Debt enforcement and relational contracting

We examine how third-party debt enforcement affects the emergence and performance ofrelational contracts in credit markets. We implement an experiment with finitely repeatedcredit relationships in which borrowers can default. In the weak enforcement treatmentdefaulting borrowers can keep their funds invested. In the strong enforcement treatmentdefaulting borrowers have to liquidate their investment. Under weak enforcement fewerrelationships emerge in which loans are extended and repaid. When such relationships doemerge they exhibit a lower credit volume than under strong enforcement. These findingssuggest that relational contracting in credit markets requires a minimum standard of thirdpartydebt enforcement.

Inside Iowa's DOC, July 2004, Vol. 2, no. 1

Newsletter from the Department of Corrections

Inside Iowa's DOC, February 2004, Vol. 2, no. 2

Newsletter from the Department of Corrections

Inside Iowa's DOC, May 2004, Vol. 1, no. 3

Newsletter from the Department of Corrections

Inside Iowa's DOC, October 2003, Vol. 1, no. 1

Newsletter from the Department of Corrections

The hidden costs of hidden debt

We report evidence that salience may have economically signi.cant e¤ects on homeowners.borrowing behavior, through a bias in favour of less salient but more costly loans. Survey evidence corroborates the existence of such a bias. We outline a simple model in which some consumers are biased and show that under plausible assumptions this affects prices in equilibrium. Market data support the predictions of the model.

Inside Iowa's DOC, October 2004, Vol. 2, no. 2

Newsletter from the Department of Corrections

Inside Iowa's DOC, January 2005, Vol. 2, no. 3

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Inside Iowa's DOC, April 2005, Vol. 2, no. 4

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Inside Iowa's DOC, July 2005, Vol. 3, no. 1

Newsletter from the Department of Corrections

A Comparative Study of Transvaginal Tape, Transobturator Tape Outside-in, and Transvaginal Tape-obturator Inside-out Surgical Procedures in the Treatment of Stress Urinary Incontinence

The aim of this work was to use the Urinary Distress Inventory (UDI-6) and Incontinence Impact Quality of Life (IIQ-7) questionnaires to compare 3 surgical techniques for stress urinary incontinence: the transvaginal tape (TVT) (105 women), the transobturator tape outside-in (TOT) (43 women), and the transvaginal tape-obturator inside-out (TVT-O) (54 women). There were no significant differences in frequent urination, urine leakage related to the feeling of urgency, urine leakage related to physical activity, or small amounts of urine leakage. TVT-operated women had a lower percentage of micturition difficulties compared with TOT women. TVT-O-operated women described slight discomfort in the genital area compared with the TVT technique, but this difference was not significant when compared with the TOT technique. When utilizing the UDI-6 and IIQ-7 scoring modifications before and after surgery, no difference among these 3 techniques is apparent.

Institutions, Public Debt and Foreign Finance

We study the role of domestic financial institutions in sustaining capital flows to the private and public sector of a country whose government can default on its debt. As in recent public debt crises, in our model public defaults weaken banks' balance sheets, disrupting domestic financial markets. This effect leads to a novel complementarity between private capital inflows and public borrowing, where the former sustain the latter by boosting the government's cost of default. Our key message is that, by shaping the direction of private capital flows, financial institutions determine whether financial integration improves or reduces government discipline. We explore the implications of this complementarity for financial liberalization and debt-financed bailouts of banks. We present some evidence consistent with complementarity.

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.

Credit card debt puzzles

Most US credit card holders revolve high-interest debt, often combined with substantial (i) asset accumulation by retirement, and (ii) low-rate liquid assets. Hyperbolic discounting can resolve only the former puzzle (Laibson et al., 2003). Bertaut and Haliassos (2002) proposed an 'accountant-shopper'framework for the latter. The current paper builds, solves, and simulates a fully-specified accountant-shopper model, to show that this framework canactually generate both types of co-existence, as well as target credit card utilization rates consistent with Gross and Souleles (2002). The benchmark model is compared to setups without self-control problems, with alternative mechanisms, and with impatient but fully rational shoppers.

Debt and deficit fluctuations and the structure of bond markets

This paper tests for the market environment within which US fiscal policyoperates, that is we test for the incompleteness of the US government bondmarket. We document the stochastic properties of US debt and deficits andthen consider the ability of competing optimal tax models to account forthis behaviour. We show that when a government pursues an optimal taxpolicy and issues a full set of contingent claims, the value of debthas the same or less persistence than other variables in the economyand declines in response to higher deficit shocks. By contrast, ifgovernments only issue one-period risk free bonds (incomplete markets),debt shows more persistence than other variables and it increases inresponse to expenditure shocks. Maintaining the hypothesis of Ramseybehavior, US data conflicts.