default correlation an empirical investigation of a subprime lender in recent years subprime lending has grown substantially as an important sector of the credit markets this paper is concerned with the risk management of subprime loan portfolios and the importance of default correlation in measuring that risk using a large portfolio of residential subprime loans from an anonymous subprime lender we show that default correlation is substantial for this lender in particular the significance of default correlation increases as the internal credit rating declines our results suggest that lenders and regulators would be well served investing in the understanding of default correlation in subprime portfolios

redistributing income and relative efficiency i introduction the welfare costs associated with a demo grant reform and with spending on a publicly provided good have been extensively investigated as in browning and johnson 1984 stuart 1984 and ballard 1988 the welfare cost of marginal spending on earnings or wage subsidies has received less attention even though as scholz 1996 reports the income subsidy rate of the earned income tax credit eitc has increased from 10 to 40 in the past 20 years 1 triest 1994 and browning 1995 are two articles that analyze the welfare gains and losses associated with reforms to the eitc triest concludes that the eitc is a relatively efficient way to redistribute income whereas browning suggests considering alternative methods of assisting the working poor this article calculates the welfare gains and losses for marginal reforms to three different policies designed to redistribute income increased spending on an earnings subsidy program as defined by the eitc is compared with the effects of higher spending on means tested cash transfers to low income households a negative income tax nit an nit is used to represent welfare policies because hoffman and siedman 1990 suggest that programs such as aid to families with dependent children afdc have properties similar to an nit reforms to the nit and eitc are compared to the effects of increasing the subsidy rate of a wage subsidy or a negative wage tax as defined by browning 1973 understanding the normative effects of an earnings subsidy are important because the eitc has grown and it is now larger than the food stamp program although the eitc is best known as an earnings subsidy it actually has three phases for a household with one child in 1997 labor income up to 6 500 is subsidized at a rate of 34 households receive the subsidy in the form of a refundable tax credit and the household receives a check from the government if their credit exceeds their tax liability for income between 6 500 and 11 930 households receive the maximum tax credit but for earnings above 11 930 the tax credit diminishes 15 98 cents for every dollar earned according to rosen 1999 over 70 of those receiving a tax credit are in the last two phases of the program for these households the credit takes the form of a cash transfer and for most it is a means tested transfer unlike traditional assistance to the poor the eitc only provides assistance to those employed a priori one might expect a subsidy on labor earnings to be more efficient than an nit at redistributing income to the working poor this view is consistent with the survey results of fuchs et al 1998 who find that economists do not generally support increased funding of programs such as afdc however if the eitc is just an nit for most households it services it is not obvious that the eitc is more efficient at marginally redistributing income to the poor steuerle 1990 envisioned that effort would be made to convert the tax credit system to an hourly wage subsidy more recently browning 1995 suggested that a negative wage tax nwt be considered instead of the eitc an nwt like that proposed by browning 1973 1995 involves subsidizing the difference between a target wage rate and a household s actual wage rate and it does not have a cash transfer or the high positive implicit marginal tax rates mtrs associated with most redistributive programs browning 1973 demonstrates that a wage subsidy is more efficient that an nit but less is known about the relative efficiency of an nwt and the eitc traditional welfare programs such as afdc and food stamps provide most of their benefits to those who receive no labor income whereas wage and income subsidies only aid those employed how does one compare redistributive programs that serve different populations to address this question two different sets of reforms are considered

a note on the nonexistence of a rationing equilibrium in the besanko thakor model it is shown that in a credit market with two types of borrowers distinguished only through their not commonly known probability of default and with a perfectly elastic supply of deposits a pair of contracts with random rationing of less risky loan applicants cannot be a nash equilibrium copyright 1993 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

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

design and rating of risk contingent credit for balancing business and financial risks for kenyan farmers abstractweather related agricultural risks and limited access to credit are serious impediments to agricultural productivity and growth in developing countries this paper describes a novel insuran

the role of collateral in credit markets with imperfect information abstract the paper analyzes the structure of credit market equilibrium under imperfect information collateralization and credit rationing are compared as alternative means to cope with problems of adverse selection and moral hazard it is shown that lenders may use collateral as a self selection and incentive mechanism rationing occurs only if the borrowers collaterizable wealth is too small to allow perfect sorting or to create sufficiently strong incentives whenever there is rationing in an equilibrium some borrowers are charged the maximum amount of collateral

information acquisition coordination and fundamentals in a financial crisis abstract this paper reconciles the two explanations of a financial crisis the self fulfilling prophecy and the fundamental causes in an empirically relevant framework by explicitly modeling the costly voluntary acquisition of information about fundamentals in a variant of diamond and dybvig diamond d dybvig p 1983 bank runs deposit insurance and liquidity journal of political economy 91 401 419 the model exhibits strategic complementarity in information acquisition in the partial run equilibrium investors engage in costly evaluation of projects so that banks with lower return projects fail there also exist the classic full run and no run equilibria in which there is no project evaluation investors coordination on a specific equilibrium is triggered by a self fulfilling prophecy so financial crises are seen as both fundamentals based and self fulfilling prophecies based phenomena

taxation and excess burden a life cycle perspective a lifetime perspective is appropriate in assessing the welfare implications of government tax policies although a number of attempts have been made to ex amine the excess burden of taxation in life cycle models these have tended to ignore the role of human capital accumulation and or the leisure income choice in this paper we do numerical simulations with a model that takes both of these phenomena into account we find that under reasonable assumptions the failure to take into account distortions of human capital decisions produces substantial underestimates of the excess burden of income taxation in addition allowing for the endogeneity of human capital increases the efficiency of a personal consumption tax relative to that of an equal yield income tax this abstract was borrowed from another version of this item

dual distribution channels the competition between rental agencies and dealers managerial decisions involving marketing channels are among the most critical that an organization must make part of the reason for this importance is that relationships between manufacturers and their intermediaries usually involve long term commitments that are difficult to change on the other hand in order to respond to the realities of the market place an organization must be ready to adapt its distribution practices sometimes under considerable uncertainty about the long term consequences such a problem faces the u s automobile industry which has led manufacturers to experiment with various channel structures when manufacturers first changed their distribution policies they were clear about the short term effect on sales but were unsure about its longer term impact on profitability in this article we develop a model to analyze the marketing of durable products through multiple channels our analysis suggests that even though it was not apparent at the time manufacturers were indeed behaving optimally when they changed their policies our model provides insights not only to automobile manufacturers but also to practitioners and academics who are interested in understanding the unique problems associated with marketing durable products through multiple channels we develop a two period model by assuming that a single manufacturer markets a durable product through two retailers a rental agency and a dealer the rental agency focuses mainly on renting the product in a daily rental market while the dealer focuses on selling the product to a different set of customers in the sales market to model the development of channels in the u s automobile industry we analyze three different channel structures the first structure a separate channel reflects the state of the industry through most of the 1980s when rental agencies were franchised solely to rent and dealers solely to sell the cars in response to a decrease in overall sales manufacturers encouraged rental agencies to sell their slightly used rental cars in the consumer market resulting in the second structure an overlapping channel dealers did not like this arrangement however and in the next experiment a buyback channel some manufacturers began buying back used rental cars and selling them through dealers in terms of the consumer side of the model we assume that consumers are heterogeneous and have product valuations that are distributed uniformly between a low and a high value in addition they recognize that as the durable depreciates with use its secondhand market value decreases while both sold and rented goods depreciate with use we assume based on an analysis of market prices that sold goods depreciate at a higher rate than rented goods given these different depreciation rates and consumers underlying utility functions we develop the market demand functions in the dealer s and rental agency s markets then for each of the channel structures we solve the intermediaries and manufacturer s problems the main contribution of this article is that it allows us to evaluate the profitability associated with various channel structures for all the players in our analysis the dealer the rental agency and the manufacturer in terms of the intermediaries we find that the overlapping channel is the most profitable structure for the rental agency on the other hand it is the least profitable for the dealer in terms of manufacturer profitability our model suggests that the separate channel is the least profitable and the overlapping channel is the most profitable it is interesting to note that the distribution structure in existence today is more akin to a buyback channel this strikes us as a compromise channel which alleviates dealer concerns with the overlapping channel and yet does not harm rental agencies as much as a separate channel these are surprising results because conventional wisdom has been that the overlapping channel was competing away profits for all players this suggests to us that automobile manufacturers were indeed on the right track when they began experimenting with the structure of their distribution channels

the marginal welfare cost of public funds theory and estimates abstract we derive a general analytic formula for the marginal welfare cost mwc of public funds without imposing restrictive assumptions on preferences or technologies the framework encompasses the various special cases previously considered and reconciles the disparities among the reported estimates of mwc unresolved differences in existing estimates are fully explained by appropriate interpretations of intended thought experiments and alternative assumptions about the elasticity of labor supply with respect to public spending further progress in measuring mwc requires empirical estimation of labor supply functions that include government spending as an explanatory variable

auctions actions and the failure of information aggregation we study a market where k identical and indivisible objects are allocated using a uniform price auction where n k bidders each demand one object before the auction each bidder receives an informative but imperfect signal about the state of the world the good that is auctioned is a common value object for the bidders and a bidder s valuation for the object is determined jointly by the state of the world and an action that he chooses after winning the object but before he observes the state we show that there are equilibria where the auction price is completely uninformative about the state of the world and aggregates no information even in an arbitrarily large auction in the equilibrium that we construct because prices do not aggregate information agents have strict incentives to acquire costly information before they participate in the market also market statistics other than price such as the amount of rationing and bid distributions contain extra information about the state our findings sharply contrast with past work which shows that large auctions aggregate information when there is no ex post action

house prices bank instability and economic growth evidence from the threshold model abstract this paper examines the effects of house prices on bank instability when gauged at various levels of income growth bank stability may respond differently to house price changes or deviations from fundamental values in an economic boom environment than in a bust circumstance a threshold estimation technique developed by hansen 1999 is applied to a panel of 286 u s metropolitan statistical areas msas over the period 1990q1 2010q4 we consider two house price indicators the house price changes and the house price deviations from long run equilibrium the results suggest the existence of income growth threshold effects in the relationship between house prices and bank instability specifically there are two income growth thresholds when using the house price changes and one income growth threshold when the house price deviations are applied robustness results using the non msas sample from 1995q1 to 2010q4 provide further evidence of income growth threshold effects

symbiosis vs crowding out the interaction of formal and informal credit markets in developing countries abstract it is a common observation in many developing countries that enterprises are active borrowers in both formal and informal credit markets we propose a model in which the formal sector s superior ability in deposit mobilization is traded off against the informational advantage that lenders in the informal sector enjoy the formal sector can screen borrowers by providing only partial financing for projects thereby forcing borrowers to resort to the informal sector for the remainder of the loan we use the model to predict how the market structure responds to changes in the environment and we consider the policy implications of various forms of government intervention

the higher cost of follow up loans this paper uses unique data and looks at the interest margin for follow up finance vis a vis first round finance applying data for asset values we examine the substitution between collateral and interest margins consistent with the theories of bester 1985 besanko and thakor 1987 and the empirical evidence of cressy 1996b we find that a trade off between collateral and interest margins exists our main result indicates that follow up finance is more expensive for loans but not for overdrafts we suggest that a relatively fixed asset base land and buildings as seen in higher security to loan values raises the price and risk of successive financial increments this explains the higher relative cost of follow up finance to borrowers

marginal welfare costs of taxation with human and physical capital i introduction marginal welfare cost of taxation is the amount by which the social cost of an additional tax dollar differs from 1 because of distortionary taxation browning and johnson 1984 stuart 1984 browning 1987 ballard 1988 and allgood and snow 1998 use static models of the u s economy in which labor supplies adjust but the stocks of human and physical capital are fixed to calculate estimates of this welfare cost relevant to cost benefit analysis the studies by lucas 1990 and perroni 1995 incorporate human and physical capital into calculations of excess burden for the purpose of comparing alternative tax systems but do not address the welfare costs of marginal tax and spending reforms ballard et al 1985 and judd 1987 provide estimates of welfare cost using models that allow the stock of physical capital to change in response to marginal reforms but the stock of human capital is exogenous in these studies however judd 2001 argues that there is ample evidence indicating that human capital investment decisions have a significant effect on the cost of altering the tax system which suggests that these decisions could also have an important influence on marginal welfare cost in this article we present estimates of welfare costs for marginal reforms to government tax and spending policies when labor supply saving and education decisions are all endogenous we focus our analysis on marginal reforms because as skinner and slemrod 1985 observe most policy reforms enacted do not involve replacing one tax or spending system with another but instead typically entail marginal adjustments in tax laws and government appropriations using a perfect foresight overlapping generations model with a three period life cycle we derive analytical expressions for the changes in labor supply saving and education and use them to calculate marginal welfare cost as shown by auerbach et al 1983 in overlapping generations models steady state welfare comparisons of alternative tax policies are biased unless households are compensated for intergenerational redistribution along the transition path to arrive at our steady state estimates of welfare costs we adapt the compensation method introduced by gravelle 1991 for analyzing fundamental tax reforms to the context of incremental tax and spending reforms in a static one consumer model triest 1990 has shown that marginal welfare cost mwc is positive solely because of tax leakage the decline in tax revenue caused by reductions in the tax base we extend this insight to an intertemporal context that incorporates tax leakage arising from changes in both human and physical capital investment we evaluate three sets of reforms first a revenue neutral reduction in the tax on capital income funded by a higher tax on labor income second spending on a public good financed by either a higher tax on labor or interest income third a per capita lump sum transfer or demogrant also funded by either a higher tax on labor or interest income we find that marginal welfare costs are uniformly lower in the dynamic model where investment decisions are endogenous than in the static model where investment decisions are fixed and that the majority of the difference between the dynamic and static estimates is attributable to human capital decisions the principal reason is that a reallocation of time between labor hours and human capital investment has opposing and potentially offsetting effects on effective labor supply as a result labor supply responds less elastically in the dynamic model and changes in labor supply are the main source of tax leakage because wage taxation is the main source of tax revenue we also find that shifting marginal financing from capital to labor results in a lower welfare cost the reason being that such a change encourages saving which increases wage rates and stimulates labor supply leading to a reduction in marginal welfare costs

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

assessing the dynamic efficiency gains of tax reform when human capital is endogenous this paper develops a life cycle growth model with endogenous human capital accumulation and variable leisure which is employed to simulate dynamic equal yield changes from an income tax to a consumption tax although endogenizing human capital investment decisions raises partial equilibrium estimates of the efficiency costs of capital income taxation general equilibrium welfare impacts of unanticipated tax changes are little affected by the inclusion of endogenous human capital this finding cannot be fully explained by the presence of general equilibrium adjustments in factor prices and can be attributed in part to the existence of transitional rigidities in capital stocks copyright 1995 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

on credible delegation by oligopolists a discussion of distribution channel management several papers in the recent marketing literature have suggested that delegation in distribution e g the use of independent middlemen helps manufacturers to precommit strategically to profit enhancing competitive actions further the literature suggests that the profitability of such actions depends on market structure we challenge these conclusions here this is done in two steps first we perform an analysis of the entire class of models which have been used in the literature using internally consistent assumptions about market structure and contracting the only subgame perfect equilibrium is one in which all distribution channels have infinitely many levels of delegation obviously this is not what we see in the real world next we relax a key hidden assumption namely that all intra channel agreements are observable to competitors without this assumption the usual results unravel unless channel members can offer credible guarantees that unobservable agreements do not exist the strategic effects of delegation disappear since these guarantees are virtually impossible to maintain credibly we would expect to reject the hypothesis in the earlier literature relating channel structure to competition in an empirical study controlling for observability we conclude that mechanisms other than strategic ones must be responsible for the existence of delegated channels and make some suggestions about promising avenues for future theory research in channel structure

do capital adequacy requirements reduce risks in banking abstract in a dynamic framework it is shown that capital adequacy rules may increase a bank s riskiness in addition to the standard negative effect of rents on risk attitudes of banks a further intertemporal effect has to be considered the intuition behind the result is that under binding capital requirements an additional unit of equity tomorrow is more valuable to a bank if raising equity is excessively costly the only possibility to increase equity tomorrow is to increase risk today

redistributive taxation in a simple perfect foresight model abstract we investigate the redistributive potential of capital taxation in an intertemporal maximizing model of capital formation first even unanticipated redistributive capital taxation is severely limited in its effectiveness since it depresses wages second under any convergent redistributive tax policy which maximizes a paretian social objective the capital income tax will converge to zero independent of the factor supply elasticities these results are independent of workers holdings of capital

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

the marginal cost of raising tax revenue and redistributing income we present analytic formulas for calculating marginal welfare costs when taxes are levied against the wages of a heterogeneous population of households and marginal tax revenue finances either the supply of a public good or lump sum transfers the formulas are applied to explain the wide discrepancy between estimates of marginal welfare costs for redistribution previously obtained through computer simulation procedures our calculations reveal that these procedures introduced lump sum transfers that were not specified as part of the reforms to be simulated but explain most of the differences between their estimates we also show that welfare cost estimates are quite sensitive to the elasticity of labor supply with respect to exhaustive public spending

is relationship lending special evidence from credit file data in germany the german financial market is often characterized as a bank based system with strong bank customer relationships the corresponding notion of a housebank is closely related to the theoretical idea of relationship lending it is the objective of this paper to provide a direct comparison between housebanks and normal banks as to their credit policy therefore we analyze a new data set representing a random sample of borrowers drawn from the credit portfolios of five leading german banks over a period of five years we use credit file data rather than industry survey data and thus focus the analysis on information that is directly related to actual credit decisions in particular we use bank internal borrower rating data to evaluate borrower quality and the bank s own assessment of its housebank status to control for information intensive relationships the major results of our study support the view that housebanks are able to establish a distinct behavioral pattern consistent with the idea of long term commitment we find that housebanks do provide liquidity insurance in situations of unexpected deterioration of borrower ratings with respect to loan pricing we find no evidence for intra or intertemporal price differentiation related to housebanking

leverage and house price dynamics in u s cities we use city level data to analyze the relationship between homeowner borrowing patterns and house price dynamics our principal finding is that in cities where a greater fraction of homeowners are highly leveraged i e have high loan to value ratios house prices react more sensitively to city specific shocks such as changes in percapita income this finding is consistent with recent theories that emphasize the role of borrowing in shaping the behavior of asset prices

moral hazard and secured lending in an infinitely repeated credit market game we analyze repeated moral hazard with discounting in a competitive credit market with risk neutrality even without learning or risk aversion long term bank borrower relationships are welfare enhancing the main result is that the borrower obtains an infinite sequence of unsecured loans at below spot market cost following the first good project realization this contract produces first best action choices prior to this stage the borrower gets secured loans with above market borrowing cost the optimal contract thus displays a selective memory feature taking only one of two forms at any given point in time depending on prior history we consider an infinitely repeated bank borrower relationship with moral hazard and universal risk neutrality and explore the ramifications of credit contract duration when the two well known benefits of long term contracting learning and improved risk sharing are absent our objectives are twofold the first is to analyze an infinitely repeated game with discounting in a credit market context we thus relate the theory of repeated games to financial intermediation theory particularly to issues of moral hazard and collateral related distortions the second objective is to understand noteworthy stylized facts of credit markets such as durability in credit relationships lower borrowing costs for established borrowers and unsecured loans for established borrowers versus secured loans for newer borrowers while these practices may be partly due to learning we show that learning is not essential to rationalize them even if information decays rapidly and banks learn nothing about borrowers through time these aspects of credit contracting arise in a repeated game context our main results are as follows first despite universal risk neutrality and the absence of learning a durable bank relationship benefits the borrower 2 the intuition is that the long term contracting permitted by a durable relationship enables the bank to efficiently tax and subsidize the borrower through time to reduce the use of costly collateral second the average welfare loss due to moral hazard per period is positive even as the time horizon goes to infinity third the optimal infinite horizon contract has the striking property that following the period

the effect of taxation on human capital this study finds a significant negative effect of proportional income taxation on human capital of the few earlier studies to address this issue most suggested a negligible effect of taxation on investment in human capital this earlier conclusion is shown to be incorrect by using a model that is more general in several respects than the models used previously

welfare and optimum dynamic taxation of consumption and income abstract this paper estimates that the us could attain large welfare gains by implementing an optimal ramsey tax policy that taxes consumption and income it is also found that the welfare implications associated with taxing consumption are quantitatively more important than those associated with dynamically taxing income indeed replacing income taxes with a constant consumption tax leads to a welfare gain that is only slightly lower than that attained by a dynamic policy that taxes consumption and income in computing these welfare gains careful attention is given to the dynamic path of tax rates and the transitional dynamics associated with how the economy responds to a new tax policy

the relationship between the marginal cost of public funds and marginal excess burden a large literature has recently developed which attempts to measure the marginal cost shadow price of public funds the motivation for much of this literature is the recognition that many of the tax instruments used by governments generate substantial amounts of excess burden deadweight loss jerry a hausman 1981 for example estimates that for an average prime aged american male with a wage of ten dollars in 1975 the excess burden generated by the federal income tax was over fifty percent of the revenue raised from taxing that individual one might suspect that such large excess burden estimates would require a change in the way government project costs are calculated in benefit cost analysis if the revenue required to finance a project is raised through distortionary taxation then intuition would suggest that the excess burden generated by the increase in tax rates needed to finance the project should be incorporated into the cost of the project however this analysis is not entirely consistent with the theoretical literature on the optimal provision of public goods which are financed by distortionary taxation when distortionary taxes are used to finance public goods and the level of public good provision does not affect consumption of the taxed goods the standard samuelsonian rule which equates the sum over consumers of the marginal rates of substitution between a private good and a public good with the marginal rate of transformation between the two goods must be modified to account for the marginal effect of increases in tax rates on the revenue raised from the existing taxes 2 the intuition behind this result is that we need to correct for indirect leakages from existing government revenue sources when considering an incremental expenditure if the increase in tax rates needed to finance the project causes a reduction in the revenue raised by the current tax structure then we need to account for this loss in calculating the cost of the project it is important to note that this result concerns the values of uncompensated demand elasticities an example first provided by atkinson and stern 1974 illustrates this point consider a world where the only tax is on labor earnings and incremental expenditure on the public good does not affect the demand for leisure in this case the marginal rate of transformation will overstate the cost of the public good as long as the uncompensated wage elasticity of labor supply is negative this is because an increase in the tax rate causes an increase in labor supply leading to an indirect increase in government revenue from the excess burden perspective described earlier this example is very puzzling it is well known that even if the uncompensated own price elasticity of a good is zero a tax on that good can still result in a large deadweight loss we instead need the compensated elasticity to be zero to ensure that there will be no excess burden however the department of economics university of california davis ca 95616 this paper is based on chapter two of my dissertation at the university of wisconsin madison i wish to thank the members of my dissertation committee martin david robert haveman chair and arthur goldberger for very helpful advice and comments i have also benefited from comments by don fullerton and bruce hamilton an anonymous referee provided unusually helpful comments and corrected an error in the figure 1don fullerton 1989 provides a recent survey and analysis of this literature 2this is shown by anthony atkinson and nicholas h stern 1974 and david e wildasin 1979 the effect of provision of the public good on consumption of the taxed goods must also generally be taken into account

on the marginal welfare cost of taxation this paper develops a rigorous partial equilibrium analysis of the determinants of margin al welfare cost mwc of taxes on labor earnings it shows that four key parameters interact to determine the magnitude of mwc using aggregate data and plausible ranges of values for the parameters mwc can vary from under 10 percent to more than 300 percent of marginal tax revenue intermediate parameter values sugge st mwc is in the 25 50 percent range however the more extreme estimates cannot be ruled out on the basis of available evidence suggesting that mwc cannot yet be copyright 1987 by american economic association

the lender of last resort a twenty first century approach the classical bagehot conception of a lender of last resort lolr that lends to illiquid banks has been criticized on two grounds on the one hand the distinction between insolvency and illiquidity is not clear cut on the other a fully collateralized repo market allows central banks to provide the adequate aggregate amount of liquidity and leave to the banks the responsibility of lending uncollateralized the object of this paper is to analyze these issues rigorously by providing a framework in which liquidity shocks cannot be distinguished from solvency ones and then asking whether there is a need for a lolr and how it should operate in the absence of systemic threats determining the optimal lolr policy requires a careful modeling of the structure of the interbank market and of the closure policy in our setup the results depend upon the existence of moral hazard if the main source of moral hazard is the banks lack of incentives to screen loans then the lolr may have to intervene to improve the efficiency of an unsecured interbank market in crisis periods if instead the main source of moral hazard is loan monitoring then the interbank market should be secured and the lolr should never intervene jel e58 628

mail versus mall a strategic analysis of competition between direct marketers and conventional retailers consumers now purchase several offerings from direct sellers including catalog and internet marketers these direct channels exist in parallel with the conventional retail stores the availability of multiple channels has significant implications for the performance of consumer markets the literature in marketing and economics has however been dominated by a focus on the conventional retail sector this paper is an effort toward modeling competition in the multiple channel environment from a strategic viewpoint at the outset a parsimonious model that accommodates the following consumer and market characteristics is introduced first the relative attractiveness of retail shopping varies across consumers second the fit with the direct channel varies across product categories third the strength of existing retail presence in local markets moderates competition fourth in contrast with the fixed location of the retail store that anchors its localized market power the location of the direct marketer is irrelevant to the competitive outcome the model is first applied in a setting where consumers have complete knowledge of product availability and prices in all channels in the resulting equilibrium the direct marketer acts as a competitive wedge between retail stores the direct presence is so strong that each retailer competes against the remotely located direct marketer rather than against neighboring retailers this outcome has implications for the marketing mix of retailers which has traditionally been tuned to attract consumers choosing between retail stores in the context of market entry conditions under which a direct channel can access a local market in retail entry equilibrium are derived our analysis suggests that the traditional focus on retail entry equilibria may not yield informative or relevant findings when direct channels are a strong presence next the role of information in multiple channel markets is modeled this issue is particularly relevant in the context of direct marketing where the seller can typically control the level of information in the marketplace sometimes on a customer by customer basis e g by deciding on the mailing list for a catalog campaign when a certain fraction of consumers does not receive information from the direct marketer the retailers compete with each other for that fraction of the market the retailer s marketing mix has to be tuned in this case to jointly address direct and neighboring retail competition the level of information disseminated by the direct marketer is shown to have strategic implications and the use of market coverage as a lever to control competition is described even with zero information costs providing information to all consumers may not be optimal under some circumstances in particular when the product is not well adapted to the direct channel the level of market information about the direct option should ideally be lowered the only way to compete with retailers on a larger scale with a poorly adapted product is by lowering direct prices which lowers profits lowering market information levels and allowing retailers to compete more with each other facilitates a higher equilibrium retail price in turn this allows a higher direct price to be charged and improves overall direct profit on the other hand when the product is well adapted increasing direct market presence and engaging in greater competition with the retail sector yields higher returns the finding that high market coverage may depress profits raises some issues for further exploration first implementing the optimal coverage is straightforward when the seller controls the information mechanism as in the case of catalog marketing the internet in contrast is an efficient mechanism to transmit information but does not provide the sellers with such control over the level of market information a key reason is that the initiative to gather information on the internet lies largely with consumers the design and implementation of mechanisms to control aggregate information levels in electronic markets can therefore be an important theme for research and managerial interest second direct marketers have traditionally relied on the statistical analysis of customer records to decide on contact policies the analysis in this paper reveals that these policies can have significant strategic implications as well research that integrates the statistical and strategic aspects could make a valuable contribution the paper concludes with a discussion of issues for future research in multiple channel markets including avenues to model competition in settings with multiple direct marketers

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

the substantial bias from ignoring general equilibrium effects in estimating excess burden and a practical solution we show that under typical conditions the simple excess burden triangle formula substantially underestimates the excess burden of commodity taxes in some cases by a factor of 10 or more this formula performs poorly because it ignores general equilibrium interactions most important interactions between the taxed commodity and the labor market many prior studies have shown that general equilibrium interactions affect excess burden but have not appreciated the bias associated with ignoring these interactions or the quantitative importance of this bias we derive an implementable alternative to the simple formula this alternative formula captures interactions that the simple formula omits as a result it is both unbiased and usually more accurate

imperfect competition risk taking and regulation in banking abstract we asses the welfare implications of banking competition under various deposit insurance regimes in a model of imperfect competition with social failure costs and where banks are subject to limited liability we study the links between competition for deposits and risk taking incentives and conclude that the welfare performance of the market and the appropriateness of alternative regulatory measures depend on the degree of rivalry and the deposit insurance regime specifically when competition is intense and the social failure costs high deposit rates are excessive both in a free market and with risk based insurance if insurance premiums are insensitive to risk then the same is true even if there is no social cost of failure we find also that in an uninsured market with nonobservable portfolio risk or with flat premium deposit insurance deposit regulation rate regulation or deposit limits and direct asset restrictions are complementary tools to improve welfare in an uninsured market with observable portfolio risk or with risk based insurance deposit regulation may be a sufficient instrument to improve welfare

pooling access and countervailing power in channel governance fruit and vegetable marketing organization the greenery has experienced various governance structure changes like horizontal merger forward integration and the emergence of grower associations a multilateral incomplete contracting model is presented to account for these changes by analysing the interactions between pooling access and countervailing power this model does not only explain the changes at the greenery but it contributes also to the design of efficient channel governance this paper was accepted by pradeep chintagunta and preyas desai special issue editors this paper was accepted by pradeep chintagunta and preyas desai special issue editors

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

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

the efficiency gains from dynamic tax reform this paper presents a new simulation methodology for determining the pure efficiency gains from tax reform along the general equilibrium rational expectations growth path of life cycle economies the principal findings concern the effects of switching from a proportional income tax with rates similar to those in the u s to either a proportional tax on consumption or a proportional tax on labor income a switch to consumption taxation generates a sustainable welfare gain of almost 2 percent of lifetime resources in contrast a transition to wage taxation generates a loss of greater than percent of lifetime re sources a second general result is that even a mild degree of progressivity in the income tax system imposes a very large efficiency cost this abstract was borrowed from another version of this item

labor income taxation and human capital accumulation abstract this paper provides alternative analytical results concerning the effect of labor income taxation on human capital accumulation with the tax revenues being consumed by the government and savings being negatively related to the labor tax rate an increase in the labor income tax rate reduces the incentive for human capital accumulation and thus decreases human capital with tax revenues being consumed by government and savings being positively related to the labor tax rate an increase in the tax rate increases the incentive for human capital accumulation and increases human capital with the tax revenues being used to compensate the individuals who pay the taxes an increase in the tax rate has no effect on human capital

comprehensive income taxation investments in human and physical capital and productivity abstract this paper analyses the implications of the comprehensive income tax for the accumulation of human and physical capital and for the overall productivity level of the economy a comprehensive income tax applying to both labour income and capital income is shown to discriminate against investments in human capital relative to investments in physical capital it has an adverse impact on human capital accumulation and lowers productivity

excess liquidity bank pricing rules and monetary policy abstract this paper studies the implications of excess bank liquidity for the effectiveness of monetary policy in a simple model with credit market imperfections the demand for excess reserves is determined by precautionary factors and the opportunity cost of holding cash it is argued that excess liquidity may impart greater stickiness to the deposit rate in response to a monetary contraction and induce an easing of collateral requirements on borrowers which in turn may translate into a lower risk premium and lower lending rates as a result asymmetric bank pricing behavior under excess liquidity may hamper the ability of a contractionary monetary policy to lower inflation

real estate prices and bank stability abstract real estate prices can deviate from their fundamental value due to rigid supply heterogeneity in quality and various market imperfections which have two contrasting effects on bank stability higher prices increase the value of collateral and net wealth of borrowers and thus reduce the likelihood of credit defaults in contrast persistent deviations from fundamentals may foster the adverse selection of increasingly risky creditors by banks seeking to expand their loan portfolios which increases bank distress probabilities we test these hypotheses using unique data on real estate markets and banks in germany house price deviations contribute to bank instability but nominal house price developments do not this finding corroborates the importance of deviations from the fundamental value of real estate rather than just price levels or changes alone when assessing bank stability

direct marketing indirect profits a strategic analysis of dual channel supply chain design the advent of e commerce has prompted many manufacturers to redesign their traditional channel structures by engaging in direct sales the model conceptualizes the impact of customer acceptance of a direct channel the degree to which customers accept a direct channel as a substitute for shopping at a traditional store on supply chain design the customer acceptance of a direct channel can be strong enough that an indepent manufacturer would open a direct channel to compete with its own retailers here direct marketing is used for strategic channel control purposes even though it is inefficient on its own and surprisingly it can profit the manufacturer even when so direct sales occur specifically we construct a price setting game between a manufacturer and its independent retailer direct marketing which indirectly increases the flow of profits through the retail channel helps the manufacturer improve overall profitability by reducing the degree of inefficient price double marginalization while operated by the manufacturer to constrain the retailer s pricing behavior the direct channel may not always be detrimental to the retailer because it will be accompanied by a wholesale price reduction this combination of manufacturer pull and push can benefit the retailer in equilibrium finally we show that the mere threat of introducing the direct channel can increase the manufacturer s negotiated share of cooperative profits even if price efficiency is obtained by using other business practices

does collateral fuel moral hazard in banking this paper presents two models in which the fluctuating value of loan collateral real estate generates the problem of moral hazard between a bank and a deposit insurance agent the bank finances risky projects against collateral and relies on the rising collateral value if the collateral value later appreciates the bank enjoys handsome profits otherwise the bank fails the findings are rather consistent with the characteristics of the topical subprime mortgage crisis

the relationship between house prices and house purchase loans the spanish case abstract this paper looks at recent developments in house purchase loans and house prices in spain and the linkages between them it aims at identifying deviations of these variables from their equilibrium levels and for this purpose we estimate a vector error correction model the results show that both variables are interdependent in the long run and that both variables were above their equilibrium level by the end of the sample period 2009 q1 the paper also offers insight into how overvaluation overindebtedness in house prices can lead to a false sense of no overindebtedness house prices overvaluation

the rise of risk based pricing of mortgage interest rates in italy abstract this paper assesses how much mortgage interest rates in italy are priced on credit risk as proxied by the probability of household mortgage delinquency estimated using the eu silc database owing to data availability we restrict the analysis of mortgage pricing to italian households consistent with the more widespread use of credit scoring estimates indicate that italian lenders have increasingly priced mortgage interest rates on household credit risk for mortgages granted between 2000 and 2007 we find that a 1 point increase in the probability of default is associated with a 21 basis point rise in mortgage interest rates lower than the 38 basis point premium edelberg 2006 estimated for the us at the end of the 1990s

capital requirements and the behaviour of commercial banks abstract i study the consequences of capital regulations on the portfolio choices of commercial banks elaborating on previous work by kareken and wallace 1978 koehn and santomero 1980 and kim and santomero 1988 i obtain the following results if the objective of commercial banks is maximization of the market value of their future profits value maximizing banks capital regulations cannot prevent banks from choosing very specialized and very risky portfolios risk based insurance premia are in fact the relevant instrument for that purpose on the other hand if banks behave as portfolio managers utility maximizing banks capital regulations can be effective but only if the weights used in the computation of the ratio are proportional to the systematic risks of the assets their betas because of limited liability of commercial banks a minimum capital regulation or a closing rule may become necessary as well to prevent failing banks from betting for resurrection

income consumption and wage taxation in a life cycle model separating efficiency from redistribution the desirability of switching from an income tax base to a wage or consumption tax base hinges critically on the potential efficiency gains from doing so the overlapping generations life cycle model developed by lawrence summers 1981 cannot easily be used to answer this question because individuals of different ages alive at the time of the tax substitution differ in their shares of income consumption wages and savings propensities steady state welfare changes include redistribution of taxes and factor incomes the effects of redistribution on the calculation can be controlled for by tracing the transition in another paper summers 1980 used myopic expectations individuals assume that current prices will prevail and solved the economy s equilibrium for 100 years gains and losses were discounted and summed alan auerbach laurence kotlikoff and jonathan skinner 1983 hereafter referred to as aks employed a perfect foresight model they used lumpsum payments to keep the utility of those alive at the time of the tax change fixed and allowed equal equivalent variations to all future generations 1 a perfect foresight model requires simultaneous solution of many years of equilibria 150 years in the aks model although these techniques eliminate distributional elements such models are so costly to construct modify and use that the study of relative efficiency of alternative tax regimes is now greatly hampered by computational complexity this study has two major contributions first it introduces a much simpler method of separating the efficiency and redistributional components of steady state gains rather than tracing the transition it uses a system of transfers which ensures that changes in welfare in the steady state do not arise from redistribution of income to or from transitional generations while this approach does not allow calculation of the transition its application to the aks model suggests that very little information about the magnitude of efficiency effects is lost by forgoing the tracing of the transition for estimating the relative efficiency of income consumption and wage taxation or the extent to which assumptions drive the results this approach greatly simplifies the researcher s task 2 this simplification becomes increasingly valuable as more detail is introduced into models which could involve thousands of equations using an approach that traces the transition secondly my calculations suggest that switching tax bases may not be worthwhile this result differs from the results of summers 1981 and auerbach and kotlikoff 1987 which strongly suggest that the consumption tax is always superior on efficiency grounds using a 0 25 intertemporal substitution elasticity and a cobb douglas production function the steady state wel congressional research service library of congress washington dc 20540 i thank christophe chamley don fullerton yolanda henderson don kiefer larry kotlikoff jonathan skinner tom woodward dennis zimmerman and three anonymous referees for helpful comments and discussions the views in this paper do not necessarily represent those of the congressional research service or the library of congress 1the aks model is confined to one good charles ballard 1984 1989 lawrence goulder 1985 and ballard and goulder 1987 develop multisector models 2the suggestion of a method for separating efficiency from redistribution is not intended to imply that there is no value to tracing the transition tracing the transition can provide information about intergenerational redistribution in an uncompensated change and insights into the realism of the model

intertemporal diversification in financial intermediation abstract this paper examines the incentive problem between a bank and depositors or deposit insurer limited liability makes risk shifting lucrative we show how intertemporal diversification of lending decisions i e bank s loan portfolio consists of overlapping long term loans and is thus gradually renewed may solve the incentive problem of risk shifting a new or expanding bank sets a high equity level and acquires depositors confidence subsequently it can allow its equity to depreciate to a permanently lower level depositors can control the bank by monitoring equity and realized credit losses ex post they do not have to monitor bank s lending choices ex ante maturity mismatch illiquidity of long term loans and liquidity of deposits is optimal the analysis can be extended more generally to the borrower lender relationship

collateral and rationing sorting equilibria in monopolistic and competitive credit markets the authors examine how market structure affects credit allocation under universal risk neutrality and asymmetric information about borrowers they consider both monopolistic and perf ectly competitive banks and examine the role of collateral in each ca se when a bank is a monopolist on the loan side they find collatera l is never used and asymmetric information results in reduced bank le nding under perfect competition collateral has a useful sorting rol e moreover rationing is possible even with collateral availability and perfectly elastic deposit supply in this setting the authors sh ow co signers are valuable social welfare properties of the monopoly and competitive equilibria are also compared copyright 1987 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

simulating fundamental tax reform in the united states this paper uses a new large scale dynamic life cycle simulation model to compare the welfare and macroeconomic effects of transitions to five fundamental alternatives to the u s federal income tax including a proportional consumption tax and a flat tax the model incorporates intragenerational heterogeneity and a detailed specification of alternative tax systems simulation results project significant long run increases in output for some reforms for other reforms namely those that seek to insulate the poor and initial older generations from adverse welfare changes long run output gains are modest

evaluation of credit guarantee policy using propensity score matching in this article we evaluate the effect of the credit guarantee policy by comparing a large sample of guaranteed firms and matched non guaranteed firms from 2000 to 2003 the sample firms are compared with respect to growth rates of different performance indicators including productivity sales employment investment r d wage level and the survival of firms in the post crisis period in order to avoid the selectivity problem propensity score matching methodologies are adopted results suggest that credit guarantees influenced significantly firms ability to maintain their size and increase their survival rate but not to increase their r d and investment and hence their growth in productivity moreover due to the adverse selection problem firms with lower productivity were receiving guarantees

involuntary unemployment and worker self selection abstract consider a firm that lacks information about the reservation wage or ability of any specific worker but is aware that workers with higher reservation wages tend to be more able on average we show that under a simple condition that the efficiency wage exceeds the lowest reservation wage the optimal hiring policy for the firm involves 1 no wage discrimination and 2 rationing of jobs when demand for its product is low the result also extends to the case where hours of work are variable provided each worker is most productive when working a strictly positive number of hours per week

the effect of bank ownership and deposit insurance on monetary policy transmission abstract in this paper we develop a theoretical model with a representative bank whose ownership is shared between state and private sector the bank faces a risk of failure and provides private and public explicit deposit insurance banks owned to a larger extent by the government are more able to counteract a restrictive monetary policy because of their capacity to raise additional volume of deposits therefore the greater the state s share in the bank ownership the less the impact of a monetary tightening on the level of loan supply

sharing contracts marginalisation adverse selection and markup calculation this paper proposes a new approach to explain the dominance in the islamic banking market of markup contracts at the expense of sharing ones we show that the dual pricing practised in this market produces an additional or artificial dimension of adverse selection which is causing the sharing contracts marginalization we suggest specialized use of two islamic contractual categories as a device for eliminating artificial adverse selection we suggest also an endogenous calculation of the markup that is independent of the interest rate based on the financing cost unification this approach allows the deduction of default and liquidity risk premiums

the future of u s agricultural cooperatives a neo institutional approach thirty years ago helmberger speculated that industrialization of agriculture would lead to the demise of farmer cooperatives helmberger 1966 p 1434 in responding to helmberger s prediction abrahamsen countered by suggesting that as industrialization of agriculture evolved cooperatives would increasingly become the farmer s integrating agency abrahamsen p 1442 in this paper i examine these two divergent opinions by a briefly describing the structural and strategic evolution of u s farmer cooperatives since the helmberger and abrahamsen h a forecasts b utilizing recent developments in neo institutional economic organizational economic theory to generate hypotheses regarding structural and strategic shifts in u s agricultural cooperatives and c further applying neo institutional economics to speculate what the future might hold for u s producerowned and controlled agricultural cooperatives

incomplete contracts vertical integration and supply assurance this paper extends the analysis of transactions cost models of vertical integration to multilateral settings its main focus is on supply assurance concerns which arise when several downstream firms are competing for inputs in limited supply integration reduces supply assurance concerns for an integrating firm but it may increase them for others therefore to explain the scope of any firm one must consider the overall network of production and distribution relations three fundamental questions are addressed 1 what are the effects of different integration structures 2 what are the determinants of the socially efficient integration structures 3 in what way do equilibrium integration structures differ from socially efficient structures

tax avoidance and the deadweight loss of the income tax traditional analyses of the income tax greatly underestimate deadweight losses by ignoring its effect on forms of compensation and patterns of consumption the full deadweight loss is easily calculated using the compensated elasticity of taxable income to changes in tax rates because leisure excludable income and deductible consumption are a hicksian composite good microeconomic estimates imply a deadweight loss of as much as 30 of revenue or more than ten times harberger s classic 1964 estimate the relative deadweight loss caused by increasing existing tax rates is substantially greater and may exceed 2 per 1 of revenue

bank income structure and risk an empirical analysis of european banks the purpose of this paper is to investigate the relationship between bank risk and product diversification in the changing structure of the european banking industry based on a broad set of european banks for the period 1996 2002 our study first shows that banks expanding into non interest income activities present higher risk and higher insolvency risk than banks which mainly supply loans however considering size effects and splitting non interest activities into both trading activities and commission and fee activities we show that the positive link with risk is mostly accurate for small banks and essentially driven by commission and fee activities a higher share of trading activities is never associated with higher risk and for small banks it implies in some cases lower asset and default risks

capital regulation heterogeneous monitoring costs and aggregate loan quality abstract this paper develops a banking sector framework with heterogeneous loan monitoring costs banks are exposed to the moral hazard behavior of borrowers and endogenously choose whether to monitor their loans to eliminate this exposure after analyzing an unregulated banking system we examine several cases in which regulatory capital requirements bind the notional loan supplies of various subsets of banks to gauge the impact of capital requirements we define loan quality in terms of either the ratio of monitored to total loans or the ratio of monitoring banks to total bank population under the assumption of a specific cross sectional distribution of banks our simulations show that the imposition of binding capital requirements on a previously unregulated banking system unambiguously increases the market loan rate and reduces aggregate lending but has an ambiguous effect on loan quality nevertheless once capital requirements are in place the simulations indicate that regulators can contribute to higher overall loan quality by toughening capital requirements

the welfare cost of capital income taxation in a growing economy the welfare cost of capital income taxation is analyzed in a general equilibrium framework where the private sector is represented by a competitive household endowed with perfect foresight and an infinite life the value of the welfare cost depends essentially on the elasticity of substitution between capital and labor in the production function numerical estimates are presented for different values of the parameters of the model the welfare gain obtained by the abolition of the capital income tax is smaller when the private sector is not endowed with perfect foresight it is reduced by about 40 percent when expectations are myopic the allocation efficiency cost of the corporate tax dwarfs the intertemporal welfare cost

house prices non fundamental components and interstate spillovers the australian experience abstract using australian capital city data from 1984q3 2008q2 this paper utilizes a dynamic present value model within a var framework to construct time series of house prices depicting what aggregate house prices should be given expectations of future real disposable income the fundamental price and continues by comparing capital city fundamental prices with actual prices the extent to which revealed capital city non fundamental components spillover from state to state as well as their long term impact is also investigated results provide evidence of periods of sustained deviations of house prices from values warranted by income for all state capitals with the greatest deviations arising in the nsw market and starting around 2000 in general nsw is relatively more susceptible to spillovers transmitted from other states while act and wa are most isolated from the rest of the country

the welfare cost of factor taxation in a perfect foresight model this paper examines the marginal efficiency cost of various factor taxes in a dynamic general equilibrium model the au thor solves for the excess burden of anticipated and unanticipated t emporary and permanent tax policies using a range of estimates for taste and technology parameters he finds excess burdens larger than those indicated by previous studies that use static models these exc ess burdens are sensitive to parameter values and timing however th e rankings of alternative tax policies turn out to be insensitive to structural parameter values copyright 1987 by university of chicago press

the trade off between equality and efficiency this paper uses a 1976 microdata base to estimate the marginal cost of reducing income inequality with a policy that has distributional effects similar to the present tax transfer system the analysis uses a simulation methodology in which only the labor supply effects are evaluated other behavioral effects are ignored the most striking finding is that marginal cost is quite high even for modest labor supply elasticities for example in the benchmark case with a weighted average economy wide uncompensated wage elasticity of 0 2 and compensated elasticity of 0 31 the disposable money income of upper income quintiles of households is depressed by 9 51 for each dollar increase in the disposable money income of lower income quintiles when income equivalent values that take account of the value of leisure are compared the marginal cost for this case is estimated to be 3 49

motives for forming research development financing organizations abstract we study the decision to fund r d through a separate financing organization an rdfo that takes the form of either a limited partnership or a corporation the rdfo offers tax and financial reporting benefits as a form of external funding it also creates moral hazard and adverse selection problems information costs using convertible debt as a comparative form of external funding we find that debt related but not equity related financial reporting benefits affect the decision to form rdfos the evidence is mixed on whether taxes influence the formation decision and the information costs of rdfos restrict their use

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

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

the importance of equity finance for r d activity this article analyzes the importance of equity finance for the r d activity of small and medium sized enterprises we use information on almost 6 000 german smes from a company survey using the intensity of banking competition at the district level as an instrument to control for endogeneity we find that a higher equity ratio is conducive to a higher r d intensity owners may only start r d activities if they have the financial resources to sustain them until successful completion we find a larger influence of the equity ratio for young companies equity may be more important for young companies which have to rely on the original equity investment of their owners since they have not yet accumulated retained earnings and can rely less on bank financing

cost of capital and public loan guarantees to small firms in this paper we study the determinants of the spread charged by banks under a uk policy intervention scheme aimed at supporting access to the credit market for small firms through guarantee backed loans we exploit a unique dataset containing data on 29 266 guarantee backed loans under the uk sflg scheme over the period 2000 to 2005 results suggest that lower spreads are offered for loans of larger amounts and higher durations for service firms for larger firms and for those located in the most advanced regions higher spreads are applied to high tech manufacturing firms and to loans issued for working capital purposes we also find that the presence of other extant debt is associated with a relatively higher spread and that this effect is especially significant for the subset of firms that have reached a maximum debt capacity based on collateralized assets further we also find that the higher the incidence of the publicly guaranteed debt over the total amount of outstanding loans the lower on average the spread however an increase in the guaranteed coverage leads to a contraction in the spread only for loans aimed at covering working capital needs rather than investments