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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 ...
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
Policies to stimulate innovation
Discussion Paper
New and Larger Costs of Monopoly and Tariffs
Fifty-eight years ago, Harberger (1954) estimated that the costs of monopoly, which resulted from misallocation of resources across industries, were trivial. Others showed that the same was true for tariffs. This research soon led to the consensus that monopoly costs are of little significance?a consensus that persists to this day. This paper reports on a new literature that takes a different approach to the costs of monopoly. It examines the costs of monopoly and tariffs within industries. In particular, it examines the histories of industries in which a monopoly is destroyed (or tariffs ...
Discussion Paper
The Stages of Economic Growth Revisited, Part 2: Catching Up to and Joining the Economic Leader
Rostow (1960) hypothesized that taking off into economic growth was a difficult task for countries in the 19th century, requiring major changes in institutions. In the 20th century, however, as the United States and other advanced countries became richer because of improvements in technologies and managerial practices, it became easier for poor countries to take off into rapid growth by adopting some of these improvements. {{p}} We hypothesize that, while taking off is now easier, the difficult transition is now from take-off to catch-up, where nations grow closer to the economic leader (now ...
Discussion Paper
China’s Foreign Investment
Foreign investment into China has surged since the 1990s and become a topic of keen interest for both scholars and the media. While China has encouraged this investment with the goal of catching up technologically, close analysis reveals that only a small share of its foreign investment comes from the United States and other nations with the technology China seeks. Instead, inward foreign direct investment flows predominantly from Hong Kong and a few Caribbean nations. Two key factors behind this: China?s tax policy toward foreign investment and its ?industrial? policies to encourage ...
Discussion Paper
Liquidity crises
Discussion Paper
Foreclosure Delay and the U.S. Labor Market
The time required to complete a home foreclosure rose substantially during the Great Recession, due both to lender bottlenecks in processing foreclosures and to government policies intended to slow the foreclosure process. This paper shows that foreclosure delay had the unintentional benefit of giving unemployed homeowners additional time to search for high-paying jobs. {{p}} Our economic model analyzes foreclosure delay as equivalent to extending additional credit to unemployed homeowners that is paid back if the homeowners find jobs and fulfill their delinquent mortgage obligations before ...
Discussion Paper
Paychecks or Promises? Lessons from the Death Spiral of Detroit
Pay-with-promises compensation plans accumulate liability for future employee benefits, such as retiree health insurance. A simple economic model demonstrates that such plans can exacerbate fiscal crises faced by cities that experience external economic shocks, such as the departure of a major employer. City leaders often raise taxes and/or reduce public services to pay off legacy employee debts, and such steps encourage residents to move out, reducing the tax base and raising fiscal stress. Pay-as-you-go compensation plans are more prudent; they settle liabilities to employees paycheck by ...
Discussion Paper
Thoughts on the Federal Reserve System's exit strategy
How can banks and similar institutions design optimal compensation systems? Would such systems conflict with the goals of society? This paper considers a theoretical framework of how banks structure job contracts with their employees to explore three points: the structure of a socially optimal compensation system; the structure of a compensation system that is privately optimal, given the reality of government-guaranteed bank debt; and policy interventions that can lead from the second structure to the first. Analysis reveals a potential policy option: providing proper incentives to banks by ...