Project financing,entrepreneurial activity,and investment in the presence of asymmetric information

We analyze a two-period signaling model in which a representative entrepreneur in a regional economy has a project that generates a random cash flow and that requires investment that the entrepreneur raises from a competitive market. The project's type is known to the entrepreneur but not to the investors. Further, the entrepreneur is restricted to issuing debt only or equity only. We first show that there is no separating perfect Bayesian equilibrium (PBE) contract involving the issuance of equity only, that there exists a pooling PBE contract involving the issuance of equity only, and that a debt contract is preferred to an equity contract by our entrepreneur. Next, we suppose that the entrepreneur incurs a non-pecuniary cost of financial distress F > 0 whenever he is unable to make a repayment at time t = 1. We provide conditions on F under which a pooling PBE contract with debt exists and a separating PBE contract with debt and equity exists. Finally, we examine whether a high type entrepreneur will prefer a setting with a cost of financial distress (F > 0) or a setting in which there is no such cost (F = 0).     

Generic properties of simple Bergson-Samuelson welfare functions

Methods of transversality theory are introduced to determine the generic properties of a simple non-collegial preference function σ, whose domain is the class of ordinal utility profiles on a smooth manifold W of policy alternatives. When the dimension of W is sufficiently large, it is shown that (i) the set of local optima of σ is generically empty, and (ii) the local cycle set of σ is generically dense.     

The number of equilibria of smooth infinite economies

We construct an index theorem for smooth infinite economies that shows that generically the number of equilibria is odd. As a corollary, this gives a new proof of existence and gives conditions that guarantee global uniqueness of equilibria.     

Structure of the demand function and Pareto optimal set with natural boundary conditions

We consider utility functions defined on P?, the closure of the positive orthant of R^l, that satisfy the differentiable monotonicity and differentiable convexity conditions. We show that the demand function derived from such a utility function is piecewise smooth in a strong sense. We use this result to show that the Pareto optimal subset of a pure exchange economy derived from the kind of utility functions we consider is generically the union of a finite number of compact manifolds-with-corners.     

New evidence on the impact of financial leverage on beta risk: A time-series approach

The traditional estimation of a project’s cost of capital often requires leverage adjustments to beta. Several researchers have empirically investigated the relationship between the debt/equity ratio (D/E) and beta implied by such leverage adjustments. Typically, this has involved cross-sectional analysis of a sample of U.S. firms in selected industry classifications. The major contribution of the current study is to extend this evidence by investigating the relationship between financial leverage and beta using a time-series approach. This has several advantages over the cross-sectional approach. Our results reveal that while the estimated unlevered beta produced by the time-series approach is quite close to the theoretically implied unlevered beta, the mean difference between the two measures across our sample of 348 U.S. stocks is highly significant. The analysis also reveals that 30–40% of our full sample rejects a theoretical D/E restriction on the time-series model. Moreover, the results suggest that the restriction is much more likely to be rejected for stocks with high debt/equity ratios, which in general have low unlevered betas. Further, there is a considerable cross-sectional variation in the proportion of these rejections across industry groupings. Accordingly, these results suggest that due care needs to be applied when taking the traditional view of delevering beta risk.     

Quadratic semiparametric Von Mises calculus

We discuss a new method of estimation of parameters in semiparametric and nonparametric models. The method is based on U-statistics constructed from quadratic influence functions. The latter extend ordinary linear influence functions of the parameter of interest as defined in semiparametric theory, and represent second order derivatives of this parameter. For parameters for which the matching cannot be perfect the method leads to a bias-variance trade-off, and results in estimators that converge at a slower than n ^?1/2-rate. In a number of examples the resulting rate can be shown to be optimal. We are particularly interested in estimating parameters in models with a nuisance parameter of high dimension or low regularity, where the parameter of interest cannot be estimated at n ^?1/2-rate.     

Regular economies with ambiguity aversion

We consider a family of exchange economies with complete markets where consumers have multiprior preferences representing their ambiguity aversion. Under a linear independence assumption, we prove that regular economies are generic. Regular economies exhibit enjoyable properties: odd finite number of equilibrium prices, local constancy of this number, local differentiable selections of the equilibrium prices.Thus, even if ambiguity aversion is represented by non-differentiable multiprior preferences, economies retain generically the properties of the differentiable approach.     

Equilibrium analysis and envelope theory

Qualitative comparative statics amounts to a study of the qualitative properties of the Debreu mapping, i.e., the restriction of the projection (p,ω)?ω to the equilibrium manifold. We show that a natural framework for such a study is Thom's envelope theory which generalizes the theory of planar curve envelopes.     

Constrained suboptimality when prices are non-competitive

The paper addresses the following question: how efficient is the market system in allocating resources if trade takes place at prices that are not competitive? Even though there are many partial answers to this question, an answer that stands comparison to the rigor by which the first and second welfare theorems are derived is lacking. We first prove a “Folk Theorem” on the generic suboptimality of equilibria at non-competitive prices. The more interesting problem is whether equilibria are constrained optimal, i.e. efficient relative to all allocations that are consistent with prices at which trade takes place. We discuss an optimality notion due to Bénassy, and argue that this notion admits no general conclusions. We then turn to the notion of p-optimality and give a necessary condition, called the separating property, for constrained optimality: each constrained household should be constrained in each constrained market. If the number of commodities is less than or equal to two, the case usually treated in the textbook, then this necessary condition is also sufficient. In that case equilibria are constrained optimal. When there are three or more commodities, two or more constrained households, and two or more constrained markets, this necessary condition is typically not sufficient and equilibria are generically constrained suboptimal.     

Fisher equations inverted and not

Regressions of the realized real after-tax interest rate on theex post rate of inflation are shown to be incapable of discriminating between the competing hypotheses that the real after-tax interest rate is not effected by expected inflation due to the substitutability between debt and equity (the Fisher hypothesis); and, that the nominal after-tax interest rate is not effected by expected inflation due to the substitutability between money and debt (the inverted Fisher hypothesis). An alternative regression which is so capable, is shown to reject the inverted and support the original Fisher hypothesis.     

Evaluating the sustainability of Italian public finances

Are Italy’s primary-surplus policies compatible with the sustainability of government debt? We address the question by examining historical budget data in post-unification Italy, from 1861 to 2016. Controlling for temporary output, temporary spending and world war-time periods in assessing whether primary surpluses significantly reacted to changes in debt, we find the following results: (i) the hypothesis of nonlinearity in the surplus-debt relationship significantly outperforms the hypothesis of linearity; (ii) there exists a threshold level in the debt-GDP ratio, approximately equal to 105 percent, above which Italian fiscal policy makers are concerned with corrective actions to avoid insolvency; (iii) the robustly positive reaction of primary surpluses to debt beyond the trigger point ensures fiscal sustainability.     

Optimal interest rate stabilization in a basic sticky-price model

This paper studies optimal monetary policy with the nominal interest rate as the single policy instrument. Firms set prices in a staggered way without indexation and real money balances contribute separately to households’ utility. The optimal deterministic steady state under commitment is the Friedman rule—even if the importance assigned to the utility of money is small relative to consumption and leisure. We approximate the model around the optimal steady state as the long-run policy target. Optimal monetary policy is characterized by stabilization of the nominal interest rate instead of inflation stabilization as the predominant principle.     

The index theorem for a GEI economy when the degree of incompleteness is even

The purpose of this paper is to present a method to compute the index in an incomplete market economy. We show that generically in endowments and the asset structure the index theorem holds when the deficiency of markets, S−J, is even. The result is based on the indices of homotopies which have been presented for computation of an equilibrium in incomplete market economies.     

Federal budget deficits and long-term interest rates in USA

We investigate whether the emergence of high inflation rates after 1965 and large budget deficits after 1980s caused the financial market agents to become more sensitive to the outlooks for inflation and budget deficits. Our approach is parametric and our models fully account for possible presence of ARCH effects in the data.Our results show a statistically significant positive link between the budget deficits and the slope of the yield curve which is more pronounced in the later sub-sample period. These results are in line with Reinhard and Sack [Reinhard, V., & Sack, B. (2000). The economic consequences of disappearing government debt. Brooking Papers of Economic Activity, 163–209] but in sharp contrast with Evans [Evans, P. (1985). Do large deficits produce high interest rates? American Economic Review, 7, 68–87] and Evans [Evans, P. (1987). Do budget deficits raise nominal interest rates? Journal of Monetary Economics, 20, 281–300].     

General consumption constraints and regular economies

In the spirit of Smale’s work, we consider pure exchange economies with general consumption sets. In this paper, the consumption set of each household is described in terms of a function called possibility function. The main innovation comes from the dependency of each possibility function with respect to the individual endowments. We prove that, generically in the space of endowments and possibility functions, economies are regular. A regular economy has a finite number of equilibria, which locally depend on endowments and possibility functions in a continuous manner.     

A dynamic mobility model of individuals between jurisdictions in a system of local governments

This paper presents a dynamic mobility model in which individuals find incentives to move from one jurisdiction to another when they can enjoy a higher utility level by doing so, and inquires about welfare implications of the final outcome of such dynamic paths. The main conclusions are summarized as follows: (i) The mobility process of individuals is globally stable in the sense that the dynamic paths converge to the steady state equilibrium as time tends to infinity. (ii) There is a possible conflict between the principles of horizontal equity and Pareto optimality in the steady state of the dynamic system.     

Are hyperinflation paths learnable?

Earlier studies of the seigniorage inflation model have found that the high-inflation steady state is not stable under learning. We reconsider this issue and analyze the full set of solutions for the linearized model. Our main focus is on stationary hyperinflationary paths near the high-inflation steady state. These paths are shown to be stable under least-squares learning if agents can utilize contemporaneous data. In an economy with a mixture of agents, some of whom only have access to lagged data, stable hyperinflationary paths emerge only if the proportion of agents with access to contemporaneous data is sufficiently high.     

The impact of monetary policy in the midst of big shocks

This paper studies the impact of Federal Reserve policies that created the largest deviations from price stability during the Fed׳s first 100 years: the post-World War I deflation, the deflation of the Great Depression, the inflation of World War II, and the Great Inflation of the 1970s. In terms of their macroeconomic impacts, I find that deflation was uniquely depressing in the 1930s because of cartel policies that prevented nominal prices and wages from adjusting to clear markets, and not because deflation is generically depressing. I find that the biggest impact of monetary policy during World War II was in debasing debt through inflation. I find that the main drivers of the 1970s economy were long-run changes in productivity and the labor market, and that there may have been little that the Fed could have done at this time to expand employment and output. More broadly, I find that macroeconomic performance would have been better over the Fed׳s first century had the Fed followed a monetary policy to deliver stable prices.     

Determinants of capital structure choice: A structural equation modeling approach

In their seminal research on the determinants of capital structure choice using structural equation modeling (SEM), Titman and Wessels [Titman, S., & Wessels, R. (1988). The determinants of capital structure choice. Journal of Finance, 43, 1–19] obtain weak results and hence call for further investigation. We apply a Multiple Indicators and Multiple Causes (MIMIC) model, with refined indicators, to a pooled sample for the period 1988–2003 and find more convincing results than those obtained by Titman and Wessels. With the capital structure measured simultaneously by the ratios of long-term debt, short-term debt, and convertible debt to the market value of equity, our results show that growth is the most important determinant of capital structure choice, followed in order by profitability, collateral value, volatility, non-debt tax shields, and uniqueness. Moreover, we find that long-term debt is the most important proxy of capital structure, followed by short-term debt, and then convertible debt.     

Myopia and monetary equilibria

In an infinitely lived, representative individual economy, important properties of competitive equilibria, such as determinacy and the non-existence of monetary equilibria, are not robust to the introduction of myopia. An individual is myopic if, at each date, he plans consumption only for that date and few periods that immediately follow; that is, his planning horizon, n, is finite. Equilibria with myopia can display real indeterminacy and allow for monetary as well as non-monetary steady states; thus, they share some of the features of equilibria in economies of overlapping generation. The equilibrium price dynamics (but not the consumption dynamics) of an exchange economy with extreme myopia, n = 1, are identical to the dynamics of an overlapping generation economy with two-period lives.