Contributions in Merlin

Motivated by Manski and Tamer (2002) and especially their partial identification analysis of the regression model where one covariate is only interval-measured, we present two extensions. Manski and Tamer (2002) propose two estimation approaches in this context, focussing on general results. The modified minimum distance (MMD) estimates the true identified set and the modified method of moments (MMM) a superset. Our first contribution is to characterize the true identified set and the superset. Second, we complete and extend the Monte Carlo study of Manski and Tamer (2002). We present benchmark results using the exact functional form for the expectation of the dependent variable conditional on observables to compare with results using its nonparametric estimate, and illustrate the superiority of MMD over MMM.

We implement a novel method to detect systemically important financial institutions in a network. The method consists in a simple model of distress and losses redistribution derived from the interaction of banks' balance-sheets through bilateral exposures. The algorithm goes beyond the traditional default-cascade mechanism, according to which contagion propagates only through banks that actually default. We argue that even in the absence of other defaults, distressed-but-non-defaulting institutions transmit the contagion through channels other than solvency: weakness in their balance sheet reduces the value of their liabilities, thereby negatively affecting their interbank lenders even before a credit event occurs. In this paper, we apply the methodology to a unique dataset covering bilateral exposures among all Italian banks in the period 2008-2012. We find that the systemic impact of individual banks has decreased over time since 2008. The result can be traced back to decreasing volumes in the interbank market and to an intense recapitalization process. We show that the marginal effect of a bank's capital on its contribution to systemic risk in the network is considerably larger when interconnectedness is high (good times): this finding supports the regulatory work on counter-cyclical (macroprudential) capital buffers.

In this paper, we examine the long-term effects of high school exit exams (HSEEs) on graduation rates and achievement using an interrupted time series approach. We find that introducing a HSEE has an overall positive effect on graduation rate trends, an effect which is heterogeneous over time. In the year of introduction and the following three years we find a negative impact of HSEE on graduation rates; this negative impact is short-lived and becomes positive over the long term. We perform robustness checks using states that do not have HSEEs as control group. We also estimate a pre-intervention negative effect, suggesting that high schools start preparing for the HSEE before its actual introduction. We find no effects for achievement, possibly due to the lack of meaningful cross-state achievement data in the time period studied.

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.

We investigate the relationship between unfulfilled educational aspirations and self-esteem. Classifications of education relying on completed years of schooling or degree attainment are not able to distinguish between college dropouts with unfulfilled aspirations and graduates with fulfilled aspirations. To separate the two groups, we develop a classification of education combining the highest type of college enrolled in (aspiration) and the highest degree obtained (realization of aspiration). Using data spanning three decades from the National Longitudinal Survey of Youth, we find that four-year college dropouts compared to graduates have permanently lower self-esteem, whether dropouts obtain an associate’s degree or not. However, associate’s degree holders who had never enrolled in a four-year college do not experience this long-term negative effect. Therefore, finishing the highest type of college in which the student ever enrolled is critical for the formation of self-esteem. We discuss implications for college enrollment decisions.

Abstract We model bank bailout decisions by a state that looks beyond a bailout, taking into account future cost of rescuing or liquidating the bank. Using a repeated game we find that a long-term perspective makes both, the state and banks, more cautious. Yet, a looming “fiscal cliff” putting an end to bailouts, may make the state more aggressive. The expectation that a bank will never again need to be rescued in the future makes it an attractive bailout candidate in the present. Running out of money therefore is not an ideal commitment strategy. Political resolutions like “never again” are not only unrealistic but misdirected. Bailouts of systemically relevant banks are efficient not only ex post; they may also reduce moral hazard ex ante. Policy measure should focus on banks’ systemic importance, not on bailouts.

This paper analyzes the decision of firms to sell assets to fund investments (financing asset sales). For a sample of U.S. manufacturing firms during the 1971-2010 period, we document new stylized facts about financing asset sales that cannot be explained by traditional motives for selling assets, such as financial distress or financing constraints. Using a structural model of financing, investment, and macroeconomic risk, we show that financing asset sales attenuate the debt overhang problem, because asset sale financed investments imply lower wealth Transfers from equity to debt than otherwise identical but equity financed investments. This novel motive to reduce the debt overhang problem can explain how financing asset sales relate to firm characteristics and business cycles. We also confirm with simulated panels of model firms that are structurally similar to their empirical counterpart that they indeed feature the dynamic patterns of financing asset sales we observe in the data for real firms.

This paper combines the concept of market sidedness with excess option demand (changes in open interest) to solve the empirical challenge of separating directional from uninformed trading motives in widely available, unsigned options data. Our measure of options market sidedness persistently predicts the sign and strength of stock returns. Trading strategies conditional on the measure are highly profitable. For instance, when the measure indicates positive (negative) information, out-of-the-money calls (puts) generate returns of 27% (32%) over roughly four weeks. Risk-adjusted returns of a long-short equity strategy yield more than 2%. An increase in directionally informed demand predicts a decrease in option liquidity and increases in pricing inefficiency.

Early regulator interventions into problem banks is one of the key suggestions of Basel Committee on Banking Supervision. However, no guidance is given on their design. To fill this gap, we outline an incentive-based preventive supervision strategy that eliminates bad asset management in banks. Two supervision techniques are combined: temporary regulatory administration and random audits. Our design ensures good management without excessive supervision costs, through a gradual adjustment of supervision efforts to the bank's financial health. We also allow random audits to be delegated to an independent audit agency and show how to induce agency compliance with regulatory instructions in the least costly way.