Creator: Boyd, John H. and Smith, Bruce D. (Bruce David), 1954-2002 Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 512 Abstract:
We investigate ex-ante efficient contracts in an environment in which implementation is costless. In this environment, standard debt contracts will typically not be optimal. Optimal contracts may involve defaults, even in states in which the borrower is fully able to repay. We then examine the welfare costs of arbitrarily restricting the set of feasible contracts to standard debt contracts. When model parameters are calibrated to realistic values, the welfare loss from exogenously imposing this restriction is extremely small. Thus, if the implementation costs are actually nontrivial (as seems likely), standard debt contracts will be (very close to) optimal.
Keyword: CSV, Optimal contract, CESV, Standard debt contract, Ex ante contract, Costly state verification, Loans, Financial contract, Bankruptcy, Costly ex-post state verification, Contracts, and Debt Subject (JEL): G10 - General Financial Markets: General (includes Measurement and Data) and D86 - Economics of Contract: Theory
Creator: Green, Edward J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 509 Abstract:
Thinking regarding the privatization of state industries and enterprises in the former Comecon countries has tended to focus on the efficiency gains that would occur in the privatized sector. Based on the comparatively good performance and the rather rigid configuration of Comecon production institutions, the scope for such productivity gains seems small. Rather, productivity and innovation in the post-Comecon economies are likely to depend greatly on the emergence of new, initially small, entrepreneurial firms. The extent and form of privatization may affect these firms' prospects for success. How the privatized-firm and entrepreneurial sector will interact depends on public-finance considerations as well as on considerations of industrial organization.
Keyword: Soviet bloc, Entrepreneurship, State enterprise, Comecon, Eastern bloc, Privatization, Council for Mutual Economic Assistance, Private enterprise, and Growth Subject (JEL): G38 - Corporate Finance and Governance: Government Policy and Regulation, L16 - Industrial Organization and Macroeconomics: Industrial Structure and Structural Change; Industrial Price Indices, and L33 - Comparison of Public and Private Enterprises and Nonprofit Institutions; Privatization; Contracting Out
Creator: Hansen, Gary D. (Gary Duane) and Prescott, Edward C. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 507 Description:
Presented at the ASSA meetings in Anaheim, CA.
Keyword: 1991, Recession, Technology shock, Labor, 1990, Productivity, Knowledge, and Technological shocks Subject (JEL): G14 - Information and Market Efficiency; Event Studies; Insider Trading and O33 - Technological Change: Choices and Consequences; Diffusion Processes
Creator: Braun, R. Anton Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 506 Abstract:
This paper investigates the macroeconomic effects of cyclical fluctuations in marginal tax rates. It finds that systematically including tax variables in a standard real business cycle model substantially improves the model's ability to reproduce basic facts about postwar U.S. business cycle fluctuations. In particular, modeling fluctuations in personal and corporate income tax rates increases the model's predicted relative variability of hours and decreases its predicted correlation between hours and average productivity. Fluctuations in tax rates produce large substitution effects that alter the leisure/labor supply decision.
Keyword: Corporate tax , Taxes, Business cycle, Tax, Income tax, Tax rates, Real business cycle model, Productivity, and Taxation Subject (JEL): E32 - Business Fluctuations; Cycles, H25 - Business Taxes and Subsidies including sales and value-added (VAT), and H24 - Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes
Creator: Glosten, Lawrence R., Jagannathan, Ravi, and Runkle, David Edward Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 505 Abstract:
Earlier researchers have found either no relation or a positive relation between the conditional expected return and the conditional variance of the monthly excess return on stocks when they used the standard GARCH-M model. This is in contrast to the negative relation found when other approaches were used to model conditional variance. We show that the difference in the estimated relation arises because the standard GARCH-M model is misspecified. When the standard model is modified allow for (i) the presence for seasonal patterns in volatility, (ii) positive and negative innovations to returns to having different impacts on conditional volatility, and (iii) nominal interest rates to affect conditional variance, we once again find support for a negative relation. Using the modified GARCH-M model, we also show that there is little evidence to support the traditional view that conditional volatility is highly persistent. Also, positive unanticipated returns result in a downward revision of the conditional volatility whereas negative unanticipated returns result in an upward revision of conditional volatility of a similar magnitude. Hence the time series properties of the monthly excess return on stocks appear to be substantially different from that of the daily excess return on stocks.
Keyword: Stock market, Rate of return, Risk, Asset valuation, Return rate, and Stocks Subject (JEL): G12 - Asset Pricing; Trading Volume; Bond Interest Rates and G11 - Portfolio Choice; Investment Decisions
Creator: Aiyagari, S. Rao and Peled, Dan Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 503 Abstract:
It is often argued that with a positively skewed income distribution (median less than mean) a majority voting over proportional tax rates would result in higher tax rates than those that maximize average welfare, and will accordingly reduce aggregate savings. We reexamine this view in a capital accumulation model, in which distorting redistributive taxes provide insurance against idiosyncratic shocks, and income distributions evolve endogenously. We find small differences of either sign between the tax rates set by a majority voting and a utilitarian government, for reasonable parametric specifications. We show how these differences reflect a greater responsiveness of a utilitarian government to the average need for the insurance provided by the tax-redistribution scheme. These conclusions remain true despite the fact that the model simulations produce positively skewed distributions of total income across agents.
Keyword: Votes, Taxes, and Income distribution Subject (JEL): E62 - Fiscal Policy and D72 - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
Creator: Green, Edward J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 501 Abstract:
I consider two theories of the determination of political institutions. One of these theories stresses effects of changes in the balance of military power between the ruler and subjects on the distribution of property rights which the political system enforces. The other theory emphasizes the effect of changing informational constraints which require institutional changes to be made in order to maintain efficiency. I examine how each of these theories would apply to explaining the development of parliamentary government in thirteenth-century England. My general conclusion is that both theories are required to understand fully the process by which liberal political institutions emerge.
Keyword: History, Government, England, and Great Britain Subject (JEL): N43 - Economic History: Government, War, Law, International Relations, and Regulation: Europe: Pre-1913 and H11 - Structure, Scope, and Performance of Government
Creator: Green, Edward J. and Oh, Soo-Nam Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 499 Abstract:
In this paper we explain why markets in noncontingent debt securities might be a stable form of market organization for intermediation to households. Efficient-contract allocation might be supported by these markets because households' relationships with their intermediaries do not exactly parallel the explicit form of the noncontingent contracts that they explicitly sign with one another. Also we show that the efficient-contract model can be distinguished from alternative models within the time-series framework that has been widely used to study households' consumption patterns.
Paper prepared for the 'Debt and Credit' Conference at the LSE.
Keyword: Households, Credit contracts, Consumption, Credit, and Debt securities Subject (JEL): G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages, C22 - Single Equation Models; Single Variables: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes, and D11 - Consumer Economics: Theory