Financial frictions and real implications of macroprudential policies

I model a number of imperfections in financial intermediation that have implications for real economic activity in a production economy with technological risk. Partially opaque firms are financed by both debt and insider equity. Banks have market power over borrowers. There can be a prior bias in public beliefs about aggregate productivity (business sentiment). I investigate the dependence of equilibrium on the biased business sentiment and a prudential policy instrument (a convex dependence of bank capital requirements on the quantity of uncollateralized credit). Loss given default can be reduced by both a monetary restriction and a macroprudential restriction. Real implications of both are very similar in the aggregate, but macroprudential policies are more advantageous for bank earnings. On the other hand, the policies considered here are unable to reduce the number of defaulting firms (default frequency). Economic activity is highly sensitive to ??leaning against the wind?? actions on both fronts, so that using a macroprudential instrument to intervene against an asset price bubble has tangible welfare costs comparable to those of a monetary restriction. The costs can be offset by fine tuning capital charges as a function of corporate governance on the borrower side (specifically, by discouraging limited liability of borrowing firm managers).     

Becker’s utility approach to discrimination: A review of the issues

Conclusion In general, most studies have been unable to confirm the predictions of the Becker utility approach to discrimination by employers and employees. This lack of verification would seem to indicate that the observed wage differentials are generated by a different or more complex process. However, such a strong statement is premature in view of the measurement problem that has been present in most studies. Becker’s model is a characterization of how individual employers and employees behave in the market. Empirical testing of Becker’s model requires detailed information about the degree and level of contact between the races, the wage rates paid to each race, skills of each worker, and the manner of employment and placement of each race. Invariably the lack of such detailed firm data, particularly wage rates, forces researchers to use aggregative data of income or earnings averages and occupation of workers employed within a state or broadly defined industry in order to generalize how firms behave in the market. The necessity of using such data, however, results in a dichotomy between the original parameters in Becker’s model and the data utilized. Clearly the lack of a significant association between the data utilized and the parameters specified in Becker’s model undermines the credibility of such empirical testing. The empirical analysis on the implications of Becker’s theory of discrimination has left a wide variety of unsettled questions and much remains to be done.