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.

Money, Fame and the Allocation of Talent: Brain Drain, the Matthew Effect and the Institution of Science

The earning structure in science is known to be flat relative to the one in the private sector, which could cause a brain drain toward the private sector. In this paper, we assume that agents value both money and fame and study the role of the institution of science in the allocation of talent between the science sector and the private sector. Following works on the Sociology of Science, we model the institution of science as a mechanism distributing fame (i.e. peer recognition). We show that since the intrinsic performance is less noisy signal of talent in the science sector than in the private sector, a good institution of science can mitigate the brain drain. We also find that providing extra monetary incentives through the market might undermine the incentives provided by the institution and thereby worsen the brain drain. Finally, we study the optimal balance between monetary and non-monetary incentives in science.

Do the Wealthy Risk More Money? An Experimental Comparison

Are poor people more or less likely to take money risks than wealthy folks? We find that risk attraction is more prevalent among the wealthy when the amounts of money at risk are small (not surprising, since ten dollars is a smaller amount for a wealthy person than for a poor one), but, interestingly, for the larger amounts of money at risk the fraction of the nonwealthy displaying risk attraction exceeds that of the wealthy. We also replicate our previous finding that many people display risk attraction for small money amounts, but risk aversion for large ones. We argue that preferences yielding risk attraction for small money amounts, together with risk aversion for larger amounts, at all levels of wealth, while contradicting the expected utility hypothesis, may be well-defined, independently of reference points, on the choice space.

Fiat Money, Intrinsic Properties, and Government Transaction Policy

Why do people coordinate on the use of valueless pieces of paper as generally accepted money? A possible answer is that these objects have intrinsic properties that make them better candidates to be used as media of exchange. Another answer stresses the fact that unconvertible fiat money will not easily appear unless there is a centralized institution that favors its use. The main objective of the paper is to analyze these questions. In order to do this, we take a model of commodity money in which fiat money does not play any significant role and modify it to examine under which circumstances fiat money might come to circulate as medium of exchange. Some of the results obtained from the model differ in a rather substantial way from previous related literature.

Are Chileans equally supportive? Analysis of the individual differences in money donations

In the public discourse it is commonly assumed that Chile is a solidary country, an assumption that is mixed with the idea of homogeneity in the country as far as helping behavior and solidarity values is concerned. The present paper is aimed at challenging this homogeneity assumption by proposing that helping behavior is associated to personal resources, which at the same time are linked to the position in the stratification structure. Using data from the Solidarity Survey implemented by the assessment center MIDE UC of the Pontificia Universidad Católica de Chile in 2009, the paper focuses on a specific type of helping behavior: money donations. The analysis centers on the influence of personal resources such as income, education and networks on this kind of donations. Results indicate that individuals with greater resources are more given to donate, whereby the educational level plays a key role.

Endogenous angiotensinergic system in neurons of rat and human trigeminal ganglia.

To clarify the role of Angiotensin II (Ang II) in the sensory system and especially in the trigeminal ganglia, we studied the expression of angiotensinogen (Ang-N)-, renin-, angiotensin converting enzyme (ACE)- and cathepsin D-mRNA, and the presence of Ang II and substance P in the rat and human trigeminal ganglia. The rat trigeminal ganglia expressed substantial amounts of Ang-N- and ACE mRNA as determined by quantitative real time PCR. Renin mRNA was untraceable in rat samples. Cathepsin D was detected in the rat trigeminal ganglia indicating the possibility of existence of pathways alternative to renin for Ang I formation. In situ hybridization in rat trigeminal ganglia revealed expression of Ang-N mRNA in the cytoplasm of numerous neurons. By using immunocytochemistry, a number of neurons and their processes in both the rat and human trigeminal ganglia were stained for Ang II. Post in situ hybridization immunocytochemistry reveals that in the rat trigeminal ganglia some, but not all Ang-N mRNA-positive neurons marked for Ang II. In some neurons Substance P was found colocalized with Ang II. Angiotensins from rat trigeminal ganglia were quantitated by radioimmunoassay with and without prior separation by high performance liquid chromatography. Immunoreactive angiotensin II (ir-Ang II) was consistently present and the sum of true Ang II (1-8) octapeptide and its specifically measured metabolites were found to account for it. Radioimmunological and immunocytochemical evidence of ir-Ang II in neuronal tissue is compatible with Ang II as a neurotransmitter. In conclusion, these results suggest that Ang II could be produced locally in the neurons of rat trigeminal ganglia. The localization and colocalization of neuronal Ang II with Substance P in the trigeminal ganglia neurons may be the basis for a participation and function of Ang II in the regulation of nociception and migraine pathology.

Money doctors

We present a new model of money management, in which investors delegate portfolio management to professionals based not only on performance, but also on trust. Trust in the manager reduces an investor's perception of the riskiness of a given investment, and allows managers to charge higher fees to investors who trust them more. Money managers compete for investor funds by setting their fees, but because of trust the fees do not fall to costs. In the model, 1) managers consistently underperform the market net of fees but investors still prefer to delegate money management to taking risk on their own, 2) fees involve sharing of expected returns between managers and investors, with higher fees in riskier products, 3) managers pander to investors when investors exhibit biases in their beliefs, and do not correct misperceptions, and 4) despite long run benefits from better performance, the profits from pandering to trusting investors discourage managers from pursuing contrarian strategies relative to the case with no trust. We show how trust-mediated money management renders arbitrage less effective, and may help destabilize financial markets.

Endogenous spillovers, increased competition and re-organization waves

We consider an entrepreneur that is the sole producer of a costreducing skill, but the entrepreneur that hires a team to usethe skill cannot prevent collusive trade for the innovation related knowledge between employees and competitors. We showthat there are two types of diffusion avoiding strategies forthe entrepreneur to preempt collusive communication i) settingup a large productive capacity (the traditional firm) and ii)keeping a small team (the lean firm). The traditional firm ischaracterized by its many "marginal" employees that work shortdays, receive flat wages and are incompletely informed about the innovation. The lean firm is small in number of employees,engages in complete information sharing among members, that are paid with stock option schemes. We find that the lean firm is superior to the traditional firm when technological entry costsare low and when the sector is immature.

Endogenous credit cycles

I develop an overlapping-generations framework in which changes in lending standards generateendogenous cycles. In my economy, entrepreneurs who are privately informed about thequality of their projects need to borrow funds. Intermediaries screen entrepreneurs both throughthe amount of investment undertaken and through the level of entrepreneurial net worth.I show that endogenous regime switches in financial contracts from pooling to separatingand vice-versa may generate fluctuations even in the absence of exogenous shocks. Whenthe economy is in the pooling (separating) regime, lending standards seem lax ( tight ) andinvestment is high (low). Differently from the existing literature, my model does not requireentrepreneurial net worth to be counter cyclycal or inconsequential for determining aggregateinvestment.