Essays on financial institutions and instability

Thumbnail Image
Date
2012-01-01
Authors
Jin, Yu
Major Professor
Advisor
David M Frankel
Committee Member
Journal Title
Journal ISSN
Volume Title
Publisher
Altmetrics
Authors
Research Projects
Organizational Units
Organizational Unit
Economics

The Department of Economic Science was founded in 1898 to teach economic theory as a truth of industrial life, and was very much concerned with applying economics to business and industry, particularly agriculture. Between 1910 and 1967 it showed the growing influence of other social studies, such as sociology, history, and political science. Today it encompasses the majors of Agricultural Business (preparing for agricultural finance and management), Business Economics, and Economics (for advanced studies in business or economics or for careers in financing, management, insurance, etc).

History
The Department of Economic Science was founded in 1898 under the Division of Industrial Science (later College of Liberal Arts and Sciences); it became co-directed by the Division of Agriculture in 1919. In 1910 it became the Department of Economics and Political Science. In 1913 it became the Department of Applied Economics and Social Science; in 1924 it became the Department of Economics, History, and Sociology; in 1931 it became the Department of Economics and Sociology. In 1967 it became the Department of Economics, and in 2007 it became co-directed by the Colleges of Agriculture and Life Sciences, Liberal Arts and Sciences, and Business.

Dates of Existence
1898–present

Historical Names

  • Department of Economic Science (1898–1910)
  • Department of Economics and Political Science (1910-1913)
  • Department of Applied Economics and Social Science (1913–1924)
  • Department of Economics, History and Sociology (1924–1931)
  • Department of Economics and Sociology (1931–1967)

Related Units

Journal Issue
Is Version Of
Versions
Series
Department
Abstract

Influenced by the recent, ongoing financial crisis spreading across the world's economies, my dissertation studies aspects of the connections between securitization – originating and selling loans – in the banking sector and economic instability.

In the first chapter, “Bank Monitoring and Liquidity in the Secondary Market for Loans”, I study transactional loans and traditional–relationship loans in a dynamic lending model. In the model, since transactional loans are easier to resell, a bank's benefit from transactional lending over relationship lending is increasing in secondary market loan liquidity (investors' willingness to pay). The relative payoff is also increasing in the proportion of banks that choose transactional lending because lower quality borrowers prefer transactional lenders, who monitor them less. When liquidity rises above a given threshold, all banks switch to transactional lending. However, greater liquidity also increases the economy–wide default risk since banks reduce their monitoring effort. If the latter effect is strong enough, securitization can lower welfare.

The previous study suggests that the problems in securitization may come from information asymmetry in both the primary and secondary loan markets. My second chapter, “Securitization and Lending Competition” (with David Frankel), studies the effects of securitization on interbank lending competition when banks see private signals of local applicants' repayment chances. We find that if banks cannot securitize, the outcome is efficient: they lend to their most creditworthy local applicants. With securitization, banks lend also to remote applicants with strong observables in order to lessen the lemons problem they face in selling their securities. This reliance on observables is inefficient and raises the conditional and unconditional default risk.

Finally, Chapter 3, “Credit Termination and the Technology Bubbles”, studies the financial instability from a different angle. I consider a credit cycles model in which firms face technology shocks to the riskiness of different types of projects. The new project arriving is more attractive to the firms but even riskier. The riskiness of the new project is not observed by banks as occurred during the technology bubbles. After observing a higher default rate, banks deny future loans to entrepreneurs more often in order to affect their choice of projects ex ante. The model is used to explain the boom–and–bust of the dot–com bubble in the late 1990s.

Comments
Description
Keywords
Citation
Source
Subject Categories
Copyright
Sun Jan 01 00:00:00 UTC 2012