financial markets and growth the last five years have witnessed a resurgence of interest in the relationship between financial intermediation and economic growth this issue had been extensively studied nearly two decades earlier by goldsmith 1969 mckinnon 1973 shaw 1973 and others who produced considerable evidence that financial development correlates with growth but their work though insightful lacked analytical foundations in traditional growth theory financial intermediation could be related to the level of the capital stock per worker or to the level of productivity but not to their respective growth rates the latter were ascribed to exogenous technical progress the recent revival of interest in the link between financial development and growth stems mainly from the insights and techniques of endogenous growth models which have shown that there can be self sustaining growth without exogenous technical progress and that the growth rate can be related to preferences technology income distribution and institutional arrangements this provides the theoretical underpinning that early contributors lacked tinancial intermediation can be shown to have not only level effects but also growth effects the resulting models have offered important insights into the effect of financial development on growth and vice versa they have also provided new impetus to empirical research on these issues this paper reviews the ground covered so far on the theoretical and empirical front and points to some still unresolved issues

a perspective on the symptoms and causes of the financial crisis abstract prior to the 2007 2008 financial crisis banking sector profits were very high but the profitability of financial intermediation was poor using a novel model of banking this article argues that the high profits were achieved through balance sheet expansion and growing default liquidity and term risk mismatches between assets and liabilities as a result large banks financial leverage rose as they became less liquid setting the conditions for a systemic banking crisis this article argues that the increase in financial leverage was possible due to misguided changes in the regulatory framework specifically the basel i capital accord and reductions in reserve requirements finally this article overviews and assesses the policy response in the aftermath of the crisis

macroprudential regulation versus mopping up after the crash this paper compares ex ante policy measures such as macroprudential restrictions on leverage and ex post policy interventions such as bailouts to respond to systemic risk i e to the danger that an economy may experience nancial feedback loops in which falling asset prices declining net worth and tightening nancial constraints reinforce each other ex post policy measures are better targeted since they are taken only once a crisis has materialized but they aggravate the over investment problem ex ante and introduce a time consistency problem ex ante policy measures are more blunt but they can both mitigate the pecuniary externalities that arise during crises and resolve the time consistency problem in ex post policies we nd that except in limit cases it is optimal to respond to systemic risk by using a mix of both ex ante measures and ex post interventions and characterize the optimal policy mix furthermore limiting bailouts to the revenue accumulated in a bailout fund reduces welfare

nonmonetary effects of the financial crisis in propagation of the great depression this paper examines the effects of the financial crisis of the 1930s onthe path of aggregate output during that period our approach is complementary to that of friedman and schwartz who emphasized the monetary impact of the bank failures we focus on non monetary primarily credit related aspects of the financial sector output link and consider the problems of debtors as well as those of the banking system we argue that the financial disruptions of 1930 33 reduced the efficiency of the credit allocation process and that the resulting higher cost and reduced availability of credit acted to depress aggregate demand evidence suggests that effects of this type can help explain the unusual length and depth of the great depression this abstract was borrowed from another version of this item

interest rate deregulation monetary policy efficacy and rate rigidity abstract this paper examines the effects of interest rate regulation and subsequent deregulation on the efficacy of monetary policy and rigidity of retail bank deposit rates in hong kong using an error correction model we find that interest rate deregulation increases the efficacy of monetary policy by improving the correlation between retail bank deposit rates and market interest rates and increasing the degree of long term pass through for retail bank deposit rates our study also shows that the adjustments in retail bank deposit rates are asymmetric and rigid upwards during the regulated period but tend to be rigid downwards during the deregulated period the spreads between retail bank deposit rates and market rates have also tightened sharply after the removal of interest rate controls

financial crises unconventional monetary policy exit strategies and agents expectations a central bank may purchase assets during a financial crisis and then exit from those purchases agents have rational expectations about financial crises as rare events the probability the central bank purchases assets and the exit strategy selling off assets quickly produces a double dip recession while slowly unwinding generates a smooth recovery expectations about the exit strategy influence the initial effectiveness of purchases increasing the probability of purchases during crises distorts the pre crisis economy and depends upon the exit strategy the welfare benefits of unconventional policy may differ ex ante versus ex post as can the preferred exit strategy

speculation and hedging in segmented markets we analyze a model in which traders have different trading opportunities and learn information from prices the difference in trading opportunities implies that different traders may have different trading motives when trading in the same market some trade for speculation and others for hedging and thus they may respond to the same information in opposite directions this implies that adding more informed traders may reduce price informativeness and therefore provides a source for learning complementarities leading to multiple equilibria and price jumps our model is relevant to various realistic settings and helps to understand a variety of modern financial markets

towards a sustainably certifiable futures contract for biofuels abstract how are biofuels to be certified as produced in a sustainable and responsible fashion in the global debate over this issue one party to the proceedings seems rarely to be mentioned namely the commodities exchanges through which a global biofuels market is being created in this contribution i propose a solution to the problem of sustainability certification through a biofuels futures contract equipped with proof of origin documentation the proposal does not call for any radical break with current practice extending existing certification procedures with a requirement for the vendor to provide documentation probably in barcoded form of the history of the biofuel offered for sale including plantation and biorefinery where the biofuel was produced and subsequent blendings it may have undergone the proposal is thus compatible with the blending practices of large global traders whose activities are the source of the difficulties of other approaches to certification it is argued that if such a sustainable futures contract for bioethanol in the first instance were to be introduced then it would likely trade at a premium and become the primary vehicle for north south trade in biofuels

inflation financial markets and long run real activity abstract empirical evidence suggests that real activity the volume of bank lending activity and the volume of trading in equity markets are strongly positively correlated at the same time inflation and financial market activity are strongly negatively correlated in the long run as are inflation and the real rate of return on equity inflation and real activity are also negatively correlated in the long run particularly for economies with relatively high rates of inflation we present a monetary growth model in which banks and secondary capital markets play a crucial allocative function we show that at least under certain configurations of parameters the predictions of the model are consistent with these and several other observations about inflation finance and long run real activity

default premiums in commodity markets theory and evidence we model the effect of nonperformance risk on forward and futures pricing and look for evidence of nonperformance risk in precious metals futures prices from the hunt brothers episode changes in default premiums are measured and related to the sequence of events in the metals markets during this period results suggest first that ex ante costs of nonperformance can be a significant priced factor in commodity markets and second that the arrival of new information is often associated with changes in these costs the evidence has implications for both theoretical and empirical research on commodity markets organized commodity markets offer traders an efficient medium in which to execute their hedging and speculative strategies in particular the markets have developed mechanisms that reduce the costs of nonperformance which would be substantial in the absence of an organized exchange devices such as margin requirements position limits daily marking to market price limit moves and the clearinghouse reduce the expected costs of distress and default in commodity markets while organized exchanges greatly reduce expected costs of nonperformance they do not eliminate such costs throughout the history of organized futures trading there have been many instances of markets collapsing or coming to the brink of collapse after a period of unusual trading activity the most prominent example in recent times is the near collapse of the new

market exit through divestment the effect of accounting bias on competition we analyze the effect of accounting bias on the competition and market structure of an industry in our model firms interim accounting reports on investment projects may contain bias introduced by the mandatory accounting system we find that this bias strictly decreases firms profits when investors do not have an abandonment option but different results emerge when we allow the investors to divest in the interim specifically a conservative accounting regime may increase the likelihood of projects being discontinued inducing some firms to exit from the product market and leaving rivals to capture their market share a conservative regime can thus soften market competition and result in ex ante higher investment payoff higher consumer surplus and higher total social welfare since industries often have common reporting standards we also identify the degrees of industry wide accounting bias that maximize the expected investor payoffs finally we allow for investors to coordinate their divestment

inflation and asset returns sustained inflation is detrimental to long run growth and the financial system a recent theoretical literature suggests that high inflation implies low real returns on assets these low returns exacerbate informational frictions interfering with the functioning of financial markets and the allocation of investment we investigate the plausibility of an inverse relationship between inflation and real returns inflation and nominal equity returns are negatively correlated or uncorrelated for all low to moderate inflation economies examined safe nominal rates of return and inflation are only weakly positively correlated however for high inflation economies inflation and nominal returns are strongly positively correlated

asset fire sales and credit easing in a january 2009 lecture on the financial crisis federal reserve chairman bernanke advocated a new fed policy of credit easing defined as a combination of lending to financial institutions providing liquidity directly to key credit markets and buying of long term securities we show that bernanke s analysis and recommendations can be naturally considered in a model of unstable banking which relies on two mechanisms 1 fire sales reduce asset prices below fundamental values and 2 financial institutions prefer speculation to new lending when markets are dislocated we analyze credit easing and compare it to alternative government interventions during the crisis this abstract was borrowed from another version of this item

the paradox of financial fire sales the role of arbitrage capital in determining liquidity how can fire sales for financial assets happen when the economy contains well capitalized but non specialist investors our explanation combines rational expectations equilibrium and lemons models when specialist informed market participants are liquidity constrained prices become less informative this creates an adverse selection problem decreasing the supply of high quality assets and lowering valuations by non specialist uninformed investors who become unwilling to supply capital to support the price in normal times arbitrage capital can multiply itself by making uninformed capital function as informed capital but in a crisis this stabilizing mechanism fails

the role of financial sector competition for monetary policy in this paper we examine the impact of competition in the banking industry on financial market activity in particular we explore this issue in a setting where banks simultaneously insure individuals against liquidity risk and offer loans to promote intertemporal consumption smoothing in addition spatial separation and private information generate a transactions role for money interestingly we demonstrate that the industrial organization of the financial system bears significant implications for the effects of monetary policy under perfect competition higher rates of money growth lead to lower interest rates and a higher volume of lending activity in contrast in a monopoly banking sector money growth restricts the availability of funds and raises the cost of borrowing

risk premium and market power in credit markets abstract the use of credit risk adjusted marginal opportunity cost of funds in the computation of the lerner index for bank loans opens new directions to properly evaluate market power of banks in credit markets beyond disputed concentration measures

bank commercial loan markets and the role of market structure evidence from surveys of commercial lending abstract this paper seeks to test two tenets that underlie the current practice of antitrust analysis in banking the first is the view that bank commercial loan markets are local in nature and the second is the view that banks in more concentrated markets are more likely to engage in some form of noncompetitive behavior tests of both of these tenets are conducted using an extensive set of loan specific survey information not previously employed to address these issues results consistent with the existence of local banking markets and the dominance of competitive differences as an explanation for observed differences in loan rates are found

market structure and the nature of price rigidity evidence from the market for consumer deposits panel data on consumer bank deposit interest rates reveal asymmetric impacts of market concentration on the dynamic adjustment of prices to shocks banks in concentrated markets are slower to raise interest rates on deposits in response to rising market interest rates but are faster to reduce them in response to declining market interest rates thus banks with market power skim off surplus on movements in both directions since deposit interest rates are inversely related to the price charged by banks for deposits the results suggest that downward price rigidity and upward price flexibility are a consequence of market concentration

risk futures pricing and the organization of production in commodity markets this paper examines equilibrium in a spot and futures market with both primary producers growers and intermediate producers processors for a commodity that is subject to output shocks processors tend to hedge long in contrast with hick s theory of futures hedging nevertheless if transaction costs are low the two stage production process brings about a downward futures price bias consistent with hick s pricing prediction but if costs of trading futures are high growers tend to be differentially driven from the futures market reversing the direction of the bias futures trading may also affect the organization of industry when demand is inelastic futures trading can serve as a substitute for vertical integration as a means of diversifying risk because the risk positions of growers are complementary with those of processors

the determination of spot and futures prices with storable commodities this paper analyzes the effects of futures trading in a market for a storable commodity in which producers and speculators are assumed to be risk averse and specifications of the aggregate supply and inventory demand functions are derived from explicit optimization a critical aspect is how the parameters of these functions change with the introduction of the future market as it is through these induced parameter changes that the futures market exerts its influence on the spot price the effects of the futures market on both the long run average spot price and its variance are analyzed while we are unable to draw any definitive conclusions on this issue we find that in all cases considered the futures market stabilizes the spot price as well as lowering its long run mean for many years now the question of the effects of futures trading on the stability of spot prices has been extensively debated this topic has been discussed at various levels for example farmers and agricultural interest groups have claimed that futures trading destabilizes spot prices thereby imposing welfare losses on the economy in the united states congress has decided that futures trading can cause price destabilization and has subjected futures trading to the regulation of the commodity futures trading commission at a more analytical level economists have been investigating the issue both empirically and more recently theoretically as well

what s different about banks abstract negotiable certificates of deposit cd s trade in the capital market in competition with other securities like commercial paper and bankers acceptances if cd s must pay lenders competitive monetary interest the reserve tax on cd s is borne by bank borrowers viability of the tax means there must be something special about bank loans that makes some borrowers willing to pay higher interest rates than those on other securities of equivalent risk moreover there must be something special about banks that prevents other intermediaries from competing to assure that it never pays to finance loans with cd s

an asymmetry generator for error coorection mechanisms with application to bank mortgage rate dynamics empirical evidence supports asymmetries in the adjustment of prices interest rates and other economic variables the asymmetry hypothesis however is often procedurally difficult to set up and test this article shows that a wide variety of such mechanisms can be nested within an asymmetry generator which represents the interactions between the disequilibrium term of an error correction mechanism and an ancillary driver process the asymmetry hypothesis can then be tested in a straightforward extension of linear statistical methods the methods are applied to 10 years of monthly new zealand mortgage rate data

monetary transmission and bank competition in the emu the introduction of the euro has led to renewed attention for monetary transmission in the european union this special issue of the journal of banking and finance includes papers that contribute to the development of both the theory and empirical applications of the monetary transmission channel that assumes various types of imperfections the issue includes papers that can best be described by the credit view and studies on concentration and competition in the european banking industry this introduction positions the papers in this active field of research c 2002 elsevier science b v all rights reserved

retail gasoline price dynamics and local market power using monthly data from the 48 contiguous states except nevada for the 1988 2002 period it is shown that retail gasoline prices respond faster to wholesale price increases than to equivalent wholesale price decreases moreover markets with high average retail wholesale margins experience a slower adjustment and a more asymmetric response since gasoline is the only variable input average margins in a state likely reflect the degree of retail market power this suggests that sticky prices and response asymmetries in the gasoline market are at least partially a consequence of retail market power

deposit spreads and the welfare cost of inflation abstract high nominal interest rates are associated with high deposit spreads which is consistent with a model where banks have monopoly power and currency and deposits are substitutes therefore higher interest rates raise the implicit price of banking services increase bank profits and attract entry into the banking sector taking these effects into account a one percentage point increase in inflation has a welfare cost of 0 083 of gdp 6 7 times higher than traditional estimates

business cycles and monetary regimes in emerging economies a role for a monopolistic banking sector abstract this study shows that the presence of imperfect competition in the banking system propagates external shocks and amplifies the business cycle strategic limit pricing aimed at protecting retail niches from potential competitors generates countercyclical bank markups markup increments during recessions directly increase borrowing costs for firms and indirectly damage the financial position of firms balance sheets increasing the risk perception of lenders i use bayesian techniques and data from argentina to show that the inclusion of monopolistic banking improves the fit of the new keynesian small open economy model

market structure and the pass through of the federal funds rate abstract we study the effect of local market bank concentration on business loan originations and on the pass through of the federal funds rate to business loan originations economic theory on the relationship between concentration and the pass through of input prices to quantity or price is ambiguous we find that more concentrated markets have lower business loan originations and experience smaller changes in business loan originations in response to changes in the federal funds rate our results support the idea that market concentration dampens quantity reactions to input price changes

technology and hedging behavior a proof of hicks conjecture technical conditions give the entrepreneur a much freer hand about the acquisition of inputs which are largely needed to start a new process than about the completion of outputs whose process of production in the ordinary business sense may be already begun if forward markets consisted entirely of hedgers there would always be a tendency for a planned weakness on the demand side a smaller proportion of planned purchases than of planned sales would be covered by forward contracts 1946 p 137

liquidity risk and financial competition implications for asset prices and monetary policy abstract this paper studies the implications of banking competition for capital markets and monetary policy in particular i develop a two sector monetary growth model in which a group of agents is exposed to liquidity shocks and money is essential banks insure depositors against such risk and invest in the economy s assets in this setting i compare an economy with a perfectly competitive banking sector to an economy with a fully concentrated financial sector unlike previous work banks can have market power in both deposits and capital markets compared to a perfectly competitive financial sector i demonstrate that a monopolistic banking system can have substantial adverse consequences on capital formation assets prices and the degree of risk sharing furthermore multiple steady states can emerge and the economy becomes subject to poverty traps more importantly market power in financial markets may overturn the tobin effect present under a perfectly competitive financial sector this necessarily happens in economies with high degrees of liquidity risk and low levels of capital formation

the hedging of an uncertain future foreign currency cash flow this paper derives the optimal hedge of an uncertain unknown quantity future foreign currency cash flow this more general optimal hedge includes the traditional hedge for a certain known quantity future foreign currency cash flow as a special case the optimal hedge is found to be unbounded and determined by firm specific conditions including the variance of the expected cash flow and the correlation of that future cash flow with actual exchange rate movements simulated optimal hedge values are found for u s based multinational firms possessing s dm cash flows using exchange rate data for the 1981 1987 period special cases in which the optimal hedge ratio equals zero and one also are identified and we show that cash flow uncertainty can strongly affect the effectiveness of hedging

optimal managerial contracts and equilibrium security prices recent developments in economic theory have focused attention on efficient methods for providing incentives within a corporation especially to top management jensen meckling 12 have examined some implications of incentive or agency problems for corporate finance in this paper we combine a simple model of security market equilibrium with that of an optimal managerial incentive contract using results of harris raviv 8 and holmstrom 9 we provide a rationale for including security prices in the managerial incentive contracts of publicly held firms in this model we also show that non systematic diversifiable risks will be considered in the capital budgeting decisions of a managerial firm operated in the interests of its stockholders this is in contrast to the implication of the arbitrage pricing theory a similar result follows from the capital asset pricing model which abstracts from incentive problems and suggests that only systematic risks ought to be considered the optimal contract model of the corporation takes the following view of the firm since decision makers within a firm are not sole owners of the business but employed agents the decisions which they make depend on the incentives which the organization provides these incentives are embodied explicitly in employment contracts and implicitly through the threat of dismissal or effect on reputation the contract whether explicit or not describes the decision maker s anticipation of the consequences to him conditional on various observable outcomes these outcomes are used to provide information useful in determining whether he did his job properly in the simplest optimal contract scenario there is a single principal and a single agent whose decision concerns the level of effort he expends the level of effort affects the level of output of the firm but not unambiguously because the output is also governed by other stochastic elements as a result some information about the agent s level of effort can be inferred

a comparison of futures and forward prices abstract this paper uses the pricing models of cox ingersoll and ross 1981 richard and sundaresan 1981 and french 1982 to examine the relation between futures and forward prices for copper and silver there are significant differences between these prices the average differences are generally consistent with the predictions of the futures and forward price models however these models are not helpful in describing intra sample variations in the futures forward price differences this failure is apparently caused by measurement errors in both the price differences and in the explanatory variables

currency elasticity and banking panics theory and evidence existing models of banking panics contain no role for monetary factors and fail to explain why some banking systems experienced panics while others did not a monetary model is constructed where seasonal variations in the demand for liquidity and credit play a critical role in generating banking panics these panics occur when there are restrictions on the issue of currency in private banks but they do not occur if banks are unrestricted empirical evidence from canada and the united states for the period 1880 1910 is largely consistent with the predictions of the model

economic organization with limited communication this paper presents formal stylized representations of communication accounting systems oral assignment portable object written message and telecommunication systems are considered the environments that allow this formalization are characterized by spatial separation private information and a need to keep track of past actions transfers and shocks in environments that have spatial separation and private information beneficial multilateral arrangements can depend critically on agents ability to communicate to one another values of contemporary shocks and to keep track of histories of past transfers or past announced shocks this paper formalizes this idea and focuses on com

liquidity loanable funds and real activity abstract this paper develops a general equilibrium model of two traditional explanations of the monetary black box linking money and real activity the liquidity effect and the loanable funds effect these effects are modeled with a monetary production economy in which central bank injections of cash are funnelled into the economy through the credit market since only borrowers have direct access to the newly injected cash monetary injections cause nominal interest rates to fall if firms are borrowers then monetary injections also increase current and future real activity

deposit banks and the market for payment media this paper develops a model of bank deposit pricing with optimal consumer choices of spending shares among alternative media of exchange interpreting deposits as a tie in feature of the sale of bank payment services the paper shows that the wedge between consumer and social costs of currency use may reverse typical prescriptions regarding bank market structure and distortionary taxes on banks an explanation is offered for below cost bank service fees despite deregulated deposit interest rates while rate ceilings are shown to induce substitution into payment media with higher social costs copyright 1992 by ohio state university press

asymmetric adjustment of commercial bank interest rates evidence from malaysia and singapore abstract this paper examines the rigidity of commercial bank interest rates using evidence from singapore and malaysia an asymmetric error correction technique is used to test whether mean adjustment lags are different when retail rates are above or below their equilibrium levels it is concluded in both countries that the mean adjustment lag is shorter when the deposit rate is above its equilibrium than when it is below its equilibrium using the framework of hannan and berger 1991 this finding implies that the hypothesis of collusion cannot be rejected

crises in competitive versus monopolistic banking systems we study a monetary general equilibrium economy in which banks exist because they provide inter temporal insurance to risk averse depositors a banking crisis is defined as a case in which banks exhaust their reserve assets this may but need not be associated with liquidation of a storage asset when such liquidation does occur the result is a real resource loss to the economy and we label this a costly banking crisis there is a monetary authority whose only policy choice is the long run constant rate of growth of the money supply and thus the rate of inflation under different model specifications the banking industry is either a monopoly bank or a competitive banking industry it is shown that the probability of a banking crisis may be higher either under competition or under monopoly this is shown to depend on the rate of inflation in particular if the nominal rate of interest rate of inflation is below above some threshold a monopolistic banking system will always result in a higher lower crisis probability thus the relative crisis probabilities under the two banking systems cannot be determined independently of the conduct of monetary policy we further show that the probability of a costly banking crisis is always higher under competition than under monopoly however this apparent advantage of the monopoly banking is strictly due to the fact that it provides relatively less valuable inter temporal insurance

stimulating housing markets we study temporary fiscal stimulus designed to support distressed housing markets by inducing demand from buyers in the private market using difference in differences and regression kink research designs we find that the first time homebuyer credit increased home sales by 490 000 9 8 median home prices by 2 400 1 1 per standard deviation increase in program exposure and the transition rate into homeownership by 53 the policy response did not reverse immediately instead demand comes from several years in the future induced buyers were three years younger in 2009 than typical first time buyers the program s market stabilizing benefits likely exceeded its direct stimulus effects

search limited participation and monetary policy a model is developed that employs recent developments in the literature on search models of money to capture the distributional effects of monetary policy in a tractable way deterministic and stochastic versions of the model are studied money is not neutral and these nonneutralities persist whether or not the change in the money supply is anticipated or unanticipated at the optimum monetary policy is geared to correcting distortions in the search sector of the economy while correcting for the persistent effects of past monetary policy actions there is no consensus among macroeconomists concerning the role of monetary policy in the short run however an influential idea is that limited participation in financial markets is an important mechanism behind the short run macroeconomic effects of central bank actions that is there is a component of economic activity that is centralized and interconnected this economic activity involves financial transactions among banks and other financial intermediaries and the agents who hold the assets and liabilities of these financial intermediaries when the central bank injects outside money into the economy or withdraws it the economic agents who are immediately affected by the monetary injection or withdrawal are the participants in these centralized transactions other economic agents who are engaged in more decentralized and less interconnected transactions will not be affected directly by the first round effects of central bank actions thus there will be a distributional effect of monetary injections and withdrawals as first captured in heterogeneous agent models by grossman and weiss 1983 and rotemberg 1984 this distributional effect will matter in interesting ways for the price level nominal interest rates aggregate output foreign exchange rates and the distribution of consumption across the population the grossman weiss and rotemberg models are not analytically tractable because of the difficulty in tracking the distribution of wealth over time however lucas 1990 fuerst 1992 and alvarez and atkeson 1997 among others

money banking and capital formation we consider a monetary growth model in which banks arise to provide liquidity in addition there is a government that issues not only money but interest bearing bonds these bonds compete with capital in private portfolios when the government fixes a constant growth rate for the money stock we show that there can exist multiple nontrivial monetary steady states one of these steady states is a saddle while the other can be a sink moreover paths approaching a steady state can display damped endogenous fluctuations and development trap phenomena are common across different steady states low capital stocks are associated with high nominal interest rates the latter signal the comparative inefficiency of the financial system also increases in the steady state inflation rate can easily reduce the steady state capital stock journal of economic literatureclassification numbers e13 e44 e50 g20 o16

a simple competitive model with production and storage we study a rational expectations partial equilibrium model of a market for a single storable commodity whose output each period is a function of previous period effort on production and a realization of a shock that affects equally all producers i he final demand is non random and depends only on each period s price risk neutral producers make production and storage decisions based on forecasts of future price distributions existence of equilibrium is proved and for the case of i i d shocks several comparative statics results are established as well as the existence and stability of a unique stationary distribution and whose output at each period is a multiplicative function of previous period s planting and of the realization of a shock that affects equally all producers the final demand for this good is non random and depends only on this period s price this describes approximately markets for agricultural products which are not traded internationally and where most of the price uncertainty stems from supply shocks risk neutral producers make their decisions based on forecasts of future price distributions and of known cost functions of storage and production to maximize their discounted profits in order to close the model an assumption on how such price forecasts are made is needed we assume that agents make equilibrium forecasts i e that their forecast is common and that when producers act taking the forecasted prices as given they make decisions that yield the forecasted prices as equilibrium prices this is of course what has been sometimes called rational expectations the assumption of equilibrium expectations and the presence of risk neutral pro ducers will imply that the equilibrium variables may be obtained by considering a related market surplus maximization problem 1 this places strong restriction on the stochastic process of equilibrium prices for the case where the basic shocks are assumed to be independently and identically distributed over time one may thus show that equilibrium prices are a function of a certain state variable the total stocks kept from last period plus this period s output and this allows us to derive properties of equilibrium solutions our main results concerning this case are a storage is a non increasing function of price and expected production a non decreasing one b the elasticity of expected future prices with respect to today s prices is positive and less than one c this elasticity is non constant being zero for high enough prices d the price process follows a renewal process if prices are low

extensive margins and the demand for money at low interest rates we argue that the relevant monetary decision for the majority of u s households is not the fraction of assets to be held in interest bearing form but whether to hold any such assets at all we call this the decision to adopt the financial technology we show that the key variable governing the adoption decision is the product of the interest rate times the total amount of assets this implies that the interest elasticity of household money demand at low interest rates can be estimated from the variation in asset holdings in a cross section of households rather than historical interest rate variations we do so with the 1989 survey of consumer finances we find that a the elasticity of money demand is very small when the interest rate is small b the probability that a household holds any amount of interest bearing assets is positively related to the level of financial assets and c the cost of adopting financial technologies is negatively related to participation in a pension program at intere

forward contracts and futures contracts abstract this paper provides a detailed discussion of the similarities and differences between forward contracts and futures contracts under frictionless markets and continuous trading simple arbitrage arguments are invoked to value forward contracts to relate forward prices and spot prices and to relate forward prices and futures prices we also argue that forward prices need not equal futures prices unless default free interest rates are deterministic

a note on futures markets with small price and production risks when the spot price and production risk are jointly normally distributed the mean variance approach has little theoretical justification the authors use taylor approximations instead and show the three results one farmers hedge less than expected production when the futures price is less than or equal to the expected spot price two when the futures price equals the expected spot price farmers facing production risk produce less than those without production risk three normal backwardation contango prevails in the markets when correlation between the spot price and production risk is smaller greater in absolute value than the ratio of coefficients of variation of these variables copyright 1992 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

risk aversion and technology mix in an electricity market this article analyzes the eff ect of risk and risk aversion on the long term equilibrium technology mix in an electricity market it develops a model where fi rms can invest in baseload plants with a fi xed variable cost and peak plants with a random variable cost and demand for electricity varies over time but is perfectly predictable at equilibrium the electricity price is partly determined by the random variable cost and the returns from the two kinds of plants are negatively correlated when the variable cost of the peak technology is high the return of peak plants is low but the return to baseload plants is high risk averse fi rms reduce the capacity of the riskiest technology and develop the capacity of the other compared to risk neutral fi rms in the particular case where a risk neutral fi rm invests heavily in baseload technology and only sparely in peak capacity a risk averse fi rm would invest less in baseload increase peak capacity and increase total installed capacity

bank asset quality monetary policy pass through the funding mix of european firms is weighted heavily towards bank credit which underscores the importance of efficient pass through of monetary policy actions to lending rates faced by firms euro area pass through has shifted from being relatively homogenous to being fragmented and incomplete since the financial crisis distressed loan books are a crisis hangover with direct implications for profitability hampering banks ability to supply credit and lower loan pricing in response to reductions in the policy rate this paper presents a parsimonious model to decompose the cost of lending and highlight the role of asset quality in diminishing pass through using bank level data over the period 2008 2014 we empirically test the implications of the model we show that a one percentage point increase in the impairment ratio lowering short run pass through by 3 we find that banks with severely impaired balance sheets do not adjust their loan pricing in response to changes in the policy rate at all

bank competition and access to finance international evidence using a unique database for 74 countries and for firms of small medium and large size we assess the effect of banking market structure on the access of firms to bank finance we find that bank concentration increases obstacles to obtaining finance but only in countries with low levels of economic and institutional development a larger share of foreign owned banks and an efficient credit registry dampen the effect of concentration on financing obstacles while the effect is exacerbated by more restrictions on banks activities more government interference in the banking sector and a larger share of government owned banks

the deposits channel of monetary policy we propose and test a new channel for the transmission of monetary policy we show that when the fed funds rate increases banks widen the interest spreads they charge on deposits and deposits ow out of the banking system we present a model in which imperfect competition among banks gives rise to these relationships an increase in the nominal interest rate increases banks market power inducing them to increase deposit spreads and hence restrict deposit supply households respond to the increase in deposit prices by substituting from deposits into less liquid but higheryielding assets consequently changes in the nominal interest rate aect banks cost of capital and lending using branch level data on the universe of u s banks we show that following an increase in the fed funds rate deposit spreads increase by more and supply falls more in areas with less deposit competition we control for changes in banks lending opportunities by comparing branches of the same bank we control for changes in macroeconomic conditions by showing that deposit spreads widen immediately after a rate change and even if this change is fully anticipated our results imply that monetary policy has a signicant impact on how the nancial system is funded on the quantity of safe and liquid assets it produces and on its provision of loans to the real economy

equilibrium in a futures market normal backwardation the hypothesis that futures prices normally lie below expected future spot prices was justified by keynes 6 and hicks 2 by the contention that speculators while risk averse are less so than hedgers consequently hedgers pay speculators to bear that hedgers risk houthakker 5 supported this view arguing that according to all available data short hedging and conversely long speculation is the more common type working 9 favored the view that futures prices are unbiased predictors of future spot prices if this is true hedgers are not on average paying to reduce their risk nor are speculators on average earning a premium for assuming risk risk averse speculators will participate in such a market only if there are nonhomogeneous beliefs regarding the expected spot price the level of futures prices is important not only because it determines the cost of hedging but also because it influences production decisions in light of the competing views in the literature of both the level of futures prices and the factors which determine them we will analyze these issues in this paper to do so we employ a model based on incomplete markets in certainty claims in this and other respects identified later the model parallels existing futures markets in agricultural commodities the analysis shows in the absence of speculators that the relative magnitudes of the futures price pf and the expected future spot price e p are determined by the business transactions of and markets available to those economic units with a commercial or production interest in the commodity this defines the conditions under which there is a role for speculators even if they have the same degree of risk aversion and share the expectations of other market participants thus neither differences in degrees of risk

credit cronyism and control evidence from the americas abstract i examine the effects of corruption and government control of the banking system for 18 western hemisphere countries on the sensitivity of commercial lending rates to changes in international financial conditions and find that most countries lending rates are insensitive to these conditions only the least corrupt nations exhibit a significant positive relation between lending rates and international financial conditions the responsiveness of these lending rates is nonlinearly related to corruption and government control of the banking sector the findings suggest that both corruption and government control of banks need to be considered when analyzing international credit markets

the simultaneous determination of spot and futures prices in a simple model with production risk this paper deals with properties of a rational expectations equilibrium when there is futures trading a simple two good model is analyzed where one of the goods is produced subject to production risk although the futures market provides insurance against price risk to producers it is income risk that concerns them whether they hedge in equilibrium is shown to depend on the price and income elasticity of demand for their output as well as on the degree to which consumers the other party in the futures transaction are risk averse

fairly priced deposit insurance and bank charter policy the thrust of current deposit insurance reform risk based insurance premiums and capital requirements is an effort to price deposit insurance more fairly fairly pricing deposit insurance eliminates inequitable wealth transfers but it does not lead to an efficient equilibrium this paper shows that an alternative charter policy results in an efflcient separating equilibrium this article analyzes the effect of alternative charter policies when deposit insurance is fairly priced the thrust of current deposit insurance reformrisk based capital requirements 1988 and risk based insurance premiums 1994 is an effort to price deposit insurance more fairly chan greenbaum and thakor s 1992 seminal paper dramatically illustrated that fairly pricing deposit insurance is not enough to solve the deposit insurance problem in their model when banks hold nontraded private information assets no equilibrium exists with fairly priced deposit insurance unless banks earn rent or are subsidized fairly pricing deposit insurance eliminates inequitable transfers of wealth but it does not lead to an efficient equilibrium this paper shows that an alternative charter policy gives an efficient separating equilibrium the separating equilibrium segregates the market for insured transactions deposits from private information financial intermediation the analysis in this article provides support for the deposit insurance reform proposal in the recent 1993 national commission on financial institution reform recovery and enforcement ncfirre report to the president and congress and for merton and bodie s 1993 proposal both proposals impose a separating equilibrium that isolates insured transactions accounts and the public information traded assets that secure them from private information assets in the bank s portfolio the formal model developed here is designed to demonstrate the effect of charter policy on the efficiency of market equilibrium in an uncomplicated setting but the main result that a separating equilibrium is more efficient is extremely robust with respect to the model specification the model has two types of financial intermediaries intermediaries that hold nontraded private

banking services for everyone barriers to bank access and use around the world using information from 193 banks in 58 countries the authors develop and analyze indicators of physical access affordability and eligibility barriers to deposit loan and payment services they find substantial cross country variation in barriers to banking and show that in many countries these barriers can potentially exclude a significant share of the population from using banking services correlations with bank and country level variables show that bank size and the availability of physical infrastructure are the most robust predictors of barriers further the authors find evidence that in more competitive open and transparent economies and in countries with better contractual and informational frameworks banks impose lower barriers finally though foreign banks seem to charge higher fees than other banks in foreign dominated banking systems fees are lower and it is easier to open bank accounts and to apply for loans on the other hand in systems that are predominantly government owned customers pay lower fees but also face greater restrictions in terms of where to apply for loans and how long it takes to have applications processed these findings have important implications for policy reforms to broaden access

the demand for hedging and the value of hedging opportunities hedging strategies typically assume that hedging is costless and that only one futures market exists when these assumptions are dropped the demand for hedging is shown to depend on basis risk price risk and the hedger s risk preference the marginal and incremental value of hedging opportunities are computed for the general cases of one and two markets and applied to the specific case of pennsylvania dairy input hedging copyright 2000 oxford university press

monetary stability and liquidity crises the role of the lender of last resort we study an economy where agents are subject to liquidity demand shocks and banks arise endogenously to insure consumers against these shocks in this environment we evaluate the desirability of a lender of last resort who can provide liquidity loans to banks in distress in the absence of a lender of last resort the economy has a unique stationary equilibrium the introduction of unlimited and costless lender of last resort services allows the economy to achieve a steady state allocation that is pareto optimal however this economy also displays a continuum of hyperin ationary equilibria we then explore restrictions on the provision of lender of last resort services that rule out such monetary instability while preserving some of the e ciency obtained by unrestricted lender of last resort services when the lender of last resort charges an interest rate on liquidity loans the economy has a unique steady state equilibrium and when the interest rate charged is high enough no hyperin ationary equilibria arise finally when the lender of last resort faces an upper bound on loanable funds there is again a unique long run equilibrium and when the upper bound on loanable funds is small enough hyperin ationary equilibria are ruled out

competition and pricing in the credit card market many credit card issuers charge fixed rates that remain the same for three to five years while the rest charge variable rates that are indexed to market rates the presence of these two distinct rate types forces prices at firms selling an otherwise identical product to move asynchronously variable rates move one for one with the index while fixed rates stay constant empirical and theoretical analysis shows that this pricing structure provides an explanation for the simultaneous yet seemingly contradictory existence of high rate cost margins and aggressive non price competition for new customers a phenomenon that existed in the credit card market in the early 1990s

the rigidity of prices this paper uses evidence on individual transaction prices to analyze price behavior the evidence shows that for many transactions pricesremain rigid for periods exceeding one year the rigidity of price ispositively correlated with industry concentration for several productsthe correlation of price changes across buyers is low the paper alsoinvestigates the relationship between price rigidity price change andthe length of time a buyer and seller have been doing business together the author interprets the evidence as emphasizing the importance of nonprice rationing and the inadequacy of models in whichprice movements alone clear markets copyright 1986 by american economic association

price response asymmetric information and competition we compare predictions from a theoretical model based on the structure of the main outdoor retail market in jerusalem with the results of an empirical analysis of price response to changes in cost we find that firms without adjacent competition exhibit both upward and downward price rigidity an outcome we ascribe to asymmetric information between the consumer and the firm given that previous studies have focused on downward price rigidities of firms with market power our findings highlight the importance of accounting for transitory information asymmetries between the consumer and the firm when studying price rigidity

price and hedging policy the case of an intertemporarily risk averse bank abstract in a two period framework we analyze the behavior of a maturity transforming intertemporarily risk averse bank in the presence of a stochastic inter bank rate and futures markets we show that the separation property holds but that loan and deposit price decisions show non linear dependence

who bears interest rate risk we study the allocation of interest rate risk within the european banking sector using novel data banks exposure to interest rate risk is small on aggregate but heterogeneous in the cross section contrary to conventional wisdom net worth is increasing in interest rates for approximately half of the institutions in our sample cross sectional variation in banks exposures is driven by cross country differences in loan rate fixation conventions for mortgages banks use derivatives to partially hedge on balance sheet exposures residual exposures imply that changes in interest rates have redistributive effects within the banking sector received october 31 2017 editorial decision august 30 2018 by editor philip strahan authors have furnished an internet appendix which is available on the oxford university press web site next to the link to the final published paper online

on the market consistent valuation of fish farms using the real option approach and salmon futures we consider the optimal harvesting problem for a fish farmer in a model which accounts for stochastic prices featuring schwartz 1997 two factor price dynamics unlike any other literature in this context we take account of the existence of a newly established market in salmon futures which determines risk premia and other relevant variables that influence risk averse fish farmers in their harvesting decision we consider the cases of single and infinite rotations the value function of the harvesting problem determined in our arbitrage free setup constitutes the fair values of lease and ownership of the fish farm when correctly accounting for price risk the data set used for this analysis contains a large set of futures contracts with different maturities traded at the fish pool market between 12 06 2006 and 22 03 2012 we assess the optimal strategy harvesting time and value against two alternative setups the first alternative involves simple strategies which lack managerial flexibility the second alternative allows for managerial flexibility and risk aversion as modeled by a constant relative risk aversion utility function but without access to the salmon futures market in both cases the loss in project value can be very significant and in the second case is only negligible for extremely low levels of risk aversion in consequence for a risk averse fish farmer the presence of a salmon futures market as well as managerial flexibility are highly important

optimum pricing policy under stochastic inflation we describe aggregate inflation as a stochastic process in which the rate of change of the price level can be positive or zero where the times spent in each state are of random duration this class of processes includes two state markov chains and renewal processes as special cases it is shown that the optimal pricing policy of a monopolistic firm with non convex costs of price adjustment is s s in its real price i e its nominal price relative to the price level a basic certainty equivalence result is proved i e the firm behaves as if it faces a certain and fixed rate of inflation higher than the actual expected rate the difference between the two rates being a risk premium which depends on the real interest rate and the parameters of the stochastic process one can thus apply previous results from the case of certainty sheshinski and weiss review of economic studies 1977 to obtain comparative static results in particular one finds that an increase in the variance of expected inflation leads firms to choose a pricing policy with larger amplitude in real price the paper also addresses the question of consistency in firms expectations when the price level is determined by the firms actions in this paper we consider pricing policies of individual firms in an inflationary environment each firm expects the general price level to increase and must determine the rate of increase of its own price it is assumed that the firm incurs an adjustment cost when it changes its nominal price consequently firms choose to change prices occasionally rather than continuously

retail bank deposit pricing an intertemporal asset pricing approach fundamentally spreads between market and deposit interest rates increase when interest rates rise and decline when rates fall recent empirical studies have found this phenomenon to be related to market concentration static equilibrium models are poorly equipped to explain this behavior in this paper the author applies an intertemporal asset pricing model incorporating bank deposits as a form of money in order to analyze the pricing behavior of a banking sector exercising market power his results extend the theoretical literature on deposit pricing and provide some insights into the behavior of interest rate spreads through time copyright 1995 by ohio state university press

the size distribution of the banking sector and the effects of monetary policy abstract in recent years the industrial organization of the banking system has received a large amount of attention in particular it is generally viewed that the size distribution of the banking sector has changed where it is dominated by a small number of large institutions in this paper we develop a model of imperfectly competitive banks that differ in terms of the size of their deposit base such differences are important for aggregate credit market activity and the effects of monetary policy notably we explain how the optimal size distribution of the banking system involves trade offs from distortions in credit markets due to imperfect competition across banking markets second the effects of monetary policy on credit market activity are weaker in an economy dominated by a small number of large banks empirical analysis examining the role of concentration among the current members of the european monetary union is consistent with the predictions of the model

multimarket contact competition and pricing in banking abstract in this paper we assess the impact of multimarket contact of banks on their market power by means of a simultaneous equation model in which the divergence of price from marginal cost is a function of multimarket linkages the model is estimated using aggregate data from the italian regions for the years 1997 2009 our results show that multimarket contact is positively and significantly correlated to the market power index and is also connected to both home and non home market concentration the evidence is robust to changes in model specification and multimarket contact measures and supports the idea that firms which have a greater amount of contact are more likely to collude

the relation between forward prices and futures prices abstract this paper consolidates the results of some recent work on the relation between forward prices and futures prices it develops a number of propositions characterizing the two prices these propositions contain several testable implications about the difference between forward and futures prices many of the propositions show that equilibrium forward and futures prices are equal to the values of particular assets even though they are not in themselves asset prices the paper then illustrates these results in the context of two valuation models and discusses the effects of taxes and other institutional factors

banks and markets in a monetary economy abstract modern financial sectors consist of banks asset markets and a central bank this paper builds a model where these institutions provide different financial services and their interaction supports efficient allocations when one institution is missing equilibria are by construction inefficient the paper analyzes how interest rates and asset prices depend on the structure of the financial sector and characterizes the central bank policy that supports efficient allocations the analysis relies on the difference between liquidity and real shocks and relates the notion of liquidity used in this paper to the one adopted in other studies

the cyclicality of price cost margins in banking an empirical analysis of its determinants i introduction in this paper we study the cyclical behavior of price cost margins in banking calculated as the difference between the interest rate on loans and deposits using time series quarterly data for the period 1979 2005 in the united states this cyclical behavior of banks price cost margins a key fact about business fluctuations has received little attention before dueker and thornton 1997 find evidence that in cyclical downturns banks opt for a relatively high price cost margin however they focus exclusively on the markup of the bank prime lending rate over the marginal cost of funds for banks mandelman 2006 presents evidence on the cyclicality of margins for a large sample of countries and uses foreign bank penetration to explain the behavior of margins 1 in olivero 2005 aliaga diaz 2006 and aliaga diaz and olivero 2010a we document the countercyclicality of banks price cost margins in the united states in that paper we do so using an atheoretical methodology based on var forecast errors to measure comovement between variables 2 in this paper we build on this atheoretical evidence and take a step further by constructing an empirical model of the determinants of the cyclical behavior of margins here we take a theory based approach to decide on the inclusion of the relevant regressors that belong to this model doing so allows us to contribute to the literature by providing potential explanations for the previously documented countercyclical nature of margins monetary policy and credit risk could be suggested as the main and potentially the only determinants of the cyclical behavior of margins on the one hand the bank lending channel of monetary transmission predicts that the federal funds rate as a monetary policy indicator and margins are directly related therefore if policy rates exhibit a particular cyclical behavior not controlling for monetary policy could bias the estimations on the cyclical behavior of margins on the other hand credit risk is expected to be countercyclical and to raise margins so that default should help explain the countercyclicality of the latter based on these two observations our empirical methodology consists of two steps in a first step we test whether the negative and significant contemporaneous sample correlations between margins and a business cycle indicator are robust to the inclusion of controls related to monetary policy default risk and banking regulation results show it is so that there seems to be other channels through which fluctuations in the economy give rise to the observed countercyclicality of margins in a second step we look for these channels and offer several potential explanations for the observed behavior interest rate risk the economy s financial depth banks liquidity and capitalization and the share of total assets held by large banks all exert a significant impact on the behavior of margins over the business cycle these conclusions are consistent across alternative definitions of the margins and the business cycle indicator our work is linked to two strands of research in macroeconomics first our countercyclicality results are linked to the large literature on countercyclical markups in goods markets and its effects on aggregate demand started by rotemberg and saloner 1986 and rotemberg and woodford 1992 second price cost margins that vary endogenously and countercyclically in response to the state of the economy are a necessary condition for the existence of a financial accelerator as an amplifier of business fluctuations see for example bernanke and gertler 1989 and bernanke gertler and gilchrist 1998 therefore the countercyclical nature of price cost margins that we study here provides empirical support to the large body of literature in macroeconomic theory on this financial accelerator with price cost margins in the market for credit being countercyclical credit becomes more expensive in bad times firms may delay investment and production as a result and recessions may be exacerbated

bank concentration and retail interest rates abstract the recent wave of mergers in the euro area raises the question whether the increase in concentration has offset the increase in competition in european banking through deregulation we test this question by estimating a simple cournot model of bank pricing we construct country and product specific measures of bank concentration and find that for loans and demand deposits increasing concentration may have resulted in less competitive pricing by banks whereas for savings and time deposits the model is rejected suggesting increases in contestability and or efficiency in these markets finally the paper discusses some implications for tests of the effect of concentration on monetary policy transmission

forward and futures prices evidence from the foreign exchange markets empirical studies of the treasury bill markets have revealed substantial differences between the futures price and the implied forward price these differences have been attributed to taxes transaction costs and the settling up procedure employed in the futures market this paper examines the forward and futures prices in foreign exchange in an attempt to distinguish between the competing explanations empirical studies of the treasury bill market have revealed differences between the futures price or rate and the implicit forward price derived from the term structure of interest rates 1 these differences have generally been attributed to market imperfections such as taxes and transaction costs see for example arak 1 capozza and cornell 2 and rendelman and carabini 6 recently however cox ingersoll and ross 3 henceforth cir derived a model in which forward and futures prices need not be equal even in perfect markets without taxes as long as interest rates are stochastic the significance of the cir effect may be hard to investigate using only data from the bill market because of the potentially complicating effects of taxes and transaction costs unique to this market by using data from the foreign exchange market we are able to eliminate the tax effect and reduce the impact of transaction costs the question we address is whether the discrepancies observed in the treasury bill market are also observed in the foreign exchange market if they are then we have evidence that the differences are due to a combination of the cir effect and the transaction costs common to both markets if they are not then either the magnitude of the cir effect is much less in the foreign exchange market or the treasury bill results are due to the unique tax treatment and transaction costs of that market this paper is organized as follows in section i the trading mechanics of the forward and futures markets in foreign exchange are discussed section ii reviews the explanations for the discrepancies between the forward and futures prices for treasury bills the institutional differences between the foreign exchange and bill markets are also summarized to show which of these explanations cannot apply to the foreign exchange market in section iii the data are decribed and the empirical results are presented the conclusions are summarized in the final section

production flexibility stochastic separation hedging and futures prices we study a dynamic model where uncertainty about interim output adjustments causes producers to face price cost and output uncertainty stochastically separable production decisions are independent of the producer s risk preferences and expectations and are based on the prevailing futures price as a certain output price conditions under which futures contracts achieve stochastic separation are established optimal hedging and maturity structure of futures contracts equilibrium futures prices and the effects of futures trading on output are studied the systematic risk premium depends on the product of the futures beta and the covariance of the market return with production revenues article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

determinants of hedging and risk premia in commodity futures markets this paper examines the determinants of commodity futures hedging and of risk premia arising from covariation of the futures price with stock market returns and with the reve nues of producers owing to supply shocks that stochastically redistribute real wealth surplus between producers and consumers and to limited participation in the futures market the total risk premium in the model is not proportional to the contract s covariance with aggregate consumption stock market variability interacts with the incentive to hedge causing the producer hedging component of the risk premium to increase de crease with income elasticity for a normal inferior good production costs that depend on output raise the premium we argue that output and demand shocks will typically be positively correlated raising the premium high supply elasticity reduces the absolute heding premium by reducing the variability of spot price and revenue

the price concentration relationship in banking the commonly observed positive correlation between market concentration and profitability may be explained by noncompetitive pricing behavior as argued by the structure performance hypothesis or by the greater efficiency of firms with dominant market shares as argued by the efficient structure hypothesis by examining the price concentration relationship instead of the profit concentration relationship this paper tests the structure performance hypothesis in a manner that excludes the efficient structure hypothesis as an alternative explanation of the results the results strongly support the structure performance hypothesis and are robust with respect to model specification measurement of concentration and econometric technique copyright 1989 by mit press