation of this phenomenon has yet to be formulated the model described in this paper focuses on the role of multiple information problems in a theory of complex financial structure specifically in an environment with private action i e unobservable investment allocations and private information i e partially unobservable project cash flows multiple claimant classes arise to resolve the separate inefficiencies induced by moral hazard in our model the interaction of project risk and observability creates investment distortions which can be mitigated by increasing the number of outside claimant classes our results demonstrate explicitly the way in which a firm s optimal financial structure depends on the assumed configuration of an investment project s risk and observability characteristics under certain conditions we show that the optimal contractuai allocation in an economy with only direct financial contract markets consists of a debt contract and an outside equity claim this contractual configuration restores the efficient investment allocation decision we then consider the feasibility of an intermediated financial contract market in this setting we show that the existence of an intermediated financial contract market improves economic efficiency due to the reduced aggregate costs of

financial development financial structure and domestic investment international evidence does it matter for domestic investment whether a country s financial system is bank based or stock market based this paper posits that financial intermediation affects domestic investment notably by alleviating financing constraints allowing firms to increase investment in response to increased demand for output the key result is that the structure of the financial system has no independent effect on investment in the sense that it does not enhance the response of investment to changes in output while financial development makes investment more responsive to output growth consequently rather than promoting a particular type of financial structure countries should implement policies that reduce transactions costs in financial intermediation and enforce creditor and investor rights this will facilitate the development of banks and stock markets which will stimulate domestic investment

distributional coalitions and the politics of economic reform in latin america for much of the discipline of economics a closed economy is seen as the result of efforts of distributional coalitions and rent seekers to maintain sector specific protections accordingly economic liberalization is explained by the policy consistency of uncompromising reform elites students of the politics of economic adjustment in the developing world in turn have argued that reform programs concentrate costs in the present and disperse benefits in the future hence losers are prepared to engage in collective action whereas prospective winners facing uncertainty about payoffs remain disorganized they thus posit the cohesiveness and insularity of policymakers as the main variable for explaining successful reform both economists and political scientists therefore adopt a collective action approach that overlooks how groups organize in support of liberalization in the recent latin american experience however these reforms have preserved market reserves for firms that provided vital political support to and often colluded with policymaking elites this setting has thus reproduced incentives for rent seeking behavior even in the presence of comprehensive liberalization this evidence supports two interrelated theoretical claims first distributional coalitions may proliferate when the state withdraws from the economy not only when it intervenes second interest based variables retain explanatory power in political economy which state autonomy arguments disregard irrespective of whether the economy is closed or open which neoclassical perspectives overlook to highlight the centrality of interest groups favoring marketization therefore the article suggests modifications to the dominant theories of collective action and the literature on the politics of economic adjustment

the importance of equity finance for r d activity this article analyzes the importance of equity finance for the r d activity of small and medium sized enterprises we use information on almost 6 000 german smes from a company survey using the intensity of banking competition at the district level as an instrument to control for endogeneity we find that a higher equity ratio is conducive to a higher r d intensity owners may only start r d activities if they have the financial resources to sustain them until successful completion we find a larger influence of the equity ratio for young companies equity may be more important for young companies which have to rely on the original equity investment of their owners since they have not yet accumulated retained earnings and can rely less on bank financing

bank strategies toward firms in decline abstract small firms are usually in constant need of funds in addition when they are in decline it puts them in a weak and dependent relationship with a commercial bank the strategy followed by the bank toward these firms is a powerful influence on their success in turnaround and their very existence in order to identify generic strategies followed by banks this exploratory study analyzed data on bank responses to 192 client firms these firms have been classified as problem loans i e there is an actual default or the bank perceives a potential default on their loans as this problem in the firm arises largely out of weakness in its primary sources of payment which is operations problem loans are firms in the early stages of decline using factor analysis four distinct strategies toward these firms were identified 1 managerial involving efforts to influence strategy and operations of the firm through suggestions and recommendations 2 financial involving efforts to safeguard the security interests of the bank by seeking additional collateral and guarantees 3 legal involving recovery of funds through courts and 4 restructuring including efforts to improve capitalization the firms were clustered into six groups using factor scores thumbnail profiles of each cluster showed the groups to be distinct finally three sets of contextual variables representing firm loan characteristics event triggers and the bank client relationship were used to discriminate among the clusters of firms the variables found to be significant in discriminating among the groups and thus impacting the strategies followed toward them included firm size the secured status of the loan the bank s perception of whether the decline was due to internal or external reasons severity of the problems facing the firm and cooperation of the client significantly the extent of loss incurred by the firm and years as a client did not make a difference to the strategy used where reasons for decline were largely external to the firm financial and merger strategies were preferred when the causes were internal managerial and legal strategies were important firm size was significant banks were less inclined to adopt managerial and financial strategies toward small as against medium sized firms these findings point to important lessons for managers in their dealings with banks banks generally prefer to work with clients toward a turnaround rather than resorting to legal means of recovery to take advantage of this attitude firms need to demonstrate cooperation to secure favorable terms as long as the bank s funds are fully secured moreover because bank strategies are dependent on their perceptions of the causes of the problems managers need to recognize the importance of providing appropriate information to create the right perception