Endogenous Credit Cycles and Financial Dampening in an Adverse Selection Economy

We propose an adverse selection framework in which the financial sector has a dual role. It amplifies or dampens exogenous shocks and also generates endogenous fluctuations. We fully characterize constrained optimal contracts in a setting in which entrepreneurs need to borrow and are privately informed about the quality of their projects. Our characterization is novel in analyzing pooling and separating allocations in a context of multi-dimensional screening: specifically, the amounts of investment undertaken and of entrepreneurial net worth are used to screen projects. We then embed these results in a dynamic competitive economy. First, we show how endogenous regime switches in financial contracts may generate fluctuations in an economy that exhibits no dynamics under full information. Unlike previous models of endogenous cycles, our result does not rely on entrepreneurial net worth being counter-cyclical or inconsequential for determining investment. Secondly, the model shows the different implications of adverse selection as opposed to pure moral hazard. In particular, and contrary to standard results in the macroeconomic literature, the financial system may dampen exogenous shocks in the presence of adverse selection.

Interviews and adverse selection

Interviewing in professional labor markets is a costly process for firms. Moreover, poor screening can have a persistent negative impact on firms bottom lines and candidates careers. In a simple dynamic model where firms can pay a cost to interview applicants who have private information about their own ability, potentially large inefficiencies arise from information-based unemployment, where able workers are rejected by firms because of their lack of offers in previous interviews. This effect may make the market less efficient than random matching. We show that the first best can be achieved using either a mechanism with transfers or one without transfers.

Hiring and firing costs, adverse selection and long-term unemployment

In this paper, we present a matching model with adverse selection that explains why flows into and out of unemployment are much lower in Europe compared to North America, while employment-to-employment flows are similar in the two continents. In the model,firms use discretion in terms of whom to fire and, thus, low quality workers are more likely to be dismissed than high quality workers. Moreover, as hiring and firing costs increase, firms find it more costly to hire a bad worker and, thus, they prefer to hire out of the pool of employed job seekers rather than out of the pool of the unemployed, who are more likely to turn out to be 'lemons'. We use microdata for Spain and the U.S. and find that the ratio of the job finding probability of the unemployed to the job finding probability of employed job seekers was smaller in Spain than in the U.S. Furthermore, using U.S. data, we find that the discrimination of the unemployed increased over the 1980's in those states that raised firing costs by introducing exceptions to the employment-at-will doctrine.

Comparative genomic analysis of the odorant-binding protein family in 12 Drosophila genomes: purifying selection and birth-and-death evolution

Background: Chemoreception is a widespread mechanism that is involved in critical biologic processes, including individual and social behavior. The insect peripheral olfactory system comprises three major multigene families: the olfactory receptor (Or), the gustatory receptor (Gr), and the odorant-binding protein (OBP) families. Members of the latter family establish the first contact with the odorants, and thus constitute the first step in the chemosensory transduction pathway.Results: Comparative analysis of the OBP family in 12 Drosophila genomes allowed the identification of 595 genes that encode putative functional and nonfunctional members in extant species, with 43 gene gains and 28 gene losses (15 deletions and 13 pseudogenization events). The evolution of this family shows tandem gene duplication events, progressive divergence in DNA and amino acid sequence, and prevalence of pseudogenization events in external branches of the phylogenetic tree. We observed that the OBP arrangement in clusters is maintained across the Drosophila species and that purifying selection governs the evolution of the family; nevertheless, OBP genes differ in their functional constraints levels. Finally, we detect that the OBP repertoire evolves more rapidly in the specialist lineages of the Drosophila melanogaster group (D. sechellia and D. erecta) than in their closest generalists.Conclusion: Overall, the evolution of the OBP multigene family is consistent with the birth-and-death model. We also found that members of this family exhibit different functional constraints, which is indicative of some functional divergence, and that they might be involved in some of the specialization processes that occurred through the diversification of the Drosophila genus.

Heterogeneity, selection and labor market disparities

We study the incentives to acquire skill in a model where heterogeneous firmsand workers interact in a labor market characterized by matching frictions and costlyscreening. When effort in acquiring skill raises both the mean and the variance of theresulting ability distribution, multiple equilibria may arise. In the high-effort equilibrium, heterogeneity in ability is sufficiently large to induce firms to select the bestworkers, thereby confirming the belief that effort is important for finding good jobs.In the low-effort equilibrium, ability is not sufficiently dispersed to justify screening,thereby confirming the belief that effort is not so important. The model has implications for wage inequality, the distribution of firm characteristics, sorting patternsbetween firms and workers, and unemployment rates that can help explaining observedcross-country variation in socio-economic and labor market outcomes.

Growth, selection and appropriate contracts

We study a dynamic model where growth requires both long-term investmentand the selection of talented managers. When ability is not ex-ante observable and contracts are incomplete, managerial selection imposes a cost, as managers facing the risk ofbeing replaced choose a sub-optimally low level of long-term investment. This generates atrade-off between selection and investment that has implications for the choice of contractualrelationships and institutions. Our analysis shows that rigid long-term contracts sacrificingmanagerial selection may prevail at early stages of economic development and when heterogeneity in ability is low. As the economy grows, however, knowledge accumulation increasesthe return to talent and makes it optimal to adopt flexible contractual relationships, wheremanagerial selection is implemented even at the cost of lower investment. Measures of investor protection aimed at limiting the bargaining power of managers improve selection undershort-term contract. Given that knowledge accumulation raises the value of selection, theoptimal level of investor protection increases with development.

Saccharomyces cerevisiae as a model organism: a comparative study

Background: Model organisms are used for research because they provide a framework on which to develop and optimize methods that facilitate and standardize analysis. Such organisms should be representative of the living beings for which they are to serve as proxy. However, in practice, a model organism is often selected ad hoc, and without considering its representativeness, because a systematic and rational method to include this consideration in the selection process is still lacking. Methodology/Principal Findings: In this work we propose such a method and apply it in a pilot study of strengths and limitations of Saccharomyces cerevisiae as a model organism. The method relies on the functional classification of proteins into different biological pathways and processes and on full proteome comparisons between the putative model organism and other organisms for which we would like to extrapolate results. Here we compare S. cerevisiae to 704 other organisms from various phyla. For each organism, our results identify the pathways and processes for which S. cerevisiae is predicted to be a good model to extrapolate from. We find that animals in general and Homo sapiens in particular are some of the non-fungal organisms for which S. cerevisiae is likely to be a good model in which to study a significant fraction of common biological processes. We validate our approach by correctly predicting which organisms are phenotypically more distant from S. cerevisiae with respect to several different biological processes. Conclusions/Significance: The method we propose could be used to choose appropriate substitute model organisms for the study of biological processes in other species that are harder to study. For example, one could identify appropriate models to study either pathologies in humans or specific biological processes in species with a long development time, such as plants.

Selection response of growth rate in rabbits for meat production

Genetic and environmental trends in 2 lines of rabbit (B and R) selected on individual weight gain (WG) from weaning (4 wk) to slaughter (11 wk) were estimated using mixed model methodology. Line B was derived from the California breed and line R was a synthetic of stock of different origin. The data were collected from a single herd and comprised 7 718 individuals in line B and 9 391 in line R, the lines having 12 and 9 generations of selection respectively. Realized responses in the 2 lines were 2.7% and 2.2% of the initial mean per year respectively and showed that selection on WG was effective but was less than expected. Selection on slaughter weight (SW) and effects of selection on other economic traits are discussed. It is concluded that selection on either WG or SW is a simple method for improving growth rate in rabbit sire line stocks.

An expression of mixed animal model equations to account for different means and variances in the base population

This paper presents a general expression to predict breeding values using animal models when the base population is selected, i.e. the means and variances of breeding values in the base generation differ among individuals. Rules for forming the mixed model equations are also presented. A numerical example illustrates the procedure.

Gene filtering with optimal threshold selection

Gene filtering is a useful preprocessing technique often applied to microarray datasets. However, it is no common practice because clear guidelines are lacking and it bears the risk of excluding some potentially relevant genes. In this work, we propose to model microarray data as a mixture of two Gaussian distributions that will allow us to obtain an optimal filter threshold in terms of the gene expression level.

Divergent evolution and purifying selection of the flaA gene sequences in Aeromonas

BACKGROUND: The bacterial flagellum is the most important organelle of motility in bacteria and plays a key role in many bacterial lifestyles, including virulence. The flagellum also provides a paradigm of how hierarchical gene regulation, intricate protein-protein interactions and controlled protein secretion can result in the assembly of a complex multi-protein structure tightly orchestrated in time and space. As if to stress its importance, plants and animals produce receptors specifically dedicated to the recognition of flagella. Aside from motility, the flagellum also moonlights as an adhesion and has been adapted by humans as a tool for peptide display. Flagellar sequence variation constitutes a marker with widespread potential uses for studies of population genetics and phylogeny of bacterial species. RESULTS: We sequenced the complete flagellin gene (flaA) in 18 different species and subspecies of Aeromonas. Sequences ranged in size from 870 (A. allosaccharophila) to 921 nucleotides (A. popoffii). The multiple alignment displayed 924 sites, 66 of which presented alignment gaps. The phylogenetic tree revealed the existence of two groups of species exhibiting different FlaA flagellins (FlaA1 and FlaA2). Maximum likelihood models of codon substitution were used to analyze flaA sequences. Likelihood ratio tests suggested a low variation in selective pressure among lineages, with an omega ratio of less than 1 indicating the presence of purifying selection in almost all cases. Only one site under potential diversifying selection was identified (isoleucine in position 179). However, 17 amino acid positions were inferred as sites that are likely to be under positive selection using the branch-site model. Ancestral reconstruction revealed that these 17 amino acids were among the amino acid changes detected in the ancestral sequence. CONCLUSION: The models applied to our set of sequences allowed us to determine the possible evolutionary pathway followed by the flaA gene in Aeromonas, suggesting that this gene have probably been evolving independently in the two groups of Aeromonas species since the divergence of a distant common ancestor after one or several episodes of positive selection. REVIEWERS: This article was reviewed by Alexey Kondrashov, John Logsdon and Olivier Tenaillon (nominated by Laurence D Hurst).