optimal long term contracting with learning we introduce uncertainty into holmstrom and milgrom 1987 to study optimal long term contracting with learning in a dynamic relationship the agent s shirking not only reduces current performance but also increases the agent s information rent due to the persistent belief manipulation effect we characterize the optimal contract using the dynamic programming technique in which information rent is the unique state variable in the optimal contract the optimal effort is front loaded and stochastically decreases over time furthermore the optimal contract exhibits an option like feature in that incentives increase after good performance implications about managerial incentives and asset management compensations are discussed

financial contracting theory meets the real world an empirical analysis of venture capital contracts we compare the characteristics of real world financial contracts to their counterparts in financial contracting theory we do so by studying the actual contracts between venture capitalists vcs and entrepreneurs the distinguishing characteristic of vc financings is that they allow vcs to separately allocate cash flow rights board rights voting rights liquidation rights and other control rights we describe and measure these rights we then interpret our results in relation to existing financial contracting theories we also describe the interrelation and the evolution across financing rounds of the different rights query 1 query 2

how do households cope with aggregate shocks evidence from the mexican peso crisis abstract household surveys are used to examine the micro impact of a large aggregate shock the 1995 mexican peso crisis this paper examines how the impact of the crisis differed across households and the adjustment mechanisms used by households to cope with this shock the coping strategies examined include changes in household structure fertility household labor supply child schooling and interhousehold transfers many of the mechanisms households use to adapt to idiosyncratic shocks are found not to work with an aggregate shock

unemployment assistance and transition to employment in argentina abstractin 2001 2 argentina experienced a wrenching economic crisis plan jefes implemented in may 2002 was argentina s institutional response to the increase in unemployment and poverty triggered by the crisis the program provided a safety net and appears to have protected some families against indigence despite this success the continued existence of the program which provides benefits to eligible unemployed individuals for an unlimited duration may have unappealing consequences reliance on the plan may reduce the incentive to search for work and in the long run may damage individual employability and perpetuate poverty motivated by these concerns this article examines the effect of participating in plan jefes on the probability of exiting unemployment regardless of the data set the specification and the empirical approach the article shows that plan enrollees are at least 14 percentage points less likely to transit to employment as compared to individuals who applied but did not join the

do crises catalyze creative destruction firm level evidence from indonesia using indonesian manufacturing census data 1991 2001 this paper rejects the hypothesis that the east asian crisis unequivocally improved the reallocative process the correlation between productivity and employment growth did not strengthen and the crisis induced the exit of relatively productive firms the attenuation of the relationship between productivity and survival was stronger in provinces with comparatively lower reductions in minimum wages but not due to reduced entry changing loan conditions or firms connected to the suharto regime suffering disproportionately on the bright side firms that entered during the crisis were relatively more productive which helped mitigate the reduction in aggregate productivity

the economics of small business finance the roles of private equity and debt markets in the financial growth cycle abstract this article examines the economics of financing small business in private equity and debt markets firms are viewed through a financial growth cycle paradigm in which different capital structures are optimal at different points in the cycle we show the sources of small business finance and how capital structure varies with firm size and age the interconnectedness of small firm finance is discussed along with the impact of the macroeconomic environment we also analyze a number of research and policy issues review the literature and suggest topics for future research

how late to pay understanding wage arrears in russia we organize an empirical analysis of russian wage arrears around hypotheses concerning incentives for firms to pay late and for workers to tolerate late payment nationally representative household panel data matched with employer data show that arrears are positively related to firm age size state ownership and declining performance constrained multinomial logit estimates reveal intrafirm variation related to job tenure and small shareholdings in the firm wage arrears unlike wage cuts have a theoretically ambiguous effect on workers quit behavior and we show empirically that the effect varies negatively with the extent of the practice in the local labor market

buying less but shopping more the use of nonmarket labor during a crisis households allocating time between market and non market uses should respond to income variations by adjusting the time devoted to shopping search and other home production activities in this paper we exploit high frequency household expenditure data to examine the use of changes in shopping intensity as a method of mitigating the effects of the 2002 argentine economic crisis although the total quantity and real value of goods purchased fell during the crisis consumers are found to be doing more shopping search this increase in shopping is shown to enable households to seek out lower prices and locate substitutes allowing a given level of expenditure to buy more goods the magnitude and prevalence of these effects suggest that this non market use of labor can be an important coping strategy for households during a recession

dynamic delegation of experimentation i study a dynamic relationship where a principal delegates experimentation to an agent experimentation is modeled as a one armed bandit that yields successes following a poisson process its unknown intensity is high or low the agent has private information his type being his prior belief that the intensity is high the agent values successes more than the principal does so prefers more experimentation the optimal mechanism is a cutoff rule in the belief space the cutoff gives pessimistic types total freedom but curtails optimistic types behavior pessimistic types over experiment while the most optimistic ones under experiment this delegation rule is time consistent

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

ex ante and ex post labor supply response to risk in a low income area abstract this paper tests for ex ante and ex post labor supply responses to weather risk for rural indian farm households the analysis uses panel data on 2115 households spanning 13 states in rural india merged with a 22 year series of district level rainfall data ex ante households facing riskier distributions of rainfall are more likely to participate in the labor market ex post unexpectedly bad weather and low rainfall increase labor force participation

capital accumulation and deposit pricing in mutual financial institutions this paper presents a multiperiod model of a deposit type mutual financial institution and analyzes the manager s capital accumulation and deposit pricing decisions under uncertainty the model is meant to describe a mutual savings and loan assoeiation sla or a credit union in which there are no stockholders

r d in clean technology a project choice model with learning abstract in this study we investigate the qualitative and quantitative effects of an r d subsidy for a clean technology and a pigouvian tax on a dirty technology on environmental r d when it is uncertain how long the research takes to complete the model is formulated as an optimal stopping problem in which the number of successes required to complete the r d project is finite and learning about the probability of success is incorporated we show that the optimal r d subsidy with the consideration of learning is higher than that without it we also find that an r d subsidy performs better than a pigouvian tax unless suppliers have sufficient incentives to continue cost reduction efforts after the new technology successfully replaces the old one moreover by using a two project model we show that a uniform subsidy is better than a selective subsidy

breakthroughs deadlines and self reported progress contracting for multistage projects we study the optimal incentive schemes for multistage projects staged financing pervasive in both venture capital and research grants arises as a feature of the optimal contract the nature of progress plays an important role when progress is tangible incentives are provided through a series of deadlines and a reward scheme that decreases over time early progress in one stage gives the agent more time and funding to complete the next one when progress is intangible unverifiable progress reports are used despite the fact that the information in the report has no social value the optimal contract involves a soft deadline wherein the principal guarantees funding up to a certain date if the agent reports progress at that date then the principal gives him a relatively short deadline to complete the project if not then a probationary phase begins in which the project is terminated at a constant rate until progress is reported we explore the implications for welfare and optimal project design

dynamic pricing in the presence of individual learning abstract this paper studies price dynamics in a setting in which a monopolist sells a new experience good over time to many buyers and the seller can neither price discriminate among the buyers nor commit to a price rule buyers learn from their own experiences about the effectiveness of the product individual learning generates ex post heterogeneity which affects the buyers purchasing decisions the monopolist s pricing strategy and efficiency when learning occurs through good news signals buyers receive a rent because of the possible advantageous belief caused by short lived deviations if a good news signal arrives the price can instantaneously increase or decrease depending on the arrival time of this signal the equilibrium is inefficient because the monopolist s incentive to exploit known buyers leads to inefficient early termination of exploration when learning occurs through bad news signals ex post heterogeneity has no such effect since only homogeneous unknown buyers purchase the experience good

making waves to innovate or be a fast second internal finance leads to a stalemate in innovation games each firm wants to free ride on the others costly experimentation when instead innovation is financed externally e g with venture capital or initial public offerings there is an endogenous cost to delay waiting to make risky irreversible investment conveys pessimistic information i characterize the relative sizes of waves of leaders and followers in innovation cycles and the endogenous intertemporal distribution of quality as each wave builds and crashes finally old waves leave an adverse selection hangover such that too much early innovation can cause the market for future innovation to break down

contests for experimentation we study contests for innovation with learning about the innovation s feasibility and opponents outcomes we characterize contests that maximize innovation when the designer chooses a prize sharing scheme and a disclosure policy a public winner takes all contest dominates public contests where any success is immediately disclosed with any other prize sharing scheme as well as winner takes all contests with any other disclosure policy yet jointly modifying prize sharing and disclosure can increase innovation in a broad class of mechanisms it is optimal to share the prize with disclosure following a certain number of successes under simple conditions a hidden equal sharing contest is optimal

expense preference behavior in the savings and loan industry neoclassical microeconomic theory traditionally has assumed that the decision process in the firm is guided by the objective of profit maximization a number of economists have suggested however that managers may pursue goals which maximize personal utility rather than firm profitability 1 10 11 23 24 conditions under which managerial discretion may be substituted for profit maximization include weak competition in the product or service market a high degree of regulation and the separation of ownership and control under these conditions managers have greater opportunity to indulge in discretionary expenditures and the pursuit of managerial emoluments that is managers may seek to achieve a higher level of personal utility via higher salaries additional staff and other perquisites for which they have positive preferences in general this results in an expansion of expenditures beyond the profit maximizing level and a suboptimal x inefficient use of resources within the firm the expense preference theory of the firm recently received considerable support by the work of edwards 3 in which he developed a test to distinguish between expense preference and profit maximizing behavior upon application of this test to the banking industry edwards found that the number of employees and bank expenditures on wages and salaries are higher in noncompetitive banking markets

two sided learning and the ratchet principle i study a class of continuous time games of learning and imperfect monitoring a long run player and a market share a common prior about the initial value of a gaussian hidden state and learn about its subsequent values by observing a noisy public signal the long run player can nevertheless control the evolution of this signal and thus affect the market s belief the public signal has an additive structure and noise is brownian i derive conditions for an ordinary differential equation to characterize equilibrium behavior in which the long run player s actions depend on the history of the game only through the market s correct belief using these conditions i demonstrate the existence of pure strategy equilibria in markov strategies for settings in which the long run player s flow utility is nonlinear the central finding is a learning driven ratchet principle affecting incentives i illustrate the economic implications of this principle in applications to monetary policy earnings management and career concerns

learning while voting determinants of collective experimentation this paper combines dynamic social choice and strategic experimentation to study the following question how does a society a committee or more generally a group of individuals with potentially heterogeneous preferences experiment with new opportunities each voter recognizes that during experimentation other voters also learn about their preferences as a result pivotal voters today are biased against experimentation because it reduces their likelihood of remaining pivotal this phenomenon reduces equilibrium experimentation below the socially efficient level and may even result in a negative option value of experimentation however one can restore efficiency by designing a voting rule that depends deterministically on time another main result is that even when payoffs of a reform are independently distributed across the population good news about any individual s payoff increases other individuals incentives to experiment with that reform due to a positive voting externality

private versus verifiable interim performance evaluations under uncertainty i study the trade off between private and verifiable interim performance evaluations under uncertainty more uncertainty leads to higher agency costs if the interim evaluation is public and verifiable but lower agency costs if the interim evaluation is private and unverifiable

macroinsurance for microenterprises a randomized experiment in post revolution egypt firms in many developing countries cite macroeconomic instability and political uncertainty as major constraints to their growth economic theory suggests uncertainty can cause firms to delay investments until uncertainty is resolved a randomized experiment was conducted in post revolution egypt to measure the impact of insuring microenterprises against macroeconomic and political uncertainty demand for macroeconomic shock insurance was high 36 7 percent of microentrepreneurs in the treatment group purchased insurance however purchasing insurance does not change the likelihood that a business takes a new loan the size of the loan or how the loan is invested this lack of effect is attributed to microenterprises largely investing in inventories and raw materials rather than irreversible investments like equipment these results suggest that contrary to what some firms profess macroeconomic and political risk is not inhibiting the investment behavior of microenterprises however insurance may still be of value to help firms cope with shocks when they do occur but the paper is unable to examine this dimension because the insurance product did not pay out over the course of the pilot

subsidizing research programs with if and when uncertainty in the face of severe informational constraints we study government optimal subsidy policies for research programs in the face of servere information asymmetry when firms have private information about the likelihood of project viability but the government cannot form a unique prior belief about this likelihood the paper makes two contributions first we show that the way in which rd under r d competition the first best outcome can also be achieved through a simple combination of a matching subsidy and an unrestricted subsidy if the shadow cost of public funds is positive an ex post equilibrium in general does not exist either under monopoly or competition we then consider two alternative policy decision criteria that are appropriate for belief free games rationalizability and max min criteria we argue that the max min criteria is preferable in our context and by way of doing so establish that the set of max min subsidy policies under either monopoly or competitive r d consists entirely of simple pure matching subsidies we further establish that allowing firms to form an r d consortium reduces the matching rate for the highest max min subsidy suggesting that cooperative r d has the potential to economize on the shadow costs of public funding of subsidies

savings savings and loan ownership structure and expense preference reply abstract we present counterarguments to the points krinsky and thomas make and express confidence with our original conclusions and the tests that support them

equity during an economic crisis financing of the argentine health system this article analyses the redistributive effect caused by health financing and the distribution of healthcare utilization in argentina before and during the severe 2001 2002 economic crisis both dramatically changed during this period the redistributive effect became much more positive and utilization shifted from pro poor to pro rich this clearly demonstrates that when utilization is contingent on financing changes can occur rapidly and that an integrated approach is required when monitoring equity from a policy perspective the argentine health system appears vulnerable to economic downturns mainly due to high reliance on out of pocket payments and the strong link between health insurance and employment

crises and the poor socially responsible macroeconomics this paper presents evidence on the impact of economic crisis on poverty and inequality in latin america crises not only result in higher poverty rates but also may cause irreversible damage to the human capital of the poor in light of this evidence the author concludes that crisis avoidance and a pro poor response to crisis should be a major component of a poverty reduction strategy as a result the paper analyses the role of exchange rate policy capital controls and countercyclical fiscal policy in generating or avoiding crisis responses to macroeconomic crisis are assessed by considering the effects of different policy combinations the use of safety nets and the composition of fiscal adjustment to protect the income of the poor in the face of macroeconomic adjustment the main lesson is that socially responsible macroeconomic policy can protect the poor during times of crisis and simultaneously contribute to lower chronic poverty

stage financing and the role of convertible securities venture capital financing is characterized by extensive use of convertible securities and stage financing in a model where a venture capitalist provides staged financing for a project we illustrate an advantage of convertible debt or warrants over a mixture of debt and equity essentially when the venture capitalist retains the option to abandon the project the entrepreneur has an incentive to engage in window dressing and bias positively the short term performance of the project reducing the probability that it will be liquidated an appropriately designed convertible security prevents such behaviour because window dressing also increases the probability that the venture capitalist will exercise the conversion option becoming the owner of a substantial fraction of the project s equity

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

on the genesis of multinational foreign affiliate networks multinational enterprises mnes develop their networks of foreign affiliates gradually over time instead of exploring all profitable opportunities immediately they first establish themselves in their home countries and then enter new markets stepwise we argue that this behavior is driven by uncertainty concerning a firm s success in new markets after entry the firm collects information which is used to update its beliefs about its performance in a market as conditions in different markets are correlated the information gathered in one of them can also be used to update beliefs elsewhere with the degree of correlation depending on issues such as the geographical or cultural distance between markets this correlated learning may render it optimal to enter markets sequentially investment in market a is only followed by entry in market b if the firm was sufficiently successful in a the prediction that firms start their expansion in markets that are closer to their home base and then proceed step by step is supported by our empirical analysis which features the universe of foreign affiliates held by german multinationals based on a rich set of benchmark estimates and sensitivity checks we identify correlated learning across markets beyond alternative explanations as a key driver of gradualism in the genesis of mnes foreign affiliate networks

a theory of delegated search for the best alternative searching for the best worker a reliable supply alternative or the most profitable investment is frequently delegated to an agent this article develops a theory of delegated search we show that the principal s ability to delegate depends on the agent s luck her initial resources and the contract that governs her search with moral hazard the optimal contract is characterized by performance deadlines with bonuses for early completion if performance cannot be specified the optimal search is implemented by an option to buy contract for the principal if performance is partially specified the optimal contract is a standard pay for performance arrangement

jump starting self employment evidence among welfare participants in argentina one important concern of governments in developing countries is how to phase out large safety net programs the authors evaluate the short run effects of one possible exit strategy programs that promote self employment in argentina they provide evidence that a small fraction of beneficiaries were attracted by this program overall potential participants to self employment are more likely to be female household heads and more educated beneficiaries relative to the average jefes beneficiaries using nonexperimental methods the authors show that participation in the program does affect the labor supply of participants by reducing the probability of having an outside job especially for males and increasing the total number of hours worked but the intervention fails to produce on average income gains to participating individuals and households in the short run the fact that a small subset of former welfare beneficiaries are attracted to the program coupled with the fact that only a subset of participants younger and more educated beneficiaries and with previous self employment experience benefited from participation has important implications for this intervention to represent a viable exit strategy from welfare

the many faces of poverty quantifying the deprivation costs of the 2001 2002 crisis in argentina this paper presents empirical evidence on the deprivation costs of the 20012002 argentinean crisis the selected approach is multidimensional and focuses on four aspects of quality of life labor assets education and income these dimensions are constructed by multivariate data reduction techniques and then aggregated using the bourguignon and chakravarty s axiomatic multidimensional poverty measure the main findings indicate that the crisis had larger costs on well being dimensions which are tied to the economic cycle such as income and labor costs were mild on structural aspects of wellbeing such as assets and education a sensitivity analysis shows that these results are robust to different deprivation lines

learning about the arrival of sales abstract we analyse optimal stopping when the economic environment changes because of learning a primary application is optimal selling of an asset when demand is uncertain the seller learns about the arrival rate of buyers as time passes without a sale the seller becomes more pessimistic about the arrival rate when the arrival of buyers is not observed the rate at which the seller revises her beliefs is affected by the price she sets learning leads to a higher posted price by the seller when the seller does observe the arrival of buyers she sets an even higher price

optimal contracts for experimentation this paper studies a model of long term contracting for experimentation we consider a principal agent relationship with adverse selection on the agent s ability dynamic moral hazard and private learning about project quality we find that each of these elements plays an essential role in structuring dynamic incentives and it is only their interaction that generally precludes efficiency our model permits an explicit characterization of optimal contracts

venture capital financing moral hazard and learning we consider the provision of venture capital in a dynamic agency model the value of the venture project is initially uncertain and more information arrives by developing the project the allocation of the funds and the learning process are subject to moral hazard the optimal contract is a time varying share contract which provides intertemporal risk sharing between venture capitalist and entrepreneur the share of the entrepreneur reflects the value of a real option the option itself is based on the control of the funds the dynamic agency costs may be high and lead to an inefficient early stopping of the project a positive liquidation value explains the adoption of strip financing or convertible securities finally relationship financing including monitoring and the occasional replacement of the management improves the efficiency of the financial contracting

effects of deregulation on failing thrift institutions the purpose of this paper is to test the hypothesis that much of the decline in the net worth of the failing saving and loan institutions was a result of deregulation variables are developed to represent major actions to deregulate sltime series analysis is developed to estimate the effects of financial deregulation on failing thrifts net worth the data are 1984 89 balance sheet adn income statement data for thrift institutions prior to the enactment of the 1989 legislation to solve the crisis the reuslts of the analysis indicate that deregulation of asset and deposit activities was not the cause of the financial distress of failing us thrift institutions the primary cause appears to be the increase in the federal deposit insurance limit to 100 000 and how attractive this legislative action made brokering deposits that became insured up to 100 000

beyond baseline and follow up the case for more t in experiments the vast majority of randomized experiments in economics rely on a single baseline and single follow up survey if multiple follow ups are conducted the reason is typically to examine the trajectory of impact effects so that in effect only one follow up round is being used to estimate each treatment effect of interest while such a design is suitable for study of highly autocorrelated and relatively precisely measured outcomes in the health and education domains this paper makes the case that it is unlikely to be optimal for measuring noisy and relatively less autocorrelated outcomes such as business profits household incomes and expenditures and episodic health outcomes taking multiple measurements of such outcomes at relatively short intervals allows the researcher to average out noise increasing power when the outcomes have low autocorrelation it can make sense to do no baseline at all moreover the author shows how for such outcomes more power can be achieved with multiple follow ups than allocating the same total sample size over a single follow up and baseline the analysis highlights the large gains in power from ancova rather than difference in differences when autocorrelations are low and a baseline is taken the paper discusses the issues involved in multiple measurements and makes recommendations for the design of experiments and related non experimental impact evaluations

savings and loan ownership structure and expense preference abstract this paper studies the influence of ownership structure on managerial expense preference behavior the hypothesis is that the greater the diffusion of ownership the weaker is the monitoring by owners and the greater is the degree of expense preference behavior whereas expense preference behavior affects inputs particularly on the job consumption of managers well functioning managerial labor markets should resolve the problem by equating the total compensation of managers across firms of different ownership structures a more serious problem however is the potential impact of expense preference behavior on output evidence from the savings and loan industry is adduced indicating that the more diffuse ownership structures associated with mutuality exhibit greater agency costs through the expansion of inputs and outputs beyond profit maximizing levels

strategic real options abstract i study hidden investment in quality in a dynamic persuasion game a seller such as a project manager or startup company controls an asset and wants to convince a potential buyer such as an acquiring company or a regulator that it has high quality the buyer observes exogenous news with quality dependent drift and holds a call option on the asset the seller is privately informed about quality and can wait at a flow cost upgrade at a fixed cost or exit the market for low upgrade costs multiple equilibria exist and exhibit novel reputational dynamics resetting barriers and skew brownian motion a generalization of a reflected stochastic process in one type of equilibrium a seller with low quality waits until his reputation hits rock bottom and then upgrades with some probability inducing upward reputational jumps in equilibrium the seller may exit at an intermediate reputation in a second type the low quality seller mixes over exiting at low reputations and upgrading in an intermediate sweet spot region the results suggest a social benefit to setting high expectations for effort when agents start with low reputations and help explain why agents respond to adversity in drastically different ways across environments

earnings mobility in times of growth and decline argentina from 1996 to 2003 summary in recent years argentina s economy has experienced both rapid growth and severe decline in this paper we use a series of one year long panels to study who gained the most in pesos when the economy grew and who lost the most in pesos when the economy contracted various considerations led us to expect that mobility would be divergent that is that the individuals who started with the highest initial earnings would enjoy the largest earnings gains in pesos contrary to expectations and for a wide range of specifications mobility is found to be mostly convergent sometimes neutral and never divergent

credit and efficiency in centralized and decentralized economies we study a credit model where because of adverse selection unprofitable projects may nevertheless be financed indeed they may continue to be financed even when shown to be low quality if sunk costs have already been incurred we show that credit decentralization offers a way for creditors to commit not to refinance such projects thereby discouraging entrepreneurs from undertaking them initially thus decentralization provides financial discipline nevertheless we argue that it puts too high a premium on short term returns the model seems pertinent to two issues soft budget constraint problems in centralized economies and differences between anglo saxon and german japanese financing practices

savings and loan ownership structure and expense preference abstract this note demonstrates that the conclusion of the akella and greenbaum 1988 study that managers of mutual s ls exhibit more expense preference behavior than managers of stockholder owned s ls is premature it is shown that in operationalizing their theoretical model a g introduce an endogenous variable in their correction for homogeneity invalidating their results the only firm conclusion which can be drawn from their results is that a higher proportion of assets of mutual s ls is invested in loans while a higher proportion of liabilities are sourced from deposits than is the case for stockholder owned s ls

the financing of innovation learning and stopping we consider the financing of a research project under uncertainty about the time of completion and the probability of eventual success we distinguish between two financing modes namely relationship financing where the allocation decision of the entrepreneur is observable and arm s length financing where it is unobservable we find that equilibrium funding stops altogether too early relative to the efficient stopping time in both financing modes the rate at which funding is released becomes tighter over time under relationship financing and looser under arm s length financing the tradeoff in the choice of financing modes is between lack of commitment with relationship financing and information rents with arm s length financing

smoothing consumption by smoothing income hours of work responses to idiosyncratic agricultural shocks in rural india while research has demonstrated that farm households in developing economies are able to protect consumption from idiosyncratic crop shocks little evidence shows how this is achieved this paper examines the extent to which labor markets allow households to shift labor from farm to off farm employment and the extent to which such a shift explains the observed lack of correlation between consumption and idiosyncratic crop shocks the empirical analysis uses a novel measure of the idiosyncratic crop income shock which utilizes information on start of season cropping choices to more accurately estimate household expectations of weather

bank credit rates across the business cycle evidence from a french cooperative contracts database abstract financial theory indicates that bank firm relationships can induce a hold up problem resulting in higher interest rates yet only weak empirical confirmation of this result exists moreover the potential influence of the business cycle on the bank firm relationship still requires empirical consideration with a unique contracts data set collected from a french cooperative bank between 1996 and 2009 this study shows that the effects of bank firm relationships on the credit rate depend on economic conditions and that the hold up problem is at play only during economic recessions

contagion in latin america definitions measurement and policy implications this paper analyzes bond and stock markets in latin america and uses these patterns to investigate whether contagion occurred in the 1990 s it defines shift contagion as a significant increase in cross market linkages after a shock to one country or region several coin toss examples and a simple model show that the standard tests for contagion are biased due to the presence of heteroscedasticity endogeneity and omitted variable bias recent empirical work which addresses these problems finds little evidence of shift contagion during a range of crisis periods instead this work argues that many countries are highly interdependent in all states of the world and the strong cross country linkages which exist after a crisis are not significantly different than those during more stable periods these findings have a number of implications for latin america

experimentation and project selection screening and learning firms must strike a delicate balance between the exploitation of well known business models and the exploration of risky untested approaches in this paper we study financial contracting between an investor and a firm with private information about its returns from exploration and exploitation the investor optimal mechanism offers contracts with different tolerance for failures to screen returns from exploitation and with different exposure to the project s revenues to screen returns from exploration we derive necessary and sufficient conditions for private information about returns from exploration to have zero value to the firm when these conditions fail private information about exploration may even decrease the firm s payoff

on the market for venture capital we propose a theory of the market for venture capital that links the excess return to venture equity to the scarcity of venture capitalists vcs high returns make the vcs more selective and eager to terminate nonperforming ventures because they can move on to new ones the scarcity of vcs enables them to internalize their social value and the competitive equilibrium is socially optimal moreover the bilaterally efficient contract is a simple equity contract we estimate the model for the period 1989 2001 and compute the excess return to venture capital which turns out to be 8 6 percent finally we back out the return of solo entrepreneurs which is increasing in their wealth and ranges between zero and 3 5 percent

a note on savings and loan ownership structure and expense preference a re examination this study extends the work of akella and greenbaum journal of banking finance 12 1988 419 through the use of a much larger nationwide sample of us saving and loan associations and supports their original finding of significant expense preference behavior in mutual savings and loans during their original study period 1979 80 this study also provides evidence that over the time period of substantial deregulation and changes in the competitive environment in the us financial services industry expense preference behavior for savings and loans decreased the results are consistent with the idea that the removal of barriers that restrict competition should improve managerial efficiency in firms that survive 2003 elsevier b v all rights reserved

the structure of ownership and the theory of the firm the separation of ownership from control produces a condition where the interests of owner and of ultimate manager may and often do diverge and where many of the checks which formerly operated to limit the use of power disappear in creating these new relationships the quasi public corporation may fairly be said to work a revolution it has divided ownership into nominal ownership and the power formerly joined to it thereby the corporation has changed the nature of profit seeking enterprise 1

the benefits of lending relationships evidence from small business data this paper empirically examines how ties between a firm and its creditors affect the availability and cost of funds to the firm we analyze data collected in a survey of small firms by the small business administration the primary benefit of building close ties with an institutional creditor is that the availability of financing increases we find smaller effects on the price of credit attempts to widen the circle of relationships by borrowing from multiple lenders increases the price and reduces the availability of credit in sum relationships are valuable and appear to operate more through quantities rather than prices

crises and confidence systemic banking crises and depositor behavior abstract we show that individuals who have experienced a systemic banking crisis are 11 percentage points less likely to use banks in the u s than otherwise similar individuals who emigrated from the same country but did not live through a crisis this finding is robust to controlling for exposure to other macroeconomic events and to various methods for addressing potential bias due to migrant self selection consistent with the view that personal experience plays an important role in decision making the effects are larger for individuals who were older and more likely to have had wealth entrusted to the banking system at the time of the crisis and for people who experienced crises in countries without deposit insurance

managerial short termism turnover policy and the dynamics of incentives i study managerial short termism in a dynamic model of project development with hidden effort and imperfect observability of quality the manager can complete the project faster by reducing quality to preempt this behavior the prin cipal makes payments contingent on long term outcomes i analyze the dynamics of the optimal contract and its implications for the level of managerial turnover i show that optimal contracts might be stationary and entail no termination in general i show that the principal reduces the manager s temptation to behave myopically by reducing the likelihood of termination and deferring compensation the model predicts a negative relation between the rate of managerial turnover and the use of deferred compensation that is consistent with evidence of managerial compensation contracts received may 23 2016 editorial decision may 27 2017 by editor francesca cornelli

default and renegotiation a dynamic model of debt we analyze the role of debt in persuading an entrepreneur to pay out cash e ows rather than to divertthem in the e rstpartof the paper we study the optimal debt contract specie cally the trade off between the size of the loan and the repayment under the assumption that some debt contract is optimal in the second part we consider a more general class of nondebt contracts and derive sufficient conditions for debt to be optimal among these

getting it done dynamic incentives to complete a project a principal wants an agent to complete a project the agent undertakes unobservable effort which affects in each period the probability that the project is completed we characterize the contracts that the principal sets with and without commitment with full commitment the contract involves the agent s value and wage declining over time in order to give the agent incentives to exert effort the best sequentially rational equilibrium for the principal also involves the agent s wage declining over time while the worst sequentially rational equilibrium for the principal has a constant wage and is in fact the unique stationary equilibrium the best weakly renegotiation proof equilibrium for the principal is achieved by a constant wage that maximizes the principal s payoff conditional on wages being constant we compare these solutions to the efficient outcome

dynamics of innovation and risk we study the dynamics of an innovative industry in which agents learn about the likelihood of negative shocks managers can exert risk prevention effort to mitigate the consequences of shocks if no shock occurs confidence improves attracting managers to the innovative sector but when confidence becomes high inefficient managers exerting low risk prevention effort also enter this stimulates growth while reducing risk prevention the longer the boom the larger the losses if a shock occurs although these dynamics arise in the first best asymmetric information generates excessive entry of inefficient managers earning informational rents inflating the innovative sector and increasing its vulnerability