Truth-telling and the Role of Limited Liability in Costly State Verification Loan Contracts

Recent literature has considered the form of loan contract between two or more risk neutral parties where the revelation principle is inappropriate due to the lack of commitment to an auditing policy by the lender. The privately informed debtor has a stochastic return; once he knows the state realisation, auditing and cheating are determined as Nash equilibria. The literature assumes that this leads to randomised cheating and auditing. In this paper we verify that the contract may involve this randomisation; but that it may also involve truthtelling with random auditing and one or more investors in line with Persons (1996); or a single state independent repayment with no auditing. We define conditions on the state observation cost and the distribution of returns which determine which of these three forms of contract is optimal. We find that under unlimited liability when the loan size is fixed the two investor truthtelling contract dominates all the other forms; and that this is also true when the loan size is optimally chosen. On the other hand under limited liability if the cost of observation is large relative to the lowest state revenue, the random auditing contract or a constrained two investor truthtelling contract may be optimal. The limited liability condition in the constrained truthtelling contracts forces the level of finance to be higher than under unlimited liability.loan contracts, costly state verification, commitment, limited liability

The Impact of Labour Turnover: Theory and Evidence from UK Micro-Data

We analyse the impact of labour turnover on profits. We extend the efficiency wage model of Salop (1979) by separating incumbent and newly hired workers in the production function. We show that an exogenous increase in the turnover rate can increase profits, but only where firms do not choose the wage. This effect of turnover varies across firms as it depends on turnover costs, the substitutability of incumbents and new hires and other factors. We test our model on UK cross-sectional establishment-level data. We find that our predictions are consistent with the data.Labour Turnover; Turnover Costs; Optimal Turnover

Labour Turnover and Firm Performance

We explore the impact of labour turnover on firm performance by analysing the predictions of an extension of the efficiency wage model of Salop (1979) developed by Garino and Martin (2007), which separates incumbent and newly hired workers in the production function. Within this theoretical framework, an exogenous increase in the turnover rate can increase profits if firms do not choose wages unilaterally. We test the theoretical predictions of the model using UK cross-section establishment-level data, the 2004 Workplace and Employee Relations Survey. In accordance with our theoretical priors, the empirical results support the standard inverse relationship between the quit rate and firm performance where firms unilaterally choose the wage and generally support a positive relationship between firm performance and the quit rate where trade unions influence wage setting

Returns to Education and Risky Financial Investment

The aim of this paper is to explore the relationship between wages, human capital and investment in financial assets with risky returns at the individual level. To explore this relationship from an international perspective, we analyse individual level data from the British Household Panel Survey, the German Socio-Economic Panel and the U.S. Panel Study of Income Dynamics. Our findings suggest that investment in financial assets with risky returns is positively associated with returns to human capital investment

Mortgages and Financial Expectations: A Household Level Analysis

We contribute to the literature on household mortgage debt by exploring one particular influence on mortgage debt at the household level, namely the financial expectations of the individuals within the household. Our theoretical model predicts a positive association between the quantity of mortgage debt and optimistic financial expectations. Our empirical findings based on household level data provide convincing support for our theoretical priors in that optimistic financial expectations are positively associated with the level of outstanding mortgage debt.Financial Expectations; Housing Tenure; Inter-temporal Consumption; Mortgage Debt

Debt and Risk Preference: A Household Level Analysis

We explore the relationship between risk preference and the level of unsecured debt at the household level within the context of a two period theoretical framework, which predicts that debt is a function of risk aversion. We test the predictions of our theoretical framework for a sample of households drawn from the U.S. Panel Study of Income Dynamics (PSID) and the U.S. Survey of Consumer Finances (SCF). Using a sequence of questions from the 1996 PSID and the 1989 to 2004 SCF, we construct measures of risk preference allowing us to explore the implications of interpersonal differences in risk preference for the accumulation of unsecured debt at the household level. Our empirical findings, which accord with our theoretical priors, suggest that risk preference is an important determinant of the level of unsecured debt acquired at the household level with risk aversion serving to reduce the level of unsecured debt accumulated by households

Fracture strength of multi-component ultra-high temperature carbides

Ultra-high temperature ceramics (UHTCs) have emerged as a promising material for next generation re-entry hypersonic vehicles due to high melting point (\u3e3000 °C), and high mechanical properties and oxidation resistance. Yet none of the unary UHTCs can satisfy the whole gamut of demanding requirements for aerospace applications. Recently, the single-phase solid-solution formation in a multi-component ultra-high temperature ceramic (MC-UHTC) materials have gained interest due to their superior thermo-mechanical properties compared to conventional UHTCs. Herein, a systematic approach was used to fabricate binary (Ta, Nb)C, ternary (Ta, Nb, Hf)C, and quaternary (Ta, Nb, Hf, Ti)C UHTCs by gradual addition of UHTC components via spark plasma sintering (SPS). Fracture strength of the samples was measured using 4-point bend testing to understand the effect of UHTC components on the failure behavior of MC-UHTCs. A high-speed camera was also used to visualize and record the failure in each sample. The results showed that the quaternary UHTC has a fracture strength of ~351 MPa, which is ~227% and 10% higher than binary and ternary samples, respectively. Enhancement in the fracture strength has been attributed to increase in the entropy of a MC-UHTC with gradual addition of UHTC component. The present findings promote MC-UHTCs as a candidate damage tolerant structural material for aerospace applications