This working paper reports the preliminary results of an effort to analyse under what conditions liquidity can be created in an historic context setting. Starting point is the notion made by Dang, Gorton, and Holmstrom (2012) that symmetric ignorance can create liquidity in money markets under certain circumstances. The authors take as an example the New York clearing house (NYCH) system from 1853 onwards. At times of panic, the intended suppression of bank-specific information by the NYCH avoided the identification of weak banks and thus safeguarded the reputation of all member banks. In addition to the threat of expulsion, one particular successful mechanism that united the banks in the U.S. was the issuance of the clearinghouse loan certificate, a de-facto liability of the clearinghouse. My hypothesis is that a number of critical factors have to be present for the clearing house mechanism to create liquidity. For comparison, I take the example of Switzerland where a clearing house was established in 1876. However, while the Swiss system exhibits many features similar to the NYCH (e.g. threat of expulsion, monitoring), it did not manage to achieve the necessary degree of risk-sharing among its member banks, and its failure became had become aparent by the time of the foundation of the Swiss central bank in 1907.
In the neoclassical model of consumer behavior, considerable work has been done investigating when a consumer's demand behavior can be described as having been derived from utility maximization. However, most discussions are in a certainty world. We expand on prior analyses in an uncertainty setting by providing conditions under which contingent claim and asset demands will be consistent with state independent Expected Utility maximization. The question is addressed using two different traditional approaches. First given the analytical form of the demand functions, we derive necessary and sufficient conditions such that the consumer's behavior can be rationalized by an Expected Utility function. Second, we provide a necessary and sufficient condition for a finite set of observations on prices, probabilities and quantities to be consistent with Expected Utility maximization for the case of a single commodity in each state. This condition is shown to be analogous to the strong axiom of revealed preference in classical certainty demand theory. For both approaches, we consider the complete and incomplete asset market cases.
We compare default rates on conventional and Islamic loans using a comprehensive monthly dataset from Pakistan that follows more than 150,000 loans over the period 2006:04 to 2008:12. We find robust evidence that the default rate on Islamic loans is less than half the default rate on conventional loans. Islamic loans are less likely to default during Ramadan and in big cities if the share of votes to religious-political parties increases, suggesting that religion – either through individual piousness or network effects – may play a role in determining loan default.
1914 und 2014: Ein Jahrhundert ist es her, seit die europäische und vor allem französische und deutsche Jugend auf den Schlachtfeldern des Ersten Weltkriegs geopfert wurde. Heute gibt es in Europa glücklicherweise keine Schützengräben mehr, doch die aktuellen Generationen leiden unter einer Finanzkrise, die seit 2007 andauert und die Zukunftsperspektiven überschattet. Damals lehnte die Mehrheit der Bevölkerung einen Krieg ab oder rechnete nur mit einem sehr kurzen Verlauf. Der Krieg sollte jedoch vier lange Jahre dauern. Aktuell zieht sich die Krise in die Länge - trotz zahlreicher Beteuerungen der Regierungen, dass ein Weg aus der Massenarbeitslosigkeit und der Krise gefunden werden könnte. Marc Chesney zieht Parallelen zwischen der Gesellschaft von 1914 und der heutigen. Er analysiert die Rolle der Finanzaristokratie und die Diktatur der Finanzmärkte. Im Vordergrund steht die Forderung, dass die Finanzsphäre primär der Wirtschaft und Gesellschaft dienen sollte. Er zeigt zahlreiche Lösungsansätze auf, wie sich dieses Prinzip verwirklichen lässt. «Während des Ersten Weltkrieges waren es die Nationen, die aufs Podest gestellt wurden, die Opfer verlangten. Das grösste Opfer, das darin bestand, 'auf dem Felde der Ehre zu fallen', war dann auch das Los von Millionen Europäern. Heute verlangen die ebenfalls zum Gott erhobenen Finanzmärkte fortwährende Befriedigung und die damit verbundenen Opfer. Die Frage, ob ein solches Ziel wünschenswert ist, mag unpassend wirken, so eindeutig scheint die Antwort zu sein! Selbstverständlich sollte man das, sonst erwartet uns das Schlimmste [...]»
We empirically test the hypothesis that relatively high returns to talent explain the wage premium for working in finance. We exploit a specificity of the French educational system to build a precise measure of talent that we match with compensation data obtained from an educational elite. Using this measure, we show wage returns to talent to be three times higher in the finance industry than in the rest of the economy. This greater sensitivity to talent almost fully explains the level of the finance wage premium, its evolution since the 1980s, and, at the individual level, the pay increase workers obtain when joining the finance industry. Finally, talented workers receive a larger share of variable compensation, and even more so in the finance industry.
