Overcapacities in banking: Measurement,trends and determinants

Global banks face profitability challenges since the global financial crisis. Besides cyclical factors, structural features such as overcapacities have been identified as root causes. While policymakers agree on the need for bank consolidation, there is less consensus on the definition and measurement of overcapacities in banking. This paper contributes by conceptualising and formalising the different dimensions of overcapacities in banking and by constructing a novel measure thereof. In addition, it empirically tests the main determinants of overcapacities in banking from 2006 to 2017 and assesses their relative importance. The results indicate that non-bank competition, the interest rate environment and bank business models are the most important driving factors of banking sector overcapacities. This is because shadow banks, benefitting from regulatory arbitrage, have altered banks’ capacity needs, low rates compressed margins and increased pressure to improve cost efficiencies, and retail-oriented business models have operated extensive branch networks entailing heavy fixed costs.     

Relationship between city size and firm productivity – A new interpretation using the Chinese experience

This paper contributes to the literature on the relationship between city size and firm productivity by focusing on agglomeration, selection (market competition), and sorting (presence of firms with diverse productivity) effects using Chinese firm-level data for 1998–2013. Contrary to the existing literature, our parametric regression estimates from nearly two million firms show that when the selection effect is controlled, productivity advantage in big cities is reversed. This outcome is explained through a quantile regression showing the existence of left-sided sorting (inefficient firms sort themselves to larger cities) in big cities which is not captured in existing empirical literature. We further find that (1) left-sided sorting is stronger in exporters than non-exporters; (2) is also generated mainly in enterprises with high asset-liability ratios; and (3) selection has a positive effect on firm productivity, suggesting that market competition is key in an explanation of the rapid growth of big cities in China.     

The animal spirits hypothesis and the Benhabib–Farmer condition for indeterminacy

This paper provides a self-contained review of the introduction of the animal spirits hypothesis into the infinite horizon optimal‐growth model. The analysis begins with an economic discussion of Pontryagin's maximum principles. Thereafter, I develop a version of the increasing-returns Benhabib–Farmer model by showing the possible sub-optimality of the central planner solution and deriving the bifurcation condition for indeterminacy. Moreover, I give some insights on how to model intrinsic and extrinsic uncertainty. Finally, analyzing the equilibrium condition of the labor market, I provide an intuitive rationale for the mechanism that in this model might lead prophecies to be self-fulfilling.     

Social contracts,markets and efficiency: Groundwater irrigation in North India

This paper uses primary data to analyze the institutions and informal markets that govern groundwater allocation in a sugarcane-cultivating village in North India. We find that, in contrast to earlier literature, the observed water trades result in efficient water allocation across farms. We interpret this and other stylized facts in terms of a social contract using a simple bargaining model with limited inter-player transfers. Poor functioning of the power sector leads to reduced pumping and a water supply constraint. Simulations show that power supply reform can significantly increase farm yields, and be financed out of increased farm profits.     

Microfinance and gender empowerment

In this paper, we develop a theoretical model of household production, bargaining and credit to analyse how access to microcredit affects intra-household decision-making and welfare, and identify conditions under which female household members are most likely to benefit. We show that, consistent with ethnographic accounts of the impact of microcredit programmes on poor households, access to loans can lead to a variety of outcomes for intra-household decision-making and welfare depending on initial conditions and that, in some instances, women borrowers may experience a decline in welfare. We identify two instances in which a woman is most likely to benefit: when there is scope for investing the loan profitably in a joint activity, and when a large share of the household budget is devoted to household public goods.     

Local elections and consumption insurance

During our sample period from 1987 to 2002, Chinese villages completed the transition from government‐appointed village leaders to elected ones. This article examines if and how much democratic elections of the village leaders affected consumption insurance by Chinese village residents. Exploring a panel dataset of 1,400 households from this period, we find that consumption insurance is around 20 percent more complete with elected village leaders. Furthermore, local elections improve consumption insurance only for the poor and middle‐income farmers, but not for the rich. The results are robust when we allow for pretrending, potential endogeneity of elections, and higher measurement errors for rich residents. We also find that the effects on consumption insurance are stronger when closer to the upcoming election year and when the village committees consist largely of non‐Communist Party members. These findings suggest that the election effects on consumption insurance partly come from increasing accountability to local constituents.     

Testing for serial correlation and random effects in a two-way error component regression model

In this paper, we test the existence of serial correlation and random effects in a two-way error component regression model with panel data. Under moment conditions alone, we suggest several easily implemented tests based on the parameter estimators for artificial autoregressions modeled by the differences in residuals. Under the null hypotheses, the tests for serial correlation are two-sided and asymptotically chi-square distributed, whereas those for random effects are one-sided, and are asymptotically standard normally distributed variables. Moreover, these methods can also be used similarly to construct tests for both serial correlation and individual effects jointly, whether or not time effects are present. The proposed tests are able to detect local alternatives that are distinct from the null at the parametric rate. Monte Carlo simulations and real data applications are carried out for purposes of illustration.     

Investigating regional house price convergence in the United States: Evidence from a pair-wise approach

In this paper we examine long-run house price convergence across US states using a novel econometric approach advocated by Pesaran (2007) and Pesaran et al. (2009). Our empirical modelling strategy employs a probabilistic test statistic for convergence based on the percentage of unit root rejections among all state house price differentials. Using a sieve bootstrap procedure, we construct confidence intervals and find evidence in favour of convergence. We also conclude that speed of adjustment towards long-run equilibrium is inversely related to distance.     

On the evolutionary edge of altruism: a game-theoretic proof of Hamilton’s rule for a simple case of siblings

We offer a game-theoretic proof of Hamiltons rule for the spread of altruism. For a simple case of siblings, we show that the rule can be derived as the outcome of a one-shot prisoners dilemma game between siblings.JEL Classification: A13, C70, D64Correspondence to: Oded Stark, ZEF, University of Bonn, Walter-Flex-Strasse 3, 53113 Bonn, GermanyWe are indebted to an anonymous referee and to Uwe Cantner for helpful comments and suggestions. Partial financial support from the National Institute on Aging (grant RO1-AG13037) and from the Humboldt Foundation is gratefully acknowledged.     

The α-beauty contest: Choosing numbers, thinking intervals

We present a model for the α-beauty contest that explains common patterns in experimental data of one-shot and iterative games. The approach is based on two basic assumptions. First, players iteratively update their recent guesses. Second, players estimate intervals rather than exact numbers to cope with incomplete knowledge of other players' rationality. Under these assumptions we extend the cognitive hierarchy model of Camerer et al. [Camerer, C., Ho, T., Chong, J., 2003b. A cognitive hierarchy model of one-shot games. Quart. J. Econ. 119, 861–898]. The extended model is estimated on experimental data from a newspaper experiment.