Firm-bank linkages and optimal policies after a rare disaster

We study optimal government support following a rare disaster that creates heterogeneous firm liquidity needs. Firms' increase in debt reduces their output due to moral hazard. Banks are subject to a minimum capital requirement that limits deposit insurance costs upon bad aggregate shocks. Without government support, firms' moral hazard and banks' funding frictions reinforce each other amplifying output losses. Optimal support is implemented with firm-specific transfers combined with the provision of aggregate risk insurance through a capital requirement relaxation and a public preferred equity stake in banks. Our results shed light on suboptimality features in the actual policy responses to Covid-19 lockdowns.

Reexamine the Role of the Financial Institution Management During Card Debt Crisis or the COVID-19

Due to the increasing popularity of financial technology and the lifting of financial regulations, various financial institutions have become increasingly competitive and actively expand their consumer finance business. Changes in generational consumption behavior have led to excessive credit expansion, excessive debt or bad credit records. All of these result in the emergence of adverse selection and moral hazard problems of information asymmetry, and finally cause the card debt crisis in 2005. This article focuses on variables such as the number of cards in circulation, retail sales volume, revolving balance, and overdue ratios of credit cards in public and private banks, and examine whether the information asymmetry in the credit card market has been improved ,with the financial institution management. Furthermore, due to the COVID-19 exploring whether the information asymmetry has been worsened or improved deserves the attention of the financial authority again. The results reveal that continuous financial institution management is very important and effective during the card debt period or the pandemic.

Should investors rely on central bank asset purchases to backstop markets?

During the global financial crisis, central banks in advanced economies cut policy rates to near zero, and then provided further stimulus via balance sheet expansion. In many instances this took the form of quantitative easing — central banks creating new money with which to purchase securities. With years of quantitative easing behind us, and aggressive measures from central banks during the COVID-19 pandemic, should investors now expect central banks to backstop financial markets? This paper examines asset purchases from the twin perspectives of monetary and financial stability, and argues that investors should not expect central banks to always come to their rescue. © Henry Stewart Publications 1752-8887 (2023).

Effect of Health Insurance Uptake on Hesitancy toward COVID-19 Vaccines in Nigeria: A Recursive Bivariate Probit and Decomposition Estimation.

Moral hazard remains one of the major challenges of health insurance administration. This paper recursively analyzed the effect of health insurance on the willingness to take COVID-19 vaccines in Nigeria. The data comprised 1892 unvaccinated respondents in the 2021/2022 National Longitudinal Phone Survey (NLPS). The data were analyzed with Coban's recursive probit regression and decomposition approaches. The results revealed that 5.87% were health insured, and 7.93% were willing to take COVID-19 vaccines. Health insurance uptake significantly increased (p < 0.05) with an adult being the decision-maker on vaccination, requiring family planning, and urban residence, while it reduced with loss of jobs and residence in the southeast and southwest zones. In addition, health insurance significantly (p < 0.01) increased the willingness to take COVID-19 vaccines, along with each adult, all adults, and households' heads being the major vaccination decision-makers, loss of jobs, and support for making COVID-19 vaccines compulsory. The average treatment effects (ATEs) and average treatment effect on the treated (ATET) of health insurance were significant (p < 0.01), with positive impacts on willingness to be vaccinated. It was concluded that policy reforms to promote access to health insurance would enhance COVID-19 vaccination in Nigeria. In addition, hesitancy toward COVID-19 vaccines can be reduced by targeting adults and household heads with adequate information, while health insurance uptake should target southern states and rural areas.

Eurobonds versus Coronabonds: Same Idea, New Context, Different Outcome?

Since the outbreak of the SARS-CoV-2 pandemic, the European Union has taken tentative steps toward the issuance of joint debt. This progress is significant but puzzling: the technical value of such instruments has never been in doubt;however, the political will to move forward has always been lacking. What changed? This short article argues that contemporary political economy research points us toward the role of ideas and identity in explaining this shift.

The soft budget constraint in action: German third tier professional football during the COVID19 pandemic

Rationale: The paper examines whether the concept of the soft budget constraint (SBC) helps understanding how lower tier football coped with the revenue drop during the COVID19. Design: A qualitative research design relying on expert interviews and document analyses was employed. A sample of five clubs was examined using process-tracing methods. Findings: Overspending and debt-making are persistent features of German lower tier football. Before the pandemic, clubs benefitted from distinct bail-outs. The revenue drop during the pandemic was primarily compensated by public subsidies;clubs also got money injections from fans, sponsors and investors. Yet, shareholder structure matters for the likelihood that clubs faced hard budget constraints. Practical implications: The system of promotion and relegation facilitates overspending and debt-making. The specific corporate of German football clubs encourages moral hazard and creates hold-up risks. The public seems to have become more hesitant to grant bail-outs. Research contribution: The concept of the soft budget constraint is instructive for understanding the specific economics of European football but its limits have to clearer specified. © 2022 Informa UK Limited, trading as Taylor & Francis Group.

Venture Capital and Chinese Firms’ Technological Innovation Capability: Effective Evaluation and Mechanism Verification

Making the financial industry a solider mainstay of the real economy is of great concern for China in the midst of economic reform. For China, leveraging venture capital (VC) to enhance a firm’s technological innovation capability (TIC) is an important means of actualising its innovation and development strategy, as well as a must-do to realise sustainable development. In this study, firms that went public from 2010 to 2020 on the A-stock market were used as samples to study the effects of VC on TIC and the relevant mechanism based on the difference-in-differences (DID) method. As research findings show, VC can improve TIC through the medium of the internal incentive and external constraint easing effects. The contributory role of VC in TIC varies with firm size, ownership, and industry type. A range of robustness tests, including the PSM, variable substitution, and instrumental variable methods, further strengthened the reliability of the conclusions. This study can enlighten policymakers on how to implement comprehensive resource factor market reform to build a favourable innovation environment that materialises the role of marketisation.

Understanding the Function of a Social Business Ecosystem

Social entrepreneurs face challenging situations in trying to expand and grow businesses with little investment and limited resources. Interactions and networks between social entrepreneurs, investors, and other stakeholders are indispensable in promoting social entrepreneurship. Together, they come to form a cyclical “social business ecosystem” (SBE), in which social entrepreneurs can finance their projects by paying “share transfer fees.” By using a theoretical/mathematical model in our method, this study examines the fundamental role of share transfer fees in an SBE. In particular, it establishes a moral hazard model that can explain important characteristics of an SBE. As main results, the study identifies conditions under which an SBE can mitigate the moral hazard of social entrepreneurs. The results suggest that SBEs work efficiently for relatively small social projects. This is consistent with actual cases of social business. Within this framework, this study also explores the practical implications of knowledge spillover;social entrepreneurs conduct SBEs more efficiently if they take advantage of knowledge spillover.

Choosing the Optimal Tool for Fiscal Adjustment or Living under Fiscal Constraints: Panel Evidence from Selected OECD Countries

This article examines the long-run two-way causal relationship between government revenues and spending and their interaction with the yearly change in public debt for eighteen OECD countries by using annual data for 1976-2017 period. The empirical literature has mainly focused on the long run relationship between government expenditure and revenues or other single country time series while only a few studies have used panel causality analysis and none have investigated the link with the evolution of public debt ratios. The purpose of this paper is to present a dynamic model identifying the underlying relationships constituting the fiscal policy set-up in sample countries. We apply a robust dynamic panel causality methodology based on SUR systems and Wald tests with country specific bootstrap critical values. The study also aims to provide the basis for recommendations on the policy response to public finance challenges stemming from exogenous shocks like the global pandemic that began in 2020. By developing an enhanced analysis of the long-term causal relationship between taxation, spending and their interaction with changes in public debt, the study not only provides fresh insights into the sustainability and optimal design of fiscal adjustment efforts but also offers a country-specific schematization as a guide for policymaking.

Unemployment Insurance in Transition and Developing Countries: Moral Hazard vs. Liquidity Constraints in Chile

One of the most complex policy issues that developing countries will face as a result of the employment crisis caused by the Covid crisis is the question of how they can better protect the unemployed. However, the analysis of unemployment insurance (UI) in developing economies with large informal sectors is in its infancy, with few papers providing solid empirical evidence. This paper therefore makes several contributions: first, it applies Chetty’s 2008 landmark work on UI to a transition economy (Chile) and shows that the moral hazard effects expected by policy makers, who designed the system are minimal, while liquidity effects were entirely neglected. Second, it demonstrates that it is not enough merely to quantify effects such as moral hazard, but to understand their causes as unemployment generated by moral hazard or liquidity constraints has different welfare implications and should therefore result in different policies. By means of an RDD, this paper analyses the Chilean UI system using a large sample of administrative data, which allows for an extremely precise analysis of how the system works, thus providing invaluable empirical lessons for other countries. [ FROM AUTHOR] Copyright of Journal of Development Studies is the property of Routledge and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full . (Copyright applies to all s.)

Addressing the Next State Fiscal Crisis: Toward an Ex Ante Scheme of Federal Assistance to States in Fiscal Distress

The Brookings Institute projects that state and local revenues will decline $155 billion in 2020 (5.5%), $167 billion in 2021 (5.7%), and $145 billion in 2022 (4.7%).4 Dwindling revenues are insufficient to cover mounting costs, and budget shortfalls are mounting.5 The looming state economic crisis has spurred a debate about the proper federal response.6 One position, often represented by governors or Congressional Democrats, advocates for massive federal aid to distressed states.7 In talks regarding the second COVID-19 stimulus, for example, Democrats pushed for more than $900 billion in federal aid to states, reasoning that states are unable to cope independently with their financial troubles.8 Without federal funds, argue the proponents of federal assistance, states may collapse, bringing the nation's economy with them.9 The other position, often represented by congressional Republicans, objects to using federal funds for state bailouts.10 According to this view, states should handle their own finances, and federal funds should not be handed out to poorly-managed ("blue") states.11 In lieu of federal aid, a state bankruptcy solution is offered.12 Bankruptcy law, it is argued, can reduce the states' debt overhang and spread their losses among their creditors, obviating the need for federal funds.13 But both of the suggested federal responses, bankruptcy law and ex post federal aid, seem problematic. [...]states don't have the resources to finance their rising costs, and a state economic crisis develops. [...]opposite to the directives of standard economic theory, in times of recession states cut spending and investments, and these measures damage not only the distressed states, but also the national economy. [...]as emphasized by opponents of federal bailouts, federal aid creates moral hazard problems. if states know that the federal government will provide financial assistance when they fall on hard times, they have little motivation to save or follow prudent financial policies.17 Second, and no less importantly, the Article shows that because federal aid is provided through a political process, it is dispensed according to politicians' personal interests and not necessarily pursuant to the beneficiaries' financial needs.

Does an Overcrowded Emergency Department Reduce Moral Hazard? Lessons from Emergency Department Visits to Three Hospitals in an Israeli Metropolitan Area

Metropolitan Haifa, Israel, has three hospitals: Rambam Health Care Campus, Bnai Zion Medical Center, and Carmel Medical Center. In 2007–2014, the length of stay at RHCC’s emergency department increased, while the number of visits decreased. We ask whether the increase in LOS is associated with the falling numbers of visits to other EDs, whether an increase in LOS induces more referrals to competing hospitals in the metropolitan area, and whether it pays to be a crowded ED in mitigating moral hazard. Average LOS at Rambam climbed from 3.5 h in 2000–2007 to 6.4 in 2008–2018. While the number of visits to Rambam decreased significantly, those to Bnai Zion increased significantly and quite linearly. A one-way ANOVA test reveals a statistically significant difference among the three hospitals. In addition, Rambam was significantly different from Carmel but not from Bnai Zion. When LOS stabilized at Rambam from 2016 to 2018 and increased at Bnai Zion, referrals to Rambam went up again. Policymakers should instruct all hospitals to publish LOS data, regulate referrals to EDs, and find an optimal LOS that will reduce competition, non-urgent visits, and moral hazard.

Incentives, lockdown, and testing: from Thucydides' analysis to the COVID-19 pandemic.

In this work, we provide a general mathematical formalism to study the optimal control of an epidemic, such as the COVID-19 pandemic, via incentives to lockdown and testing. In particular, we model the interplay between the government and the population as a principal-agent problem with moral hazard, à la Cvitanic et al. (Finance Stoch 22(1):1-37, 2018), while an epidemic is spreading according to dynamics given by compartmental stochastic SIS or SIR models, as proposed respectively by Gray et al. (SIAM J Appl Math 71(3):876-902, 2011) and Tornatore et al. (Phys A Stat Mech Appl 354(15):111-126, 2005). More precisely, to limit the spread of a virus, the population can decrease the transmission rate of the disease by reducing interactions between individuals. However, this effort-which cannot be perfectly monitored by the government-comes at social and monetary cost for the population. To mitigate this cost, and thus encourage the lockdown of the population, the government can put in place an incentive policy, in the form of a tax or subsidy. In addition, the government may also implement a testing policy in order to know more precisely the spread of the epidemic within the country, and to isolate infected individuals. In terms of technical results, we demonstrate the optimal form of the tax, indexed on the proportion of infected individuals, as well as the optimal effort of the population, namely the transmission rate chosen in response to this tax. The government's optimisation problems then boils down to solving an Hamilton-Jacobi-Bellman equation. Numerical results confirm that if a tax policy is implemented, the population is encouraged to significantly reduce its interactions. If the government also adjusts its testing policy, less effort is required on the population side, individuals can interact almost as usual, and the epidemic is largely contained by the targeted isolation of positively-tested individuals.

Orchestrating finance with Material Adverse Changes?

From a legal and economic perspective, the global financial crisis, terrorist attacks, wars, natural catastrophes, and COVID-19 all have one thing in common: they are potentially ‘material adverse change’ events. Such events are unpredictable and have severe consequences for the global economy. To help manage the fallout from such negative events, businesses in economically valuable and complex deals, such as debt financing or mergers and acquisition (M&A) agreements, include special contractual risk allocation provisions, called Material Adverse Change/Effect (MAC) clauses. The COVID-19 crisis has had a drastic effect on M&A and debt financing deals, often leading to renegotiation and sometimes to litigation of these agreements based on MAC clauses. Termination of such transactions via MAC clauses poses serious risks, including those of causing a domino-effect in the market.The effects of MAC clauses in debt finance (as opposed to M&A deals), however, have been largely overlooked both in law and in finance. This paper is the first to investigate the pre-contractual (ex-ante) and contractual (ex-post) effects of MAC clauses in commercial debt financing agreements. It proposes a novel Multifunctional Effect Approach of MAC clauses in debt finance. This paper aims to explain why the commercial parties attach high importance to these vague and uncertain MAC clauses in debt financing agreements but hardly ever rely on them. First, the paper argues that apart from acceleration of the credit facilities, MAC clauses have various beneficial effects, such as screening. Secondly, MAC clauses should be regarded not only as mechanisms to solve information asymmetry but also have the following effects: improving governance, decoupling debt, providing restructuring impulses, countering uncertainty, signalling with acceleration. Potentially, MAC clauses also have the effect of a penalty default rule. The paper finds that despite these functions, the potential of MAC clauses in debt finance is not fully utilised, due to the unique characteristics of debt finance. This significantly undermines the efficiency of MAC clauses in debt finance, as lenders overprotect themselves by additionally relying on other contractual protection mechanisms and risk offsetting strategies for more efficiency.

Information Disclosure in China’s Rising Securitization Market

E-commerce and FinTech are currently booming in China. The growing consumer market is accompanied by internet finance, by which consumers can easily borrow money from financial institutions online. As a result, the growing risks of financial institutions are of concern to the government and regulatory bodies. Consequently, the securitization market in China is seeing rapid growth that could affect financial stability. Applying FinTech and emerging technologies in securitization might be an effective way to protect against these risks. This paper studies the question of whether China needs a higher standard of information transparency in order to protect against its risks against the background of digital transformation. We analyzed the determinants of securitization in the Chinese banking sector, relying on data on banks for two periods: pre-2017Q4 and post-2017Q4. The main findings of the paper demonstrate that the application of FinTech in China’s banking industry resulted in less information asymmetry. The risk exposure was the most significant determinant in general. Higher risk exposures increased securitization transaction volumes, which reflects securitization with adverse selection problems between the originator and investors. Liquidity and profitability, as important determinants indicating the moral hazard problem, also affected securitization pre-2017Q4, but liquidity and profitability were found to be unimportant determinants after the application of FinTech (the post-2017Q4 period). Moreover, this study finds that the effects of the adverse selection and moral hazard problems varied in different types of banks. Overall, our findings suggest that the Chinese securitization market needs a higher standard of information transparency.

Indemnifying precaution: economic insights for regulation of a highly infectious disease.

Economic insights are powerful for understanding the challenge of managing a highly infectious disease, such as COVID-19, through behavioral precautions including social distancing. One problem is a form of moral hazard, which arises when some individuals face less personal risk of harm or bear greater personal costs of taking precautions. Without legal intervention, some individuals will see socially risky behaviors as personally less costly than socially beneficial behaviors, a balance that makes those beneficial behaviors unsustainable. For insights, we review health insurance moral hazard, agricultural infectious disease policy, and deterrence theory, but find that classic enforcement strategies of punishing noncompliant people are stymied. One mechanism is for policymakers to indemnify individuals for losses associated with taking those socially desirable behaviors to reduce the spread. We develop a coherent approach for doing so, based on conditional cash payments and precommitments by citizens, which may also be reinforced by social norms.