Market Based, Segregated Exchanges with Default Risk

This paper studies a competitive general equilibrium model with default and endogenous collateral constraints. Even though all collateralized contracts are allowed, the possibility and desirability of trade in spot markets (or the equivalent trade in ex ante asset backed securities) creates externalities, as spot prices (or security prices) and the bindingness of collateral constraints interact. We show that if agents are allowed to contract ex ante on market fundamentals determining the state-contingent spot price, over and above contracting on true underlying states of the world, then competitive equilibria with bundled securities and commodities and with endogenous collateral constraints are equivalent with Pareto optima. Examples show that it is possible to have multiple market fundamentals in equilibrium. Equivalently, it is possible for there to be segregation into distinct competitive securities exchanges with endogenous (positive and negative) entry fees. Fees accrue to borrowers who are otherwise collateral constrained.default; endogenous collateral; externalities; segregated exchanges; Walrasian equilibrium; limited commitment; financial crises

Information-Constrained Optima with Retrading: An Externality and Its Market-Based Solution

This paper studies the efficiency of competitive equilibria in environments with a moral hazard problem and unobserved states, both with retrading in ex post spot markets. The interaction between private information problems and the possibility of retrade creates an externality, unless preferences have special, restrictive properties. The externality is internalized by allowing agents to contract ex ante on market fundamentals determining the spot price or interest rate, over and above contracting on actions and outputs. Then competitive equilibria are equivalent with the appropriate notion of constrained Pareto optimality. Examples show that it is possible to have multiple market fundamentals or price islands, created endogenously in equilibrium.Externalities; Private information; Moral hazard; Retrading; Walrasian equilibrium; Constrained efficiency; Decentralization

Formal and informal financing in a Chicago neighborhood

This article documents not only the actual use of banks, but also the widespread use of alternative financing mechanisms, using data from a survey of households and businesses in a Hispanic neighborhood of Chicago.Bank loans ; Chicago (Ill.) ; Consumer behavior ; Mortgages

Discovering the Sources of TFP Growth: Occupation Choice, Capital Heterogeneity, and Financial Deepening

The sources of "total factor productivity (TFP) growth" or the "Solow residual" typically remain unknown as a residual. This paper aims to identify the underlying sources of this residual growth, being explicit about micro underpinnings and transitional growth from occupation choices of heterogeneous agents and financial deepening in use of both macro and micro data. We develop a method of growth accounting that decomposes not only the overall growth but also the residual TFP growth into four components: occupational shifts, financial deepening, capital heterogeneity, and sectoral Solow residuals. Applying this method to Thailand, which experienced rapid growth with enormous structural changes for the two decades between 1976 and 1996, we find that 55 percent of TFP growth can be explained on average by occupational shifts and financial deepening, without presuming exogenous technical progress. Expansion of credit is a major part of this explained TFP growth. Decomposition of the simulation helps us to infer that for the remainder TFP growth, capital-heterogeneity effect is behind during the initial period (1976-1980) while sectoral Solow residuals, due to the surge of wage after 1986, is behind during the latter decade (1986-1996)TFP, Capital Heterogeneity, Occupation Choice, Financial Deepening

Evaluation of financial liberalization : a general equilibrium model with constrained occupation choice

The objective of this paper is to assess both the aggregate growth effects and the distributional consequences of financial liberalization as observed in Thailand from 1976 to 1996. A general equilibrium occupational choice model with two sectors, one without intermediation, and the other with borrowing and lending, is taken to Thai data. Key parameters of the production technology and the distribution of entrepreneurial talent are estimated by maximizing the likelihood of transition into business given initial wealth as observed in two distinct datasets. Other parameters of the model are calibrated to try to match the two decades of growth as well as observed changes in inequality, labor share, savings, and the number of entrepreneurs. Without an expansion in the size of the intermediated sector, Thailand would have evolved very differently, namely, with a drastically lower growth rate, high residual subsistence sector, non-increasing wages, but lower inequality. The financial liberalization brings welfare gains and losses to different subsets of the population. Primary winners are talented would-be entrepreneurs who lack credit and cannot otherwise go into business (or invest little capital). Mean gains for these winners range from 17 to 34 percent of observed overall average household income. But liberalization also induces greater demand by entrepreneurs for workers resulting in increases in the wage and lower profits of relatively rich entrepreneurs of the same order of magnitude as the observed overall average income of firm owners. Foreign capital has no significant impact on growth or the distribution of observed income.Fiscal&Monetary Policy,Environmental Economics&Policies,Economic Conditions and Volatility,Economic Theory&Research,Banks&Banking Reform,Economic Theory&Research,Environmental Economics&Policies,Banks&Banking Reform,Economic Conditions and Volatility,International Terrorism&Counterterrorism

Distinguishing limited commitment from moral hazard in models of growth with inequality

We use non-parametric, reduced form and structural techniques to distin-guish the micro-economic foundations of two models of growth with increasing inequality using new data from rural and semi-urban households in Thailand. We estimate a limited commitment model that is similar to Evans and Jovanovic (1989) and a moral hazard model that is an extension of Aghion and Bolton (1996). Both models emphasize the role of occupational choice and financial constraints. While the models share many implications, they are distinguished by their assumptions about the nature of financial market imperfections. We provide structural and reduced form evidence that the dominant source of credit market imperfections varies with wealth. For poorer households limited commit-ment is the dominant concern. However, as wealth increases moral hazard gains importance. These findings provide a rationale for important characteristics of the financial environment in Thailand.Financial markets ; Wealth

The credit risk-contingency system of an Asian development bank

This article offers a new method for the evaluation of financial institutions, one that combines socioeconomic survey data with appropriate accounting standards. A government-operated development bank in Thailand is found to be offering a risk-contingency or insurance system while being regulated as a more standard, loan-generating bank. Farmer clients experiencing adverse shocks receive indemnities that improve their well-being. With proper provisioning and accounts, that welfare gain could be weighed against premia or government subsidies.Financial crises - Asia ; Financial institutions - Thailand ; Thailand

An evaluation of financial institutions: Impact on consumption and investment using panel data and the theory of risk-bearing

The theory of the optimal allocation of risk and the Townsend Thai panel data on financial transactions are used to assess the impact of the major formal and informal financial institutions of an emerging market economy. We link financial institution assessment to the actual impact on clients, rather than ratios and non-performing loans. We derive both consumption and investment equations from a common core theory with both risk and productive activities. The empirical specification follows closely from this theory and allows both OLS and IV estimation. We thus quantify the consumption and investment smoothing impact of financial institutions on households including those running farms and small businesses. A government development bank (BAAC) is shown to be particularly helpful in smoothing consumption and investment, in no small part through credit, consistent with its own operating system, which embeds an implicit insurance operation. Commercial banks are smoothing investment, largely through formal savings accounts. Other institutions seem ineffective by these metrics