COSTLY VERIFICATION AND BANKING

This paper outlines a model in which costly state verificationleads to the emergence of a bank-like financial intermediarythat issues both debt and equity liabilities. Shareholders incurverification costs when projects in the bank's asset portfoliofail, and depositors incur verification costs when the bankfails. The bank's optimal capital structure is determined bytrading off shareholders' expected verification costs againstdepositors', and a closed-form solution is derived for the bank'soptimal capital level. The comparative statics results are derived,and the implications set out for capital adequacy, shareholderliability and bank regulation.     

Tax Reform with Useful Public Expenditures

We examine the effects of tax reform in an endogenous growth with two types of useful public expenditures. The optimal fiscal policy shifts the tax base to private consumption and generally requires a change in the size of government. If a tax reform holds the size of government fixed to satisfy a revenue‐neutrality constraint, then the reform will be suboptimal; theory alone cannot tell us if welfare will be improved. For some model calibrations, we find that a revenue‐neutral consumption tax reform can result in large welfare gains. For other quite plausible calibrations, the exact same reform can result in tiny or even negative welfare gains as the revenue‐neutrality constraint becomes more severely binding. Overall, our results highlight the uncertainty surrounding the potential welfare benefits of fundamental tax reform.     

Choosing to Disagree: Endogenous Dismissiveness and Overconfidence in Financial Markets

The psychology literature documents that individuals derive current utility from their beliefs about future events. We show that, as a result, investors in financial markets choose to disagree about both private information and price information. When objective price informativeness is low, each investor dismisses the private signals of others and ignores price information. In contrast, when prices are sufficiently informative, heterogeneous interpretations arise endogenously: most investors ignore prices, while the rest condition on it. Our analysis demonstrates how observed deviations from rational expectations (e.g., dismissiveness, overconfidence) arise endogenously, interact with each other, and vary with economic conditions.     

Fathers' participation in infant-care

Ordinary least squares multiple regression was used to model time spent in child-care by 107 fathers of infants, 3–10 months of age. Time in both physical and non-physical care activities was reported by fathers for a weekday. Number of years married, hours employed for pay the previous week, and fathers' stress score in the child domain were negatively related to time spent in infant-care.     

Testing the Expectations Hypothesis on the Term Structure of Volatilities in Foreign Exchange Options

This article tests the expectations hypothesis in the term structure of volatilities in foreign exchange options. In particular, it addresses whether long-dated volatility quotes are consistent with expected future short-dated volatility quotes, assuming rational expectations. For options observed daily from December 1, 1989 to August 31, 1992 on dollar exchange rates against the pound, mark, yen, and Swiss franc, we are unable to reject the expectations hypothesis in the great majority of cases. The current spread between long- and short-dated volatility rates proves to be a significant predictor of the direction of future short-dated rates.     

The Cross-Section of Realized Stock Returns: The Pre-COMPUSTAT Evidence

Using a database that is free of survivorship bias, this article finds that book-to-market equity, earnings yield, and cash flow yield have significant explanatory power with respect to the cross-section of realized stock returns during the period from July 1940 through June 1963. There is a strong January seasonal in the explanatory power of these variables, even though small stocks are, by construction, excluded from the sample.