1,720,986 research outputs found
Optimal collective contract without peer information or peer monitoring
No full textIf entrepreneurs have private information about factors influencing the outcome of an investment, individual lending is inefficient. The literature typically offers solutions based on the assumption of full peer information to solve adverse selection problems and peer monitoring to solve moral hazard problems. In contrast, I show that it is possible to construct a simple budget-balanced mechanism that implements the efficient outcome even if each borrower knows only own type and effort, and has neither privileged knowledge about others nor monitoring ability. The mechanism satisfies participation incentives for all types, and is immune to the Rothschild–Stiglitz cream skimming problem despite using transfers from better types to worse types. The presence of some local information implies that the mechanism cannot be successfully used by formal lenders. Thus a local credit institution can emerge as an optimal response to the informational environment even without peer information or monitoring. Finally, I investigate the role of monitoring in this setting and show how costly monitoring can increase the scope of the mechanism
How to sell debt (but not money)
Full text linkMulti-unit common value auctions in which bidders submit demand functions are used for a variety of purposes, including selling government debt (Treasury auctions) and allocating
liquidity (repo auctions). Typically, either a discriminatory or a uniform-price format is used. In this paper, we consider the incentive for participation by relatively uninformed bidders in the presence of more informed bidders under these formats. We characterize the equilibrium under a discriminatory auction and show that discriminatory pricing inhibits uninformed participation. In contrast, the equilibria we construct under a uniform pricing rule show that profitable uninformed participation can occur. The usefulness of widening participation in Treasury auctions makes the latter format a natural choice in these auctions, providing an explanation for the switch to the uniform-price format in US Treasury auctions. We also apply our results to repo auctions and show that a uniform-price format can reduce the ability of a central bank to steer interest rates. This sheds light on the reason for the switch away from the uniform-price format by several central banks in conducting repo auctions. We also consider the question of information aggregation and show that uniform-price auctions might fail to do so. The results also offer an explanation for the fact that the ECB, as well as several other central banks, prefer to allocate liquidity through a fixed-rate tender rather than either uniform-price or discriminatory auctions
Enforcing repayment: social sanctions versus individual incentives
No full textAbstract
We study repayment incentives generated through social sanctions and under pure in- dividual liability. In our model agents are heterogeneous, with differing degrees of risk aversion. We consider a simple setting in which agents might strategically default from a loan program. We remove the usual assumption of exogenous social penalties, and consider the endogenous penalty of exclusion from an underlying social cooperation game, modeled here as social risk-sharing. For some types of agents social risk-sharing can be sustained by the threat of exclusion from this arrangement. These types have social capital and can be given a loan that bootstraps on the risk-sharing game by using the threat of exclusion from social risk-sharing to deter strategic default. We show that the use of such sanctions can only cover a fraction of types participating in social risk sharing. Further, coverage is decreasing in loan duration. We then show that an individual loan programaugmented by a compulsory illiquid savings plan (such schemes are used by the Grameen Bank) can deliver greater coverage, and can even cover types excluded from social risk-sharing (i.e. types for whom social penalties are not available at all). Further, the coverage of an individual loan program has the desirable property of increasing with loan size as well as loan duration. Finally, we show that social cooperation enhances the performance of individual loans. Thus fostering social cooperation is beneficial under individual liability loans even though it has limited usefulness as a penalty under social enforcement of repayment. The results offer an explanation for the Grameen Bank’s adoption of individual liability replacing group liability in its loan programs since 2002
Monitoring versus gatekeeping
Full text linkWe study alternative mechanisms facing adverse selection and moral hazard, as well as the problems of collusion and free-riding, which are often ignored in the literature. We derive the optimal monitoring mechanism and show that it solves free riding and collusion problems. However, with different types of agents, the optimal mechanism needs to also solve an “assignment problem,” which, coupled with the need to generate incentive for monitoring, prevents the optimal monitoring mechanism from attaining full second best efficiency. The paper then considers an alternative mechanism in which some agents are simply given gatekeeping powers: they can either allow or block any investment project. The mechanism allows rent extraction through side payments from investors to the gatekeepers. A gatekeeping mechanism with competing gatekeepers attains first best efficiency, and is also proof against collusion between investors and gatekeepers by construction.\ud
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We show that the crucial issue for the success of monitoring is whether monitors can be penalized for false reporting. Without this assumption monitoring reduces to gatekeeping. Further, the crucial assumption for gatekeeping to succeed is that gatekeepers behave in a competitive manner. The results provide an explanation for the observed institutional choices: monitoring is typical in informal collectives, whereas government regulation of investment (licensing, issuing permits etc) leads naturally to gatekeeping
Mobile money and financial inclusion in India
No full textDespite improvements in the coverage of banking services, financial exclusion remains a significant problem in India. 190 million adults remain unbanked and even those with a basic bank account lack access to credit and insurance markets. Mobile money, if successfully adopted by a large enough part of the population, could offer a novel solution. This article clarifies the potential of this technology in transforming the landscape of financial access, describes the current state of development in India, and suggests policies that could help realize the potential. Policy suggestions include provision of adoption incentives at local network levels as well as macro policies and regulatory regimes facilitating non-standard channels for service provision
Uninformative equilibrium in uniform price auctions
Full text linkI analyze the incentive for costly information collection in a multi-unit commonvalue uniform-price auction in which bidders submit demand functions. I show that so long as there are some bidders who have a very high cost of information collection, even if there are a large number of other bidders who face an arbitrarily small cost of information collection, there are equilibria in which no bidder collects information
Credit booms and freezes
Full text linkWe show that short-term borrowing by intermediaries creates a rollover-coordination problem endogenously. We then introduce ambiguity and show that the coordination outcome is discontinuous in ambiguity attitude: starting from neutrality, any aversion implies a complete collapse for every value of fundamentals for which coordination matters, whereas any ambiguity loving causes successful coordination for all such values of fundamentals - a "lending euphoria." These help clarify credit booms even when backed by sub-prime assets as well as sudden credit freezes at the advent of bad news even for borrowers investing in non-sub-prime assets
How (not) to sell money
Full text linkA repo auction is a multi-unit common value auction in which bidders submit demand functions. Such auctions are used by the Bundesbank as well as the European Central Bank as the principal instrument for implementing monetary policy. In this paper, we analyze a repo auction with a uniform pricing rule. We show that under a uniform pricing rule, the usual intuition about the value of exclusive information can be violated, and implies free riding by uninformed bidders on the information of the informed bidders, lowering payoff of the latter. Further, free riding can distort the information content of auction prices, in turn distorting the policy signals, hindering the conduct of monetary policy. The results agree with evidence from repo auctions, and clarifies the reason behind the Bundesbank’s decision to switch away from the uniform price format. Our results also shed some light on the rationale behind the contrasting switch to the uniform price format in US Treasury auctions
Informational free riding in uniform price auctions: exception or norm?
Full text linkWe propose a simple theory of trade credit and prepayment. A downstream firm trades off inventory holding costs against lost sales. Lost final sales impose a negative externality on the upstream firm. We show that allowing the downstream firm to pay with a delay, an arrangement known as “trade credit,” is precisely the solution to the problem. Solving a reverse externality accounts for the use of prepayment for inputs, even in the absence of any risk of default by the downstream firm. We clarify previously unexplained facts including the universal presence of a zerointerest component in trade credit terms, and the non-responsiveness of interest charges to fluctuations in the bank rate as well as market demand. We explain why trade credit is short term credit and why the level of provision is negatively related to sales and profit and inventory, but positively related to the profit margin. Finally, we show that under trade credit, inventory investment is invariant to the real interest rate for a wide range of parameters, explaining the puzzle posed by Blinder and Maccini (1991). This implies that standard empirical inventory models would gain explanatory power by including the subsidy effect of accounts payable
Optimal collective contract without peer monitoring
Full text linkIf entrepreneurs have private information about factors influencing the outcome of an investment, individual lending is inefficient. The literature emphasizes improvements through non-market organizations that harness local information through peer monitoring. I investigate the complementary question of designing a credit mechanism when local information is limited, disabling peer monitoring. I show that a pooling mechanism that does not rely on peer monitoring can implement a market for rights-to-borrow, restoring efficiency. The mechanism achieves a strict Pareto improvement - providing incentive for each type of agent to join. Further, even though the mechanism involves pooling - and consequent implicit transfers from better types to worse types - it has a “collective” feature that makes it immune to the Rothschild-Stiglitz cream-skimming problem under competing contracts. Finally, the presence of even weak local information implies that the mechanism cannot be successfully used by formal lenders. Thus a local credit institution can emerge as an optimal response to the informational environment even without peer monitoring. I apply the results to contracts offered by rural moneylenders in developing countries
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