Over the last decade many developing countries strengthened their transparency standards with the objective of improving asset market allocations and macroeconomic outcomes. This paper develops a general equilibrium model and argues that in a financially underdeveloped economy - with uninsurable consumption risk and stochastic-investment - enforcing financial transparency might be counterproductive. The framework builds upon a standard property that illiquid asset markets cause under-investment in assets that pay in the long-run, because individually rational agents hoard cash to exploit sales of underpriced long-term assets. First, I show that in this environment private revelation of news about investment-returns could give a chance to sell low-quality assets and then characterize the conditions under which the lack of financial transparency reduces under-investment and improves macroeconomic development. An empirical analysis reveals that the theoretical predictions of the model is in line with cross-country data.

This paper studies the quantitative relevance of the cross-sectional dispersion of corporate financial structure in explaining the intra-industry allocation efficiency of productive factors. I solve a heterogeneous firms model with financial constraints and distortions to the marginal rental-rate of capital, and develop a measure for the intra-industry misallocation of factors of production. The distribution of capital rental rate and two types of firm-level balance sheet characteristics (pledgeability and liquid asset positions) determine the extent of misallocation and industry level total factor productivity (TFP). I calibrate the model using firm-level balance sheet data from seven major industry clusters of the US economy. The counterfactual policy experiments show that weakening the observed balance sheet positions for financially constrained firms leads to a reallocation of production factors from firms with high cost distortions to firms with low cost distortions and cause quantitatively important industry level TFP losses.

This paper analyzes the interactions between government's indebtedness, sovereign default risk and the size of the informal sector. We test an underlying theory that suggests that in societies with limited tax enforcement, the presence of informality constrains the set of pledgeable fiscal policy alternatives, increases public debt and the implied probability of sovereign debt restructuring. The hypotheses that we test in our empirical analysis are: a larger size of the informal sector is associated with (1) higher public indebtedness, (2) higher interest rates paid on sovereign debt, (3) a higher level of financial instability and (4) a higher probability of sovereign default. The empirical results from cross-country panel regressions show that after controlling for previously highlighted variables in the literature that could explain the variation in financial instability, sovereign default risk and public indebtedness, the size of informality remains as a significant determinant of these variables.

Cross-country aggregate data exhibits a strong (positive) relationship between the size of the informal employment and aggregate homeownership rates. We investigate this empirical observation using a cash-in-advance model with housing markets and argue that the rate of inflation is important in explaining the nexus between informality and homeownership rates. Specifically, we uncover a novel monetary transmission mechanism and show that households with informal employment desire to economize on their short-term cash usage and avoid periodic rental payments when (i) informality is associated with constrained business investment finance, and (ii) inflation expectations are high. Our empirical and theoretical findings highlight an important interaction between the conduct of monetary policy and the performance of housing markets.

This paper investigates the empirical relationship between financial structure and employee compensation in the banking industry. Using an international panel of banks, we show that well-capitalized banks pay higher wages to their employees. Our results are robust to changes in measurement, model specification and estimation methods. In order to account for the positive association between bank capital and employee compensation, we illustrate a stylized 3-period model and show that well-capitalized banks have incentives to pay higher wages to induce monitoring. Such monitoring rents of employees at capitalized banks are expected to be higher in societies with weak institutions. Further empirical analysis shows that the weaker is institutional quality of a country the stronger is the positive relationship between bank capital and wages - supporting our theoretical conjectures.

On average, wages in the finance industry are higher compared to the rest of the economy. Two explanations suggested for this finance wage premium are (1) the positive correlation between risk-taking and wages, and (2) industry differences in information technology intensity. Using a comprehensive worker-firm panel dataset for the Netherlands, we estimate wage models with additive worker and firm fixed effects, and compute the finance wage premium as the average of the firm fixed effects in an industry. We then relate the estimated cross-section of firm fixed effects to a range of firm characteristics, and find that information technology investment, the average level of educational attainment at a firm, and the complementarity of the two are the main drivers of the finance wage premium, while firm risk only makes a small contribution.