Trade credit: Suppliers as debt collectors and insurance providers

There are two fundamental puzzles about trade credit: why does it appearto be so expensive,and why do input suppliers engage in the business oflending money? This paper addresses and answers both questions analysingthe interaction between the financial and the industrial aspects of thesupplier-customer relationship. It examines how, in a context of limitedenforceability of contracts, suppliers may have a comparative advantageover banks in lending to their customers because they hold the extrathreat of stopping the supply of intermediate goods. Suppliers may alsoact as lenders of last resort, providing insurance against liquidityshocks that may endanger the survival of their customers. The relativelyhigh implicit interest rates of trade credit result from the existenceof default and insurance premia. The implications of the model areexamined empirically using parametric and nonparametric techniques on apanel of UK firms.

Long term debt with hidden borrowing

We consider borrowers with the opportunity to raise funds from a competitive baking sector,that shares information about borrowers, and an alternative hidden lender. We highlight thatthe presence of the hidden lender restricts the contracts that can be obtained from the banking sector and that in equilibrium some borrowers obtain funds from both the banking sector and the (inefficient) hidden lender simultaneously. We further show that as the inefficiency of the hidden lender increases, total welfare decreases. By extending the model to examine a partially hidden lender, we further highlight the key role of information.

Why do emerging economies borrow short term?

We argue that one reason why emerging economies borrow short term is that it is cheaperthan borrowing long term. This is especially the case during crises, as in these episodes therelative cost of long-term borrowing increases. We construct a unique database of sovereignbond prices, returns, and issuances at di¤erent maturities for 11 emerging economies from 1990to 2009 and present a set of new stylized facts. On average, these countries pay a higher riskpremium on long-term than on short-term bonds. During crises, the di¤erence between the tworisk premia increases and issuance shifts towards shorter maturities. To illustrate our argument,we present a simple model in which the maturity structure is the outcome of a risk sharingproblem between an emerging economy subject to rollover crises and risk averse internationalinvestors.

Effect of irrigation water on the incidence of Salmonella spp. on lettuces produced by urban agriculture and sold on the markets in Dakar, Senegal

The aim of our survey was to assess the effect of irrigation water of the microbiological quality on the production chain of lettuce in the Dakar area. Microbiological analysis showed that 35% of irrigation water was contaminated by Salmonella spp. between the two water-types used for irrigation (groundwater and wastewater), no significant difference (p>0.05) in their degree of contamination was found. The incidence of different types of irrigation water on the contamination rate of lettuces from the farm (Pikine and Patte d'Oie) was not different either (p>0.05). However, the contamination rate of lettuce from markets of Dalifort and Grand-Yoff that were supplied by the area of Patte d'Oie was greater than those of Sham and Zinc supplied by Pikine (p<0.05). Comparison of serotypes of Salmonella isolated from irrigation water and lettuce showed that irrigation water may affect the microbiological quality of lettuce. Manures, frequently used as organic amendment in cultivating lettuce are another potential source of contamination. These results showed that lettuce may constitute effective vectors for the transmission of pathogens to consumers. Extensive treatment of the used wastewater and/or composting of manure could considerably reduce these risks.

Implications of dynamic trading for insurance markets

We study the interaction between insurance and capital markets within singlebut general framework.We show that capital markets greatly enhance the risksharing capacity of insurance markets and the scope of risks that areinsurable because efficiency does not depend on the number of agents atrisk, nor on risks being independent, nor on the preferences and endowmentsof agents at risk being the same. We show that agents share risks by buyingfull coverage for their individual risks and provide insurance capitalthrough stock markets.We show that aggregate risk enters private insuranceas positive loading on insurance prices and despite that agents will buyfull coverage. The loading is determined by the risk premium of investorsin the stock market and hence does not depend on the agent s willingnessto pay. Agents provide insurance capital by trading an equally weightedportfolio of insurance company shares and riskless asset. We are able toconstruct agents optimal trading strategies explicitly and for verygeneral preferences.

Job creation under liquidity constraints: The Spanish case

This paper shows that liquidity constraints restrict jobcreation even when labor markets are flexible. In a dynamicmodel of labor demand, I show that in an environment of imperfect capital and imperfect labor markets, firms usetemporary contracts to relax financial constraints. Evidence for the predictions of the model is presented using Spanish data from the CBBE (Central de Balances del Banco de España - Balance Sheet data from the Bank of Spain). It is shown that firms substitute temporary laborfor permanent one and use less debt as their financial position improves. In particular, it is rejected that Spanish firms operate in an environment of free capital markets and of no labor adjustment costs. The labor reform of 1984, which created temporary contracts, implied to some extent a relaxation of liquidity constraints.Accordingly, firms used these contracts more extensivelyand used less debt; however, as capital markets continueto be imperfect, permanent job creation continues to beslow. Consequently, relaxation of liquidity constraints should also be part of a job creation strategy.

The adverse effects of environmental policy in green markets

We model green markets in which purchasers, either firms orconsumers, have higher willingness-to-pay for lesspolluting goods. The effectiveness of pollution reductionpolicies is examined in a duopoly setting. We show thatduopolists' strategic behaviour may increase pollutionlevels. Maximum emission standards, commonly used in greenmarkets, improve the environmental features of products.Nonetheless, overall pollution levels will rise becausegovernment regulation also affects market shares and bootsfirms' sales. Consequently, social welfare may be reduced.We also explore the effects of technological subsidies andproduct charges, including differentiation of charges.

Multimarket contact in pharmaceutical markets

We analyze the effect of multimarket contact on the pricing behavior of pharmaceutical firms controlling for different levels of regulatory constraints using the IMS MIDAS database for the industry. Theoretically, under product differentiation, firms may find it profitable to allocate their market power among markets where they are operating, specifically from more collusive to more competitive ones. We present evidence for nine OECD countries suggesting the existence of a multimarket effect for more market friendly countries (U.S. and Canada) and less regulated ones (U.K., Germany, Netherlands), while the results are more unstable for highly regulated countries with some countries being consistent with the theory (France) while others contradicting it (Japan, Italy and Spain). A key result indicates thatin the latter countries, price constraints are so intense, that there is little room for allocating market power. Thus equilibrium prices are expected in general to be lower in regulated countries.

Flexible multivariate GARCH modeling with an application to international stock markets

The goal of this paper is to estimate time-varying covariance matrices.Since the covariance matrix of financial returns is known to changethrough time and is an essential ingredient in risk measurement, portfolioselection, and tests of asset pricing models, this is a very importantproblem in practice. Our model of choice is the Diagonal-Vech version ofthe Multivariate GARCH(1,1) model. The problem is that the estimation ofthe general Diagonal-Vech model model is numerically infeasible indimensions higher than 5. The common approach is to estimate more restrictive models which are tractable but may not conform to the data. Our contributionis to propose an alternative estimation method that is numerically feasible,produces positive semi-definite conditional covariance matrices, and doesnot impose unrealistic a priori restrictions. We provide an empiricalapplication in the context of international stock markets, comparing thenew estimator to a number of existing ones.

Imitation of succesful behavior in Cournot markets

In an experimental standard Cournot Oligopoly we test the importance ofmodels of behavior characterized by imitation of succesful behavior. Wefind that the players appear to the rather reluctant to imitate.

Bank liquidity, interbank markets and monetary policy

A major lesson of the recent financial crisis is that the interbank lending marketis crucial for banks facing large uncertainty regarding their liquidity needs. Thispaper studies the efficiency of the interbank lending market in allocating funds. Weconsider two different types of liquidity shocks leading to different implications foroptimal policy by the central bank. We show that, when confronted with a distributional liquidity-shock crisis that causes a large disparity in the liquidity held amongbanks, the central bank should lower the interbank rate. This view implies that thetraditional tenet prescribing the separation between prudential regulation and monetary policy should be abandoned. In addition, we show that, during an aggregateliquidity crisis, central banks should manage the aggregate volume of liquidity. Twodifferent instruments, interest rates and liquidity injection, are therefore required tocope with the two different types of liquidity shocks. Finally, we show that failureto cut interest rates during a crisis erodes financial stability by increasing the riskof bank runs.

Insurance with frequent trading: A dynamic analysis of efficient insurance markets

This paper extends existing insurance results on the type of insurance contracts needed for insurance market efficiency toa dynamic setting. It introduces continuosly open markets that allow for more efficient asset allocation. It alsoeliminates the role of preferences and endowments in the classification of risks, which is done primarily in terms of the actuarial properties of the underlying riskprocess. The paper further extends insurability to include correlated and catstrophic events. Under these very general conditions the paper defines a condition that determines whether a small number of standard insurance contracts (together with aggregate assets) suffice to complete markets or one needs to introduce such assets as mutual insurance.

Nominal debt as a burden on monetary policy

We study the effects of nominal debt on the optimal sequential choice of monetary policy. When the stock of debt is nominal, the incentive to generate unanticipated inflation increases the cost of the outstanding debt even if no unanticipated inflation episodes occur in equilibrium. Without full commitment, the optimal sequential policy is to deplete the outstanding stock of debt progressively until these extra costs disappear. Nominal debt is therefore a burden on monetary policy, not only because it must be serviced, but also because it creates a time inconsistency problem that distorts interest rates. The introduction of alternative forms of taxation may lessen this burden, if there is enough commtiment to fiscal policy. If there is full commitment to an optimal fiscal policy, then the resulting monetary policy is the Friedman rule of zero nominal interest rates.

Irreversible investment in stochastically cyclical markets

This paper presents a new framework for studying irreversible (dis)investment whena market follows a random number of random-length cycles (such as a high-tech productmarket). It is assumed that a firm facing such market evolution is always unsure aboutwhether the current cycle is the last one, although it can update its beliefs about theprobability of facing a permanent decline by observing that no further growth phasearrives. We show that the existence of regime shifts in fluctuating markets suffices for anoption value of waiting to (dis)invest to arise, and we provide a marginal interpretationof the optimal (dis)investment policies, absent in the real options literature. Thepaper also shows that, despite the stochastic process of the underlying variable has acontinuous sample path, the discreteness in the regime changes implies that the samplepath of the firm s value experiences jumps whenever the regime switches all of a sudden,irrespective of whether the firm is active or not.