the principal agent relationship with an informed principal ii common values in many circumstances a principal may have relevant private information when she proposes a contract to an agent we analyze such a principal agent relationship as a noncooperative game the principal proposes a contract which is accepted or rejected by the agent who for most of our analysis has no private information the contract is executed if accepted otherwise the reservation allocation takes effect this allocation may be determined by a pre existing contract which the principal by her proposal is attempting to renegotiate or it may simply be the no trade point in this paper we assume that the principal s information directly affects the agent s payoff before solving the game we discuss pareto efficiency with asymmetric information we define an incentive compatible allocation to be weakly interim efficient wie if there exists no alternative incentive compatible allocation that both parties prefer for all possible beliefs that the agent might have about the principal s private information type we show that any wie allocation is interim efficient ie for some beliefs the rothschild stiglitz wilson rsw allocation relative to the reservation allocation l is the allocation that maximizes the payoff of each type of principal within the class of incentive compatible allocations that guarantee the agent at least the utility he gets from a irrespective of his beliefs about the principal s type the equilibrium set of the contract proposal game consists of the allocations that weakly pareto dominate the rsw allocation thus there is a unique equilibrium outcome if and only if the latter is ie and the equilibrium outcome is the rsw allocation itself after characterizing the equilibrium allocations we study those that are renegotiation proof when either the principal or the agent leads the renegotiation we then compare our contract proposal game which is a signaling model with its screening counterpart we conclude by extending our results to the case in which the agent as well as the principal has private information under the assumption of quasi linear preferences

risk shifting incentives of depository institutions a new perspective on federal deposit insurance reform abstract we characterize the risk shifting incentives of a depository institution as arising fundamentally from the existence of limited liability and the associated convex payoff to equity holders this risk incentive feature is unchanged by deposits being insured and hence excessive risk taking by depository institutions is not solely attributable to the flat rate insurance premium consequently the incentive problem cannot be resolved through a risk based insurance premium contrary to the prevailing view we propose a solution that eliminates risk shifting through an optimal tax structure and specify a corresponding insurance premium that is revenue neutral from the social planner s regulator s standpoint the solution is derived in the context of a social objective function that trades off the benefits of liquidity services by banks and the unique informational role of bank loans with the costs of investment distortions engendered by risk shifting

the impact of the euro on risk exposure of the world s major banking industries abstract in this paper we examine if the introduction of the euro impacted the risk exposures risk premiums and hence the cost of equity of the banking industry of 11 eurozone countries five non eurozone european countries and three non european countries using a multi factor asset pricing model that allows time variation in the risk exposures we find a statistically significant and economically large decline in the cost of equity of the banking industry across the three groups of countries following the introduction of the euro though we find an increase in the market and currency exposures after the euro consistent with increased competition among banks the fall in the cost of equity arises from an economically large decline in the currency premium as expected the eurozone banking industry experienced the largest decrease our results are inconsistent with the argument that increased banking competition arising from the legislative changes accompanying the introduction of the euro would result in an increase in the overall risk premium of the banking sector

redistribution state trading enterprises and politically optimal tariffs state trading enterprises stes are widely used and can be viewed as instruments of trade policy we analyse two aspects the first is their potential trade distorting effect the second is how they modify the case for the politically optimal tariff we show that the ste can reduce the need for a tariff designed for domestic redistribution this result introduces some ambiguity about how stes are interpreted from a multilateralist perspective they should be dealt with in the same way as other non tariff barriers from a nationalistic perspective they can reduce the need for politically optimal redistribution entreprises d etat impliquees dans le commerce international et tarifs politiquement optimaux les entreprises d etat impliquees dans le commerce international eeici sont communement utilisees comme instruments de politique commerciale on analyse deux aspects de cette intervention le premier est leur effet potentiel de distorsion sur les flux commerciaux le second est jusqu a quel point cette intervention modifie l argument du tarif politiquement optimal on montre que les eeici peuvent reduire le besoin d un tarif defini pour des fins de redistribution au niveau domestique le resultat injecte une certaine ambiguite dans le traitement des eeici d un point de vue international on devrait les traiter comme toute autre barriere non tarifaire d un point de vue nationaliste ils peuvent reduire le besoin de faire appel au politiquement optimal

rent seeking bureaucracies and oversight in a simple growth model abstract following recent cross country empirical work research on public policy and growth has come to examine the impact of inefficient or corrupt bureaucracies most of this work has emphasized the interactions of bureaucracies with private markets by contrast this paper focuses on the relationship between rent seeking bureaucracies and their political authority we show that when oversight is relatively costly as in many developing economies the political authority exercises little monitoring of its agencies which reduces the effectiveness of productive government spending moreover when the technology used to provide public services is poor bureaus better succeed in requesting overly large budgets before triggering any monitoring both of these characteristics contribute to reducing the growth rate of already poor economies

rent seeking mechanism for safety supervision in the chinese coal industry based on a tripartite game model abstract there are extensive governmental rent seeking activities in safety supervision of the chinese coal industry the rents come from industry safety barriers low resource taxes and privilege policies for coalmining enterprises the rent seeking mechanism was analyzed using a model comprising dynamic games with incomplete information the equilibrium results indicate that the probability of national supervision is influenced by penalties and bribery there is negative correlation with penalties and positive correlation with bribery the rent seeking probability of a governmental safety supervision department is influenced by several factors and positively correlates with the cost of national supervision the probability of bribery of coalmining enterprises is influenced by several factors and positively correlates with wages of governmental departments and a reasonable rent seeking range reversed rent seeking reduces the probability of bribery but it s not worth recommending some recommendations are proposed

bureaucracy investment and growth abstract using data from 21 oecd economies for the period 1960 1990 we construct a measure of bureaucracy and show that it is negatively related to economic growth because it has a negative effect on investment

imperfect information and the theory of government intervention in farm credit markets this paper describes some possible economic motivations for government intervention in farm credit markets these motivations are made possible by explicit departures from the perfect information and complete market assumptions that underlie both the neoclassical competitive paradigm and the fundamental theorems of welfare economics to be more precise the analysis focuses on three types of asymmetric information between farmers and prospective outside investors both of whom are assumed to be risk neutral arguably the three informational asymmetries examined here represent natural departures from perfect markets in that unlike the unencumbered neoclassical model each elicits farmers optimal use of debt contracts rather than equity instruments or other contractual forms to raise investment capital despite their consistency with observed contractual choices all three of the models analyzed below yield free market equilibria that diverge from first best perfect information outcomes given the inefficiency of these market equilibria the key question raised and discussed here is can government improve upon the derived competitive outcomes and if so how despite the enormity of the credit rationing literature only a few extant studies address this question in models that are consistent with debt contracts among them are demeza and webb 1987 1988 1989 and innes 1988 which focus on the third type of informational asymmetry considered below the other two information structures posited in this paper have been studied in several analyses of credit markets but with attention focused on positive attributes of the unfettered competitive equilibrium rather than on prospective implications for welfare enhancing government intervention in what follows th s literature is surveyed and for the first two information structures some new policy results a e presented a critical discussion of the paper s limitations concludes the article

capital standard forbearance and deposit insurance pricing under garch abstract we propose a multiperiod deposit insurance pricing model that simultaneously incorporates the capital standard and the possibility of forbearance the model employs the recently developed garch option pricing technique in determining the deposit insurance value our model offers two distinctive advantages first it explicitly considers the implications of the strict enforcement on capital standard as stipulated in fdic improvement act of 1991 second the use of the garch model allows us to capture many robust features exhibited by financial asset returns by the garch option pricing theory the value of a contingent claim is a function of the asset risk premium this unique feature is found to be prominent in determining the bank s deposit insurance value we also examine the effects of capital forbearance and moral hazard behavior in this multiperiod deposit insurance setting

an incentive approach to banking regulation we examine the optimal design of a risk adjusted deposit insurance scheme when the regulator has less information than the bank about the inherent risk of the bank s assets adverse selection and when the regulator is unable to monitor the extent to which bank resources are being directed away from normal operations toward activities that lower asset quality moral hazard under a socially optimal insurance scheme 1 asset quality is below the first best level 2 higher quality banks have larger asset bases and face lower capital adequacy requirements than lower quality banks and 3 the probability of failure is equated across banks perihaps t he most troubling aspect of the current deposit insurance system is the distortions caused by the pervasive use of an insurance premium that is independent of risk the undesirable incentives that result when such a system is employed in a world with imperfect information have long been recognized in the literature of particular concern is the incentive banks have to increase the risk of their portfolio in order to maximize the value of the deposit insurance provided in some respects this problem is similar to the incentives generated by corporate debt however the solution to this problem may be different in a banking context because the creditors include the deposit insurer who has the power to regulate the banks conceivably regulation may be able to mitigate the informational problem at hand in this paper we examine some of the tradeoffs that arise in the design of a regulatory system for banks

managerial compensation contract and bank bailout policy abstract under the incomplete contract framework we consider an optimal regulatory policy for motivating bank equity owners and bank managers to restructure the bad loans of their banks in the presence of managerial compensation contracts with stock options the regulatory policy studied in this paper is mainly concerned with the design of repayment schedules in the scheme of injection of cash funds into insolvent banks by the regulator we show that the regulator cannot necessarily attain the social optimal allocation by injecting cash funds into insolvent banks through the purchase of subordinated bonds with the risk free interest rate however even in that case we also suggest that if the regulator injects cash funds into active restructuring banks through the purchase of subordinated bonds or preferred stocks with less stringent repayment conditions and nationalizes passive restructuring banks the regulator can attain the social optimal allocation by performing such a non linear injection scheme under certain conditions

a theory of corporate capital structure and investment this article uses a general equilibrium framework to explore the origins and limitations of financial intermediaries in the model investors have a generic lending technology that they can improve at a cost those who upgrade become intermediaries to exploit their advantage however conflicts with depositors will limit the banks market presence and they will only lend to moderately endowed firms while bondholders will finance cash rich corporations the article also analyzes the extent to which investors adopt the superior lending technique the nature of bank competition and how corporate and bank conditions affect interest rates and investment copyright 2004 oxford university press

forbearance deposit insurance pricing and incentive compatible bank regulation abstract this paper examines the incentive compatible role of regulatory forbearance policy in the context of optimal bank regulation under moral hazard we show that when a bank s asset portfolio returns have market risk the regulator can influence the bank s choice of ex ante risk by delaying the closure of an insolvent bank the optimal closure policy involves co ordinating the closure decision with market wide performance such a policy may significantly alleviate the bank s ex ante risk shifting problem furthermore even fixed rate deposit insurance can be optimal when combined with a sound forbearance policy and a minimum capital standard

monetary policy bank leverage and financial stability abstract this paper shows that with limited liability banks lever up excessively to finance new loans lower monetary policy rates can worsen or reduce these incentives depending on the size of the shock when equity financing is ruled out when this constrained is relaxed but the bank faces costly dividend adjustment lower monetary policy rates always worsen risk taking incentives and the effect is persistent the reason is that costly dividend adjustment lowers the opportunity cost of lending in this model capital requirements are closer to the source of the distortion and thus work better than loan to value caps in reducing excessive risk taking

productive government expenditures and long run growth the purpose of this paper is to review some of the recent developments in endogenous growth models specifically our focus is on the growth effects of productive government spending in dynamic general equilibrium models we use a simple overlapping generations model as our basic framework and illustrate the role of taxes and spending we then examine several related issues nonrivalry in publicly provided goods existence and uniqueness of competitive equilibrium endogenous public policy ways of financing public expenditures composition of publicly provided goods and services and private alternatives finally we review some empirical results related to output elasticity of public capital and educational expenditures

optimal tariffs in the presence of middlemen in this paper the authors examine the question of optimal tariffs when producers and sellers are different entities a number of alternative market structures are considered it is found that the sign of the optimal tariff may depend on the nature of the producer seller relationship viz who the leader is in particular the authors find that the optimal tariff is negative when the only seller is the leader and there is only one foreign producer there is also a case where it is optimal for the government of the home country to subsidize imports no matter who the leader is

moral hazard under commercial and universal banking many claims have been made about the potential benefits and the potential costs of adopting a system of universal banlcing in the united states we evaluate these claims using a model where there is a moral hazard problem between banks and borrowers a moral hazard problem between banks and a deposit insurer and a costly state verification problem under conditions we describe allowing banks to take equity positions in firms strengthens their ability to extract surplus and exacerbates problems of moral hazard the incentives of universal banks to take equity positions will often be strongest when these problems are most severe for many decades commercial banks in the united states have been prohibited from making equity investments in the firms they serve rather they are restricted to providing them with loans in the form essentially of debt contracts this longstanding regulatory restriction1 results in distinctly different roles for bank lenders and equity investors and has had important implications for the entire financial sector the american system of commercial banking presents a sharp contrast with the banking systems of some other countries most notably germany in which banks are permitted to take equity positions under such universal banking arrangements banks can make equity investments as well as loans vote their equity shares and even hold seats on the boards of directors of nonfinancial firms in general they can be actively involved in all aspects of firm decision malqing in germany the control rights the authors have benefitted from the helpful comments of doug diamond joe haubrich ross levine stan longhofer joao santos and an anonymous referee the views expressed herein are those of the authors and not necessarily those of the federal reserve bank of minneapolis or the federal reserve system 1 the key legislation which constrains u s banks equity investments is the glass steagall act of 1933 however a number of other laws also pertain to this issue particularly the bank holding company act of 1956 and its 1970 amendments incidentally there are some important exceptions to the equity investment prohibition in default situations banks are perrnitted to restructure loans into equity positions with the requirement of divestiture after a few years see james 1993 also bank holding companies are permitted to form separately capitalized venture capital subsidiaries for the expressed purpose of investing in start up enterprises john h boyd is a professor of finance in the carlson school of management at the university of minnesota and an adjunct consultant with the federal reserve bank of minneapolis chun chang is an associate professor of finance in the carlson school of management at the university of minnesota bruce d smith is a professor of economics at the university of texas ataustin

how does the stock market view bank regulatory capital forbearance policies during the subprime crisis the fdic has shown once again laxity in resolving and closing insolvent institutions ronn and verma 1986 call the tolerance level below which a bank closure is triggered the regulatory policy parameter we derive a model in which we make this parameter stochastic and bank specific to infer the stock market view of the regulatory capital forbearance value for 565 u s listed banks during 1990 to 2012 the countercyclical forbearance fraction in capital most substantial in recessions could represent 17 on average of the market valuation of bank equity and could go as high as 100

state contingent regulatory mechanisms and fairly priced deposit insurance abstract this paper presents a model of incentive compatible bank regulation under moral hazard and adverse selection we derive a wide range of simple and conceptually implementable mechanisms that can solve each type of incentive problem separately and also achieve the first best outcome but only when regulatory instruments involve ex post pricing that is contingent on the bank s performance relative to the market an important feature of these mechanisms is that they do not involve a subsidy to the bank when the regulator faces both moral hazard and adverse selection simultaneously we identify the conditions under which the same mechanism can achieve the first best solution

welfare maximizing and revenue maximizing tariffs with a few domestic firms in this paper we compare the orthodox optimal tariff formula with the appropriate welfare maximizing tariff when there are a few producing or importing firms the welfare maximizing tariff can be very low voire negative in some cases while in others it can even exceed the maximum revenue tariff the relationship between the welfare maximizing tariff and the number of firms need not be monotonically increasing because the tariff is not strictly used to internalize terms of trade externality it is also used to manipulate cost asym metries between producing and importing firms welfare maximizing specific tariffs are never worse than their ad valorem counterparts jel classification f13 l13

public investment in infrastructure in a simple growth model abstract in this paper we examine the implications for capital accumulation when infrastructure enters as an external input into private production functions in our model infrastructure is nonexclusive but may exhibit varying degrees of nonrivalry revenues from uniform taxes on capital and labor income are used to finance public investment in infrastructure we show that the optimal tax rate is independent of the degree of nonrivalry when production exhibits constant returns to augmentable factors the equilibrium displays constant growth for most parameters the growth rate depends on the population size under decreasing returns the optimal trajectory exhibits monotonic convergence to a steady state level

financial intermediation and delegated monitoring this paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders it presents a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary diversification within an intermediary serves to reduce these costs even in a risk neutral economy the paper presents some more general analysis of the effect of diversification on resolving incentive problems in the environment assumed in the model debt contracts with costly bankruptcy are shown to be optimal the analysis has implications for the portfolio structure and capital structure of intermediaries

the effects of closure policies on bank risk taking abstract this paper models bank closure policy for a risk averse bank that enjoys flat rate deposit insurance we find that increasing the level of net worth at which banks are closed can increase or decrease induced risk aversion as well as increase the likelihood that marginally healthy banks would be subject to extreme moral hazard these result suggest that more timely closure policies should be imposed in conjunction with greater monitoring of bank portfolio risk and with restrictions on risk taking for marginally healthy banks in addition we find that changes in closure policy can increase or decrease desired leverage and that this effect depends on the degree of correlation among asset returns

market based risk adjusted examination schedules for depository institutions abstract among deposit insurance reforms considered by economists and policymakers have been prompt resolution of problem institutions risk adjusted deposit insurance premiums and risk adjusted capital requirements some economists have further suggested that risk adjusted deposit insurance premiums or capital ratios be calculated by applying option pricing models to stock market data alternatively the option methodology could be used to establish a risk based examination schedule whereby riskier banks would be examined on a more frequent basis such an examination schedule would be consistent with prompt resolution strategies since it would relate the frequency of examination and closeness of supervision to banks riskness this paper demonstrates how a risk adjusted examination schedule could be derived the paper also considers alternatives to the assumptions regarding examination policies made in standard applications of the option model which may not be valid for the sample periods previously used it discusses potential resulting biases and ways to mitigate their effects

the institutional framework and economic development the compound growth rates of per capita output and farrell type efficiency measures for 115 market economies over the period 1960 80 were compared with measures of political civil and economic liberty it was found that the institutional framework has significant and large effects on the efficiency and growth rate of economies politically open societies which subscribe to the rule of law to private property and to the market allocation of resources grow at three times the rate and are two and one half times as efficient as societies in which these freedoms are abridged

when and why did fslic resolve insolvent thrifts abstract this paper develops an optimal resolution triage strategy for a deposit insurance regulator the regulator seeks to maximize the market value of the deposit insurance enterprise subject to budget personal bureaucratic political informational and legal restraints testable hypotheses are derived concerning the timing of insolvency resolutions the paper tests these hypotheses using a two step hazards model and a data set of thrift resolutions during 1985 1989 the tests focus on the relative roles of value maximization and constraint pressures in decisions to grant capital forbearance the results suggest that regulators seldom conformed to the benchmark resolution timing strategy that an unconflicted agent would follow under only a budget constraint instead the evidence shows that the resolution timing decision was distorted by personal political informational and legal constraints

deregulation and bank financial policy the standard view that banks can value maximize by exploiting non risk rated deposit insurance ignores the potential loss of a valuable bank charter due to insolvency recognition of this effect changes the bank s optimal financial policy and can induce extreme risk averting as well as risk taking behavior however as the value of the bank charter falls the risk taking strategy is more apt to dominate therefore current deregulation of the banking industry by easing entry and devaluing charters holds the potential for increases in the incidence of insolvency unless offsetting policies are instituted

costly monitoring loan contracts and equilibrium credit rationing this paper develops a model with asymmetrically informed agents and costly monitoring of loan contracts where an equilibrium can exhibit credit rationing borrowers are identical ex ante but some receive loans and others do not in contrast to existing credit rationing theories rationing does not occur here due to inflexible prices adverse selection or moral hazard optimizing behaviour produces a standard debt contract in equilibrium the aggregate quantity of loans and equilibrium interest rates respond differently depending on whether there is rationing in equilibrium

a reexamination of mean variance analysis of bank capital regulation abstract the mean variance framework has been used to analyze the effects of bank capital regulation on the asset and bankruptcy risk of insured utility maximizing banks this literature claims that more stringent capital regulation will increase asset risk and can increase bankruptcy risk these conclusions are notable because they are opposite to those obtained for insured value maximizing banks in this paper we show that the utility maximization literature does not support its conclusions regarding the effects of bank capital regulation because it has mischaracterized the bank s investment opportunity set by neglecting the option value of deposit insurance

deposit insurance and subsidized recapitalizations the 2007 2009 financial crisis saw a vast expansion in deposit insurance guarantees around the world and yet our understanding of the design and consequences of deposit insurance schemes is in its infancy we provide a new rationale for the provision of deposit insurance in our model the banking sector exhibits both adverse selection and moral hazard which implies that the social benefits of bank monitoring must for incentive reasons be shared between depositors and banks consequently socially too few deposits are made in equilibrium deposit insurance or equivalently bank recapitalization corrects this market failure we find that deposit insurance should be funded not by banks or depositors but out of general taxation the optimal level of deposit insurance varies inversely with the quality of the banking system hence when the soundness of the financial sector is uncertain governments should consider supporting deposit insurance schemes and undertaking subsidized recapitalizations

is fairly priced deposit insurance possible we analyze risk sensitive incentive compatible deposit insurance in the presence of private information and moral hazard without deposit linked subsidies it is impossible to implement risk sensitive incentive compatible deposit insurance pricing in a competitive deregulated environment except when the deposit insurer is the least risk averse agent in the economy we establish this formally in the context of an insurance scheme in which privately informed depository institutions are offered deposit insurance premia contingent on reported capital the result holds for alternative sorting instruments as well this suggests a contradiction between deregulation and fairly priced risk sensitive deposit insurance this paper exposes a conflict between a deregulated competitive financial services industry on the one hand and fairly priced risk sensitive deposit insurance on the other we show that if depository institutions dis are perfectly competitive i e each makes zero profits on average then it is impossible to implement incentive compatible risk sensitive deposit insurance pricing recent distress among dis has fueled debate about reform of the existing deposit insurance system many believe that the prevailing risk insensitive premium structure encourages dis to choose excessively risky assets and that it should be replaced by deposit insurance premia linked to the dis choices of risk 2 risk sensitive deposit insurance pricing however imposes greater informational demands on the deposit insurer and runs afoul of both

optimal bank reorganization policies and the pricing of federal deposit insurance optimal dynamic regulatory policies for closing ailing banks and for deposit insurance premia are derived as functions of the rate of flow of bank deposits and interest rate on deposits the economy s risk free interest rate and the regulators bank audit administration costs under competitive conditions the threshold assets to deposits ratio below which a bank should be optimally closed is shown to be greater than or equal to one optimal deposit insurance premia and probabilities of bank closure are shown to be nondecreasing in the bank s risk on investment and nonincreasing in the bank s current assets to deposits ratio should regulatory agencies close reorganize an ailing federally insured financial institution if so when the recent record rate of failures of savings and loans associations s ls has renewed the urgency of this question the regulatory agencies are empowered but not required to reorganize financial institutions that are statutorily insolvent i e have zero or negative regulatory net worth recently regulators have in many instances permitted insolvent financial institutions to remain in operation 2 also while debating on the increase of the proposed funding of the federal deposit insurers the u s congress argued whether it would be desirable and if so when to close more s ls thus when regulators should close a troubled financial institution has become a major question of bank regulatory policy while the existing academic literature provides powerful insights into the structure and pricing of the insurers liability this literature offers very little guidance regarding the timing of bank reorganizations 3 indeed to the best of our knowledge the value of the federal

deposit insurance and regulatory forbearance are caps on insured deposits optimal considerable academic and public policy attention has been focused on the deposit insurance contract and in particular its mispriced deposit insurance premium this has resulted in a burgeoning literature on the optimal pricing of deposit insurance guarantees see merton 1977 1978 pyle 1983 ronn and verma 1986 acharya and dreyfus 1989 and allen and saunders 1993 for examples in addition other authors have studied the ability of uninsured depositors or debtholders to provide market discipline in the form of marketbased risk premia in the absence of explicit risk based insurance premia see for example ellis and flannery 1989 and avery belton and goldberg 1988 however a third control instrument namely the setting of ceilings or caps on the amount of deposit insurance coverage has not been subject to rigorous investigation in particular while the fdic 1989 and others have considered the general pros and cons of limiting the scope of deposit insurance for instance by lowering the 100 000 ceiling on the amount of insurance per account or by restricting the brokering in of deposits l no formal analysis of the role of coverage caps can be

the macroeconomic implications of financial deregulation abstract this paper explores the possible macroeconomic consequences of financial deregulation in an institutional environment where deregulation raises risks in banking the central bank is supposed to maximize an objective function in which the probability of bank failure is an argument it is then shown that the usual tradeoffs between policy objectives imply that financial deregulation will lead to more interest rate smoothing than would otherwise take place and further that because of restricted entry into banking deregulation will call for some inflation the transition toward deregulation raises special problems which are likely to require a more gradual approach toward the stationary equilibrium

optimal contracts under costly state falsification we examine an exchange economy with two agents one risk neutral with a certain endowment and a second risk averse with a random endowment the realization of the endowment is public but can be falsified by the second agent at a cost for a broad class of falsification cost functions the optimal no falsification contract is noncontingent on a left hand interval and strictly increasing with a slope strictly less than one on a right hand interval under a mild further restriction optimal no falsification contracts are in addition piece wise linear optimal contracts may in general require falsifying the state but for a set of the highest endowment realizations there is no falsification we find simple conditions under which the optimal contract is a no falsification contract the model has applications that include financial insurance and employment contracts and tax policy

capital regulation and bank risk taking a note abstract this paper examines theoretically the effects of more stringent capital regulation on bank asset portfolio risk the analysis shows that for a value maximizing bank incentives to increase asset risk decline as its capital increases thus as long as regulatory efforts to contain asset risk and size are not reduced more stringent capital regulation unambiguously reduces the expected liability of the deposit insurance system

distributive politics and economic growth a crude distinction between economics and politics would be that economics is concerned with expanding the pie while politics is about distributing it in this paper we analyze the relationship between the two we focus on how an economy s initial configuration of resources shapes the political struggle for income and wealth distribution and how that in turn affects long run growth our main conclusion is that inequality is conducive to the adoption of growth retarding policies we derive this result from a simple political economy model of growth and present cross country evidence consistent with it the key feature of our model is that individuals differ in their relative factor endowments we distinguish between two types of factors an accumulated factor called capital and a nonaccumulated factor called labor growth is driven by the expansion of the capital stock which is in turn determined by individual saving decisions long run growth is endogenous as the aggregate production function is taken to be linearly homogeneous in capital and productive government services taken together the provision of government services is financed by a tax on capital because government services are productive a small tax on

deposit insurance a reconsideration abstract this paper undertakes a simple general equilibrium analysis of the consequences of deposit insurance programs the way in which they are priced and the way in which they fund revenue shortfalls in our economy the central issue in analyzing deposit insurance is how the government will make up any fdic losses deposit insurance premia matter only in so far as they affect the level of implied fdic revenue shortfalls moreover local variations in the magnitude of fdic losses will generically be irrelevant for the determination of any equilibrium quantities that affect agent welfare however large enough changes in these losses can matter there is no presumption that keeping these shortfalls low is a good idea finally we show that multiple pareto ranked equilibria can be observed the potential for multiplicity of equilibria may depend on components of fdic policy our analysis provides counterexamples to the following propositions 1 actuarially fair pricing of deposit insurance is always desirable 2 implicit fdic subsidization of banks through deposit insurance is always undesirable 3 large fdic losses are necessarily symptomatic of a poorly designed deposit insurance system 4 risk based deposit insurance premia can easily be used to reduce moral hazard problems associated with deposit insurance provision

helping minor firms reduces welfare the effect on national welfare of uneven technical progress and eli mination of a firm is analyzed under the existence of a cournot oligopolistic sector an increase in the share of an inefficient firm owing to its innovations results in a shift of production from more efficient firms to the inefficient firm causing a less efficie nt allocation of production it may decrease welfare even though the innovation itself is beneficial conversely policies keeping ineffic ient firms from innovations or eliminating them may increase welfare though they make the market structure more oligopolistic copyright 1988 by royal economic society

budget maximizing governmental agencies an empirical test niskanen s theory of government budgeting involving powerful agencies interested in maximizing their budgets through bargaining with a weak poorly informed governmental sponsor has received wide recognition this paper presents the first direct empirical tests of niskanen s ideas one implication of niskanen s model of budgeting is that the demand for public services will appear to be elastic niskanen s model also implies restrictions on the elasticity of the derived demand for labor in the public sector neither set of predictions is supported by existing empirical research on government activity

some evidence on the empirical significance of credit rationing this paper examines the credit rationing debate using detailed contract information on over one million commercial bank loans from 1977 to 1988 while commercial loan rates are sticky consistent with rationing this stickiness varies with loan contract terms in ways that are not predicted by equilibrium credit rationing theory in addition the proportion of new loans issued under commitment does not increase significantly when credit markets are tight despite the fact that borrowers without commitments can be rationed whereas commitment borrowers are contractually insulated from rationing overall the data suggest that equilibrium rationing is not a significant macroeconomic phenomenon