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on Contract Theory and Applications |
| By: | Nicolás Figueroa; Oksana Leukhina |
| Abstract: | Several empirical studies suggest that the systematic behavior of lending standards, with laxer (tighter) standards applied during expansions (recessions) are responsible for reverting trends in aggregate productivity. We build a dynamic screening model with informational asymmetries in credit markets that rationalizes the observed dependence of lending standards on economic fundamentals and generates reversion of output and productivity trends via the lending standards channel. When the capital stock, which evolves endogenously, is high, liquidity is high for all types of producers, allowing even the unproductive type to meet the early payments on the loan, and thus making signals about entrepreneurs’ type, inferred from such payments, less informative. The early payment required to accomplish screening out the unproductive types thus rises. Because the early payment hurts productive entrepreneurs by restricting their investments, competition among lenders results in the selection of contracts with no screening. Low productivity entrepreneurs enter production along with productive types, the composition effect setting off a recession. The opposite happens for low enough values of capital. JEL Codes: E32, E44, D24. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:edj:ceauch:264&r=cta |
| By: | Michael Ehrmann (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); David Sondermann (University of Münster, Schlossplatz 2, D-48149 Münster, Germany.) |
| Abstract: | How do financial markets price new information? This paper analyzes price setting at the intersection of private and public information, by testing whether and how the reaction of financial markets to public signals depends on the relative importance of private information in agents’ information sets at a given point in time. It studies the reaction of UK short-term interest rates to the Bank of England’s inflation report and to macroeconomic announcements. Due to the quarterly frequency at which the Bank of England releases one of its main publications, it can become stale over time. In the course of this process, financial market participants need to rely more on private information. The paper develops a stylized model which predicts that, the more time has elapsed since the latest release of an inflation report, market volatility should increase, the price response to macroeconomic announcements should be more pronounced, and macroeconomic announcements should play a more important role in aligning agents’ information set, thus leading to a stronger volatility reduction. The empirical evidence is fully supportive of these hypotheses. JEL Classification: E58, E43, G12, G14. |
| Keywords: | public signals, inflation reports, monetary policy, interest rates, announcement effects, co-ordination of beliefs, Bank of England. |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091077&r=cta |
| By: | Eduardo Engel; Ronald Fischer; Alexander Galetovic |
| Abstract: | Public-private partnerships (PPPs) are increasingly used to provide infrastructure services. Even though PPPs have the potential to increase efficiency and improve resource allocation, contract renegotiations have been pervasive. We show that existing accounting standards allow governments to renegotiate PPP contracts and elude spending limits. Our model of renegotiations leads to observable predictions: (i) in a competitive market, firms lowball their offers, expecting to break even through renegotiation, (ii) renegotiations compensate lowballing and pay for additional expenditure, (iii) governments use renegotiation to increase spending and shift the burden of payments to future administrations, and (iv) there are significant renegotiations in the early stages of the contract, e.g. during construction. We use data on Chilean renegotiations of PPP contracts to examine these predictions and find that the evidence is consistent with the predictions of our model. Finally, we show that if PPP investments are counted as current government spending, the incentives to renegotiate contracts to increase spending disappear. |
| JEL: | H21 L51 L91 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15300&r=cta |
| By: | Eduardo Engel (Cowles Foundation, Yale University); Ronald Fischer (U. de Chile); Alexander Galetovic (U. de los Andes) |
| Abstract: | Public-private partnerships (PPPs) are increasingly used to provide infrastructure services. Even though PPPs have the potential to increase efficiency and improve resource allocation, contract renegotiations have been pervasive. We show that existing accounting standards allow governments to renegotiate PPP contracts and elude spending limits. Our model of renegotiations leads to observable predictions: (i) in a competitive market, firms lowball their offers, expecting to break even through renegotiation, (ii) renegotiations compensate lowballing and pay for additional expenditure, (iii) governments use renegotiation to increase spending and shift the burden of payments to future administrations, and (iv) there are significant renegotiations in the early stages of the contract, e.g. during construction. We use data on Chilean renegotiations of PPP contracts to examine these predictions and find that the evidence is consistent with the predictions of our model. Finally, we show that if PPP investments are counted as current government spending, the incentives to renegotiate contracts to increase spending disappear. |
| Keywords: | Build-operate-and-transfer, Concessions, Lowballing |
| JEL: | H21 L51 L91 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1723&r=cta |
| By: | Albert Banal-Estanol; Paul Heidhues; Rainer Nitsche; Jo Seldeslachts |
| Abstract: | In our paper targets, by setting a reserve price, screen acquirers on their (expected) ability to generate merger-speci?c synergies. Both empirical evidence and many common merger models suggest that the di?erence between high- and low-synergy mergers becomes smaller during booms. This implies that the target’s opportunity cost for sorting out rel- atively less ?tting acquirers increases and, hence, targets screen less tightly during booms, which leads to a hike in merger activity. Our screening mechanism not only predicts that merger activity is intense during economic booms and subdued during recessions but is also consistent with other stylized facts about takeovers and generates novel testable predictions. |
| Keywords: | Takeovers, Merger Waves, Defense Tactics, Screening |
| JEL: | D21 D80 L11 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:bon:bonedp:bgse20_2009&r=cta |