There are two opposing welfare effects of market power in a model with monopolistic competition, loan defaults and moral hazard. The loss of output produced if firms set a higher mark‐up over ...marginal costs confronts with some gain due to higher expected profits and the reduction of defaults. Such tradeoff results in an optimal level of market power that decreases with the efficiency of liquidation following default on a loan. If moral hazard is pervasive, credit rationing cuts down the default rates and mitigates the welfare cost of financial frictions.
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DOBA, FZAB, GIS, IJS, IZUM, KILJ, NLZOH, NUK, OILJ, PILJ, PNG, SAZU, SBCE, SBMB, SIK, UILJ, UKNU, UL, UM, UPUK
We investigate the relationship between the quality of politicians, defined in terms of their competence (skills), and rewards from public office in a game between parties and citizens in which ...parties play a crucial role in the selection of politicians. Parties shape the selection of politicians by manipulating information about the quality of their candidates. An increase in the rewards from public offices leads to two opposing effects on the average quality of politicians. The first is a selection effect, whereby more skilled citizens enter politics, leading to an increase in average quality. The second is a manipulation effect, as parties have the incentive to further manipulate information to increase the probability of election for their unskilled candidates, from whom they can extract higher rents in the form of service duties. We find that the second effect dominates when (i) parties’ costs of manipulating information are sufficiently low; (ii) even in the absence of manipulation, the quality of information available to citizens about candidates is sufficiently poor; and (iii) the net gains from becoming a politician for unskilled citizens are sufficiently larger than those for skilled citizens. These findings provide a rationale for the ambiguous sign of the empirical relationship between the quality and pay of politicians.
•Empirical association between pay and quality of politicians is ambiguous. Why?•A higher pay provides incentives to skilled citizens to enter politics.•Parties might prefer unskilled politicians from whom they can extract higher service duties.•Parties might manipulate information to select unskilled politicians.•In unaware/captured societies pay and quality of politicians tend to be negatively associated.
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GEOZS, IJS, IMTLJ, KILJ, KISLJ, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UL, UM, UPCLJ, UPUK, ZRSKP
This paper presents a model of financial and economic development which assumes the consumption of real resources by the financial sector. Financial development occurs endogenously as the economy ...reaches a critical threshold of economic development. Compared to financial autarky, financial intermediaries allocate savings, net of their costs of operation, to more productive investments. Whenever the technology financed by intermediaries is more capital-intensive than that operated in financial autarky, the growth effect of financial development is ambiguous. As a result, financial development may be unsustainable. However, when financial development is sustainable, the credit market becomes more competitive and more efficient over time, and this could eventually contribute to economic growth. Nonetheless, given monopolistic competition in the financial sector, the level of entry into the credit market is generally inefficient. For instance, with diminishing returns to specialisation, entrants might be too few at the early stages of economic development and too many later on.
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GEOZS, IJS, IMTLJ, KILJ, KISLJ, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UL, UM, UPCLJ, UPUK
Development of bank microcredit Cao-Alvira, José J.; Deidda, Luca G.
The North American journal of economics and finance,
January 2020, 2020-01-00, Volume:
51
Journal Article
Peer reviewed
Open access
We analyze the process by which banks enter the microcredit market while still engaging in traditional credit practices. For this we study a competitive credit market with adverse selection, where ...lenders are endowed with a screening technology capable of extracting an informative signal about a borrower’s quality if enough time is devoted to process the loan application. The time necessary for signal extraction depends on the borrower’s informational transparency. In the presence of opaque and transparent borrowers, depending on economy parameters, either a separating equilibrium with standard credit or microcredit prevails or a pooling equilibrium with either loan contract prevails.
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GEOZS, IJS, IMTLJ, KILJ, KISLJ, NLZOH, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UILJ, UL, UM, UPCLJ, UPUK, ZAGLJ, ZRSKP
In a market where sellers are heterogeneous with respect to the quality of their good and are more informed than buyers, high quality sellers' chances to trade might depend on their ability to inform ...buyers about the quality of the goods they offer. We study how the strength of competition among sellers affects the ability of sellers of high quality goods to achieve communication by means of appropriate pricing decisions in the context of a market populated by a large number of strategic price-setting sellers and a large number of buyers. When competition among sellers is weak high quality sellers are able to use prices as a signaling device and this enables them to trade. By contrast, strong competition among sellers inhibits the role of prices as signals of high quality, and high quality sellers are driven out of the market.
►We introduce competition in a market for lemons with informed price-setting sellers. ►If competition is weak, sellers can signal their quality through the price choice. ►Strong competition among sellers inhibits the role of prices as signals.
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GEOZS, IJS, IMTLJ, KILJ, KISLJ, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UL, UM, UPCLJ, UPUK, ZRSKP
We study incentive provision in a model of securities issuance with an informed issuer and uninformed investors. We show that the presence of an informed intermediary may increase surplus even if we ...allow for collusion between the intermediary and the issuer. Collusion is neutralized by introducing a misalignment between the interests of the issuer and those of the intermediary. To achieve this, the intermediary commits to hold some of the securities. The intermediary then underprices the remaining securities and extracts any investor surplus through a "participation fee." We provide an explanation for the diffusion of book building and quid pro quo practices in Initial Public Offerings (IPOs).
We analyze trade between a perfectly informed price setting party (seller) and an imperfectly informed price taker (buyer). Differently from most of the literature, we focus on the case in which, ...under full information, it would be inefficient to trade goods of sufficiently poor quality. We show that the unique equilibrium surviving D1 is characterized by market breakdown, although trade would be mutually beneficial in some state of nature. This occurs independently of the precision of the information available to the buyer. The model thus implies that signaling through prices may exacerbate the effect of adverse selection rather than mitigate it. Under D1, the seller would always benefit from committing to prices that do not reveal her information. We develop this intuition by analyzing the strategic advantages of price rigidities. We show that price rigidities help restore trade and could even enhance effectiveness of prices as signals of quality.
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GEOZS, IJS, IMTLJ, KILJ, KISLJ, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UL, UM, UPCLJ, UPUK
We present a simple model which establishes a non-linear and possibly non-monotonic relationship between financial development and economic growth. Applying a threshold regression model to King and ...Levine’s (Q. J. Econ. 109 (1993) 83) data set, we find evidence consistent with the theoretical model.
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GEOZS, IJS, IMTLJ, KILJ, KISLJ, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UL, UM, UPCLJ, UPUK
We analyze the interaction between bank and market finance in a model where bankers gather information through monitoring and screening. We show that if a market characterized by a disclosure law is ...established such that entrepreneurs wishing to raise market finance can credibly disclose their sources of financing, this might undermine bankers' incentive to screen, even when screening is efficient. Correspondingly, other things being equal, the change from a bank-based system to one in which market-finance and bank-finance coexist might have an adverse affect on economic growth. Consistent with this result, our empirical findings suggest that both bank and stock market development have a positive effect on growth, but the growth impact of bank development is lower the higher is the level of stock market development.
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GEOZS, IJS, IMTLJ, KILJ, KISLJ, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UL, UM, UPCLJ, UPUK
We present an endogenous growth model with two sectors: a real sector where the final good is produced, and a banking sector that intermediates between savers and firms. Banking concentration exerts ...two opposite effects on growth. On the one hand, it induces economies of specialization, which is beneficial to growth. On the other hand, it results in duplication of banks' investment in fixed capital, which is detrimental to growth. The trade-off between the two opposing effects is ambiguous and can vary along the process of economic development. Hence, there is a potential nonlinear and nonmonotonic relationship between concentration and growth. We test this implication, using cross-country data on income and industry growth. We find that banking concentration is negatively associated with per-capita income growth and industrial growth only in low-income countries. This suggests that reducing concentration is more likely to promote growth in low-income countries than in high-income ones.
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