Bail-Out or Work-Out? Theoretical Considerations

In recent years, we appear to have entered an era of capital account crises. In response, a number of new crisis resolution ideas have been put forward, including the establishment of supranational institutions such as an international lender of last resort or an international bankruptcy court, temporary payments standstills and the inclusion of collective action clauses in debt contracts. This paper assesses these proposals using a theoretical model of crisis. The model underscores the importance of adapting policy interventions to the nature of the crisis at hand. For example, it finds that payments standstills and last-resort lending are an equally efficient means of dealing with liquidity crises, both ex-ante and ex-post, while creditor committees are second-best. It finds that debt-write-downs are a preferred means of dealing with solvency crises than subsidized IMF financing because of the negative moral hazard implications of the latter tool. And it finds that international bankruptcy court proposals may be superior to contractual approaches in securing such write-downscrisis resolution, international lender of last resort, standstills, IMF

Should we pay for ecosystem service outputs, inputs or both?

Payments for ecosystem service outputs have recently become a popular policy prescription for a range of agri-environmental schemes. The focus of this paper is on the choice of contract instruments to incentivise the provision of ecosystem service outputs from farms. The farmer is better informed than the regulator in terms of hidden information about costs and hidden-actions relating to effort. The results show that with perfect information, the regulator can contract equivalently on inputs or outputs. With hidden information, input-based contracts are more cost effective at reducing the informational rent related to adverse selection than output-based contracts. Mixed contracts are also cost-effective, especially where one input is not observable. Such contracts allow the regulator to target variables that are “costly-to-fake” as opposed to those prone to moral hazard such as effort. Further results are given for fixed price contracts and input-based contracts with moral hazard. The model is extended to include a discussion of repeated contracting and the scope that exists for the regulator to benefit from information revealed by the initial choice of contract. The models are applied to a case study of contracting with farmers to protect high biodiversity native vegetation that also provides socially-valuable ecosystem services

The Intensity of Incentives in Firms and Markets: Moral Hazard with Envious Agents

While most market transactions are subject to strong incentives, transactions within firms are often not incentivized. We offer an explanation for this observation based on envy among agents in an otherwise standard moral hazard model with multiple agents. Envious agents suffer if other agents receive a higher wage due to random shocks to their performance measures. The necessary compensation for expected envy renders incentive provision more expensive, which generates a tendency towards flat-wage contracts. Moreover, empirical evidence suggests that social comparisons like envy are more pronounced among employees within firms than among individuals who interact only in the market. Flat-wage contracts are thus more likely to be optimal in firms than in markets

Improving Incentives in Unemployment Insurance: A Review of Recent Research

This paper provides a review of the recent literature on how incentives in unemployment insurance (UI) can be improved. We are particularly concerned with three instruments, viz. the duration of benefit payments (or more generally the time sequencing of benefits), monitoring in conjunction with sanctions, and workfare. Our reading of the theoretical literature is that the case for imposing a penalty on less active job search is fairly solid. A growing number of empirical studies, including randomized experiments, are in line with this conclusion.Unemployment insurance; search; monitoring; sactions; workfare

Improving incentives in unemployment insurance: A review of recent research

This paper provides a review of the recent literature on how incentives in unemployment insurance (UI) can be improved. We are particularly concerned with three instruments, viz. the duration of benefit payments (or more generally the time sequencing of benefits), monitoring in conjunction with sanctions, and workfare. Our reading of the theoretical literature is that the case for imposing a penalty on less active job search is fairly solid. A growing number of empirical studies, including randomized experiments, are in line with this conclusion.Unemployment insurance; search; monitoring; sanctions; workfare

Liquidity constraints and credit subsidies in auctions

I consider an auction with participants that differ in valuation and access to liquid assets. Assuming credit is costly (e.g. due to moral hazard considerations) different auction rules establish different ways of screening valuation-liquidity pairs. The paper shows that standard auction forms result in different allocation rules. When the seller can deny access to capital markets or offer credit subsidies, she gains an additional tool to screen agents. The paper derives conditions under which the seller increases profits by way of subsidizing loans. In particular, in a second price auction, the seller always benefits from offering small subsidies. The result extends to a non-auction setting to show that a monopolist may use credit subsidies as a price discrimination device