Interventions in Markets with Adverse Selection: Implications for Discount Window Stigma

I study the implications for central bank discount window stigma of a workhorse model of adverse selection in financial markets. In the model, firms (banks) need to borrow to finance a productive project. There is limited liability and firms have private information about their ability to repay their debts, which gives rise to the possibility of adverse selection. The central bank can ameliorate the impact of adverse selection by lending to firms. Discount window borrowing is observable and it may be taken as a signal of firms' credit worthiness. Under some conditions, firms borrowing from the discount window may pay higher interest rates to borrow in the market, a phenomenon often associated with the presence of stigma. I discuss these and other outcomes in detail and what they suggest about the relevance of stigma as an empirical phenomenon.     

Collaboration for R&D Projects between the Industry and External Agents: Evidence from Manufacturing Companies in Peru

In this article we use the innovation survey of the manufacturing industry of Peru to identify cooperation behaviors for research and development (R&D) projects among companies and external agents in general. Likewise, we also find cooperation behaviors among the industry and the following external agents: university, technical centers, suppliers, customers, and companies of the same group, competitors, guilds, and consultants. Within the specific agents, the university is considered a cooperation agent for R&D projects. We use the survey of innovation in the manufacturing industry of Peru conducted in 2015, which resulted in 1447 Peruvian companies being surveyed. Evidence was obtained as to the degree of the tie between the industry and external agents for cooperation in R&D projects, giving relevance to variables such as investment, resources, and degree of innovation. Our results show that investment is an important factor for cooperation with external agents. Additionally, companies that have innovated at some point seek to cooperate with external agents. Finally, the importance of the university is demonstrable, thus, companies that invest in R&D seek to cooperate with the university.     

The impact of foreign direct investment on productivity: New evidence for developing countries

We provide new empirical evidence on the relationship between inward foreign direct investment (FDI) and total factor productivity (TFP) growth using cross-country data for 51 developing countries over the period 1984–2010. Our results suggest a weak direct effect of FDI on TFP growth but, after accounting for the roles of human capital and institutions as contingencies in the FDI-TFP growth relationship, we find a robust FDI-induced productivity growth response dependent on these ‘absorptive capacities’. However, the relevance of the human capital contingency effect diminishes when the effect of institutions is also considered, which suggests that improving institutions is relatively more important than human capital development for developing countries to realise productivity gains from FDI.     

‘Market failure’ arguments are a poor guide to policy

‘Market failure’ is frequently offered as a justification for government intervention in the economy. Proponents of interventions can point to almost limitless examples of markets which do not meet all the criteria for Pareto optimality and argue that government taxation, subsidies or regulation can perfect them, maximising social welfare. But comparing market outcomes with an unattainable and unidentifiable ideal is not useful in a world of imperfect knowledge and government failure. It is better to compare market outcomes against realistic alternatives. Furthermore, even within the market failure paradigm, concepts such as ‘public goods’ and ‘negative externalities’ are routinely misunderstood and inconsistently applied. This leads to predictably poor policy outcomes.     

Foreign aid preferences and perceptions in donor countries

We present original survey data on preferences for foreign aid in 24 donor countries from 2005 to 2008. On publicly-funded foreign aid (Official Development Assistance, or ODA), we find patterns that are consistent with a standard model of democratic policy formation, in which donations are treated as a pure public good. Controlling for perceptions of current ODA, we show that individual preferences for ODA are (i) negatively correlated with relative income within a country-year; and (ii) positively correlated with inequality at the country level. We extend the analysis to explain variation in the gap between desired aid and actual ODA, arguing that lobbying by high-income special interest groups can divert resources away from the median voter’s preferred level of aid. Consistent with this, we observe that ODA is significantly lower where policymakers are more susceptible to lobbying. Finally, we present a novel test of competing “crowding out” hypotheses. Self-reported private aid donations are negatively correlated with actual ODA, and positively correlated with perceived ODA. This finding is consistent with an emerging argument in the literature, whereby ODA crowds out private aid by enabling charities to forego fundraising activities and crowds in private aid through a signaling channel.     

The electoral migration cycle

This paper proposes a new test of Tiebout sorting that relies on the exogenous time structure of recurrent local elections. The test is based on the idea that competitive elections represent periodic perturbations to the Tiebout equilibrium of local public good provision and allocation of households to communities, so that their schedule should affect the timing of households' sorting decisions. On the other hand, internal migration flows that have nothing to do with the demand for public goods over which localities vote recurrently ought to be orthogonal to the timing of elections in a reduced-form migration equation. I exploit the staggered schedule of mayoral elections in Italy to analyze migration, elections, and public budget data across several thousands of municipalities, and find evidence of a systematic influence of the electoral calendar on the timing of sorting decisions.     

Financing Technological Innovation: Evidence from Patent-Intensive Firms

ABSTRACT

Equityholders of firms with high debt loads have an incentive to underinvest, a distortion that can be most costly for firms with attractive growth options. Using a novel patent-based measure of a firm's growth options, we find that firms issue more equity and shy away from debt financing when they have larger investment opportunities sets. The results are more pronounced among firms in patent-intensive industries. The findings suggest the existence of conflicts of interest between debtholders and equityholders. Our results are consistent with the use of conservative debt policies by technology-intensive firms to mitigate the debt overhang associated with their future growth options.     

Eco-labels and product longevity: The case of whitefish in UK grocery retailing

In recent years, eco-labeling has become an increasingly used tool to signal sustainable sourcing of (sea-) food. While the literature has focused on price premiums associated with the labels, it is noted in this paper that eco-labels can also contribute to profitability by reducing cost, e.g. through longer product lifespans. Hence, eco-labels can be beneficial in a supply chain even without a price premium. This study applies duration analysis to explore whether two eco-labels (the MSC label of the Marine Stewardship Council and a line-caught label) influence product longevity of whitefish products in eight different grocery retailers in the UK. The results show that MSC labeled products have a 64.7% lower risk of being withdrawn from the shelves compared to non-MSC products, while products with the line-caught label have a 32.8% lower risk of being withdrawn than products without this label. The results also indicate that the influence of the eco-labels on product longevity vary considerably between the retailers.     

Consequences of Debt Forgiveness: Strategic Default Contagion and Lender Learning

I use a unique data set of loans to small business owners to examine whether lenders face adverse consequences when they grant debt forgiveness to borrowers. I provide evidence consistent with borrowers communicating their debt forgiveness to other borrowers, who then more frequently strategically default on their own obligations. This strategic default contagion is economically large. When the lender doubles debt forgiveness, the default rate increases by 10.9% on average. Using an exogenous shock to the lender's forgiveness policy, my findings suggest that as the lender learns about the extent of borrower communication the lender tightens its debt forgiveness policy to mitigate default contagion.     

Partnerships and production: Agriculture and polygyny in Tanzanian households

Women make important contributions to household food production in sub‐Saharan Africa. Women's agricultural productivity is often reduced, however, by inefficient intrahousehold allocation of agricultural resources. Complex marital structures found in polygynous households may complicate resource allocation. Using three waves of the Tanzania Living Standards Measurement Survey–Integrated Survey on Agriculture, we measure the effect of the marital structure, wife position, and plot management on agricultural productivity and input allocations. We find evidence of cooperation within polygynous households. Plots managed by husbands and wives in polygynous households produce more valuable crops, have higher yields, and are more likely to use fertilizer than their monogamous counterparts. Within polygynous households, we observe that plots jointly managed by husbands, first wives, and second wives (together) have significantly more family labor than plots managed by husbands and first wives. This result may provide evidence of different production technologies across plot managers within the same households.