Inflation Expectations and Risk Premiums in an Arbitrage‐Free Model of Nominal and Real Bond Yields

Differences between yields on comparable‐maturity U.S. Treasury nominal and real debt, the so‐called breakeven inflation (BEI) rates, are widely used indicators of inflation expectations. However, better measures of inflation expectations could be obtained by subtracting inflation risk premiums (IRP) from the BEI rates. We provide such decompositions using an affine arbitrage‐free model of the term structure that captures the pricing of both nominal and real Treasury securities. Our empirical results suggest that long‐term inflation expectations have been well anchored over the past few years, and IRP, although volatile, have been close to zero on average.     

Foreign Entry into Underwriting Services: Evidence from Japan's “Big Bang” Deregulation

We examined the effect of foreign entry into bond market underwriting activity using issue‐level data from the Japanese “Samurai” and euro–yen bond markets. We found that the fees charged by Japanese underwriters were higher on average than those of foreign underwriters, but the difference could be explained by conditioning on issue characteristics. Our results also suggest that bond issuers sorted properly across underwriters, as switching across underwriter nationalities would be expected to result in higher fees. However, the savings enjoyed by firms issuing with foreign underwriters were modest and statistically insignificant, while those of firms issuing with Japanese underwriters were substantial and statistically significant. This result suggests that Japanese underwriters priced their services aggressively over the sample period, perhaps in an effort to retain or gain market share. This conjecture is supported by a matching exercise that examined the liberalization of foreign underwriter access to the Samurai bond market, using euro–yen bond issues as a control. Foreign entry led to a statistically and economically significant decrease of 16 basis points on average in underwriting fees in the Samurai bond market. Overall, our results suggest that the international market for Japanese bond underwriting services was partially segmented by nationality as issuers appear to have preferred habitats, but that liberalization increased overall market competition.     

Testing for the utility maximization hypothesis of consumers using the revealed preference theory

The objective of this paper is to test the utility maximization hypothesis in various Western countries using the non-parametric approach based on the revealed preference theory. The data employed are annual time series covering the period 1964 to 1992 of per capita consumption and prices from Germany, France, the United Kingdom, Spain, Sweden and Canada. The results indicate that all sample countries are consistent with the weak, strong and generalized axioms of the revealed preference theory. This implies that the observed behaviour of these consumers is consistent with the condition of utility maximization or, in other words, that the hypothesis of stability of individual preferences is accepted.     

The Determinants of the Maturity of Corporate Debt Issues

We document the determinants of the term to maturity of 7,369 bonds and notes issued between 1982 and 1993. Our main finding is that large firms with investment grade credit ratings typically borrow at the short end and at the long end and of the maturity spectrum, while firms with speculative grade credit ratings typically borrow in the middle of the maturity spectrum. This pattern is consistent with the theory that risky firms do not issue short-term debt in order to avoid inefficient liquidation, but are screened out of the long-term debt market because of the prospect of risky asset substitution.     

Cream‐Skimming in Financial Markets

We propose a model in which investors may choose to acquire costly information that identifies good assets and purchase these assets in opaque (OTC) markets. Uninformed investors access an asset pool that has been cream‐skimmed by informed investors. When the quality composition of assets for sale is fixed, there is too much information acquisition and the financial industry extracts excessive rents. In the presence of moral hazard in origination, the social value of information varies inversely with information acquisition. Low quality origination is associated with large rents in the financial sector. Equilibrium acquisition of information is generically inefficient.     

Information and Incentives Inside the Firm: Evidence from Loan Officer Rotation

We present evidence that reassigning tasks among agents can alleviate moral hazard in communication. A rotation policy that routinely reassigns loan officers to borrowers of a commercial bank affects the officers' reporting behavior. When an officer anticipates rotation, reports are more accurate and contain more bad news about the borrower's repayment prospects. As a result, the rotation policy makes bank lending decisions more sensitive to officer reports. The threat of rotation improves communication because self‐reporting bad news has a smaller negative effect on an officer's career prospects than bad news exposed by a successor.     

USING PSEUDO‐PANELS TO MEASURE INCOME MOBILITY IN LATIN AMERICA

This paper presents a comparative overview of mobility patterns in 14 Latin American countries between 1992 and 2003. Using three alternative econometric techniques on constructed pseudo‐panels, the paper provides a set of estimators for the traditional notion of income mobility as well as for mobility around extreme and moderate poverty lines. The estimates suggest very high levels of time‐dependent unconditional immobility for the Region. However, the introduction of socioeconomic and personal factors reduces the estimate of income immobility by around 30 percent. There are also large variations in country‐specific income mobility (estimated to explain some additional 10 percent of inter‐temporal income variation). Analyzing the determinants of changes in poverty incidence within cohorts revealed statistically significant roles for age, gender, and education of the household head, the latter subject to distinctive effects across levels of attainment and transition in and out of poverty.     

Beliefs and Public Good Provision with Anonymous Contributors

We analyze a static game of public good contributions where finitely many anonymous players have heterogeneous preferences about the public good and heterogeneous beliefs about the distribution of preferences. In the unique symmetric equilibrium, the only individuals who make positive contributions are those who most value the public good and who are also the most pessimistic; that is, according to their beliefs, the proportion of players who most like the public good is smaller than it would be according to any other possible belief. We predict whether the aggregate contribution is larger or smaller than it would be in an analogous game with complete information and heterogeneous preferences, by comparing the beliefs of contributors with the true distribution of preferences. A trade‐off between preferences and beliefs arises if there is no individual who simultaneously has the highest preference type and the most pessimistic belief. In this case, there is a symmetric equilibrium, and multiple symmetric equilibria occur only if there are more than two preference types.