We use new data from rural and semi-urban Thailand to examine how financial constraints affect entrepreneurial activity. The analysis uses nonparametric and reduced form techniques. The results indicate that financial constraints play an important role in shaping the patterns of entrepreneurship in Thailand. In particular, wealthier households are more likely to start businesses. Wealthier households are also more likely to invest more in their businesses and face fewer constraints. We also provide evidence that financial constraints place greater restrictions on entrepreneurial activity in the poor Northeast compared to the more developed Central region.

The term structure of interest rates is modeled as a random field with conditional volatility. Random field models allow consistency with the current shape of the term structure without the need for recalibration. However, most such models are Gaussian, with no conditional volatility. State-dependent volatility is introduced while a key property of Gaussian random field models is retained. Each forward rate is part of a low-dimensional diffusion process, simplifying estimation and derivatives pricing. The modeling approach also implies that, in general, the set of zero coupon bonds does not complete the market, and term structure derivatives cannot always be priced by arbitrage.

After a large bank merger, the compensation of the surviving bank's CEO often increases materially. Theories of executive compensation based on managerial productivity and optimal incentives suggest that changes in CEO compensation are related to the potential gains from merger. Alternatively, compensation gains might result from an increase in bank size regardless of whether the merger creates value. We examine mergers among billion-dollar banks in the 1990s and find results consistent with managerial productivity. Specifically, we show empirically that changes in CEO compensation after mergers are positively related to anticipated gains from merger measured at the announcement date. Other changes in the structure of compensation are also consistent with hypotheses based on managerial productivity and incentive restructuring.

It is widely believed that the Fed controls the federal funds rate by altering the degree of pressure in the reserve market through open market operations when it changes its target for the funds rate. Recently, however, several analysts have suggested that the Fed need not conduct open market operations to change the funds rate. Rather, they argue it is sufficient that the Fed indicate its desire for the funds rate. This paper notes that there is yet a third alternative, the interest-rate-smoothing hypothesis, that suggests that the Fed does not move rates per se but, rather, smooths the transition of rates to the new equilibrium required by economic shocks. This paper tests the open market and open mouth alternatives using a methodology first used by Cook and Hahn [Journal of Monetary Economics (1989a) 331]. Finding no evidence that either open market operations or open mouth operations can account for the close relationship between the funds rate and the funds rate target, a variety of evidence consistent with the interest-rate-smoothing hypothesis is considered. The results suggest that many changes in the Fed’s funds rate target are an endogenous response to economic events and suggest that an alternative way to identify exogenous changes in policy is to identify exogenous changes in the Fed’s funds rate target.

This paper analyzes how community heterogeneity influences resident decisions to undertake actions generating public benefits. The decision in question is completing and returning the 2000 Census questionnaire, an action which secures a significant amount of federal grants for the community. The model developed to explain this action allows members of societal groups to differentially value public benefits that accrue to other group members. Racial, generational, and socioeconomic class heterogeneity all predict significantly lower response rates at the county level. The potential for endogenous sorting into heterogeneous counties implies that the magnitude of true behavioral effects exceeds these estimates.

We investigate external and internal corporate governance activity observed at Japanese banks over 1985–1996. External governance appears to be inactive, and even after the onset of the banking crisis of the 1990s there are few mergers, failures, and other changes in ownership and control. Prior to the banking crisis we do not find a relation between bank performance and executive turnover. In contrast, non-routine turnover of bank presidents is inversely related to both stock returns and profitability in the 1990s. Consequently, internal governance activity is observable following the onset of the Japanese banking crisis, a period otherwise characterized by inactive external governance and regulatory forbearance.

Both debt covenants and federal monitoring restrict banks’ discretion. We examine whether banks substituted monitoring for covenants by investigating debt issues of 105 banks between 1979 and 1984, a period when monitoring increased. We hypothesize that bank shareholders take advantage of the intersection between debt covenants and regulatory monitoring to reduce agency costs. We find a decrease in the number of debt issues containing such covenants and the total debt subject to such covenants. We find no such decrease during the same period for a sample of non-banking firms, or for banks during a subsequent period.