Showing papers by "CEMFI published in 1999"

Transitions to and From Self‐employment in Spain: An Empirical Analysis

Abstract: This paper investigates the influence of individual characteristics and the business cycle on the probability of entry into self-employment and on self-employment duration. We estimate multinomial logit and discrete competing risks models using data from a longitudinal sample of Spanish men for the period 1985-1991. The results indicate that unemployment rises the probability of entering self-employment, but also increases the hazard of leaving self-employment, specially into unemployment. Moreover, receiving unemployment benefits significantly reduces the probability of entering self-employment. Liquidity constraints are important in determining entrepreneurial selection, but only for those who become self-employed with employees.

Sharing Default Information as a Borrower Discipline Device

Abstract: Creditors often share information about their customers' credit record. Besides helping them to spot bad risks, this informational exchange acts as a disciplinary device. If creditors are known to exchange data about defaults, borrowers must consider that default on a current lender would disrupt their credit rating with all the other lenders. This raises their incentive to perform. But sharing more detailed information can reduce this disciplinary effect: when lenders only disclose past defaults, borrowers' incentives to perform may be greater than when lenders share all their information. In some instances, by "fine-tuning" the type and accuracy of the information shared, lenders can raise borrowers' incentives to their first-best level.

Willingness to Move for Work and Unemployment Duration in Spain

Abstract: This paper examines unemployed workers' willingness to move for work and its relationship to their unemployment duration in Spain. We use a hypothetical question in the Spanish Labour Force Survey: ‘Would you accept a job offer which implied a change of residence?’ The main finding is that, while family responsibility, age and education are important in determining individuals’ migration willingness, the duration of unemployment does not show any significant effect, even after controlling for unobserved fixed individual heterogeneity. However, the significant improvement in migration willingness after the exhaustion of unemployment benefits (or when other household members become unemployed) suggests that economic incentives could play an important role in increasing worker mobility. We also find that job-finding probability is significantly higher among those with positive migration attitudes than among others.Universidad del Pais Vasco

Venture Capital Finance: A Security Design Approach

Abstract: This paper provides a theory of venture capital financing based on the complementarity between the financing and advising roles of venture capitalists. We examine the interaction between the staging of investment, that characterizes young firms with a high growth potential, and the double-sided moral hazard problem arising from the managerial contributions of entrepreneurs and venture capitalists. The optimal contractual arrangements have features that resemble the securities actually employed in venture capital financing. In particular, we identify an incentive-related insurance motive for making the initial financier bear the start-up's downside risk, as well as a financing motive for protecting him against dilution. This can explain the widespread use of convertible preferred stock.

The Time Series and Cross-Section Asymptotics of Dynamic Panel Data Estimators

Abstract: In this paper we derive the asymptotic properties of within groups (WG), GMM and LIML estimators for an autoregressive model with random effects when both T and N tend to infinity. GMM and LIML are consistent and asymptotically equivalent to the WG estimator. When T/N->0 the fixed T results for GMM and LIML remain valid, but WG although consistent has an asymptotic bias in its asymptotic distribution. When T/N tends to a positive constant, the WG, GMM and LIML estimators exhibit negative asymptotic biases of order T,N and (2N-T), respectively. In addition, the crude GMM estimator that neglects the autocorrelation in first differenced errors is inconsistent as T/N->c>0, despite being consistent for fixed T. Finally, we discuss the properties of a random effects MLE with unrestricted initial conditions when both T and N tend to infinity.

Swapping the Nested Fixed Point Algorithm: A Class of Estimators for Discrete Markov Decision Models

Abstract: This paper proposes a procedure for the estimation of discrete Markov decision models and studies its statistical and computational properties. Our Nested Pseudo-Likelihood method (NPL) is similar to Rust's Nested Fixed Point algorithm (NFXP), but the order of the two nested algorithms is swapped. First, we prove that NPL produces the Maximum Likelihood Estimator under the same conditions as NFXP. Our procedure requires fewer policy iterations at the expense of more likelihood-climbing iterations. We focus on a class of infinite-horizon, partial likelihood problems for which NPL results in large computational gains. Second, based on this algorithm we define a class of consistent and asymptotically equivalent Sequential Policy Iteration (PI) estimators, which encompasses both Hotz-Miller's CCP estimator and the partial Maximum Likelihood estimator. This presents the researcher with a "menu" of sequential estimators reflecting a trade-off between finite-sample precision and computational cost. Using actual and simulated data we compare the relative performance of these estimators. In all our experiments the benefits in terms of precision of using a 2-stage PI estimator instead of 1-stage (i.e., Hotz-Miller) are very significant. More interestingly, the benefits of MLE relative to 2-stage PI are negligible.

Some Remarks on Leland's Model of Insider Trading

Abstract: This paper shows that Leland's (1992) results on the positive effects of insider trading on investment are not robust to the introduction of noise in the insider's information. The paper then considers two variations of his model in which the insider is risk neutral (to ensure robustness), and the investment decision is prior to the placing of the stock in the market. It is shown that if insider trading takes place in the primary market, it has no effect on the level of investment, whereas if it takes place in the secondary market, it has a negative effect on investment. ing debate. Insider trading moves the resolution of uncertainty forward, and this may bring benefits (better information for investment decisions) as well as costs (increased volatility of prices, and hence higher risk premia). To analyse these effects, Leland (1992) constructs a model with an endogen- ous level of investment, and he shows that, when insider trading is permitted, stock prices will be higher on average, expected real investment will rise, and markets will be less liquid and more volatile. Leland's model is, however, very special. First of all, he assumes that the risk-averse insider learns exactly the future return of the risky asset. In this paper, I analyse the robustness of Leland's results to the introduction of some noise in the insider's information. I show that, given the assumptions of his model, an arbitrarily small amount of noise is sufficient to make negligible all the effects of insider trading. The source of this lack of robustness lies in the assumption that, because of risk aversion, the insider's trade is always negligible-except in the limit case where holding the asset entails no risk. To ensure robustness to the intro- duction of noise in the insider's information, I then consider a model with a risk-neutral insider. However, for this model insider trading does not have any effect on the average price of the risky asset, and hence no effect on the average level of investment. Another feature of Leland's model is the fact that the (only) supplier of the risky asset is assumed to be a price-taker. This seems a fairly implausible assumption, so I propose an alternative model (with a risk-neutral insider) in which the investment decision is prior to the placing of the asset in the market, and which allows the supplier to have market power. The equilibrium of this model can be easily derived from Leland's analysis, and although we get the same results for the volatility of the price and the liquidity of the market, now insider trading has no effect on the level of investment. The result, however, depends crucially on the assumption that the supplier of the asset is risk-neu- tral; under risk aversion, the increase in price volatility would imply a negative

Entrepreneurial Moral Hazard and Bank Monitoring: A Model of the Credit Channel

Abstract: This paper develops a model of the choice between bank and market finance by entrepreneurial firms that differ in the value of their net worth. The monitoring associated with bank finance ameliorates a moral hazard problem between the entrepreneurs and their lenders. The model is used to analyze the different strands of the credit view of the transmission of monetary policy. In particular, we derive the empirical implications of a broad credit channel, and compare them to those obtained when the model is extended to incorporate some elements of the bank lending channel.

A Note on the Changing Relationship Between Fertility and Female Employment Rates in Developed Countries

Abstract: In this paper we look at a panel of OECD aggregate fertility and labor market data between 1970 and 1995 and we report some striking recent developments. Total Fertility Rates (TFR) were falling and Female Participation Rates were increasing, conforming to a well known long-run trend. Along the cross-sectional dimension, the correlation between TFR and FPR was negative and significant during the 1970's and up to the early 1980's. This seemed consistent with secular comovements. However, by the late 1980's the correlation had become positive and equally significant. We discuss our findings within the framework of standard neoclassical models of fertility and labor supply adapted to macro data, as in Butz and Ward (1979). In order to explain the reversal of the correlation between fertility and participation rates, we consider simple extensions of their framework. First, we discuss the possibility that income effects of female wage increases are important. Next, we turn to three other factors: inflexible working hours faced by individual workers, the possibility of purchasing child care, and unemployment.

Econometric applications of positive rank-one modifications of the symmetric factorization of a positive semi-definite matrix

Abstract: . We present an algorithm for updating the symmetric factorization of a positive semi-definite matrix after a positive rank-one modification, which works even if the matrices involved do not have full rank. Recursive least squares and factor analysis provide two important econometric applications. An illustrative simulation shows that it can be potentially very useful in recursive situations.

Sharing Default Information as a Borrower Discipline Device

Abstract: Creditors often share information about their customers' credit records. Besides helping them to spot bad risks, this acts as a disciplinary device. If creditors are known to inform one another of defaults, borrowers must consider that default on one lender would disrupt their credit rating with all the other lenders. This increases their incentive to perform. However, sharing more detailed information can reduce this disciplinary effect: borrowers' incentives to perform may be greater when lenders only disclose past defaults than when they share all their information. In some instances, by ``fine-tuning'' the type and accuracy of the information shared, lenders can raise borrowers' incentives to their first-best level.

Entrepreneurial moral hazard and bank monitoring: a model of the credit channel

Abstract: This paper develops a model of the choice between bank and market finance by entrepreneurial firms that differ in the value of their net worth. The monitoring associated with bank finance ameliorates a moral hazard problem between the entrepreneurs and their lenders. The model is used to analyze the different strands of the credit view of the transmission of monetary policy. In particular, we derive the empirical implications of a broad credit channel, and compare them to those obtained when the model is extended to incorporate some elements of the bank lending channel.

Testing labour supply and hours constraints

Abstract: This paper provides empirical evidence on the assumption that individuals freely decide the number of hours they work at a given wage, using US data on prime age males from the National Longitudinal Survey of Youth. Two types of individuals are considered: those who change job between two consecutive periods and those who do not. We estimate an endogenous switching labour supply equation consistent with a life-cycle model under uncertainty. In this context the endogeneity of movements, ignored in previous analysis, proves to be crucial to get consistent estimates. The results confirm that individuals are constrained in the number of hours they work on a given job and that the intertemporal substitution elasticities are usually upward biased when ignoring the possibility of some groups of individuals being off their labour supply curves.

Multilateral institutions for international economic policy coordination: bargaining vs voting

Abstract: . We study a world economy where worldwide policy coordination is essential to optimally stabilize unfavorable common supply shocks. We develop a two-stage game to investigate how to implement the first-best response to these shocks via a multilateral institution, whose board of directors is composed of a representative per each member country. In a first stage, national governments nominate their representatives on the board. In a second stage, the board collectively chooses stabilization policies. We compare the relative merits of two collective choice mechanisms - bargaining and majority voting - in avoiding manipulation of the cooperative agreement through the strategic nomination of national representatives.