This paper attempts to evaluate the effects of capital market imperfections on consumer behavior,... more This paper attempts to evaluate the effects of capital market imperfections on consumer behavior, on the basis of cross-sectional Italian data. We evaluate the difference between desired and observed consumption using a technique proposed by Hayashi. We find that in Italy borrowing constraints are more severe than in the United States, and that they are more stringent for young households, non-home-owners, the unemployed and consumers living in the Southern regions.
The Italian saving rate has exhibited large variability since World War 11, with a trend decline ... more The Italian saving rate has exhibited large variability since World War 11, with a trend decline in the past two decades, following very high levels in the fifties and sixties. Since tax incentives and social security arrangements are potentially important determinants of private and national saving, it is natural to consider whether changes in the tax code and in the social security system have contributed to the changes in the Italian saving rate. For instance, is the decline due to reforms in the taxation of capital income or to the transition ...
ABSTRACT Laws are costly to enforce. We explore the implications of this principle in a model whe... more ABSTRACT Laws are costly to enforce. We explore the implications of this principle in a model where the design of the laws and their enforcement are determined jointly. A benevolent government trades off the benefit of a stricter legal standard with the cost of its enforcement. Therefore, legal standards and enforcement are complements, and increase in aggregate wealth. If bureaucrats are corruptible, the optimal legal standard is lower. With a self-interested government legal standards may be increasing in corruption, according to the "toll-booth view" International evidence on environmental regulation shows that standards are correlated positively with enforcement and negatively with corruption.
According to conventional wisdom, a fiscal consolidation is likely to contract real aggregate dem... more According to conventional wisdom, a fiscal consolidation is likely to contract real aggregate demand. It has often been argued, however, that this conclusion is misleading as it neglects the role of expectations of future policy: if the fiscal consolidation is read by the private sector as a signal that the share of government spending in GDP is being permanently reduced, households will revise upwards their estimate of their permanent income, and will raise current and planned consumption.
According to conventional wisdom, a fiscal consolidation is likely to contract real aggregate dem... more According to conventional wisdom, a fiscal consolidation is likely to contract real aggregate demand. It has often been argued, however, that this conclusion is misleading as it neglects the role of expectations of future policy: if the fiscal consolidation is read by the private sector as a signal that the share of government spending in GDP is being permanently reduced, households will revise upwards their estimate of their permanent income, and will raise current and planned consumption.
It is increasingly recognized that detailed analysis of microeconomic data can shed light on hous... more It is increasingly recognized that detailed analysis of microeconomic data can shed light on households' motivation for saving, discriminating between life-cycle motives, concern for future generations, the need to insure against income, health, and mortality risks, and the desire to acquire a house. Studies of household behavior have begun to develop along these lines in Italy, in particular drawing on the Survey of Household Income and Wealth conducted by the Bank of Italy.
When a customer can borrow from several banks, each of these may be uncertain about the customer'... more When a customer can borrow from several banks, each of these may be uncertain about the customer's total exposure, and therefore about his ability to repay. This uncertainty may be endogenously determined by the borrower's equilibrium behavior, or may arise from shocks to other banks'capital availability, when their loans are complementary because more than one bank is needed to e¢ ciently fund the project. The danger of overlending resulting from this uncertainty may result in ine¢ ciently scarce credit. Insofar as it makes lending safer, information sharing about seniority or debt exposure can raise investment and welfare. In our setting, information sharing has also pro-competitive e¤ects, as it makes easier to undercut competitors by eliminating the fear of overlending.
We analyze how the law and its enforcement affect equity market equilibrium. Improvements in the ... more We analyze how the law and its enforcement affect equity market equilibrium. Improvements in the legal system, while invariably associated with broader equity markets, have different effects on equity returns depending on the institutional change considered and on the degree of international stock market segmentation. The model is useful to interpret the results of recent empirical work, such as La and Lombardo and Pagano (1999). In particular, it can rationalize the observed cross-country pattern, whereby better institutions are associated both with broader equity markets and higher risk-adjusted returns on equity.
This paper analyses the coexistence of two markets for the same shares, a quote-driven market and... more This paper analyses the coexistence of two markets for the same shares, a quote-driven market and an order-driven market, as observed for example for the trading of continental shares on the London SEAQ International. The focus is on the trade-o¤ between the uncertain execution price faced by investors on an auction market and the implicit transaction cost represented by the spread in a dealer market. We obtain that those investors who desire to make large trades will prefer to trade with the dealer, while trades of smaller size will be carried out on the auction market. Moreover, we explicitly investigate the interrelations between the two markets showing that the pricing policy followed by a dealer depends on the conditions prevailing on the auction market. nar participants for very helpful comments. The views expressed herein are those of the authors and do not necessarily re ‡ect those of the Bank of Italy. F. C. Bagliano and A. Dalmazzo acknowledge …nancial support from the MURST 40% program.
Creditors often share information about their customers' credit record. Besides helping them to s... more Creditors often share information about their customers' credit record. Besides helping them to spot bad risks, this informational exchange acts as a disciplinary device. If creditors are known to exchange data about defaults, borrowers must consider that default on a current lender would disrupt their credit rating with all the other lenders. This raises their incentive to perform. But sharing more detailed information can reduce this disciplinary effect: when lenders only disclose past defaults, borrowers' incentives to perform may be greater than when lenders share all their information. In some instances, by "fine-tuning" the type and accuracy of the information shared, lenders can raise borrowers' incentives to their first-best level.
This paper studies effects of income-based and collateral borrowing constraints on wealth accumul... more This paper studies effects of income-based and collateral borrowing constraints on wealth accumulation and portfolios. We compare unconstrained and constrained behavior for different types of constraints and degrees of tightness. Income-based constraints can reduce or eliminate effects of earnings risk on wealth accumulation by constraining wealth adjustments to such risk. They can also reverse effects of risk aversion and of temperance on stockholding relative to those obtained in unconstrained models. Analogous results hold for collateral constraints, where risky assets play the dual role of portfolio component and of collateral. Thus, samples containing borrowing-constrained households are likely to underplay or even reverse the impact of risk aversion and of earnings risk expected on the basis of unconstrained models. This may help explain the failure of empirical studies to uncover sizeable precautionary effects on wealth and on portfolios. , 1999, Consumption and portfolio choice over the life-cycle, mimeo.
This paper attempts to evaluate the effects of capital market imperfections on consumer behavior,... more This paper attempts to evaluate the effects of capital market imperfections on consumer behavior, on the basis of cross-sectional Italian data. We evaluate the difference between desired and observed consumption using a technique proposed by Hayashi. We find that in Italy borrowing constraints are more severe than in the United States, and that they are more stringent for young households, non-home-owners, the unemployed and consumers living in the Southern regions.
The Italian saving rate has exhibited large variability since World War 11, with a trend decline ... more The Italian saving rate has exhibited large variability since World War 11, with a trend decline in the past two decades, following very high levels in the fifties and sixties. Since tax incentives and social security arrangements are potentially important determinants of private and national saving, it is natural to consider whether changes in the tax code and in the social security system have contributed to the changes in the Italian saving rate. For instance, is the decline due to reforms in the taxation of capital income or to the transition ...
ABSTRACT Laws are costly to enforce. We explore the implications of this principle in a model whe... more ABSTRACT Laws are costly to enforce. We explore the implications of this principle in a model where the design of the laws and their enforcement are determined jointly. A benevolent government trades off the benefit of a stricter legal standard with the cost of its enforcement. Therefore, legal standards and enforcement are complements, and increase in aggregate wealth. If bureaucrats are corruptible, the optimal legal standard is lower. With a self-interested government legal standards may be increasing in corruption, according to the "toll-booth view" International evidence on environmental regulation shows that standards are correlated positively with enforcement and negatively with corruption.
According to conventional wisdom, a fiscal consolidation is likely to contract real aggregate dem... more According to conventional wisdom, a fiscal consolidation is likely to contract real aggregate demand. It has often been argued, however, that this conclusion is misleading as it neglects the role of expectations of future policy: if the fiscal consolidation is read by the private sector as a signal that the share of government spending in GDP is being permanently reduced, households will revise upwards their estimate of their permanent income, and will raise current and planned consumption.
According to conventional wisdom, a fiscal consolidation is likely to contract real aggregate dem... more According to conventional wisdom, a fiscal consolidation is likely to contract real aggregate demand. It has often been argued, however, that this conclusion is misleading as it neglects the role of expectations of future policy: if the fiscal consolidation is read by the private sector as a signal that the share of government spending in GDP is being permanently reduced, households will revise upwards their estimate of their permanent income, and will raise current and planned consumption.
It is increasingly recognized that detailed analysis of microeconomic data can shed light on hous... more It is increasingly recognized that detailed analysis of microeconomic data can shed light on households' motivation for saving, discriminating between life-cycle motives, concern for future generations, the need to insure against income, health, and mortality risks, and the desire to acquire a house. Studies of household behavior have begun to develop along these lines in Italy, in particular drawing on the Survey of Household Income and Wealth conducted by the Bank of Italy.
When a customer can borrow from several banks, each of these may be uncertain about the customer'... more When a customer can borrow from several banks, each of these may be uncertain about the customer's total exposure, and therefore about his ability to repay. This uncertainty may be endogenously determined by the borrower's equilibrium behavior, or may arise from shocks to other banks'capital availability, when their loans are complementary because more than one bank is needed to e¢ ciently fund the project. The danger of overlending resulting from this uncertainty may result in ine¢ ciently scarce credit. Insofar as it makes lending safer, information sharing about seniority or debt exposure can raise investment and welfare. In our setting, information sharing has also pro-competitive e¤ects, as it makes easier to undercut competitors by eliminating the fear of overlending.
We analyze how the law and its enforcement affect equity market equilibrium. Improvements in the ... more We analyze how the law and its enforcement affect equity market equilibrium. Improvements in the legal system, while invariably associated with broader equity markets, have different effects on equity returns depending on the institutional change considered and on the degree of international stock market segmentation. The model is useful to interpret the results of recent empirical work, such as La and Lombardo and Pagano (1999). In particular, it can rationalize the observed cross-country pattern, whereby better institutions are associated both with broader equity markets and higher risk-adjusted returns on equity.
This paper analyses the coexistence of two markets for the same shares, a quote-driven market and... more This paper analyses the coexistence of two markets for the same shares, a quote-driven market and an order-driven market, as observed for example for the trading of continental shares on the London SEAQ International. The focus is on the trade-o¤ between the uncertain execution price faced by investors on an auction market and the implicit transaction cost represented by the spread in a dealer market. We obtain that those investors who desire to make large trades will prefer to trade with the dealer, while trades of smaller size will be carried out on the auction market. Moreover, we explicitly investigate the interrelations between the two markets showing that the pricing policy followed by a dealer depends on the conditions prevailing on the auction market. nar participants for very helpful comments. The views expressed herein are those of the authors and do not necessarily re ‡ect those of the Bank of Italy. F. C. Bagliano and A. Dalmazzo acknowledge …nancial support from the MURST 40% program.
Creditors often share information about their customers' credit record. Besides helping them to s... more Creditors often share information about their customers' credit record. Besides helping them to spot bad risks, this informational exchange acts as a disciplinary device. If creditors are known to exchange data about defaults, borrowers must consider that default on a current lender would disrupt their credit rating with all the other lenders. This raises their incentive to perform. But sharing more detailed information can reduce this disciplinary effect: when lenders only disclose past defaults, borrowers' incentives to perform may be greater than when lenders share all their information. In some instances, by "fine-tuning" the type and accuracy of the information shared, lenders can raise borrowers' incentives to their first-best level.
This paper studies effects of income-based and collateral borrowing constraints on wealth accumul... more This paper studies effects of income-based and collateral borrowing constraints on wealth accumulation and portfolios. We compare unconstrained and constrained behavior for different types of constraints and degrees of tightness. Income-based constraints can reduce or eliminate effects of earnings risk on wealth accumulation by constraining wealth adjustments to such risk. They can also reverse effects of risk aversion and of temperance on stockholding relative to those obtained in unconstrained models. Analogous results hold for collateral constraints, where risky assets play the dual role of portfolio component and of collateral. Thus, samples containing borrowing-constrained households are likely to underplay or even reverse the impact of risk aversion and of earnings risk expected on the basis of unconstrained models. This may help explain the failure of empirical studies to uncover sizeable precautionary effects on wealth and on portfolios. , 1999, Consumption and portfolio choice over the life-cycle, mimeo.
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Papers by Marco Pagano