This paper provides a simple and practical approach to hedging bonds that are subject to credit risk. Three new hedge ratios are derived and tested and the roles of basis risk and diversification is investigated. Empirical tests reveal that basis risk is an important factor in hedging corporate bonds. These tests identify a need for new interest rate derivatives where the underlying asset is subject to credit risk.

The widespread Italian practice of multiple borrowing has been studied with respect to the continuity of bank lending and to the interest rates charged to individual borrowers. However, there is a lack of empirical evidence on the effects of multiple credit relationships over the fragility of the corporate borrowers. Two theses are competing: one asserts that multiple borrowing results in a desirable sharing of risks; the other, that the parcellization of loans substantially weakens the discipline exercised by the banks and makes corporate borrowers more fragile. Through multivariate techniques, we check whether the indicators describing the structure of lending relationships can help, along with balance-sheet variables, to separate healthy from failed firms. This exercise shows that multiple banking relationships are associated with a higher riskiness of the borrowers, even though the impact is moderate in comparison with the importance of real and financial variables derived from balance sheets.

Governmental agencies, Cost allocation, External Competition, Efficiency

Aaron S. Edlin, Mario Ephemerella, Walter P. Keller, Is Perfect Price Discrimination Really Efficient?: Welfare and Existence in General Equilibrium, Econometrica, Vol. 66, No. 4 (Jul., 1998), pp. 897-922

This paper compares the changing skill structure of wage bills and employment in the United States with six other OECD countries (Denmark, France, Germany, Japan, Sweden, and the United Kingdom). We investigate whether a directly observed measure of technical change (R&D intensity) is closely linked to the growth in the importance of more highly skilled workers which has occurred in all countries. Evidence of a significant association between skill upgrading and R&D intensity is uncovered in all seven countries. These results provide evidence that skill-biased technical change is an international phenomenon that has had a clear effect of increasing the relative demand for skilled workers.

Lojack is a hidden radio-transmitter device used for retrieving stolen vehicles. Because there is no external indication that Lojack has been installed, it does not directly affect the likelihood that a protected car will be stolen. There may, however, be positive externalities due to general deterrence. We find that the availability of Lojack is associated with a sharp fall in auto theft. Rates of other crime do not change appreciably. At least historically, the marginal social benefit of an additional unit of Lojack has been fifteen times greater than the marginal social cost in high crime areas. Those who install Lojack, however, obtain less than 10 percent of the total social benefits, leading to underprovision by the market.

This paper offers a theory of training whereby workers do not pay for the general training they receive. The superior information of the current employer regarding its employees' abilities relative to other firms creates ex post monopsony power, and encourages this employer to provide and pay for training, even if these skills are general. The model can lead to multiple equlibria. In one equilibrium quits are endogenously high, and as a result employers have limited monopsony power and provide little training, while in another equilibrium quits are low and training is high. Using microdata on German apprentices, we show that the predictions of our model receive some support from the data.

We develop a positive theory of how interest-group competition shapes the organization of Congress and use it to explain campaign contribution patterns in financial services. Since interest groups cannot enforce fee-for-service contracts with legislators, legislators have an incentive to create specialized, standing committees which foster repeated dealing between interests and committee members. The resulting reputational equilibrium supports high contributions and high legislative effort for the interests. Contribution patterns by competing interests in the congressional battle over whether banks can enter new businesses support the theory, which also has implications for term limits and campaign reform.