Raghuram Rajan. That gives his novel and sometimes surprising thesis added authority. He argues in his excellent new book that the roots of the calamity go wider and deeper still. This makes his new book, Fault Lines , worthy of consideration amidst the rampant speculation about the causes of the financial crisis. Fault Lines is valuable primarily for its clear explanation of unintended economic consequences from well-meaning government intervention. Rajan then puts forward broad policy recommendations to ward off a future problem.
Rajan's book takes a comprehensive look at what got us into the crisis and offers an intriguing approach to avoiding another one. It's brief, well-written, and extremely interesting.
I would definitely recommend adding it to your financial crisis reading list. Along with revamping Wall Street's pay system, he offers innovative ideas on building capital buffers into the global credit system, obviating much of the need for bailouts of companies deemed too big or too enmeshed in the financial system to fail.
No short summary can do justice to this well-written, insightful, and nuanced study. Rajan delivered a stark warning to the world's top bankers: financial markets were headed for doom.
They laughed it off. In the wake of the collapse that followed, Rajan has written a new book, Fault Lines: How Hidden Fractures Still Threaten the World Economy , that warns the system is doomed to repeat its mistakes.
Like many defenders of the market, Rajan urges us not to demonize the bankers. But it's this fiscal conservative's focus on inequality that makes him stand out from the pack. The growing wage gap, he argues, is a hidden driver of financial instability, putting constant pressure on politicians to enact short-term fixes. The breadth of Rajan's explanatory framework—which is presented cogently and concisely within pages of text—marks this book apart from many others that tackle the same themes.
Murali, Business Line. Raghuram Rajan's receipt of the Financial Times and Goldman Sachs annual business book award only confirmed his book's widespread popularity. It is not hard to see why so many people liked it. Fault Lines eschews hyperbole for a lucid and balanced account of the crisis.
Rajan's book is a bold enterprise in three ways: firstly it aims to explain the US financial crisis by looking at deep, decade-long fractures in economies and societies; secondly it suggests well-known but radical solutions that few dare put forward; and finally it supplies innovative answers to practical questions. Neither too technical for laymen nor too glib for specialists, the book ought to be a significant contribution to policy-makers' discussions of where we go now.
Written with clarity and persuasion. Of the many books written in the wake of our recent economic meltdown, this is the one that gets it right.
Akerlof, coauthor of Animal Spirits and Identity Economics. In , Rajan foresaw the coming financial collapse—and was fiercely criticized for his insight. This is the best book out there on the global imbalances that gave us the last financial crisis and might well give us the next one.
The act was intended to force states to accord the same branching rights to national banks as they accorded to state banks. By uniting the interests of large state and national banks, it also had the potential to expand the number of states that allowed branching.
Congressional votes for the act therefore could reflect the strength of various interests in the district for expanded banking competition. We find congressmen in districts in which landholdings were concentrated suggesting a landed elite , and where the cost of bank credit was high and its availability limited suggesting limited banking competition and high potential rents , were significantly more likely to oppose the act. The evidence suggests that while the law and the overall regulatory structure can shape the financial system far into the future, they What channels could it work through?
What are the long run consequences? In this paper we address these questions by examining the farm land price boom and bust in the United States that preceded the Great Depression. We find that credit availability likely had a direct effect on inflating land prices. Credit availability may have also amplified the relationship between the perceived improvement in fundamentals and land prices.
When the perceived fundamentals soured, however, areas with higher ex ante credit availability suffered a greater fall in land prices, and experienced higher bank failure rates.
Land prices stayed low for a number of decades after the bust in areas that had higher credit availability, suggesting that the effects of booms and busts induced by credit availability might be persistent. We draw lessons for regulatory policy. New: Financing Capacity and Fire Sales: Evidence from Bank Failures Date Posted:Mon, 18 Nov Theory suggests the reduction in financing capacity after the failure of a financial intermediary can reduce the value of financial assets.
This paper investigates these predictions using a new dataset of bank failures during the farm depression just before the Great Depression. Using regulatory impediments to lending across state borders as a means of identification, we find that the reduction in local financing capacity as a result of bank failures reduces the recovery rates on failed assets of nearby banks, depresses local land prices, renders land markets illiquid, and is associated with subsequent financial sector distress among nearby banks.
All this indicates a rationale for why bank failures are contagious. Congressional votes for the act therefore could reflect the In this paper, we develop a model where myopic governments seek electoral popularity bu tcan nevertheless commit credibly to service external debt. They do not default when they are poor because they would lose access to debt markets and be forced to reduce spending; they do not default when they become rich because of the adverse consequences to the domestic financial sector.
Interestingly, the more myopic a government, thegreater the To produce significant net present value, an entrepreneur has to transform her enterprise into one that is differentiated from the ordinary. To achieve the control that will allow her to execute this strategy, she needs to have substantial ownership, and thus financing. But it is hard to raise finance against differentiated assets.
So an entrepreneur has to commit to undertake a second transformation, standardization, that will New: Failed States, Vicious Cycles, and a Proposal Date Posted:Wed, 27 Apr Rajan examines the problems of failed states, including the repeated return to power of former warlords, which he argues causes institutions to become weaker and people to get poorer. He notes that economic power through property holdings or human capital gives people the means to hold their leaders accountable. In the absence of such distributed power, dictators reign.
Rajan argues that in failed states, economic growth leading to empowered citizenry is more likely if a neutral party presides. We recommend that you highlight your program schedule to ensure your participation in these engaging panel sessions. This leads to a theory of investment and dividend policy, where dividends are paid by New: Controlled Capital Account Liberalization: A Propasal Date Posted:Thu, 29 Jul In this paper, we develop a proposal for a controlled approach to capital account liberalization for economies experiencing large capital inflows.
The proposal essentially involves securitizing a portion of capital inflows through closed-end mutual funds that issue shares in domestic currency, use the proceeds to purchase foreign exchange from the central bank and then invest the proceeds abroad. This would eliminate the fiscal costs of sterilizing those inflows, give domestic investors New: Trade Credit Contracts Date Posted:Tue, 25 May This paper provides new evidence on the unique role of trade credit and contracting terms as a way for both sellers and buyers to mange business risk.
We use a novel and unique dataset on almost 30, supplier contracts for 56 large buyers and over 24, suppliers in Europe and North America. Our sample of buyers and suppliers include firms of varying size, investment grade, and sectors. We find evidence in support of four important, and not mutually exclusive, reasons for trade credit: Anticipating a potential future fire sale, cash rich buyers have high expected returns to holding New: Aid, Dutch Disease and Manufacturing Growth Date Posted:Tue, 26 Jan We examine the effects of aid on the growth of manufacturing, using a methodology that exploits the variation within countries and across manufacturing sectors, and corrects for possible reverse causality.
We provide some evidence suggesting that the channel for these effects is the real exchange rate appreciation caused by aid inflows. New: The Internal Governance of Firms Date Posted:Sat, 19 Dec We develop a model of internal governance where the self-serving actions of top management are limited by the potential reaction of subordinates. Internal governance works best when both top management and subordinates are important in generating cash flow.
External governance, even if crude and uninformed, can complement internal governance The Emergence of Strong Property Rights: Speculation from History Date Posted:Thu, 08 Oct How did citizens acquire rights protecting their property from the depredations of the government?
In this paper, we argue that one important factor strengthening respect for property is how it is distributed.
When there is some specificity associated with property, and property is held by those who are most productive, the distribution of property becomes relatively easy to defend. By contrast, when property is owned by those who get rents simply by virtue of ownership, the distribution of What keeps asset prices and lending depressed?
What can be done to remedy matters? While it is too early to arrive at definite answers to these questions, it is certainly time to offer informed conjectures, and these are the focus of this paper. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at New: Illiquidity and Interest Rate Policy Date Posted:Tue, 18 Aug The cheapest way for banks to finance long term illiquid projects is typically to borrow short term from households.
But when household needs for funds are high, interest rates will rise sharply, debtors will have to shut down illiquid projects, and in extremis, will face more damaging runs. Authorities may want to push down interest rates to maintain economic activity in the face of such illiquidity, but intervention may not always be feasible, and when feasible, could encourage banks to Date Posted:Mon, 13 Jul Economists have argued that a high concentration of land holdings in a country can create powerful interest groups that retard the creation of economic institutions, and thus hold back economic development.
Could these arguments apply beyond underdeveloped countries with backward political institutions? We find that in the early 20th century, the distribution of land in the United States is correlated with the extent of banking development.
Correcting for state effects, counties with very If so, why did banks not attempt to sell them? This creates high expected returns to holding cash for potential buyers and an aversion to New: The Internal Governance of Firms Date Posted:Tue, 07 Apr We develop a model of internal governance where the self-serving actions of top management are limited by the potential reaction of subordinates.
We find that internal governance can mitigate agency problems and ensure firms have substantial value, even without any external governance. Internal governance seems to work best when both top management and subordinates are important to value creation. We then allow for governance provided by external financiers and show that external governance, We then allow for governance provided by external financiers and find situations where external New: The Contributions of Stewart Myers to the Theory and Practice of Corporate Finance Date Posted:Thu, 19 Feb These contributions are seen as falling into three main categories: In a plus year career notable for path-breaking work on capital structure and innovations in capital budgeting and valuation, MIT finance professor Stewart Myers has had a remarkable influence on both the theory and practice of corporate finance.
In this article, two of his former students, a colleague, and a co-author offer a brief survey of Professor Myers's accomplishments, along with an assessment of their relevance for New: Landed Interests and Financial Underdevelopment in the United States Date Posted:Thu, 02 Oct Landed elites in the United States in the early decades of the twentieth century played a significant role in restricting the development of finance.
States that had higher land concentration passed more restrictive banking legislation. At the county level, counties with very concentrated land holdings tended to have disproportionately fewer banks per capita.
Banks were especially scarce both when landed elites' incentive to suppress finance, as well as their ability to exercise local We analyze the economic and political forces that have triggered these changes as well as their likely welfare implications.
We also try to assess whether this trend will continue. Based on our analysis, we conjecture that even if Europe might benefit from a continuation of the trend, in the near future political support for it is likely to become much weaker.
Furthermore, without serious reforms the New: Landed Interests and Financial Underdevelopment in the United States Date Posted:Thu, 11 Sep Landed elites in the United States in the early decades of the twentieth century played a significant role in restricting the development of finance.
New: A Pragmatic Approach to Capital Account Liberalization Date Posted:Tue, 10 Jun Cross-country regressions suggest little connection from foreign capital inflows to more rapid economic growth for developing countries and emerging markets. This suggests that the lack of domestic savings is not the primary constraint on growth in these economies, as implicitly assumed in the benchmark neoclassical framework.
We explore emerging new theories on both the costs and benefits of capital account liberalization, and suggest how one might adopt a pragmatic approach to the process. New: A Pragmatic Approach to Capital Account Liberalization Date Posted:Thu, 22 May Cross-country regressions suggest little connection from foreign capital inflows to more rapid economic growth for developing countries and emerging markets.
Is a firm defined solely by the ownership of physical assets as suggested by the property rights theory? This paper presents a theory of the firm based on the well-known idea that the firm improves over the market because it uses ex ante mechanisms to enhance specific investments. Maintaining the contractability assumptions of the property rights view, however, we identify not one but two such mechanisms. One is, of course, the ownership of Some Evidence From International Data Date Posted:Tue, 22 Apr We investigate the determinants of capital structure choice by analyzing the financing decisions of public firms in the major industrialized countries.
At an aggregate level, firm leverage is fairly similar across the G-7 countries. We find that the factors identified by previous studies as important in determining the cross-section of capital structure in the US, affect firm leverage in other countries as well.
However, a deeper examination of the US and foreign evidence suggests that the The Cost of Diversity: The Diversification Discount and Inefficient Investment Date Posted:Tue, 22 Apr In a simple model of capital budgeting in a diversified firm where headquarters has limited power, we show that funds are allocated towards the most inefficient divisions The distortion is greater the more diverse are the investment opportunities of the firm's divisions.
We test these implications on a panel of diversified firms in the U. We find that i diversified firms mis-allocate investment funds; ii the extent of mis-allocation is positively related to the The Firm as a Dedicated Hierarchy: A Theory of the Origin and Growth of Firms Date Posted:Tue, 22 Apr In the formative stages of their businesses, entrepreneurs have to provide incentives for employees to protect, rather than steal, the source of organizational rents.
We study how the entrepreneur's response to this problem determines the organization'sinternal structure, growth,anditseventualsize. Large, steep hierarchies will predominate in physical-capital in-tensive industries, and will have seniority-based promotion policies.
By contrast, at hierarchies will prevail in human-capital What Determines Firm Size? Date Posted:Tue, 22 Apr In this paper we examine data on firm size from Europe to shed light on factors correlated with firm size. In addition to studying broad patterns, we use the data to ask whether it is sufficient to think of the firm as a black box as some theories of the firm that we label "technological" do, or whether we need to be concerned with features such as asset specificity and the process of control that are the focus of "organizational" theories.
At the industry level, we find capital-intensive The Tyranny of Inequality Date Posted:Tue, 22 Apr This paper focuses on the externality that a contractual transfer of fungible resources can have on future interactions. The very fungibility of the resource transferred make it hard to restrict its use, changing the amount the parties involved spend in trying to grab future rents. This spill-over effect can inhibit otherwise valuable transactions, as well as enable otherwise ineffcient transactions.
Agreement typically breaks down when the required transfer is large and the proposed recipient The Tyranny of Inequality Date Posted:Tue, 22 Apr When parties are very unequally endowed, agreement may be very difficult to reach, even if the specific transaction is easy to contract on, and fungible resources can be transferred to compensate the losing party. The very fungibility of the transferred resource makes it hard to restrict its use, and changes the amount the parties involved spend in trying to grab future rents.
This spill-over effect can inhibit otherwise valuable transactions, as well as enable otherwise inefficient In particular, we find that by most measures, countries were more financially developed in than in and only recently have they surpassed their levels.
This pattern cannot be explained by structural theories that attribute cross-country differences in financial development to time-invariant factors, such as a country's legal origin or culture. We propose an "interest group" theory of The Influence of the Financial Revolution on the Nature of Firms Date Posted:Tue, 22 Apr Major technological, regulatory, and institutional changes have made finance more widely available in recent years.
The ability of financial institutions to price a variety of exotic instruments, and to assess and spread risks, has increased. More data on potential borrowers is now available, and it is also more timely. Improvements in accounting disclosure have resulted in greater borrower transparency.
Deregulation has resulted in greater competition and better prices in financial markets Financial Systems, Industrial Structure, and Growth Date Posted:Tue, 22 Apr How does the development of the financial sector affect industrial growth? What effect does it have on the composition of industry, and the size distribution of firms? What is the relative importance of financial institutions and financial markets, and does it depend on the stage of economic growth? How do financial systems differ in their vulnerability to crisis?
This paper attempts to provide an answer to these questions based on the current state of empirical research. Some Evidence from International Data Date Posted:Mon, 21 Apr We investigate the determinants of capital structure choice by analyzing the financing decisions of public firms in the major industrialized countries.
We find that factors identified by previous studies as important in determining the cross- section of capital structure in the U. However, a deeper examination of the U. Investors desire liquidity because they are uncertain about when they will want to eliminate their holding of a financial asset.
Borrowers are concerned about liquidity because they are uncertain about their ability to continue to attract or retain funding. Because borrowers typically cannot repay investors on demand, investors will require a premium or significant control rights when they lend to borrowers directly, as compensation Trade Credit: Theories and Evidence Date Posted:Tue, 25 Mar In addition to borrowing from financial institutions, firms may be financed by their suppliers.
Although there are many theories explaining why non-financial firms lend money, there are few comprehensive empirical tests of these theories. This paper attempts to fill the gap. We focus on a sample of small firms whose access to capital markets may be limited. We find evidence that firms use trade credit relatively more when credit from financial institutions is not available. Thus while Date Posted:Wed, 19 Mar This paper investigates how organizational structure can affect a firm's ability to compete.
In particular, we examine the two ways in which U. We document a strong movement toward the use of the affiliate structure during The Paradox of Liquidity Date Posted:Tue, 18 Mar The more liquid a company's assets, the greater their value in a short-notice liquidation.
Liquid assets are generally viewed as increasing debt capacity, other things being equal. This paper focusses on the dark side of liquidity: greater liquidity reduces the ability of borrowers to commit to a specific course of action.
It examines the effects of differences in asset liquidity on debt capacity. It suggests an alternative theory of financial intermediation and disintermediation. New: Foreign Capital and Economic Growth Date Posted:Tue, 04 Dec We document the recent phenomenon of uphill flows of capital from nonindustrial to industrial countries and analyze whether this pattern of capital flows has hurt growth in nonindustrial economies that export capital.
Surprisingly, we find that there is a positive correlation between current account balances and growth among nonindustrial countries, implying that a reduced reliance on foreign capital is associated with higher growth. This result is weaker when we use panel data rather than New: Foreign Capital and Economic Growth Date Posted:Thu, 29 Nov We document the recent phenomenon of "uphill" flows of capital from nonindustrial to industrial countries and analyze whether this pattern of capital flows has hurt growth in nonindustrial economies that export capital.
I argue that one reason is the initial inequality in endowments and opportunities, which leads to self-interested constituencies that perpetuate the status quo. Each constituency prefers reforms that preserve only its rents and expand its opportunities, so no comprehensive reform path may command broad support. Though the initial conditions may well be a legacy of the colonial past, persistence does not require the presence of coercive political Date Posted:Thu, 04 Jan We examine the effects of aid on growth--in cross-sectional and panel data--after correcting for the bias that aid typically goes to poorer countries, or to countries after poor performance.
Even after thiscorrection, we find little robust evidence of a positive or negative relationship between aid inflows into a country and its economic growth. We also find no evidence that aid works better in better policy or geographical environments, or that certain forms of aid work better than others One explanation is that poor countries do not have institutions that can support growth.
Because institutions both good and bad are persistent, underdevelopment is persistent. An alternative view is that underdevelopment comes from poor education. Neither explanation is fully satisfactory, the first because it does not explain why poor economic institutions persist even in fairly democratic but poor societies, and the second because it does not explain This pattern is inconsistent with most recent theories of why cross-country differences in financial development do not track differences in economic development, since these theories are based upon time-invariant factors, such as a Date Posted:Thu, 21 Sep Developments in the financial sector have led to an expansion in its ability to spread risks.
The increase in the risk bearing capacity of economies, as well as in actual risk taking, has led to a range of financial transactions that hitherto were not possible, and has created much greater access to finance for firms and households. On net, this has made the world much better off. Concurrently, however, we have also seen the emergence of a whole range of intermediaries, whose size and appetite New: Modernizing China's Growth Paradigm Date Posted:Tue, 05 Sep In the literature theoretical models have appeared that predict a positive impact of the level of individual wealth on the job exit probability.
Empirically this prediction is most likely to be relevant for elderly workers who have been able to accumulate wealth throughout their working life and whose residual working life is relatively short. In the Netherlands, as in other European countries, there is a tendency of introducing more individual choice options in pension schemes.
It is likely Date Posted:Sun, 03 Sep Why is underdevelopment so persistent? The number of positions reporting directly to the CEO has gone up significantly over time while the number of levels between the division heads and the CEO has decreased. More of these managers now report directly to the CEO and more are being appointed officers of the firm, reflecting a delegation of Date Posted:Mon, 31 Jul We examine one of the most important and intriguing puzzles in economics: why it is so hard to find a robust effect of aid on the long-term growth of poor countries, even those with good policies.
We look for a possible offset to the beneficial effects of aid, using a methodology that exploits both cross-country and within-country variation. Date Posted:Tue, 30 May India has followed an idiosyncratic pattern of development, certainly compared with other fast-growing Asian economies.
While the importance of services rather than manufacturing is widely noted, within manufacturing India has emphasized skill-intensive rather than labor-intensive manufacturing, and industries with higher-than-average scale. Some of these distinctive patterns existed prior to the beginning of economic reforms in the s, and stem from the idiosyncratic policies adopted after Does Distance Still Matter?
Not only are firms choosing more distant lenders, they are also communicating with them in more impersonal ways. After documenting these systematic changes, we demonstrate that they do not stem from small firms locating differently, from simple consolidation in the banking industry, or from biases in the sample. Instead, they seem correlated with improvements in bank productivity.
We conjecture that greater, Increased uncertainty can make deposits excessively fragile in which case there is a role for outside bank capital. Greater bank capital reduces liquidity creation by the bank but enables the bank to survive more often and avoid distress. A more subtle effect is that banks with different amounts of capital extract different amounts of repayment from borrowers.
The optimal bank capital structure trades off the The Cost of Diversity: The Diversification Discount and Inefficient Investment Date Posted:Thu, 25 May In a simple model of capital budgeting in a diversified firm where headquarters has limited power, we show that funds are allocated towards the most inefficient divisions. We find that i diversified firms mis-allocate investment funds; ii the extent of mis-allocation is positively related to Date Posted:Sat, 13 May Why is underdevelopment so persistent?
Date Posted:Wed, 10 May We examine the effects of aid on growth - in cross-sectional and panel data - after correcting for the bias that aid typically goes to poorer countries, or to countries after poor performance.
Even after this correction, we find little robust evidence of a positive or negative relationship between aid inflows into a country and its economic growth. We also find no evidence that aid works better in better policy or geographical environments, or that certain forms of aid work better than others.
New: India's Patterns of Development: What Happened, What Follows Date Posted:Thu, 27 Apr India seems to have followed an idiosyncratic pattern of development, certainly compared to other fast-growing Asian economies.
While the emphasis on services rather than manufacturing has been widely noted, within manufacturing India has emphasized skill-intensive rather than labor-intensive manufacturing, and industries with typically higher average scale. We show that some of these distinctive patterns existed even prior to the beginning of economic reforms in the s, and argue they stem Date Posted:Fri, 03 Mar We examine one of the most important and intriguing puzzles in economics: why it is so hard to find a robust effect of aid on the long-term growth of poor countries, even those with good policies.
Date Posted:Wed, 25 Jan Developments in the financial sector have led to an expansion in its ability to spread risks. Is this because crises tend to take place during economic downturns, or do banking sector problems have independent negative effects on the economy? To answer this question we examine industrial sectors with differing needs for financing. If banking crises have an exogenous detrimental effect on real activity, then sectors more dependent on external finance should perform relatively worse during banking crises.
The evidence Business Environment and Firm Entry: Evidence from International Data Date Posted:Mon, 23 May Using a comprehensive database of firms in Western and Eastern Europe, we study how the business environment in a country drives the creation of new firms. Our focus is on regulations governing entry. We find entry regulations hamper entry, especially in industries that naturally should have high entry. Also, value added per employee in naturally "high entry" industries grows more slowly in countries with onerous regulations on entry.
The consequences of more restrictive entry barriers are Money in a Theory of Banking Date Posted:Mon, 21 Feb We explore the connection between money, banks, and aggregate credit. We start with a simple 'real' model without money, where banks make loans repayable in goods and depositors hold claims on the bank payable on demand in goods. Aggregate production may be delayed in the economy. If so, we show that the level of ongoing bank lending, and hence of aggregate future output, can decrease with increases in the real repayment due on deposits: ceteris paribus, the higher the amount due, the more In this paper, I will outline an explanation of why emerging markets are so fragile, and why they may adopt contractual mechanisms - such as a dollarized banking system - that increase their fragility.
I draw on this analysis to explain why dollarized economies may be prone to dollar shortages and twin crises. The model of crises described here differs in some important aspects from what is now termed the first, second, and third generation Are Perks Purely Managerial Excess? Date Posted:Fri, 28 May Why do some firms tend to offer executives a variety of perks while others offer none at all?
A widespread view in the corporate finance literature is that executive perks are a form of agency or private benefit and a way for managers to misappropriate some of the surplus the firm generates. According to this view, firms with plenty of free cash flow that operate in industries with limited investment prospects should typically offer perks. The theory also suggests that firms that are subject Business Environment and Firm Entry: Evidence from International Data Date Posted:Wed, 26 May Using a comprehensive database of firms in Western and Eastern Europe, we study how the business environment in a country drives the creation of new firms.
Also, value-added per employee in naturally 'high entry' industries grows more slowly in countries with onerous regulations on entry. Interestingly, regulatory entry barriers have no adverse Business Environment and Firm Entry: Evidence from International Data Date Posted:Tue, 25 May Using a comprehensive database of firms in Western and Eastern Europe, we study how the business environment in a country drives the creation of new firms.
The Information Revolution in Small Business Lending Date Posted:Sun, 29 Feb The distance between small firms and their lenders is increasing, and they are communicating in more impersonal ways.
After documenting these systematic changes, we demonstrate they do not arise from small firms locating differently, consolidation in the banking industry, or biases in the sample. Instead, improvements in lender productivity appear to explain our findings.
We also find distant firms no longer have to be the highest quality credits, indicating they have greater access to credit Unlike earlier work where contagion stems from depositor panics or ex ante contractual links between banks, we argue bank failures can shrink the common pool of liquidity, creating or exacerbating aggregate liquidity shortages. This could lead to a contagion of failures and a possible total meltdown of the system. Given the costs of a meltdown, there is a possible role for government intervention.
Unfortunately, liquidity problems and Which Capitalism? Lessons from the East Asian Crisis Date Posted:Thu, 18 Dec As a result of the Asian crisis, relationship-based systems are now under attack for being inefficient and corrupt. Yet, till recently, they were proposed as an alternative form of capitalism to the arm's length Anglo-Saxon system.
What went wrong? This paper suggests that relationship-based systems work well when contracts are poorly enforced and capital scarce. Power relationships substitute for contracts, and can achieve better outcomes than a primitive contractual system.
But a Money in a Theory of Banking Date Posted:Sun, 14 Dec We explore the connection between money, banks, and aggregate credit. Does Function Follow Organizational Form? Date Posted:Wed, 26 Nov Theories based on incomplete contracting suggest that small organizations may do better than large organizations in activities that require the processing of soft information. We explore this idea in the context of bank lending to small firms, an activity that is typically thought of as relying heavily on soft information.
We find that large banks are less willing than small banks to lend to informationally "difficult" credits, such as firms that do not keep formal financial records. We argue that since banks often lend via commitments, their lending and deposit-taking may be two manifestations of one primitive function: the provision of liquidity on demand.
There will be synergies between the two activities to the extent that both require banks to hold large balances of liquid assets: If deposit withdrawals and commitment takedowns are imperfectly correlated, the two activities Banks as Liquidity Providers: An Explanation for the Co-Existence of Lending and Deposit-Taking Date Posted:Sat, 15 Nov This paper addresses the following question: what ties together the traditional commercial banking activities of deposit-taking and lending?
We begin by observing that since banks often lend via commitments, or credit lines, their lending and deposit-taking may be two manifestations of the same primitive function: the provision of liquidity on demand. After all, once the decision to extend a line of credit has been made, it is really nothing more than a checking account with overdraft We analyse the economic and political forces that have triggered these changes as well as their likely welfare implications.
Furthermore, without serious reforms, the The Flattening Firm: Evidence from Panel Data on the Changing Nature of Corporate Hierarchies Date Posted:Mon, 28 Apr Using a detailed database of managerial job descriptions, reporting relationships, and compensation structures in over large U. We also find that the number of levels between the lowest managers with profit center responsibility division heads and the CEO has decreased and more of these managers are reporting directly to the CEO.
Moreover, more of these managers are being Date Posted:Wed, 22 May Theories based on incomplete contracting suggest that small organizations may do better than large organizations in activities that require the processing of soft information. We find that large banks are less willing than small banks to lend to informationally 'difficult' credits, such as firms that do not keep formal financial records.
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