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Chapter 8: Q.8 (page 235)
Which relationship would you expect to exist between measures of corruption and living standards at the country level? Explain by which channel corruption might affect living standards.
For highly developed countries, the link between corruption measures and living standards is negative.
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You wish to hire Ron to manage your Dallas operations. The profits from the operations depend partially on how hard Ron works, as follows
If Ron is lazy, he will surf the Internet all day, and he views this as a zero-cost opportunity. However, Ron views working hard as a “personal cost” valued at $2000. What fixed percentage of the profits should you offer Ron? Assume Ron cares only about his expected payment less any “personal cost.”
Gustavo is a young doctor who lives in a country with a relatively inefficient legal and financial system. When Gustavo applied for a mortgage, he found that banks usually required collateral for up to 300% of the amount of the loan. Explain why banks might require that much collateral in such a financial system. Comment on the consequences of such a system for economic growth.
Go to the St. Louis Federal Reserve FRED database and find data on the percent of value of loans secured by collateral for all commercial and industrial loans (ESANQ) and the net percentage of domestic banks tightening standards for commercial and industrial loans to large and middle-market firms (DRTSCILM). Download the data into a spreadsheet.
a. Calculate the average, over the most recent four quarters and the four quarters prior to that, for the bank standards indicator and the “percent of loans secured by collateral” indicator. Do these averages behave as you would expect?
b. Use the Data Analysis tool in Excel to calculate the correlation coefficient for the two data series from 1997:Q3 to the most recent quarter of data available. What can you conclude about the relationship between collateral and bank C&I lending standards? Is this result consistent with efforts to reduce asymmetric information?
Refer to Problem 22. Now you believe the dealer knows more about the car than you do. How much are you willing to pay? Why? How can this asymmetric information problem be resolved in a competitive market?
In December 2001, Argentina announced it would not honor its sovereign (government-issued) debt. Many investors were left holding Argentinean bonds priced at a fraction of their previous value. A few years later, Argentina announced it would pay back 25% of the face value of its debt. Comment on the effects of information asymmetries on government bond markets. Do you think investors are currently willing to buy bonds issued by the government of Argentina?
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