Lobbying-consistent Delegation and Sequential Policy Making

This paper studies the relationship between interest group political influence and allocation of decisionmaking power in a potentially divided government. We consider a simple endogenous policy model in which a legislator is in charge of setting the levels of two different policy instruments - a tax rate and a revenue redistribution scheme - and may decide to delegate policy authority over the allocation task to a bureaucracy within a hierarchy. An organized group is able to influence the political process at both tiers through the provision of policy-contingent contributions. We find conditions under which legislative delegation and sequential decisionmaking are consistent in equilibrium with the presence of two-tier lobbying, as the effects of the former on the allocation of lobbying activities exactly counterbalance the loss from bureaucracy's capture. As a consequence, we find that the possibility of multi-tier lobbying within a divided government need not be harmful to the higher level policy maker in the political equilibrium.Multi-tier lobbying; Multilevel governments; Delegation; Endogenous policy making

On the Empirical Separability of News Shocks and Sunspots

In this note we discuss the possibility of empirically evaluating the relative importance of different drivers of forecast errors in linear rational expectations frameworks, using the predictions generated by the theory. By means of a few simple examples, we show that, when accounting for indeterminate equilibria, empirical difficulties are likely to arise in distinguishing between determinate models driven by news shocks or rather by indeterminate ones under nonfundamental – or arbitrarily related to fundamentals – sunspot noise.

News Shocks or Correlated Sunspots? An Observational Equivalence Result in Linear Rational Expectations Model

This paper studies identification of linear rational expectations models under news shocks. Exploiting the general martingale difference solution approach, we show that news shocks models are observationally equivalent to a class of indeterminate equilibrium frameworks which are subject only, though arbitrarily, to i.i.d. fundamental shocks. The equivalent models are characterized by a lagged expectations structure, which arises typically when choice variables are predetermined or rather based on past information with respect to current observables. This particular feature creates room for serially correlated sunspot variables to arise in equilibrium reduced forms, whose dynamics can be equivalently induced by news shocks processes. This finding, which is inherent to the rational expectations theoretical construct, calls for carefully designing empirical investigations of news shocks in estimated DSGE models.Rational expectations; News shocks; Indeterminacy; Observational equivalence.

Credit information quality and corporate debt maturity : theory and evidence

This paper provides new theoretical and empirical evidence suggesting that the quality of credit information may be a key element in explaining the maturity structure of corporate debt around the world. In markets with poor credit information and hence a high degree of uncertainty about borrower quality, the authors find suboptimal equilibria in which short-term contracts are preferred either as a hedge against uncertainty to limit losses in bad states (in the symmetric information case) or as a screening device to learn about borrower credit quality in the course of a repeated lending relationship (in the asymmetric information case). The results of the model are supported by the econometric analysis of panel data from both industrial and developing economies. The authors find that countries with better quality of credit information (for example, as a result of improvements in credit reporting systems or accounting standards) are characterized by a higher share of long-term debt as a proportion of total corporate debt ceteris paribus. The findings suggest that promoting institutions and policies to improve the quality of credit information is an important prerequisite for increasing access of firms to long-term finance.Banks&Banking Reform,Financial Intermediation,Economic Theory&Research,Insurance&Risk Mitigation,Financial Crisis Management&Restructuring

The Role of the Judiciary in the Public Decision Making Process

In this paper we investigate the role of judicial control of lobbying activities in an endogenous policy framework, focusing on two dimensions of quality of the judiciary, namely efficiency and integrity. We present a multi-layer lobbying model where a self-interested group is allowed to inuence a public decision maker – and possibly the judicial authority itself, which performs an anti-corruption task – with the payment of illegal contributions, and provide general conditions for the existence of a zero-contribution equilibrium. Furthermore, we study how sensitive the main findings are to different institutional arrangements as to judicial independence.Illegal lobbying, Endogenous policy making, Judicial control

On the Solution of Markov-switching Rational Expectations Models

This paper describes a method for solving a class of forward-looking Markov-switching Rational Expectations models under noisy measurement, by specifying the unobservable expectations component as a general-measurable function of the observable states of the system, to be determined optimally via stochastic control and filtering theory. Solution existence is proved by setting this function to the regime-dependent feedback control minimizing the mean-square deviation of the equilibrium path from the corresponding perfect-foresight autoregressive Markov jump state motion. As the exact expression of the conditional (rational) expectations term is derived both in finite and infinite horizon model formulations, no (asymptotic) stationarity assumptions are needed to solve forward the system, for only initial values knowledge is required. A simple sufficient condition for the mean-square stability of the obtained rational expectations equilibrium is also provided.Rational Expectations, Markov-switching dynamic systems, Dynamic programming, Time-varying Kalman filter

Deposit insurance and financial development

The authors examine the effect of different design features of deposit insurance, on long-run financial development, defined to include the level of financial activity, the stability of the banking sector, and the quality of resource allocation. Their empirical analysis is guided by recent theories of banking regulation, that employ an agency framework. The authors examine the effect of deposit insurance on the size, and volatility of the financial sector, in a sample of fifty eight countries. They find that generous deposit insurance, leads to financial instability in lax regulatory environments. But in sound regulatory environments, deposit insurance does have the desired impact on financial development, and growth. Thus, countries introducing a deposit insurance scheme, need to ensure that it is accompanied by a sound regulatory framework. Otherwise, the scheme will likely lead to instability, and deter financial development. In weak regulatory environments, policymakers should at least limit deposit insurance coverage.Insurance Law,Financial Intermediation,Payment Systems&Infrastructure,Banks&Banking Reform,Insurance&Risk Mitigation,Banks&Banking Reform,Financial Intermediation,Insurance&Risk Mitigation,Insurance Law,Financial Crisis Management&Restructuring

Essays in Dynamic Macroeconomics and Political Economy

This dissertation attempts in four essays to contribute to economic research in two separate fields, and is therefore divided into two self-contained parts. Part I (Dynamic Macroeconomics) is rooted in the modern macroeconomic literature that aims at exploring theoretical departures from the classic rational expectations (RE) paradigm. According to the latter, economic agents know at all dates the full state of the economy as well as the structure which generated the state itself. Our study rather accounts for a time-varying structure and imperfect observability of the model's variables (chapter 1), and for advanced information on the future states - that is, for news shocks and anticipation (chapter 2). In chapter 1, the problem of finding a solution to time-varying linear RE systems involving past expectations of the future state values and noisy observations is addressed. It is shown that there exists always an equilibrium path having the property of being the closest, in mean square, to the state motion of the autoregressive dynamic equation governing the perfect foresight behavior of the economic system. Chapter 2 explores the empirical separability of news shocks and sunspots models. By means of the general martingale solution approach, we show that it may prove impossible to decide on an econometric basis whether the actually observed data is generated by determinate models driven by news shocks or rather by indeterminate ones forced by sunspot variables. Part II of the dissertation (Political Economy) aims to contribute to the literature on the role of self-interested groups in the political arena. In chapter 3, we investigate theoretically how the presence of (corruptible) judiciaries that oversee the political process impacts on one of the mechanisms by which lobby groups can influence policy outcomes, that is, bribery. We show that judicial independence is a necessary condition for deterrence effects to arise, as dependent judges are notable to prevent the interest group and the government from maximizing the profits from the deals between them. Judges must be subject to mechanisms that hold them accountable for their institutional role. Our analysis suggests that preserving the efficiency of independent judiciaries can serve as an instrument for self-enforced judicial accountability, even in the presence of corrupt societies. In chapter 4, we study the process of legislative delegation in the presence of bureaucratic lobbying. We show that the possibility of strategic agency selection fully restores general results from the conventional theory of delegation. In particular, bureaucratic lobbying never reduces the scope of delegation across different political systems (parliamentary versus separation of powers), as it engenders no influence on the extent of (expected) policy bias induced by delegated legislation

Short-term corporate debt around the world

Short-term corporate debt as a proportion of total debt issued by public firms varies greatly across countries, between 28% in the U.S. and 78% in China. This paper argues that the interaction between information asymmetry and legal protection of creditors is an important determinant of debt maturity. When short-term debt plays a dual role as signalling and commitment devices, a reduction in information asymmetry has a larger impact on debt maturity when creditor rights are weaker. We find empirical support for this prediction using firm-level data from 45 countries around the world

Approximate Closed-Form Solutions for the Shift Mechanics of Rubber Belt Variators

The mechanical behavior of V-belt variators during the speed ratio shift is different from the steady operation as a gross radial motion of the belt is superimposed to the circumferential motion. The theoretical analysis involves equilibrium equations similar to the steady case, but requires a re-formulation of the mass conservation condition making use of the Reynolds transport theorem. The mathematical model of the belt-pulley coupling implies the repeated numerical solution of a strongly non-linear differential system. Nevertheless, an attentive observation of the numerical diagrams suggests simple and useful closed-form approximations for the four possible working modes of any pulley, opening/closing, driver/driven, whose validity ranges over most practical cases. The present analysis focuses on the development of such simplified solutions, succeeding in an excellent matching with the numerical plots, and on the comparison of the theory with some experimental tests on a motorcycle variator, revealing a very good agreemen