Wealth Endowments Research Articles

The Contested Role of Investment Consultants: Ambiguity, Contract, and Innovation in Financial Institutions

The global financial crisis and its aftermath put into sharp relief the structure and performance of the global financial services industry. Questions have been raised as to what intermediaries individually and collectively add to the production of investment returns and social welfare in general. In this paper, we look at the roles and responsibilities of investment consultants in relation to asset owners of various types, including pension funds, sovereign wealth funds, endowments, and family offices. Focusing upon the relationship between investment consultants and clients, it is suggested that this relationship is characterised by ambiguity; there is a lack of clarity as to the precise roles and responsibilities of both parties. This argument is developed by reference to a set of three prototypical pension funds, distinguished by asset size — a proxy for capabilities and resources. It is argued that ambiguity can be of benefit to both parties. But ambiguity can impose costs upon clients, unable or unwilling to remake their relationships with intermediaries. Our paper highlights instances of innovation, and the ways in which these relationships have been redrawn so as to respond to the challenges of operating in global financial markets.

Democratization and Barriers to Entry in a Two-Dimensional Voting Model

We propose a simple quality-ladder model with heterogeneous agents differing in their skills and wealth endowment to explain the persistence of barriers to entry in new democracies. In the model agents vote for a rate of redistribution and for the level of barriers to entry, which protect the incumbent firms from competition with new entrants. We show that even if a society democratizes, under certain conditions this leads only to the rise of redistribution, rather than to the elimination of barriers to entry. We show that this argument is particularly relevant for countries with a low level of human capital and high inequality in incomes and in skills.

Correlated leverage and its ramifications

Abstract This paper develops a theory in which housing prices, the capital structures of banks (mortgage lenders) and the capital structures of mortgage borrowers are all endogenously determined in equilibrium. There are four main results. First, leverage is a “positively correlated” phenomenon in that high leverage among borrowers is positively correlated with high leverage among banks, and higher house prices lead to higher leverage for both. The intuition is that first-time homebuyers with fixed wealth endowments must borrow more to buy more expensive homes, whereas higher current house prices rationally imply higher expected future house prices and therefore higher collateral values on bank loans, inducing banks to be more highly levered. Second, higher bank leverage leads to greater house price volatility in response to shocks to fundamental house values. Third, a bank’s exposure to credit risk depends not only on its own leverage but also on the leverage decisions of other banks. Fourth, positive fundamental shocks to house prices dilute financial intermediation by reducing banks’ pre-lending screening, and this reduction in bank screening further increases house prices. Empirical and policy implications of the analysis are drawn out, and empirical evidence is provided for the first two main results. The key policy implications are that greater geographic diversification by banks, tying mortgage tax exemptions to the duration of home ownership, and increasing bank capital requirements when borrower leverage is high can help reduce house price volatility.

Confronting Inter-Regional Disparities in Nigeria

Disparities in endowments of agricultural, mineral and commercial wealth across Nigeria’s six geopolitical zones determine the rates at which the different regions can grow. Economic activities and growth are concentrated in four regions, while the remaining two regions are largely excluded from the growth processes. This calls for urgent efforts to make economic growth more inclusive. Investing in fast and efficient rail links between rich and poor regions is suggested as a win-win national re-distributive strategy that could bring resource-poor regions closer to needful inputs, ensure benefits of growth are more evenly distributed across regions without hurting any of the resource-rich regions, ultimately eliminate inter-regional growth disparities, and ensure the peaceful coexistence that is required to sustain growth. Nigeria needs a strong national economic intelligence apparatus like the defunct National Economic Intelligence Committee (NEIC) to, among other things, provide the foresight required henceforth to ensure that regional growth divergence is prevented rather than cured.

Correlated Leverage and its Ramifications

This paper develops a theory in which housing prices, the capital structures of banks that make mortgage loans and the capital structures of borrowers who take these loans are all endogenously determined in equilibrium. There are four main results. First, leverage is a phenomenon in that high leverage among borrowers is positively correlated with high leverage among banks. Both borrower and bank leverage are higher when house prices are higher. First-time homebuyers with fixed wealth endowments must borrow more to buy more expensive homes, whereas higher current house prices rationally imply higher expected future house prices and therefore higher collateral values, inducing banks to be more highly levered. Second, higher bank leverage leads to greater volatility of house prices in response to shocks to fundamental house values. Third, a bank's exposure to credit risk depends not only on its own leverage but also on the leverage decisions of other banks. Fourth, positive fundamental shocks to house prices dilute financial intermediation by reducing banks' pre-lending screening, and this reduction in bank screening further increases house prices. Empirical and policy implications of the analysis are drawn out, and empirical evidence is provided for the first two predictions. The key policy implications are that greater geographic diversification by banks, tying mortgage tax exemptions to the duration of home ownership, and increasing bank capital requirements when borrower leverage is high can help reduce house price volatility.

The role of credit in enhancing drought resilience in agriculture

Credit constraints can undermine livelihood sustenance strategies of farmers faced with prolonged droughts. Marginal farmers with low wealth endowments could be especially vulnerable. The model developed in this paper explores the role of credit in enhancing long-term drought resilience. When repeated droughts increase reliance upon groundwater resources, credit availability may promote or undermine groundwater sustainability. Timely availability of credit can be used for water-saving technology adoption and towards maintaining minimum consumption levels during drought years. It is demonstrated here that high costs of credit coupled with a high risk of repeated droughts occurring in the future could be detrimental to groundwater sustainability. This is counter to the earlier findings in the literature that cheap credit could be damaging to groundwater sustainability. The duration to credit maturity also has a bearing on farmers’ groundwater extraction strategies and hence there could be a role for credit granting financial institutions in influencing sustainable outcomes. Specifically, medium-term loans have a better effect on groundwater sustainability as compared to long-term loans.

Redistribution and the Political Support of Free Entry Policy in the Schumpeterian Model with Heterogenous Agents

We consider the problem of finding sufficient conditions for political support of liberal, growth-enhancing policy in a quality-ladders model with heterogeneous agents differing in their endowment of wealth and skills. The policy set is two-dimensional: Agents vote for the level of redistribution as well as for the level of entry barriers preventing the creation of more efficient firms. We show that under the majority voting rule there are three possible stable political outcomes: full redistribution and low barriers to entry (liberal order), high redistribution and high barriers to entry (corporatism). We show that key variables determining the political outcome are the expected gain from technological adoption, the ratio of total profits to total wages, and the skewness of human capital distribution.

The Bind that Ties: Socioemotional Wealth Preservation in Family Firms

A growing body of research shows that family firms are different from other organizations in significant ways. In this paper we review this literature by examining how family firms differ from nonfamily firms along five broad categories of managerial decisions. These categories encompass a set of key organizational choices concerning management processes, firm strategies, corporate governance, stakeholder relations and business venturing. We argue that socioemotional wealth or affective endowment of family owners explain many of these choices. We also examine some contingency factors (namely family stage, firm size, firm hazard, and the presence of nonfamily shareholders) that moderate the influence of socioemotional wealth preservation as a point of reference when making managerial decisions in family firms. Lastly, we explore the firm performance consequences of family ownership.

Může přerozdělování posílit konkurenceschopnost ekonomiky?

The article contests an argument that the creation of a capital market in educational "human capital" and subsequent voluntary transactions on this market are sufficient to create equal opportunities in education, consequently reducing the income premium enjoyed by households with higher initial wealth endowment end eliminating deadweight detriments to efficiency caused by unequal household budget constraints. The counterargument is based on game-theoretical model developed in Bowles 2004. The inevitable incompleteness of contracts results in allocation inefficiency: agents with above average wealth endowment are able to finance larger projects, and/or projects of worse than average quality, while agents with insufficient initial wealth endowment are excluded from the financial market. This inefficiency can be attenuated only by redistribution enforced by the government. The article concludes with a discussion of the general relationship between equality (redistribution) and efficiency.

Abdicating Responsibility: The Deceits of Fisheries Policy

AbstractThe imperiled status of global fish stocks offers clear evidence of the comprehensive failure of national governments to provide coherent management to protect those stocks. The universal policy response to this failure seems to consist of nothing more imaginative than the free gifting to the commercial fishing sector of permanent endowments of income and wealth under the utopian claims associated with individual transferable quotas (ITQs). It now seems that the fishing industry is to be entrusted to become exemplary stewards, to become efficient, to maximize resource rent, to stop racing for fish, and to make society better off. These exultant promises are rendered false by the incoherent models from fisheries economics that are confused about the essential concepts of:

Factors determining the use of botanical insect pest control methods by small-holder farmers in the Lake Victoria basin, Kenya

A farm survey was conducted in three representative administrative districts of the Lake Victoria Basin (LVB), Kenya to document farmers’ indigenous knowledge and the factors that influence the use of botanicals instead of synthetic insecticides in insect pest management. A total of 65 farm households were randomly sampled using stratified sampling procedure. The maximum likelihood log model was used to determine factors that influence use of botanical and synthetic insect pest control methods (PCM). Results revealed that female gender as household head (HH) and age significantly (P < .001) increased the likelihood of a household using botanical PCM in the field by 0.15 and 0.021, respectively. In storage, female gender and severity of pest infestation significantly (P < .001) increased the probability of a household using botanical insecticide by 0.814 and 0.738, respectively. On the contrary, education of HH (0.342) and ownership of title to land (0.512) significantly (P < .001) reduced the likelihood of using botanical PCM in the field, while traditional rank (0.910) and cash rank (0.744) of the crops reduced the likelihood of using botanical insecticides in the store. With respect to synthetic pesticides, gender (3.407), area cultivated (0.295) and expected yield (5.315) significantly (P < .001) reduced likelihood of their use in the field, while food rank (3.967) reduced the probability of use in storage. In storage, female gender, crop type, food and traditional rank of crops were also the most important factors determining the use of botanical control methods. In conclusion, the study established that female gender, literacy levels, wealth endowments in form of land and old age are key determinants of botanical insecticides use in small-holder farming systems in the LVB, Kenya. It is recommended that the Government of Kenya enacts policies that empower youth and female gender economically in subsistence farming with the aim of improving their educational levels and farming skills to modernize agriculture among the rural communities. Key words: Botanical, synthetic pesticide, insects, pest control method, determinants, small-holder farmers.

THE DYNAMICS OF WEALTH INEQUALITY IN A SIMPLE RAMSEY MODEL: A NOTE ON THE ROLE OF PRODUCTION FLEXIBILITY

It has been shown that the Ramsey growth model with agents that differ in their initial wealth endowments is compatible with a wide range of distributional outcomes, yet it is difficult to characterize under which circumstances the distribution of wealth becomes more or less unequal. In this note, we characterize the steady state distribution of wealth and compare it to the initial distribution, obtaining analytical conditions for one to be more skewed than the other. We show that whether wealth inequality increases or decreases during the transition to the steady state depends on simple and intuitive conditions on parameter values. Standard values for these parameters indicate that it is more likely that wealth inequality decreases as the economy accumulates capital.

Correlated Leverage and Its Ramifications

This paper develops a theory in which housing prices, the capital structures of banks that make mortgage loans and the capital structures of borrowers who take these loans are all endogenously determined in equilibrium. There are four main results. First, leverage is a "positively correlated" phenomenon in that high leverage among borrowers is positively correlated with high leverage among banks. Both borrower and bank leverage are higher when house prices are higher. First-time homebuyers with fixed wealth endowments must borrow more to buy more expensive homes, whereas higher current house prices rationally imply higher expected future house prices and therefore higher collateral values, inducing banks to be more highly levered. Second, higher bank leverage leads to greater volatility of house prices in response to shocks to fundamental house values. Third, a bank's exposure to credit risk depends not only on its own leverage but also on the leverage decisions of other banks. Fourth, positive fundamental shocks to house prices dilute financial intermediation by reducing banks' pre-lending screening, and this reduction in bank screening further increases house prices. Empirical and policy implications of the analysis are drawn out, and empirical evidence is provided for the first two predictions. The key policy implications are that greater geographic diversification by banks, tying mortgage tax exemptions to the duration of home ownership, and increasing bank capital requirements when borrower leverage is high can help reduce house price volatility.

Origin of the Phenomenon of Plenty

The retrospective overview of the Paradox of Plenty over different regions of the globe effectuated in this research covers some nations of Europe as well as South and North America from medieval times to the present. The advent of prosperous times for Spaniards and the decline of the Spanish Empire are associated with the discovery of abundant precious metals in the New World, specifically gold and silver. Among Latin American nations economic implications of the Phenomenon of Plenty were manifested in: colonial Mexico which experienced silver boom in 1770-1800; post-colonial Colombian Caribbean where flourishing banana cultivation was crowded out by fostering of coffee production in 1910-1950; and Colombia which perceived repercussions of the windfall of coffee boom in 1975-1980. The Nordic countries of Europe displayed decay of non/less-booming sectors, as well as associated effects for the whole national economy, resulting from their endowment and use of natural wealth: Iceland due to enormous fish resources, Norway because of possessing huge oil deposits, and Finland because of its abundant forests.

DYNAMICS OF THE CONSUMPTION–CAPITAL RATIO, THE SAVING RATE, AND THE WEALTH DISTRIBUTION IN THE NEOCLASSICAL GROWTH MODEL

The paper utilizes a common approach to derive sufficient conditions for strictly monotonic behavior of three ratios along the transition to the steady state in the Ramsey–Cass–Koopmans model: the consumption–capital ratio, the consumption–output ratio (and the saving rate), and the consumption–wage ratio. These conditions are then applied to derive additional results on the transitional dynamics of the distribution of wealth in the model (when individual consumers are differentiated by their initial wealth endowments).

Endogenous Persistent Inequality

The purpose of this paper is to demonstrate that inherited human capital is a powerful vector of inequality formation and persistence, irrespective of its links with financial wealth endowment. This paper argues that the agents who inherit a low level of human capital bear a greater utility cost in their educational investment and that there are different profiles of returns on human capital within the economy. These two arguments are sufficient to generate an endogenous formation of workers' and entrepreneurs' groups and a continuum of steady states with inequality. Allowing for self-employment in the model generates the possibility of equality at equilibrium in addition to the inequality equilibrium with the emergence of a middle class.

Strong Versus Standard Property Entitlements: Toward a New Theory of Legal Entitlements

Strong Versus Standard Property Entitlements: Toward a New Theory of Legal Entitlements

Keeping Up With the Joneses in a Non-Symmetric Equilibrium

This paper studies the asset pricing and portfolio choice implications of keeping up with the Joneses preferences. In terms of portfolio choice, we provide sufficient conditions on the utility function under which no portfolio bias can arise across agents in equilibrium. Regarding asset prices, we find that under Joneses behavior asset prices are a function of the economy's aggregate consumption, the agents preference parameters, the wealth endowment distribution and the weighting across agents in the Joneses definition. We present necessary and sufficient conditions such that equilibrium prices are only a function of aggregate wealth. Non-financial, non-diversifiable income is introduced in the model. In the presence of Joneses behavior, an under-diversified equilibrium emerges where investors will bias their portfolios towards the financial assets that better hedge their exposure to the non-financial income risk.

The impact of keeping up with the Joneses behavior on asset prices and portfolio choice

This paper studies the asset pricing and portfolio choice implications of keeping up with the Joneses preferences. In terms of portfolio choice, we provide sufficient conditions on the utility function under which no portfolio bias can arise across agents in equilibrium. Regarding asset prices, we find that under Joneses behavior asset prices are a function of the economy's aggregate consumption, the agents preference parameters, the wealth endowment distribution and the weighting across agents in the Joneses definition. We present necessary and sufficient conditions such that equilibrium prices are only a function of aggregate wealth. Non-financial, non-diversifiable income is introduced in the model. In the presence of Joneses behavior, an under-diversified equilibrium emerges where investors will bias their portfolios towards the financial assets that better hedge their exposure to the non-financial income risk.

Severity of illness and the welfare effects of moral hazard

The extent to which the moral hazard caused by health insurance represents economic inefficiency has been the subject of much debate. This paper incorporates health status in a model of moral hazard, and finds that seriously ill patients are likely to exhibit greater moral hazard than healthier patients but the proportion of moral hazard that is inefficient declines with the severity of illness. Because of these competing tendencies, the cost of resource misallocation is parabolic in the severity of illness. The effect of the consumer's initial wealth endowment is also considered.