Measuring the efficiency of decision making units

According to basic economics, if demand exceeds supply, prices will rise, thus decreasing demand or increasing supply until demand and supply are in equilibrium; thus if prices do their job, rationing will not exist. However, credit rationing does exist. This paper demonstrates that even in equilibrium, credit rationing will exist in a loan market. Credit rationing is defined as occurring either (a) among loan applicants who appear identical, and some do and do not receive loans, even though the rejected applicants would pay higher interest rates; or (b) there are groups who, with a given credit supply, cannot obtain loans at any rate, even though with larger credit supply they would. A model is developed to provide the first theoretical justification for true credit rationing. The amount of the loan and the amount of collateral demanded affect the behavior and distribution of borrowers. Consequently, faced with increased credit demand, it may not be profitable to raise interest rates or collateral; instead banks deny loans to borrowers who are observationally indistinguishable from those receiving loans. It is not argued that credit rationing always occurs, but that it occurs under plausible assumptions about lender and borrower behavior. In the model, interest rates serve as screening devices for evaluating risk. Interest rates change the behavior (serve as incentive mechanism) for the borrower, increasing the relative attractiveness of riskier projects; banks ration credit, rather than increase rates when there is excess demand. Banks are shown not to increase collateral as a means of allocating credit; although collateral may have incentivizing effects, it may have adverse selection effects. Equity, nonlinear payment schedules, and contingency contracts may be introduced and yet there still may be rationing. The law of supply and demand is thus a result generated by specific assumptions and is model specific; credit rationing does exist. (TNM)

/pdf/credit-rationing-in-markets-with-imperfect-information-21n5gppfp1.pdf

Credit Rationing in Markets with Imperfect Information.

This paper surveys research on corporate governance, with special attention to the importance of legal protection of investors and of ownership concentration in corporate governance systems around the world.

A Survey of Corporate Governance

Since the turn of the twentieth century, legislation in Western countries has expanded rapidly to reverse the brief dominance of laissez faire during the nineteenth century. The state no longer merely protects against violations of person and property through murder, rape, or burglary but also restricts ‘discrimination’ against certain minorities, collusive business arrangements, ‘jaywalking’, travel, the materials used in construction, and thousands of other activities. The activities restricted not only are numerous but also range widely, affecting persons in very different pursuits and of diverse social backgrounds, education levels, ages, races, etc. Moreover, the likelihood that an offender will be discovered and convicted and the nature and extent of punishments differ greatly from person to person and activity to activity. Yet, in spite of such diversity, some common properties are shared by practically all legislation, and these properties form the subject matter of this essay.

/pdf/crime-and-punishment-an-economic-approach-1zvxgodjbi.pdf

Crime and Punishment: An Economic Approach

This article surveys research on corporate governance, with special attention to the importance of legal protection of investors and of ownership concentration in corporate governance systems around the world. CORPORATE GOVERNANCE DEALS WITH the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment. How do the suppliers of finance get managers to return some of the profits to them? How do they make sure that managers do not steal the capital they supply or invest it in bad projects? How do suppliers of finance control managers? At first glance, it is not entirely obvious why the suppliers of capital get anything back. After all, they part with their money, and have little to contribute to the enterprise afterward. The professional managers or entrepreneurs who run the firms might as well abscond with the money. Although they sometimes do, usually they do not. Most advanced market economies have solved the problem of corporate governance at least reasonably well, in that they have assured the flows of enormous amounts of capital to firms, and actual repatriation of profits to the providers of finance. But this does not imply that they have solved the corporate governance problem perfectly, or that the corporate governance mechanisms cannot be improved. In fact, the subject of corporate governance is of enormous practical impor

/pdf/a-survey-of-corporate-governance-36f3yobhy4.pdf

ECONOMISTS have long labored with the rate of operation of firm and industry, but they have generally treated as a (technological?) datum the problem of what the firm does-what governs its range of activities or functions. It is the central thesis of this paper that the theorem of Adam Smith which has been appropriated as a title is the core of a theory of the functions of firm and industry, and a good deal more besides. I shall (i) make some brief historical remarks on the theorem, (2) sketch a theory of the functions of a firm, (3) apply this theory to vertical integration, and (4) suggest broader applications of the theorem.

The Division of Labor is Limited by the Extent of the Market

The identification of sellers and the discovery of their prices is given as an example of the role of the search for information in economic life.

The economics of information

rfl9H E young person entering the labor market for the first time has an . immense number of potential employers, scarce as they may seem the first day. If he is an unskilled or a semiskilled worker, the number of potential employers is strictly in the millions. Even if he has a specialized training, the number of potential employers will be in the thousands: the young Ph.D. in economics, for example, has scores of colleges and universities, dozens of governmental agencies, hundreds of business firms, and the Ford Foundation as potential employers. As the worker becomes older the number of potential employers may shrink more often than it grows, but the number will seldom fall to even a thousand. No worker, unless his degree of specialization is pathological, will ever be able to become informed on the prospective earnings which would be obtained from every one of these potential employers at any given time, let alone keep this information up to date. He faces the problem of how to acquire information on the wage rates, stability of employment, conditions of employment, and other determinants of job choice, and how to keep this information current. I shall concentrate attention on the determination of wage rates.

/pdf/information-in-the-labor-market-uqbbmro9o8.pdf

Information in the Labor Market

All prescriptions of behavior for individuals require enforcement. Usually the obligation to behave in a prescribed way is entered into voluntarily by explicit or implicit contract. For example, I promise to teach certain classes with designated frequency and to discuss matters which I, and possibly others, believe are relevant to the course titles. By negotiation, and in the event of its failure, by legal action, I and my employer seek to enforce the contract of employment against large departures from the promised behavior. Performance of some kinds of behavior is difficult or impossible to enforce-such as promises to be creative, noble, or steadfast in crisis-and as a result such contractual promises are either not made or enforced only when there is an uncontroversially flagrant violation. The influence upon contract, and upon economic organization generally, of the costs of enforcing various kinds of contracts has received virtually no study by economists, despite its immense potential explanatory power. When the prescribed behavior is fixed unilaterally rather than by individual agreement, we have the regulation or law, and enforcement of these unilateral rules is the subject of the present essay. Departures of actual from prescribed behavior are crimes or violations, although one could wish for a less formidable description than "criminal" to describe many of the trifling offenses or the offenses against unjust laws. My primary purpose is to construct a theory of rational enforcement, a theory which owes much to Gary Becker's major article on the subject (1968). In the conclusion the problem of explanation, as distinguished from prescription, will be commented upon.

/pdf/the-optimum-enforcement-of-laws-2wf2zjcsnq.pdf

The Optimum Enforcement of Laws

Public Regulation of the Securities Markets

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