strategic analysis of the competitive exercise of certain financial options abstract warrants and convertible bonds are claims on the firm which change the outstanding number of common stock shares when exercised or converted exercise of such claims in competitive circumstances is modeled here as a noncooperative game played by a continuum of players first equilibria of the game are shown to exist by applying results of schmeidler second the game s equilibria are compared to outcomes that come about when one individual controls the exercise of all the claims but is constrained to exercise them in one block the results are analogues of earlier results by one of the authors on the competitive pricing of such claims

the economic impact of social ties evidence from german reunification we use the fall of the berlin wall in 1989 to show that personal relationships which individuals maintain for noneconomic reasons can be an important determinant of regional economic growth we show that west german households who had social ties to east germany in 1989 experienced a persistent rise in their personal incomes after the fall of the berlin wall moreover the presence of these households significantly affects economic performance at the regional level it increases the returns to entrepreneurial activity the share of households who become entrepreneurs and the likelihood that firms based within a given west german region invest in east germany as a result west german regions that for idiosyncratic reasons have a high concentration of households with social ties to the east exhibit substantially higher growth in income per capita in the early 1990s a one standard deviation rise in the share of households with social ties to east germany in 1989 is associated with a 4 7 percentage point rise in income per capita over six years we interpret our findings as evidence of a causal link between social ties and regional economic

pricing the strategic value of putable securities in liquidity crises putable security holders have a de facto rst claim on the rm s liquid assets and can threaten to force solvent issuers to bear nancial distress costs their threatening power implies that the puts have a strategic value larger than their intrinsic value strategic value depends on the issuer s size potential distress costs and the distribution of put ownership relative to the rm s liquidity position the analysis of kmart s put induced crisis in 1995 and a calibration to observed secondary market yield reductions on poison put bonds shows that strategic value is an important determinant of payouts received by bondholders 2001 elsevier science s a all rights reserved

social networks and the process of globalization we propose a stylised dynamic model to understand the role of social networks in the phenomenon we call globalization this term refers to the process by which even agents who are geographically far apart come to interact thus being able to overcome what would otherwise be a fast saturation of local opportunities a key feature of our model is that the social network is the main channel through which agents exploit new opportunities therefore only if the social network becomes global heuristically it reaches far in few steps can global interaction be steadily sustained to shed light on the conditions under which such a transformation may or may not take place is the main objective of the paper one of the main insights arising from the model is that in order for the social network to turn global the economy needs to display a degree of geographical cohesion that is neither too high for then global opportunities simply do not arise nor too low then the meeting mechanism displays too little structure for the process to take off but if globalization does materialize we show that it is a robust state of affairs that often arises abruptly as key parameters change this occurs in particular as the rate of arrival of ideas rises or when there is a high enough increase in the range at which the network transmits information

monetary accommodation exchange rate regimes and inflation persistence stable url http links jstor org sici sici 0013 0133 28199205 29102 3a412 3c461 3amaerra 3e2 0 co 3b2 lthe economic journal is currently published by royal economic society your use of the jstor archive indicates your acceptance of jstor s terms and conditions of use available athttp www jstor org about terms html jstor s terms and conditions of use provides in part that unless you have obtainedprior permission you may not download an entire issue of a journal or multiple copies of articles and you may use content inthe jstor archive only for your personal non commercial use please contact the publisher regarding any further use of this work publisher contact information may be obtained athttp www jstor org journals res html each copy of any part of a jstor transmission must contain the same copyright notice that appears on the screen or printedpage of such transmission the jstor archive is a trusted digital repository providing for long term preservation and access to leading academicjournals and scholarly literature from around the world the archive is supported by libraries scholarly societies publishers and foundations it is an initiative of jstor a not for profit organization with a mission to help the scholarly community takeadvantage of advances in technology for more information regarding jstor please contact support jstor org http www jstor orgwed feb 13 07 34 49 2008

market structure and borrower welfare in microfinance motivated by recent controversies surrounding the role of commercial lenders in microfinance we analyze borrower welfare under different market structures considering a benevolent non profit lender a for profit monopolist and a competitive credit market to understand the magnitude of the effects analyzed we simulate the model with parameters estimated from the mix market database our results suggest that market power can have severe implications for borrower welfare while despite possible information frictions competition typically delivers similar borrower welfare to non profit lending in addition for profit lenders are less likely to use joint liability than non profits

altruism and risk sharing in networks we provide the first analysis of the risk sharing implications of altruism networks agents are embedded in a fixed network and care about each other we study whether altruistic transfers help smooth consumption and how this depends on the shape of the network we identify two benchmarks where altruism networks generate efficient insurance for any shock when the network of perfect altruism is strongly connected and for any small shock when the network of transfers is weakly connected we show that the extent of informal insurance depends on the average path length of the altruism network and that small shocks are partially insured by endogenous risk sharing communities we uncover complex structural effects under iid incomes central agents tend to be better insured the consumption correlation between two agents is positive and tends to decrease with network distance and a new link can decrease or increase the consumption variance of indirect neighbors overall we show that altruism in networks has a first order impact on risk and generates specific patterns of consumption smoothing

warrant valuation and exercise strategy abstract this paper demonstrates that warrant valuation and exercise strategy differ fundamentally from call option valuation simultaneous exercise of warrants is shown to be suboptimal and a monopolist owning all warrants can achieve a higher value unless warrants are perfectly divisible no satisfactory equilibrium exists for the valuation and exercise of widely held warrants the problems encountered appear to be quite general and stem from necessary assumptions about future corporate dividend policy and capital structure such assumptions are necessary for any model of corporate security valuation

equilibrium homophily in networks abstract i look at the equilibrium effects of homophily in network formation games having positive externalities i show that very weak preferences for network effects such as a preference for being part of a clique may result in very high levels of homophily at equilibrium i present an empirical procedure that allows an evaluation of the role of network effects on the observed level of homophily in the data i apply my method to the formation of friendship networks in the usa i show that network effects are small and have a negligible contribution to the observed racial homophily in friendship networks

renegotiation and symmetry in repeated games abstract the paper derives a theory of renegotiation proofness in symmetric repeated games based on a notion of equal bargaining power according to consistent bargaining equilibrium a player can mount a credible objection to a continuation equilibrium in which he receives a particular expected present discounted value if there are other self enforcing agreements that never give any player such a low continuation value after any history the definition does not imply strongly symmetric solutions but under modest assumptions consistent bargaining equilibria of infinitely repeated games with perfect monitoring are strongly symmetric such solutions have an unusually elementary characterization journal of economic literature classification numbers c7 c72

an exploration in the theory of exchange rate regimes three exchange rate regimes a float a one sided peg and a cooperative peg are evaluated and compared in terms of efficiency and welfare levels the framework of analysis embodies country specific monies with the money of each country being used to transact in its commodity markets and its currency denominated bonds welfare levels depend only on consumption levels in the presence of perfect foresight all equilibrium allocations are pareto efficient in a floating exchange rate regime the perfect foresight equilibrium allocation coincides with an equilibrium of a costless barter economy the same result holds in a one sided peg if the pegging country s exchange rate stabilizing authority breaks even over time in a cooperative peg regime there is a different equilibrium allocation for each combination of exchange rate levels and monetary policies problems of policy coordination and conflicts in desired monetary policies are discussed

warrant exercise and bond conversion in competitive markets abstract we develop a theory of warrants held by competitive warrantholders not constrained to exercise their warrants as one block the theory also applies to convertible bonds held by competitive bondholders not constrained to convert their bonds as one block we prove that the warrant bond price in each of the competitive equilibria is less than or equal to the price in an economy with the block constraint and for at least one competitive equilibrium the warrant bond price equals the warrant bond price in the block constrained economy we illustrate the paths of competitive warrant exercise and bond conversion and conclude that under realistic assumptions they can be long

risk sharing networks and insurance against illness most risk sharing tests on developing country data are conducted at the level of the village generally the full risk sharing hypothesis is rejected this paper uses detailed data on all insurance networks within a village in tanzania networks are not clustered but largely overlapping we test whether full risk sharing occurs within these networks while village level full insurance cannot be rejected for food consumption we find evidence consistent with at least partial insurance of non food consumption via networks

a strategic analysis of sinking fund bonds abstract unlike most securities the pricing of sinking fund bonds is influenced by the distribution of ownership which summarizes the extent to which the market is cornered the effect of the distribution of ownership on the pricing of sinking fund bonds is examined by an explicit game in which the price obtained for bonds sold can depend upon the size of the investor s position this framework is used to contrast the valuation of sinking fund bonds with the valuation of amortizing bonds and straight debt we show that it is generally incorrect to view sinking fund bonds as being equivalent to serial bonds

reputation and imperfect information abstract a common observation in the informal literature of economics and elsewhere is that is multistage games players may seek early in the game to acquire a reputation for being tough or benevolent or something else but this phenomenon is not observed in some formal game theoretic analyses of finite games such as selten s finitely repeated chain store game or in the finitely repeated prisoners dilemma we reexamine selten s model adding to it a small amount of imperfect or incomplete information about players payoffs and we find that this addition is sufficient to give rise to the reputation effect that one intuitively expects

a theory of acquisition markets mergers versus tender offers and golden parachutes we develop a model of the acquisition market in which the acquirer has a choice between two takeover mechanisms mergers and tender offers a merger is modeled as a bargaining game between the acquiring and target firms whereas a tender offer is modeled as an auction in which bidders arrive sequentially and compete for the target at any stage of the bargaining game the acquiring firm can stop negotiating and make a tender offer in equilibrium there is a unique level of synergy gains below which the acquiring firm makes only a merger attempt as it expects to lose in the competition resulting from a tender offer for synergy gains above this level tender offers can occur however to get tender offers target shareholders must give their managers golden parachutes that give higher payoffs in tender offers than in mergers article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

meeting strangers and friends of friends how random are social networks we present a dynamic model of network formation where nodes find other nodes with whom to form links in two ways some are found uniformly at random while others are found by searching locally through the current structure of the network e g meeting friends of friends this combination of meeting processes results in a spectrum of features exhibited by large social networks including the presence of more high and low degree nodes than when links are formed independently at random having low distances between nodes in the network and having high clustering of links on a local level we fit the model to data from six networks and impute the relative ratio of random to network based meetings in link formation which turns out to vary dramatically across applications we show that as the random network based meeting ratio varies the resulting degree distributions can be ordered in the sense of stochastic dominance which allows us to infer how the formation process affects average utility in the network

cooperation punishment and immigration abstract we study the incentive to cooperate in a society comprised of citizens and immigrants the level of cooperation is governed by a steady state under population dynamics along with the behavior of individual citizens and immigrants we provide an equilibrium characterization exhibiting a uniquely determined positive level of cooperation in society we then use this framework to study the impact of government programs aimed at punishing immigrants who defect when agents produce offspring we show that a consequence of such punishment is that while the incentive for immigrants to defect decreases there is an equilibrium substitution effect whereby citizens realize an increased incentive to defect

the relative pricing of high yield debt the case of rjr nabisco holdings capital corporation the authors derive and investigate empirically arbitrage pricing restrictions among three bonds of rjr nabisco holdings capital corporation the three rjr bonds are virtually identical in all respects except for the form in which interest is paid the authors document large and persistent errors in the market pricing of the three bonds over a two year period the cash paying bond was consistently more expensive than either the pay in kind or deferred coupon bonds the magnitude of the pricing errors is too large to be explained by market imperfections copyright 1993 by american economic association

credibly identifying social effects accounting for network formation and measurement error understanding whether and how connections between agents networks such as declared friendships in classrooms transactions between firms and extended family connections influence their socio economic outcomes has been a growing area of research within economics early methods developed to identify these social effects assumed that networks had formed exogenously and were perfectly observed both of which are unlikely to hold in practice a more recent literature both within economics and in other disciplines develops methods that relax these assumptions this paper reviews that literature it starts by providing a general econometric framework for linear models of social effects and illustrates how network endogeneity and missing data on the network complicate identification of social effects thereafter it discusses methods for overcoming the problems caused by endogenous formation of networks finally it outlines the stark consequences of missing data on measures of the network and regression parameters before describing potential solutions

politician family networks and electoral outcomes evidence from the philippines we demonstrate the electoral importance of politician family networks and provide evidence of the mechanisms behind the relationship we use a 20 million person dataset allowing us to reconstruct intermarriage networks for over 15 000 villages in 709 municipalities in the philippines we show that politicians are disproportionately drawn from more central families and that controlling for candidate fixed e ects candidates receive a higher vote share in villages where their families are more central we present evidence that centrality confers organizational and logistical advantages that facilitate clientelistic transactions such as vote buying and do not operate through popularity name recognition or through the choice of policies more aligned with their constituents preferences

social norms and random matching games abstract nash equilibrium has been tremendously useful in understanding economic problems in which strategic behavior is important the theoretical foundations of the solution concept often include the assumption that the game to be played is common knowledge an unrealistic assumption in games with many players we introduce the concept of norm equilibrium for random matching games a norm equilibrium is a nash equilibrium that relies on substantially less information than common knowledge of the game we use norm equilibria to provide a folk theorem for random matching games and to analyze increasing numbers of players in a random matching game journal of economic literature classification numbers c70 c72

ostracism and forgiveness many communities rely upon ostracism to enforce cooperation if an individual shirks in one relationship her innocent neighbors share information about her guilt in order to shun her while continuing to cooperate among themselves however a strategic victim may herself prefer to shirk rather than report her victimization truthfully if guilty players are to be permanently ostracized then such deviations are so tempting that cooperation in any relationship is bounded by what the partners could obtain through bilateral enforcement ostracism can improve upon bilateral enforcement if tempered by forgiveness through which guilty players are eventually readmitted to cooperative society

financing banking crises abstract a model of strategic asset pricing is used to investigate the increase in interest rates and the formation of cash syndicates that can occur during privately financed banking crises results produced help to explain the federal reserve system s creation following the panic of 1907 and to clarify the fed s role in financing contemporary banking crises

group size and the efficiency of informal risk sharing this paper seeks to understand and test empirically the relationship between group size and informal risk sharing models of informal risk sharing with limited commitment and grim trigger punishments upon deviation imply that larger groups provide better insurance however when subgroups of households can credibly deviate so that sustainable informal arrangements ought to be coalition proof the relationship between group size and the amount of insurance is unclear building on genicot and ray 2003 we show that this relationship is theoretically ambiguous we then investigate it empirically using data on the size of the sibships of the household head and spouse in rural malawi to identify the relevant potential risk sharing group we exploit a social norm among the main ethnic group in our sample that the wife s brothers play a key role in ensuring her household s wellbeing we find that households where the wife has many brothers are poorly insured against crop loss events we fail to uncover a similar relationship for the wife s sisters ruling out that our findings are driven by wives with many siblings e g brothers simply having poorer extended family networks a simple calibration exercise indicates that the threat of coalitional deviations can explain our empirical findings

an economic approach to social capital a standard optimal investment model can be used to analyse an individual s decision to accumulate social capital we analyse six facts that support the predictions of this individual based approach 1 social capital first rises and then falls with age 2 social capital declines with expected mobility 3 social capital rises in occupations with greater returns to social skills 4 social capital is higher among homeowners 5 social connections fall sharply with physical distance 6 people who invest in human capital also invest in social capital we fail to find robust evidence that social capital investments fall with the value of time or that geographic religious groups generate social capital complementarities

asymmetric network monitoring and punishment in public goods experiments abstract we extend the recent experimental literature on incomplete punishment networks in linear public goods games in these games we use an exogenous network to restrict both monitoring and the set of feasible punishment flows in addition to two baseline structures the complete network and the circle network we examine a novel asymmetric network in which both punishment responsibility and exposure differ across players average contributions are significantly lower in the asymmetric network driven entirely by the under monitored player who faces only one potential punisher we formulate and examine the hypothesis that asymmetry among a player s potential punishment targets may lead to discriminatory patterns of punishment in particular players might wish to punish targets for whom they are solely responsible discriminately more than targets for whom they share responsibility the experimental data do not support this hypothesis although they do suggest a compelling explanation as to why specifically we find that the under monitored player in the network retaliates against previous punishment significantly more often than others in the group which deters their only potential punisher from issuing stronger sanctions thus an additional complication of asymmetry in the network is that it may lead to more instances of anti social retaliation inhibiting the effectiveness of the decentralized punishment institution

on non uniqueness in rational expectations models an attempt at perspective abstract many macroeconomic models involving rational expectations give rise to an infinity of solution paths even when the models are linear in all variables some writers have suggested that this non uniqueness constitutes a serious weakness for the rational expectations hypothesis one purpose of the present paper is to argue that the non uniqueness in question is not properly attributable to the rationality hypothesis but instead is a general feature of dynamic models involving expectations it is also argued that there typically exists in a very wide class of linear rational expectations models a single solution that excludes bubble or bootstrap effects one that occur only because they are arbitrarily expected to occur a systematic procedure for obtaining solutions free from such effects is introduced and discussed in addition this procedure is used to interpret and reconsider several prominent examples with solution multiplicities including ones developed by fischer black and john b taylor

persistence in real variables under alternative exchange rate regimes some multi country evidence abstract in this paper we try to establish empirically whether a different degree of persistence is found in real variables under alternative nominal exchange rate systems the measure of persistence employed is the modified rescaled range statistic proposed by lo econometrica 1991 59 1279 1313 which tests for the presence of long range dependence after having accounted for a wide class of short memory processes the empirical results indicate a systematic increase in persistence in real variables under floating

the economic consequences of social network structure we survey the literature on the economic consequences of the structure of social networks we develop a taxonomy of macro and micro characteristics of social interaction networks and discuss both the theoretical and empirical findings concerning the role of those characteristics in determining learning diffusion decisions and resulting behaviors we also discuss the challenges of accounting for the endogeneity of networks in assessing the relationship between the patterns of interactions and behaviors

kinship and financial networks formal financial access and risk reduction kinship networks are beneficial for smoothing consumption and investment but the channels are not well understood we study the financing devices used for consumption and investment by thai households households that are connected to banks achieve significantly better consumption smoothing than unconnected households indirect connections via inter household borrowing are as effective as direct borrowing investment appears to be facilitated by kinship households with kin in the village display reduced sensitivity of investment to income while connections to banks do not significantly reduce sensitivity kin may act as implicit collateral permitting borrowing that would violate repayment constraints in its absence

the role of social capital in financial development to identify the effect of social capital on financial development we exploit social capital differences within italy in high social capital areas households are more likely to use checks invest less in cash and more in stock have higher access to institutional credit and make less use of informal credit the effect of social capital is stronger where legal enforcement is weaker and among less educated people these results are not driven by omitted environmental variables since we show that the behavior of movers is still affected by the level of social capital of the province where they were born

cooperation with network monitoring this paper studies the maximum level of cooperation that can be sustained in perfect bayesian equilibrium in repeated games with network monitoring where players observe each other s actions either perfectly or not at all the foundational result is that the maximum level of cooperation can be robustly sustained in grim trigger strategies if players are equally well monitored comparative statics on the maximum level of cooperation are highly tractable

sanctions in networks the most unkindest cut of all the extensive literature on sanctions has mainly focused on a dyadic interaction between sender and target in contrast this paper examines sanctions when the sender and target are embedded in a network of linkages to other agents the sender can assemble a sanctioning coalition of neighbors to sever their links execute multi link cuts to the target and her allies efficacy of sanctions is now crucially dependent on the network architecture we characterize the structural properties of networks in which a sender can effectively sanction a target in the short run when links can only be deleted and the long run when links can be both deleted and added

a discounted cash flow model of convertibles subject to multiple calls in a world of refunding costs and stochastic interest rates fixed income securities which can be converted into other assets such as common stock represent a sizable portion of the capital market 33 and have therefore received frequent attention in the financial literature 20 21 23 35 39 however due to their complexity attempts to develop mathematical models of convertibles have encountered severe computational and theoretical difficulties 36 one of the primary complications results from convertible securities generally having contractual call features which permit the issuing organization to redeem the securities at stipulated dates for specific prices in addition although a majority of convertibles listed in moody s bond guide have sinking funds the issue of analyzing convertible sinking fund calls represents a specific problem that has never been adequately addressed early studies of convertibles such as brigham 10 focused on the discounted cash flow approach to valuing the securities the general procedure was to estimate a terminal price for the convertible on an arbitrarily specified date in the future and then take the present value of the price together with all intervening fixed income payments these models lacked precision insofar as no theoretical framework was developed for specifying the relevant terminal date terminal price or discount rate and the individual effect of each call feature on convertible values was largely ignored other research such as walter and que 38 has employed regression analysis to pro

strategic trading behavior and price distortion in a manipulated market anatomy of a squeeze abstract this paper investigates an attempted delivery squeeze in a bond futures contract traded in london using cash and futures trades of dealers and customers we analyze their strategic trading behavior price distortion and learning in a market manipulation setting we argue that marked differences in settlement failure penalties in the cash and futures markets create conditions that favor squeezes we recommend that regulators require special flagging of forward term repurchase agreements on the key deliverables that span futures contract maturity dates and that exchanges mark to market their contract specifications more frequently or consider a cash settled contract on a basket of bonds

a further exploration in the theory of exchange rate regimes in an interesting paper in this journal elhanan helpman 1981 develops a simple two country model to compare the welfare levels that are achieved under different exchange rate regimes in a world characterized by perfect foresight his basic finding is that equilibrium consumption allocations and hence welfare levels are identical under a floating exchange rate system and a one sided peg fixed exchange rate regime this result is due to helpman s assumption that output is determined exogenously which allows a separation of the real and monetary sides of the economy the purpose of this paper is to extend helpman s model by making two alterations in his setup 1 to allow production to be endogenously determined as a function of labor force participation and 2 to allow welfare levels to be dependent on labor service as well as on consumption the main conclusion then obtained is that a country may achieve a higher welfare level under a flexible exchange rate regime than under a fixed exchange rate regime since it is able to choose an optimal rate of inflation or currency depreciation

equilibrium and options on real assets in aggregate options on real and financial assets can have very different properties typically the good or service produced by a real asset has a finite elasticity of demand and developers have finite capacities also the supply of options can be limited and developers can be less than perfectly competitive in a subgame perfect nash equilibrium with these properties the optimal exercise policy and resulting values of developed and undeveloped assets are calculated explicitly the novel comparative statics are discussed in detail article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

state restrictions on local debt their role in preventing default abstract default by a local government can impose a negative externality upon other localities within a state because the state s ability to enforce debt repayment depends upon the proportion of municipalities favoring repayment localities benefit from maintaining their state s reputation for enforcement hence jurisdictions not wishing to default favor enforcement of repayment by other jurisdictions a debt limit increases support for enforcement by reducing the proportion of municipalities preferring default we characterize when such a limit is optimal we also examine the role of special districts which typically neither are subject to a debt ceiling nor fully backed by the jurisdiction

real interest parity rip over the 20th century new evidence based on confidence intervals for the largest root and the half life abstract in this paper we employ local to unity asymptotics to investigate the validity of real interest parity rip for three countries relative to the us using long span data we find that deviations from parity are corrected quickly and this is what could in principle be expected to happen in an integrated world where economic forces act rapidly so that discrepancies do not grow systematically over time moreover the observed speed of reversion raises important issues for policy in that the tendency for rates to converge implies that the impact of the domestic authorities stabilization polices might be limited finally there is no clear cut difference in the adjustment to shocks across fixed and floating regimes

predation reputation and entry deterrence abstract economists often argue that predatory practices are irrational since there exist cheaper or more certain means to gain or maintain a monopoly our gametheoretic equilibrium analysis suggests that if a firm is threatened by several potential entrants then predation may be rational against early entrants even if it is costly when viewed in isolation because it yields a reputation which deters other entrants asymmetric information plays a crucial role in our analysis since it provides the rationale for entrants to base their expectations of the firm s future behavior on its past actions the analysis also suggests methods to treat general reputational phenomena

social capital and social quilts network patterns of favor exchange we examine the informal exchange of favors in societies such that any two individuals interact too infrequently to sustain exchange but such that the social pressure of the possible loss of multiple relationships can sustain exchange patterns of exchange that are locally enforceable and renegotiation proof necessitate that all links are supported any two individuals exchanging favors have a common friend in symmetric settings such robust networks are social quilts tree like unions of completely connected subnetworks examining favor exchange networks in 75 villages in rural india we find high levels of support and identify characteristics that correlate with support

network structure and the aggregation of information theory and evidence from indonesia abstract we use unique data from over 600 indonesian communities on what individuals know about the poverty status of others to study how network structure influences information aggregation we develop a model of semi bayesian learning on networks which we structurally estimate using within village data the model generates qualitative predictions about how cross village patterns of learning relate to network structure which we show are borne out in the data we apply our findings to a community based targeting program where citizens chose households to receive aid and show that the networks that the model predicts to be more diffusive differentially benefit from community targeting jel d14 d83 d85 i32 o12 z13

the transmission of disturbances under alternative exchange rate regimes with optimal indexing the paper develops a general stochastic macroeconomic model that can be used to study the international transmission of disturbances under four alternative exchange rate systems uniform flexible exchange rates uniform fixed exchange rates and two versions of two tier exchange rates the analysis makes two general points first one cannot assume stability of structure when assessing the consequences of alternative exchange rate regimes for example the slope of the aggregate supply curve and the rationally formed expectations in the asset markets can respond dramatically to the government s choice of exchange rate regime second exchange rate regimes that provide full insulation from foreign disturbances may nevertheless be inferior to other regimes in terms of their ability to maximize social welfare

trust and social collateral this paper builds a theory of trust based on informal contract enforcement in social networks in our model network connections between individuals can be used as social collateral to secure informal borrowing we define network based trust as the largest amount one agent can borrow from another agent and derive a reduced form expression for this quantity which we then use in three applications 1 we predict that dense networks generate bonding social capital that allows transacting valuable assets whereas loose networks create bridging social capital that improves access to cheap favors such as information 2 for job recommendation networks we show that strong ties between employers and trusted recommenders reduce asymmetric information about the quality of job candidates 3 using data from peru we show empirically that network based trust predicts informal borrowing and we structurally estimate and test our model

incentive conflicts bundling claims and the interaction among financial claimants we show that for certain capital structures equity has an incentive to buy out another claim and alter the firm s investment strategy so as to maximize the combined value of equity and the acquired claim this restructuring may reintroduce agency problems into capital structures which appear to avoid agency conflicts by bundling claims it is possible to avoid this agency problem the agency problem is also eliminated by dispersed ownership of the claims in the presence of other claims issued by the firm the projects that maximize the value of equity need not maximize the value of the firm e g myers 1977 an agency problem occurs because the equityholders select projects that are in the interest of equity rather than the firm as a whole for example if the firm comprises equity and bonds then equity would prefer risky projects and may undertake projects that are undesirable from the firm s perspective but desirable from the equity perspective the resulting difference in the claimants preferences among projects could be limited by structuring the financial claims so that the preferences of equityholders among projects are similar to those of the firm as a whole the issuance of separate claims that are individually both more risky and less risky than the equity can control incentive problems for a fixed capitalization without trading see jensen and meckling 1976 and green 1984 green 1984 examines the financing of a new project by a combination of warrants and bonds and shows that if the warrants and bonds correctly balance then the incentives of equity still will be to maximize the value of the firm for this fixed capital structure the incentive conflicts are removed and the optimal strategy for equity coincides with the firm s optimal strategy a time inconsistency problem can arise when an earlier period is added to allow trading among the financial claimants we initially suppose that the capital structure is designed so that without trading equity has an incentive

barriers to formal saving micro and macroeconomic effects this paper examines different barriers to formal saving considering various interventions and their possible effects at microeconomic and macroeconomic levels it presents a comprehensive review of the literature based on a detailed classification of the barriers associated with supply side factors related to access to financial products and demand side barriers related to the use and frequency of use of those products the paper concludes that this classification and analysis contributes to a fuller understanding of the question of financial inclusion and how to achieve it

why the west became wild informal governance with incomplete networks settlers flocking to boomtowns on the american western frontier were faced with the same task that communities in weak states across the globe face in contemporary times self governance peer sanctions can enforce cooperation in these environments but their efficacy depends on the social networks that transmit information from peer to peer the author uses a game theoretic model to show that peripheral network positions can generate such strong incentives to misbehave that persistent cheating occurs in equilibrium the model reveals that groups maintaining high levels of cooperation that face shocks to their strategic environment or to their network can ratchet down into less cooperative equilibria in which the most peripheral become ostracized furthermore population change that features rapid growth high turnover and enclave settlements can undermine cooperation the insights from this article help to explain the trajectory of cooperation in the mining towns of the wild west in which high levels of cooperation deteriorated as the population surged and help to make sense of why only certain nonwhite settlers were targets of hostility and racism

voluntary conversion of convertible securities and the optimal call strategy abstract we provide an explanation of why convertibles are called long after the conversion value exceeds the call price delaying the call benefits the firm if enough investors are expected to delay their voluntary conversions consistent with this theory we document that a substantial number of investors do not voluntarily convert when the common dividend exceeds the convertible s dividend plus its premium over conversion value we find that firms would not have increased common stock returns by switching to the strategy of calling to force conversion as soon as possible surprisingly we find that convertible preferreds frequently sell below conversion value

networks in economic development this chapter surveys the implications of some studies in network economics research for economic development we focus on information flow and risk sharing two topics where work in theory empirics and policy analysis have been especially intensive and complementary in analysing information we distinguish models of information diffusion and aggregation highlight how different models imply very different guidance regarding the right way to seed information in discussing risk sharing we look at the key frictions that impede efficient informal insurance and some potential unintended consequences when policymakers intervene to help throughout we stress practical insights that can be used with limited measurement of the details of networks

a strategic model of social and economic networks we study the stability and efficiency of social and economic networks when self interested individuals can form or sever links first for two stylized models we characterize the stable and efficient networks there does not always exist a stable network that is efficient next we show that this tension persists generally to assure that there exists a stable network that is efficient one is forced to allocate resources to nodes that are not responsible for any of the production we characterize one such allocation rule the equal split rule and another rule that arises naturally from bargaining of the players

warrant exercise dividends and reinvestment policy in this paper we examine sequential exercise strategies by warrantholders and the gain from hoarding warrants we analyze several obstacles to acquiring large blocks in order to exploit sequential strategies first we identify several reinvestment policies for which sequential exercise is not advantageous thereby eliminating the gain from hoarding however sequential exercise strategies may be advantageous for monopoly or oligopoly warrantholders even absent dividends because using exercise proceeds to repurchase stock or to expand the firm s scale increases the riskiness of an equity share second oligopoly warrantholders can receive a smaller warrant value than perfectly competitive warrantholders suggesting a potential cost to unsuccessful hoarding

reciprocity in groups and the limits to social capital robert putnam defines social capital as features of social organization such as networks norms and social trust that facilitate coordination and cooperation putnam 1995 67 such networks are typically associated with norms that promote coordination cooperation and reciprocity for the mutual benefit of network members these norms coupled with the appropriate use of sanctions in case of noncompliance are often thought to enable these groups to deal smoothly and effectively with multiple social and economic issues at the same time some authors have noted that strongly bonded groups may have adverse consequences for others see for instance alejandro portes and patricia landolt 1996 or even for themselves see for instance george akerlof 1976 or kaushik basu 1986 it is this latter aspect that we wish to emphasize in these notes

sanctions in networks abstract in this paper we contribute to the sender target models of sanctions by explicitly incorporating the linkages social political or economic that bind the sender and target to other agents given any network model and architecture we draw attention to two factors that play a key role in determining the efficacy of sanctions in reducing the frequency of violations these are respectively strategic complementaritiesbetween the sanctioning action deleting link with target and number of direct links of the sender and the externalities imposed on the sender by third parties we examine the role played by these factors both in the short run when links can only be deleted and the long run when links can also be added as well as when sanctions are unilateral the sender can only delete own links or multilateral the sender can impose on common allies to sever links to the target our analysis allows an active role to the target to build an opposing coalition to deflect sanctions and to third parties to engage in sanction busting it also extends to multiple senders and targets existence of interest groups within sender and target with dissimilar objectives and signed networks allowing both antagonistic and cordial bilateral relationships

social division with endogenous hierarchy many societies are divided into multiple smaller groups certain kinds of interaction are more likely to take place within a group than across groups i model a reputation effect that enforces these divisions people who are observed to interact with members of different groups are believed to be less trustworthy by members of their own group a hierarchical relationship between groups appears endogenously in equilibrium the information requirements for my equilibrium to exist are much less demanding than the information requirements in related models these different information requirements correspond to concrete differences between the institutions of different indian castes

clean money dirty system connected landowners capture beneficial land rezoning we use a unique regulatory event that occurred in queensland australia from 2007 to 2012 to examine the predictive power of landowner relationship networks and lobbying behaviour on successfully gaining value enhancing rezoning a state authority the urban land development authority ulda took planning control away from local councils in selected areas in order to increase the speed and scale of development in those areas in the process increasing land values using micro level relationship data from multiple sources we compare the relationship network characteristics of landowners of comparable sites inside and outside the ulda areas finding that connected landowners owned 75 of land inside the rezoned areas and only 12 outside capturing 410 million in land value gains out of the total 710 million from rezoning we also find that engaging a professional lobbyist is a substitute for having one s own connections scaling up from our sample of six rezoned areas to the hundreds of rezoning decisions across queensland and australia in the last few decades suggests that many billions of dollars of economic rent are being regularly transferred from the general population to connected landowners through political rezoning decisions

a strategic analysis of corners and squeezes we develop a dynamic game theoretic model of a futures market in which prices can be manipulated by corner and squeeze we investigate equilibrium trading strategies and the price dynamics these strategies produce price paths produced by our model can mimic observed prices for potentially comerable commodities and explain the volatility of certain prices even when no manipulations occur our model also generates occasional apparent price bubbles and accounts for the existence of normal backwardation in futures markets even when players are risk neutral

economic shocks and labor market flexibility we test how labor markets adjust to large but temporary economic shocks in a context in which such shocks are common using an individual level panel from 1 140 philippine municipalities over 26 quarters we find that workers in areas affected by strong typhoons experience reductions in hours worked and hourly wages without evidence of layoffs the results are strongest for formal wage paying jobs we argue that those results are best explained by implicit contracts where workers and firms share risks we provide extensive qualitative data suggesting that employment contracts in the philippines allow for such flexibility abstract from author

the call sinking fund and term to maturity features of corporate bonds an empirical investigation do bond issuing firms attempt to choose the call sinking fund and term to maturity features of bonds to improve shareholder wealth this paper develops and tests two hypotheses about the determinants of bond features using a conditional logistic model the model is estimated on a sample of bonds issued between 1982 and 1986 model estimates show that a bond s call sinking fund and term to maturity features are statistically related to the issuing firm s retention ratio ratio of convertible to long term debt two year change in net operating income and whether the firm is listed on the nyse and included in the s p400 these findings support the view that firms financing highquality projects but facing information asymmetries choose shorter term medium term callable bonds with and without the sinking fund feature

international evidence on the persistence of economic fluctuations abstract this paper presents new evidence on the persistence of fluctuations in real gnp we estimate two measures of persistence nonparametrically using post war quarterly data from canada france germany italy japan the united kingdom and the united states we compare these estimates with monte carlo results from various ar 2 processes for six out of seven countries the point estimates indicate that a 1 shock to output should change the long run unvariate forecast of output by well over 1 low order arma models yield similar conclusions finally we examine the persistence in relative outputs of different countries

the phillips curve the persistence of inflation and the lucas critique evidence from exchange rate regimes comment we present evidence from the united states and the united kingdom that the persistence of price inflation is significantly higher under managed exchange rate regimes than under gold based fixed exchange rate regimes these differences are also reflected in expectations augmented phillips curves we use a two country macro model with forward looking price setters to demonstrate that higher monetary accommodation of inflation and exchange rate accommodation of inflation differentials increase inflation persistence the evidence does not contradict this hypothesis it supports the hypothesis of forward looking price setters and highlights the empirical significance of the lucas critique jel e31 e42 f33

capital flows investment and exchange rates abstract this paper incorporates international capital flows into a two country monetary general equilibrium model of asset prices with investment and production we calculate theoretical covariances between investment the current account the exchange rate and the terms of trade these covariances depend upon the coefficient of relative risk aversion the magnitude and sign of a country s net international indebtedness other properties of tastes and technologies and the stochastic processes on disturbances to productivity and monetary growth rates international capital flows arise from changes in world wealth and its relative composition in foreign and domestic assets

social norms and the enforcement of laws we examine the interplay between social norms and the enforcement of laws agents choose a behavior e g tax evasion production of low quality products corruption harassing behavior substance abuse etc and then are randomly matched with another agent there are complementarities in behaviors so that an agent s payoff decreases with the mismatch between her behavior and her partner s and with overall negative externalities created by the behavior of others a law is an upper bound cap on behavior a law breaker when detected pays a fine and has her behavior forced down to the level of the law equilibrium law breaking depends on social norms because detection relies at least in part on whistle blowing law abiding agents have an incentive to whistle blow on a law breaking partner because this reduces the mismatch with their partners behaviors as well as the negative externalities when laws are in conflict with norms and many agents are breaking the law each agent anticipates little whistle blowing and is more likely to also break the law tighter laws banning more behaviors greater fines and better public enforcement all have counteracting effects reducing behavior among law abiding individuals but increasing it among law breakers we show that laws that are in strong conflict with prevailing social norms may backfire whereas gradual tightening of laws can be more effective in influencing social norms and behavior