Processing and Transmission of Information

Contains reports on three research projects.Lincoln Laboratory, Purchase Order DDL B-00283U. S. ArmyU. S. NavyU. S. Air Force under Air Force Contract AF 19(604)-5200Office of Naval Research under Contract Nonr-1841(57

The Procyclical Role of Rating Agencies: Evidence from the East Asian Crisis

We demonstrate that credit rating agencies aggravated the East Asian crisis. In fact, having jailed to predict the emergence of the crisis, rating agencies became excessively conservative. They downgraded East Asian crisis countries more than the worsening in these countries' economic fundamentals would justify. This unduly exacerbated, for these countries, the cost of borrowing abroad and caused the supply of international capital to them to evaporate. In turn, lower than deserved ratings contributed -- at least for some time -- to amplify the East Asian crisis. Although this goes beyond the scope of our paper we also propose an endogenous rationale for rating agencies to become excessively conservative after having made blatant errors in predicting the East Asian crisis. Specifically, rating agencies would have an incentive to become more conservative, so as to recover from the damage these errors caused to them and to rebuild their own reputation

Risk Aversion, Supply Response, and the Optimality of Random Prices: A Diagrammatic Analysis

This paper analyzes the effect of commodity price stabilization on producers and consumers, both in the short run, and in the long run, when producers have adjusted their production decisions to take account of the change in the price distribution. We derive conditions under which (a) both producers and consumers may be better off; and (b) both producers and consumers may be worse off. Moreover, we show that the long-run effects may differ not only quantitatively but also qualitatively from the short-run effects. The anomalous results may occur even with reasonable assumptions concerning production functions and utility functions of producers and consumers

The Choice of Techniques and the Optimality of Market Equilibrium with Rational Expectations

This paper shows that, in the absence of a complete set of risk markets, prices provide incorrect signals for guiding production decisions. Even if all individuals have rational expectations concerning the distribution of prices which will prevail on the market next period, the market allocation is, in general, not a constrained Pareto optimum. Essentially the only conditions under which, for all technologies, the market equilibrium is a constrained Pareto optimum are those in which risk markets are redundant. We derive the necessary and sufficient conditions for redundancy of risk markets, which turn out to be extremely restrictive

Wage Rigidity, Implicit Contracts, Unemployment, and Economic Efficiency

This article examines the theory of involuntary unemployment and implicit contracts. Furthermore, the article is concerned with identifying the circumstances under which implicit contracts will give rise to unemployment even though involuntary unemployment has been often attributed to wage rigidities generated by implicit contracts by themselves. Moreover, a simple, general equilibrium model and the three sources of restrictions on the set of feasible contracts: (1) information; (2) enforcement; and (3) complexity. Finally, it is concluded that implicit contracts can then provide an explanation of unemployment

The Theory of Commodity Price Stabilization Rules: Welfare Impacts and Supply Responses

It is the aim of this paper to suggest an alternative framework for the analysis of commodity stabilisation schemes, based on more secure micro-economic foundations. We begin with what might be termed the general theory of partial (or incomplete) price stabilisation. This meets objection (vi) above, and shows how the shape of the demand schedule and the source and specification of risk influence the size and distribution of welfare gains. It therefore allows the reader to appreciate the importance of the more detailed model specification which is required to investigate the remaining questions. This new model allows one to distinguish between the short run and long run impact of stabilisation, and to examine the importance of risk aversion and individual supply elasticity on the distribution of gains and losses from partial stabilisation. In particular, we do not discuss the dynamics of price stabilisation in the paper (price expectations, learning, the stochastic nature of buffer stocks, etc.), nor do we model demand uncertainty, the macro-economic impact of risk and stabilisation, market imperfections, interactions with future markets, private speculators, with other commodities, and a host of other important issues. For these, and for a more detailed exposition of some of the key concepts presented here, the interested reader is referred to our forthcoming book (Newbery and Stiglitz, 1980). Finally, we should point out that the buffer stock rules analysed here are not optimal rules, which can only be derived from complete dynamic analysis, as derived and discussed in the book 1 Turnovsky (1978a) examines a simple parameterisation of a partial stabilisation scheme, but restricts the analysis to the linear Waugh-Oi-Massell case

Optimal Commodity Stockpiling Rules

Stiglitz and Newbery discuss optimal commodity stockpiling rules

Consumer credit information systems: A critical review of the literature. Too little attention paid by lawyers?

This paper reviews the existing literature on consumer credit reporting, the most extensively used instrument to overcome information asymmetry and adverse selection problems in credit markets. Despite the copious literature in economics and some research in regulatory policy, the legal community has paid almost no attention to the legal framework of consumer credit information systems, especially within the context of the European Union. Studies on the topic, however, seem particularly relevant in view of the establishment of a single market for consumer credit. This article ultimately calls for further legal research to address consumer protection concerns and inform future legislation

Crises: Principles and Policies: With an Application to the Eurozone Crisis

Economies around the world have faced repeated crises — more frequently over the past thirty years. The fact that they have become more frequent and pervasive at the same time that we believe we have learned more about the management of the economy and as markets have seemingly improved poses a puzzle: shouldn't rational markets avoid these catastrophes, the costs of which outweigh, by an enormous amount, any benefit that might have accrued to the economy from the actions prior to the crisis that might have contributed to it? This is especially true of the large fraction of crises that can be called “debt crises,” precipitated by a country’s difficulty in repaying what it owes. The benefits of income smoothing (arising from the difference in the marginal utility of income in periods when income is low and when income is high) are overwhelmed by the social and economic costs of the ensuing crisis