collateral in credit rationing in markets with imperfect information note in their 1981 article joseph stiglitz and andrew weiss analyze adverse selection and incentive effects in the loan market the models considered are based on two crucial assumptions borrowers are subject to limited liability and lenders cannot distinguish borrowers projects of different risk stiglitz and weiss show that a bank that raises its interest rate may suffer adverse selection because only risky borrowers will be willing to borrow at the higher rate thus lenders may choose not to raise the interest rate to eliminate excess demand resulting in the possibility of a credit rationing equilibrium stiglitz and weiss also consider briefly the role of collateral in such credit rationing models they conclude that lenders may choose not to use collateral requirements as a rationing device an increase in collateral requirements like an increase in the interest rate potentially leads to a decrease in the lender s expected return on loans because of resulting adverse incentive and selection effects the purpose of this note is to further investigate the role of collateral in these models stiglitz and weiss discussion in section iii establishes that adverse selection effects can result from increases in collateral when borrowers are risk averse i will show by returning to a model they discussed earlier in section i that the adverse selection effects can also occur when borrowers are risk neutral stiglitz and weiss outline a model to consider the use of collateral as a rationing device section iii in that model all potential borrowers face the same array of risky projects each potential borrower chooses at most one of those projects to undertake the individuals are by assumption risk averse with decreasing absolute risk aversion and possess different amounts of initial wealth thus choice of project if any to undertake and the method of finance selffinance from initial wealth or loan finance will differ from one individual to the next stiglitz and weiss show that among those who undertake risky projects and who choose borrowing as the method of finance wealthier individuals undertake riskier projects an increase in collateral has two effects on the market for loans those individuals who remain in the market will choose to undertake less risky projects and those individuals who drop out of the market are less wealthy low risk borrowers if the second effect is sufficiently strong then increased collateral requirements will mean decreased expected returns for the lender thus a credit rationing equilibrium may occur since lenders may not choose to use collateral requirements or the interest rate to eliminate excess demand the adverse selection effect just described does not occur in this model if the individuals are risk neutral consequently the potential for a credit rationing equilibrium is limited to cases where borrowers are risk averse to see that increases in collateral requirements can also result in adverse selection if borrowers are risk neutral consider the model stiglitz and weiss used to analyze the adverse selection effects of increases in the interest rate section i pp 395 99 it differs from the section iii model discussed above in three ways first borrowers are risk neutral second all projects ar loan financed the analogy to the section iii model is that no individuals have sufficient wealth to self finance projects third in the section

life cycle consumption and hyperbolic discount functions abstract studies of animal and human behavior suggest that discount functions are approximately hyperbolic ainslie picoeconomics 1992 hyperbolic models explain a wide range of empirical anomalies including 1 missing precautionary savings effects 2 incongruence between the elasticity of intertemporal substitution and the inverse of the coefficient of relative risk aversion 3 consumption discontinuities at retirement 4 variation in patience over the life cycle 5 consumer self reports of undersaving 6 disproportionate retirement accumulation in illiquid assets 7 asset specific marginal propensities to consume and 8 declining national savings rates in developed countries hyperbolic models also provide a new framework for analyzing the welfare gains that come from pro saving policies like social security and tax deferred retirement accounts

discount rates and credit markets theory and evidence from rural india three models of credit markets 1 the permanent income model 2 upward sloping credit supply to individual borrowers and 3 constrained credit due to imperfect enforcement are tested using credit market data and an experimental study of individuals discount rates in south india the permanent income model is rejected by both the discount rate and the credit market data the discount rate data are consistent with either of the other two models while the credit market data are consistent with a combination of these two models other explanations are found to be insufficient to explain the results of this study

delegated portfolio management abstract a problem of screening agents with privately known forecasting abilities and reservation utilities and then eliciting truthful information from these agents once they are employed is considered for the case of risk averse agents and large principals an approximately optimal solution is constructively characterized under the assumption that payoffs are normally distributed a significant extension of the definnetti savage probability elicitation result is developed under this extension knowledge of agent preferences is not required when the underlying conditional distributions are symmetric and this fact is exploited to solve the screening problem in a mean variance formulation

the hyperbolic consumption model calibration simulation and empirical evaluation ur preferences for the long run tend to conflict with our short run behavior when planning for the long run we intend to meet our deadlines exercise regularly and eat healthfully but in the short run we have little interest in revising manuscripts jogging on the stairmaster and skipping the chocolate souffleala mode delay of gratification is a nice long term goal but instant gratification is disconcertingly tempting this gap between long run intentions and short run actions is apparent across a wide range of behaviors including saving choices a 1997 survey found that 76 percent of respondents believe they should be saving more for retirement looking only at respondents who believed they were at an age where you should be seriously saving already the survey found that 55 percent reported being behind in their savings and only 6 percent reported being ahead farkas and johnson 1997 the report on the survey concluded t he gaps between people s atti tudes intentions and behavior are troubling and threaten increased insecurity and dissatisfaction for people when they retire americans are simply not doing what logic and their own reasoning suggests they should be doing a 1993 luntz webber merrill lynch survey found similar answers when baby boomers were asked what percentage of your annual household income do you think you should save for retirement and what percentage of your annual

self fulfilling fire sales fragility of collateralised short term debt markets this paper shows that collateralised short term debt although privately optimal for reducing borrowers moral hazard can cause fragility multiple equilibria when the collateral market is illiquid a new form of coordination failure between borrowers ex ante margin and risk taking decisions engenders a systemic run in the collateralised debt market large changes in credit rationing margins repo spreads etc the model also captures the large small crosssectional differences between safe and risky collateral in bad good times finally i show that asset price guarantees could improve welfare and promote stability but repealing repo contracts automatic stay exemption might do the opposite

studying optimal paternalism illustrated by a model of sin taxes the classical economic approach to policy analysis assumes that people always respond optimally to the costs and benefits of their available choices a great deal of evidence suggests however that in some contexts people make errors that lead them not to behave in their own best interests economic policy prescriptions might change once we recognize that humans are humanly rational rather than superhumanly rational and in particular it may be fruitful for economists to study the possible advantages of paternalistic policies that help people make better choices we propose an approach for studying optimal paternalism that follows naturally from standard assumptions and methods of economic theory write down assumptions about the distribution of rational and irrational types of agents about the available policy instruments and about the government s information about agents and then investigate which policies achieve the most efficient outcomes in other words economists ought to treat the analysis of optimal paternalism as a mechanism design problem when some agents might be boundedly rational this approach has many advantages first and foremost by explicitly addressing when and how people do and don t pursue their own best interests economists will be better able to contribute to policy debates to contribute to debates over regulating private financial decisions we must study whether financial decisions are based on fallacious statistical reasoning and whether self control problems lead people to borrow too heavily to contribute to debates over teenage smoking we must study whether teenagers become smokers against their long run best interest economists will and should be ignored if we continue to insist that it is axiomatic that constantly trading stocks or accumulating consumer debt or becoming a heroin addict must be optimal for the people doing these things merely because they have chosen to do it a second advantage of our approach is that it forces us to look for the best feasible policy our

is addiction rational theory and evidence this paper makes two contributions to the modeling of addiction first we provide new and convincing evidence that smokers are forward looking in their smoking decisions using state excise tax increases that have been legislatively enacted but are not yet effective and monthly data on consumption second we recognize the strong evidence that preferences with respect to smoking are time inconsistent with individuals both not recognizing the true dife culty of quitting and searching for self control devices to help them quit we develop a new model of addictive behavior that takes as its starting point the standard rational addiction model but incorporates time inconsistent preferences this model also exhibits forward looking behavior but it has strikingly different normative implications in this case optimal government policy should depend not only on the externalities that smokers impose on others but also on the internalities imposed by smokers on themselves we estimate that the optimal tax per pack of cigarettes should be at least one dollar higher under our formulation than in the rational addiction case

the war of information we analyse political contests campaigns between two parties with opposing interests parties provide costly information to voters who choose a policy the information flow is continuous and stops when both parties quit parties actions are strategic substitutes increasing one party s cost makes that party provide more and its opponent provide less information for voters parties actions are complements and hence raising the advantaged party s cost may be beneficial asymmetric information adds a signalling component resulting in a belief threshold at which the informed party s decision to continue campaigning offsets other unfavourable information

tax incidence when individuals are time inconsistent the case of cigarette excise taxes abstract one of the most cogent criticisms of excise taxes is their regressivity with lower income groups spending a much larger share of their income on goods such as cigarettes than do higher income groups we argue that traditional quantity based measures of incidence are only appropriate under a very restrictive time consistent model of consumption of sin goods a model that is much more consistent with existing evidence on smoking decisions is a time inconsistent formulation where excise taxes on cigarettes serve a self control function that is valued by smokers who would like to quit but cannot this self control function benefits lower income groups more since they have a significantly higher price sensitivity of smoking calibrations show that as a result cigarette taxes are much less regressive than previously assumed and are even progressive for a wide variety of parameter values

credit markets in northern nigeria credit as insurance in a rural economy this article addresses the issues of imcomplete markets and imperfect information in the context of credit markets in rural northern nigeria in much recent theoretical literature the problems of moral hazard and adverse selection are assumed to be decisive for the organization of agrarian institutions in contrast it is found that in the four villages surveyed credit transactions take advantage of the free flow of information within rural communities information asymmetries between borrower and lender are unimportant and their institutional consequences the use of collateral and interlinked contracts are absent credit transactions play a direct role in pooling risk between households through the use of contracts in which the repayment owed by the borrower depends on the realization of random production shocks by both the borrower and the lender

anomalies in intertemporal choice evidence and an interpretation research on decision making under uncertainly has been strongly influenced by the documentation of numerous expected utility eu anomalies behaviors that violate the expected utility axioms the relative lack of progress on the closely related topic of intertemporal choice is partly due to the absence of an analogous set of discounted utility du anomalies we enumerate a set of du anomalies analogous to the eu anomalies and propose a model that accounts for the anomalies as well as other intertemporal choice phenomena incompatible with du we discuss implications for savings behavior estimation of discount rates and choice framing effects

nominal and true cost of loan collateral abstract this paper explores costs and proceeds from loan collateral in the credit market with ex ante asymmetric information when collateral value and the probability of project success fluctuate a borrower is willing to pledge collateral if i its future value is correlated with the probability of project success or ii its value fluctuates strongly or iii it is funded with loan capital when one of the conditions is satisfied in contrast to bester 1985 a high risk borrower may be more willing to pledge collateral than a low risk borrower the paper is related to topical subprime crises and real estate collateral

the effects of formal and informal contracting in credit availability this paper investigates how the use of collateral formal contracting along with the market power of banks which facilitates relational contracts affects the availability of credit for business firms using loan data from the spanish credit register we show that the average credit quality of borrowers in a provincial market decreases with market concentration and the availability of collateral additionally the marginal effect of each variable decreases with the higher values of the other variable we also find that credit line interest rates increase with the availability of collateral although the increase is lower for banks operating in more concentrated credit markets therefore market power relations and collateral formal contracting act as substitutes to increase the availability of bank finance under asymmetric information

collateral loan quality and bank risk abstract most commercial loans are made on a secured basis yet little is known about the relationship between collateral and credit risk several theoretical studies find that when borrowers have private information about risk the lowest risk borrowers tend to pledge collateral in contrast conventional wisdom holds that when risk is observable the highest risk borrowers tend to pledge collateral an additional issue is whether secured loans as opposed to secured borrowers tend to be safer or riskier than unsecured loans empirical evidence presented here strongly suggests that collateral is most often associated with riskier borrowers riskier loans and riskier banks

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

tax policy and present biased preferences paternalism under international capital mobility this paper deals with tax policy responses to quasi hyperbolic discounting earlier research on optimal paternalism typically abstracts from capital mobility if capital is mobile between countries it may no longer be possible for national governments to control domestic savings via capital taxation as in a closed economy in this paper we take a broad perspective on public policy responses to self control problems by showing how these responses vary i between closed and open economies ii between small open and large open economies and iii depending on whether or not both source based and residence based capital taxes can be used

collateral type of lender and relationship banking as determinants of credit risk abstract this paper analyses the determinants of the probability of default pd of bank loans we focus the discussion on the role of a limited set of variables collateral type of lender and bank borrower relationship while controlling for the other explanatory variables the study uses information on the more than three million loans entered into by spanish credit institutions over a complete business cycle 1988 2000 collected by the bank of spain s credit register central de informacion de riesgos we find that collateralised loans have a higher pd loans granted by savings banks are riskier and finally that a close bank borrower relationship increases the willingness to take more risk

financing difficulties for smes and credit rationing an expanded model of mortgage loans with asymmetric information this article presents a new model of mortgage loans under reasonable assumptions a several key variables that affects the success of a project such as project risk total investment lending rate

secured lending and default risk equilibrium analysis policy implications and empirical results the authors examine collateral in a competitive equilibrium in which borrowers can choose hidden actions and may additionally possess hidden knowledge apart from explaining the widespread use of collateral despite deadweight costs they show that an increase in the riskless interest rate causes equilibrium loan rates and collateral requirements to increase a decline in the deadweight costs of collateral reduces the equilibrium collateral use under moral hazard and an increase in the borrower s project size reduces equilibrium collateral use under moral hazard some of these predictions are tested and found to be supported by the data copyright 1991 by royal economic society

a simple model for merit good arguments abstract in this paper we examine a way of representing merit goods by allowing governments to apply a specific form of correction to consumers preferences the model builds upon an approach to the analysis of taste and quality change due to fisher and shell we look at the first best allocation of resources where this is done we also consider second best policies in which the government must charge the same price to all consumers of the merit good and when optimal lump sum transfers are not available

addiction and cue triggered decision processes we propose a model of addiction based on three premises 1 use among addicts is frequently a mistake 2 experience sensitizes an individual to environmental cues that trigger mistaken usage 3 addicts understand and manage their susceptibilities we argue that these premises find support in evidence from psychology neuroscience and clinical practice the model is tractable and generates a plausible mapping between behavior and the characteristics of the user substance and environment it accounts for a number of important patterns associated with addiction gives rise to a clear welfare standard and has novel implications for policy

credible commitments contract enforcement problems and banks intermediation as credibility assurance abstract we consider contract enforceability problems in credit transactions and justify a bank as an organizational solution to market breakdown due to unenforceable contracts specifically we explain i why loan commitments exist and ii why banks exist to sell such commitments a loan commitment resolves moral hazard more efficiently than any combination of inside equity and spot credit however the market breaks down if commitment sellers are individuals because their promises to honor contracts are not credible with a large bank a perfect sequential equilibrium is obtained in which credibility is restored

an analysis of the principal agent problem most analyses of the principal agent problem assume that the principal chooses an incentive scheme to maximize expected utility subject to the agent s utility being at a stationary point an important paper of mirrlees has shown that this approach is generally invalid we present an alternative procedure if the agent s preferences over income lotteries are independent of action we show that the optimal way of implementing an action by the agent can be found by solving a convex programming problem we use this to characterize the optimal incentive scheme and to analyze the determinants of the seriousness of an incentive problem

optimal non linear income taxation for the alleviation of income poverty there has been much discussion recently of structuring tax and transfer programs to ensure that resources go to the poor with minimal leaks to the nonpoor the poor have no incentive to earn income with 100 percent marginal tax rates but how high or low the marginal rate of taxation should be and how they should vary with income is a complex issue and opinions vary social security schemes that withdraw benefits represent an extremely high effective marginal tax rate other schemes call for relatively low marginal tax rates at the bottom of the income distribution which tax transfer schedule does most to reduce poverty the issue is one of optimal nonlinear income taxation the authors show that one of the key theoretical results of the welfarist literature is overturned if it is desirable for everybody to work the optimal marginal tax rate on the very poorest individuals is strictly negative they argue that the nonwelfarist perspective points toward lower marginal tax rates in the lower part of the income distribution than does the welfarist perspective but numerical simulations suggest that the effect is of limited quantitative significance using conventional functional forms and parameter values optimal marginal tax rates on the poor are in the 60 70 percent range

loan collateral corporate investment and business cycle abstract collateral and loan rates are observed to be highly cyclical in their use for bank lending the effects of such cyclicality on corporate investment are analyzed in this paper using a dynamic model we find that more collateral causes firms to select riskier safer projects if the loan rate rises above falls below the expected investment return we show that the incentive effect of loan rates becomes stronger with greater collateral with the two credit terms having larger incentive effects on lower quality firms these results offer a new explanation for why lenient collateral policies are associated with rising loan rates in economic upturns but stricter collateral requirements come with falling loan rates during downturns

non leaky buckets optimal redistributive taxation and agency costs abstract economists generally have argued that income redistribution comes at a cost in aggregate income we provide a counter example in a model where private information gives rise to incentive constraints in the model a wage tax creates the usual distortion in labor leisure choices but the redistributive grants that it finances reduce a distortion in investment in higher education we prove that simple redistributive policies can yield pareto improvements and increase aggregate income indeed redistributive policies are under most circumstances more effective in increasing efficiency than corrective taxes or subsidies where higher education is beyond the reach of the poor

robust financial contracting and the role of venture capitalists we derive a role for inside investors such as venture capitalists in resolving various agency problems that arise in a multistage financial contracting problem absent an inside investor the choice of securities is unlikely to reveal all private information and overinvestment may occur an inside investor however always makes optimal investment decisions if and only if he holds a fixed fraction contract where he always receives a fixed fraction of the project s payoff and finances that same fraction of future investments this contract also eliminates any incentives of the venture capitalist to misprice securities issued in later financing rounds in this article we develop a model of financial contracting with multiple investment decisions and show how conflicts of interest and informational asymmetries can be effectively resolved by an inside investor i e an investor who not only provides capital but also works closely with the firm monitors it frequently and is generally very well informed about the firm s prospects and investment opportunities venture capitalists are obvious examples of inside investors and their function has been an important motivation for this article banks especially in japan and germany are also involved in monitoring and can be viewed as playing the role of inside investors in this article we examine the potential benefits of inside investors in a context where there are no restrictions beyond limited liability on the type of financial contracts that can be written we address a basic financial contracting problem involving an entrepreneur who has an idea for a project but does not have sufficient capital to fund it an important assumption is that there are several stages in the project s development and that a decision must be made at each stage whether the project should be continued or abandoned if the project is continued the amount of additional capital to be invested must also be determined we assume that the entrepreneur as an insider observes private information about the project s profitability at each stage this information is not

competition risk neutrality and loan commitments abstract we rationalize fixed rate loan commitments forward credit contracting with options in a competitive credit market with universal risk neutrality future interest rates are random but there are no transactions costs borrowers finance projects with bank loans and choose ex post unobservable actions that affect project payoffs credit contract design by the bank is the outcome of a non cooperative nash game between the bank and the borrower the initial formal analysis is basically in two steps first we show that the only spot credit market nash equilibria that exist are inefficient in the sense that they result in welfare losses for borrowers due to the bank s informational handicap second we show that loan commitments because of their ability to weaken the link between the offering bank s expected profit and the loan interest rate enable the complete elimination of informationally induced welfare losses and thus produce an outcome that strictly pareto dominates any spot market equilibrium perhaps our most surprising result is that if the borrower has some initial liquidity it is better for the borrower to use it now to pay a commitment fee and buy a loan commitment that entitles it to borrow in the future rather than save it for use as inside equity in conjunction with spot borrowing

a superpopulation theory approach to the design of price index estimators with small sampling biases this article uses simple superpopulation models to examine estimators for long and short term laspeyres price relatives based on pps samples

asymmetric valuations and the role of collateral in loan agreements loan contracts with provision for collateral are of two general types in one the collateral may be an existing asset of the borrowing firm which is pledged to a lender in the event of default in this case collateral does not increase the assets that the borrower would lose if there is default since all the borrower s assets are attachable therefore the expected marginal cost to the borrower of providing an additional unit of collateral includes principally transactions costs associated with the collateral l this describes the usual type of commercial loan arrangement with the collateral being either equipment real estate accounts receivable or inventories in the other type of loan contract the collateral is an additional asset that is given up by the borrower if there is default that is in addition to the usual assets that are available to its lenders the borrower assigns as collateral to a creditor an asset that would normally not be legally attachable this arrangement is more common in small business loans that are secured by a personal asset e g a house of the entrepreneur likewise debt issued by a legally separate subsidiary may be secured by an asset of the parent firrn in these cases the expected marginal cost to the borrower the owner manager of the small firm or the parent corporation in the latter example of providing an additional unit of collateral

relationship lending and sme financing in the continental european bank based system this paper analyzes the relationship between banks and smes in the continental european bank based system we find that smes with longer bank relationships have enhanced access to loans but at the same time they bear a higher cost for their debt we also find that firms maintaining two bank relationships get the cheapest debt which establishes a limit for the degree of concentration of bank relationships our results also show that the existence of trust between firm and bank improves access to financing and reduces the borrowing costs whereas it increases the likelihood that guarantees will have to be provided as a consequence it seems that a relationship based on trust is a better strategy to improve smes access to finance than the establishment of longer or more concentrated relationships

collateral and competitive equilibria with moral hazard and private information the authors examine equilibrium credit contracts and allocations under different competitivity specifications and explain the economic roles of collateral under these specifications both moral hazard and adverse selection are considered the principal message is that how a competitive equilibrium is conceptualized significantly affects the characterization of equilibrium credit contracts specifically some well known results in the rationing literature are shown to rest delicately on the adopted equilibrium concept two somewhat surprising results emerge first high quality borrowers with unlimited collateral may be priced out of the market despite the bank having idle deposits second high quality borrowers may put up more collateral this paper explores the allocational consequences of alternative credit market competitivity specifications and explains the different economic roles of collateral under these specifications we model banks that lend to borrowers financing projects with payoffs depending on a priori unknown borrower attributes and ex post unobservable borrower actions borrowers are assumed to have unconstrained access to collateral our analysis is based on two concepts of competitive equilibrium under both banks compete in the sense that they earn zero expected profits however under the first concept of equilibrium ti as in jaffee and russell 11 all rents accrue to borrowers whereas under the second concept t2 all rents accrue to depositors as in stiglitz and weiss 17 our research makes two main points first we demonstrate that the manner in which a competitive equilibrium is conceptualized importantly influences the characterization of equilibrium credit allocations specifically one of the findings is that the rationing equilibria of stiglitz and weiss 17 and others should be viewed as rather delicate things in that they are very sensitive to the competitivity specification used for instance

loan commitments investment decisions and the signalling equilibrium abstract this paper analyzes the use of loan commitments to finance future risky investment projects when the capital market is informed of a firm s project quality having a loan commitment would lead the firm to overinvest if banks are competitively rational the cost of this overinvestment would be borne by the firm making the loan commitment contract unattractive when the project quality is private information firms will signal their project qualities through purchasing loan commitments this signal is credible because purchasing a loan commitment poses overinvestment cost to the firm this paper establishes and characterizes this dissipative signalling equilibrium

optimal sin taxes abstract we investigate sin taxes on unhealthy items such as fatty foods that people may by their own reckoning consume too much of we employ a standard optimal taxation framework but replace the standard assumption that all consumers have 100 self control with an assumption that some consumers may have some degree of self control problems we show that imposing taxes on unhealthy items and returning the proceeds to consumers can generally improve total social surplus because such taxes counteract over consumption by consumers with self control problems while at the same time they naturally redistribute income to consumers with no self control problems who consume less such taxes can even create pareto improvements finally we demonstrate with some simple numerical examples that even if the population exhibits relatively few self control problems optimal taxes can still be large

a class of multiplicative estimators of laspeyres price indexes publication of indexes measuring changes in prices of retail wholesale export and import items is an important part of many governmental statistics programs one form of price index that is often used is the fixed base laspeyres in which a fixed market basket of goods is priced over time this article introduces a new class of multiplicative estimators of laspeyres indexes the optimum within the class is derived for long term price change and compared with two other members of the class when used for estimating both long term and short term change theoretical properties are derived under a model in which long term relative price changes for individual items have common within stratum means and are correlated over time theory for long term and short term change estimators is tested in a simulation study in which a large number of stratified probability samples is selected from a population extracted from items priced for the u s consumer price index

the role of soft information in a dynamic contract setting evidence from the home equity credit market credit underwriting is a dynamic process involving multiple interactions between borrower and lender during this process lenders have the opportunity to obtain hard and soft information from the borrower we analyze more than 108 000 home equity loans and lines of credit applications to study the role of soft and hard information during underwriting our data set allows us to distinguish lender actions that are based strictly on hard information from decisions that involve the collection of soft information our analysis confirms the importance of soft information and suggests that its use can be effective in reducing overall portfolio credit losses ex post

the measurement of inflation a stochastic approach the stochastic approach to index number theory views each commodity price change as an independent observation on the underlying rate of inflation so that inflation can be estimated by averaging over all the prices this article extends the approach by a allowing for sustained changes in relative prices b showing the link with divisia index numbers and c deriving standard errors for the inflation estimates the results are illustrated with australian data

population intervals and the true cost of living index with known price distributions abstract this note provides a simple closed form expression for an aggregate cost of living index when prices paid differ across consumers properties of the lognormal distribution are used to construct a population interval around the index so that a given fraction of consumers have a true cost of living index in the interval

estimation of laspeyres price indexes using the prediction approach for finite population sampling estimators of chain and fixed base laspeyres price indexes are studied using the prediction approach to finite population sampling the estimators include some that are based on those used in several u s government index programs and others derived from prediction models biases and variances of the estimators are studied for a case in which the reference period index weights are unknown for nonsample items under a model for a one period price change in which items have common within stratum means unbiased estimators can be constructed but under a more general regression model special sample balance conditions are needed for unbiasedness of those estimators the theory for the estimators of fixed base indexes is illustrated in an empirical study using a population of items priced for the u s consumer price index

a model of focusing in economic choice we present a generally applicable theory of focusing based on the hypothesis that a person focuses more on and hence overweights attributes in which her options dier more our model predicts that the decisionmaker is too prone to choose options with concentrated advantages relative to alternatives but maximizes utility when the advantages and disadvantages of alternatives are equally concentrated in intertemporal choice because the relative concentrations of an option s costs and benets can be dierent from the perspective of a single period and the perspective of the entire choice problem the decisionmaker often exhibits a form of time inconsistency she is present biased when the costs of current misbehavior are distributed over many future dates such as in harmful consumption but future biased when the benet of many

capital market access and corporate loan structure in this article we use a sample of 14 075 loan packages issued between 1993 and 2007 to examine if borrower access to external capital markets influences corporate loan structure we classify firms into three access categories private unrated public and rated public private firms have the lowest access and to date no large sample investigation of their loans has been done in the literature rated public firms access the capital markets the most we find the level of access influences loan structure in ways that are consistent with having greater or fewer financing alternatives as well as theories on information asymmetry agency and monitoring in particular loans to firms with higher levels of access have shorter maturities fewer loan facilities per package and a lower probability of being secured we also find that a higher level of access results in a higher incidence of single lender loans but among multiple lender loans it leads to a larger number of lenders furthermore we find evidence

choice and procrastination author s o donoghue ted rabin matthew abstract recent models of procrastination due to self control problems assume that a procrastinator considers just one option and is unaware of her self control problems we develop a model where a person chooses from a menu of options and is partially aware of her self control problems this menu model replicates earlier results and generates new ones a person might forego completing an attractive option because she plans to complete a more attractive but never to be completed option hence providing a non procrastinator additional options can induce procrastination and a person may procrastinate worse pursuing important goals than unimportant ones

paternalism and tax competition when consumers make mistakes the government may wish to use paternalistic taxation as a corrective measure we analyse the extent to which tax competition undermines the feasibility of paternalistic taxation we show that the paternalistic component of a tax on a harmful good is reduced when there is cross border shopping but it does not disappear altogether in a model with tax competition between two countries only one of which has a paternalistic objective we show that a minimum tax rate requirement can be pareto improving despite the divergence in policy objectives tax harmonization however reduces welfare in the non paternalistic country

nudging farmers to use fertilizer theory and experimental evidence from kenya we model farmers as facing small fixed costs of purchasing fertil izer and assume some are stochastically present biased and not fully sophisticated about this bias such farmers may procrastinate post poning fertilizer purchases until later periods when they may be too impatient to purchase fertilizer consistent with the model many farmers in western kenya fail to take advantage of apparently profit able fertilizer investments but they do invest in response to small time limited discounts on the cost of acquiring fertilizer free deliv ery just after harvest calibration suggests that this policy can yield higher welfare than either laissez faire policies or heavy subsidies

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

the commitment problem of secured lending the paper presents a new theory of trade credit in which firms buy inputs on credit from suppliers to restore the benefits of secured bank financing impaired by contract incompleteness in a setting where investment is endogenous and unobservable to financiers we show that a bank secured credit contract is time inconsistent upon being granted credit the entrepreneur has an incentive to alter the original input combination jeopardizing the bank s revenues anticipating the entrepreneur s opportunism the bank offers an unsecured credit contract reducing the surplus from the venture one way for the entrepreneur to commit to the contract terms is to purchase inputs on credit from the supplier the supplier observes the input investment and acts as a guarantor that inputs will be purchased as contracted thus facilitating access to secured bank financing the commitment role of trade credit still holds in a multi period extension that investigates the impact of bank relationship lending on secured debt and trade credit our model provides novel testable predictions on optimal financial contracts in both one period and repeated lending relationships

dynamic corrective taxes with time varying salience abstract economies across the globe are becoming increasingly cashless and many payment systems have become automated driving a temporal wedge between consumption and payment and generally making the costs of consumption intermittently salient since this inconsistent price salience alters demand elasticities it is a particular concern for goods that generate externalities and the price based policies deployed to address them this paper derives optimal dynamic corrective taxes for suboptimal and persistent consumption decisions these taxes depend on the agent s ability to commit to a future consumption path we also characterize a second best constant tax and the excess burden from time invariant tax rates when calibrated to u s residential electricity consumption the model shows that the second best constant tax is more than twice the marginal external cost of carbon emissions

the substitution bias of the laspeyres price index an analysis using estimated cost of living indexes the most commonly used measure of the cost of living the consumer price index cpi published by the bureau of labor statistics is essentially a laspeyres price index it is well known however that a laspeyres price index provides an upward biased estimate of the cost of living because in keeping the same base period basket of goods as weights it does not take into account substitution among commodities induced by relative price changes the magnitude of the bias is an empirical question which is the focus of this study an estimate of the substitution bias may be obtained by taking the difference between the laspeyres price index and an estimated true cost of living index the true cost of living index cli is based on the theory of consumer demand it is the ratio of the minimum expenditures under two different price regimes necessary to maintain a constant level of utility as opposed to the constant basket of goods in the laspeyres index the size of the bias depends on two factors 1 the size of consumption substitution elasticities if there is no commodity substitution then the cli and laspeyres index coincide regardless of changes in relative prices and 2 the magnitude of relative price changes if all prices move together then the cli and laspeyres index again coincide regardless of the size of substitution elasticities in order to compute a true cli it is necessary to specify a particular utility function and estimate the parameters of the resulting system of demand equations see for example louis phlips p 135 several estimates of the magnitude of the substitution bias have appeared in the literature but all previous studies suffer from a common weakness they are all based on a very small number of commodities essentially because of econometric problems involved in estimating large systems of demand equations in one group of studies demand models have been estimated using highly aggregated data in which total consumption is grouped into four to nine aggregate commodites such as housing durables or clothing arthur goldberger and theodore gamaletsos for example estimate the linear expenditure system les demand model using data on five aggregate goods for several european countries and compare the resulting cli for one of the countries greece to the corresponding laspeyres price index tran van hoa estimates costof living indexes for six australian provinces using data on nine aggregate goods phlips cites work by r sanz ferrer who computed a cli for belgium from data on eight aggregate commodities in such studies using highly aggregated data the estimate of the substitution bias may be understated because the aggregation obscures substitution in consumption within categories which is perhaps more prevalent than substitution between gross aggregates another shortcoming of these three aggregate studies is the fact that they use only a single demand system and hence do not explore the sensitivity of the cli to a priori u s bureau of labor statistics the groundwork for this study was my dissertation i would like to thank the chairman and members of my committee r robert russell llad phillips and robert deacon for their support and helpful suggestions and jack triplett robert pollak richard j mcdonald and a referee for valuable comments on an earlier version the views expressed are my own and do not necessarily reflect the policies of the bureau of labor statistics for a theoretical discussion of cost of living indexes see robert pollak 1971b and paul samuelson and subramanian swamy

the relationship between u k banks and their small business customers much emphasis is placed upon the benefits to both parties of a good relationship between banks and their small business customers having explained the significance of smes in the u k economy the papers goes on to consider briefly some of the arguments which underpin the rationale for these relationships the roles of information and communication are discussed and the poor co ordination between banks smes and their accountants is highlighted evidence from over 6 000 small businesses in response to the forum of private business survey in 1994 is then presented this demonstrates the strong positive association between more participative relationships and more positive perceptions of their banks by firms finally it is suggested that a virtuous circle of information and communication could be established if the parties cooperate in a systematic process of risk assessment

the determinants of contract terms in bank revolving credit agreements the paper examines the determinants of contract terms on bank revolving credit agree ments revolvers of medium large publicly traded companies we model the duration maturity secured status and pricing decisions within a simultaneous decision frame work thereby overcoming the biased and inconsistent estimates in prior single equation studies of debt contract terms we find strong interrelationships between contract terms with significant bi directional relationships between duration and secured status and be tween the all in spread and commitment fees and a unidirectional relationship from both duration and secured status to all in spread we also illustrate how several single equa tion studies of contract terms draw incorrect conclusions because of their inappropriate assumption that other contract terms and leverage were exogenous finally our results sup port the hypothesis that the setting of contract terms plays an important role in alleviating contracting problems

tax incidence with strategic firms in the soft drink market abstract because soft drink sd consumption is considered to be a contributor to the epidemic of obesity there is a growing interest in evaluating the impact on sd consumption of alternative tax policies in this paper we propose a methodology to evaluate the impact of taxation of a food market taking into account the strategic price response of both manufacturers and retailers we apply this methodology to the french sd market and simulate the impacts of ad valorem and excise taxes we find that firms behave differently when facing an ad valorem tax or an excise tax an excise tax is overshifted to consumer prices while an ad valorem tax is undershifted to consumer prices we find that an excise tax based on the sugar content of sd is the most effective at reducing sd consumption our results also indicate that ignoring strategic pricing by firms leads to misestimations of the impact of taxation by between 15 and 40 depending on the products and the tax implemented in the short term that is ignoring positive long term health effects a 9 cents l excise tax has a small negative welfare effect about 1 person year

asymmetric information collateral and moral hazard in a credit market characterized by a priori asymmetric information collateral not only can identify credit applicants but also can result in moral hazard involving the borrower s use of pledged assets the borrower s other alternatives are to apply for unsecured bank credit and be priced as average or to acquire financing by selling an asset and subsequently renting it for continued use the optimal secured loan contract for higher quality firms is shown to involve overcollateralization there is underinvestment relative to first best in maintenance of the pledged assets but overinvestment relative to the level that would be chosen without bank monitoring self financing and unsecured credit are chosen by the intermediate and lowest quality groups respectively

estimating individual discount rates in denmark a field experiment we estimate individual discount rates with respect to time streams of money using controlled laboratory experiments these discount rates are elicited by means of field experiments involving real monetary rewards the experiments were carried out across denmark using a representative sample of 268 people between 19 and 75 years of age individual discount rates are estimated for various households differentiated by socio demographic characteristics such as income and age our conclusions are that discount rates are constant over the 12 month to 3 year horizons used in these experiments and that discount rates vary substantially with respect to several socio demographic variables hence we conclude that it would be reasonable to assume constant discount rates for specific household types but not the same rates across all households

microfinance subsidies and local externalities we analyse equilibrium borrowers effort and the cost of microcredit loans in the presence of moral hazard project correlation and subsidies under group lending conditions our results show that under the assumption of endogenous effort project correlation has significant effects on borrowers effort only when it is determined by asymmetric positive or negative shocks these findings indicate that the well known negative effect of within group symmetric project correlation on group lending with joint liability disappears once endogenous effort is taken into account we also analyse the effects of subsidised lending and asymmetric correlation on the relative convenience in terms of borrowers effort of the alternative 1 between group lending and individual lending with notional collateral and 2 among three different market structures of the microfinance industry

strategic ignorance as a self disciplining device we analyse the decision of an agent with time inconsistent preferences to consume a good that exerts an externality on future welfare the extent of the externality is initially unknown but may be learned via a costless sampling procedure we show that when the agent cannot commit to future consumption and learning decisions incomplete learning may occur on a markov perfect equilibrium path of the resulting intra personal game in such a case each agent s incarnation stops learning for some values of the posterior distribution of beliefs and acts under self restricted information this conduct is interpreted as strategic ignorance all equilibria featuring this property strictly pareto dominate the complete learning equilibrium for any posterior distribution of beliefs

organizational distance and use of collateral for business loans abstract this paper examines the effect of organizational distance i e distance between the headquarters of the bank that grants a loan and the location of the borrower on the use of collateral for business loans by spanish banks on the basis of the recent lender based theory of collateral inderst r mueller h m 2007 a lender based theory of collateral journal of financial economics 84 826 859 we find that for the average borrower the use of collateral is higher for loans granted by local lenders than by distant ones we also show that the difference in the likelihood of collateral in loans granted by local lenders relative to distant lenders is higher among older and larger firms than respectively younger and smaller firms we also find that banks use lending technologies that are different for near and for distant firms in response to organizational diseconomies

collateral relationship lending and family firms prior research suggested that relationship lending could play a role in solving asymmetric information problems between borrower and lender other studies suggest a relationship between family ownership and the shareholder bondholder agency conflict the present paper investigates the impact of relationship characteristics family ownership and their interaction effects upon the use of collateral in sme lending we examine the determinants of collateral as well as the determinants of the choice between business and personal collateral using decision tree analysis the results reveal that relationship characteristics have a significant influence but not always in the direction as expected moreover they do not seem to be the primary determinants in our classification models the most important determinants in both classification models seem to be the loan amount total assets and the family versus non family firm distinction in addition we differentiate between line of credit and non line of credit loans and find significant differences between these decision trees

self confidence and personal motivation the maintenance and enhancement of self esteem has always been identified as a fundamental human impulse philosophers writers educators and of course psychologists have all emphasized the crucial role played by self image in motivation affect and social interactions the aim of this chapter is to bring these concerns into the realm of economic analysis and show that this has important implications for how agents process information and make decisions conversely the tools of economic modelling can help shed light on a number of apparently irrational behaviours documented by psychologists