Michael Manove

Collateral versus Project Screening: A Model of Lazy Banks

Many economists argue that the primary economic function of banks is to provide cheap credit, and to facilitate this function, they advocate the strict protection and enforcement of creditor rights. But banks can serve another important economic function: through project screening they can reduce the number of project failures and thus mitigate their private and social costs. Strict protection of creditor rights would leave the tradeoff between these two banking functions to the market. In this paper, we show that because of market imperfections in the banking industry, strong creditor protection may lead to market equilibria in which cheap credit is inappropriately emphasized over project screening. Restrictions on collateral requirements and the protection of debtors in bankruptcy proceedings may redress this imbalance and increase credit-market efficiency.

Banking (Conservatively) with Optimists

Commercial banks frequently encounter optimistic entrepreneurs whose perceptions are biased by wishful thinking. Bankers are left with a difficult screening problem: separating realistic entrepreneurs from optimists who may be clever, knowledgeable, and completely sincere. We build a game-theoretic model of the screening process. We show that although entrepreneurs may practice self-restraint to signal realism, competition may lead banks to be insufficiently conservative in their lending, thus reducing capital-market efficiency. High collateral requirements decrease efficiency further. We discuss bank regulation and bankruptcy rules in connection with the problems that optimistic entrepreneurs present.

The Harm from Insider Trading and Informed Speculation

Insider traders and other speculators with private information are able to appropriate some part of the returns to corporate investments made at the expense of other shareholders. As a result, insider trading tends to discourage corporate investment and reduce the efficiency of corporate behavior. In the context of a theoretical model, measures that provide some indication of the sources and extent of the investment reduction are derived.

BARGAINING WITH DEADLINES AND IMPERFECT PLAYER CONTROL

This paper presents a game of strategic bargaining under deadlines whose equilibrium conforms to anecdotal and experimental information about real-life bargaining sessions. The model operates in continuous time and incorporates possible strategic delay and imperfect player control over the timing of offers (modeled by means of an exogenous random delay). In the unique symmetric Markov-perfect equilibrium, players adopt strategic delay early in the game, make and reject offers later on, and usually reach agreements late in the game, though they miss the deadline with positive probability. The expected division of the surplus is close to an even split. Copyright 1993 by The Econometric Society.

Racial Discrimination in Labor Markets with Posted Wage Offers

We analyze race discrimination in labor markets in which wage offers are posted. If employers with job vacancies receive multiple applicants, they choose the most qualified but may choose arbitrarily among equally qualified applicants. In the model, firms post wages, workers choose where to apply, and firms decide which workers to hire. Labor-market frictions greatly amplify racial disparities, so mild discriminatory tastes or small productivity differences can produce large wage differentials between the races. Compared with the nondiscriminatory equilibrium, the discriminatory equilibrium features lower net output, lower wages for both white and black workers and greater profits for firms.

Job Responsibility, Pay and Promotion

How are pay and promotion prospects related to job responsibility? A job entails responsibility to the extent that the value of the job outcome is sensitive to the workers input of effort. In the authors model, an employer uses termination contracts to elicit effort from workers. The optimal wage increases with responsibility. The author shows that the employer can reduce incentive costs by structuring a job ladder and offering workers a self-enforcing prospect of promotion. In fact, the employers will choose to pay differentiated wages to identical workers in identical jobs, promoting workers from the lower-paying to the higher-paying positions as vacancies occur. Copyright 1997 by Royal Economic Society.

Aggregation for Material Balances

Abstract In an input-output system, let final demands and gross outputs be iteratively balanced by successive approximations. The speed of convergence will depend, among other things, on the initial choice of gross outputs. Suppose that, using some aggregation weights, aggregate supply is made equal to aggregate demand in the initial plan. The current paper finds the set of aggregation weights that yields speediest convergence. An economic interpretation of the “optimal” aggregation weights is given, and some examples are calculated. J. Comp. Econ., March 1978, 2(1), pp. 1–11. Boston University, Boston, Mass., and Massachusetts Institute of Technology, Cambridge, Mass.

Wage Announcements with a Continuum of Worker Types

We present models of labor-market discrimination in which identical employers choose among job applicants according to a continuous characteristic such as skin color or worker height. The characteristic in question is assumed to be unrelated to worker productivity. Firms are required to announce wage offers that are not conditioned on the characteristic. Workers apply to firms on the basis of those announcements. Firms rank all applicants with respect to the characteristic and select the most desirable one. We show that in equilibrium all firms will offer the same wage, and workers will apply to each firm with equal probability. All employed workers will receive the same wage, but lower ranked workers will have a higher rate of unemployment than higher ranked workers and will thus have a lower expected income. These results differ from those of directed-search models characterized by a finite number of worker types.