The Firm Size Distribution and Inter-Industry Diversification

We show that the stylized facts of the Firm Size Distribution (FSD) by age cohorts, as shown in Cabral and Mata (2003), bind within 4-digit manufacturing industries in the UK and Belgium. This paper investigates whether the time to build a portfolio of products from inter-industry diversification is a mechanism that helps explain the stylized facts of the FSD by age cohorts. We find that the degree of inter-industry diversification has a separate impact on firm size when controlling for age, amongst other factors. Using the techniques of Cabral and Mata, we find that inter-industry diversification does shift the FSD to the right, and more so in older age groups.     

What do we know about entry?

This paper is a brief survey of recent empirical work on entry. It is organized as a series of stylized facts and a series of stylized results which together summarize much of what is generally understood - or believed - about what drives entry, and about the effects that entry has on markets.     

An Applied Econometrician's View of Large Company Performance

This paper contains a brief survey of recent empirical work on the performance of large companies. It tries to pull together the literature in the form of six stylized facts, illustrating them with data drawn from a single sample. The paper concludes by highlighting the issues which are thrown up for future work. These are: accounting for persistent heterogeneities between firms, accounting for the apparently erratic performance of many firms and, finally, moving away from hypothesis testing driven empirical agendas.     

Housing Tenure in a Model of Consumer Choice: A Simple Diagrammatic Analysis

The paper begins with a general model of demand for housing in an intertemporal utility maximization framework. Under standard assumptions the consumer is indifferent between owning and renting. Relaxation of various assumptions would explain tenure choice, but this is mathematically complex. As an alternative, a diagrammatic model of consumer choice over one period is presented which shows the effects of income, savings, housing and other prices, mortgage interest rates, rates of return on alternative investments, and tastes. Again under standard assumptions the consumer is indifferent about housing tenure. The effects on tenure choice of a change in the assumption about the availability of mortgage credit, rates of return on alternative investments and income taxes are demonstrated.     

Optimal Sharing of Interest‐Rate Risk in Mortgage Contracts: The Effects of Potential Prepayment and Default

Much of the literature on the economics of mortgage markets has studied the fixed vs. adjustable‐rate mortgage choice made by individual borrowers. However, to decide if the outcome of such a choice is efficient or approximately so, it is necessary to explore the question of optimal risk‐sharing in mortgage contracts. But because only a small literature has studied this question, more research is clearly warranted. The present article helps fill this gap by developing a simplified version of Arvan and Brueckner's model, using it to characterize optimal contracts in the absence of mortgage termination, and then exploring how termination via prepayment or default affects optimal risk‐sharing. The broad conclusion of the analysis is that potential mortgage termination makes higher risk exposure for borrowers optimal.     

Regional Economic Stability and Mortgage Default Risk in the Netherlands

This paper investigates the relationship between regional economic diversification and stability, and residential mortgage default risk in the Netherlands. To describe and measure regional economic diversity and stability, methods from both the regional economics and the industrial economics literature are used. All measures are based on regional employment characteristics. Mortgage default rates were obtained from a database of the population of insured mortgage defaults in the Netherlands from 1983 through 1990. To test the relationship between the measures and mortgage default risk, cross sectional Seemingly Unrelated Regression was used. The paper concludes that the employed measures explain regional mortgage default rates to a significant extent, and that stability measures outperform diversity measures.     

The Mortgage Acquisition Process: A Comparison of VRM and FRM Borrowers*

In recent years a number of alternative types of residential mortgage plans (i.e., alternative to the fixed-rate level-payment mortgage) have been proposed, and some of these have been available in various parts of the country. The most often proposed innovation has been the variable rate mortgage (VRM). The most widespread use of the VRM has been in the State of California, starting in early 1975. This paper discusses some of the results of a survey of over 1,700 homeowners in California that examined consumer reaction to the VRM. Specifically, this paper looks at the impact of the VRM on the mortgage acquisition process and the features of mortgages demanded by consumers. The data seem to indicate that the process of acquiring a mortgage has not been affected significantly by the availability of the VRM. However, the existence of alternative mortgage plans means that consumer choice can be broadened to include type of mortgage as well as lending institution.     

Credit rating industry: A helicopter tour of stylized facts and recent theories

The recent subprime crisis and the ongoing Euro zone crisis have generated an enormous interest in the credit rating industry not only among economists but also among average citizens. As a consequence, we have seen an explosion of the economic literature on the industry. The objective of this survey is to introduce readers to the key stylized facts of the credit rating industry and to the recent theoretical economic literature on this industry.     

Choice of Mortgage Contracts: Evidence from the Survey of Consumer Finances

This study revisits the empirical question of the determinants of the choice between fixed‐ and adjustable‐rate mortgages using data from the Survey of Consumer Finances that overcome some of the data limitations in previous studies. The results from a logit model of mortgage choice indicate that pricing variables and affordability are important considerations. We also find that factors, such as mobility expectations, income volatility and attitudes toward financial risk largely influence mortgage choice, with more risk‐averse borrowers preferring fixed‐rate mortgages. For households that are less risk averse, the mortgage type choice decision is less sensitive to pricing variables and income volatility, and affordability factors are not significant. These findings provide empirical support that underscores the importance of attitudes toward risks in mortgage choice.     

Firms' Cost Functions: A Reconstruction

Three empirical stylized facts characterize afirm's cost functions: AVC is generallyhorizontal; scale economies are often important;and capital usage (as well as labor usage)varies with the rate of output. In contrast ourstandard theory of diminishing marginalproducts, variable proportions, and U-shapedunit cost curves does not adequately reflectthese stylized facts of industrial reality. Explicit distinction between capital stocks andcapital flows allows a remodeling of a firm'scost curves to conform with these empirical facts.     

Unobservable Risks in Mortgage Contract Choice

This study proposes a lifetime utility maximization model where borrowers choose optimal mortgage bundles including mortgage type, loan‐to‐value and loan size to maximize their allocation of limited budgets between housing and nonhousing consumptions. The model predicts that the mortgage bundle choices by borrowers of different income and risk attributes explain significant variations in the ex post default risks of the borrowers. The empirical tests using sampled mortgages pooled in nonagency residential mortgage backed securities support the hypothesis that the optimal choice of mortgage bundles reveals hidden risk factors of borrowers, which, if ignored, could lead to misjudgment of ex post default of borrowers.     

Geroski's Stylized Facts and Mobility of Large German Manufacturing Firms

Paul Geroski has established two stylized facts with respect to theprevalence of differential changes (mobility) of indicators ofeconomic and technological performance: technologicalindicators show a larger amount of mobility than do economic indicators.We assess the two stylized facts for a sample of 392 large Germanfirms observed over the period 1981–1993 and assigned to elevenmanufacturing industries. We analyze these data with two novelmethods, Salter curves and mobility indices based on fractileMarkov chains. Our analysis supports Geroski's two stylized factsin the case of large German manufacturing firms taking account ofsectoral differences.     

Self-Selection in the Fixed-Rate Mortgage Market

This paper analyzes the effect of information asymmetry between the lender and the borrower (i.e., the borrower knows how long he will reside in his home, whereas the lender does not) on the borrower's choice among the interest rate-discount points combinations available in the fixed-rate mortgage market. The analysis shows that if the rate-points trade-off of the mortgage menu is either too steep or too flat, then all types of borrowers will choose the same loan contract from the menu. In addition, if the rate-points trade-off is not convex to the origin, then only the contracts with extreme rate-points combinations will be chosen by borrowers; all contracts with intermediate rate-points combinations are redundant and will not be chosen by any borrowers. Intermediate rate-points combination mortgage contracts would be chosen by some borrowers only if the mortgage menu were to provide a self-selection function. Several necessary conditions of a self-selection mortgage menu are depicted.     

A Note on Identification of Discrimination in Mortgage Lending

This paper shows how reduced form estimates of discrimination in mortgage lending may be biased by race differences in loan demand. The result, which follows formally from the model of the mortgage lending process developed in the seminal paper by Maddala and Trost (1982), has important implications for the regulation of financial institutions. It also reinforces findings of Rachlis and Yezer (1993) and Yezer, Phillips and Trost (1994). A review of recent empirical evidence on race differences in loan demand suggests that this factor may help explain mortgage loan application differentials.     

Consumer Welfare Under the Adjustable-Rate Mortgage: Some Empirical Evidence

The theoretical literature on the economics of mortgage choice holds that consumer-borrower preference for the ARM depends largely on the FRM-ARM rate differential. However, there is no empirical evidence as to whether consumers are better off, worse off, or left indifferent with the choice of the ARM relative to the alternative FRM. This paper estimates the windfall gain or loss induced by the FRM-ARM rate differential in a multiperiod setting. The major results are as follows: (1) on the average consumer-borrowers reap windfall gain from the use of ARM, (2) but some individual consumers had windfall loss, (3) consumers with ARMs that have periodic interest-rate caps have significantly higher windfall gain than consumers whose ARMs have no periodic rate caps, and (4) the level of the windfall gain (loss) appears to be correlated with the slope of the yield curve and the level of interest rate.     

Small forces and large firms: Foundations of the RBV

The article presents a synthesis of several papers I have written, mostly in the economics literature, since the publication of ‘A resource‐based view of the firm’ (Wernerfelt, 1984). The starting point is a very small force: the reduction in bargaining costs when several bargains are pooled into one. I show how one can construct a theory of the firm based on this force and defend the theory by arguing that it makes predictions consistent with several stylized facts. In addition, the theory suggests that firms should decide on their strategy and scope based on excess capacity of productive resources—exactly like the RBV.     

Household Interest Rate Risk Management

I investigate household interest rate risk management by solving a life‐cycle asset allocation model that includes mortgage and bond portfolio choice. I find that most investors prefer an adjustable‐rate mortgage and thereby save on the bond risk premium that is contained in fixed‐rate mortgage payments. Only older, risk‐averse investors hold some fixed‐rate mortgage debt. Together with a position in short‐term bonds this enables them to hedge against changes in the real interest rate, while the inflation exposure of the debt and bond positions cancel out. Hedging house price changes with bonds only occurs at the end of the life cycle. Early in the life cycle short‐sale constraints prevent an effective hedge.     

Agriculture in Africa – Telling myths from facts: A synthesis

Stylized facts drive research agendas and policy debates. Yet robust stylized facts are hard to come by, and when available, often outdated. The 12 papers in this Special Issue revisit conventional wisdom on African agriculture and its farmers’ livelihoods using nationally representative surveys from the Living Standards Measurement Study-Integrated Surveys on Agriculture Initiative in six African countries. At times they simply confirm our common understanding of the topic. But they also throw up a number of surprises, redirecting policy debates while fine-tuning others. Overall, the project calls for more attention to checking and updating our common wisdom. This requires nationally representative data, and sufficient incentives among researchers and policymakers alike. Without well-grounded stylized facts, they can easily be profoundly misguided.     

Comparative statics for real options on oil: What stylized facts?

An important application in the real options literature has been in investments in the oil sector. Two commonly applied “stylized facts” in such applications are tested here. One is that the correlation of the returns on oil and the stock market is positive; the other that it is invariant to changes in oil price volatility. Both are rejected in data for 1993–2008 for crude oil and Standard & Poor's 500 stock market index. Based on real options theory, consequences are pointed out. The widespread idea that higher volatility leads to increased value and postponed investment is not necessarily valid.     

The Optimal Mortgage Payment Path Under Price Uncertainty

It has been shown that in a world of certainty, individuals with rising income streams will choose a graduated payment mortgage over the standard flat payment mortgage. The present paper extends this analysis by introducing uncertainty about future inflation rates. We show that the risk-averse individual, when faced with uncertainty, will choose a less graduated payment path than in the certainty situation. While not conclusive, the analysis may cast some doubt on the suboptimality of the standard flat payment mortgage.