peer group formation in an adverse selection model this paper develops an adverse selection model where peer group systems are shown to trigger lower interest rates and remove credit rationing in the case where borrowers are uninformed about their potential partners and ex post state verification or auditing by banks is costly peer group formation reduces interest rates due to a collateral effect namely cross subsidisation amongst borrowers acts as collateral behind a loan by uncovering such a collateral effect this paper shows that peer group systems can be viewed as an effective risk pooling mechanism and thus enhance efficiency notjust in the full information set up a well known family of adverse selection models in the stiglitz and weiss 1981 tradition demonstrates that when banks are imperfectly informed about the riskiness of borrowers projects and therefore cannot discriminate against risky borrowers interest rates become inefficiently high and worthy borrowers are driven out of the credit market the extent of this problem is substantially magnified when borrowers do not have adequate collateral to secure a loan typically adverse selection combined with lack of collateral leads to prohibitively high interest rates poorly endowed individuals e g students immigrants the unemployed and a vast majority of poor individuals in developing countries often face such high rates and therefore cannot take advantage of profitable investment opportunities a peer group formation system represents a possible solution to the above problem under this system a bank lends to borrowers without collateral on condition that the borrowers organise themselves into groups and that participant borrowers within each group accept to take joint responsibility for a loan thus in addition to repaying their own share of the loan each group member must accept to repay the obligations of their defaulting peers otherwise the entire group is denied access to future refinancing systems of this kind have been very successful in practice they have generated lower interest rates for the rural poor in for example bangladesh the philippines bolivia and the state of arkansas in the united states moreover group lending has also been successfully implemented in large urban areas such in the cities of dhaka and chicago 1

the microfinance promise in the past decade microfinance programs have demonstrated that it is possible to lend to low income households while maintaining high repayment rates even without requiring collateral the programs promise a revolution in approaches to alleviating poverty and spreading financial services and millions of poor households are served globally a growing body of economic theory demonstrates how new contractual forms offer a key to microfinance success particularly the use of group lending contracts with joint liability for the most part however high repayment rates have not translated into profits and studies of impacts on poverty yield a mixed picture in describing emerging tensions the paper highlights the diversity of innovative mechanisms beyond group lending contracts the measurement of financial sustainability the estimation of economic and social impacts the costs and benefits of subsidization and the potential to reduce poverty through savings programs rather than just credit the promise of microfinance has pushed far ahead of the evidence and an agenda is put forward for addressing critical empirical gaps and sharpening the terms of policy discussion

group lending repayment incentives and social collateral abstract in this paper we investigate the impact on repayment rates of lending to groups which are made jointly liable for repayment this type of scheme especially in the guise of the grameen bank in bangladesh has received increasing attention we set up and analyze the repayment game which group lending gives rise to our analysis suggests that such schemes have both positive and negative effects on repayment rates the positive effect is that successful group members may have an incentive to repay the loans of group members whose projects have yielded insufficient return to make repayment worthwhile the negative effect arises when the whole group defaults even when some members would have repaid under individual lending we also show how group lending may harness social collateral which serves to mitigate its negative effect

introduction imperfect information and rural credit markets puzzles and policy perspectives rural credit markets have been at the center of policy intervention in developing countries over the past forty years many governments supported by multilateral and bilateral aid agencies have devoted considerable resources to supplying cheap credit to farmers in a myriad of institutional settings the results of many of these interventions have been disappointing and one explanation for this must be that they were based on an inadequate understanding of the workings of rural credit markets the articles in this symposium issue are devoted to empirical and theoretical investigations of rural credit markets in the framework of the imperfect information paradigm the authors show how this framework is useful not only in explaining puzzling features of these markets but also in providing a policy perspective to assess the successes and failures of specific interventions

new venture teams assessment of learning assistance from venture capital firms abstract prior research examining whether venture capital firms vcs add value to the ventures in their portfolios by advising their new venture teams nvts has led to inconclusive results whereas most prior studies have assumed that nvts value vc assistance this study tests for the possibility that they differentially value two different types of vc assistance business management and operational we collected data by surveying 837 firms identified in the venture capital journal that had received financing from venture capital firms only firms that received first round financing were included in our analysis which reduced our sample size to 205 firms our central finding is that systematic differences exist among nvts in their evaluation of learning assistance from vcs even though vcs can chose their own level of involvement with an nvt successfully improving venture performance through nonfinancial assistance at least partially depends upon the extent to which the nvt values vc input our results indicate that nvts with more industry experience and longer team tenure in the current venture are negatively related to both business management advice and operational assistance offered by their vcs however when an nvt has previously worked together and when its primary experience is from another industry it tends to welcome business management advice from its vc one interpretation of this finding is that an advanced level of operational specialization already exists in such a team which reinforces established operating patterns changing established operating patterns could make it more costly to adopt vc input on operational issues however business management advice may be more welcome because the nvt is still learning how to compete in a new industry these findings add to the growing literature that suggests that vcs play a particularly important role in entrepreneurial ventures when they pursue the development of new technologies ehrlich et al 1994 sapienza 1992 however business management advice is not highly valued by nvts that pursue more technical innovations these findings in combination with those of sapienza and amason 1993 suggest that conflict in the vc nvt relationship may be the greatest when the parties attempt to resolve critical differences which ironically appear to be the ones where the nvt could derive the greatest benefit from listening to its vc finally current firm performance is not related to the nvt s evaluation of vc assistance although cross sectional measures of performance have obvious limitations particularly with new ventures these results indicate that the nvt evaluation of vc assistance is not driven by short term performance past research has shown that vcs vary widely in their preferred level of involvement with the managers of firms in their portfolio some vcs prefer a laissez faire approach whereas others think that they must be more involved if they are to ultimately receive high rewards the central finding from this study is that significant differences exist among nvts in their evaluation of business management and operational assistance for vcs that are more involved these findings suggest that the optimal level of involvement is also partially contingent upon the nvts openness to learning ignoring the contingent nature of the vc nvt relationship vcs could reduce their influence as a tool to improve firm performance and to ensure the ultimate survival of the venture

limited liability and incentive contracting with ex ante action choices abstract this article examines a principal agent model of financial contracting in which a risk neutral entrepreneur agent makes an unobservable ex ante effort choice while employing the investment funds of a risk neutral investor principal the key innovation is that the investment contract is subject to statutory liability limits given these liability limits two settings are considered one in which the investor payoff function is also constrained to be monotonically nondecreasing in firm profit and another in which no such monotonic contract constraint is imposed in the former case a standard debt contract is shown to emerge and a first best effort choice is not achieved in the latter setting the optimum is characterized by a live or die payoff function and a first best effort level may or may not be realized

peer pressure and partnerships partnerships and profit sharing are often claimed to motivate workers by giving them a share of the pie but in organizations of any significant size the free rider effects would seem to choke off

international comparisons of welfare and poverty dominance orderings for ten countries inference based stochastic dominance procedures are applied to luxembourg income study data to rank ten western countries in terms of standards of living and poverty first order dominance comparisons ranks more than 50 percent of all pairwise comparisons and second order generalized lorenz dominance adds another 25 percent truncated dominance analysis is used to make inferences about poverty and up to 98 percent of the truncated distributions are ordered the results differ substantially from those obtained when only relative incomes and inequality are considered

when different market concentration indices agree abstract the herfindahl hirschman entropy and n firm indices may not agree when comparing market concentrations for different oligopoly markets the majorization pre ordering is shown to be both necessary and sufficient for all to agree

the impossibility of a progressive tax structure abstract when households are identical in all respects other than income a non decreasing average tax rate is both necessary and sufficient for post tax incomes to be always at least as equal as pre tax incomes this paper investigates whether this well known result can be extended to households with different needs a tax structure which never increases inequality in the lorenz sense is shown to be unable to discriminate between household types if in addition the tax structure never reduces the relative income of the poorest member of the neediest group of households then the same proportional tax must be applied to all households and redistribution is impossible either within or between groups of households with differing needs a similar conclusion is reached using conventional equivalence scale arguments and also applies when the parameters of the tax schedules are determined endogenously we discuss the significance of this impossibility result and its implications for tax design

rank dominance and international comparisons of income distributions abstract the rank dominance criterion for comparing income distributions assumes the pareto principle anonymity and population size invariance this paper applies rank dominance to compare international income distributions empirically rank dominance is a powerful tool for ordering income distributions our results suggest that much of the power of generalized lorenz dominance is due to efficiency preference and equity preference adds only marginally to the ability to order income distributions

is grameen lending efficient repayment incentives and insurance in village economies many believe that a key innovation by the grameen bank is to encourage borrowers to help each other in hard times to analyse this we study a mechanism design problem where borrowers share information about each other but their limited side contracting ability prevents them from writing complete insurance contracts we derive a lending mechanism which efficiently induces mutual insurance it is necessary for borrowers to submit reports about each other to achieve efficiency such cross reporting increases the bargaining power of unsuccessful borrowers and is robust to collusion against the bank copyright 2004 wiley blackwell

limited attention and the role of the venture capitalist abstract this research analyzes the venture capitalist s incentives to maximize the profits of the entrepreneurs of ventures and the limited partners of a venture fund venture capital is a professionally managed pool of capital invested in equity linked private ventures entrepreneurs turn to venture capitalists for financing because high technology startup firms have low or negative cash flows which prevent them from borrowing or issuing equity in addition venture capitalists are actively involved in management of the venture to assure its success this solves the problem of startup firms that do not have the cash flows to hire management consultants venture capital contracts have three main characteristics 1 staging the commitment of capital and preserving the option to abandon 2 using compensation systems directly linked to value creation and 3 preserving ways to force management to distribute investment proceeds these characteristics address three fundamental problems 1 sorting the venture capital among the entrepreneurial ventures 2 providing incentives to motivate venture capitalists to maximize the value of the funded ventures and 3 providing incentives to motivate entrepreneurs to maximize the value of the ventures venture capitalists fund only about a dozen projects a year out of a thousand evaluated each project may receive several rounds of financing payoffs to vcs can be very high or be a complete loss the typical venture capital vc firm is organized as a limited partnership with the venture capitalists serving as general partners and the investors as limited partners general partner vcs act as agents for the limited partners in investing their funds vcs invest their human capital by placing their reputation on the line the goal is to begin to convert the investment into cash or marketable securities which are distributed to the partners vc management companies receive a management fee equal to a percentage usually 2 5 of the capital of each fund they also receive a percentage 15 30 of the profits of each fund called carried interest periodic reports are made by the vc firm to the limited partners usually these are only costs of managing the fund and so revenues are negative most contracts specify the percentage of time that the vc will devote to managing the fund the analysis of this research deals with the incentives of the vc who has limited attention to be allocated between improving current ventures and evaluating new ventures for possible funding the analysis shows that the vc as agent for both the entrepreneur and the general partners does not have the incentives required to maximize their profits the vc allocates attention among ventures and venture funds less frequently than required to maximize the entrepreneurs and limited partners profits however the vc does maximize the total profits of all ventures because the vc considers the opportunity cost of attention the vc s allocation of attention is efficient the implication of this result is that although the entrepreneurs and limited partners could be made better off with a different allocation of the vc s time this would be an inefficient use of the vc s time

a stochastic dominance approach to the measurement of discrimination abstract this note suggests a bridge between stochastic dominance rothschild and stiglitz 1970 17 1973 18 inequality measurement atkinson 1970 1 and discrimination measurement gastwirth 1975 10 discrimination orderings are defined and illustrated through discrimination curves in the same spirit as stochastic dominance analysis the main result which links the second order discrimination curve and the gastwirth discrimination index also generalizes the equivalence between generalized lorenz dominance and second order stochastic dominance

the impact of food stamps on us poverty in the 1980s a marginal dominance analysis the relative effectiveness of the us food stamp program in reducing the incidence and depth of poverty is compared at a number of poverty lines across time the analysis is based upon an extension of dominance methods for ordering poverty recently developed statistical inference procedures and a merged data set that permnits an unusually comprehensive measure of income the comparative effectiveness of the food stamp program in reducing headcount poverty over time is contingent on the poverty line selected however the reduction in poverty gaps is greater in 1990 than in 1982 regardless of the poverty line chosen the sensitivity of the results to the income concept equivalence scale and time period used for measuring income are also considered

joint liability versus individual liability in credit contracts abstract i offer an explanation for the coexistence of joint liability and individual liability microcredit contracts i show that both contracts maximize welfare when credit is rationed due to limited liability but for different borrowers borrowers monitor each other when liability is joint while the lender monitors individual loans joint liability offers poorer borrowers larger loans with less monitoring effort than would have to be exerted by the lender individual liability offers the wealthier among credit constrained borrowers larger loans even without monitoring the theory explains why individual loans serve the wealthier among poor borrowers and are larger and why businesses funded with individual loans grow more

the measurement of inequality and poverty a policy maker s guide to the literature abstract mathematical measures of poverty and inequality embody values that reflect the historical political social intellectual and ethical forces prevalent at the time of their formulation so that policy makers may select measures of poverty and inequality that are consistent with their values it is important to make explicit the value judgements implicit in the measures models designed to measure poverty and inequality fall into four categories absolute poverty measures absolute income measures relative poverty measures and relative inequality measures this article examines the principal models within each category and discusses the assumptions limitations and values implicit in the models

testing for marginal changes in income distributions with lorenz and concentration curves asymptotically distribution free statistical tests for comparing absolute and relative lorenz and concentration curves are provided the procedures do not require independent samples and can be used to test for marginal changes in income distributions the tests are illustrated using a large sample of tax returns that have been randomly selected for audit by the internal revenue service the tests reveal the marginal effects of systematic underreporting of income and tax liabilities on the u s income distribution copyright 1994 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

moral hazard and nonmarket institutions dysfunctional crowding out or peer monitoring the authors examine a situation in which insurance is characterized by moral hazard when market insurance is provided supplementary mutual assistance between family and friends unobservable to market insurers will occur when nonmarket insurers have no better information than market insurers the mutual assistance not only crowds out market insurance but is also harmful and therefore dysfunctional alternatively when nonmarket insurers can observe each other s effort perfectly mutual assistance is beneficial these results point to the potential importance of peer monitoring mechanisms in mitigating moral hazard copyright 1991 by american economic association

capturing preferences for inequality aversion in decision support abstract we investigate the situation where there is interest in ranking distributions of income of wealth of health of service levels across a population in which individuals are considered preferentially indistinguishable and where there is some limited information about social preferences we use a natural dominance relation generalised lorenz dominance used in welfare comparisons in economic theory in some settings there may be additional information about preferences for example if there is policy statement that one distribution is preferred to another and any dominance relation should respect such preferences however characterising this sort of conditional dominance relation specifically dominance with respect to the set of all symmetric increasing quasiconcave functions in line with given preference information turns out to be computationally challenging this challenge comes about because through the assumption of symmetry any one preference statement i prefer giving 100 to jane and 110 to john over giving 150 to jane and 90 to john implies a large number of other preference statements i prefer giving 110 to jane and 100 to john over giving 150 to jane and 90 to john i prefer giving 100 to jane and 110 to john over giving 90 to jane and 150 to john we present theoretical results that help deal with these challenges and present tractable linear programming formulations for testing whether dominance holds between any given pair of distributions we also propose an interactive decision support procedure for ranking a given set of distributions and demonstrate its performance through computational testing

ethically robust comparisons of bidimensional distributions with an ordinal attribute abstract we provide foundations for robust normative evaluation of distributions of two attributes one of which is cardinally measurable and transferable between individuals and the other is ordinal and non transferable the result that we establish takes the form of an analogue to the standard hardy littlewood polya theorem for distributions of one cardinal attribute more specifically we identify the transformations of the distributions which guarantee that social welfare increases according to utilitarian unanimity provided that the utility function is concave in the cardinal attribute and that its marginal utility with respect to the same attribute is non increasing in the ordinal attribute we establish that this unanimity ranking of the distributions is equivalent to the ordered poverty gap quasi ordering introduced by bourguignon 12 finally we show that if one distribution dominates another according to the ordered poverty gap criterion then the former can be derived from the latter by means of an appropriate and finite sequence of such transformations

can micro credit bring development abstract we examine the long run effects of micro credit on development in an occupational choice model similar to banerjee and newman jpe 1993 micro credit is modeled as a pure improvement in the credit market that opens up self employment options to some agents who otherwise could only work for wages or subsist micro credit can either raise or lower long run gdp since it can lower use of both subsistence and full scale industrial technologies it typically lowers long run inequality and poverty by making subsistence payoffs less widespread thus an equity efficiency tradeoff may be involved in the promotion of micro credit however in a worst case scenario micro credit has purely negative long run effects the key to micro credit s long run effects is found to be the graduation rate defined as the rate at which the self employed build up enough wealth to start full scale firms we distinguish between two avenues for graduation winner graduation of those who earn above average returns in self employment and saver graduation due to gradual accumulation of average returns in self employment long run development is not attainable via micro credit if winner graduation is the sole avenue for graduation in contrast if the saving rate and self employment returns of the average micro borrower are jointly high enough then micro credit can bring an economy from stagnation to full development through saver graduation thus the lasting effects of micro credit may partially depend on simultaneous facilitation of micro saving eventual graduation of the average borrower rather than indefinite retention should be the goal of micro banks if micro credit is to be a stepping stone to broad based development rather than at best an anti poverty tool

the design of direct taxation and family benefits abstract the subject of this paper is the design of the personal income tax and social security benefits that vary with the size of the family it is concerned with the analytical problems of policy design that arise from constraints on the instruments which may be used from differences in social judgements about the desirability of redistribution and from differences of view about the disincentive effects of taxation the paper considers these issues in the context of the french tax benefit system and the implications of the french system being harmonised towards certain features of the british system

ranking income distributions a large variety of policy questions involve choices between social states and a consequent ordering of the feasible alternatives when these social states are related to the levels of welfare experienced by individuals or households two central issues stand out in determining the relative desirability of different social outcomes one of these is the essentially positive exercise of achieving comparability between households with different characteristics such as composition or preferences operating in different environments for example facing different price structures the other concerns the normative judgments implicit in the evaluation of alternative allocations of resourcesthe emphasis placed on inequality between households and the extent to which greater inequality can be compensated by higher average living standards this paper focuses on the second of these issues and in doing so we abstract from the problem of household comparability by considering a population of n households identical in all respects except for their incomes the question of ordering social states then becomes one of ranking income distributions over a group of anonymous households or individuals borrowing the usual assumptions imposed on consumer preferences we may suppose that a social ordering of income distributions can be represented by a welfare function 2

unique implementation of incentive contracts with many agents in this paper we consider the problem of implementation when a principal hires many agents and is not able to monitor their actions we distinguish two cases i when actions are mutually observable among agents ii when actions are not observable at all in i there is a mechanism in which the first best arises as a unique perfect equilibrium in ii we show by two examples that typically there are multiple equilibria if the principal merely offers a set of optimal sharing rules however we prove that the principal can use these optimal sharing rules as a starting point and construct a multi stage mechanism that has a unique second best perfect bayesian equilibrium

the absence of deprivation as a measure of social well being an empirical investigation abstract the generalised lorenz criterion is widely used for making welfare comparisons within and across countries on the basis of their income distributions experimental studies have challenged this way of proceeding by showing that the principle of transfers which underlies the generalised lorenz criterion does not meet with widespread agreement among the public that theorists would have expected we propose to substitute the non deprivation quasi ordering introduced by chakravarty 1997 for the generalised lorenz criterion this criterion is less demanding than the generalised lorenz criterion as it builds on a weaker version of the principle of transfers and it is therefore more likely to be accepted by the public we use income data from the luxembourg income study for 17 countries in order to contrast the generalised lorenz and the non deprivation criteria although the non deprivation quasi ordering is less decisive than the generalised lorenz criterion it is shown that the former approximates the latter surprisingly well

microcredit and mechanism design individual microcredit loans are not necessarily simple fixed debt obligations but rather may have contingencies and procedures suggested by the theory of mechanism design further group or joint liability lending may not be the single miracle cure practitioners claim nor operate the way the logic of a single theory might suggest there are multiple theories these theories can be distinguished in data on repayment rates and the best fit theory may vary with the environment finally the debate about whether to lend to individuals or lend to groups may be misplaced under simple theories of selection the pareto superior regime which is predicted to emerge varies with exogenous environmental characteristics jel d5 d82 g2 o17

testing the significance of income distribution changes over the 1980s business cycle a cross national comparison using kernel density estimation we describe the distribution of household size adjusted real income and how it changed over the business cycle of the 1980s in the united states and the united kingdom we confirm previous studies that show income inequality increased in the two countries and the middle of the distribution was squashed down using a series of statistical tests however we find that while the mass in both tails of the distribution increased significantly in both countries over the period by far the greatest gains were in the upper tail copyright 1999 john wiley sons ltd

dollars and dreams a reduced middle class alternative explanations we decompose annual earnings into hours of work and hourly earnings and analyze male female differences in earnings inequality using canadian data our results indicate that the larger female inequality in earnings is due to a greater inequality in the

using repayment data to test across models of joint liability lending theories rationalising joint liability lending are rich in implications for repayment rates we exploit this fact to test four diverse models we show that the models repayment implications do not always coincide for example higher correlation of output and borrowers ability to act cooperatively can raise or lower repayment depending on the model data from thai borrowing groups suggest that repayment is affected negatively by the joint liability rate ceteris paribus and social ties and positively by the strength of local sanctions and correlated returns further the relative fit of the adverse selection versus informal sanctions models varies by region

does the classic microfinance model discourage entrepreneurship among the poor experimental evidence from india do the repayment requirements of the classic microfinance contract inhibit investment in high return but illiquid business opportunities among the poor using a field experiment we compare the classic contract which requires that repayment begin immediately after loan disbursement to a contract that includes a two month grace period the provision of a grace period increased short run business investment and long run profits but also default rates the results thus indicate that debt contracts that require early repayment discourage illiquid risky investment and thereby limit the potential impact of microfinance on microenterprise growth and household poverty jel a21 g32 i32 l25 l26 o15 o16

optimal partial group liability in microfinance lending abstract this paper develops a model of group borrowing that incorporates partial group liability where borrowers are penalized if their group members default but are not held responsible for the entirety of the failed loan the model illustrates a trade off of group liability lending while higher levels of group liability increase within group risk sharing if liability is too high borrowers strategically default the model predicts the existence of an optimal partial liability that maximizes transfers between group members while avoiding strategic default consistent with this prediction loan officers from a large microfinance institution in southern mexico who rarely allow one group member to repay while the other defaults achieve substantially lower default rates than loan officers for whom the practice is commonplace or for those for whom it has never occurred structural estimation using repayment data suggests that while a partial liability below full liability may reduce default rates the incidence of strategic default is rare

on the design of a credit agreement with peer monitoring this paper analyses the optimal design of collective credit agreements with joint responsibility first we demonstrate that these agreements can potentially induce peer monitoring reduce the incidence of strategic default and enhance the lender s ability to elicit debt repayments the resulting benefits in terms of extended credit should however be weighted against the higher monitoring effort that such agreements impose upon participant borrowers second we show that the relative benefits from peer monitoring are maximized when risks are positively correlated across borrowers and also when the size of the group is neither too small due to a joint responsibility cost sharing and commitment effects nor too large due to a free riding effect third we compare among different monitoring structures

on the rank generalized lorenz and overtaking criteria for evaluating stochastic income regimes this essay is concerned with the evaluation of income regimes that is a set of income classes and the stochastic process which governs the individual s position among the income classes we follow champernowne 4 theil 21 shorrocks 18 19 bartholomew 2 geweke marshall and zarkin 9 and conlisk 5 in characterizing mobility as a markov chain here states of a markov chain correspond to positions in the income classes utilizing the ergodic theorem for markov chains and propositions from the theory of decisionmaking under uncertainty we derive necessary and sufficient conditions on the income classes for one such income regime to be preferred to another in terms of the overtaking criterion specifically we show that the rank dominance condition saposnik 17 is necessary and sufficient for there to be a critical time at which overtaking occurs for each agent this time depends on the agent s von neumann morgenstern utility function which is merely required to be monotone increasing in income moreover versions of the generalized lorenz criterion shorrocks 20 provide necessary and sufficient conditions for there to be a time at which uniform overtaking occurs this time being the same for all agents provided the agents are risk averse among the applications of this model to individual choice one may consider a new college graduate deciding among employment opportunities in addition to starting salaries an applicant should consider the firms entire salary schedules as well as prospects for promotion within each firm alternatively one may consider a musician who must choose between a back section position with a leading orchestra or a more prominent position with a less highly regarded orchestra again one may be wise to consider the entire compensation schedule as well as the prospects for

compensating corporate venture managers this article reports the results of a questionnaire survey addressed to ceos of fortune 500 companies concerning incentive practices for venture managers data was also collected for venture performance history in these companies highlights of the results are most companies are not providing different incentives for venture managers than for other managers companies that do and companies that do not provide special incentives seem to agree on the types of incentives which would promote improved venture performance which include milestone bonuses equity and or options in the new venture variable bonuses based on venture roi the primary obstacle to installing such incentives is reported by firms without special incentives in place to be concern about internal equity firms with special incentives already in place have less concern with this problem a moderate problem to such firms is difficulty in defining venture objectives there is no evidence from this study that special incentives for venture managers affected the outcome in venture performance when such performance was measured by the percentage of successes and failures about 50 success rate was reported by each group the article deals with these questions are performance incentives essential certainly not from the data in this sample but this was a head count of successes and failures a study of overall economic performance might yield a different result one expensive failure can wipe out the gains from many small successes are the incentives reported effective obviously not enough to show a difference between those who use them and those who don t analysis of the incentive elements used and the earnings limits imposed suggest that the special incentives are not particularly special nor very much of an incentive further the most common incentive reported based on venture roi fails to consider the time period usually required to achieve a positive roi and the many changes of management which occur during that period what criteria should be used for designing an incentive program for venture managers recognition of the probability of management change incentives which promote early identification of need for change of direction or to abort focus on event completion milestones rather than the calendar the relationship of reward potential to risk potential including job security and actual financial risk by the venture manager achievability and simplicity are factors to be considered what kind of financial incentives might be included in incentive design depending on the life cycle stage of the venture fixed and variable bonuses options for equity or shadow equity in the venture itself actual equity in the new venture and to a lesser extent salary increases and equity or equity options in the parent are suggested how can the obstacles to installation of performance incentives for venture managers be reduced to reduce perception of internal inequity relating potential risk to potential reward and extending performance incentives to other managers is suggested the problem of defining venture objectives as an obstacle is instantly solved as an incentive issue by making ownership possibility a reality for venture management especially with financial investment required by venture management

a little at a time the use of regularly scheduled repayments in microfinance programs abstract informal lenders appear to be thriving even in regions where microfinance institutions mfis such as the grameen bank have established lending programs we suggest that an explanation for this well documented observation lies in the ubiquitous use of regularly scheduled repayments by mfis borrowers are typically required to repay their loans in tightly structured installments beginning soon after loan disbursement this little remarked aspect of the repayment schedule is usually explained as inculcating fiscal discipline among borrowers we argue that an alternative rationale for this loan repayment structure lies in the difficulty of monitoring borrowers actions the potential for moral hazard leads mfis to use innovative mechanisms such as regularly scheduled repayments which indirectly coopt the better informed informal lenders conversely this installment repayment structure allows informal lenders to survive further we show that this linkage can not only expand the volume of informal lending but may also raise the interest rate in the informal sector

nontaxable income and necessary consumption the rousseau s paradox of fiscal egalitarianism this article compares a tax method featuring flat rates and fixed allowances equal for all taxpayers surplus income tax method sitm procedure with a tax method featuring also flat rates and increasing personal allowances ipas to meet the amounts of necessary consumption required by the different living standards discretionary income tax method ditm procedure our results show that the ditm procedure generates an after tax income distribution less unequal and superior in terms of social welfare moreover the assumption for comparison purposes of identical total tax revenues leads to the corollary that the flat tax rate under the ditm is necessarily larger than the one under the sitm being thus the former taxmethod is more progressive than the latter these results imply an obvious paradox considering the commonly accepted principle that basic necessities are the same for everyone rousseau 1755 based on the results obtained in this article we have labelled this paradox as the rousseau s

aversion to health inequalities in healthcare prioritisation a multicriteria optimisation perspective abstract in this paper we discuss the prioritisation of healthcare projects where there is a concern about health inequalities but the decision maker is reluctant to make explicit quantitative value judgements and the data systems only allow the measurement of health at an aggregate level our analysis begins with a standard welfare economic model of healthcare resource allocation we show how under the assumption that the healthcare projects under consideration have a small impact on individual health the problem can be reformulated as one of finding a particular subset of the class of efficient solutions to an implied multicriteria optimisation problem algorithms for finding such solutions are readily available and we demonstrate our approach through a worked example of treatment for clinical depression

relative undernutrition in puerto rico under alternative food assistance programmes in the early 1980s puerto rico experienced a conversion from the food stamp program fsp to the nutrition assistance program nap and a severe recession to compare relative undernutrition in puerto rico in 1977 and 1984 stochastic dominance methods and statistical inference procedures are applied to nutrient distributions to separate the effect of the recession from the effect of converting food coupons to cash benefits a multiple regression model of nutrient consumption is also estimated in the dominance comparisons every improvement in nutrition status between 1977 and 1984 is statistically significant at the lowest quintile while no case of worsening undernutrition is significant at the lowest quintile the multiple regression model provides some evidence that the conversion from food coupons to cash might have reduced nutrition status in the lowest quintile but a larger proportion of food assistance was allocated to low income households under the nap than under the fsp no evidence of signi

thy neighbor s keeper the design of a credit cooperative with theory and a test economists now appreciate that resource allocation in less economically developed economies is profoundly influenced by non firm economic institutions however our theories of non firm institutions often suggest different answers to many questions including those of policy this paper illustrates a method for discriminating between alternative theories using data from german credit cooperatives from the nineteenth and early twentieth century germany we build a model of credit cooperatives designed to provide monitoring incentives and test this using nineteenth century data authors

multidimensional welfare distributions empirical application to household panel data from vietnam this article explores the empirical application of theoretical multidimensional welfare distribution analysis techniques to real household welfare distributions the article operationalizes recent conceptual developments in multidimensional distribution theory and assesses their usefulness for the measurement of multidimensional household inequality the results strongly highlight the importance of bringing nonmonetary aspects of household welfare into the forefront of inequality analysis agreement over the various approaches to the measurement of multidimensional inequality entails however nontrivial decisions that may limit the practical usefulness of these measures we suggest that the use of multidimensional inequality ranges and the application of restrictive dominance criteria to multidimensional welfare distributions may open significant scope for further developments in the empirical analysis of multidimensional inequality

imperfect information screening and the costs of informal lending a study of a rural credit market in pakistan many governments have perceived the rural moneylender as usurious this article takes a first step toward directly testing the validity of this view in a study of services costs and charges of fourteen informal market moneylenders and their clients in chambar pakistan the article examines whether the high implicit interest rates charged reflect the actual costs of operating in that market estimates of the resource costs incurred by informal lenders for screening pursuing delinquent loans overhead and cost of capital including unrecoverable loans suggest that lenders charges are equal to their average cost of lending but exceed their marginal cost this finding is consistent with the view that the informal credit market is characterized by excess capacity and monopolistic competition in the presence of imperfect information

lorenz dominance and welfare changes in the u s distribution of income 1967 1986 this paper examines income inequality in the untied states over the period 1967 86 using recently developed tests for differences in lorenz curves the authors are able to rank eighteen of nineteen annual comparisons in contrast standard techniques are able to rank only twelve these results suggest that the lorenz dominance principle is more empirically relevant than previously thought the tests reveal a sharp rise in u s inequality between 1978 and 1982 as well as a shift toward greater inequality over the entire period the authors also examine changes in economic welfare using the joint mean lorenz dominance principle copyright 1991 by mit press

statistical inference for the measurement of the incidence of taxes and transfers we establish the asymptotic sampling distribution of general functions of quantile based estimators computed from samples that are not necessarily independent the results provide the statistical framework within which to assess the progressivity of taxes and benefits their horizontal inequity and the change in the inequality of income which they cause by the same token these findings characterise the sampling distribution of a number of popular indices of progressivity horizontal inequity and redistribution they can also be used to assess welfare and inequality changes using panel data and to assess poverty when it depends on estimated population quantiles we illustrate these results using micro data on the incidence of taxes and benefits in canada

sharing the cost of a public good an incentive constrained axiomatic approach we study the problem of provision and cost sharing of a public good in large economies where exclusion complete or partial is possible we search for incentive constrained efficient allocation rules that display fairness properties population monotonicity says that an increase in population should not be detrimental to anyone demand monotonicity states that an increase in the demand for the public good in the sense of a first order stochastic dominance shift in the distribution of preferences should not be detrimental to any agent whose preferences remain unchanged under suitable domain restrictions we give an explicit characterization of all incentive constrained efficient allocation rules we then show that there exists a unique incentive constrained efficient and demand monotonic allocation rule the so called serial rule in the binary public good case the serial rule is also the only incentive constrained efficient and population monotonic rule

calculation and decomposition of income inequality in low and middle income countries a survey data analysis this article estimates income inequality in a sample of four low and middle income lmi countries namely albania nepal tajikistan and tanzania using the household survey data nepal living st

the measurement and trend of housing inequality in the united states 1978 85 inequality in housing services for renters owners and all households in the united states is estimated for 1978 and 1985 hedonic techniques are applied to data from the american housing survey to derive values for housing services that include publicly provided as well as subsidized housing we find significant disparities in housing but substantially less inequality than in incomes in 1978 the top decile garnered 19 2 of housing services while the bottom decile received only 5 1 the trend however is towards greater equality in housing with large and statistically significant shifts across all deciles by 1985 the share of the top decile dropped to 16 3 a percentage decrease in share of 15 3 while that of the bottom decile rose to 5 7 a percentage increase of 11 4

recent advances in lending to the poor with asymmetric information abstract microfinance institutions have successfully extended unsecured small loans to poor and opaque borrowers at the bottom of the economic pyramid this success is largely due to innovative financial contracts that impose joint liability and create dynamic incentives to mitigate the effects of asymmetric information given recent advances in microfinance contracts there is a need to map the theoretical developments this article aims to accomplish that by performing a critical literature survey of microlending contracts focussing on joint liability and dynamic incentives bringing out some of the deficiencies of contract theoretic propositions that cannot effectively account for the social mission of microfinance

optimal collective contract without peer information or peer monitoring if entrepreneurs have private information about factors influencing the outcome of an investment individual lending is inefficient the literature typically offers solutions based on the assumption of full peer information to solve adverse selection problems and peer monitoring to solve moral hazard problems in contrast i show that it is possible to construct a simple budget balanced mechanism that implements the efficient outcome even if each borrower knows only own type and effort and has neither privileged knowledge about others nor monitoring ability the mechanism satisfies participation incentives for all types and is immune to the rothschild stiglitz cream skimming problem despite using transfers from better types to worse types the presence of some local information implies that the mechanism cannot be successfully used by formal lenders thus a local credit institution can emerge as an optimal response to the informational environment even without peer information or monitoring finally i investigate the role of monitoring in this setting and show how costly monitoring can increase the scope of the mechanism

peer monitoring and credit markets a major problem for institutional lenders is ensuring that borrowers exercise prudence in the use of the funds so that the likelihood of repayment is enhanced one partial solution is peer monitoring having neighbors who are in a good position to monitor the borrower be required to pay a penalty if the borrower goes bankrupt peer monitoring is largely responsible for the successful financial performance of the grameen bank of bangladesh and of similar group lending programs elsewhere but peer monitoring has a cost it transfers risk from the bank which is in a better position to bear risk to the cosigner in a simple model of peer monitoring in a competitive credit market this article demonstrates that the transfer of risk leads to an improvement in borrowers welfare

nutrition and nonparticipation in the us food stamp programme microdata from the national food consumption survey are used to test for differences in caloric and protein intake distributions we compare poor households that participate in the us food stamp programme to eligible households that do not participate tests for stochastic dominance provide unambiguous evidence that eligible nonparticipants suffer from relative undernutrition compared to participating households probit analysis is used to identify characteristics of participating and nonparticipating households

sharecropping and the interlinking of agrarian markets one of the often noted features of less developed agrarian economies is the existence of interlinkages among the land labor credit and product markets the landlord is often the supplier of credit he frequently purchases and markets the output of the tenant farmers and often sells raw materials and even consumption goods to his tenant farmers how can this phenomenon be explained what are the welfare consequences of attempts to restrict these practices which often seem to constitute restraints on free trade these are the questions to which this paper is addressed a general set of arguments applicable to both competitive and noncompetitive environments are presented to situations where all the terms of the contract are determined in an optimal way as well as to situations where many of the terms are specified institutionally section i examines interlinked credit and tenancy contracts section ii examines interlinked marketing and tenancy contracts section iii points out the possible interlinking between labor contracts and consumption goods markets and section iv presents the different equilibrium frameworks discussed in the paper such as monopoly monopsony competition and equilibria with surplus labor

risk bearing and the theory of income distribution this paper develops the stochastic theory of distribution with a dynamic model which focuses on the role of incomplete insurance in generating inequality unlike previous work our approach takes explicit account of the reason for market incompleteness in modeling agents behaviour in particular the amount of risk borne is endogenous using a model of growth with altruism in which agents are risk averse and there is moral hazard we show that lineage wealth follows a markov process which converges globally to an ergodic distribution this also represents the long run population distribution of wealth we discuss the role of particular assumptions such as availability of production loans and unboundedness of utility in yielding the qualitative properties of the distribution of wealth the choice of occupation and the prevention of poverty traps

service for equity arrangements untangling motives and conflicts abstract many professional service organizations have adopted a little understood contractual form service for equity based on in depth case studies of 12 major professional service providers with a combined experience of 179 equity for service deals this paper documents 18 intended and unintended consequences emanating from and expanding beyond agency theory of adopting such a contractual form six propositions are developed which speculate how these consequences categorized under client development service operations financial management and organizational behaviour affect long run performance assuming these propositions cannot be rejected through empirical analysis the paper also provides managerial guidance for effective implementation of equity for service arrangements

group lending local information and peer selection this paper analyzes how group lending programs use joint liability to utilize local information that borrowers have about each other s projects through self selection of group members in the group formation stage these schemes are shown to lead to positive assortative matching in group formation faced with the same contract this makes the effective cost of borrowing lower to safer borrowers because they have safer partners conditional on success their expected dues to the lender are lower than that of riskier borrowers the resulting improvement in the pool of borrowers is shown to increase repayment rates and welfare q 1999 elsevier science b v all rights reserved

salesforce compensation theory and managerial implications this paper discusses recent advances in the study of salesforce motivation and compensation special emphasis is given to quantitative approaches from the economics finance and marketing literatures the paper summarizes the findings in this analytical work in the context of some examples of compensation practice in order to illustrate the usefulness of the paradigm for the evaluation and setting of compensation systems we consider some major issues in setting compensation such as the firm s own objective the salesperson s objective and the nature of the sales response function variations in these factors imply significant variation in optimal compensation policy where optimal takes into account the components in the plan the parameter levels of the components and whether or not a menu of such plans should be made available to the salesforce by highlighting the results in the literature in light of some relevant compensation examples we show the applicability of theory to the practical concerns of salesforce management we close with a summary of these insights and directions for future research in the area

income distribution in the dynamic two factor trade model the issue of the effects of trade on personal income distribution has remained largely unexamined this paper describes an overlapping generations 2 x 2 model with a bequest motive and heterogeneous agents in order to examine the problem in this dynamic setting trade leads to both short run and long run reductions increases in inequality in labor capital abundant countries if the investment good is capital intensive if the consumption good is capital intensive the short run effects continue to hold but the long run effects are ambiguous copyright 1992 by the london school of economics and political science

household inequality social welfare and trade abstract working with sen social welfare functions meaning explicit separability between mean income and income dispersion we develop a generalized dual approach to tracking household inequality aspects of social welfare in general equilibrium we highlight how household equity can be examined analytically alongside production efficiency in duality based models using our dual framework to explore potential trade offs between efficiency and equity effects of trade policy our results complement the set of standard inequality results in trade theory focused on functional rather than household inequality we also find that the relative distributional impact of tariffs on welfare is conditional on the initial level of inequality

marginal conditional stochastic dominance this paper introduces the concept of marginal conditional stochastic dominance mcsd which states the conditions under which all risk averse individuals when presented with a given portfolio prefer to increase the share of one risky asset over that of another mcsd rules also answer the question of whether all risk averse individuals include a new asset in their portfolio when assets returns are correlated mcsd criteria are expressed in terms of the probability distributions of the assets and of the underlying portfolio an empirical application of mcsd is provided using stocks traded on the new york stock exchange mcsd rules are used to show that in the long run one cannot assert that the market portfolio is inefficient

venture capitalist certification in initial public offerings this paper provides support for the certification role of venture capitalists in initial public offerings consistent with the certification hypothesis a comparison of venture capital backed ipos with a control sample of nonventure capital backed ipos from 1983 through 1987 matched as closely as possible by industry and offering size indicates that venture capital backing results in significantly lower initial returns and gross spreads in effect the presence of venture capitalists in the issuing firms serves to lower the total costs of going public and to maximize the net proceeds to the offering firm in addition we document that venture capitalists retain a significant portion of their holdings in the firm after the ipo the ability of third party specialists to certify the value of securities issued by relatively unknown firms in capital markets that are characterized by asymmetric information between corporate insiders and public investors has attracted much academic interest in recent years several authors including james 1990 blackwell marr and spivey 1990 and barry muscarella peavy and vetsuypens 1991 have developed and tested models based at least in part on the formal certification hypothesis presented in booth and smith 1986 a related body of work represented by deangelo 1981 beatty and ritter 1986 titman and trueman 1986 johnson and miller 1988 carter 1990 simon 1990 and carter and manaster 1990 has examined how investment bankers and auditors help resolve the asymmetric information inherent in the initial public offering ipo process in this paper we examine whether the presence of venture capitalists as investors in a firm going public can certify that the offering price of the issue reflects all available and relevant inside information we hypothesize that venture capitalists can perform this function that it will be an economically

coalitions incentives and risk sharing abstract this paper analyzes the effects of coalitional behavior in principal multiagent relationships with moral hazard and identifies cases where the principal prefers agents to form a coalition via side contracting it is shown that the principal can implement given efforts via non individualistic incentive contracts at a lower cost when the agents can monitor each other s efforts perfectly and hence coordinate their effort choice than when the agents behave independently permitting the principal to utilize more complex communication mechanisms does not alter the result for there is no coalition proof revelation mechanism improving the principal s welfare journal of economic literature classification number d82

interactions between institutional and informal credit agencies in rural india in an attempt to expand rural credit and displace the village moneylender india created a system of rural cooperatives in the 1950s and expanded branch banking into rural areas in the 1970s this article examines how these measures affected the rural market it begins with the question of how large the expansion of institutional credit has been and the extent to which it has dislodged the village and nonresident moneylenders a detailed comparison of three major surveys of the indian rural credit market suggests that in various guises the moneylender is still a major source of loans the article also examines the weak evidence on intermediation between the formal and informal sectors a formal model of the interaction between the informal moneylender and institutional lender is constructed under a variety of assumptions about the exclusivity of loan contracts and the competitive structure of the informal sector the conclusions are drawn together in the form of five proposals for public policy

some classes of functions that preserve the inequality and welfare orderings of income distributions abstract we identify in the paper those classes of functions that preserve the ranking of distributions according to three welfare criteria introduced recently by a f shorrocks economica 50 1983 3 17 we prove that a necessary and sufficient condition for a function to preserve the generalized lorenz ordering of distributions is that it be increasing and concave requiring welfare improvements to be compatible with more equality we obtain linear resp affine functions when emphasis is placed on relative resp absolute income differentials

group versus individual liability short and long term evidence from philippine microcredit lending groups abstract group liability in microcredit purports to improve repayment rates through peer screening monitoring and enforcement however it may create excessive pressure and discourage reliable clients from borrowing two randomized trials tested the overall effect as well as specific mechanisms the first removed group liability from pre existing groups and the second randomly assigned villages to either group or individual liability loans in both groups still held weekly meetings we find no increase in short run or long run default and larger groups after three years in pre existing areas and no change in default but fewer groups created after two years in the expansion areas