repudiation risk and restitution costs toward understanding premiums on insured deposits this paper contains a theoretical development of the relationship of cd premiums to both the risks of the cd issuer and the third party government guarantor of those deposits the theoretical development shows that the risk of the guarantor derives from the possibility that the guarantee could be repudiated and or the restitution of the depositor s claim could be costly the empirical analysis of the premiums for insured cds indicates that during the years preceding the ultimate collapse of the fslic the market priced the risk of both the guarantor as well as the firm the guarantor risk pricing was responsive to the insolvency of the guarantor the attempts to recapitalize the guarantor and the efforts to resolve the insolvent thrifts during this eventful time period cd premiums rose to 187 basis points and averaged 79 and 54 basis points copyright 1994 by ohio state university press

distributional weights in cost benefit analysis should we forget about them many argue that it is socially inefficient to use distributional weights in cost benefit analysis and that doing so implies large inefficiency losses when distributional matters can be dealt with trough income taxation instead our results question this view by showing a large range of cases when distributional weights are second best optimal to use one example is when different provided goods affect tax revenues equally per dollar spent utility functions that are separable in the provided goods is sufficient for this most results hold for linear and non linear income taxes and whether they are optimal or not general policy implications are discussed

market trading structures and asset pricing evidence from the treasury bill markets earlier studies report signfficant price disparities betweenfutures andforward or spot markets examining the treasury bill markets this article demonstrates that differences in market trading structures explain these disparities treasury billfutures rates contain significantly lower liquidity and default premia than do syntheticforward rates this reflects the functioning of a futures clearing association and differences between an open outcry auction futures market and an over the counter dealer spot market the same factors that make futures contracts nonredundant securities also explain the existence in equilibrium of price disparities

an experiment on learning with limited information nonconvergence experimentation cascades and the advantage of being slow abstract we present the results of an experiment on learning in a continuous time low information setting for a dominance solvable version of a cournot oligopoly with differentiated products we find little evidence of convergence to the nash equilibrium in an asynchronous setting characterized by players updating their strategies at different frequencies play tends toward the stackelberg outcome which favors the slower player convergence is significantly more robust for a serial cost sharing game which satisfies a stronger solution concept of overwhelmed solvability as the number of players grows this improved convergence tends to diminish seemingly driven by frequent and highly structured experimentation by players leading to a cascading effect in which experimentation by one player induces experimentation by others these results have implications both for traditional oligopoly competition and for a wide variety of strategic situations arising on the internet

regulating banks through market discipline a survey of the issues abstract the interest in the application of market discipline to regulate the financial industry has boomed recently due to the proposed new capital accord this paper reviews the potential role market discipline can play in financial regulation we start with a discussion of the rationale for financial regulation and with a brief history of the current regulatory mechanisms next a definition of market discipline as a regulatory mechanism is advanced we evaluate the disciplining power various market participants have finally we argue that more external risk management disclosure is a condition sine qua non in order to enable market discipline as a regulatory mechanism in this respect the basle committee has taken the right approach

real interest rates and the savings and loan crisis the moral hazard premium real interest rates shifted upwards by four or five percentage points in approximately 1980 the question is why in this paper we review some of the more popular explanations and point out that they are somewhat inconsistent with the facts we then present a new explanation which may partially account for the dramatic increase we suggest that the upward shift in rates may be directly connected with the decade long crisis in the savings and loan industry and the federal government s handling of that crisis owners and managers of troubled thrifts responded to the incentives provided by underpriced deposit insurance by offering higher and higher rates in an attempt to attract new funds depositors anticipating that the government would protect their investments actively sought out higher yields in local and national markets the end result was that the rates offered by treasury securities rose to compete with these quasi risk free substitutes sold by savings and loans this added and indeed continues to add significantly to the federal government s borrowing costs we calculate this increased cost under various assumptions about the effect of the s l crisis on real interest rates

inequality aversion and efficiency with ordinal and cardinal social preferences an experimental study abstract in this paper we report on a series of free form bargaining experiments in which two players have to distribute four indivisible goods among themselves in one treatment players are informed about the monetary payoffs associated with each bundle of goods in a second treatment only the ordinal ranking of the bundles is given we find that in both cases inequality aversion plays a prominent role in the ordinal treatment individuals apparently use the ranks in the respective preference orderings over bundles of goods as a substitute for the unknown monetary value allocations that distribute the value money or ranks respectively most equally serve as natural reference points for the bargaining processes frequently such equal split allocations are chosen by our subjects even though they are pareto dominated whether a pareto optimal allocation is chosen or not depends on whether or not it is a pareto improvement relative to the equal split reference allocation we find less pareto damaging behavior due to inequality aversion in the ordinal than in the cardinal treatment

communication and coordination in a two stage game we study the impact of communication on behavior in a two stage coordination game with asymmetric payoffs we test experimentally whether individuals can avoid a head to head confrontation by means of coordinated strategies in particular we analyze whether and how quickly a conflict avoidance take turn strategy can emerge first our results show that players learn to solve the conflict by choosing opposite options at both stages of the game second many adopt a take turn strategy to sustain coordination over time and alleviate the inequality induced by the asymmetry of payoffs third communication increases the likelihood of conflict resolution even when a single pair member has the right to communicate

continuous time repeated games in this paper the authors develop a model of strategic behavior in continuous time games of complete information which includes conventional repeated games in discrete time as a special case the model developed here admits a very large class of strategies that allows one to extend the repeated game model to continuous time the set of equilibria in this game may be large in many cases equal to the feasible individually rational set of payoff s the authors also study the restriction of renegotiation proofness in this framework and apply these results to a cournot duopoly example copyright 1993 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

project evaluation with democratic decision making what does cost benefit analysis really measure abstract it is often argued that projects involving public good changes should be chosen on the basis of monetary valuation and cost benefit analysis cba however cba is not value free when used to measure welfare it is based on highly controversial value judgements when used to measure efficiency it is based on assumptions of limited relevance to democratic decision making processes cba measures total net willingness to pay neither more nor less while interesting in its own right the normative significance of this indicator is not obvious

inferring market information from the price and quantity of s l deposits abstract this paper infers market information embedded in the price and quantity of s l deposits while previous empirical research typically treats the risk premium as the key element of deposit interest spread subsidy shifting theory suggests that deposit rates also contain a subsidy shifting premium that arises from an institution s eagerness to fund loan and investment opportunities that extract deposit insurance subsidies this paper examines the existence and the nature of both premiums and shows how regulators can use this information to make regulatory oversight more effective

efficiency equality and labeling an experimental investigation of focal points in explicit bargaining we investigate schelling s hypothesis that payoff irrelevant labels cues can influence the outcomes of bargaining games with communication in our experimental games players negotiate over the division of a surplus by claiming valuable objects that have payoff irrelevant spatial locations negotiation occurs in continuous time constrained by a deadline in some games spatial cues are opposed to principles of equality or efficiency we find a strong tendency for players to agree on efficient and minimally unequal payoff divisions even if spatial cues suggest otherwise but if there are two such divisions cues are often used to select between them inducing distributional effects jel c78 d63 d83 in the strategy of conflict thomas c schelling 1960 pp 53 67 74 proposes the hypothesis that the outcomes of bargaining problems can be systematically influenced by incidental details or as they would now be called properties of framing or labeling these labeling properties or cues have no direct relationship to payoffs and are not represented in standard game theoretic models but they nevertheless provide a means by which players can coordinate their expectations although much of his theoretical analysis and all of his informal experiments are concerned with simultaneous move games without communication schelling claims that this hypothesis applies to explicit bargaining with full communication and enforcement he acknowledges that communication provides mechanisms for coordination that are not present in his simple experiments but still argues that framing properties can remain significant in explicit bargaining most subsequent bargaining theory has not used this idea but if real world bargaining is substantially affected by payoff irrelevant cues a satisfactory theory of bargaining needs to take account

a continuous dilemma we study prisoners dilemmas played in continuous time with flow payoffs accumulated over 60 seconds in most cases the median rate of mutual cooperation is about 90 percent control sessions with repeated matchings over eight subperiods achieve less than half as much cooperation and cooperation rates approach zero in one shot sessions in follow up sessions with a variable number of subperiods cooperation rates increase nearly linearly as the grid size decreases and with one second subperiods they approach continuous levels our data support a strand of theory that explains how capacity to respond rapidly stabilizes cooperation and destabilizes defection in the prisoner s dilemma jel c72 c78 c91

sustainable management of renewable resources an experimental investigation in continuous time abstractthis study addresses one of the most basic questions in renewable resource management the ability of economic agents to exploit a renewable resource in an efficient and sustainable manner in a laboratory experiment subjects are presented with renewable resource extraction problems where optimal management will lead to a stable steady state a test of sustainability of the extraction practices shows that extraction behaviour results in steady states only 56 of the time the mode of the steady state distribution coincides with the optimal steady state extraction the trade off between accruing a higher payoff in the present and sustaining the resource for future exploitation leads to suboptimal behaviours such as initial overextraction of the resource compared to the optimal extraction policy costly downward adjustment of the extraction later in time and settling down for lower long run resource and extraction the suboptimal behaviours lead to 17 loss in efficiency on average in terms of th

separating the hawks from the doves evidence from continuous time laboratory games human players in our laboratory experiment received ow payos over 120 seconds each period from a standard hawk dove bimatrix game played in continuous time play converged closely to the symmetric mixed nash equilibrium under a one population matching protocol when the same players were matched in a two population protocol with the same bimatrix they showed clear movement towards an asymmetric and very inequitable pure nash equilibrium of the game these ndings support distinctive predictions of evolutionary game theory

how do official bailouts affect the risk of investing in emerging markets we analyze the effects of bailout expectations on sovereign bond spreads in emerging markets the non bailout of russia in august 1998 is interpreted as an event that decreased the perceived probability of future crisis lending to emerging markets if official rescues are expected to mitigate the losses of investors in the event of a crisis such an event should raise the cross country dispersion of spreads because investors pay more attention to differences in risk characteristics across countries we find strong evidence for such an effect this is consistent with the existence of investor moral hazard at least prior to 1998

the barely revealed preference behind road investment priorities an attempt is made to reveal the preference of decision makers within the regional norwegian public roads administration the order of priority assigned to the respective competing public road investment opportunities within the various counties provinces is studied by means of a rank order multinomial logit model explanatory variables used include cost benefit and a variety of attributes characterizing the individual investment projects although statistically significant cost and benefit appear to be of only marginal importance for the priorities set more weight is attached to cost than to benefit smaller projects are preferred to larger given the benefit cost ratio in general the models estimated are able to explain only a relatively small share of the priority setting made

the ideology of efficiency searching for a theory of policy analysis the potential pareto improvement criterion and other measures of economic efficiency do not pass the test of consistency and coherence within economic theory nor do such measures accord with what public decision makers seek in policy advice from economists such efficiency measures are nonetheless durable components of the ideology of economics in general and benefit cost analysis in particular the objectivity of the policy scientist has been confused with the objectivity of the science while economic efficiency has no claim to objectivity the policy scientist can be an objective analyst of policy choices

cost benefit analysis of an infrastructure project and a cost reflective tariff a case study for investment in wastewater treatment plant in serbia to prevent the environment from being adversely affected by the disposal of insufficiently treated wastewater the european urban wastewater directive directives 91 271 eec and 98 15 eec emphasizes the need for secondary or more stringent treatment of urban wastewater in sensitive areas the eu water framework directive directive 2000 60 ec stresses the role of economic analysis to prevent the degradation and depletion of water resources the wastewater treatment process results in external benefits that should be quantified in order to assess the economic feasibility of a proposed project the principle of full cost recovery and the polluter pays principle are to be pursued using the european commission methodology for cost benefit analysis economic performance indicators of an infrastructure project in serbia requiring tertiary treatment of wastewater in a sensitive area are calculated to ensure a financial sustainability the authors assessed a cost reflective tariff to be introduced following the start of wastewater treatment plant operations the economic net present value is positive while the economic internal rate of return is greater than the social discount rate full cost recovery implies a significant tariff increase that should be taken into account by water authorities and companies as the project should not be only economically feasible but also socially affordable

opportunity cost of environmental conservation in the presence of externalities application to the farmed and wild salmon trade off in norway estimation of the opportunity cost is necessary for the economic assessment of environmental conservation policies this paper considers the case where an environmental good is negatively affected in the process of the production of marketable goods in the presence of externalities conservation implies the undertaking of abatement measures by polluters a relevant measure of opportunity cost in these settings is the abatement cost required to preserve or restore a unit of the environmental good in question current economic literature lacks an established methodology for deriving such measures as it commonly focuses on pricing pollutants rather than the natural stocks affected by them this paper uses a non optimal valuation approach suggested by fenichel and abbott jaere 1 1 2 1 27 2014 as a point of departure and develops a framework for deriving the opportunity cost of conservation as the cost of externality abatement per unit of environmental good an empirical illustration is provided for the case of the farmed and wild salmon trade off in norway in light of the current pollution control regulations

are people inequality averse or just risk averse individuals preferences for risk and inequality are measured through choices between imagined societies and lotteries the median relative risk aversion which is often seen to reflect social inequality aversion is between 2 and 3 most people are also found to be individually inequality averse reflecting a willingness to pay for living in a more equal society left wing voters and women are both more risk and inequality averse than others the model allows for non monotonic swfs implying that welfare may decrease with an individual s income at high income levels which is illustrated in simulations based on the empirical results

the numeraire matters in cost benefit analysis abstract the choice of numeraire is shown to be important in cost benefit analysis when a public good is involved individual consumers marginal rates of substitution will generally differ thus the less valuable the numeraire is to a person the higher the number required to express his net benefit and the more will his interest weigh in the total sum the choice of money as numeraire is systemetically favourable to those who value money the least relative to alternative numeraires

project analysis as input to public debate environmental valuation versus physical unit indicators abstract monetary valuation of environmental change is useful if one aims to rank alternative projects according to some specific social welfare function however if the project analysis is intended as background information to a democratic debate the advantages of monetary valuation are less obvious this paper analyzes aggregation of information taking normative disagreement explicitly into account it is demonstrated that monetary valuation is not always more informative than a physical unit measure of environmental change

firm and guarantor risk risk contagion and the interfirm spread among insured deposits we develop a model of third party guaranteed debt and show that interest rate premiums are multiplicatively related to firm and guarantor risk we apply the model to thrifts issuing cds guaranteed by the fslic and then estimate firm probabilities of insolvency and guarantor risk across 20 observed months this time period spans the insolvency of the guarantor followed by two recapitalizations the relative stability in firm risk across time offers no evidence of generalized risk contagion among firms we attribute elevated cd premiums and rate spreads to increases in guarantor risk rather than changes in firm risk on third party guaranteed debt the risk of both the issuing firm and guarantor determines the interest rate we show that the interest premium above the riskless treasury rate for guaranteed debt is multiplicatively related to two factors the probability of firm insolvency and the expected cost of an incomplete guarantor payoff we demonstrate that the presence of the guarantor obscures firm risk despite this our model provides the basis for measuring firm risk as well as guarantor risk we explain how different rates can exist on different firms debt with the same guarantor and how spreads among the different firms rates widen when the guarantor becomes riskier only a riskless guarantor causes the spreads to disappear our model fits nicely the case where savings and loans issue certificates of deposit cds and the guarantor is the government s deposit insuring agency the federal savings and loan insurance corporation fslic in this case the debt instrument the guarantor and the guarantee are the same for all the firms we apply the model over a 20 month period beginning in january 1987 when fol lowing hundreds of thrift failures the fslic announced its own insolvency the

efficiency and redistribution an evaluative review of louis kaplow s the theory of taxation and public economics louis kaplow proposes a two step methodology for normative policy analysis and illus trates it using various policy reforms the first step is to identify efficiency gains when hypothetical lump sum taxes can undo redistributive consequences the second step evaluates the redistributive effects using a strictly welfaristic social welfare function i critically review the foundations for kaplow s procedure and its reliance on strict welfarism i argue that basing efficiency gains on hypothetical lump sum tax adjust ments can lead to social welfare reducing policies if such tax adjustments are not car ried out i also indicate some conceptual problems with translating welfarism into policy evaluation when individuals have different utility function and review one promising alternative approach jel h20 h41 h50

collusion as public monitoring becomes noisy experimental evidence this paper uses laboratory experiments to test the implications of the theory of repeated games on equilibrium payoffs and estimate strategies in an infinitely repeated prisoners dilemma game with imperfect public monitoring we find that subjects payoffs i decrease as noise increases and ii are lower than the theoretical maximum for low noise but exceed it for high noise under the assumption that the subjects strategy uses thresholds on the public signal for transition between cooperation and punishment states we find that the best fitting strategy simply compares the most recent public signal against a single threshold

egalitarianism and efficiency in repeated symmetric games abstract we analyze the symmetric equilibria of repeated symmetric games where there is a conflict of interests over equilibria the battle of the sexes or the hawk dove game are key examples if one restricts attention to symmetric equilibria efficient equilibria must be egalitarian for finitely repeated games and generic discount factors there is a unique outcome path which ensures efficiency within the class of symmetric equilibria this is also true for the infinitely repeated games if the players are sufficiently impatient journal of economic literature classification numbers c72 c73

the 1985 ohio thrift crisis the fslic s solvency and rate contagion for retail cds this paper uses both an arima transfer function intervention model and a panel data analysis to examine the effect of the ohio deposit insurance crisis in 1985 on the pricing of six month retail certificates of deposit cds for federally insured ohio banks and savings and loans adjusting for pricing reactions due to changes in market rates we find a significant unanticipated rise in cd rate premiums on the initial event week of the crisis that continued for approximately seven weeks consistent with a contingent insurance guarantee hypothesis rate premiums are found to be risk based from both a regulator s and a bank manager s perspective it is important to understand the nature of depositors reactions to a depository institution crisis recent events including large real estate loan losses for major banks the rhode island deposit insurance crisis and the general accounting office s gao announcement that a large bank failure or a severe recession could jeopardize the solvency of the federal deposit insurance corporation fdic have renewed debate over the potential for a widespread loss of confidence in the banking system in particular concern has been expressed over the potential for instability in retail deposit markets in a deregulated environment see smith 1984 1

good for the economy an ecological economics approach to analyzing alberta s bitumen industry abstract competing claims about the economic social and environmental impacts of bitumen projects make alberta s oilsands industry highly contentious this paper uses a case study of a major bitumen project shell canada s jackpine mine expansion to examine the evidence considered by government decision makers in the project approval process the project was determined to be in the public interest based primarily on its economic benefits despite significant adverse environmental and social impacts the paper evaluates the evidence that was presented to support this decision using three criteria drawn from ecological economics efficient allocation just distribution and sustainable macroeconomic scale it finds that the evidence presented is in fact insufficient to justify the project on any of the three criteria furthermore other studies of the bitumen industry cast doubt on the likelihood that the project would satisfy these criteria if further analysis were conducted it concludes by recommending several measures that could help to improve decision making on bitumen projects in the future

difference in preferences or multiple preference orderings comparing choices of environmental bureaucrats recreational anglers and the public abstract do environmental protection agency epa bureaucrats represent the general public or are they more in line with an interest group we study preferences for environmental policy using a choice experiment ce on three populations the general public swedish epa bureaucrats and recreational anglers we also test for existence of multiple preference orderings half of the respondents were asked to choose the alternatives that best corresponded with their opinion and the other half was asked to take the role of a policy maker and make recommendations for environmental policy the sepa bureaucrats have the highest marginal willingness to pay mwtp to improve environmental quality differences in mwtp are robust and not due to differences in socio economic characteristics across the populations we only found weak evidence of multiple preference orderings

distributional weights in environmental valuation and cost benefit analysis theory and practice abstract cost benefit analysis cba is built on the kaldor hicks efficiency criterion whereby projects that have aggregate positive net benefits are recommended even if those who lose are not compensated for their losses two kinds of problems can be identified with the use of the criterion first as income tends to affect monetary welfare changes positively the preferences of those with higher wealth have a larger weight in societal decision making second monetary welfare changes can be thought of as changes in real income which matter more for those with a lower initial wealth level both problems can be mitigated with distributional weighting despite their strong theoretical pedigree distributional weights have been largely neglected in practical cbas one exception being analyses in climate change economics we present the theory of distributional weighting and illustrate how weights can be applied empirically in an international environmental cba that deals with marine water quality improvements we show that different weighting schemes can result in different policy recommendations we also show that taking the income distribution within countries into account can change a country s willingness to participate in the water quality improvement program and that the income elasticity of willingness to pay wtp is an important indication of the direction of change

deposit insurance and the risk premium in bank deposit rates abstract by placing a ceiling on the amount of possible depositor loss deposit insurance should result in a lower deposit risk premium however this effect may be modified if either the insurance promise has low credibility or the moral hazard incentives generated by deposit insurance result in a greater probability of bank default using financial and institutional panel data from thirteen countries we find that the risk premium is over 40 basis points higher on average in uninsured countries than in countries that offer insurance up to some pre specified maximum however the risk premium has a non linear relationship with the level of maximum insurance coverage suggesting that the market recognizes the moral hazard potential moreover the effect of deposit insurance on the risk premium is weaker in countries with strong creditor rights consistent with the view that investors view the latter as a substitute for explicit deposit insurance

real time tacit bargaining payoff focality and coordination complexity experimental evidence we conduct a bargaining experiment where interaction is tacit and payoffs are earned and cumulated in real time we test hypotheses about the interaction between the focal properties of payoffs and the complexity of coordinating on an intertemporal behavior that achieves them the general finding is that when a payoff focal outcome requires a complicated coordination scheme bargainers tend to settle on a simpler and sometimes inefficient behavior

rational cooperation in the finitely repeated prisoner s dilemma experimental evidence this paper presents experiments designed to examine the sequential equilibrium reputation hypothesis in the finitely repeated prisoner s dilemma the authors test the hypothesis by controlling the subjects ability to build reputations and by manipulating their beliefs that their opponent is irrational or altruistic the responses of subjects strongly support the sequential equilibrium prediction the results also suggest an important role for homemade altruism that is a natural tendency to cooperate that subjects bring to the experiment from the outside the authors find that there may be no difference between the beliefs that an opponent is altruistic and the actual chance it is so copyright 1993 by royal economic society

the evolution of cooperation in infinitely repeated games experimental evidence 1 for example in infinitely repeated prisoner s dilemma games with patient agents both cooperate and defect may be played in equilibrium even though the theory of infinitely repeated games has been used to explain cooperation in a variety of environments no definitive solution has been provided to the problem of equilibrium selection when both cooperation and defection are possible equilibrium outcomes which one should we expect to prevail previous experimental evidence has shown that subjects often fail to coordinate on a specific equilibrium when they play a small number of infinitely repeated games some subjects attempt to establish cooperative agreements while others defect but how would behavior evolve as subjects learn from previous repeated games would cooperation prevail when it can be supported in equilibrium or will subjects learn

focal points in tacit bargaining problems experimental evidence we use a new experimental design to test schelling s hypotheses about the nature and effectiveness of focal points in tacit bargaining problems in our design as in many real world bargaining problems each player s strategies are framed as proposals about what part of a stock of valuable objects she is to take and there are payoff irrelevant cues which define relations between players and objects in line with schelling s hypotheses we find that such cues serve as powerful focal points their presence increases efficiency even in games where there is no efficient and equal division and induces systematically unequal payoff distributions

a review article the case against the use of the sum of compensating variations in cost benefit analysis this paper presents a case against the use of the sum of compensating varia tions as a cost benefit test we argue that 1 the ethical judginents implied by the test are not defensible 2 positive sums of compensating variations occur without potential pareto improvements resulting in social preference reversals without simultaneous scitovsky re versals 3 when lump sum transfers are feasible a positive sum of compensating variations is necessary but not sufficient for a potential pareto improvement 4 in order to eliminate preference reversals and intransitivities all households must have almost identical quasi homothetic preferences a condition that is not satisfied in real economies