By Mathias Dewatripont, Lars Peter Hansen, Stephen J. Turnovsky
This can be the 3rd of 3 volumes containing edited models of papers and commentaries provided in invited symposium periods of the 8th global Congress of the Econometric Society. The papers summarize and interpret contemporary key advancements and talk about destiny instructions in a variety of themes in economics and econometrics. The papers conceal either concept and functions. Written via best experts of their fields those volumes supply a special survey of growth within the self-discipline.
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Extra info for Advances in Economics and Econometrics: Theory and Applications, Eighth World Congress, Volume III (Econometric Society Monographs)
This is important because it tells us that it is often optimal to aim for very low default rates even at the cost of lots of costly monitoring and high interest rates. 30 28 29 30 For example, C p is negative whenever E( p) takes the form Ap β , with A > 0 and β ∈ (0, 1). Of course, this is conditional on the loan contract being viable, which is not the case when monitoring is too costly. Aleem’s data set from Pakistan, mentioned herein, is an example. 6. The Optimal Credit Contract With Monitoring The optimal credit contract will be a combination (K , p) that maximizes F(K )E( p) − p R( , K , p, m)K M.
5. 2) now takes the form R= p + M(K , D/K , m) . 5) This equation deﬁnes R( , K , p, m), the interest rate for a borrower with a ﬁxed W who wants to invest an amount K and promises to choose a project p. Using this, we can deﬁne the expected cost of credit per unit of investment: C( , K , p, m) = p R. This formulation of the supply side of credit has the obvious advantage that the interest rate can be much higher than the cost of capital even if defaults are rare. This is because monitoring costs can be very high; indeed the reason why there is very little default may be a result of the resources spent on monitoring.
As already noted, the more general phenomenon of slow convergence and limited social mobility is both interesting and important in itself. There are a number of other interesting predictions of the imperfect credit market model, some of which are now brieﬂy sketched. First, poor capital markets will tend to be associated with great diversity in ﬁrm size within the same industry. In the case in which there is an optimal scale of production, we would expect to see ﬁrms that are both below and above this scale – the former because they are capital starved and the latter because overall underinvestment generates rents in the industry, and as a result those who do have the capital overinvest in order to capture those rents.
Advances in Economics and Econometrics: Theory and Applications, Eighth World Congress, Volume III (Econometric Society Monographs) by Mathias Dewatripont, Lars Peter Hansen, Stephen J. Turnovsky