Search

We model the effect of bank bailouts on portfolio choices and welfare. Banks sell bonds to leverage investment in risky projects and households buy bonds under rational expectations about default risk. Bailouts induce greater leverage but reduce equilibrium interest rates. The interest rate effect dominates the leverage effect and bailouts lead to fewer bank failures. Bailouts are efficient but not Pareto optimal: bailouts increase social welfare by mitigating uninsurable risk, which helps banks but hurts households since the insurance gains are not worth the price households must pay to finance the bailout.

In the natural sciences, complex non-linear systems composed of large numbers of smaller subunits provide an opportunity to apply the tools of statistical mechanics and information theory. The principle of maximum entropy can usually provide shortcuts in the treatment of these complex systems. However, there is an impasse to straightforward application to social and economic systems: the lack of well-defined constraints for Lagrange multipliers. This is typically treated in economics by introducing marginal utility as a Lagrange multiplier. Jumping off from Gary Becker’s 1962 paper "Irrational Behavior and Economic Theory" — a maximum entropy argument in disguise — we introduce Peter Fielitz and Guenter Borchardt’s concept of "information equilibrium" presented in arXiv:0905.0610v4 [physics.gen-ph] as a means of applying maximum entropy methods even in cases where well-defined constraints such as energy conservation required to define Lagrange multipliers and partition functions are not obvious (i.e. economics). From these initial steps we are able to motivate a well-defined constraint in terms of growth rates and develop a formalism for ensembles of markets described by information equilibrium conditions. We apply information equilibrium to a description of the US unemployment rate, connect it to search and matching theory, and empirical regularities such as Okun’s Law. This represents a step toward Lee Smolin’s call for a "statistical economics" analogous to statistical mechanics in arXiv:0902.4274 [q-fin.GN].

I leverage an identical co-twin control design to assess whether education, political ideology, and spirituality are antecedents of public service motivation and whether hours spent volunteering and a preference for public sector employment are outcomes of public service motivation. I show that, after differencing out unobserved genetic and social endowments, self-sacrifice is decreasing in political conservatism and increasing in spirituality; that commitment to the public interest is increasing in spirituality; that attraction to public policymaking is decreasing in education; and that compassion is decreasing in political conservatism and increasing in spirituality. Commitment to the public interest and attraction to public policymaking predict a stated preference for public sector employment compared to nonprofit and private sector employment, while self-sacrifice and compassion do not. None of the dimensions of public service motivation appear to predict the number of hours spent volunteering. Although low statistical power and measurement error may explain some of the null findings, the results are credibly causal and have a number of implications for a theory of public service motivation, empirical research on the construct, and its potential use in practice.

It is sometimes noted that public sector employment ‘runs in the family’. Two studies - one cross-sectional, one longitudinal - examined this phenomenon. The data show that having a parent/head of household who was primarily employed in the public sector throughout their life is associated with an increased likelihood of being employed in the public sector and that having a spouse/partner employed in the public sector is also associated with an increased likelihood of being employed in the public sector. Together, the studies suggest that public sector employment is an intergenerational phenomenon; one which may be encouraged by positive assortative mating.

Empirical research has struggled to document the variation in recent corporate capital structures as arising from variation in estimated corporate income tax rates. We argue that in previous studies, both the tax rates being applied to multinational corporations and the taxable income earned has been miss-measured, a result of firms operating in many foreign countries. Using a sample of multinational firms collected in the Bureau of Economic Analysis’ annual survey combined with each firm’s respective income and country specific tax rate, we revisit this tax-leverage puzzle. Empirically we find that firms do have higher leverage ratios and lower interest coverage ratios when they operate in countries with higher tax rates, as theory would suggest. Our results demonstrate that the primary benefit of leverage under the trade-off theory of capital structure continues to have empirical support.

We offer a theory and measure for determining powerful nodal positions based on potential inter-actor control in “politically charged” networks, which contain both allies and adversaries. Power is derived from actors that are dependent on the focal actor and sociometrically weak, either due to a lack of alternative allies or from being threatened by others. We create a new Political Independence Index (PII), compare it to other established measures, and illustrate its use in the setting of an international network of alliances and military conflicts from 1946 to 2000. Results show that politically independent nations as measured by PII have smaller increases in military personnel than others over time.

While Diether, Lee, and Werner (2009) find that daily shorting activity is serially correlated, this study uses more formal tests and finds significant first-order autocorrelation in daily short volume. Contrary to prior research that suggests that autocorrelation in total trade volume is explained by the flow of information into prices, our tests indicate that the information contained in short sales is decreasing in the level of autocorrelation. In additional tests, we do not find that short-sale constraints explain the presence of autocorrelation. However, our tests do provide evidence that the level of autocorrelation in daily short volume is highest in stocks that are least liquid suggesting that illiquidity might explain the presence of autocorrelation.

Informed investors have been shown to strategically break up their larger trades into smaller trades in order to disguise their information (Kyle, 1985, Barclay and Warner, 1993, and Alexander and Peterson, 2007). In this paper, we consider informed trading strategies when investors face borrowing costs. Borrowing costs may induce more intense trading and increase the use of unusually large trade sizes. Using data which consists of a subset of trades that are both informed and face borrowing costs, we test this assertion empirically. Following prior work that documents that short sales contain information about future stock prices, we show that the most informed short sales are driven primarily by large, unrounded short sales in stocks that are most likely to face higher equity borrowing costs.