A theory of predictable excess returns in real estate

A principal-agent model is employed to characterize the equilibrium mortgage contract. The value of a house depends on the actions of its owner but affects the wealth of both the owner and the lender who writes the mortgage contract with which the house is purchased. Because of this, the buyer is exposed to moral hazard. In some situations, this can lead to inefficient maintenance and predictable excess returns to home ownership. Even though there are potential buyers willing to pay back more money, the bank will not write loans for these consumers because of the adverse incentive effects of such an action.     

A Theory of the Distribution of Underpriced Initial Public Offers by Investment Banks

It is well documented that a firm may choose to offer underpriced securities in an initial public offer. An open question is why investment banks do not retain underpriced offers in their portfolio. We argue that the distribution of underpriced securities allows banks of high qualify to signal their value to their customers, promoting in this way their other product lines. We show that the total dollar value of underpriced securities distributed (rather than the percentage value) acts as the signal. We also find that, all else equal, larger customers and those with more elastic demand functions receive n larger total dollar value of underpricing.     

Estimating the Dynamics of Mutual Fund Alphas and Betas

This article develops a Kalman filter model to track dynamicmutual fund factor loadings. It then uses the estimates to analyzewhether managers with market-timing ability can be identifiedex ante. The primary findings are as follows: (i) Ordinary leastsquares (OLS) timing models produce false positives (nonzeroalphas) at too high a rate with either daily or monthly data.In contrast, the Kalman filter model produces them at approximatelythe correct rate with monthly data; (ii) In monthly data, thoughthe OLS models fail to detect any timing among fund managers,the Kalman filter does; (iii) The alpha and beta forecasts fromthe Kalman model are more accurate than those from the OLS timingmodels; (iv) The Kalman filter model tracks most fund alphasand betas better than OLS models that employ macroeconomic variablesin addition to fund returns.     

A Note from the Editor

Dear Readers: While those of us editing the RFS seek to do so error free,alas     

Investment and Capital Structure of Partially Private Regulated Firms

We develop a model that examines the capital structure and investment decisions of regulated firms in a setting that incorporates two key institutional features of the public utilities sector in many countries: firms are partially owned by the state and regulators are not necessarily independent. Among other things, we show that regulated firms issue more debt, invest more, and enjoy higher regulated prices when they face more independent regulators, are more privatized, and when regulators are more pro‐firm. Moreover, regulatory independence, higher degree of privatization, and pro‐firm regulatory climate are associated with higher social welfare.     

Is Asia Decoupling from the United States (Again)?

The recovery from the recent global financial crisis exhibited a decline in the synchronization of Asian output with the rest of the world. However, a simple model based on output gaps demonstrates that the decline in business cycle synchronization during the recovery from the global financial crisis was exceptionally steep by historical standards. We posit two potential reasons for this exceptionally steep decline. First, financial markets during this recovery improved from particularly distressed conditions relative to previous downturns. Second, monetary policy during the recovery from the crisis was constrained in developed economies by the zero bound, but less so in Asia. To test these potential explanations, we examine the implications of an increase in corporate bond spreads similar to that which took place during the recent European financial crisis in a three‐region open‐economy dynamic stochastic general equilibrium model. Our results confirm that global business cycle synchronization is reduced when zero‐bound constraints across the world differ. However, we find that the impact of reduced financial contagion actually goes modestly against our predictions.     

The Effects of Criminal Experience on the Incidence of Crime

A bstract . A hypothesis has been analyzed that criminals learn by doing, that with experience criminals increase their activity so that with level outlays on police the incidence of crime may be increasing. This hypothesis is tested by statistical analysis of time series cross sectional data on crime levels, police outlays and various socioeconomic variables. The results confirm that "learning by doing"—accumulating criminal experience—increases criminal activity, that police outlays have a negative and significant effect on crime and that certain socioeconomic characteristics have a significant effect on crime.     

RENT SEEKING AND SOCIAL INVESTMENT IN TASTE CHANGE*

We study the social allocation of resources to the alteration of preferences. Such taste changes are Pareto-preferred if, according to both the original and the new taste regime, the resource allocation resulting from the taste change constitutes an improvement. According to this criterion, a degree of altruism is in general Pareto-preferred, because it reduces socially wasteful activities, such as lobbying, bargaining and other rent seeking activities designed to increase one agent's expected share of the contested rent. We present a stylized model that captures the role of education in generating altruism and thus reducing the expenditure on rent seeking.     

Interdependent utility and cooperative behavior

In this paper we broaden current models of interdependent utility functions, develop a more general and inclusive model of interdependency, and demonstrate the specific nature of the Pareto improvement achievable through cooperative behavior of all individuals with different tastes who adopt similar (or identical) consumption baskets. The resulting model helps to explain such diverse phenomena as the declining importance of the family unit as well as the trend toward a more diverse consumption pattern among communal groups such as the Israeli kibbutz.     

The Difference Between Short and Long Run Effects of Police Outlays on Crime: Policing Deters Criminals Initially, But Later They May 'Learn by Doing'

Abstract . In the long run a positive relationship of police expenditurescrime is derived in models which explain criminal behavior In the short run, however, the statistical results point to the possible deterring effect of police expenditures. A theoretical model is constructed to explain the statistical difference of the short and long run effect of police outlays on crime. As police expenditures increase, crime level diminishes. As time elapses, criminals may adjust to the new level of police effort, improve their performance and at the same level of outlays, increase their criminal activities. This phenomenon could be termed “Criminals’Learning by Doing”. It could explain why, over the long run, the level of crime is positively associated with police expenditures. The empirical analysis examines pooled cross sectional time series of 47 states over the period 1970 to 1980—a total of 517 cases.