Knowledge that Transforms

Financial reporting, Disclosures, Banking, Loan loss allowance

In this note it is argued that bankruptcy rules and credit constraints are intrinsically related concepts. Bankruptcy occurs because credit is constrained. By introducing the concept of a «consistent» credit rationing scheme, it can be shown that a temporary equilibrium exists if credit rationing is consistent and if lenders have more conservative expectations with regard to the borrower's future repayment capability than the borrower

This paper compares the equilibrium behavior and outcomes in a model of two-party competition for legislative seats under two different assumptions about the parties' goals: (1) parties maximize the expected number of seats won, and (2) parties maximize the probability of winning a majority of the seats. The two goals may lead to qualitatively different behavior, and studying the differences yields insights into the relationship between the goals, and the role of asymmetries between the parties.

Economic models with multiple equilibria are now so common in economics that we need a general framework for statistical inference in such models. This note offers a simple theoretical framework that can be used to organize the debate about the question of whether such a model is identified, and about the question of how much predictive content it retains

Uniform laws of large numbers (ULLNs) consider sums of the form: n −1 Σ t n =1 [q t (z t , θ)-Eq t (z t , θ)], where (z t ) denotes a stochastic data generating process that takes its values in a space Z, θ is an element of the parameter space Θ, and q t : Z×Θ→R. ULLNs provide conditions under which the above sum converges to zero uniformly over the parameter space. The purpose of the present note is to introduce a new generic ULLN. It maintains a set of assumptions that is relatively easy to verify and allows at the same time the analysis of a wide variety of estimators and models of interest in economics

The value of one in-kind transfer, food stamps, is estimated by evaluating the experience of an actual conversion from stamps to cash in Puerto Rico in 1982. The evidence indicates that the cashout of the stamps had no detectable influence on food expenditures. The explanation partly lies in the distribution of expenditures, for the stamps were inframarginal for most recipients. However, some evidence indicates that trafficking in stamps was widespread as well, including indirect evidence from estimation of the piecewise-linear constraint model.

An important application of the theory of choice under uncertainty is to asset markets, and an important property in these markets is a preference for portfolio diversification. If an investor is an expected utility maximizer, then (s)he is risk averse if and only if (s)he exhibits a preference for diversification. This paper examines the relationship between risk aversion and portfolio diversification when preferences over probability distributions of wealth do not have an expected utility representation

IN AN IMPORTANT RECENT PAPER, Hausman and Taylor (1981)-hereafter HT-considered the instrumental-variable estimation of a regression model using panel data, when the individual effects may be correlated with a subset of the explanatory variables. They provided a simple consistent estimator and an efficient estimator. More recently, Amemiya and MaCurdy (1986)-hereafter AM-have suggested an alternative estimator which is more efficient than the HT estimator, under certain conditions and given stronger assumptions than HT made. However, the relationship between the HT and AM papers is less clear than it might be, in part because of notational differences between the two papers. In this paper we clarify the relationship between the HT and AM estimators, and we show that the difference between these estimators lies in the treatment of the time-varying explanatory variables which are uncorrelated with the effects: HT use each such variable as two instruments (means and deviations from means), while AM use such variables as T + 1 instruments (as deviations from means and also separately for each of the T available time periods). This enables us to make clear the conditions under which the AM estimator is more efficient than the HT estimator. We also present each estimator in a form which allows it to be calculated using standard instrumental-variables (two-stage least squares) software. Following the AM path one step further, we then define a third (BMS) estimator which, under yet stronger assumptions, is more efficient than the AM estimator. Both HT and AM use as instruments the deviations from means of the time-varying variables which are correlated with the effects. A more efficient estimator may be obtained by using separately the (T - 1) linearly independent values of these deviations from individual means. Consistency requires that these be legitimate instruments, and whether this is so depends on why these time-varying variables are correlated with the effects. For example, if such correlation arises solely because of a time-invariant component which is removed in taking deviations from individual means, these instruments are legitimate.

In this paper, the authors propose a simple procedure for testing the existence of common roots in lag polynomials. They first show, by using a generalized Bezout property, that this hypothesis can be put under a "mixed" form that is linear with respect to the auxiliary parameters and with respect to the initial parameters. It follows that the test procedures can be implemented only by using regressions packages.