Knowledge that Transforms

There has been considerable public debate on the relative merits of alternative consumer bankruptcy rules. The option to discharge one’s debt provides partial insurance against bad luck, but by driving up interest rates makes lifecycle smoothing more difficult. We construct a quantitative model of consumer bankruptcy to address this trade-off. We argue that such a model should have three key feature: a life-cycle component, idiosyncratic earnings uncertainty and expense uncertainty (exogenous negative shocks to household balance sheets). We further show that transitory and persistent earnings shocks have very different implications for evaluating bankruptcy rules – while persistent shocks make bankruptcy option desirable, transitory shocks have the opposite implication. Our findings suggest that the current US bankruptcy system may be desirable for reasonable parameter values.

An independent central bank can manage its balance sheet and its capital so as to commit itself to a depreciation of its currency and an exchange-rate peg.This way, the central bank can implement the optimal escape from a liquidity trap, which involves a commitment to higher future inflation.This commitment mechanism works even though, realistically, the central bank cannot commit itself to a particular future money supply.It supports the feasibility of Svensson's Foolproof Way to escape from a liquidity trap.

In this paper I analyze the e¤ect of the transparency of the decision making process in committees on the decisions that are eventually taken.I focus on committees whose members are motivated by career concerns, so that each member tries to enhance his own reputation.When the decision making process is secretive, the individual votes of the committee members are not exposed to the public but only the …nal decision.Thus, individuals are evaluated according to the group's decision.I …nd that in such a case, group members are induced to comply with preexisting biases.For example, if the voting rule demands a supermajority to accept a reform, individuals vote more often against reforms and exacerbate the conservatism of the voting rule.When the decision making process becomes transparent and individual votes are observed, this e¤ect disappears and such committees are then more likely to accept reforms.I also …nd that coupled with the right voting rule, a secretive procedure may induce better decisions than a transparent one.