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

bonus culture competitive pay screening and multitasking to analyze the impact of labor market competition on the structure of compensation we embed multitasking and screening within a hotelling framework competition for talent leads to an escalation of performance pay shifting effort away from long term investments risk management and cooperation efficiency losses can exceed those from a single principal who dulls incentives to extract rents as competition intensifies monopsonistic underincentivization of low skill agents first decreases and then gives way to growing overincentivization of high skill ones aggregate welfare is thus hill shaped while inequality tends to rise monotonically bonus caps can help restore balance in incentives but may generate other distortions

the choice of regulatory instrument when there is uncertainty about compliance with fisheries regulations noncompliance is an important problem for fisheries regulators and a number of studies have considered optimal enforcement issues within fisheries regulation our article extends this literature by studying the implications of noncompliance for the choice between tax and quota regulation we first develop a general stock recruitment model of a search fishery with illegal landings and show that compliance uncertainty where the regulator is uncertain about the extent of noncompliance generates an efficiency advantage for taxes over individual transferable quotas we also provide evidence that uncertainty about compliance is an important source of uncertainty for regulators copyright 2008 oxford university press

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

the role of market forces in assuring contractual performance the conditions under which transactors can use the market repeat purchase mechanism of contract enforcement are examined increased price is shown to be a means of assuring contractual performance a necessary and sufficient condition for performance is the existence of price sufficiently above salvageable production costs so that the nonperforming firm loses a discounted steam of rents on future sales which is greater than the wealth increase from nonperformance this will generally imply a market price greater than the perfectly competitive price and rationalize investments in firm specific assets advertising investments thereby become a positive indicator of likely performance

on optimal audit mechanisms for environmental taxes abstract we consider the auditing problem of an environmental enforcement agency with fixed audit resources how to decide which firms to audit after having observed the firms taxable emissions reports the goal of the agency is to implement the socially efficient emissions level the audit mechanism is the agency s sole choice variable while other variables such as the tax rate on emissions and the fine for non compliance are determined by other governmental actors the fines and budget of the agency are constrained in such a way that the common random audit mechanism fails to implement socially efficient emissions assuming perfect information among the firms we derive an optimal audit mechanism capable of implementing the socially efficient emissions level the optimal audit mechanism creates a contest exploiting the strategic interdependencies between the firms where the probability of winning not being audited for each firm depends on costly efforts their taxable emissions reports

two sided uncertainty and up or out contracts a bilateral moral hazard problem provides a rationale for up or out employment contracts the employer sets a wage higher than opportunity cost to induce the worker to invest in firm specific capital if the individual does not make the grade it is in the firm s interest ex post to fire him had the initial arrangement not included provisions for firing individuals the firm would underreport the value of the employee wrecking the incentive scheme the basic model permits both firm and worker to be risk neutral therefore it admits a straightforward multiperiod extension which we also investigate

applying and advancing internalization theory the multinational enterprise in the twenty first century internalization theory has provided a resilient analytical framework that explicitly or implicitly underlines much of international business scholarship internalization theory is not a monolithic body of knowledge instead it has devolved into several streams each of which focuses on the interests of particular epistemic communities while also acting as a more generic organizing framework for those more broadly interested in its application to real world challenges following a review of the various streams we trace the frontiers of current research of the broader internalization framework and identify emerging themes raised by the papers in the special issue these include transaction cost considerations in the bundling and recombination of assets across diverse contexts the growing relevance of quasi internalization the theoretical challenges of bounded rationality for internalization theory and the increasing disconnect between ownership control and responsibility these developments point to new research frontiers for scholars looking to apply or advance internalization theory

profits from violating controls on the use of a polluting input profits from violating the quota charge and permit market systems are compared the results indicate that for a given permit price the violation profits of the charge and permit market systems are the same and exceed the profits from violating a quota system if the optimal use of inputs in a compliant market is lower than the quota it is also shown that under a permit market system the occurrence of violation decreases the equilibrium price of permits this implies that the profits from violating a permit market are lower than violation profits of a charge system

macroeconomic factors and microlevel bank behavior we analyze the link between banks and the macroeconomy using a model that extends a macroeconomic var for the u s with a set of factors summarizing conditions in about 1 500 commercial banks we investigate how macroeconomic shocks are transmitted to individual banks and obtain the following main findings backward looking risk of a representative bank declines and bank lending increases following expansionary shocks forward looking risk increases following an expansionary monetary policy shock there is however substantial heterogeneity in the transmission of macroeconomic shocks which is due to bank size capitalization liquidity risk and the exposure to real estate and consumer loans

do depositors punish banks for bad behavior market discipline deposit insurance and banking crises this paper empirically investigates two issues largely unexplored by the literature on market discipline we evaluate the interaction between market discipline and deposit insurance and the impact of banking crises on market discipline we focus on the experiences of argentina chile and mexico during the 1980s and 1990s we find that depositors discipline banks by withdrawing deposits and by requiring higher interest rates deposit insurance does not appear to diminish the extent of market discipline aggregate shocks affect deposits and interest rates during crises regardless of bank fundamentals and investors responsiveness to bank risk taking increases in the aftermath of crises

subjective performance measures in optimal incentive contracts objective measures of performance are seldom perfect in response incentive contracts often include important subjective components that mitigate incentive distortions caused by imperfect objective measures this paper explores the combined use of subjective and objective performance measures in respectively implicit and explicit incentive contracts naturally objective and subjective measures often are substitutes sometimes strikingly so we show that if objective measures are sufficiently close to perfect then no implicit contracts are feasible because the firm s fallback position after reneging on an implicit contract is too attractive we also show however that objective and subjective measures can reinforce each other if objective measures become more accurate then in some circumstances the optimal contract puts more weight on subjective measures because the improved objective measures increase the value of the ongoing relationship and so reduce the firm s incentive to renege we also analyze the use of subjective weights on objective performance measures and provide case study evidence consistent with our analyses

enforcement of pollution levies in china abstract this paper investigates how industrial plants react to inspections conducted by environmental authorities under the pollution levy taxation regulation in china contrary to studies in the united states and canada magat and viscusi 1990 laplante and rilstone 1996 and previous studies in china dasgupta et al 2001 we find that inspections increase plants self reported pollution by 3 45 we provide a model to analyze plants strategic reactions to the pollution levy regulation in china the model concludes that under the specific regulation plants actual pollution might increase with inspections our study provides a key policy implication that inspections by environmental authorities in china are effective for verifying plants self reported pollution but not for reducing their pollution

remediation and self reporting in optimal law enforcement abstract many environmental laws encourage firms to self report their violations to government regulators rather than subject themselves to probabilistic enforcement this paper studies self reporting enforcement regimes when there are ex post benefits of remediation or clean up remediation benefits are shown to impart two advantages to the use of self reporting beyond those identified elsewhere firstly whereas non reporting firms only engage in costly clean up when they are caught by an enforcement authority self reporting firms always engage in efficient remediation secondly with self reporting the government can costlessly impose stiffer non reporter penalties that reduce the government enforcement effort required to achieve a given level of violation deterrence

the crowding out effect of formal insurance on informal risk sharing an experimental study abstract this paper investigates the crowding out effect of formal insurance on informal risk sharing arrangements via theory and laboratory experiment our model and simulation predict that the crowding out of private transfers is often more than one for one and will reduce the total risk coverage furthermore the existence of a moderate degree of altruism exaggerates the crowding out effect especially when there is an ex ante income inequality these predictions are mostly supported by the laboratory experiment except that the crowding out effect is not more than one for one and hence the total risk coverage is not significantly reduced by formal insurance

the regulatory choice of noncompliance in emissions trading programs this paper addresses the following question to achieve a fixed aggregate emissions target cost effectively should emissions trading programs be designed and implemented to achieve full compliance or does allowing a certain amount of noncompliance reduce the costs of reaching the emissions target the total costs of achieving the target consist of aggregate abatement costs monitoring costs and the expected costs of collecting penalties from noncompliant firms under common assumptions i show that allowing noncompliance is cost effective only if violations are enforced with an increasing marginal penalty however one can design a policy that induces full compliance with a constant marginal penalty that meets the aggregate emissions target with lower expected costs this last result does not depend on setting an arbitrarily high constant marginal penalty in fact the marginal penalty need not be higher than the equilibrium marginal penalty under the policy with the increasing marginal penalty and can actually be lower finally tying the marginal penalty directly to the permit price allows the policy objective to be achieved without any knowledge of firms abatement costs

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

a micro model of the federal funds market this paper demonstrates that valuable insights into the determination of federal funds rates can be gained through modeling the micro decisions of market participants fed fund demand functions are derived for different bank valuation functions and several implications are discussed specifically it is i possible to rationalize the observation that large banks are net purchasers and small banks net sellers of fed funds ii to explain the positive spread of fed funds rates over other short term money market rates and iii to link the size of this spread to the federal reserve s underlying monetary policy strategy

the existence of self enforcing implicit contracts implicit contracts are nontrivial nash equilibria to the post hiring trading game between a worker and the employer these are supported by intrafirm rather than labor market reputations the existence of an implicit contract that supports efficient trade is proved in a simple model

the interaction of implicit and explicit contracts in repeated agency abstract in a repeated principal agent model in which the agent s actions are observable to the principal but not verifiable in court the agent s incentives derive both from salary payments based on verifiable signals and from implicit promises by the principal of bonuses for good behavior explicit short term contracts are designed to enhance the effectiveness of the infinite horizon implicit contract between principal and agent in a constrained efficient equilibrium bonuses smooth the consumption path of the risk averse agent by moving in the opposite direction from salaries total consumption and expected discounted utility for the rest of the game journal of economic literature classification numbers c7 c73 d8

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

non commitment in performance evaluation and the problem of information distortions abstract auditing is modeled in a sequential game without commitment the manager must decide whether and where to audit a worker s output taking into account all interim information he has obtained the worker will work just hard enough and show it to divert the manager from making an audit or cover up withholding information about his work to make an audit more difficult this usually raises the costs of setting work incentives so incentives are softened sometimes drastically moreover when a worker s on the job information is valuable for entrepreneurial decisions work incentives must be softened to improve the internal flow of information

the efficiency of self regulated payments systems learning from the suffolk system this paper analyzes the operation of the suffolk system an interbank note clearing network operating throughout new england from the 1820s through the 1850s banks made markets in each other s notes at par which allowed new england to avoid discounting of bank notes in trade privately enforced regu lations prevented free riding in the form of excessive risk taking observers of the suffolk system have been divided some emphasized the stability and effi these arrangements others argued that the arrangements were motivated by rent seeking on the part of boston banks and were primarily coervice and exploitative in the neighboring mid atlantic states regulations limited the potential for developing a regional clearing system centered in new york city on the model of the suffolk system this difference makes it possible to compare the performance of banks across regulatory regimes to judge the relative merits of the sanguine and jaundiced views of the suffolk system evidence supports the sanguine view new england s banks were able to issue more notes and these notes traded at uniform and low discount rates compared to those of other banks an examination of the balance sheets and stock returns of boston and new york city banks indicates that the stock market perceived that bank lending produced less risk for bank debt holders in boston than in new york the benefits of the system extended outside of boston peripheral new england banks displayed high propensities to issue notes and wer able to maintain low specie reserves boston banks did not show high profit rates or high ratios of market to book values of equity thus there is no evidence that boston banks extracted rents from their control of the payments system this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item

relational incentive contracts standard incentive theory models provide a rich framework for studying informational problems but assume that contracts can be perfectly enforced this paper studies the design of self enforced relational contracts i show that optimal contracts often can take a simple stationary form but that self enforcement restricts promised compensation and affects incentive provision with hidden information it may be optimal for an agent to supply the same inefficient effort regardless of cost conditions with moral hazard optimal contracts involve just two levels of compensation this is true even if performance measures are subjective in which case optimal contracts terminate following poor performance jel c73 d82 l14

restricting the means of exchange within organizations abstract this paper considers why firms often ban monetary exchange between their employees while encouraging these trades through other means such as through the reciprocation of favours or barter despite classical inefficiencies associated with non monetary exchange we illustrate two themes as to why non monetary trade may be preferred to allowing money first the use of non monetary trade may affect the allocation of rents in surplus enhancing ways as agents respond strategically to the existence of these rents second non monetary trade improves the ability of agents to impose sanctions on those who act dishonestly

efficient environmental policy with imperfect compliance discussions of efficient environmental policytend to recommend taxes rather than quotas ongrounds of efficiency a uniform tax willequalize marginal abatement cost betweenpolluters when polluters actions are imperfectly observable the distinction betweentaxes and quotas becomes less clear taxes maybe evaded by underreporting of emissions whilequota violations will not always be discovered this paper explores the conditions under whichthe efficiency properties of taxes continue tohold even when evasion is possible and theextent to which the fine for quota violationsplays the same role as a tax on emissions withsimilar efficiency properties

evidence of bank market discipline in subordinated debenture yields 1983 1991 we examine debenture yields over the period 1983 1991 to evaluate the market s sensitivity to bank specific risks and conclude that investors have rationally reflected changes in the government s policy toward absorbing private losses in the event of a bank failure although this evidence does not establish that market discipline can effectively control banking firms it soundly rejects the hypothesis that investors cannot rationally differentiate among the risks undertaken by the major u s banking firms an increasingly important issue in the regulation of financial institutions concerns the extent to which market investors can will recognize and control the risks of banking firms although the banking act of 1933 replaced some private risk bearing with federal deposit insurance legislators were reluctant to displace market discipline very extensively flood 1992 by the early 1980s however u s regulators had come to protect virtually all bank liability holders from credit losses most visibly at large banks which were deemed too big to fail sprague 1986 o hara and shaw 1990 this extension of the government safety net largely reflects a skepticism on the part of regulators that normal market forces could adequately identify and control bank risks while u s regulators have recently shown an increased willingness to let some bank investors bear default losses an official suspicion of the efficacy of market discipline remains widespread by contrast some prominent academic economists argue that market investors in bank debentures could provide timely and effective control over banking firms risk exposures and that the social cost of supervising banks would be lower if regulators ceded greater

formal measures in informal management can a balanced scorecard change a culture abstract we extend traditional agency theory by exploring the roles for formal measures when managerial behavior is not governed by rules formulas or contracts part i describes relational incentive contracts with informal weights on formal performance measures more importantly it also explores how formal measures could be used in models of informal management such as adaptation and coordination politics and influence leadership and informal authority part ii considers the benefits from allowing key stakeholders to develop their own potentially inferior performance measures the collaboration to create a balanced scorecard of performance measures can help change an organization s culture

credence goods costly diagnosis and subjective evaluation we study contracting between a consumer and an expert the expert can invest in diagnosis to obtain a noisy signal about whether a low cost service is sufficient or whether a high cost treatment is required to solve the consumer s problem this involves moral hazard because diagnosis effort and signals are not observable treatments are contractible but success or failure of the low cost treatment is observed only by the consumer payments can therefore not depend on the objective outcome but only the consumer s report or subjective evaluation a failure of the low cost treatment delays the solution of the consumer s problem by the high cost treatment to a second period we show that the first best solution can always be implemented if the parties discount rate is zero an increase in the discount rate reduces the range of parameter combinations for which the first best can be obtained in an extension we show that the first best is also always implementable if diagnosis and treatment can be separated by contracting with two different agents

productive low morale abstract this paper models employment relationship as a repeated principal agent problem with private evaluation the efficient contracts exhibit correlated movements between lagged wage and current effort that are consistent with the positive feedback between pay and morale in practice low morale therefore is an integral part of a well functioning relationship

university knowledge transfer private ownership incentives and local development objectives abstract we study the impact of private ownership incentive pay and local development objectives on university licensing performance we develop and test a simple contracting model of technology licensing offices using new survey information together with panel data on u s universities for 1995 99 we find that private universities are much more likely to adopt incentive pay than public ones but that ownership does not affect licensing performance conditional on the use of incentive pay adopting incentive pay is associated with about 30 40 percent more income per license universities with strong local development objectives generate about 30 percent less income per license but are more likely to license to local in state start up companies in addition we show that government constraints on university licensing activity are costly in terms of forgone license income and the creation of start up companies these results are robust to controls for observed and unobserved heterogeneity

job assignments signalling and efficiency this article analyzes a model in which information about a worker s ability is only directly revealed to the firm employing the worker other firms however use the worker s job assignment as a signal of ability three results recur throughout the analysis first wage rates tend to be more closely associated with jobs than with ability levels second there is frequently an inefficient assignment of workers to jobs i e even when a firm has complete information about a worker s output third the severity of this inefficiency tends to be negatively correlated with the level of firm specific human capital in the economy

incentives between firms and within this paper reviews the significant progress in agency theory i e the economic theory of incentives during the 1990s with an eye toward applications to supply transactions i emphasize six recent models in three pairs 1 new foundations for the theory of incentive contracts 2 new directions in incentive theory and 3 new applications to supply transactions by reviewing these six models i hope to establish three things first the theory of incentive contracts needed and received new foundations second new directions in incentive theory teach us that incentive contracts are not the only source of incentives finally and especially relevant to supply transactions the integration decision is an instrument in the incentive problem

piece rate incentive schemes this paper uses recent results from incentive theory to study heretofore informal critiques of piece rate compensation schemes the informal critiques are based on the history of failed attempts to install piece rate compensation schemes at the turn of the century the formal analysis emphasizes the importance of information and commitment in contracting the main result is as follows in a work environment characterized by hidden information and a hidden action if neither the firm nor the worker can commit to future behavior then no compensation scheme piece rate or otherwise can induce the worker not to restrict output

using market information in prudential bank supervision a review of the u s empirical evidence in principle market and government supervision provide alternative devices for controlling governing any type of corporation most national governments have instituted nonmarket regulatory mechanisms for banking firms on the grounds that market based mechanisms do not adequately discipline banks but what evidence supports this assessment why must governments assure bank solvency but not the solvency of other firms government oversight naturally displaces private efforts to evaluate and control financial firms moreover if the banking business changes over time as it assuredly has in the past decade or two the best combination of government and private supervision may change concurrently this paper reviews and evaluates the growing empirical literature on private investors abilities to assess the financial condition of banking firms the evidence supports the proposition that market investors and analysts could reasonably provide a greater proportion of corporate governance services for large traded u s financial firms

the role of promotion in inducing specific human capital acquisition workers routinely carry out activities that increase their productivity with their current employer for which they are not directly compensated for example a worker may be asked to develop relationships with clients or shop floor staff or he may develop a better understanding of how his firm operates firmspecific human capital of this type is difficult to quantify so that it is likely to be difficult to directly compensate the worker for its acquisition this paper is concerned with designing compensation schemes for employees to induce them to collect nonverifiable firm specific human capital if firms develop reputations for fairly compensating workers for skill collection the vagueness of these skills may not provide a significant incentive problem i consider the case where firms do not have the opportunity to develop reputations as a result the acquisition of human capital is subject to a dual moral hazard problem first noted in kahn and huberman 1988 first a worker only collects skills if there is a promise of a higher wage if he does so second the employer has an incentive to claim that the worker has not collected these skills even when he in fact has in order to save on wage costs so on the one hand it is difficult to repay the worker after skills are collected as the firm has an incentive to renege however the worker cannot be repaid before collecting skills as he has no subsequent incentive to collect them following the institutional literature i assume that the firm can commit to a labor contract which attaches wages to different tasks the principal purpose of the paper is to show that the firm can use this ability to commit to a wage scale for different tasks to induce a worker to collect firm specific human capital in the presence of this dual moral hazard problem where the worker is rewarded for skill acquisition by promotion to another job assume that a worker can be assigned to one of two jobs d and

subjective evaluations with performance feedback this paper models two key roles of subjective performance evaluations their incentive role and their feedback role the paper shows that the feedback role makes subjective pay feasible even without repeated interaction as long as there exists some veri able measure of performance it also shows that while subjective pay is helpful it cannot achieve full e ciency however fully e cient incentives are achievable if the rm can commit to a forced distribution of evaluations and employs a continuum of workers with a small number of workers a forced distribution is valuable only if the veri able measure is poor

endogenous verifiability and relational contracting for contracting parties it will often be uncertain whether a legal court is able to enforce the real intents of their contract the strict requirements of verifiability make it costly if not impos sible for parties to arrange their transactions and design their contract in a way that makes it completely protected by the court a way out is then to rely on self enforcing relational con tracts through repeated transactions the parties can make it costly for each other to breach the contract by letting breach ruin future trade but the self enforcing range of contracts is limited so the court s ability to enforce a contract is not without consequence for the contracting parties if possible the parties may thus have incentives to take costly actions that affect the ability of the court both ex ante preparations in terms of detailed contracting and ex post revelation of informa tion can increase the probability of fair court enforcement in this paper we focus on the former assuming that the parties are able to improve the verifiability of the contracted actions by care ful ex ante contract specifications we assume that careful contracting can improve the court s ability to verify whether an action conforms to the one described in the contract then we ask what happens to the self enforcing contract equilibrium if a party takes actions ex ante that affect the probability of verification in order to provide some answers we analyze a simple repeated principal agent game where the verifiability of the agent s actions is endogenously determined by the principal s investments in drafting an explicit contract pertaining to the quality of the agent s output the model makes it possible to identify some subtle effects of two key enforcement devices legal courts and repeated interaction note that by endogenizing verifiability we also endog enize the degree of contractual incompleteness and the equilibrium level of incompleteness will depend on the verification technology i e the resource costs that are necessary to achieve various verifiability levels this verification technology will be influenced in an essential way by the quality of courts in fact we can use the model to study relationships between two distinct aspects of courts namely their ability which influences the verification technology and their predictability which manifests itself in the equilibrium level of verifiability i e the probability with which the court in fact will verify the relevant action the repeated game approach formalizes an economic concept of trust and trustworthiness since a party honors trust if the present value of honoring exceeds the present value of abusing it the discount factor is then a proxy for the trust level in the relationship by studying the effect of variations in verification technology and the discount factor we can gain insight into the rela tionship between court ability explicit contracting trust and relational contracting below we summarize the results

endogenous institutional selection building trust and economic growth abstract private order market institutions founded on trust based relational contracts suffer adverse selection and moral hazard problems while public order market institutions have a limited capacity to enforce contracts i model agent selection between contract enforcement institutions and demonstrate that the state s contract enforcement capacity is complementary to private order contract enforcement institutions for low to moderate levels of public order enforcement capacity this suggests that initial improvements to public order institutions cause the accumulation of trust and result in economic growth in both institutions however i show that the private order institution must collapse once the public order contract enforcement capacity is too great

self reporting of pollution and the firm s behavior under imperfectly enforceable regulations abstract motivated by the nature of u s laws a model is developed for a firm that maximizes expected profit and faces imperfectly enforceable pollution standards with imperfectly enforceable reporting requirements some previous models of imperfectly enforceable standards and taxes are special cases of this general mode when the fine for violating the pollution standard is linear in excess pollution the form will equate the marginal cost of control to the marginal fine rate and thus actual pollution will be insensitive to enforcement parameters related to under reporting the more complex comparative statics that exist when the fine is non linear are analyzed and comparisons with other models are made

on indirect tax evasion abstract this paper examines some aspects of the decision to evade indirect taxes in the context of a monopolistic firm in particular the degree of interdependence between the tax shifting and the tax evasion decisions is analyzed both in the case of a fixed and of a variable probability of being detected it is shown that in the first case the shifting and evasion decisions are separable while in the second case this is no longer true in this latter case a rule according to which the probability decreases with larger declarations can be said to be an efficient one the conditions for a firm s becoming a completely submerged one are derived and finally direct and indirect tax evasion are compared it is shown that for decreasing risk aversion an indirect tax is evaded as a percentage less than a profit tax of equal yield

self reporting and the design of policies for regulating stochastic pollution abstract existing environmental regulations frequently require firms to self report their compliance status to regulatory agencies using a principal agent framework i derive and compare incentive compatible regulatory policies with and without self reporting i find the firm needs to be audited less often when self reporting is required but punished more often the sign and magnitude of the gains from self reporting depend on the relative size of audit and sanction costs the accuracy of the regulator s monitoring technology and the desired level of abatement effort

a computational model of banks optimal reserve management policy abstract this paper uses numerical methods to model the demand for excess reserves by a representative bank in a framework that includes many realistic features of the current reserve market structure in the united states in particular the model incorporates a 14 day maintenance period and an accurate representation of carryover provisions we use the model to evaluate the effect of various changes to the operating environment increased uncertainty modified penalties and changes to policy paying interest on reserves

bank size collateral and net purchase behavior in the federal funds market empirical evidence differences between large and small banks net purchase behavior in the uncollaterized federal funds and collateralized repurchase agreements markets are documented the larger a bank s asset size the larger ceteris paribus its federal funds purchases the threshold asset size is in the region of 1 billion to 2 5 billion for any size class banks located in major banking centers are more likely to be net federal funds purchasers than are banks located outside money centers in the collateralized repurchases agreements market there appears to be no size of locational discrimination indeed the smallest banks are the largest net purchasers as a fraction of assets of funds on the repurchases agreements market copyright 1989 by the university of chicago

competition and relational contracts in the rwanda coffee chain how does competition affect market outcomes when formal contracts are not enforceable and parties resort to relational contracts difficulties with measuring relational contracts and dealing with the endogeneity of competition have frustrated attempts to answer this question we make progress by studying relational contracts between upstream farmers and downstream mills in rwanda s coffee industry first we identify salient dimensions of their relational contracts and measure them through an original survey of mills and farmers second we take advantage of an engineering model for the optimal placement of mills to construct an instrument that isolates geographically determined variation in competition conditional on the suitability for mills placement within the catchment area we find that mills surrounded by more suitable areas i face more competition from other mills ii use fewer relational contracts with farmers and iii exhibit worse performance an additional competing mill also iv reduces the aggregate quantity of coffee supplied to mills by farmers and v makes farmers worse off competition hampers relational contracts directly by increasing farmers temptation to default on the relational contract and indirectly by reducing mill s profits

environmental policy instruments technology adoption incentives with imperfect compliance we study the incentives to adopt advanced abatement technologies in the presence of imperfect compliance interestingly incentives under emission taxes and pollution abatement subsidies are the same that in the perfect compliance scenario however under emission standards imperfect compliance can increase firms incentives to invest whereas under an emission permit mechanism investment incentives decrease only if widespread non compliance induces a reduction in the permit price our results are valid for fairly general characteristics of the monitoring and enforcement strategies commonly found in both theoretical and empirical applications

emission taxes versus other environmental policies in the environmental policy of most countries various forms of quotas and direct regulation are more important than environmental taxes this paper addresses four arguments which are often given against the use of emission taxes the three arguments related to information asymmetries and non convexities are valid in the sense that they point to complications in the use of environmental taxes the fourth argument is related to the employment effects of different types of environmental policies in economies with unemployment although this argument is frequently used by politicians the analysis provides no justification for it on the contrary in the model used employment is higher with environmental taxes than with nonrevenue raising environmental policies

day to day monetary policy and the volatility of the federal funds rate we propose a model of the interbank money market with an explicit role for central bank intervention and periodic reserve requirements and study the interaction of profit maximizing banks with a central bank targeting interest rates at high frequency the model yields predictions on biweekly patterns of the federal funds rate s volatility and on its response to changes in target rates and in intervention procedures such as those implemented by the fed in 1994 theoretical results are consistent with empirical patterns of interest rate volatility in the u s market for federal funds

day to day monetary policy and the volatility of the federal funds interest rate we propose a model of the interbank money market with an explicit role for central bank intervention and periodic reserve requirements and study the interaction of profit maximizing banks with a central bank targeting interest rates at high frequency the model yields predictions on biweekly patterns of the federal funds rate s volatility and on its response to changes in target rates and in intervention procedures such as those implemented by the fed in 1994 theoretical results are consistent with empirical patterns of interest rate volatility in the u s market for federal funds

banks as monitors of other banks evidence from the overnight federal funds market this study provides evidence that banks are effective monitors of their peers by showing that the interest rate paid on federal funds transactions reflects differences in credit risk across borrowers in addition the size and relative importance in the funds market of the trading institutions are shown to affect the rates charged for overnight borrowing thereby providing insight into the nature of competition in the federal funds market transaction volume and size of transaction effects are uncovered as is evidence of relationship banking between banks these results are made possible by unique data identifying individual federal funds transactions copyright 2001 by university of chicago press

atmospheric externalities and environmental taxation abstract the paper reviews the theory of environmental taxation under first best and second best conditions it argues that negative environmental externalities lead to reductions of the provision of public goods while investment in abatement increases the supply of public goods together with optimal tax rules the paper therefore also derives conditions for the optimal use of resources on abatement after brief discussions of the dimensions of time and uncertainty tax reform and the double dividend and taxes vs quotas the optimal tax model is applied to the problem of global warming with a discussion of the particular incentive problems that arise in designing and implementing global climate policy

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

market discipline by thrift depositors this paper tests for the presence of depositor discipline by examining the effect of depository institutions risk on the pricing and growth of uninsured deposits the study analyzes a large panel of thrifts that includes detailed information on interest rate schedules this information allows the authors to develop a time consistent risk profile for thrifts their empirical findings support the presence of market discipline riskier banks are found to pay higher interest rates but attract smaller amounts of uninsured deposits the authors also find that qualitative results are similar for fully insured deposits although statistical significance is substantially lower

in efficient interbank networks we study the efficiency properties of the formation of an interbank network banks face a trade off by establishing connections in the interbank market on the one hand banks improve the diversification of their liquidity risk and therefore can obtain a higher expected payoff on the other hand banks not sufficiently capitalized have risk shifting incentives that expose them to the risk of bankruptcy connecting to such risky banks negatively affects expected payoff we show that both the optimal and the decentralized networks are characterized by a core periphery structure the core is made of the safe banks whereas the periphery is populated by the risky banks nevertheless the two network structures coincide only if counterparty risk is sufficiently low otherwise the decentralized network is underconnected as compared to the optimal one finally we analyze mechanisms that can avoid the formation of inefficient interbank networks

incentives equality and contract renegotiations theory and evidence in the chinese banking industry renegotiation plays an important role in contract theory but the empirical study of renegotiation is almost non existent in the literature using a unique dataset from the chinese banking industry we find that the large majority of managerial incentive contracts are renegotiated after performances are realized we develop a model of contract renegotiation where supervisors and managers sign incentive contracts and then renegotiate them in the unique equilibrium of the model incentive contracts are almost always renegotiated ex post even though renegotiation is fully anticipated incentive contracts affect performance the predictions of the model find strong support from our empirical results

governance and contract choice theory and evidence from groundwater irrigation markets abstract this paper examines the role governance institutions play in the adoption of contracts we develop a simple model of the contracting relationship in a setting where unverifiable outcomes exist and use it to interpret data on groundwater irrigation contracts in bangladesh a distinguishing feature of this market is the variety of village level institutions which impose different degrees of punishment for contract violation consistent with the model we find households adopt contracts that rely on unverifiable outcomes which are not formally contractible when punishment for contract violation is weak conversely households adopt contracts that rely on formally contractible and verifiable outcomes when punishment is severe this evidence is consistent with contract terms being chosen optimally given what is or is not formally contractible

comparing environmental policy instruments in the presence of imperfect compliance a case study in this paper we aim to include rule making implementation monitoring and enforcement costs into the cost comparison of policy instruments we use a simple partial equilibrium model and apply it to the textile industry the model includes discrete abatement functions and costly monitoring and enforcement the case study uses individual firm data to simulate the differences in abatement costs and compliance decisions between firms we compare combinations of regulatory instruments emission taxes emission standards and technology standards and enforcement instruments criminal fines civil fines and transaction offers we show that the inclusion of information monitoring and enforcement costs indeed alters the relative cost efficiency of the different instruments

depositor discipline and changing strategies for regulating thrift institutions abstract this paper examines the role of uninsured deposits as a source of thrift funding from 1984 to 1994 and tests whether uninsured depositors have adjusted their holdings at thrifts in response to market forces such as indications of impending institutional failure it also examines how the reactions have changed over time as new legislation has been implemented the study finds that failed institutions exhibit declining proportions of uninsured deposits to total deposits prior to failure and that failing institutions attract fewer deposits from uninsured depositors prior to failure than do solvent institutions though there are some differences between the periods the empirical results indicate that uninsured deposits will be governed by market discipline and that reducing the insurance limits on deposits will increase market discipline on thrifts

implicit contracts incentive compatibility and involuntary unemployment this paper considers the enforceability of employment contracts when employees performance cannot be verified in court so that piece rate contracts are not legally enforceable part i shows that there exists a variety of self enforcing implicit contracts modelled as perfect equilibria in a repeated game and characterizes all the wage and performance outcomes that can be implemented implementation requires a strictly positive surplus from employment the form of the contract depending on how this surplus is divided between firm and employee piece rate contracts and contracts with an informally agreed bonus can be made self enforcing but the use of severance pay and bonding does not extend the set of implementable allocations the resulting contracts resemble actual labor contracts more than do the contracts in standard principal agent models part ii analyses market equilibrium with these contracts also modelled as perfect equilibria in a repeated game and shows that many such equilibria exist unfilled vacancies and unemployed workers can co exist despite the existence of contracts that are potentially mutually beneficial for those jobs that are filled any division of the potential surplus is possible so that the market can have at the same time involuntary unemployment and vacancies that are unfilled despite filled jobs earning positive profits as a criterion for selecting equilibria a notion of renegotiation proofness is applied then either all workers are employed or all jobs filled but any division of the potential surplus is still possible the paper explores what further restrictions on beliefs give rise to a walrasian outcome in which all the potential surplus goes to the short side of the market and to an efficiency wage type outcome in which the potential surplus goes to the long side

a matter of relational style loan officer consistency and exchange continuity in microfinance social scientists have long considered what mechanisms underlie repeated exchange three mechanisms have garnered the majority of this attention formal contracts relational contracts and relationally embedded social ties although each mechanism has its virtues all three exhibit a common limitation an inability to fully explain the continuation and stability of intertemporal exchange between individuals and organizations in the face of change drawing on extensive quantitative data on approximately 450 000 microfinance loans made by a microfinance institution in mexico from 2004 to 2008 that include random assignment of loan officers this research proposes the concept of relational styles to help explain how repeated exchange is possible in the face of personnel change we define relational styles as systematically reoccurring patterns of interaction employed by social actors within and across exchange relationships in this paper between microfinance clients and loan officers we show that relati

rent seeking versus productive activities in a multi task experiment incentive instruments like asset ownership and performance pay often have to strike a balance between the productive incentives and the rent seeking incentives they provide standard theory predicts that these instruments become less attractive when the effectiveness of rent seeking activities increases in contrast theories that emphasize the importance of reciprocity suggest that this relationship may go the other way around in this paper we test these predictions by means of a laboratory experiment by and large our findings confirm standard theory incentive instruments typically become less attractive when the scope for rent seeking activities increases however reciprocity motivations do seem to mitigate the adverse effects of rent seeking opportunities to a considerable extent