We develop a model of lender behavior in the presence of default risk and moral hazard that determines default premiums and identifies the conditions under which borrowers are rationed. A hypothesis regarding a cognitive bias in the formation of expectations provides a dynamic component to our analysis and allows us to explain how an economy becomes vulnerable to a financial crisis and why vulnerability may increase over time.

This paper deals with the producer's optimal use of commodity futures in hedging. The framework for analysis is an intertemporal consumption and investment model. The producer makes his production decisions at the beginning of the period and realizes his return at the end of the time interval. During the period, he faces both price and output uncertainties. In applying stochastic dynamic programming methods, this paper shows the effect of these risks on his consumption behavior. Further, the paper investigates his optimal hedging positions in the futures market over time and his optimal production decisions. Finally, implications of these results on the futures markets are discussed

Through the use of laboratory market methodology, the effect of a futures market on the time path of asset prices is studied and competing models of asset pricing are analyzed. With replication of market conditions, the predictions of a rational expectations equilibrium model are relatively accurate whether or not futures markets are present. However, the presence of futures markets increases the speed with which an efficient equilibrium is achieved. While this more rapid adjustment can increase the variance of spot market prices as they move to equilibrium, this increased variance reflects efficiency gains due to better information.

This study is a refinement and an extension of an earlier study by McCulloch of tax effects in the regression equation for term structure estimation. This study includes tests for tax effects and heteroskedasticity, a reconsideration of the need for an instrumental variable, and a search for the capital gains tax rate in addition to the ordinary‐income tax rate. There are two major findings: (1) statistically significant tax‐induced bias in the non‐tax‐adjusted equation and (2) evidence that the capital gains tax is misspecified in the tax‐adjusted equation.

Product lines of traditionally heterogeneous financial institutions are rapidly fusing into a homogeneous blend. Institutions and market structures are reshaping themselves to lower the cost of serving customer demand for financial services. This paper contends that contemporary adaptations exploit scope economies rooted in technological change and deposit‐insurance subsidies to innovative forms of risk‐bearing. As they reorient work flows, financial firms are simultaneously restructuring their organizations to lower net burdens from government regulation. Alternative state and federal regulatory and legislative bodies compete vigorously for the regulatory business of developing institutional hybrids. Evolution of Federal Reserve policy toward “nonbank banks” exemplifies the process

This paper values options on assets whose returns, over a finite interval of time, are generated by a binomial process. It shows that a simple valuation relationship, between the option and the underlying stock, obtains if investors have preference functions that belong to a particular class, even if opportunities to hedge do not exist. One particular application of the theory is in the case where the stock price over a finite interval could increase by an amount, fall by the same amount, or stay at the same level. The results in this paper may be viewed as the foundation of the preference‐based approaches to obtaining a risk neutral valuation relationship

This paper examines inflation‐induced distortions in personal and corporate income taxes and discusses the implications for corporate dividend and financial structure policies and for shareholder unanimity. The tax effects relating to capital gains and debt interest cause changes in aggregate corporate borrowing and lead to equilibrium tax relationships which differ from the zero‐inflation tax relationships

This paper extends Merton's intertemporal capital asset pricing model with multiple consumers to include a description of the supply of traded securities. The production decisions of firms are described in a model with stochastic investment opportunities and incomplete markets. Firms maximize the welfare of their stockholders based on the sum of dollar values placed on the projects by shareholders of the firm. The monetary value to stockholders of a marginal change in the contract structure due to changing firm production is analyzed. In this setting, the competitive market achieves an appropriately defined Nash‐Constrained Pareto Optimum. Sufficient conditions for investor unanimity, market‐value maximization by firms, and the equilibrium to achieve a Constrained Pareto Optimum and full Pareto Optimum are derived