Knowledge that Transforms

We investigate how long an insolvent debtor can avoid default when survival benefits creditors collectively, but individual creditors gain from early repayment. Standard theory predicts that debt is not rolled over and default is immediate. Previous experimental studies of related environments suggest that liquidation is delayed, and we confirm that pattern here. We then study how secondary markets affect outcomes. The duration of the credit pool is unaffected, but average net payoffs increase because claims are held longer before redemption. With markets, realized payoff dispersion is significantly higher. Prices do not predict liquidation timing but correlate with realized payoffs.

Tax authorities often leave the consequences of non-compliance unspecified. We examine how disclosing those consequences affects tax payment and income reporting in four experiments. In a field experiment with HM Revenue and Customs, letters randomized to more than 200,000 taxpayers with outstanding income-tax debts increased payment when they warned of unspecified further action. Messages specifying financial or administrative costs did not produce the same benefit. An online payment experiment with 2050 taxpayers across fourteen conditions, including 1194 in the principal factorial design, found that revealing the maximum fine lowered the stated likelihood of paying. The reduction occurred at both modest and severe revealed maxima. It also occurred among participants who learned that the fine exceeded their prior estimate, contrary to the prediction from belief updating. An incentivized experiment with 827 participants extended the effect to income declarations with money at stake, although declarations differed between the two disclosed maxima in this setting. A laboratory experiment with 239 participants recorded differences in pupil dilation across enforcement messages without detectable differences in measured visual attention. Together, the findings suggest that ambiguity about enforcement consequences contributes to compliance. The physiological evidence is consistent with an affective account of this relationship. Disclosing a maximum penalty can therefore have a behavioral cost that tax authorities should consider when communicating enforcement policy.

We study the transmission of macroprudential policy to loan issuance by banks and nonbank financial intermediaries, and the associated real effects on firm-level outcomes including mergers and acquisitions. We use loan-level data from the global syndicated credit market, information on the type of participating lenders between banks and nonbanks, and shocks to regulatory limits to the banks’ ratio on loans-to-deposits (LTD) to document that a LTD policy tightening reduces credit supply by banks and simultaneously shifts financial intermediation to nonbanks. We show that this credit migration is driven by banks facing high pre-regulation LTD ratios and by nonbanks that are less regulated and free from leading the loan arrangements when issuing term loans. We also find evidence that in response to tighter LTD, borrowing firms with stronger nonbank relationships are shielded more by the decline in bank credit with ensuing relative increases in corporate debt, assets, and capital investment. Finally, firms in countries with better access to nonbank credit differentially increase the number of acquisitions they undertake when LTD policy intensifies.