Transition and Financial Collapse

One of the many problems facing the countries in transition from socialism to capitalism after the initial phase of privatization and restructuring is the lack of proven entrepreneurial talent in addition to a low initial level of capital. New entrepreneurs might find it hard to finance their start-up enterprises. This paper therefore argues that a financial collapse and thus a collapse of the new entrepreneurial sector might occur. First, the lack of financial intermediation in transition economies is examined empirically before proceeding to a theoretical model. Using IMF data on claims to the private sector, we find that the extent of financial intermediation in these countries is comparable to developing rather than industrialized countries. The theoretical part analyzes an overlapping generations model with heterogenous entrepreneurial qualities and private information. A financial collapse can result, if young agents are too poor to provide enough collateral for financing a small project to prove their qualities as entrepreneur and no proven middle-aged entrepreneurs are available who can be entrusted with enough funds to run big projects. In that case, the economy contracts to an agricultural steady state. Possible remedies are discussed. In particular, large inequality or a large-scale, long-lasting government program of subsidizing investment help to overcome the danger of a financial collapse.

Debt Contracts, Collapse and Regulation as Competition Phenomena

We study a credit market with adverse selection and moral hazard where sufficient sorting is impossible. The crucial novel feature is the competition between lenders in their choice of contracts offered. Qualities of investment projects are not observable by banks and investment decisions of entrepreneurs are not contractible, but output conditional on investment is. We explain the empirically observed prevalence of debt contracts as an equilibrium phenomenon with competing lenders. Equilibrium contracts must be immune against raisin-picking by competitors. Non-debt contracts allow competitors to offer sweet deals to particularly good debtors, who will self-select to choose such a deal, while bad debtors distribute themselves across all offered contracts. Competition of banks introduces three possibilities for a breakdown of credit markets that do not occur when a bank has a monopoly. First, average returns decrease since banks compete for good lenders which may make the lending altogether unprofitable. Second, banks can have an incentive to offer a debt contract and additional equity contracts to intermediate debtors. This combination, however, is in turn dominated by a simple debt contract that is only attractive for very good entrepreneurs. As a result no equilibrium in pure strategies exists. Existence can be restored, if the permissible types of contracts are limited by regulation resembling the separation of investment and commercial banking in the U.S. Third, allowing for random delivery on credit contracts leads to a break-down since all banks want to avoid the contract with the highest chance of delivery: that contract attracts all bad entrepreneurs.contract;debt contract;adverse selection;moral hazard;competition;financial collapse;regulation

Rule of Thumb and Dynamic Programming

This paper studies the relationships between learning about rules of thumb (represented by classifier systems) and dynamic programming. Building on a result about Markovian stochastic approximation algorithms, we characterize all decision functions that can be asymptotically obtained through classifier system learning, provided the asymptotic ordering of the classifiers is strict. We demonstrate in a robust example that the learnable decision function is in general not unique, not characterized by a strict ordering of the classifiers, and may not coincide with the decision function delivered by the solution to the dynamic programming problem even if that function is attainable. As an illustration we consider the puzzle of excess sensitivity of consumption to transitory income: classifier systems can generate such behavior even if one of the available rules of thumb is the decision function solving the dynamic programming problem, since bad decisions in good times can "feel better" than good decisions in bad times.

Increasing the Capital Income Tax Leads to Faster Growth

This paper shows that under rather mild conditions, higher capital income taxes lead to faster growth in an overlapping generations economy with endogenous growth. Government expenditures are financed with labor income taxes as well as capital income taxes. Since capital income accrues to the old, taxing it reliefs the tax burden on the young and leaves them with more income out of which to save. We argue that savings are sufficiently interest inelastic so that higher savings and therefore higher growth result. The basic argument is not seriously challenged by a grandfather clause for initial capital or by the old receiving some labor income as well.

Can Habit Formation be Reconciled with Business Cycle Facts?

Many asset pricing puzzles can be explained when habit formation is added to standard preferences. We show that utility functions with a habit then gives rise to a puzzle of consumption volatility in place of the asset pricing puzzles when agents can choose consumption and labor optimally in response to more fundamental shocks. We show that the consumption reaction to technology shocks are too small by an order of magnitude when a utility includes a habit. Alternative models with consistent and exogenous but stochastic labor input are considered. A model with persistent technology shocks and stochastic labor is shown to be potentially consistent with substantial consumption variability aswell as procyclical labor input and labor productivity even when a habit is present.

On the chemical equilibration of strangeness-exchange reaction in heavy-ion collisions

The strangeness-exchange reaction pi + Y -> K- + N is shown to be the dynamical origin of chemical equilibration for K- production in heavy-ion collisions up to beam energies of 10 A GeV. The hyperons occurring in this process are produced associately with K+ in baryon-baryon and meson-baryon interactions. This connection is demonstrated by the ratio K-/K+ which does not vary with centrality and shows a linear correlation with the yield of pions per participant. At incident energies above AGS this correlation no longer holds due to the change in the production mechanism of kaons.Comment: 9 pages, 4 figure