credit constraints equity market liberalizations and international trade abstract this paper provides evidence that credit constraints are an important determinant of international trade flows i exploit shocks to the availability of external finance and examine the impact of equity market liberalizations on the export behavior of 91 countries in the 1980 1997 period i show that liberalizations increase exports disproportionately more in financially vulnerable sectors that require more outside finance or employ fewer collateralizable assets this result is not driven by cross country differences in factor endowments and is independent of simultaneous trade policy reforms moreover it obtains with equal strength in the full panel of countries as well as in both panel and event study analyses of countries which removed capital controls during the sample period finally the effects of liberalizations are more pronounced in economies with initially less active stock markets indicating that foreign equity flows may substitute for an underdeveloped domestic financial system similarly opening equity markets has a greater impact in the presence of higher trade costs caused by restrictive trade policies

banking deregulation and industry structure evidence from the french banking reforms of 1985 we investigate how the deregulation of the french banking industry in the 1980s affected the real behavior of firms and the structure and dynamics of product markets following deregulation banks are less willing to bail out poorly performing firms and firms in the more bank dependent sectors are more likely to undertake restructuring activities at the industry level we observe an increase in asset and job reallocation an improvement in allocative efficiency across firms and a decline in concentration overall these findings support the view that a more efficient banking sector helps foster a schumpeterian process of creative destruction many economies around the world are characterized by heavily regulated bank

off the cliff and back credit conditions and international trade during the global financial crisis abstract we study the collapse of international trade flows during the global financial crisis using detailed data on monthly us imports we show that credit conditions were an important channel through which the crisis affected trade volumes by exploiting the variation in the cost of capital across countries and over time as well as the variation in financial vulnerability across sectors countries with higher interbank rates and thus tighter credit markets exported less to the us during the peak of the crisis this effect was especially pronounced in sectors that require extensive external financing have limited access to trade credit or have few collateralizable assets exports of financially vulnerable industries were thus more sensitive to the cost of external capital than exports of less vulnerable industries and this sensitivity rose during the financial crisis the quantitative implications of our estimates for trade volumes highlight the large real effects of financial crises and the potential gains from policy intervention

credit market imperfections and patterns of international trade and capital flows this paper offers two simple models to illustrate how corporate governance contractual enforcement and the balance sheet condition of the business sector etc can affect the patterns of international trade and capital flows in the presence of credit market imperfections jel d52 f15 f21 f40

institution induced productivity differences and patterns of international capital flows abstract this paper studies theoretically how the cross country differences in the institutional quality iq of the domestic credit markets shape the patterns of international capital flows when such iq differences cause productivity differences across countries iq affects productivity by changing productivity agency cost trade offs across heterogeneous investment projects which have opposite effects on the investment and capital flows from exogenous productivity differences the overall effect of iq could generate u shaped responses of the investment and capital flows this means that capital could flow from middle income to low income and high income countries and starting from a low iq a country could experience both growth and a current account surplus after an institutional reform more generally the results here offer some cautions when interpreting the evidence on the role of productivity and institutional differences on capital flows and question the validity of using financial frictions as a proxy for the quality of financial institutions

the heterogeneous effect of finance on international trade is the impact of financial development on international trade heterogeneous being positive negative or null across manufacturing sectors and is it dependent on the level of sectoral requirement on external finance for capital need to examine these questions this article uses a panel trade database on 21 manufacturing sectors in 80 countries between 2000 and 2009 the analysis demonstrates that the effect of financial development on trade is indeed heterogeneous by estimating a coefficient for each sector and showing that the signs and significance levels vary across them the article also demonstrates that sectors with strong reliance on external finance export higher volume from countries with developed financial system and that financial development reduces trade in industries with low financial dependence level

content based agendas and qualified majorities in sequential voting we analyze sequential binary voting schemes in settings where several privately informed agents have single peaked preferences over a finite set of alternatives and we focus on robust equilibria that do not depend on assumptions about the players beliefs about each other our main results identify two intuitive conditions on binary voting trees ensuring that sincere voting at each stage forms an ex post perfect equilibrium in particular we uncover a strong rationale for content based agendas if the outcome should not be sensitive to beliefs about others nor to the deployment of strategic skills the agenda needs to be built from the extremes to the middle so that more extreme alternatives are both more difficult to adopt and are put to vote before other more moderate options an important corollary is that under simple majority the equilibrium outcome of the incomplete information game is always the condorcet winner finally we aim to guide the practical design of schemes that are widely used by legislatures and committees and we illustrate our findings with several case studies

the finance growth nexus evidence from bank branch deregulation this paper provides evidence that financial markets can directly affect economic growth by studying the relaxation of bank branch restrictions in the united states we find that the rates of real per capita growth in income and output increase significantly following intrastate branch reform we also argue that the observed changes in growth are the result of changes in the banking system improvements in the quality of bank lending not increased volume of bank lending appear to be responsible for faster growth

north south lending and endogenous domestic capital market inefficiencies abstract we develop an open economy model of intertemporal trade under asymmetric information capital market imperfections are endogenous and depend on a country s stage of economic development relative to the perfect information benchmark north south capital flows are dampened and possibly reversed and world interest rates are lower whereas riskless rates are equalized across borders the domestic loan rate is higher in poorer countries the model can be applied to a number of policy issues including the debt overhang problem the indexation of foreign public debts and the effect of income distribution on growth

uncertainty aversion and dynamic consistency this paper applies a proposal of m machina 1989 for updating nonexpected utility preferences to d schmeidler s 1989 nonadditive probability model the authors discover that the updated preferences may not themselves satisfy schmeidler s axioms despite this the updates of uncertainty averse preferences are themselves uncertainty averse copyright 1996 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

financial constraints the distribution of wealth and international trade we develop a simple theoretical model to examine the impact of the distribution of wealth on the patterns of trade when capital markets are imperfect our model predicts that the dispersion of wealth can be a determinant of comparative advantage for low income countries with poor financial institutions we find support for these prediction using export and financial panel data from a large sample of countries

repossession and the democratization of credit we exploit a 2004 credit reform in brazil that simplified the sale of repossessed cars used as collateral for auto loans we show that the reform expanded credit to riskier self employed borrowers who purchased newer more expensive cars the legal change has led to larger loans with lower spreads and longer maturities although the credit reform improved riskier borrowers access to credit it also led to increased incidences of delinquency and default our results shed light on the consequences of a credit reform and highlight the crucial role that collateral and repossession play in the liberalization and democratization of credit

the 2005 lawrence r klein lecture emergent class structure this article presents a model of the emergent class structure in which a society inhabited by inherently identical households may be endogenously split into the rich bourgeoisie and the poor proletariat for some parameter values the model has no steady state where all households remain equally wealthy in this case the model predicts emergent class structure or the rise of class societies even if every household starts with the same amount of wealth the society will experience symmetry breaking and will be polarized into two classes in steady state where the rich maintain a high level of wealth partly due to the presence of the poor who have no choice but to work for the rich at a wage rate strictly lower than the fair value of labor the nonexistence of the equal steady state means that a one shot redistribution of wealth would not be effective as wealth inequality and the class structure would always reemerge thus the class structure is an inevitable feature of capitalism for other parameter values on the other hand the model has the unique steady state which is characterized by perfect equality in this case the model predicts dissipating class structure or the fall of class societies even if the society starts with significant wealth inequality labor demand by the rich employers pushes up the wage rate so much that workers will escape from the poverty and eventually catch up with the rich eliminating wealth inequality and the class structure in the long run in an extension we introduce self employment which not only provides the poor with an alternative to working for the rich but also provides the rich with an alternative to investment that creates jobs due to this dual nature of self employment the effects of self employment turn out to be quite subtle yet within the present framework it is possible to offer a complete characterization of the steady states even in the presence of self employment

the competitive effects of credit constraints in the global economy as credit constraints exclude some firms from external finance and thus from market entry they affect prices and markups by altering the degree of competition lower credit constraints allow less productive firms to enter with the following consequences on the one hand more competition tends to reduce average prices but on the other hand less productive firms charge above average prices the overall effect is thus ambiguous we therefore formulate and structurally estimate a quantitative multi country version of the model to gauge the direction and magnitude of the effects of credit constraints in a model with variable firm specific markups over marginal costs in a sample of 11 european countries manufacturing sectors between 2000 and 2005 we find that an abolishment of credit constraints reduces markups by about 6 1 on average while average prices are predicted to increase by 1 6 the latter indicates that the effect of credit constraints on productivity dominates the one on competition

capital market imperfections international credit markets and nonconvergence abstract we consider a two country growth model with international capital markets these markets fund capital investment in both countries and operate subject to a costly state verification csv problem investors in each country require some external finance but also provide internal finance which mitigates the csv problem when two identical except for their initial capital stocks economies are closed they necessarily convergemonotonicallyto the same steady state output level unrestricted international financial tradeprecludesotherwise identical economies from converging and poor countries are necessarily net lenders to rich countries oscillation in real activity and international capital flows can occur journal of economic literatureclassification numbers e00 f00 f34 g14

institutions and moral hazard in open economies i investigate the interaction between international trade and national institutional development in an environment characterized by heterogeneous individuals choosing their education levels to maximize their utilities and institutions alleviating moral hazard by allowing managers to better observe and verify the productive efforts of workers liberalized trade allows institutions to serve as independent sources of comparative advantage in this setting i examine the effect of trade liberalization on the distribution of income in institutionally developed and underdeveloped nations trade affects income via a direct effect on prices and an indirect effect on the incentives to invest in education

a single stage approach to anscombe and aumann s expected utility anscombe and aumann showed that if one accepts the existence of a physical randomizing device such as a roulette wheel then savage s derivation of subjective expected utility can be considerably simplified they however invoked compound gambles to define their axioms we demonstrate that the subjective expected utility derivation can be further simplified and need not invoke compound gambles our simplification is obtained by closely following the steps by which probabilities and utilities are elicited

disappointment and dynamic consistency in choice under uncertainty the central proposition of disappointment theory is that an individual forms expectations about uncertain prospects and that if the actual consequence turns out to be worse than or better than that expectation the individual experiences a sensation of disappointment or elation generating a decrement or increment of utility which modifies the basic utility derived from the consequence by incorporating a simple disappointment elation function into a model of individual choice many observed violations of conventional expected utility axioms including violations of savage s sure thing principle and the isolation effect can be predicted and defended as rational and dynamically consistent behaviour

law finance and firm growth we investigate how differences in legal and financial systems affect firms use of external financing to fund growth we show that in countries whose legal systems score high on an efficiency index a greater proportion of firms use long term external financing an active though not necessarily large stock market and a large banking sector are also associated with externally financed firm growth the increased reliance on external financing occurs in part because established firms in countries with well functioning institutions have lower profit rates government subsidies to industry do not increase the proportion of firms relying on external financing the corporate finance literature suggests that market imperfections caused by conflicts of interest and informational asymmetries between corporate insiders and investors constrain firms in their ability to fund investment projects the magnitude of these imperfections depends in part on the effectiveness of the legal and financial systems because these systems differ across countries the literature implies that there should exist systematic cross country differences in firms ability to obtain external capital to finance investment in this paper we examine whether the underdevelopment of legal and financial systems does prevent firms in some countries from investing in potentially profitable growth opportunities in particular we focus on the use of long term debt or external equity to fund growth see our earlier work demirgut kunt and maksimovic 1996a which compares firms financial structures in developed and developing countries and finds the greatest difference to be in the provision of long term credit we estimate a financial planning model to obtain the maximum growth rate that each firm in our thirty country sample could attain without access to long term financing we then compare these predicted growth rates to growth rates realized by firms in countries with differing degrees of development in their legal and financial systems our approach enables us to identify specific characteristics of the legal and financial systems that are associated with long term financing of firm growth thus we provide a micro level test of the hypoth

stochastic dominance in regret theory the regret theory of choice under uncertainty is known to admit intransitivities in preference relations in this paper the stochastic dominance properties of the theory are examined it is shown that the usual definition of first stochastic dominance is not satisfied by regret theoretic preferences and that in general violations of first stochastic dominance are not merely permitted but required an exact characterization of the stochastic dominance rule corresponding to regret theoretic preferences is presented this concept is weaker than the usual definition but stronger than the notion of statewise dominance in which one prospect yields a preferred outcome with probability 1 theories of choice under uncertainty have proliferated in recent years after a long period in which the expected utility eu approach of von neumann and morgenstern 1944 was pre eminent the breakdown of the dominance in eu theory reflects the increasing body of evidence that the choices made by many people systematically violate the predictions of the theory the axiomatic foundations of the theory and in particular the independence axiom have also received severe questioning ever since the famous critique of allais 1953

parliamentary procedure principal forms and political effects legislative agendas depend on parliamentary procedure of which there are two main versions and a noteworthy variant anglo american euro latin and mex italian theorems proved here identify the output of each procedure under strategic and sincere voting surprises abound strategic voting makes anglo american procedure more restrictive than euro latin and either sort of voting makes anglo american procedure more conservative or stabilizing although sincere voting makes mex italian procedure equivalent to the similar looking euro latin strategic voting makes it equivalent rather to anglo american also strategic voting reduces the effects of agenda manipulation only under mex italian procedure these findings raise new research questions

institutional quality and international trade institutions quality of contract enforcement property rights shareholder protection and the like have received a great deal of attention in recent years yet trade theory has not considered the implications of institutional differences beyond treating them simply as different technologies or taxes the purpose of this paper is twofold first we propose a simple model of international trade in which institutional differences are modeled within the framework of incomplete contracts we show that doing so reverses many of the conclusions obtained by equating institutions with productivity institutional differences as a source of comparative advantage imply among other things that the less developed country may not gain from trade and factor prices may actually diverge as a result of trade second we test empirically whether institutions act as a source of trade using data on us imports disaggregated by country and industry the empirical results provide evidence of institutional content of trade institutional differences are an important determinant of trade flows

financial deregulation in france in the past few years an extraordinary amount of financial deregulation has taken place in france only as recently as 1983 the country was under tight capital controls faced a wide range of administered and cartelised interest rates possessed a relative sparsity of financial instruments and had its banks strapped in a credit corset or credit ceiling arrangement known as the encadrement du credit today there is only a vestige of the capital controls the only administered interest rates that remain concern bank deposits a host of new financial instruments has emerged and there is no encadrement banking is no longer the secure business that it used to be quite significantly the first bank failure since world war ii occurred in 1987 a few other have followed since commission bancaire 1989 a couple of french bankers put the matter nicely in a recent assessment henceforth the french banking apparatus will need to show that it can manage risks instead of regulations levy lang and henrot 1987 this paper will provide a quick guide to the deregulation why it happened and what took place in addition some of the basic questions posed by the deregulation will be raised for lack of space a fundamental knowledge of general french conditions prior to the deregulation will be taken for granted the reform took sail under the socialists in 1984 85 after a period of socialist advance into opposite waters toward bank nationalisation and further regulation although the liberahsation was presented as necessary to assure the survival of paris as a financial center in view of deregulation abroad the move looks much more like a deliberate choice we see this best by comparing france and germany the german domestic financial environment is a fairly regulated one but as a country with free capital movements and the leader of monetary policy in the european monetary system ems germany has seen little cause to deregulate its financial markets what pressure to liberalise it has felt has come from the european commission following the white paper on european financial integration in june 1985 on the other hand france as a country which required capital controls to steer an independent course in macroeconomic policy in the ems turned toward financial deregulation before the white paper appeared when economic historians look back at this important juncture in european

a more robust definition of subjective probability the goal of choice theoretic derivations of subjective probability is to separate a decisionmaker s underlying beliefs subjective probabilities of events from their preferences attitudes toward risk classical derivations have all relied upon some form of the marschak samuelson independence axiom or the savage sure thing principle which imply that preferences over lotteries conform to the expected utility hypothesis this paper presents a choice theoretic derivation of subjective probability in a savage type setting of purely subjective uncertainty which neither assumes nor implies that the decisionmaker s preferences over lotteries necessarily conform to the expected utility hypothesis copyright 1992 by the econometric society

foreign banks and the dual effect of financial liberalization in emerging countries credit market liberalization is often motivated with the financial deepening generated by the entry of foreign financial institutions however there is a risk that liberalization may benefit internationally active export oriented businesses at the expense of domestically oriented ones this paper models a two sector economy in which foreign lenders are more efficient than local lenders at extracting value from internationally tradable collateral assets under some conditions the entry of foreign lenders eases entrepreneurs access to the credit market and raises asset prices and output but in other circumstances it reduces the depth of the credit market and depresses the price of nontradables and output liberalization can have a contractionary impact by inducing a reallocation of credit from the nontradables to the tradables sector

trade and capital flows a financial frictions perspective the classical heckscher ohlin mundell paradigm states that trade and capital mobility are substitutes in the sense that trade integration reduces the incentives for capital to ow to capital scarce countries in this paper we show that in a world with heterogeneous nancial development the classic conclusion does not hold in particular in less nancially developed economies south trade and capital mobility are complements within a dynamic framework the complementarity carries over to nancial capital ows this interaction implies that deepening trade integration in south raises net capital in ows or reduces net capital out ows it also implies that at the global level protectionism may back re if the goal is to rebalance capital ows when these are already heading from south to north our perspective also has

credit traps and credit cycles we develop a simple macroeconomic model of credit market imperfections with heterogeneous investment projects the projects differ in productivity the investment requirement and the severity of agency problems behind the borrowing constraints a movement in borrower net worth shifts the composition of the credit between projects with different productivity levels thereby causing endogenous investment specific technological change furthermore such endogenous technological change in turn affects borrower net worth these composition effects could give rise to credit traps credit collapse leapfrogging credit cycles and growth miracles in the dynamics of the aggregate investment and borrower net worth jel e22 e44 o33

gains from trade and the sovereign bond market abstract increasing international flows of goods services and financial assets have been shown to increase a country s welfare through various channels this paper studies how a country s access to a bond market affects its welfare gains from international trade we do so by incorporating a sovereign bond market into a simple armington 1969 s trade model while standard trade models suggest surprisingly small gains from trade our model implies that introducing channels through a sovereign bond market greatly magnifies the gains from trade key mechanisms in the model are confirmed by data and the results are found to be robust to a variety of considerations

on the origins of comparative advantage this paper proposes a simple theory of international trade with en dogenous technological dierences across countries the core of our analysis lies in the determinants of the division of labor we consider a world economy comprising two large countries with a continuum of goods and one factor of production labor each good is characterized by its complexity de ned as the number of tasks that must be per formed to produce one unit there are increasing returns to scale in the performance of each task which creates gains from specialization and uncertainty in the enforcement of each contract which create transac tion costs the trade obetween these two forces pins down the size of productive teams across sectors in each country under free trade the country where teams are larger specializes in the more complex goods in our model it is the country where the product of institutional qual ity and human per worker capital is larger hence better institutions and more educated workers are complementary sources of comparative advantage in the more complex industries

a foundation for strategic agenda voting abstract we offer complete characterizations of the equilibrium outcomes of two prominent agenda voting institutions that are widely used in the democratic world the amendment also known as the anglo american procedure and the successive or equivalently the euro latin procedure our axiomatic approach provides a proper understanding of these voting institutions and allows comparisons between them and with other voting procedures

when is quality of financial system a source of comparative advantage abstract dominant theories of trade tend to ignore the role of finance as a source of comparative advantage on the other hand the finance literature places financial institutions as a driver of economic growth this paper unites these two competing schools of thought in a general equilibrium framework for economies with high quality institutions defined by the competitiveness of the financial sector the quality of corporate governance and the level of property rights protection finance is passive on the other hand for economies with low quality institutions the quality of the financial system is an independent source of comparative advantage interestingly the conventional measure of financial development the size of the financial market relative to gdp does not adequately capture the underlying quality of financial institutions in addition free trade may reduce the aggregate income in south financial capital tends to flow from south to north

regulations market structure institutions and the cost of financial intermediation this paper examines the impact of bank regulations market structure and national institutions on bank net interest margins and overhead costs using data on over 1400 banks across 72 countries while controlling for bankspecific characteristics the data indicate that tighter regulations on bank entry and bank activities boost the cost of financial intermediation inflation also exerts a robust positive impact on bank margins and overhead costs while concentration is positively associated with net interest margins this relationship breaksdownwhencontrolling for regulatory impediments to competition and inflation furthermore bank regulations become insignificant when controlling for national indicators of economic freedom or property rights protection while these institutional indicators robustly explain cross bank net interest margins and overhead expenditures thus bank regulations cannot be viewed in isolation they reflect broad national approaches to private property and competition

financial market globalization symmetry breaking and endogenous inequality of nations this paper investigates the effects of financial market globalization on the inequality of nations the world economy consists of inherently identical countries which differ only in their levels of capital stock each country is represented by the standard overlapping generations model modified only to incorporate credit market imperfection an integration of financial markets affects the set of stable steady states as it changes the balance between the equalizing force of the diminishing returns technology and the unequalizing force of the wealth dependent borrowing constraint the model is tractable enough to allow for a complete characterization of the stable steady states in the absence of the international financial market the world economy has a unique steady state which is symmetric and stable in the presence of the international financial market symmetry breaking occurs under some conditions that is the symmetric steady state loses its stability and stable asymmetric steady states come to exist in the stable asymmetric steady states the world economy is endogenously divided into the rich and poor countries the borrowing constraints are binding in the poor but not in the rich the world output is smaller the rich are richer and the poor are poorer in any of the stable asymmetric steady states than in the unstable symmetric steady state

changes in job security and their causes an empirical analysis for france 1982 2002 abstract in this paper we analyze the changes in the risks of involuntary job loss in france between 1982 and 2002 we find that these risks are higher in the 1990s than they were in the 1980s we develop an econometric analysis to separate the effects of institutional changes from the effects of new technologies our estimates show that the rise in job loss rates is significantly more pronounced in industries that have the largest share of r d workers and the largest rate of new technologies users these findings suggest that technological changes contribute to decreasing the incentive to keep workers for long period of time and to increasing job insecurity