Intertemporal capital budgeting

This paper analyzes the optimal capital budgeting mechanism when divisional managers are privately informed about the arrival of future investment projects. Consistent with field study evidence, an optimal allocation mechanism can include a stipulation that a capital request for discretionary investment will be declined with positive probability in the period after a significant investment was made even though this is ex post suboptimal. The model derives a number of empirical predictions regarding capital budgeting and the investment of financially constrained firms.     

Bank Competition and Credit Standards

This article offers an explanation for the substantial variationof credit standards and price competition among banks over thebusiness cycle. As the economic outlook improves, the averagedefault probabilities of borrowers decline. This affects theprofitability of screening and causes bank screening intensityto display an inverse U-shape as a function of economic prospects.Low screening activity in expansions creates intense price competitionamong lenders and loans are extended to lower-quality borrowers.As the economic outlook worsens, price competition diminishes,and credit standards tighten significantly. Deposit insurancemay contribute to the countercyclical variation of credit standards.