Recently, many countries have implemented deposit insurance schemes and many more countries are planning to do so. The design of this part of the financial safety net differs across countries, especially in account coverage. Countries that introduce explicit deposit insurance make many decisions: which classes of deposits to insure and up to what amount, which banks should participate, who should manage and own the deposit insurance fund, and at what levels premiums should be set. When countries elect not to introduce explicit deposit insurance, insurance is implicit. In either case, the benefits banks gain depend on how effective the government is at managing bank risk-shifting.
Explicit deposit insurance schemes appeal increasingly to policymakers. First, an explicit scheme supposedly sets the rules of the game regarding coverage, participants, and funding. Second, an explicit scheme is appealing to politicians because it protects small depositors without immediate impact on the government budget. One should, however, not ignore the potential cost of deposit insurance. Deposit insurance reduces the incentives for (large) depositors to exert market discipline on banks, and encourages banks to take on risk. This form of moral hazard has received a lot of attention in the deposit insurance literature.
This paper is about investigate through which channels low-stakes test scores relate to economic success. The inferences in the economic literature regarding test scores and their association with economic outcomes are mostly based on tests without performance-based incentives, administered to survey participants.
The lack of performance-based incentives allows for the possibility that higher test scores are caused by non-cognitive skills associated with test-taking motivation, and not necessarily by cognitive skills alone. The coding speed test, which is a short and very simple test available for participants in the National Longitudinal Survey of Youth 1979 (NLSY), may serve as a proxy for test-taking motivation. To gather more definite evidence on the motivational component in the coding speed test conduct a controlled experiment, in which induce motivation via the provision of incentives.
This paper introduces and estimates a new model of frailty-correlated defaults, according to which firms have an unobservable common source of “frailty,” a default risk factor that changes randomly over time. The posterior distribution of this frailty factor, conditional on past observable covariates and past defaults, represents a significant additional source of uncertainty to creditors. Our model is estimated for U.S. non-financial public firms for the period 1979-2004. The results show that the frailty factor induces a large estimated increase in default clustering, and significant additional fluctuation over time in the conditional expected level of default losses, above and beyond that predicted by our observable default covariates, including leverage, volatility, and interest rates.
The usual duration-based model of default probabilities is based on the doubly-stochastic assumption, by which firms’ default times are conditionally independent given the paths of observable factors influencing their credit qualities. Under this assumption, different firms’ default times are correlated only to the extent implied by the correlation of observable factors determining their default intensities. For example, Couderc and Renault (2004), Shumway (2001), and Duffie, Saita, and Wang (2006) use this property to compute the likelihood function, which is to be maximized when estimating the coefficients of a default intensity model, as the product across firms of the covariate-conditional likelihoods of each firm’s default or survival. This significantly reduces the computational complexity of the estimation.
