Search Results
Discussion Paper
On the Ethics of Redistribution
Analysts of optimal policy often advocate for redistributive policies within developed economies using a behind-the-veil-of-ignorance criterion. Such analyses almost invariably ignore the effects of these policies on the well-being of people in poor countries. We argue that this approach is fundamentally misguided because it violates the criterion itself.
Discussion Paper
Should We Worry About Excess Reserves?
Banks in the United States have the potential to increase liquidity suddenly and significantly?from $12 trillion to $36 trillion in currency and easily accessed deposits?and could thereby cause sudden inflation. This is possible because the nation?s fractional banking system allows banks to convert excess reserves held at the Federal Reserve into bank loans at about a 10-to-1 ratio. Banks might engage in such conversion if they believe other banks are about to do so, in a manner similar to a bank run that generates a self-fulfilling prophecy. {{p}} Policymakers could guard against this ...
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Reputation and Sovereign Default
This paper presents a continuous-time model of sovereign debt. In it, a relatively impatient sovereign government?s hidden type switches back and forth between a commitment type, which cannot default, and an optimizing type, which can default on the country?s debt at any time, and assume outside lenders have particular beliefs regarding how a commitment type should borrow for any given level of debt and bond price. We show that if these beliefs satisfy reasonable assumptions, in any Markov equilibrium, the optimizing type mimics the commitment type when borrowing, revealing its type only by ...
Working Paper
A simple model of bank employee compensation
This paper considers the question, Does the limited liability associated with banking make it necessary for a government to regulate bank employee compensation? It attempts to shed light on this question by considering a mechanism design framework.
Discussion Paper
The \\"banks\\" we do need
Banks are prone to panic-induced runs due to their traditional structure of short-term, unconditional liabilities and long-term, illiquid assets. To avoid systemic crises caused by such panics, governments tend to bail out failing banks. Traditional banking systems thus impose external costs. Three major theoretical benefits are often used to justify a banking system that relies on short-term debt despite these costs: (1) maturity transformation, (2) efficient monitoring of bank managers and (3) facilitation of financial transactions. In a previous paper, we argued that the first two ...
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Opportunity and social mobility
This study argues that both unequal opportunity and social mobility are necessary implications of an efficient societal arrangement when incentives must be provided.
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On the irrelevance of the maturity structure of government debt without commitment
This paper presents a government debt game with the property that if the timing of debt auctions within a period is sufficiently unfettered, the set of equilibrium outcome paths of real economic variables given the government has access to a rich debt structure is identical to the set of equilibrium outcome paths given the government can issue only one-period debt.
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Public trust and government betrayal
This paper presents a simple model of government reputation which captures two characteristics of policy outcomes in less developed countries: governments which betray public trust do so erratically, and, after a betrayal, public trust is regained only gradually.
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Private monitoring with infinite histories
This paper develops new recursive methods for studying stationary sequential equilibria in games with private monitoring. We first consider games where play has occurred forever into the past and develop methods for analyzing a large class of stationary strategies, where the main restriction is that the strategy can be represented as a finite automaton. For a subset of this class, strategies which depend only on the players? signals in the last k periods, these methods allow the construction of all pure strategy equilibria. We then show that each sequential equilibrium in a game with infinite ...
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A recursive formulation for repeated agency with history dependence
There is now an extensive literature regarding the efficient design of incentive mechanisms in dynamic environments. In this literature, there are no exogenous links across time periods because either privately observed shocks are assumed time independent or past private actions have no influence on the realizations of current variables. The absence of exogenous links across time periods ensures that preferences over continuation contracts are common knowledge, making the definition of incentive compatible contracts at a point in time a simple matter. In this paper, we present general ...