The basic question regarding sovereign debt is why sovereign borrowers ever repay, provided that creditors have no power to foreclose on any of their assets. In this paper we suggest an answer: sovereign debt will be served as long as the median voter is a net loser from default. Default...

Leveraged investors may be subject to contagion when sales of repossessed collateral create a downward spiral in fire sales prices, increasing margin requirements and drying up the supply of liquidity. This raises the question whether market integration is desirable when the risk of contagion is...

Leveraged investors may be subject to contagion when sales of repossessed collateral create a downward spiral in fire sales prices, increasing margin requirements and drying up the supply of liquidity. This raises the question whether market integration is desirable when the risk of contagion is...

We develop a theoretical model where a redistribution of bank capital (e.g., due to reckless trading and/or faulty risk management) leads to a “freeze” of the interbank market. The fire-sale market plays a central role in spreading the crisis to the real economy. In crisis, credit rationing...

This article reviews the development of corporate finance from domestic analyses to international comparisons of financial systems, to comparative corporate governance, to law and finance, and most recently to politics and finance. It describes how both theoretical developments and empirical...

I show how to design a welfare-improving tax system for a Diamond-Dybvig (DD) related economy. In addition to its relevance to the DD literature, the paper constructs a nice example for a Pareto-improving intervention when markets are incomplete, and provides a welfare analysis of the market for...

In a series of stimulating and thought provoking papers, Mayer (1988, 1990)—on the grounds of flow-of-funds data of the type presented in Table 1—has argued that: (i) retentions are usually the most important source of investment finance, which by itself is an indication of the substantial...

We investigate the concepts of ‘activist macroeconomic policy’ and ‘stabilization’ within an optimal taxation framework when insurance markets are incomplete.