Capital forbearance and thrifts: Examining the costs of regulatory gambling

This article estimates losses embedded in the capital positions of the 996 FSLIC-insured savings and loan institutions that did not meet capital standards on December 31, 1979. We compare the estimated cost of resolving the insolvencies of these institutions in 1980 with the actual failure-resolution costs for those that were closed by August 31, 1994. Our most conservative estimates, considering only the direct costs associated with delayed closure of only the 372 thrifts that were subsequently closed as independent institutions, show that these costs exceed estimates of the cost of prompt resolution by over 16 billion 1979-dollars.R. P. DeGennaro is an Associate Professor and the 1996–1997 Tennessee Banker's Association Scholar, and J. B. Thomson is Vice President and Director of Financial Services Research.University of TennesseeFederal Reserve Bank of Cleveland     

Saving-investment dynamics and capital mobility in the US and Japan

This paper points out that a high long-run correlation between saving and investment is better interpreted as reflecting the operation of a country's intertemporal budget constraint rather than as an indicator of capital mobility. Inferences about capital mobility can instead be made from the divergent short-run dynamic responses of saving and investment to shocks. Using post-war quarterly data for the US and Japan, the paper assesses the characteristics of saving and investment behavior under different regulatory environments. It finds mixed evidence of changes in the short-run dynamics of saving and investment that suggest increased capital mobility in the 1980s.     

Probabilistic representation of complexity

We introduce a framework to study individuals’ behavior in environments that are deterministic, but too complex to permit tractable deterministic representations. An agent in these environments uses a probabilistic model to cope with his inability to think through all contingencies in advance. We interpret this probabilistic model as embodying all patterns the agent perceives, yet allowing for the possibility that there may be important details he had missed. Although the implied behavior is rational, it is consistent with an agent who believes his environment is too complex to warrant precise planning, foregoes finely detailed contingent rules in favor of vaguer plans, and expresses a preference for flexibility.     

AN ENVIRONMENTAL/INPUT–OUTPUT LINEAR PROGRAMMING MODEL TO REACH THE TARGETS FOR GREENHOUSE GAS EMISSIONS SET BY THE KYOTO PROTOCOL

The Kyoto Protocol contains legally binding targets for greenhouse gas (GHG) emissions for industrialized countries. The importance of this agreement and the elaboration of a climate change policy make it necessary to define and establish national policy measures and to bring into force environmental regulations that will reduce GHG emissions. Extending our knowledge of the economic-ecologic relationships that exist within the production sphere can assist in defining and implementing successful environmental policies. In this paper, an Environmental/Input–Output linear programming model is proposed. To develop the model we consider the input–output model as a linear programming problem combining two types of restrictions: environmental restrictions establishing GHG emission targets, and economic restrictions. The model shows how targets for the emissions of GHGs may be reached and can affect production activity composition.     

Takeover Waves

Horizontal takeovers often occur in waves. A sequence of takeovers is obtained in a Cournot setting with cost asymmetries. They are motivated by two different reasons: (1) a low realization of demand increases the profitability of takeovers; (2) takeovers raise the profitability of future takeovers. A possible explanation of merger races is also obtained by showing that firms buying in the first place pay a lower price for their targets.     

Expectations and learning under alternative monetary regimes: an experimental approach

Summary We design and analyze experimental versions of monetary overlapping generations economies under alternative policy regimes. Economies with a constant level of real deficit financed through seignorage, economies in which the level of deficit is adapted in order to follow a monetary policy with a target rate of inflation, and economies with preannounced changes in deficit levels are reported here. We also examine the behavior of an economy with no stationary competitive equilibrium. Our time series are compared to rational expectations equilibrium paths and to adaptive learning dynamics.Financial support for our work from the Graduate School of the University of Minnesota, the National Science Foundation (SES-8912552), Richard M. and Margaret Cyert Family Funds, and the Ministry of Education of Spain is gratefully acknowledged. We wish to thank Javier Diaz-Giménez, Jean Michael Grandmont, Robert Lucas, Albert Marcet, Charles Plott, Edward Prescott, Thomas Sargent, Neil Wallace and Michael Woodford for commenting on our work. We also thank Vijay Rajan for developing the software for the computerized experimental environment, and Jackie Cuccaro and Dhananjay Gode for their research assistance.     

Households' Willingness to Pay for "Green" Goods: Evidence from Patagonia's Introduction of Organic Cotton Sportswear

To shed light on individuals' willingness to pay for "green" goods (i.e., goods that are supposed to have lower adverse environmental impacts either in production or in use), we study data from the introduction by Patagonia, Inc., of organic cotton sportswear in the mid-1990s. Patagonia, a maker of high-end outdoor wear, substituted organic cotton for conventionally grown cotton in all of its sportswear (i.e., casual clothing for travel and leisure) in 1996. We find that customers were willing to pay significant premiums for organic cotton garments although the organic cotton provided no demonstrable private incremental benefits to the customer.     

Peer‐to‐Peer File Sharing and the Market for Digital Information Goods

We study competitive interaction between two alternative models of digital content distribution over the Internet: peer‐to‐peer (p2p) file sharing and centralized client–server distribution. We present microfoundations for a stylized model of p2p file sharing where all peers are endowed with standard preferences and show that the endogenous structure of the network is conducive to sharing by a significant number of peers, even if sharing is costlier than freeriding. We build on this model of p2p to analyze the optimal strategy of a profit‐maximizing firm, such as Apple, that offers content available at positive prices. We characterize the size of the p2p network as a function of the firm's pricing strategy, and show that the firm may be better off setting high prices, allowing the network to survive, and that the p2p network may work more efficiently in the presence of the firm than in its absence.     

BARGAINING FAILURES AND MERGER POLICY

We study approval rules in a model where horizontal merger proposals arise endogenously as the outcome of negotiations among the firms in the industry. We make two main points. First, relatively inefficient merger proposals succeed with positive probability. That is, the negotiation process may result in a particular merger agreement despite the existence of an alternative one that would generate higher profits and higher consumer surplus. Second, the antitrust authority should optimally commit to an approval rule that is more stringent for all mergers than the optimal ex post rule.