In the first essay, I ask how banks make their loan approval decisions and se- lect their screening activity if their loan offers can be observed by uninformed rival lenders. I find that the impact of such an informational imperfection on screening incentives and lending standards can be rather dramatic: in order to prevent unin- formed outsiders from poaching their customers, informed banks will intention- ally make “more erratic” lending decisions and will include too many borrowers of poor quality in their loan portfolio. Moreover, they will intentionally under- invest in screening and accept that their screening decisions remain quite noisy. Both effects aggravate the adverse selection problem that an uninformed outsider faces which helps informed banks to protect themselves from competition. Most interestingly, these distortions in credit are not constant in time but vary substan- tially as the expected cash flows of projects change: I find that especially in times of low interest rates and high collateral values banks are likely to lend too much and to screen too little. I argue that the predictions of the model are well in line with many known stylized facts about credit booms. Finally, I explore a dynamic version of the model in which banks’ choices of screening precision exhibit some sort of rigidity. This extended model generates boom-bust cycles in credit that are increasing in the amount of bank competition: it features both excessive credit in boom times and inefficiently severe lending contractions in recessions.
Estimating competition -i.e., the degree as well as the form of this competition- in the banking sector entails several difficulties. First of all, even if we restrict the analysis to the intermediation business of banks, their production function is not the same as other non financial firms. For instance, when raising funds, which could be considered an input of the bank’s production function, banks also pro- vide services to consumers. In other words, suppliers of this input care about more than just the return on their deposits. For example, they care about the overdraft al- lowed in their account, or the number of ATMs available in the region. Moreover, banks typically serve different markets: credit cards, unsecured personal loans, mortgages, loans to businesses, insurance, pension plans, ... While one could re- strict the attention to a particular market, this does not seem to be the question of interest: we are interested in the degree of competitionin the banking sector as a whole. The fact that competitionin the credit card market has increased or decreased does not seem enough if one is interested in the effects to financial sta- bility. Furthermore, the existence of economies of scope may distort the analysis when focusing only on one market. It could be the case that banks are providing bundles of other financial products due to increased competition, which could be missed by focusing only on one market.
items related to increase or to substitute product range, to increase product quality or to reach grater market share or new markets. The second factor la- beled as Process orientation while innovating is com- prised of five items, all of which tr y to breadth of firm actions to increase operational flexibility or pro- duction capacity or to reduce labor costs per unit or energy consumption per unit when they are look- ing for new innovations. Four items related com- mercial innovations loaded on the third factor. Sim- ilarly, three other items related to organizational innovation loaded on the four th factor. We have la- beled the fifth factor as the impor tance of the mar- ket information sources and it measures the firm’s reliance on market information sources for the in- novation process.
Second, the moderating effect of banking concentration (𝛽 3 ) in Col.2, although with the expected sign turn out not statistically significant (-0.055, t = -0.758). In the full model that includes the joint effect effects of institutional ownership andbanking concentration (Col.3), the coefficient becomes significant. (-0.353, t = -1.822). However, the effect of banking concentration in relaxing financial constraints is higher within the sample of high tangible firms (Col.5 and Col.6) and regression coefficients are more efficient (-0.477, t = -3.651; and -0.844, t = -2.970). This results tells us that the information hypothesis, mainly applies for large firms with collaterals. Banks undertake cream screaming to moderate adverse selection problems and therefore will invest on bank relationship with the high-type colletaralized firms. On the other hand, this effect is not conclusive for the opaque firms., i.e., low type collateralized firms. This finding contrasts somewhat with that was found by Ratti et al. (2008) as a higher banking concentration eased financial restrictions even for opaque firms.
Wessels, 1988; Frank and Goyal, 2008, 2009). In particular, we use the logic of the pecking order theory to examine whether the banks’ choices of ﬁnancial instruments are related to adverse selection costs. Also, we test whether the choice of ﬁnancial instruments targets an optimal capital structure. To perform such tests, we look at the expected choices of ﬁnancial instruments if banks have liquidity needs or have growth opportunities as predicted by the different theories. Speciﬁcally, we test whether banks have a preference toward debt, as the pecking order predicts, or if banks want to maintain a target capital ratio, as predicted by the trade-off theory. The pecking order theory argues that the issuance of ﬁnancial instruments responds to informational problems and banks should prefer to issue the type of market instrument that minimizes the adverse selection discount. The trade-off theory states that there is an optimal capital structure for each individual bank and banks should issue those ﬁnancial instruments that minimize the overall cost of their capital structure. If the pecking order holds, we expect a higher probability in issuing instruments with more information asymmetries (i.e., capital) for those banks that the markets know, such as listed banks. If the trade-off theory holds, banks prefer to combine issuances of different instruments to reach or maintain an optimal capital structure. We also test how the fulﬁllment of capital regulation affects the choice of ﬁnancial instruments. Under the pecking order, we hypothesize that banks prefer to issue debt-like capital instruments (from now on, hybrid instruments) rather than capital instruments (i.e., common shares) because the former can also be computed as regulatory capital but suffer from lower costs of asymmetric information as compared to capital instruments. Under a trade-off, we could expect a combination of issuances of hybrid and capital instruments to maintain the relative weight of the different capital instruments.
This paper is divided into two parts. In the first, we place the incentive problem facing banks in a theoretical framework, both when selling loans and also when monitoring duties are shared amongst banks We then take up an empirical analysis of credit risk-sharing in lending syndicates where credit is dispersed among the lead and participant banks. Our paper contributes to- ward understanding whether the exposure of the lead bank matters for the long run performance of the borrower. In contrast, most of the literature has focused on lending structure, pricing and short run equity reactions. There is strong support for the hypothesis that borrower performance is increasing in the interest the lead bank takes in a borrower, whether performance is mea- sured by defaults or other long run measures of profitability and investment- grade status. This is corroborated with short run evidence from the equity market’s response. The asymmetric information effect we find is economically larger and statistically significant when we instrument the lead bank’s share. We also find that lower costs of monitoring help to offset the negative effects from lower lead exposure, such as when the lead bank is also based in the US or when the borrower’s industry is better known. A lead bank with a greater reputation is also associated with improved performance. Lead exposure mat- ters more for firms that are opaque or performing poorly. And interestingly, loans originated in boom times perform worse but to a lesser extent the greater the stake the lead bank retains in the borrower.
Today, nobody can argue the strong interactions existing between services and the other economic sectors (including the services sector itself). It is also clear that the economic system cannot operate efficiently without well-established and dynam- ic financial, communication, distribution and transport mechanisms, and this is valid not only from a national and supranational perspective, but from the point of view of regions and cities. On the other hand, the importance and the crucial role of busi- ness services, from consultancy, to engineering, design or information, is beyond any doubt in relation to the development of any national or regional economy and its progress in terms of efficiency and competitiveness. However, as previously indi- cated, most analyses address individual countries or establish comparisons between countries, whilst the number of publications adopting a territorial —regional— ap- proach is far lower. This is particularly true for analyses of less-developed regions, which have received less attention and whose possible role as part of regional devel- opment policy programs has been dismissed. Some cases have unexpectedly shown that the development of a services activity —like tourism, for example— could be- come a growth engine and even a more stable activity than several manufacturing processes, particularly in terms of long-term evolution.
One of the main problems that arises when estimating human capital ex- ternalities is that a regression of aggregate average wages against an aggregate measure of human capital is very likely to imply a problem of endogeneity in all possible specifications. Human capital is not distributed randomly at the regional level. Cities and regions with higher productivity, and therefore with higher average aggregate wages, will attract more skilled workers simply because of higher standards of living or a larger supply of amenities. Firms may also choose to locate in cities and regions where there is a higher average level of human capital in order to reduce search costs or trying to appropriate externalities generated by a more specialized labor market. Therefore it is reasonable to assume that these two variables are both endogenous. As a consequence, the direction of causality between wages and aggregate human capital level has to be identified using appropriate instruments. Furthermore the use of different proxies for the average human capital intensity at the regional level may imply important measurement errors which may exacer- bate the correlation of the explanatory variables and the random terms of our equations. We are going to use as instruments the population structure in terms of the weight of young and old groups prior to 1980. This is prede- termined for the period that we consider, but the change in human capital may be correlated with the weight of young and old people in the population at the beginning of the sample period.
The horizontal axis in Fig. 2.2, R&D activity, is the dimension that contains the main proxies used for technological intensity, with the vertical axis separating the positive and negative part of R&D activity. In the positive part there are 22 firms, which are those with higher levels of all variables included in R&D expenditure, personnel, outsourcing, applied research versus development and attitude towards change. We classify these firms as medium-technology firms, and we label the 37 firms remaining on the left of the vertical axis as low technology. This separation, using MDS analysis, discriminates only majorly according to the OECD’s technological classification by sectors. Specifically, 32 firms out of 37 in the left part belong to sectors that the OECD classify as low or medium-low, which implies a coincidence of 86,5%. In the right part, labeled medium technology firms, 14 out of 22 belong to medium-high technology sectors, which is a 63,4% coincidence rate. Moreover there are significant deviations in the expected technological ordering. For example, the optical instruments firm, which would be classified as high technology by the OECD, happens to be at the extreme left part of the perceptual map, since their R&D activity indicators are very low. We also observe some firms in medium-high technology sectors with a rating worse than firms classified in low-technology sectors, and vice-versa, firms in typically low-tech rating better than firms in medium-tech sectors.
Abbas et al. (2011) apply both the panel regression and PVAR approaches to study the effect of fiscal policy on the current account using a large sample of advanced, emerg- ing and low-income economies. They find that a strengthening in the fiscal balance by 1 percentage point of GDP is associated with a current account improvement of 0.3 percent- age points of GDP. This relationship appears to be stronger in emerging and low-income economies; when the exchange rate is flexible; in economies that are more open; when output is above potential; and when initial debt levels are above 90% of GDP. Studies on the impact of the relationship between fiscal policy and the current account in microstates are sparse. Imam (2008) attempted to identify policies that help reduce the current account in microstates. The results suggest that microstates are more likely to have large current account adjustments if they are already running large current account deficits, run budget surpluses and are less open. Interestingly, Imam (2008) finds that changes in the real effec- tive exchange rate do not help drive reductions in the current account deficit in microstates.
able to talk about sectoral productivity differences. First, we assume that firms in different sectors use different factor proportions when faced with the same input prices, which gives rise to Heckscher-Ohlin style trade between countries. Second, we add bilateral transport costs. As Romalis (2004) points out in an influential paper, this makes locally abundant factors relatively cheap and strengthens the link between factor abundance and trade. In the Helpman-Krugman-Heckscher-Ohlin model (Helpman and Krugman (1985)), which does not consider transport cost, trade is undetermined as long as the number of factors is smaller than the number of goods and countries are not specialized. On the other hand, in the model we discuss here there is a cost advantage to produce more in those sectors that use the abundant factors intensively. This creates the prediction that countries export more in those sectors. Finally, we add sectoral differences in TFP, which introduces a motive for Ricardian style trade. Countries that have a high productivity in a sector have a cost advantage relative to their foreign competitors and charge lower prices. Because the elasticity of substitution between varieties is larger than one, demand shifts towards
for diﬀerent liquidity classes I sort assets traded at the NYSE, AMEX and NASDAQ into 5 equally weighted portfolios by their Amihud Illiquidity measure. Next, I construct zero cost port- folios using the most and least liquid assets and estimate the 3 Fama-French factor loads. I expect to find a significantly positive market beta for the zero cost portfolio, and a negative size factor. This would mean that liquid assets are significantly more risky with respect to the market factor than illiquid assets. The nega- tive size factor is to be expected due to the fact that the illiquid short-portfolio is expected to have a high positive size factor load. Second, I estimate the variation in the market beta for a re- duction in trading cost. The reduction of the size of the mini- mum price variation (tick) in quotations at the NYSE is an event where trading cost reduction can be considered exogenous and or- thogonal to other market events. It has been shown empirically by, for example, Goldstein and Kavajecz (2000) or Chakravarty, Wood and VanNess (2004) that the reduction of the tick at the NYSE has lead to a permanent decrease in the Bid-Ask spread of most assets traded at the exchange. To test for the change in systematic risk, I estimate the Fama-French risk factors for the previously mentioned zero cost portfolios before and after the tick size reduction event and compare the diﬀerences with the control group of assets traded at the AMEX and NASDAQ 5 . I
A trade-off between employment and productivity has been at work in Spain in the last decades. This phenomenon is characterized by lower productivity growths in the regions with higher employment growth rates. Since the mid-90s, changes in the employment rate have been as a rule higher than variations in the rate of productivity. This feature to a large extent can be considered as a consequence of the “extensive” nature of the Spanish growth model. It was mainly based on large investments efforts to increase capital endowments in public infrastructures, private companies and human capital, without substantial development in the overall performance of productive system. Total factor productivity (TFP) exhibits a decreasing trend over the period, whereas the rapid growth of investments in ICTs related assets and RTDI projects did not deliver productivity improvements in the large majority of economic activities and was not enough to counteract the shrinking tendency of TPF growth. There is some evidence of a “productivity paradox” in Spain, but despite that GDPpc development in Spain was meanly driven by continuous increases in per worker capital endowments (both physical and human capital) and the employment-to-population ratio (EPR).
using tone as a proxy for ex ante uncertainty. I find empirical evidence of the per- sistence of this effect at least during the first month of being public. Second, I do not find empirical evidence of the power changes in governance institutions in ex- plaining the level of underpricing. This is an interesting result if we consider the recent efforts in the region to improve a legal environment and the poor develop- ment of capital markets (Chong and López-de Silanes, 2007). The result supports the evidence found by Maquieira et al. (2012) in which the decision to issue equity in Latin America is firm-oriented rather than market-oriented as it is in the US mar- ket. Firms undertake an initial public offering to send a signal of good quality to the market or the feeling it is a cheaper source of funds. Third, I explore the role of firm level governance traits to see how much these variables can affect IPO valuation in Latin America. In this work I find none of firm governance variables are statisti- cally linked with first-day returns of Latin American IPOs. When interacting with uncertainty in tone, firm governance traits become significant in explaining under- pricing. This empirical result sheds light about how these two firm level decisions can affect IPO valuation. Finally, I explore the role of family firms in Latin Amer- ican IPOs. Although not significant, the average underpricing for family firms is slightly higher than for not family firms. Take it with caution, this empirical evi- dence for Latin American firms supports at first the previous idea in which fam- ily firms tend to underprice the offer to either attract institutional investors and improve monitoring or as stated by Brennan and Franks (1997), underprice to di- lute ownership and keep control. When uncertainty in tone interacts with a fam- ily firm type, I find that for non family firms, the slope coefficient of uncertainty results positive and significant in explaining underpricing. For family firms, this slope coefficient is still positive but much lower than form family firms. This result indicates somehow a favorable situation for family firms in Latin America facing lower levels of underpricing than non family firms. I interpret this situation as a reputation effect of family on market valuation.
Government intervention in education frequently takes the form of public provision. Advocates of school choice argue that a public school system oﬀering a uniform -and frequently low- educational quality, independently of individuals’ specific needs may fail to ensure equal educational opportunities. Discontent with public schools in many coun- tries may help explain the interest on issues related to school choice, including education vouchers. A voucher program provides students attending private schools a tax-financed payment covering all or most of the tuition charged. Chapter 3 evaluates the impact of education vouchers on the eﬃcient sorting of students into public and private schools. Private schools oﬀer a continuum of quality levels, while public schools provide a uniform quality, funded with proportional taxes. Students diﬀer over family income and ability and parents choose between public and private schools. We find that a tax-minimizing voucher will be approved by majority when the level of public educational quality is suﬃciently high. In the calibrated model, the equilibrium voucher entails welfare gains although leads to greater inequality. The impact of diﬀerent voucher policies is also an- alyzed. We find that welfare gains increase with the voucher size but the impact of the magnitude of the voucher on income inequality is not monotone.
In carrying out our analysis we will not have to determine the value func- tions for the private sector behavior but we will simply focus on the first order conditions. In order to do it we will take a local approximation of the model which means we need to find a reasonable point around which to perform the approximation (for a discussion on the approximation procedure see appendix). A natural candidate is the steady state of the deterministic version of our model where aggregate shocks have been shut off. However even in this case fiscal and monetary authority can affect the steady state values of the endogenous variables of the system. Because we want to keep staying close to those val- ues - when starting from initial conditions close enough to them and for small enough exogenous disturbances - then we have to characterize the optimal long run steady state.
while in the south grain production predominated (Clark and Cummins 2012). In this section, I gauge the extent to which my results are driven by these stark geographical differences between the North and the South. In Table 2.10, I examine if the association between landownership concentration and funds raised for education is broadly similar when I subdivide the sample into northern versus southern counties. Both in the North andin the South, School Boards in counties where land was more concentrated raised less money for education. The magnitude of the ef- fects, however, seem to be larger in the North. In detail, one percent in- crease in land concentration in the hands of peers decreased by 0.2 pence p.c. the funds raised from rates in the South and the Midlands, by 0.3 pence p.c. in Wales, and by 1,92 pence p.c. in the North. This suggests that in the North peers could exhort a stronger political opposition. They effectively avoided being taxed to pay for education, consequently un- dermining the introduction of an effective public education system in the North. This pattern is reproduced when I look at grants received from the Committee and school fees. Note also that, in all specifications, landown- ership concentration in the hands of commoners plays little role every- where except in the South.
How and when can these imperfections be observed? In the face of uncertainty about a future repayment on their loans, lenders will charge higher interest rates to the riskier borrowers. Figure 1.1 con…rms this intuition. It reports the evolution of the spread between the Bank Prime rate and the Six-month Treasury-bill rate for the period 1970:1-2000:2, as well as the real GNP for the same period. 1 There are two things worth pointing out here. First, during the whole period, the average spread is positive (250 basis points), implying a risk premium paid by …rms issuing this type of bonds. Second, the chart clearly shows the countercyclical character of this spread with respect to GNP, with a correlation of -0.15 for the whole sample. 2 This suggests that in good times, when GNP is high, the …nancial imperfections diminish. The opposite is true in a recession. According to some empirical analysis (for example, Bernanke, Gertler and Gilchrist ) the presence of such time-varying imperfections may help amplify the movements in output. If this is the case, analyzing the performance of monetary policy rules abstracting from credit frictions might be misleading, in particular if central bankers are concerned with macroeconomic stabilization issues.
analytically determine the extent to which output gap losses should be tolerated. Our next contribution is to derive optimal policy under decreasing gain learn- ing. We show that our main results are robust to the changing the gain parameter: (1) optimal policy is aggressive on inflation even at the cost of higher output gap volatility, (2) optimal policy under learning qualitatively resembles optimal policy under rational expectations when the Central Bank is able to commit. A new re- sult is that when beliefs are updated according to a decreasing gain algorithm, the optimal policy is time-varying, reflecting the fact that the incentives for the Cen- tral Bank to manipulate agents’ beliefs evolve over time. After a structural break, for example the appointment of a new central bank governor, the Central Bank should be more aggressive in containing inflationary expectations and decrease the extent of this aggressiveness in subsequent periods. The intuition for this result is that in the first periods after the appointment of a new governor, agents pay more attention to monetary policy actions (place more weight on current data), therefore an optimally behaving central bank should make active use of this by aggressively driving private sector expectations close to the equilibrium inflation. Finally, we show that when the Central Bank (CB) is uncertain about the nature of expectation formation (within a set relevant for the US economy) the optimal learning rules derived in our paper are more robust than the time con- sistent optimal rule derived under rational expectations. Optimal learning rules provide smaller expected welfare losses even if the Central Bank assigns only a very small probability to learning and a very high probability to rational expectations in how it believes the private sector forms its expectations.
An important corollary of this result has to do with the use of grants or transfers from the central government to the jurisdictions. Grants affect the amount of resources that an incumbent can allocate in his jurisdiction positively, but do not affect the amount of resources that the accountability sector has to invest on political accountability. When this happens, our model predicts an increment (reduction) in the level of corruption (political accountability). This is an important issue for developing countries where the central governments use transfers intensively in order to reduce the high between- jurisdiction income inequality. In order to avoid corruption while reducing inequalities, the design of these transfers must include some grants to the accountability sectors. The third relevant element is the offices spoils. National office spoils are expected to be larger than jurisdictional office spoils, independently of the level of development. Our model predicts that under theses circumstances, decentralization increases the level of corruption. Nevertheless, the effect on political accountability is ambiguous. Thus, the decentralization design also affects the level of corruption. For instance, the office spoils in small municipalities are farther from the national ones than the respective spoils in states. Therefore, when a federation is decentralized, corruption will increase more if it focuses on small jurisdictions than if it focuses on states. Decentralization in developing countries has allocated many tasks to small municipalities.