Search

We investigate whether small business clients could use revocable credit lines, firstly, in their cash management and, secondly, as a funding source. Since the medium-size bank that provided our unique sample has the right to call these lines and charges considerably high rates for using them, we argue that these lines are particularly suitable for managing short-term liquidity needs. From our findings on how the line terms (line availability, line limit, and charged line rate) depend on a client’s liquidity-at-risk, the duration of its relationship with the bank, and its limit overdrafts, we nonetheless conclude that these lines, although they are revocable, fulfill both purposes.

The Value at Risk (VaR) is widely used to measure the risk of banks’ trading books, but it also has been criticized in the previous academic literature due to some odd properties. Other risk measures have been suggested as potentially being superior from a theoretical perspective. This gives rise to the question whether or not it makes much difference in practical applications which index is being used. Certainly, the numbers indicating risk will be different. Whenever risk measures are ordinal, however, it only matters whether or not the ranking of risky alternatives (portfolios, say) coincides. Therefore, taking actual data from two trading books, we analyze the rank correlation of different measures. In most cases we observe high values of Spearman’s rank correlation coefficient, indicating that the index choice might not be too important. But it also becomes apparent that the VaR could as well be replaced by indices with a more convincing theoretical basis which do not generate a very different ranking of risks and in fact seem to compromise better between competing risk judgements. On the basis of theoretical arguments, we modify the data in various ways and repeat the analysis. It turns out that the results do not vary much, i.e., they seem to be quite robust. JEL classification: D81, G20, I32

It is well known that a close relation between the measurement of inequality and the measurement of risk exists. We demonstrate a similar relation between measures of poverty and downside risk, respectively. Based on properties of poverty measures, a number of axioms for reasonable downside risk measures is suggested and applied to the class of decomposable indices, which includes the lower partial moments as special cases. In a more general perspective, the paper enables those interested in measuring the downside risk of distributions to build upon the wealth of literature on poverty measurement when looking for suitable indices.

A bargaining solution is a social compromise if it is metrically rationalizable, i.e., if it has an optimum (depending on the situation, smallest or largest) distance from some reference point. We explore the workability and the limits of metric rationalization in bargaining theory where compromising is a core issue. We demonstrate that many well-known bargaining solutions are social compromises with respect to reasonable metrics. In the metric approach, bargaining solutions can be grounded in axioms on how society measures differences between utility allocations. Using this approach, we provide an axiomatic characterization for the class of social compromises that are based on p-norms and for the attending bargaining solutions. We further show that bargaining solutions which satisfy Pareto Optimality and Individual Rationality can always be metrically rationalized.

For this study, a unique sample provided by a German universal bank reveals whether small and medium-sized enterprises (SMEs) actually use bank lines of credit to substitute for cash holdings. The bank has the right to recall these lines and charges considerably higher rates for using them compared with regular loans. However, because the bank does not require any upfront commitment or usage fee, rational SMEs should demand a line, such that comparisons of the cash holdings of SMEs with and without lines as a means to detect cash substitution effects becomes inapplicable. Therefore, this study proposes an alternative test that reveals that the impact of the line rate and line limit on cash holdings and line use by SMEs is in line with the trade-off theory of cash. Moreover, SMEs' adverse behavior when using lines, their creditworthiness, and the duration of the bank-client relationship all influence the terms and conditions surrounding the lines.

In many federations which have a hierarchical structure it is for various reasons desired that the fiscal strength of jurisdictions on the same level be partially equalized. The higher level jurisdiction often supports this equalization via grants to the jurisdictions on the lower level. It is a trouble-causing question which part of total funds should be allowed to each of them. The paper starts by discussing eight independent properties of a so-called funds function a reasonable (appropriate, fair) equalization method should have. It turns out that there is only one mechanism, respectively one class of funds functions, satisfying these requirements.

The Value at Risk (VaR) is widely used to measure the risk of banks’ trading books, but it also has been criticized in the previous academic literature due to some odd properties. A number of other risk measures has been suggested as potentially being superior from a theoretical perspective. This gives rise to the question whether or not it makes much difference in practical applications which index is being used. Taking actual data from two trading books, we analyze the rank correlation of different measures. It turns out that they are rather high, indicating that the index choice might not be too important, but it also becomes apparent that VaR could as well be replaced by indices with a more convincing theoretical basis that do not imply a very different ranking of risks and in fact seem to compromise better between competing risk judgements.

An approximation method is applied to derive inequality concepts and progressivity objectives from recent German tax functions. Tax functions with constant progressivity serve as benchmarks.

Starting from a set of plausible requirements for local measures of tax progression, we derive appropriate indices for different concepts of inequality. Value judgements on redistribution are made explicit in this procedure.

In the theory of price index numbers we observe two mainlines of research. One is the so-called mechanistic approach. It takes prices and quantities as independent variables and derives price index formulas which have certain desirable properties. The other stream argues for economic cost of living indices that depend on prices and reference levels of utility. These indices ask for the expenditure necessary to reach the corresponding degree of satisfaction. In this paper we are proposing economic cost of living indices PR and PR' that are based on revealed preference considerations. We will build a bridge to mechanistic price indices by showing that several of the properties formulated in E i c h h o r n / V o e l l e r [1976] hold (slightly changed) for PR as well. S a m u e l s o n / S w a m y [1974] have shown similar results for the standard economic approach. We thereby extend results of F u c h s S e l i g e r [1984a]. In recent articles by V a r i a n [1982, 1983] and V a r t i a [1983] progress has been made in applying revealed preference theory to index number problems. By V a r i a n [1982] a utility function compatible with observed data can be approximated. If one is not interested in the utility function itself but only in measuring price changes, then one may, according to V a r t i a [1983, p. 92], proceed more directly. This is also the mainline the present paper pursues: Based on revealed preferences the income compensation function is calculated. It can be used to define price and welfare indices as well as serving as an (indirect) utility function. Hence it turns out

Situations are shown where an informational asymmetry prevails in a principal-agent relation. A general model is formulated to derive some first results in this framework. Modified assumptions yield a similar but more simpler model and further insights into the problem. Yet the reader is left with a considerable research agenda.

The concept most widely used in comparing income distributions is that of Lorenz curves. Since by now it has become standard textbook material, we refrain from a detailed explanation here.

The paper introduces the notion of inequality-equivalence of tax functions. Desirable distributional properties are examined and some of their implications are derived. All this is done for different inequality concepts entering the analysis parametrically.