DP7351 Rational and Naive Herding
Author(s):	Erik Eyster, Matthew Rabin
Programme Area:	PP
Programme Area: PP
Keyword(s): Cursed equiliibrium, Herding, Naive inference, Social Learning
Abstract: In social-learning environments, we investigate implications of the assumption that people naively believe that each previous person's action reflects solely that person's private information, leading them to systematically imitate all predecessors even in the many circumstances where rational agents do not. Naive herders inadvertently over-weight early movers' private signals by neglecting that interim herders' actions also embed these signals. They herd with positive probability on incorrect actions across a broad array of rich-information settings where rational players never do, and---because they become fully confident even when wrong---can be harmed on average by observing others.
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DP7354 Cross-Country Causes and Consequences of the 2008 Crisis: Early Warning
Author(s):	Andrew K Rose, Mark Spiegel
Programme Area:	IM
Programme Area: IM
Keyword(s): country;, credit;, cross-section, data, empirical, international;, MIMIC., model;, stock;
Abstract: This paper models the causes of the 2008 financial crisis together with its manifestations, using a Multiple Indicator Multiple Cause (MIMIC) model. Our analysis is conducted on a cross-section of 107 countries; we focus on national causes and consequences of the crisis, ignoring cross-country "contagion" effects. Our model of the incidence of the crisis combines 2008 changes in real GDP, the stock market, country credit ratings, and the exchange rate. We explore the linkages between these manifestations of the crisis and a number of its possible causes from 2006 and earlier. We include over sixty potential causes of the crisis, covering such categories as: financial system policies and conditions; asset price appreciation in real estate and equity markets; international imbalances and foreign reserve adequacy; macroeconomic policies; and institutional and geographic features. Despite the fact that we use a wide number of possible causes in a flexible statistical framework, we are unable to link most of the commonly-cited causes of the crisis to its incidence across countries. This negative finding in the cross-section makes us skeptical of the accuracy of "early warning" systems of potential crises, which must also predict their timing.
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DP7355 Lenders of Last Resort in a Globalized World
Author(s):	Maurice Obstfeld
Programme Area:	IM
Programme Area: IM
Keyword(s): central banking, financial crisis, International Monetary Fund, international monetary system, Lender of last resort
Abstract: The recent financial crisis teaches important lessons regarding the lender-of-last resort function. Large swap lines extended in 2007-08 from the Federal Reserve to other central banks show that the classic concept of a national last-resort lender fails to address key vulnerabilities in a globalized financial system with multiple currencies. What system of emergency international financial support will best help to minimize the likelihood of future economic instability? Acting alongside national central banks, the International Monetary Fund has a key role to play in the constellation of lenders of last resort. As the income-level and institutional divergence between emerging and mature economies shrinks over time, the IMF may even evolve into a global last-resort lender that channels central bank liquidity where it is needed. The IMF’s effectiveness would be greatly enhanced by several complementary reforms in international financial governance, though some of these appear politically problematic at the present time.
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DP7356 The Evolution of Aggregate Stock Ownership---A Unified Explanation
Author(s):	Kristian Rydqvist, Joshua Spizman, Ilya Strebulaev
Programme Area:	FE
Programme Area: FE
Keyword(s): Bracket creep, capital gains tax, Income tax, Inflation, Pension funds, stock ownership
Abstract: Since World War II, direct stock ownership by households has largely been replaced by indirect stock ownership by financial institutions. We argue that tax policy is the driving force. Using long time-series from eight countries, we show that the fraction of household ownership decreases with measures of the tax benefits of holding stocks inside a pension plan. This finding is important for policy considerations on effective taxation and for financial economics research on the long-term effects of taxation on corporate finance and asset prices.
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DP7357 The Impact of Creditor Protection on Stock Prices in the Presence of Credit Crunches
Author(s):	Galina B Hale, Assaf Razin, Hui Tong
Programme Area:	IM
Programme Area: IM
Keyword(s): credit crunch, Tobin Q
Abstract: Data show that better creditor protection is correlated across countries with lower average stock market volatility. Moreover, countries with better creditor protection are observed to have suffered lower decline in their stock market indexes during the current financial crisis. To explain this regularity, we use a stylised Tobin-q model of investment. Our model predicts that (1) the incidence of credit crunches should be lower in countries with better creditor protection; and, {2) that the decline in the stock market index during crises should be lower in countries with better creditor protection. We find support for these mechanisms in a panel data consisting of both OECD and OECD countries. We find that countries with higher level of creditor-rights protection are less likely to experience liquidity crises, even within the subsamples of OECD and non-OECD countries. We find, however, that only in the subsample of non-OECD countries do we observe a larger decline in the stock market index for countries with low level of creditor rights protection, in the presence of credit crunches.
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DP7358 Quantifying private benefits of control from a structural model of block trades
Author(s):	Rui Albuquerque, Enrique Schroth
Programme Area:	FE, IO
Programme Area: FE, IO
Keyword(s): Block pricing, block trades, control transactions, deadweight loss, private benefits of control, structural estimation
Abstract: We study the determinants of private benefits of control in negotiated block transactions. We estimate the block pricing model in Burkart, Gromb, and Panunzi (2000) explicitly accounting for both block premia and block discounts in the data. The evidence suggests that the occurrence of a block premium or discount depends on the controlling block holder's ability to fight a potential tender offer for the target's stock. We find evidence of large private benefits of control and of associated deadweight losses, but also of value creation by controlling shareholders. Finally, we provide evidence consistent with Jensen's free cash flow hypothesis.
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DP7360 Entrepreneurship: Origins and Returns
Author(s):	Helge Berglann, Espen R Moen, Knut Roed, Jens Fredrik Skogstrøm
Programme Area:	LE
Programme Area: LE
Keyword(s): Entrepreneurship, Self-employment, Spin-offs
Abstract: We examine the origins and outcome of entrepreneurship on the basis of exceptionally comprehensive Norwegian matched worker-firm-owner data. In contrast to most existing studies, our notion of entrepreneurship not only comprises self-employment, but also em-ployment in partly self-owned limited liability firms. Based on this extended entrepre-neurship concept, we find that entrepreneurship tends to be profitable. It also raises in-come uncertainty, but the most successful quartile gains much more than the least suc-cessful quartile loses. Key determinants of the decision to become an entrepreneur are occupational qualifications, family resources, gender, and work environments. Individual unemployment encourages, while aggregate unemployment discourages entrepreneurship.
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Total Papers listed: 7