Attack Assignments in Terror Organizations and The Productivity of Suicide Bombers

This paper studies the relation between human capital of suicide bombers and outcomes of their suicide attacks. We argue that human capital is an important factor in the production of terrorism, and that if terrorists behave rationally we should observe that more able suicide bombers are assigned to more important targets. We use a unique data set detailing the biographies of Palestinian suicide bombers, the targets they attack, and the number of people that they kill and injure to validate the theoretical predictions and estimate the returns to human capital in suicide bombing. Our empirical analysis suggests that older and more educated suicide bombers are being assigned by their terror organization to more important targets. We find that more educated and older suicide bombers are less likely to fail in their mission, and are more likely to cause increased casualties when they attack.

Does short-term debt increase vulnerability to crisis? Evidence from the East Asian financial crisis

Does short-term debt increase vulnerability to financial crisis, or does causality go the other way, so that short term debt reflects rather than causes the incipient crisis? We approach this question empirically by examining the banking sector in five East Asian economies that were affected by the financial crisis of 1997-8. We put together a firm-level database that includes information on banks’ debt obligations as well as on bank failures following the crisis. We deal with potential endogeneity of short term debt by using certain long term debt obligations instead. These are debt obligations that mature at the time of the crisis, and therefore add to the bank’s vulnerability, but since they were contracted many years previously, cannot be mistaken as an endogenous response to changing conditions or expectations in the period immediately before the crisis. We find that such debt obligations that were contracted four years or more before the crisis have a negative, albeit sometimes insignificant effect on the probability of failure. Our results are therefore consistent with an interpretation of short-term debt as reflecting, rather than causing, distress in the banking sector. However, our findings do not rule out the hypothesis that exposure to roll-over risk contributed to bank failure in the East Asian crisis.Financial crises - Asia

The Political Economy of Financial Regulation: Evidence from U.S. State Usury Laws in the 19th Century

We investigate the causes and consequences of financial regulation by studying the political economy of U.S. state usury laws in the 19th century. We find evidence that usury laws were binding and enforced and that lending activity was affected by rate ceilings. Exploiting the heterogeneity across states and time in regulation, enforcement, and market conditions, we find that regulation tightens when it is less costly and when it coexists with other economic and political restrictions that exclude certain groups. Furthermore, the same determinants of financial regulation that favor one group (and restrict others) are associated with higher (lower) future economic growth rates. The evidence suggests regulation is the outcome of private interests using the coercive power of the state to extract rents from other groups, highlighting the endogeneity of financial development and growth.

Do Liquidation Values Affect Financial Contracts? Evidence from Commercial Loan Contracts and Zoning Regulation

We examine the impact of asset liquidation value on debt contracting using a unique set of commercial property non-recourse loan contracts. We employ commercial zoning regulation to capture the flexibility of a property's permitted uses as a measure of an asset's redeployability or value in its next best use. Within a census tract, more redeployable assets receive larger loans with longer maturities and durations, lower interest rates, and fewer creditors, controlling for the current value of the property, its type, and neighborhood. These results are consistent with incomplete contracting and transaction cost theories of liquidation value and financial structure.

An Empirical Analysis of the Fed\u27s Term Auction Facility

NBER Working Paper No. 1830

The Alchemy of CDO Credit Ratings

Collateralized Loan Obligations (CLOs) were one of the largest and fastest growing segments of the structured finance market, fueling the 2003-2007 boom in syndicated loans and leveraged buyouts. The credit crisis brought CLO issuance to a halt, and as a result the leveraged loan market dried up. Similar to other structured finance products, investors in CLOs rely heavily on credit rating provided by the rating agencies, yet little is known about CLO rating practices. This paper attempts to fill that gap. Using novel hand-collected data on 3,912 tranches of Collateralized Loan Obligations (CLO) we document the rating practices of CLOs and analyze their existing structures.

Credit Traps

This paper studies the limitations of monetary policy transmission within a credit channel frame- work. We show that, under certain circumstances, the credit channel transmission mechanism fails in that liquidity injections by the central bank into the banking sector are hoarded and not lent out. We use the term ‘credit traps’ to describe such situations and show how they can arise due to the interplay between financing frictions, liquidity, and collateral values. Our analysis offers a characterization of the problems created by credit traps as well as potential solutions and policy implications. Among these, the analysis shows how quantitative easing and fiscal policy acting in conjunction with monetary policy may be useful in increasing bank lending. Further, the model shows how small contractions in monetary policy or in loan supply can lead to collapses in lending, aggregate investment, and collateral prices.

Liquidation Values and the Credibility of Financial Contract Renegotiation: Evidence from U.S. Airlines

How do liquidation values affect financial contract renegotiation? While the 'incomplete contracting' theory of financial contracting predicts that liquidation values determine the allocation of bargaining power between creditors and debtors, there is little empirical evidence on financial contract renegotiations and the role asset values play in such bargaining. This paper attempts to fill this gap. We develop an incomplete-contracting model of financial contract renegotiation and estimate it using data on the airline industry in the United States. We find that airlines successfully renegotiate their lease obligations downwards when their financial position is sufficiently poor and when the liquidation value of their fleet is low. Our results show that strategic renegotiation is common in the airline industry. Moreover, the results emphasize the importance of the incomplete contracting perspective to real world financial contract renegotiation.

Stock-Based Compensation and CEO (Dis)Incentives

Stock-based compensation is the standard solution to agency problems between shareholders and managers. In a dynamic rational expectations equilibrium model with asymmetric information we show that although stock-based compensation causes managers to work harder, it also induces them to hide any worsening of the firm's investment opportunities by following largely sub-optimal investment policies. This problem is especially severe for growth firms, whose stock prices then become over-valued while managers hide the bad news to shareholders. We find that a firm-specific compensation package based on both stock and earnings performance instead induces a combination of high effort, truth revelation and optimal investments. The model produces numerous predictions that are consistent with the empirical evidence.

Negotiating with Labor under Financial Distress

We analyze how firms renegotiate labor contracts to extract concessions from labor. While anecdotal evidence suggests that firms tend to renegotiate wages downward in times of financial distress, there is no empirical evidence that documents such renegotiation, its determinants, and its magnitude. This article attempts to fill this gap. Using a unique data set of airlines, which includes detailed information on wages and pension plans, we document an empirical link between airline financial distress, pension underfunding, and wage concessions.National Science Foundation (U.S.) (CAREER award SES-0847392