This paper studies the extent to which poor institutions compromise risk-sharing. We model a multilateral organization as a social contract that provides insurance to members. Countries privately observe the realization of a performance variable with a verification cost that differs across...

This paper uses a Costly State Verification model to analyze risk-sharing arrangements between a coalition of countries when there is uncertainty about the realization of a key performance variable. The realization of the performance variable is a country's private information, and the cost of...

The lack of a supra-national legal authority that can enforce private contracts across borders makes debt repayment in an international setting contingent on borrowers' willingness to pay rather than ability to pay. This market failure (i.e., inadequate enforcement) causes investment to fall...

We consider a model that provides insight into the well-known Folk Theorem in economics that when the discount factor, (Greek character) 'beta', is sufficiently close to one, expropriation will never occur. While this Folk Theorem is true in our model, our perspective is different. 'Beta' is...

This paper assesses quantitatively the impact of legal institutions on entrepreneurial firm dynamics. Owners choose firm size, financial structure and default to manage risk. We find: (i) Less risk averse entrepreneurs run bigger firms and it is optimal for them to incorporate, while more risk...

This paper studies the distributional implications of intermediation costs. We built a "Bewley" model economy where individuals experience uninsurable idiosyncratic shocks on labor productivity and financial intermediation is costly. Individuals smooth consumption by making deposits to a...

This paper conducts a theoretical and quantitative analysis of how entrepreneurs choose firm size, capital structure, default, and owner consumption to manage firm risk, including how these choices change with risk aversion. We decompose an entrepreneur’s default decision into three elements:...

The authors present a theoretical model in which a profit-maximizing lender may ration credit to businesses by restricting loan size. Such credit rationing occurs despite the absence of differences across borrowers in default risk or loan administration costs. Moreover, the model predicts an...