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1994 Working Papers

  • WP 94-21 | Underserved Mortgage Markets: Evidence from HMDA Data


    Robert Avery Patricia Beeson Mark Sniderman

    Abstract

    A baseline evaluation of the variation in mortgage credit flows across different types of neighborhoods using HMDA data collected in 1990 and 1991. Read More

  • WP 94-20 | The Computational Experiment: an Econometric Tool


    Finn Kydland Edward Prescott

    Abstract

    An economic experiment consists of the act of placing people in an environment desired by the experimenter, who then records the time paths of their economic behavior. Performing experiments that use actual people at the level of national economies is obviously not practical, but constructing a model economy and computing the economic behavior of the model's people is. Such experiments are termed computational. This essay specifies the steps in designing a computational experiment to address some well-posed quantitative question. The authors emphasize that the computational experiment is an econometric tool used in the task of deriving the quantitative implications of theory. Read More

  • WP 94-19 | Posted Rates as Signals in Mortgage Lending Markets


    Robert Avery Patricia Beeson Mark Sniderman

    Abstract

    A discussion of how mortgage lenders might use posted lending terms to signal both their eagerness to take new loan applications and their lending standards. Read More

  • WP 94-18 | The Effects of Inflation on Wage Adjustments in Firm-Level Data: Grease or Sand?


    Erica Groshen Mark E. Schweitzer

    Abstract

    An analysis of whether inflation facilitates adjustments to shocks or distorts relative prices, examining the wage-setting process across a panel of occupations and employers and finding that the costs of inflation may rise more rapidly than its benefits beyond quite modest rates of increase in the price level. Read More

  • WP 94-17 | Bank Diversification: Laws and Fallacies of Large Numbers


    Joseph G. Haubrich

    Abstract

    The conventional wisdom on bank diversification confuses risk with failure. This paper clarifies that distinction and shows how increasing bank size may increase bank risk even though it lessens the probability of failure and lowers the expected loss. The key result is an application of Samuelson's "fallacy of large numbers." Read More

  • WP 94-16 | Executive Compensation: A Calibration Approach


    Joseph G. Haubrich Ivilina Popova

    Abstract

    We use a version of the Grossman and Hart (1983) principal-agent model with 10 actions and 10 states to produce quantitative predictions for executive compensation. Performance incentives derived from the model are compared with the performance incentives of 350 firms from a survey by Michael Jensen and Kevin Murphy. The results suggest both that the model does a reasonable job of explaining the data and that actual incentives are close to the optimal incentives predicted by theory. Read More

  • WP 94-15 | Bankruptcy Rules and Debt Contracting


    Stanley Longhofer

    Abstract

    Typical corporate finance folklore tells us that existing proportionate priority and absolute priority rules in bankruptcy have evolved in order to eliminate inefficiencies that result when lenders rush to retrieve their assets from a firm in financial distress. This paper shows that when a firm is faced with a moral hazard problem, first-come, first served rules reduce lenders' incentives to free ride on the monitoring efforts of each other. As a result, these rules may reduce the total social cost of loan contracts compared to other bankruptcy rules. The bankruptcy rules described here mimic important contractual arrangements found in real-world debt contracts. Read More

  • WP 94-14 | Loan Sales: Pacific Rim Trade in Nontradable Assets


    Joseph G. Haubrich James Thomson

    Abstract

    Foreign banks play a large role in the loan sales market. We examine this role using individual bank data on foreign-owned banks in the United States. We find that the motives for loan sales and purchases differ between U.S. and foreign-owned banks and between foreign banks of different regions. The evidence is consistent with foreign banks' using the market for diversification. Read More

  • WP 94-13 | The Annuitization of Americans' Resources: A Cohort Analysis


    Alan Auerbach Jagadeesh Gokhale Laurence Kotlikoff John Sabelhaus David Weil

    Abstract

    An analysis of the changes since 1960 in the share of Americans' resources that are annuitized, which has declined slightly for younger Americans but has risen dramatically for the elderly, with important implications for the national saving rate and income inequality. Read More

  • WP 94-12 | The Burden of German Unification: A Generational Accounting Approach


    Jagadeesh Gokhale Bernd Raffelhüschen Jan Walliser

    Abstract

    Germany recently introduced several unification-related tax measures for financing resource transfers to support the eastern economy. This paper assesses the generational stance of postunification German fiscal policy and estimates the burden of unification related fiscal measures on West German generations. It finds that postunification German fiscal policy is, generationally speaking, imbalanced: Future generations will bear 22 percent larger lifetime net tax burdens than current newborn German generations. Most of the burden of the tax increases falls on young and working-age generations. Additional tax increases or spending reductions are required to produce a generationally balanced fiscal policy. Read More

  • WP 94-11 | Similarities and Dissimilarities in the Collapses of Three State Chartered Private Deposit Insurance Funds


    Walker Todd

    Abstract

    An analysis of the collapse of the Rhode Island Share and Deposit Indemnity Corp., focusing on distinguishing the elements of failure that it shared with other large state-chartered deposit insurance funds (principally the Ohio and Maryland funds) from those that were unique to Rhode Island. Read More

  • WP 94-10 | Tax Structure, Welfare, and the Stability of Equilibrium in a Model of Dynamic Optimal Fiscal Policy


    Jang-Ting Guo Kevin Lansing

    Abstract

    A demonstration that the assumed structure of taxation can have dramatic effects on economic welfare and on the stability of the steady state in a dynamic general-equilibrium model of optimal fiscal policy. The authors find that household welfare is highest under a structure that includes separate tax rates on labor and capital incomes, double taxation of dividends, and tax-deductible depreciation. Read More

  • WP 94-09 | The Welfare Effects of Tax Simplification: a General Equilibrium Analysis


    Jang-Ting Guo Kevin Lansing

    Abstract

    An analysis of various schemes for simplifying the U.S. tax system, which finds that a uniform tax system performs almost as well as a system with separate taxes on labor and capital incomes, provided that a depreciation allowance is maintained. Read More

  • WP 94-08 | The Impact of AFDC on Birth Decisions and Program Participation


    Elizabeth Powers

    Abstract

    A longitudinal study examining how the level of AFDC benefits and the per-child increment affect births. Although the findings support the "AFDC benefits cause births" hypothesis, the author shows that eliminating the new-birth increment would reduce total program costs by less than 3 percent, since both the per-dollar effect of benefits on births and the per-child increments themselves are small. Read More

  • WP 94-07 | Anticipating Bailouts: the Incentive-Conflict Model and the Collapse of the Ohio Deposit Guarantee Fund


    Ramon DeGennaro James Thomson

    Abstract

    An examination of the effect of the collapse of the Ohio Deposit Guarantee Fund on insured financial institutions in the context of the incentive-conflict model developed by Edward Kane, finding that differences in abnormal returns of FDIC and FSLIC firms tend to reaffirm that taxpayer-funded bailouts are a natural outgrowth of the moral-hazard problem that taxpayers face. Read More

  • WP 94-06 | Optimal Fiscal Policy when Public Capital is Productive: a Business-Cycle Perspective


    Kevin Lansing

    Abstract

    Recent empirical evidence suggests that the stock of public-sector capital may be an important input to private production. This paper examines the business-cycle implications of productive public capital in a two-sector, dynamic general-equilibrium model with endogenous fiscal policy. In the model, public capital is a direct input to the - neoclassical production technology, and public consumption goods provide direct utility to households. The production of public and private goods takes place in separate sectors. At the optimum level of public capital, the rate of return on public investment is found to be less than that on private investment. In simulations, public investment and public consumption are procyclical, and the capital tax is more variable than the labor tax, features also observed in annual U.S. data. The introduction of stochastic shocks to households' preference for public consumption helps the model to match certain features of the data, namely, the high variability and low correlation of public expenditures relative to their private-sector counterparts over the business cycle. Read More

  • WP 94-05 | The Federal Reserve Board before Marriner Eccles (1931-1934)


    Walker Todd

    Abstract

    A history of the evolution of political economy models in the early 1930s--crucial years of change in the supervision and regulation of the financial industry--outlining the policies of the Hoover and Roosevelt administrations, the change of focus in the Federal Reserve Board from corporate-statist economic initiatives to an orthodox Keynesian outlook, and the push toward centralizing the monetary powers of the Federal Reserve System at the Board. Read More

  • WP 94-04 | Depositor Preference and the Cost of Capital for Insured Depository Institutions


    William Osterberg James Thomson

    Abstract

    Depositor-preference laws provide depositors with a claim on a failed depository institution's assets that is senior to unsecured general creditor claims. Therefore, depositor preference is correctly viewed as changing the capital structure of banks and thrifts and, consequently, these laws will affect the cost of capital for depositories. However, depositor preference will not have an impact on the total value of banks and thrifts unless deposit insurance is mispriced. Read More

  • WP 94-03 | Underlying Determinants of Closed-Bank Resolution Costs


    William Osterberg James Thomson

    Abstract

    This paper looks at the underlying determinants of bank resolution costs. In the spirit of James (1991), resolution costs are modeled as functions of problem assets. However, we extend previous work by looking at more recent failures (from 1986 through 1992) and by extending our specification to include proxies for fraud, off-balance-sheet risk, brokered deposits, and both regional and size effects. Unlike James, we find no evidence that capital reflects net unbooked losses. On the other hand, we find roles for fraud, off-balance-sheet items, and both regional and size dummies. We also find evidence suggesting that regulators may have practiced forbearance. Read More

  • WP 94-02 | Auctions with Budget-Constrained Buyers: A Nonequivalence Result


    Yeon-Koo Che Ian Gale

    Abstract

    Anecdotal evidence of concern about the limited financial resources of small firms abounds in government auctions. Recent empirical work also provides evidence of the importance of capital constraints. In this paper, we show that the first-price sealed-bid auction yields higher expected revenue than the second-price sealed-bid auction if buyers face wealth constraints. Differences in the extent to which wealth constraints bind in the different auction formats generate the revenue nonequivalence. Read More

  • WP 94-01 | Exclusion in All-Pay Auctions


    Ian Gale Mark Stegeman

    Abstract

    In a recent paper, Baye, Kovenock, and de Vries (1993) derive a general formula for the seller's expected revenue in an all-pay auction, where the buyers' valuations are common knowledge. They use this formula to show that excluding the buyer with the highest valuation sometimes increases the seller's expected revenue. Lobbying may be modeled as an all-pay auction, and the exclusion result may therefore explain the practice of reducing fields of contestants vying for a political prize. One implication is that a politician may, perversely, exclude the individuals who place the highest value on a political prize.The exclusion result depends critically on the assumption that the politician must award the prize to the highest bidder. We describe an alternate procedure that gives the politician more expected revenue. Although a politician adopting our procedure sometimes increases her expected revenue by excluding potential bidders, she should never exclude the buyer with the highest valuation. Read More