Adverse Selection, Credit, and Efficiency: the Case of the Missing Market

We analyze a standard environment of adverse selection in credit markets. In our envi- ronment, entrepreneurs who are privately informed about the quality of their projects need to borrow from banks. As is generally the case in economies with adverse selection, the competitive equilibrium of our economy is shown to be ine¢ cient. Under adverse selection, the choices made by one type of agents limit what can be o¤ered to other types in an incentive-compatible manner. This gives rise to an externality, which cannot be internalized in a competitive equilibrium. We show that, in this type of environment, the ine¢ ciency associated to adverse selection is the consequence of one implicit assumption: entrepreneurs can only borrow from banks. If an additional market is added (say, a .security market.), in which entrepreneurs can obtain funds beyond those o¤ered by banks, we show that the e¢ cient allocation is an equilibrium of the economy. In such an equilibrium, all entrepreneurs borrow at a pooling rate in the security market. When they apply to bank loans, though, only entrepreneurs with good projects pledge these additional funds as collateral. This equilibrium thus simultaneously entails cross- subsidization and separation between di¤erent types of entrepreneurs.

Intergovernmental Transfers and Elementary Education: Quasi-Experimental Evidence from Brazil

Whether providing additional resources to local communities leads to improved public services and better outcomes more generally, given existing management capacity and incentive and accountability structures, is an unresolved yet important question for public policy. This paper uses a regression-discontinuity design to evaluate the effect of unrestricted fiscal transfers on local spending (including on education), schooling and learning in Brazil. Results show that transfers increase local public spending almost one for one with no evidence of crowding out own revenue or other revenue sources. Extra per capita transfers of 1000 Reais lead to about 0.42 additional years of elementary schooling and student literacy rates increase by about 5.6 percentage points on average. Part of this effect arises through higher teacher-student ratios in municipal elementary school systems. Results also suggest that additional resources have stronger effects in more rural and less developed parts of Brazil.

Optimal Contracts, Adverse Selection, and Social Preferences: An Experiment

It has long been standard in agency theory to search for incentive-compatible mechanisms on the assumption that people care only about their own material wealth. However, this assumption is clearly refuted by numerous experiments, and we feel that it may be useful to consider nonpecuniary utility in mechanism design and contract theory. Accordingly, we devise an experiment to explore optimal contracts in an adverse-selection context. A principal proposes one of three contract menus, each of which offers a choice of two incentive-compatible contracts, to two agents whose types are unknown to the principal. The agents know the set of possible menus, and choose to either accept one of the two contracts offered in the proposed menu or to reject the menu altogether; a rejection by either agent leads to lower (and equal) reservation payoffs for all parties. While all three possible menus favor the principal, they do so to varying degrees. We observe numerous rejections of the more lopsided menus, and approach an equilibrium where one of the more equitable contract menus (which one depends on the reservation payoffs) is proposed and agents accept a contract, selecting actions according to their types. Behavior is largely consistent with all recent models of social preferences, strongly suggesting there is value in considering nonpecuniary utility in agency theory.

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.

The Long-Run Impact of Corn-Based Ethanol on the Grain, Oilseed, and Livestock Sectors: A Preliminary Assessment, November 2006

The ongoing growth of corn-based ethanol production raises some fundamental questions about what impact continued growth will have on U.S. and world agriculture. Estimates of the long-run potential for ethanol production can be made by calculating the corn price at which the incentive to expand ethanol production disappears. Under current ethanol tax policy, if the prices of crude oil, natural gas, and distillers grains stay at current levels, then the break-even corn price is $4.05 per bushel. A multi-commodity, multi country system of integrated commodity models is used to estimate the impacts if we ever get to $4.05 corn. At this price, corn-based ethanol production would reach 31.5 billion gallons per year, or about 20% of projected U.S. fuel consumption in 2015. Supporting this level of production would require 95.6 million acres of corn to be planted. Total corn production would be approximately 15.6 billion bushels, compared to 11.0 billion bushels today. Most of the additional corn acres come from reduced soybean acreage. Wheat markets would adjust to fulfill increased demand for feed wheat. Corn exports and production of pork and poultry would all be reduced in response to higher corn prices and increased utilization of corn by ethanol plants. These results should not be viewed as a prediction of what will eventually materialize. Rather, they indicate a logical end point to the current incentives to invest in corn-based ethanol plants.

Financial protection of patients through compensation of providers: the impact of health equity funds in Cambodia

Public providers have no financial incentive to respect their legal obligation to exempt the poor from user fees. Health Equity Funds (HEFs) aim to make exemptions effective by giving NGOs responsibility for assessing eligibility and compensating providers for lost revenue. We use the geographic spread of HEFs in Cambodia to identify their impact on out-of-pocket (OOP) payments. Among households with some OOP payment, HEFs reduce the amount by 29%, on average. The effect is larger for households that are poorer, mainly use public health care and live closer to a district hospital. HEFs are more effective in reducing OOP payments when they are operated by a NGO, rather than the government, and when they operate in conjunction with the contracting of public health services. HEFs reduce households' health-related debt by around 25%, on average. There is no significant impact on non-medical consumption and health care utilisation

On optimal monetary and fiscal policy interactions in open economies

This paper studies monetary and fiscal policy interactions in a two country model, where taxes on firms sales are optimally chosen and the monetary policy is set cooperatively.It turns out that in a two country setting non-cooperative fiscal policy makers have an incentive to change taxes on sales depending on shocks realizations in order to reduce output production. Therefore whether the fiscal policy is set cooperatively or not matters for optimal monetary policy decisions. Indeed, as already shown in the literature, the cooperative monetary policy maker implements the flexible price allocation only when special conditions on the value of the distortions underlying the economy are met. However, if non-cooperative fiscal policy makers set the taxes on firms sales depending on shocks realizations, these conditions cannot be satisfied; conversely, when fiscal policy is cooperative, these conditions are fulfilled. We conclude that whether implementing the flexible price allocation is optimal or not depends on the fiscal policy regime.

Completing contracts ex post: How car manufacturers manage car dealers

This article illustrates how contracts are completed ex post in practice and, in so doing, indirectly suggests what the real function of contracts may be. Our evidence comes from the contracts between automobile manufacturers and their dealers in 23 dealership networks in Spain. Franchising dominates automobile distribution because of the need to decentralize pricing and control of service decisions. It motivates local managers to undertake these activities at minimum cost for the manufacturer. However, it creates incentive conflicts, both between manufacturers and dealers and among dealers themselves, concerning the level of sales and service provided. It also holds potential for expropriation of specific investments. Contracts deal with these conflicts by restricting dealers decision rights and granting manufacturers extensive completion, monitoring and enforcement powers. The main mechanism that may prevent abuse of these powers is the manufacturers reputational capital.

Appropriateness of respiratory care: evidence-based guidelines.

PRINCIPLES: Respiratory care is universally recognised as useful, but its indications and practice vary markedly. In order to improve the appropriateness of respiratory care in our hospital, we developed evidence-based local guidelines in a collaborative effort involving physiotherapists, physicians and health service researchers. METHODS: Recommendations were developed using the standardised RAND appropriateness method. A literature search was conducted based on terms associated with guidelines and with respiratory care. A working group prepared proposals for recommendations which were then independently rated by a multidisciplinary expert panel. All recommendations were then discussed in common and indications for procedures were rated confidentially a second time by the experts. The recommendations were then formulated on the basis of the level of evidence in the literature and on the consensus among these experts. RESULTS: Recommendations were formulated for the following procedures: non-invasive ventilation, continuous positive airway pressure, intermittent positive pressure breathing, intrapulmonary percussive ventilation, mechanical insufflation-exsufflation, incentive spirometry, positive expiratory pressure, nasotracheal suctioning and non-instrumental airway clearance techniques. Each recommendation referred to a particular medical condition and was assigned to a hierarchical category based on the quality of the evidence from the literature supporting the recommendation and on the consensus among the experts. CONCLUSION: Despite a marked heterogeneity of scientific evidence, the method used allowed us to develop commonly agreed local guidelines for respiratory care. In addition, this work fostered a closer relationship between physiotherapists and physicians in our institution.

Managerial incentives for mergers

We study managerial incentives in a model where managers take notonly product market but also takeover decisions. We show that the optimalcontract includes an incentive to increase the firm's sales, under bothquantity and price competition. This result is in contrast to the previousliterature and hinges on the fact that with a more aggressive manager rivalfirms earn lower profits and are willing to sell out at a lower price. \\However, as a side--effect of such a contract, the manager might take overmore rivals than would be profitable.

Globalization, technology and inequality

What are the effects of international integration on inequality, both between and within countries? The growing evidence that technology is the main determinant of wage and income differences may seem to imply that the forces of globalization only play a secondary role. Such a conclusion is however premature, in that it neglects the effect of international integration on technology itself. This opuscle summarizes recent and ongoing research studying how two important aspects of globalization, trade in goods and offshoring of production, shape the distribution of income when technological progress is endogenous. It discusses the theoretical foundations and the empirical support for various mechanisms through which international integration may change the incentive to develop and adopt new technologies and how this affects wages and the return to skill around the world.

Perfil e Competências Essenciais aos Dirigentes públicos: um olhar sobre os Directores Gerais das Direcções Gerais do

O presente estudo tem como objectivo principal identificar e analisar o perfil e as competências essenciais para o cargo de dirigente público sob a óptica dos dirigentes das DGPOG, e qual a relação entre a importância atribuída às competências apontadas e o domínio que os dirigentes dizem possuir sobre as mesmas. Foram abordadas, no referencial teórico, as competências no seu sentido lato e as competências essenciais ao cargo de direcção. Para o desenvolvimento deste trabalho foram utilizadas duas abordagens: a quantitativa e a qualitativa. Tendo em conta os objectivos do estudo, optou-se pela pesquisa qualitativa descritiva, por se pretender estudar um grupo específico – os dirigentes da Direcção Geral de Planeamento, Orçamento e Gestão (DGPOG) e para se estabelecer a relação entre as variáveis “grau de importância” e “nível de domínio”, e pela qualitativa interpretativa por se procurar analisar a percepção dos entrevistados acerca das competências necessárias aos mesmos no exercício de suas funções. Os resultados revelaram que o perfil e as competências dos dirigentes entrevistados vão de encontro ao desejado, embora o problema da pesquisa tivesse levantado a hipótese de que a nomeação dos dirigentes em detrimento destes serem colocados por via de concurso, pudesse trazer alguns reveses na dinamização da Administração Pública. Apesar de tal hipótese não ter sido confirmada pelos resultados da pesquisa, tal não pressupõe que se dispense uma análise cuidadosa do perfil e competências dos dirigentes aquando da sua nomeação. Espera-se, ainda, que a presente pesquisa incentive a Administração Pública a realizar outros diagnósticos, de forma a propiciar dados adicionais para o planeamento de um eventual programa de desenvolvimento gerencial e capacitação dos dirigentes públicos.

Speed of convergence of recursive least squares learning with ARMA perceptions

This paper fills a gap in the existing literature on least squareslearning in linear rational expectations models by studying a setup inwhich agents learn by fitting ARMA models to a subset of the statevariables. This is a natural specification in models with privateinformation because in the presence of hidden state variables, agentshave an incentive to condition forecasts on the infinite past recordsof observables. We study a particular setting in which it sufficesfor agents to fit a first order ARMA process, which preserves thetractability of a finite dimensional parameterization, while permittingconditioning on the infinite past record. We describe how previousresults (Marcet and Sargent [1989a, 1989b] can be adapted to handlethe convergence of estimators of an ARMA process in our self--referentialenvironment. We also study ``rates'' of convergence analytically and viacomputer simulation.

The INTERNORM project : bridging two worlds of expert- and layknowledge in standardization

This paper presents a pilot project to reinforce participatory practices in standardization. The INTERNORM project is funded by the University of Lausanne, Switzerland. It aims to create an interactive knowledge center based on the sharing of academic skills and the experiences accumulated by the civil society, especially consumer associations, environmental associations and trade unions to strengthen the participatory process of standardization. The first objective of the project is action-oriented: INTERNORM provides a common knowledge pool supporting the participation of civil society actors to international standard-setting activities by bringing them together with academic experts in working groups and by providing logistic and financial support to their participation to meetings of national and international technical committees. The second objective of the project is analytical: the standardization action initiated through INTERNORM provides a research field for a better understanding of the participatory dynamics underpinning international standardization. The paper presents three incentives that explain civil society (non-)involvement in standardization that try to overcome conventional resource-based hypotheses: an operational incentive, related to the use of standards in the selective goods provided by associations to their membership; a thematic incentive, provided by the setting of priorities by strategic committees created in some standardization organization; a rhetorical incentive, related to the discursive resource that civil society concerns offers to the different stakeholders.

Weights in the balance: jasmonic acid and salicylic acid signaling in root-biotroph interactions.

Work on the interaction of aerial plant parts with pathogens has identified the signaling molecules jasmonic acid (JA) and salicylic acid (SA) as important players in induced defense of the plant against invading organisms. Much less is known about the role of JA and SA signaling in root infection. Recent progress has been made in research on plant interactions with biotrophic mutualists and parasites that exclusively associate with roots, namely arbuscular mycorrhizal and rhizobial symbioses on one hand and nematode and parasitic plant interactions on the other hand. Here, we review these recent advances relating JA and SA signaling to specific stages of root colonization and discuss how both signaling molecules contribute to a balance between compatibility and defense in mutualistic as well as parasitic biotroph-root interactions.