Integration and efficiency convergence in EU banking markets

Evidence of financial integration and convergence are considered of importance in assessing the outcome of EU deregulation policies aimed at improving the efficiency and performance of banking sectors. This paper evaluates the recent dynamics of bank cost efficiency by means of data envelopment analysis (DEA). Borrowing from the growth literature, we apply dynamic panel data models (GMM) to the concepts of β-convergence and σ-convergence to assess the speed at which banking markets are integrating. We also employ a partial adjustment model to evaluate convergence towards best practice. Results seem to provide supporting evidence of convergence of efficiency levels towards an EU average. Nevertheless, there is no evidence of an overall improvement of efficiency levels towards best practice.     

Competitive conditions in the Central and Eastern European banking systems

The aim of this study is to conduct an empirical analysis of the competitive conditions in the banking systems of Central and Eastern European countries. The well-known model of Panzar and Rosse [1] is implemented on bank-level data over the period 1999–2006. The estimates based on the separate country panels suggest a wide variation in the competitive conditions of the banking systems examined, with some being characterized as (monopolistically) competitive and other as non-competitive. Finally, the results from the full sample indicate that bank revenue is substantially influenced by structural and macroeconomic conditions.     

Financial literacy and its influence on internet banking behavior

This paper presents the survey results for financial literacy among Cypriot adults and reports their financial aptitude and behaviour. Additionally, it investigates for the first time the implications of financial literacy on respondents’ usage of digital financial services, particularly internet banking (i-banking). The focus is on Cyprus, a country that experienced an unprecedented financial crisis in 2013 that resulted in a bail-in and an enormous subsequent shrinkage of the banking sector. Cypriot consumers face an ever-increasing need for financial sophistication to effectively utilise and manage digital banking services. Neverthless, financial literacy is still low in Cyprus, whereby only 37.33% of survey respondents showed proficiency in financial knowledge. The findings indicate that there is a statistically positive relationship between the levels of financial knowledge and the frequency of i-banking use. More importantly, financially illiterate consumers appear to report far more often than their financially literate peers the lack of trust in i-banking, as well as a lack of self-confidence in financial and digital skills as the main reasons for not using this service. The findings highlight the interplay between financial literacy and digital proficiency, and their implication on individuals’ use of i-banking services.     

The effect of board size on shareholder value: Evidence from bank mergers and acquisitions

This study examines the effect of board size on the economic impact of bank mergers and acquisitions (M&A) in the US. Using a hand-collected dataset of 508 M&A between 2012 and 2018, we find that board size is negatively related to acquirer excess returns. In an additional analysis, we show that large boards have positive value implications for banks that combine the CEO and chairman roles as well as for large banks. Our findings indicate that a “one-size-fits-all” approach to board size is not necessarily in the interests of shareholders; instead, a more flexible and proactive formulation is needed.     

Misallocation and Total Factor Productivity in Italy: Evidence from Firm‐Level Data

Over the last two decades, total factor productivity (TFP) in Italy decreased by 0.2% per year, while increasing on average in the Euro‐area countries. This decline suggests the existence of large inefficiencies in the allocation of resources, making the Italian case particularly interesting and suitable in order to study the role of misallocation. In this article, I quantify the within‐industry misallocation of inputs in Italy over the period 1993–2011, by applying the Hsieh and Klenow's methodology. Using a micro‐level longitudinal dataset of Italian manufacturing firms, I find that, in the hypothetical absence of distortions, aggregate TFP in manufacturing would be boosted by 58% in 1993, by 67% in 2006 and by 80% in 2011. This leads to a twofold conclusion: first, misallocation plays a crucial role in determining the inefficiency level of the Italian manufacturing sector; second, misallocation has increased over time. Given the magnitude of the results obtained and the policy implications related thereto, I take a step ahead by checking to what extent the degree of misallocation can be attributed to specific characteristics of the Italian firms: it emerges that misallocation is higher for firms located in the south and at low‐technological intensity, as well as for small or young firms.     

BUILDING REPUTATION FOR CONTRACT RENEWAL: IMPLICATIONS FOR PERFORMANCE DYNAMICS AND CONTRACT DURATION

We study how career concerns affect the dynamics of incentives in a multi‐period contract, when the agent's productivity is a stochastic function of his past productivity and investment. We show that incentives are stronger and performance is higher when the contract approaches its expiry date. Contrary to common wisdom, long‐term contracts may strengthen reputational effects whereas short‐term contracting may be optimal when investment has persistent, long‐term effects.     

RELATIVE RISK AVERSION IS CONSTANT: EVIDENCE FROM PANEL DATA

Most classical tests of constant relative risk aversion (CRRA) based on individual portfolio composition use cross‐sectional data. Such tests must assume that the distributions of wealth and preferences are independent. We use panel data to analyze how individuals’ portfolio allocation between risky and riskless assets varies in response to changes in total financial wealth. We find the elasticity of the risky asset share to wealth to be small and statistically insignificant, supporting the CRRA assumption; this finding is robust when the sample is restricted to households experiencing large income variations. In addition, we find a small but significant negative correlation between wealth and risk aversion. Various extensions are discussed.     

MEASURING SELF‐CONTROL PROBLEMS: A STRUCTURAL ESTIMATION

Abstract We adopt a two‐stage Method of Simulated Moments to estimate the preference parameters in a life‐cycle consumption‐saving model augmented with temptation disutility. Our approach estimates the parameters from the comparison between simulated moments with empirical moments observed in the US Survey of Consumer Finances; to identify the parameters we consider moments from liquid and illiquid asset holdings at different ages. We find evidence of a small but significantly positive degree of temptation. The temptation model predicts consumption choices similar to the model with standard preferences, and holdings of liquid and illiquid assets closer to those observed in the empirical data.     

DEALER INTERMEDIATION BETWEEN MARKETS

We develop a dynamic model of dealer intermediation between a monopolistic customer–dealer market and a competitive interdealer limit order market. Dealers face inventory constraints and adverse selection. We characterize the optimal quote setting and inventory management behavior for both markets in closed form and reveal how price setting in one market segment influences quote behavior in the other. The framework is used to explore market stability issues of the two‐tier market structure and delivers testable predictions about how the dispersion of retail prices is related to the state of the interdealer limit order book. Data from the European sovereign bond market is used to test for inventory related retail price dispersion.     

Who Chooses Which Private Education? Theory and International Evidence

Private school students do not always perform better in standardized tests. We suggest that this may be explained by choice of private schooling by less capable students in countries where government schools are better suited to talented students. To assess the empirical relevance of this mechanism, we exploit cross‐country variation in the Program for International Student Assessment (PISA) 2009 survey of differences between private and state school regarding organizational features that are differently suitable for students with different learning ability. We seek and find evidence of this mechanism's empirical relevance in controlled regressions that treat within‐country variation of PISA scores as an indicator of unobserved ability to learn.     

DO TRANSFER TAXES REDUCE INTERGENERATIONAL TRANSFERS?

We estimate the effect of taxes on intergenerational transfers by exploiting a sequence of Italian reforms culminating with the abolishment of transfer taxes. We use the Surveys of Household Income and Wealth from 1993 to 2006, which have data on real estate transfers, and information on potential donors and recipients. Difference‐in‐differences estimates indicate that the abolition of transfer taxes increases the probability of high‐wealth donors making a transfer by two percentage points and increases the area transferred by 9.3 square meters relative to poorer donors.     

RELATIONSHIP LENDING DURING A FINANCIAL CRISIS

This paper studies whether relationship lending mitigates the transmission of the Lehman default shock to the supply of credit in Italy. Exploiting the presence of multiple banking relationships, we control for banks' and firms' unobserved characteristics. Results show that the growth of credit itself is higher and its cost lower the shorter the distance between the bank and the firm, the longer the relationship, and the higher the share of credit held by the bank. Credit growth by relationship lenders is 4.6% higher than that by transactional lenders; the increase in the cost of credit is 50 basis points lower. The positive effect of relationship lending on credit supply increased during the crisis, compared to a pre‐crisis period. The beneficial effect of relationship lending is weaker if the relationship lender is more exposed to the financial crisis, especially when lending to weaker borrowers.     

MATERNAL EDUCATION,HOME ENVIRONMENTS,AND THE DEVELOPMENT OF CHILDREN AND ADOLESCENTS

We study the intergenerational effects of maternal education on children’s cognitive achievement, behavioral problems, grade repetition, and obesity, using matched data from the female participants of the National Longitudinal Survey of Youth 1979 (NLSY79) and their children. We address the endogeneity of maternal schooling by instrumenting it with variation in schooling costs during the mother’s adolescence. Our results show substantial intergenerational returns to education. Our data set allows us to study a large array of channels which may transmit the effect of maternal education to the child, including family environment and parental investments at different ages of the child. We discuss policy implications and relate our findings to the literature on intergenerational mobility.     

UNDERSTANDING THE EVOLUTION OF THE US WAGE DISTRIBUTION: A THEORETICAL ANALYSIS

In this paper, we propose an analytically tractable overlapping‐generations model of human capital accumulation and study its implications for the evolution of the US wage distribution from 1970 to 2000. The key feature of the model, and the only source of heterogeneity, is that individuals differ in their ability to accumulate human capital. Therefore, wage inequality results only from differences in human capital accumulation. We examine the response of this model to skill‐biased technical change (SBTC) theoretically. We show that in response to SBTC, the model generates behavior consistent with some prominent trends observed in the US data including (i) a rise in overall wage inequality both in the short run and long run, (ii) an initial fall in the education premium followed by a strong recovery, leading to a higher premium in the long run, (iii) the fact that most of this fall and rise takes place among younger workers, (iv) a rise in within‐group inequality, (v) stagnation in median wage growth (and a slowdown in aggregate labor productivity), and (vi) a rise in consumption inequality that is much smaller than the rise in wage inequality. These results suggest that the heterogeneity in the ability to accumulate human capital is an important feature for understanding the effects of SBTC and interpreting the transformation of the US labor markets since the 1970s.     

Firm Size and Employment Dynamics: Estimations of Labor Demand Elasticities Using a Fractional Panel Probit Model

This paper examines the comprehensive discussion on the relationship between job creation, or destruction and firm size. More specifically, the study will determine whether the argument about small‐ and medium‐sized enterprises (SMEs) showing higher employment dynamics is confirmed or not. As such, the following work applies elasticities from a standard labor demand model derived from the estimations of fractional probit models for panel data, as process recommended in Papke and Wooldridge [2008; Journal of Econometrics 145(1–2): 121–133]. Elasticities are a useful measure of employment dynamics, if it is assumed that SMEs act on the same markets. The elasticity results from German establishment data illustrate that firm size does matter for the increase or decrease of employment. SMEs with less than 10 workers exhibit a higher employment dynamic, compared with other entities, at each respective percentile in the distribution of the wage share. Additionally, the outcome of the analysis weakly confirms the hypothesis that smaller firms are more restricted to capital markets, compared with large entities. The results also illustrate that firm size only explains one aspect of job creation and destruction. As stated in the well‐known Hicks–Marshall rules for elasticities of factor demand, the results illustrate that the reaction of labor demand on economic changes increases with the share of labor. Firms with a high share of labor also have larger elasticities, compared with firms with a strong use of capital. Both effects, the size effect and the effect of the proportion of labor, would blend in reality, and therefore, possibly lead to controversial results for the relationship between firm size and employment dynamics. In addition, a model with a negative relationship among both variables is too simple to explain the behavior of firms.     

Skill Acquisition in the Informal Economy and Schooling Decisions: Evidence from Emerging Economies

Informal jobs offer skill acquisition opportunities that may facilitate a future switch to formal employment for young workers. In this sense, informal training on the job may be a viable alternative to formal schooling in an economy with a large and diverse informal sector. In this paper, I investigate if these considerations are relevant for the schooling decisions of young individuals using panel data for 17 Latin American countries and micro‐level data for Turkey. Specifically, I ask if the prevalence of informal jobs distorts schooling attainment. I concentrate on three measures of schooling outcomes: (1) secondary education enrollment rate; (2) out‐of‐school rate for lower secondary school; and (3) tertiary education graduation rate. I find that the secondary education enrollment rate is negatively correlated with the size of the informal economy, whereas the out‐of‐school rate is positively correlated. Moreover, the tertiary education graduation rates tend to fall as the informal employment opportunities increase. This means that informal training on the job may be crowding out school education in developing countries. Policies that can potentially affect the size of the informal sector should take into consideration these second‐round effects on aggregate schooling outcomes.     

ON THE RELATIVE EFFICIENCY OF PERFORMANCE PAY AND NONCONTINGENT INCENTIVES

We report evidence from a large field experiment that compares the effectiveness of contingent and noncontingent incentives in eliciting costly effort for a large range of payment levels. The company with which we worked sent 7,250 letters asking customers to complete a survey. Some letters promised to pay amounts ranging from $1 to $30 upon compliance (contingent incentives), whereas others already contained the money in the request envelopes (noncontingent incentives). Compared to no payment, very small contingent payments lower the response rate while small noncontingent payments raise the response rate. As expected, response rates rise with the size of the incentive offered. The response rate in the noncontingent incentives rises more rapidly for low amounts of incentive, but then flattens out and reaches lower levels than under contingent payments. We discuss how the optimal policy regarding the use of each size and type of incentives crucially depends on firms’ objectives.     

Is There Still a Wage Penalty for Being Overeducated But Well‐matched in Skills? A Panel Data Analysis of a Swiss Graduate Cohort

Using two periods' panel data from the Swiss Graduate Survey, this study examines the incidence, persistence and wage effects of overeducation. An alternative measure of overeducation that accounts for graduate heterogeneity in perceived skills mismatch is used. This analysis differs from previous panel data studies in that two estimation methods are applied to control for unobserved ability. Results indicate that graduates who are overeducated and mismatched in skills are the most penalized in terms of earnings. This evidence is still valid when unobserved ability is accounted for, whereas the pay penalty is no more significant for graduates who are overeducated but matched in skills. This result is robust to different definitions of perceived skills mismatch and is consistent with the notion that apparent overeducation reflects a lack of unobserved attributes, such as ability.     

The effect of mergers and acquisitions on productivity: An empirical application to Spanish banking

Mergers and acquisitions are frequently justified in terms of value creation or efficiency improvements. Nevertheless, the evidence is not consistent with the existence of benefits in terms of the costs, productivity, profitability or market value of the firms involved. A distinguishing feature of extant research is that it focuses on the assessment of the consequences of mergers around the time in which the operation takes place, limiting the possibility of observing a complete integration between the merged firms. In this context, the objective of this paper is to evaluate the effects of mergers and acquisitions on the long-run productivity of Spanish savings banks. Our results show that productivity improvements can be found in only half of the mergers that take place during the period analyzed.     

Using Malmquist Indexes to measure changes in the productivity and efficiency of US accounting firms before and after the Sarbanes–Oxley Act

There have been many criticisms of the Sarbanes–Oxley (SOX) Act passed in July of 2002 to correct business accountability and performance practices. The act has a major emphasis on accounting and its practices. This paper attempts a response to these criticisms by investigating changes in productive efficiency for 62 of the largest US public accounting firms between the periods (2000–2001) and (2003–2004)—the periods before and after enactment of SOX in July of 2002. DEA is used to calculate Malmquist indexes of productivity and efficiency changes. This index is used because it can distinguish between changes in technical efficiency, which limit the possibilities, and changes in the performance efficiencies for each firm. Contrary to many of the criticisms, results indicate that accounting firms have exhibited significant post SOX growth in productive efficiency which is better than pre-SOX performances.