Across-the-Curve Credit Spread Indices

We design a novel across-the-curve credit spread index, AXI, a measure of the recent cost of wholesale unsecured debt funding for publicly listed US bank holding companies and commercial banks. AXI, a benchmark for bank lending and risk management, is the weighted average of credit spreads for unsecured debt instruments with maturities ranging from overnight to five years, with weights that reflect both transaction and issuance volumes. We provide illustrative output of the bond-based component of AXI. By widening coverage to include all corporate debt issuers, we also build a financial conditions index (FXI).     

Entry deterrence and innovation in durable-goods monopoly

This paper investigates the efficiency of innovation investments in a durable-goods monopoly when a potential entrant threatens to innovate as well. We show that the durability of the good endows the monopolist with the power to discourage rival innovation since current sales alter the demand for a new generation of the good. The equilibrium is therefore determined not only by the incentive for intertemporal price discrimination in durable-goods monopoly, but also by the incumbent's concern for maintaining the technological leadership. We demonstrate that entry deterrence followed by no innovation always implies underinvestment in innovation.     

Innovation timing games: a general framework with applications

We offer a new algorithm for analyzing innovation timing games. Its main advantage over the traditional approach is that it applies to problems that had previously been intractable. We use the algorithm to examine two classical innovation problems. We find that the competition takes the form of a waiting game with a second-mover advantage either for any level of R&D costs (process innovation) or for high R&D costs (product innovation). Moreover, both models predict that the second-mover advantage is monotonically increasing in the costs of R&D.     

Minimum return guarantees,investment caps,and investment flexibility

We study the merits of capped retirement products with guarantee for investors who have the flexibility to dynamically adjust their investment strategy. All contracts under consideration are fairly priced such that the net profit of the provider is zero. Without the rider, an expected utility maximizing CRRA investor does not want an investment cap. Here, she commits herself to a strategy a priori. With the flexibility rider, the optimization problem changes and the optimal strategy is a response to an exogenously set price. A fair pricing then anticipates the optimal response of the investor. We show that the maximum expected utility of the investor can, for anticipated fairly priced products, be obtained for a finite cap. Thus, a capped product design can give a Pareto improvement to the otherwise uncapped contract version.     

Remittances and the human capital of children: New evidence from Kyrgyzstan during revolution and financial crisis, 2005–2009

We analyze the effect of the receipt of remittances on the education and health of children in Kyrgyzstan during a volatile period of their recent history, 2005–2009. The country experienced revolution in 2005 and the global financial crisis beginning in 2008. Both events impact human capital investment, and the changes vary by region of the country. We use fixed effects estimation and fixed effects, instrumental variables estimation to isolate the effects of remittances and other events on human capital. We find that boys aged 14–18 in remittances’ receiving households are less likely to be enrolled in school than other children. We also find that girls in remittances’ receiving households are more likely to be malnourished (thin). Both effects are relatively small. Remittances do not improve the human capital of children left behind. However, we do find an overall positive improvement in school enrollment among young children between 2005 and 2009 but a negative trend in enrollment among older boys and girls. Nutrition improves over time. Regional differences are apparent in these trends in nutrition and education.     

Can contracts solve the hold-up problem? Experimental evidence

In the contract-theoretic literature, there is a vital debate about whether contracts can mitigate the hold-up problem, in particular when renegotiation cannot be prevented. Ultimately, this question has to be answered empirically. As a first step, we have conducted a laboratory experiment with 960 participants. We consider investments that directly benefit the non-investing party. While according to standard theory, contracting would be useless if renegotiation cannot be ruled out, we find that option contracts significantly improve investment incentives compared to a no-contract treatment. This finding might be attributed to Hart and Moore?s (2008) recent idea that contracts can serve as reference points.     

Moral hazard and adverse selection in the originate-to-distribute model of bank credit

Bank credit has evolved from the traditional relationship banking model to an originate-to-distribute model. We show that the borrowers whose loans are sold in the secondary market underperform their peers by about 9% per year (risk-adjusted) over the three-year period following the initial sale of their loans. Therefore, either banks are originating and selling loans of lower quality borrowers based on unobservable private information (adverse selection), and/or loan sales lead to diminished bank monitoring that affects borrowers negatively (moral hazard). We propose regulatory restrictions on loan sales, increased disclosure, and a loan trading exchange/clearinghouse as mechanisms to alleviate these problems.