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I analyze a critical illness insurance in a consumption-investment model over the life cycle. I solve a model with stochastic mortality risk and health shock risk numerically. These shocks are interpreted as critical illness and can negatively affect the expected remaining lifetime, the health expenses, and the income. In order to hedge the health expense effect of a shock, the agent has the possibility to contract a critical illness insurance. My results highlight that the critical illness insurance is strongly desired by the agents. With an insurance profit of 20%, nearly all agents contract the insurance in the working stage of the life cycle and more than 50% of the agents contract the insurance during retirement. With an insurance profit of 200%, still nearly all working agents contract the insurance, whereas there is little demand in the retirement stage.
I numerically solve realistically calibrated life cycle consumption-investment problems in continuous time featuring stochastic mortality risk driven by jumps, unspanned labor income as well as short-sale and liquidity constraints and a simple insurance. I compare models with deterministic and stochastic hazard rate of death to a model without mortality risk. Mortality risk has only minor effects on the optimal controls early in the life cycle but it becomes crucial in later years. A diffusive component in the hazard rate of death has no significant impact, whereas a jump component is desired by the agent and influences optimal controls and wealth evolution. The insurance is used to ensure optimal bequest such that there is no accidental bequest. In the absence of the insurance, the biggest part of bequest is accidental.
We explore the sources of household balance sheet adjustment following the collapse of the housing market in 2006. First, we use microdata from the Federal Reserve Board’s Senior Loan Officer Opinion Survey to document that banks cumulatively tightened consumer lending standards more in counties that experienced a house price boom in the mid-2000s than in non-boom counties. We then use the idea that renters, unlike homeowners, did not experience an adverse wealth shock when the housing market collapsed to examine the relative importance of two explanations for the observed deleveraging and the sluggish pickup in consumption after 2008. First, households may have optimally adjusted to lower wealth by reducing their demand for debt and implicitly, their demand for consumption. Alternatively, banks may have been more reluctant to lend in areas with pronounced real estate declines. Our evidence is consistent with the second explanation. Renters with low risk scores, compared to homeowners in the same markets, reduced their levels of nonmortgage debt and credit card debt more in counties where house prices fell more. The contrast suggests that the observed reductions in aggregate borrowing were more driven by cutbacks in the provision of credit than by a demand-based response to lower housing wealth.
This paper solves a dynamic model of households' mortgage decisions incorporating labor income, house price, inflation, and interest rate risk. It uses a zero-profit condition for mortgage lenders to solve for equilibrium mortgage rates given borrower characteristics and optimal decisions. The model quantifies the effects of adjustable vs. fixed mortgage rates, loan-to-value ratios, and mortgage affordability measures on mortgage premia and default. Heterogeneity in borrowers' labor income risk is important for explaining the higher default rates on adjustable-rate mortgages during the recent US housing downturn, and the variation in mortgage premia with the level of interest rates.
The paper analyses the relationship between deposit insurance, debt-holder monitoring, bank charter values, and risk taking for European banks. Utilising cross-sectional and time series variation in the existence of deposit insurance schemes in the EU, we find that the establishment of explicit deposit insurance significantly reduces the risk taking of banks. This finding stands in contrast to most of the previous empirical literature. It supports the hypothesis that in the absence of deposit insurance, European banking systems have been characterised by strong implicit insurance operating through the expectation of public intervention at times of distress. Hence the introduction of an explicit system may imply a de facto reduction in the scope of the safety net. This finding provides a new perspective on the effects of deposit insurance on risk taking. Unless the absence of any safety net is credible, the introduction of deposit insurance serves to explicitly limit the safety net and, hence, moral hazard. We also test further hypotheses regarding the interaction between deposit insurance and monitoring, charter values and "too-big-to-fail." We find that banks with lower charter values and more subordinated debt reduce risk taking more after the introduction of explicit deposit insurance, in support of the notion that charter values and subordinated debt may mitigate moral hazard. Finally, large banks (as measured in relation to the banking system as a whole) do not change their risk taking in response to the introduction of deposit insurance, which suggests that the introduction of explicit deposit insurance does not mitigate "too-big-to-fail" problems.
This paper uses the co-incidence of extreme shocks to banks’ risk to examine within country and across country contagion among large EU banks. Banks’ risk is measured by the first difference of weekly distances to default and abnormal returns. Using Monte Carlo simulations, the paper examines whether the observed frequency of large shocks experienced by two or more banks simultaneously is consistent with the assumption of a multivariate normal or a student t distribution. Further, the paper proposes a simple metric, which is used to identify contagion from one bank to another and identify “systemically important” banks in the EU.
Using a normalized CES function with factor-augmenting technical progress, we estimate a supply-side system of the US economy from 1953 to 1998. Avoiding potential estimation biases that have occurred in earlier studies and putting a high emphasis on the consistency of the data set, required by the estimated system, we obtain robust results not only for the aggregate elasticity of substitution but also for the parameters of labor and capital augmenting technical change. We find that the elasticity of substitution is significantly below unity and that the growth rates of technical progress show an asymmetrical pattern where the growth of laboraugmenting technical progress is exponential, while that of capital is hyperbolic or logarithmic.
Recent empirical studies on the inflation-growth-relationship underline that inflation has negative growth effects already under relatively modest rates. Most contributions to monetary growth theory, however, have difficulties in explaining such a pattern. It is shown in this paper that this problem can be overcome by establishing a link between monetary instability and the aggregate elasticity of factor substitution. Several microeconomic justifications can be found for a negative influence of inflation on factor substitution. It turns out that already in a simple neoclassical monetary growth model this effect is usually strong enough to question the superneutrality benchmark result in the steady state and to dominate all potential positive effects of inflation along the convergence path. In a more general perspective the paper contributes to a better integration of institutional change in aggregate models of economic growth.
This paper explores the various personal and intellectual links between Edmund Husserl, Rudolf and Walter Eucken. Our interdisciplinary approach gives an insight into Husserl’s transcendental phenomenology, Walter Eucken’s Ordoliberalism as well as in the interdependency between phenomenology and economics for which Rudolf Eucken’s philosophy of intellectual life plays an important role. Particular affiliations between phenomenology and economics can be found in the following topics: epistemology, the idea of man, the comprehension of liberty and the importance of legal or social orders, institutional rules and frameworks of regulations.
The aim of the following paper is to examine the complementarities (and divergences) between the paleoliberal Adam Smith and the ordoliberal Walter Eucken. Following the hypothesis that Smith is among the forerunners and predecessors of Ordoliberalism and Social Market Economy, we try to provide the reader with an insight into the socio-political philosophy of Smith and Eucken pointing at similarities and differences alike. Therefore, we base our examination on a systematic primary source text analysis comparing the books and essays written by Eucken and Smith. The paper tackles these questions in two main steps: The first part highlights Smith's and Eucken's complex and interdependent system of natural liberty. The second section reviews Smith's and Eucken's philosophy of the state.
This paper analyzes the inherent dangers of paternalist economic policies associated with the newly established economic sub-disciplines of behavioral economics, economic happiness research and economic psychology. While the authors in general welcome these sub-disciplines for enriching and critically evaluating mainstream economics – especially their criticism of the Homo oeconomicus-heuristic is of great value contributing to a more realistic idea of man –, the political-economic implications as well as inherent risks of paternalist economic policies should be received with concern and thus be subject to a critical review. The paper is structured as follows: In the first step, we recapitulate Kahneman’s, Thaler/Sunstein’s, and Layard’s versions of paternalism pointing at similarities and differences alike. We contrast libertarian or soft paternalism of behavioral economics (Thaler/Sunstein) and economic psychology (Kahneman) with (Layard’s) happiness economics and its hard paternalism. In the second step, we analyze the political and economic implications and consequences of paternalism. We give an overview of the main points of criticism of paternalism from a constitutional economics perspective. The Ordnungs- vs. Prozesspolitik argument is discussed as well as epistemological, political-economic or idea of man arguments. The paper ends with some concluding remarks.
Die Dissertation gliedert sich in zwei Teile – einen methodisch-wissenschaftstheoretischen bzw. biografisch-dogmenhistorischen und einen wirtschaftsethischen Bereich. Beide Abschnitte sind wechselseitig miteinander verzahnt. Im ersten Teil geht es vorwiegend um biografische und theoriegeschichtliche Fragestellungen. Der erste Aufsatz – On the Affiliation of Phenomenology and Ordoliberalism – beschäftigt sich mit dem wechselseitigen Einfluss von Husserl, Rudolf und Walter Eucken. Der erste Aufsatz – On the Affiliation of Phenomenology and Ordoliberalism – beschäftigt sich mit dem wechselseitigen Einfluss von Husserl, Rudolf und Walter Eucken. Dabei wird eine Drei-Ebenen-Unterscheidung vorgenommen: Einflüsse lassen sich demnach nicht nur auf der biografischen, sondern gleichfalls auf der wissenschaftstheoretischen und sozialphilosophischen Ebene ausmachen. Dennoch ist Vorsicht geboten, denn der Einfluss der Phänomenologie auf das Werk Walter Euckens sollte nicht überbetont werden, in dem Sinne, dass man Eucken als angewandten Phänomenologen und die Husserlsche Phänomenologie als Metatheorie des Ordoliberalismus darstellt. Vielmehr ist von einem eklektischen Denkmuster in den Schriften Euckens auszugehen, das maßgeblich vom Werk seines Vaters beeinflusst wurde (d.i., Walter Eucken als Rudolf Euckenianer) – und dies sowohl im Bereich der Wissenschaftstheorie und Methodik als auch im Kontext des sozialphilosophischen Topos der Gesellschaftskrisis. Der zweite Aufsatz – An Ordoliberal Interpretation of Adam Smith – geht den Parallelen im Denken Adam Smiths und Euckens nach. Auffallend ist, dass Eucken Smith meist im Zusammenhang mit seiner Kritik am laissez faire- respektive Paläoliberalismus zitiert. Dabei ist seine Bezugnahme auf Smith von verzerrten Stereotypen geprägt – und dies obwohl es einige bemerkenswerte Parallelen nicht nur zwischen Eucken und Smith, sondern auch zwischen Smith und Kant gibt. Der Übergang vom sogenannten Paläo- bzw. klassischen Liberalismus hin zum Ordoliberalismus ist somit gradueller, nicht jedoch revolutionärer Art. Im Mittelpunkt des zweiten Hauptteils stehen wirtschaftsethische Themenstellungen, die eine große Affinität zum Forschungsprogramm des Exzellenzclusters 'Die Herausbildung normativer Ordnungen' aufweisen. Dabei geht es wesentlich um die Herausarbeitung des ethischen Gehalts und der stark normativen Komponenten des Ordoliberalismus. Die ersten Essays im zweiten Teilbereich der Dissertation beziehen sich primär auf Eucken und die Freiburger Schule. Die letzten beiden Aufsätze jedoch sind bestrebt, über Eucken hinauszugehen und den Ordoliberalismus i.e.S. um den Soziologischen Neoliberalismus bzw. den Wirtschafts- und Sozialhumanismus Rüstows und Röpkes zu erweitern. Die Aufsätze 'Über die normativen Implikationen des Ordoliberalismus für die moderne Wirtschaftsethik' und 'On the Economic Ethics of Walter Eucken' geben dem Leser einen Überblick über die Wirtschaftsethik der Freiburger Schule im Allgemeinen und Walter Euckens im Besonderen. Dabei wird insbesondere das ordoliberale Staats- sowie das (in der kantischen Tradition stehende) Freiheitsverständnis herausgearbeitet und der Versuch unternommen, Eucken für die moderne Wirtschaftsethik anschlussfähig zu machen. Als Ergebnis wird Euckens Ordoliberalismus, dem es um ein ausgewogenes Verhältnis von Eigeninteresse und Gemeinwohl und die Realisierung des Ideals einer funktionsfähigen und menschenwürdigen Gesellschaftsordnung geht, im Spannungsfeld von Homannscher Moralökonomik und Ulrichs Integrativer Wirtschaftsethik porträtiert. Ergänzt wird dieser Einblick in die ordoliberale Wirtschaftsethik durch das Kapitel 'Von Hayek and Ordoliberalism on Justice', das die Gerechtigkeitskonzeptionen Euckens, Rüstows und Röpkes mit derjenigen von von Hayek kontrastiert. Derart werden u.a. die Unterschiede zwischen Ordoliberalismus und Evolutorischem Liberalismus deutlich. Das Kapitel 'Individual versus Regulatory Ethics: An Economic-Ethical and Theoretical-Historical Analysis of German Neoliberalism' untersucht im Anschluss an Foucaults ‚Ambiguitätsthese‘ das Verhältnis von Individual- und Ordnungsethik und kommt zu dem Ergebnis, dass es die Besonderheit des Ordoliberalismus ist, eine weitreichende, integrative Einheit beider Ebenen vorzunehmen. Aufbauend auf der Unterscheidung von Individual- und Ordnungsethik werden im vorletzten Kapitel – 'Ordoliberalism and the Evolution of Norms' – schließlich die divergierenden Normengenese-Prozesse im Ordoliberalismus einer Analyse unterzogen. Das verblüffende Resultat lautet, dass im Ordoliberalismus zwei unterschiedliche Arten der Entstehung von Normen nebeneinander existieren – eine kulturell-evolutionäre und eine elitär-expertokratische. Mithilfe dieser Unterscheidung ist eine weitere Differenzierung zwischen von Hayek und dem Ordoliberalismus möglich. Das letzte Kapitel – Beyond Ordoliberalism? – fasst zentrale Kritikpunkte am Ordoliberalismus noch einmal zusammen und geht der Frage nach, inwiefern es realistisch erscheint, auf eine Renaissance eines aktualisierten Ordoliberalismus zu hoffen?
Eucken's writings are rich in content not only from an (constitutional) economic perspective but also from an economic and business ethics perspective – an often neglected perspective of the reception of German Ordoliberalism in general and the Freiburg School of Economics in particular. The paper gives a first insight into the ethical-normative thinking of Eucken, as one of the main representatives of Ordoliberalism, and explains Eucken’s conception of Social Market Economy as a functioning and humane order as well as Eucken’s Kantian understanding of freedom. To conclude the essay tries to classify Eucken’s Ordoliberalism as a part of the spectrum of modern economic and business ethics.
Wie lässt sich das anthropologische Fundament des Ordoliberalismus und der Sozialen Marktwirtschaft beschreiben? Welche Prämissen liegen ihm zugrunde? Ist ein derartiges Menschenbild überhaupt noch zeitgemäß? Welchen Gefahren ist es ausgesetzt und welche institutionellen Vorkehrungen lassen sich treffen? Diese und andere Fragen stehen im Mittelpunkt des nachfolgenden Essays. Dieser ist dabei wie folgt gegliedert: Das zweite Kapitel analysiert die anthropologischen Grundlagen des Ordoliberalismus. Ein Schwerpunkt liegt dabei auf dem kantischen ‚Programm der Freiheit als Autonomie‘. Das darauf folgende dritte Kapitel thematisiert mögliche Gefahrenpotenziale für eben jenes ordoliberale Menschenbild. Hierbei werden insbesondere die Vermachtung der Wirtschaft und die Instrumentalisierung und Funktionalisierung der Wissenschaft eingehender untersucht. Im vorletzten Kapitel schließlich werden die häufig vorgeschlagenen institutionellen Vorkehrungen kritisch evaluiert. Wichtige Beiträge hierzu stammen aus der Feder von Röpke (Clercs und Nobilitas naturalis) und Hayek (Zwei-Kammern-Verfassungsmodell).
Tagungsbericht des Workshops "Völkerrecht und Weltwirtschaft im 19. Jahrhundert. Die Internationalisierung der Ökonomie aus völkerrechts- und wirtschafts(theorie-)geschichtlicher Perspektive", der vom 3. bis 4. September 2009 in Frankfurt am Main stattfand. Veranstalter: Exzellenzcluster "Die Herausbildung normativer Ordnungen"; in Kooperation mit der Goethe Universität Frankfurt am Main; dem Max-Planck-Institut für europäische Rechtsgeschichte
As recent newspaper headlines show the topic of patents/patent laws is still heavily disputed. In this paper I will approach this topic from a theoretical-historical and history of economic thought-perspective. In this regard I will link the patent controversy of the nineteenth century with Walter Eucken’s Ordoliberalism – a German version of neoliberalism. My paper is structured as follows: The second chapter provides the reader with a historical introduction. At the heart of this paragraph are the controversy and discourse on patent laws in nineteenth century Europe as well as the pro and contra arguments presented by the anti-patent/free-trade movement respectively by the advocates of patent protection. The focus of my paper is on the struggle for the protection of inventions and innovations in nineteenth century Germany, since Walter Eucken, main representative of the Freiburg School of Law and Economics, picks up the counter-arguments presented in the national debate and in particular by the Kongress deutscher Volkswirthe. The third chapter deals intensively with the question whether patent laws are just ‘nonsense upon stilts’ from an ordoliberal perspective. Here, Eucken’s arguments against the current patent system are elaborated in great detail. The paper ends with a summary of my main findings.
2008/9 sees the 60th anniversary of the German economic and currency reform of June 20, 1948, and the adoption of the Grundgesetz on May 23, 1949, which committed the country to the ideals of a socially committed market economy. Both of these events are important points along the path taken by the Federal Republic of Germany to reach the system of a social market economy. Since the term, Social Market Economy is often used in several different contexts and sometimes to mean contradictory things, we must ask: what exactly does the term social market economy entail? What economic-ethical ideas and theories are behind it? This paper will trace the origins of the social market economy (chapter 2) and explain the central characteristics of the Freiburg School of Economics (chapter 3), one of the main pillars of the social market economy. Central to this paper is the oeuvre of Walter Eucken, one of the leading representatives of the ordoliberal Freiburg School. The aim is to identify socio-political factors of influence and inspiration on his theory of economic policy (chapter 4) and evaluate similarities to the works of Kant, Smith and other economic philosophers. Chapter 5 will seek to elucidate Eucken’s “Program of Liberty”. We shall also allow ourselves a slight diversion to elaborate on the parallels between this work and Kant’s understanding of freedom and autonomy. Chapter 6 deals with Eucken’s dual requirements of an economic and social order (i.e. functioning and humane socio-economic order). In chapter 7, we seek to answer – with considerable reference to Adam Smith – to what extent it can be assumed that self-interest and the common good are mutually compatible. This paper concludes with a few remarks about the topicality of ordoliberalism in relation to modern, German-speaking economic ethics (chapter 8).
Following Foucault's analysis of German Neoliberalism (Ordoliberalism) and his thesis of ambiguity, this paper introduces a two-level distinction between individual and regulatory ethics. In particular, its aim is to reassess the importance of individual ethics in the conceptual framework of Ordoliberalism. The individual ethics of Ordoliberalism is based on the heritage of Judeo-Christian values and the Kantian individual liberty and responsibility. The regulatory or formal-institutional ethics of Ordoliberalism which has so far received most attention on the contrary refers to the institutional and legal framework of a socio-economic order. By distinguishing these two dimensions of ethics incorporated in German Neoliberalism, it is feasible to distinguish different varieties of neoliberalism and to link Ordoliberalism to modern economic ethics.
June 4th, 2013 marks the formal launch of the third generation of the Equator Principles (EP III) and the tenth anniversary of the EPs – enough reasons for evaluating the EPs initiative from an economic ethics and business ethics perspectives. In particular, this essay deals with the following questions: What are the EPs and where are they going? What has been achieved so far by the EPs? What are the strengths and weaknesses of the EPs? Which necessary reform steps need to be adopted in order to further strengthen the EPs framework? Can the EPs be regarded as a role-model in the field of sustainable finance and CSR? The paper is structured as follows: The first chapter defines the term EPs and introduces the keywords related to the EPs framework. The second chapter gives a brief overview of the history of the EPs. The third chapter discusses the Equator Principles Association, the governing, administering, and managing institution behind the EPs. The fourth chapter summarizes the main features and characteristics of the newly released third generation of the EPs. The fifth chapter critically evaluates the EP III from an economic ethics and business ethics perspectives. The paper concludes with a summary of the main findings.
4 June 2013 marked the formal launch of the third generation of the Equator Principles (EP III) and the tenth anniversary of the EPs – enough reasons for evaluating the EPs initiative from an economic ethics and business ethics perspective. This chapter deals with the following questions: What has been achieved so far by the EPs? Which reform steps need to be adopted to further strengthen the EPs framework? Can the EPs be regarded as a role model in the field of sustainable finance and CSR? The first part explains the term EPs and introduces the keywords related to the EPs framework. The second part summarises the main characteristics of the newly-released third generation of the EPs. The third part critically evaluates EP III from an economic ethical and business ethics perspective. The chapter concludes with a summary of the main findings.
Variations and disparities between von Hayek and Ordoliberalism can be detected on diverse levels: 1. philosophy of science; 2. setting dissimilar priorities; 3. social philosophy; 4. genesis of norms; and, 5. notion of freedom. Therefore, it is possible to make an important distinction within neoliberalism itself, which contains at least two factions: von Hayek’s evolutionary liberalism, and German Ordoliberalism. The following essay not only takes the neoliberal separation of different varieties as granted; it proceeds further. It focuses on the topic of justice and elaborates the (slightly) differing conceptions of justice within neoliberalism. Thus, the specific contribution of the paper is that it adds a sixth dimension of differences (which is highly interconnected with the differing conceptions of genesis of norms). In this paper, I emphasize the (often neglected) subtle differences between von Hayek, Eucken, Röpke, and Rüstow, with special emphasis on their theories of justice. In this regard, I focus not only on Eucken and von Hayek; in addition, I include the concepts of justice developed by Rüstow and Röpke, as well, and, in consequence, broaden the perspective incorporating Eucken as a member of the Freiburg School of Law and Economics, and Rüstow and Röpke as representatives of Ordoliberalism in the wider sense. The paper tackles these topics in three steps. After briefly examining and discussing the existing literature and providing a literature overview on the decade-long debate on von Hayek and Ordoliberalism, I then describe von Hayek’s conception of commutative justice; particularly, justice of rules and procedures (rather than end-state justice). Then, I examine Eucken’s, Rüstow’s, and Röpke’s theories of justice, which consist of a mixture of commutative and distributive justice. Then, I draw a comparison between the ideas of justice developed by Eucken, Röpke, Rüstow, and von Hayek. The essay ends with a summary of my main findings.
Im Mittelpunkt des Gutachtens stehen die anthropologischen Grundlagen, das wirtschaftsethische Fundament und das Menschenbild der Sozialen Marktwirtschaft. Die Leitlinien des Wittenberg-Prozesses der Chemie-Sozialpartner dienen dabei als argumentative Grundstruktur. Ziel der Arbeit ist es, aufzuzeigen, dass die CSSA und der Wittenberg-Prozess auf den normativen und wirtschaftsethischen Prämissen der (originären) Sozialen Marktwirtschaft ruhen und die Sozialpartnerschaft der chemischen Industrie ein wichtiger Baustein ist auf dem Weg hin zu einer Neubegründung und Renaissance der Sozialen Marktwirtschaft vor dem Hintergrund der Globalisierung. Folgende Hypothesen sollen dabei eingehender untersucht werden: 1. Fundamental für die Wirtschaftsethik der Sozialen Marktwirtschaft ist die Unterscheidung von Individual, Unternehmens-und Ordnungsethik. 2. Das Freiheitsverständnis der Sozialen Marktwirtschaft enthält sowohl negative (im Sinne der Abwesenheit von Willkür und Zwang) als auch positive Momente (im Sinne von rationaler Selbstbestimmung und kantischer Autonomie). Darüber hinaus inkorporiert es die aus der Konstitutionenökonomik bekannten Prinzipien der Diskriminierungs und Privilegienfreiheit. 3. Das Gerechtigkeitsverständnis der Sozialen Marktwirtschaft ist synkretistisch und eklektisch; es verbindet kommutative mit distributiven Gerechtigkeitselementen. 4. Der Homo oeconomicus ist kein(!) Bestandteil der Wirtschaftsethik der Sozialen Marktwirtschaft. Diese weist vielmehr Parallelen zur Heuristik der Kulturellen Ökonomik – dem sogenannten Homo culturalis – auf. 5. Eine bedeutende Funktion innerhalb der Sozialen Marktwirtschaft kommt der Sozialpartnerschaft zu. Diese leistet einen wichtigen Beitrag zur Stärkung der sozioökonomischen Teilhabe und Inklusion auf der unternehmensethischen Ebene.
Freiburg School of Law and Economics, Freiburg (Lehrstuhl-)Tradition and the Genesis of Norms
(2014)
The paper analyzes the parallels and differences between the Freiburg School of Law and Economics represented by the works of Eucken (and Röpke) and the Freiburg (Lehrstuhl-)Tradition represented by the works of Hayek and Vanberg. The parallels are illustrated by making use of the constitutional economics concepts Ordnungspolitik (i.e., order of rules/choices over rules) as well as freedom of privileges and discrimination. The differences, which have received surprisingly little attention, include the following aspects: 1. philosophy of science and epistemology, 2. genesis of norms, and 3. political philosophy. The paper tackles these issues in three steps. The second chapter presents Vanberg’s constitutional economics theory with special emphasis on the concepts of citizen sovereignty and normative individualism. The third chapter reviews the ordoliberal concepts of science and the state which are – to a certain degree – elitist and expertocratic, that is, they rely to a considerable degree on intellectual experts (in particular, scientists) being part of the societal elite. The fourth chapter differentiates two kinds of genesis of norms: an evolutionary one and an elitist-expertocratic one allowing for a differentiation between Eucken’s and Röpke’s Ordoliberalism on the on the hand and Vanberg’s Hayekian -- and Buchanan-style constitutional economics approach on the other hand. The paper ends with a summary of the main findings.
SAFE Newsletter : 2014, Q1
(2014)
SAFE Newsletter : 2013, Q4
(2013)
In this paper, we study the effect of proportional transaction costs on consumption-portfolio decisions and asset prices in a dynamic general equilibrium economy with a financial market that has a single-period bond and two risky stocks, one of which incurs the transaction cost. Our model has multiple investors with stochastic labor income, heterogeneous beliefs, and heterogeneous Epstein-Zin-Weil utility functions. The transaction cost gives rise to endogenous variations in liquidity. We show how equilibrium in this incomplete-markets economy can be characterized and solved for in a recursive fashion. We have three main findings. One, costs for trading a stock lead to a substantial reduction in the trading volume of that stock, but have only a small effect on the trading volume of the other stock and the bond. Two, even in the presence of stochastic labor income and heterogeneous beliefs, transaction costs have only a small effect on the consumption decisions of investors, and hence, on equity risk premia and the liquidity premium. Three, the effects of transaction costs on quantities such as the liquidity premium are overestimated in partial equilibrium relative to general equilibrium.
This paper studies the life cycle consumption-investment-insurance problem of a family. The wage earner faces the risk of a health shock that significantly increases his probability of dying. The family can buy term life insurance with realistic features. In particular, the available contracts are long term so that decisions are sticky and can only be revised at significant costs. Furthermore, a revision is only possible as long as the insured person is healthy. A second important and realistic feature of our model is that the labor income of
the wage earner is unspanned. We document that the combination of unspanned labor income and the stickiness of insurance decisions reduces the insurance demand significantly. This is because an income shock induces the need to reduce the insurance coverage, since premia become less affordable. Since such a reduction is costly and families anticipate these potential costs, they buy less protection at all ages. In particular, young families stay away from life insurance markets altogether.
Banks' financial distress, lending supply and consumption expenditure : [version december 2013]
(2014)
The paper employs a unique identification strategy that links survey data on household consumption expenditure to bank level data in order to estimate the effects of bank financial distress on consumer credit and consumption expenditures. Specifically, we show that households whose banks were more exposed to funding shocks report significantly lower levels of non-mortgage liabilities compared to a matched sample of households. The reduced access to credit, however, does not result in lower levels of consumption. Instead, we show that households compensate by drawing down liquid assets. Only households without the ability to draw on liquid assets reduce consumption. The results are consistent with consumption smoothing in the face of a temporary adverse lending supply shock. The results contrast with recent evidence on the real effects of finance on firms' investment, where even temporary adverse credit supply shocks are associated with significant real effects.
This paper tests whether an increase in insured deposits causes banks to become more risky. We use variation introduced by the U.S. Emergency Economic Stabilization Act in October 2008, which increased the deposit insurance coverage from $100,000 to $250,000 per depositor and bank. For some banks, the amount of insured deposits increased significantly; for others, it was a minor change. Our analysis shows that the more affected banks increase their investments in risky commercial real estate loans and become more risky relative to unaffected banks following the change. This effect is most distinct for affected banks that are low capitalized.
We introduce a new measure of systemic risk, the change in the conditional joint probability of default, which assesses the effects of the interdependence in the financial system on the general default risk of sovereign debtors. We apply our measure to examine the fragility of the European financial system during the ongoing sovereign debt crisis. Our analysis documents an increase in systemic risk contributions in the euro area during the post-Lehman global recession and especially after the beginning of the euro area sovereign debt crisis. We also find a considerable potential for cascade effects from small to large euro area sovereigns. When we investigate the effect of sovereign default on the European Union banking system, we find that bigger banks, banks with riskier activities, with poor asset quality, and funding and liquidity constraints tend to be more vulnerable to a sovereign default. Surprisingly, an increase in leverage does not seem to influence systemic vulnerability.
We show that market discipline, defined as the extent to which firm specific risk characteristics are reflected in market prices, eroded during the recent financial crisis in 2008. We design a novel test of changes in market discipline based on the relation between firm specific risk characteristics and debt-to-equity hedge ratios. We find that market discipline already weakened after the rescue of Bear Stearns before disappearing almost entirely after the failure of Lehman Brothers. The effect is stronger for investment banks and large financial institutions, while there is no comparable effect for non-financial firms.
We analyze the equilibrium in a two-tree (sector) economy with two regimes. The output of each tree is driven by a jump-diffusion process, and a downward jump in one sector of the economy can (but need not) trigger a shift to a regime where the likelihood of future jumps is generally higher. Furthermore, the true regime is unobservable, so that the representative Epstein-Zin investor has to extract the probability of being in a certain regime from the data. These two channels help us to match the stylized facts of countercyclical and excessive return volatilities and correlations between sectors. Moreover, the model reproduces the predictability of stock returns in the data without generating consumption growth predictability. The uncertainty about the state also reduces the slope of the term structure of equity. We document that heterogeneity between the two sectors with respect to shock propagation risk can lead to highly persistent aggregate price-dividend ratios. Finally, the possibility of jumps in one sector triggering higher overall jump probabilities boosts jump risk premia while uncertainty about the regime is the reason for sizeable diffusive risk premia.
Advances in technology and several regulatory initiatives have led to the emergence of a competitive but fragmented equity trading landscape in the US and Europe. While these changes have brought about several benefits like reduced transaction costs, regulators and market participants have also raised concerns about the potential adverse effects associated with increased execution complexity and the impact on market quality of new types of venues like dark pools. In this article we review the theoretical and empirical literature examining the economic arguments and motivations underlying market fragmentation, as well as the resulting implications for investors' welfare. We start with the literature that views exchanges as natural monopolies due to presence of network externalities, and then examine studies which challenge this view by focusing on trader heterogeneity and other aspects of the microstructure of equity markets.
We present a thought-provoking study of two monetary models: the cash-in-advance and the Lagos and Wright (2005) models. We report that the different approach to modeling money — reduced-form vs. explicit role — neither induces theoretical nor quantitative differences in results. Given conformity of preferences, technologies and shocks, both models reduce to one difference equation. The equations do not coincide only if price distortions are differentially imposed across models. To illustrate, when cash prices are equally distorted in both models equally large welfare costs of inflation are obtained in each model. Our insight is that if results differ, then this is due to differential assumptions about the pricing mechanism that governs cash transactions, not the explicit microfoundation of money.
This paper summarizes the key proposals of the report by the Liikanen Commission. It starts with an explanation of a crisis narrative underlying the Report and its proposals. The proposals aim for a revitalization of market discipline in financial markets. The two main structural proposals of the Liikanen Report are: first, for large banks, the separation of the trading business from other parts of the banking business (the "Separation Proposal"), and the mandatory issuing of subordinated bank debt thought to be liable (the strict "Bail-in Proposal"). The credibility of this commitment to private liability is achieved by strict holding restrictions. The anticipated consequences of the introduction of these structural regulations for the financial industry and markets are addressed in a concluding part.
Ausgehend von einer Erläuterung der Kriseninterpretation (crisis narrative), wie sie in dem Bericht der Liikanen-Kommission zugrunde liegt, werden die nach Ansicht des Verfassers zentralen Vorschläge des Kommissionsberichts ausgewählt, vorgestellt und in den größeren Rahmen einer erneuerten Ordnungspolitik für die Finanzmärkte Europas eingeordnet. Die mit den Vorschlägen eng zusammenhängenden Reformelemente der Bankenunion werden in diesem Text bewusst ausgeklammert. Die beiden zentralen Strukturvorschläge des Liikanen-Berichts betreffen die Abspaltung der Handelsgeschäfte von dem Universalbankengeschäft für große, internationale Banken (der Trennbankenvorschlag), sowie die verpflichtende Emission nachrangigen, glaubwürdig haftenden Fremdkapitals (der strenge Bail-in Vorschlag). Glaubwürdigkeit der Haftungszusage wird durch strenge Halterestriktionen erreicht. Vorhersehbare Folgerungen einer Einführung dieser Strukturregeln für die Finanzindustrie und -märkte werden in einem abschließenden Teil angesprochen.
The financial crisis which started in 2007 has caused a tremendous challenge for monetary policy. The simple concept of inflation targeting has lost its position as state of the art. There is a debate on whether the mandate of a central bank should not be widened. And, indeed, monetary policy has been very accommodative in the last couple of years and central banks have modified their communication strategies by introducing forward guidance as a new policy tool. This paper addresses the consequences of these developments for the credibility, the reputation and the independence of central banks. It also comments on the recent debate among economists concerning the question whether the ECB's OMT program is compatible with its mandate.
Um den Teufelskreis sich wechselseitig verstärkender Banken- und Staatsschuldenkrisen zu durchbrechen, haben sich die europäischen Institutionen grundsätzlich dazu bekannt, eine Bankenunion zu schaffen. Der Dreh- und Angelpunkt der verfolgten Strategie liegt dabei darin, durch die Schaffung zentraler, d.h. supranationaler Auffangmechanismen die Ausfallrisiken von Banken und Staaten nachhaltig zu entkoppeln. Dabei ist zu beachten, dass gerade auch die einzelnen Elemente des institutionellen Reformpakets in ihrer Binnenstruktur so beschaffen sein müssen, dass vorhersehbare Ineffizienzen nicht dazu führen, dass Vorteile der Supranationalisierung aufgehoben oder gar in ihr Gegenteil verkehrt werden. Der vorliegende Beitrag diskutiert den Verordnungsentwurf der EU Kommission für einen Single Resolution Mechanism (SRM) vor dem Hintergrund dieser Forderung.
In der vierten Veranstaltung der „Gesprächsreihe zu Strukturreformen im europäischen Bankensek-tor“ diskutierte Dr. Elke König, Präsidentin der Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin), die Wiederherstellung privater Haftung und die zukünftige Rolle der Aufsicht, insbesondere im Hinblick auf die Vorschläge der Liikanen-Kommission.
König warnte, dass man systemische Risiken, die vor allem während der Finanzkrise zu Problemen geführt hätten, noch nicht im Griff habe. Sowohl die Bankenaufsicht als auch die Wissenschaft suche immer noch nach einer geeigneten Lösung dieses Problems. Systemische Risiken führen dazu, dass komplexe und stark vernetzte Institute von Staaten gestützt werden, wenn diese ins Straucheln gera-ten. In der Finanzkrise hatte dies zur Folge, dass Banken letztlich vom Steuerzahler gerettet wurden. Diesen Quasi-Insolvenzschutz systemrelevanter Institute müsse man aufheben, um Fehlanreize im Markt zu korrigieren, so König. Verantwortung und Haftung für unternehmerisches Handeln müssten wieder in einer Hand liegen, und zwar in der der Institute, seiner Eigner und Gläubiger.
König ist deshalb der Meinung, dass ein einheitlicher Abwicklungsmechanismus für Banken notwen-dig sei, der auch grenzüberschreitend wirke. Als einen wichtigen Bestandteil dieses Mechanismus nannte sie die Umsetzung eines breiten Bail-ins. Durch Bail-in werden Eigentümer und Gläubiger von Bankinstituten an einer Restrukturierung beteiligt. Eine Umwandlung von Fremdkapital in Eigenkapi-tal kann darüber hinaus dazu dienen, ein Brückeninstitut mit Kapital auszustatten.
Zur konkreten Ausgestaltung von Bail-in-Instrumenten gibt es unterschiedliche Ansätze: Die Liikanen-Kommission plädierte in ihrem Vorschlag für eine Schaffung konkreter Bail-in-Anleihen, vergleichbar mit den Contingent Convertible Bonds (CoCo-Bonds), die in der Schweiz bereits eingeführt wurden. Die BaFin setze dagegen, ähnlich wie die Europäische Kommission, auf einen möglichst breiten An-satz und habe sich gegen die Emission einer neuen Gattung vertraglicher Bail-in-Instrumente ausge-sprochen, sagte König. Die Höhe der bail-in-fähigen Instrumente sowie die Reihenfolge der Haftung müssten aber trotzdem für jedes Institut klar definiert sein.
König betonte, dass es wichtig sei, nun die institutsspezifischen Sanierungs- und Abwicklungspläne zu entwickeln. Die BaFin habe mit der Erstellung der Abwicklungspläne auch schon begonnen. Bail-in sei dabei nur ein Baustein in dem wesentlich umfangreicheren Instrumentenkasten der Sanierungs- und Abwicklungspläne.
In der anschließenden Diskussion sagte König, dass es eine Abwicklungsbehörde für Institute, die in Zukunft einer europäischen Aufsicht unterliegen, derzeit nur auf nationaler Ebene geben könne. An-dernfalls sei eine Änderung der europäischen Verträge notwendig, da die Mittel, die für eine Abwick-lung aufgewendet werden müssten, aus nationalen Haushalten kämen. Bei einer Abwicklungsbehör-de auf europäischer Ebene würden die Haushaltsbelastung und die Entscheidung über die Verwen-dung der Mittel auseinanderfallen.
Essays in behavioral economics - evidence on self-selection into jobs, social networks and leniency
(2013)
Die Dissertation mit dem Titel „Essays in Behavioral Economics – Evidence on Self-Selection into Jobs, Social Networks and Leniency“ besteht aus einer Sammlung von vier wissenschaftlichen Abhandlungen. Alle Arbeiten verbindet die Analyse von theoretischen Konzepten und Erkenntnissen der Verhaltensökonomie unter Verwendung der experimentellen Methode. Die erste wissenschaftliche Abhandlung trägt den Titel „Sorting of Motivated Agents - Empirical Evidence on Self-Selection into the German Police“ und untersucht Selbstselektion bestimmter Individuen in den Polizeiberuf. Die experimentelle Studie untersucht die Frage, ob Polizeibewerber sich hinsichtlich ihrer Präferenzen in Bezug auf ihr Normdurchsetzungsverhalten in den Polizeiberuf selektieren. Die zweite Abhandlung greift diese Erkenntnisse auf und untersucht Polizeianwärter in ihrer Berufsausbildung ebenfalls hinsichtlich ihrer Normdurchsetzungsbereitschaft. Die Arbeit trägt den Titel „Selection and formation of motivated agents -- empirical evidence from the German Police”. In der dritten wissenschaftlichen Abhandlung werden geschlechterspezifische Unterschiede bei der Wahl von Partnern und dem Aufbau des sozialen Netzwerkes untersucht. Diese trägt den Titel „Selectivity and opportunism: two dimensions of gender differences in trust games and network formation“ und wurde zusammen mit Guido Friebel, Marie Lalanne, Paul Seabright und Peter Schwardmann verfasst. Die vierte Abhandlung geht einer aktuellen Fragestellung der Industrieökonomie nach und trägt den Titel „Antitrust, auditing and leniency programs: evidence from the laboratory“, verfasst mit Mehdi Feizi and Ali Mazyaki. In ihrer Gesamtheit liefert meine Dissertation Antworten auf personalpolitische, soziale und industrieökonomische Fragestellungen.
SAFE Newsletter : 2013, Q3
(2013)
Research: Joachim Weber, Benjamin Loos, Steffen Meyer, Andreas Hackethal "Individual Investors' Trading Motives and Security Selling Behavior"
Ignazio Angeloni, Ester Faia "Monetary Policy and Prudential Regulations with Bank Runs"
Helmut Siekmann "Legal Limits to Quantitative Easing"
Policy Margit Vanberg "SAFE Summer Academy 2013 on 'International Financial Stability'"
Guest Commentary Peter Praet "Cooperation between the ECB and Academia"
Monetary theorists have advanced an intriguing notion: we exchange money to make up for a lack of enforcement, when it is difficult to monitor and sanction opportunistic behaviors. We demonstrate that, in fact, monetary equilibrium cannot generally be sustained when monitoring and punishment limitations preclude enforcement — external or not. Simply put, monetary systems cannot operate independently of institutions — formal or informal — designed to monitor behaviors and sanction undesirable ones. This fundamental result is derived by integrating monetary theory with the theory of repeated games, studying monetary equilibrium as the outcome of a matching game with private monitoring.