Tim Worrall | University of Edinburgh (original) (raw)
Papers by Tim Worrall
Stock returns after a Brexit vote: the winners and the losers blogs.lse.ac.uk /politicsandpolicy/... more Stock returns after a Brexit vote: the winners and the losers blogs.lse.ac.uk /politicsandpolicy/ftse-and-brexit-sentiment/ Numerous reports warn that Brexit may have negative effects on the UK stock market. But whatever the outcome, it seems unlikely that the impact will be a uniform one, argue
Journal of Banking and Finance, Feb 1, 2019
This paper extends the DeMarzo and Duffie (1999) signaling model from single sales to portfolio s... more This paper extends the DeMarzo and Duffie (1999) signaling model from single sales to portfolio sales. It shows that the extended model can account for retention of low quality assets and help explain why retained assets may be of varying quality.
RePEc: Research Papers in Economics, Sep 1, 2011
This paper considers whether countries might mutually agree a policy of open borders, allowing fr... more This paper considers whether countries might mutually agree a policy of open borders, allowing free movement of workers across countries. For the countries to agree, the short run costs must outweighed by the long term benefits that result from better labor market flexibility and income smoothing. We show that such policies are less likely to be adopted when workers are less risk averse workers and when countries trade more. More surprisingly, we find that some congestion costs can help. This reverses the conventional wisdom that congestion costs tend to inhibit free migration policies.
Journal of International Economics, Nov 1, 2020
Fiscal integration is recognized as an important issue in determining whether countries establish... more Fiscal integration is recognized as an important issue in determining whether countries establish a common currency area. Fiscal integration between sovereign states is, however, limited by the ability of countries to commit to fiscal transfers. This paper supposes that fiscal transfers between countries must be voluntary and asks how this influences the choice between a currency area and a flexible exchange rate regime. It presents a model with wage rigidity in which, absent transfers, the flexible exchange rate regime is preferred. If there are transfers that equalize consumption, then the choice of exchange rate regime is irrelevant. Nevertheless, the currency area may be preferable if transfers are made voluntarily, because the currency area can sustain greater risk sharing. It is shown that the currency area can be optimal for a plausible set of parameter values. We consider the robustness of the conclusions to some modifications of the model.
RePEc: Research Papers in Economics, Mar 1, 2014
Is a Policy of Free Movement of Workers Sustainable? * This paper studies the costs and benefits ... more Is a Policy of Free Movement of Workers Sustainable? * This paper studies the costs and benefits of the adoption of the policy of free movement for workers. For the countries to agree on uncontrolled movement of workers, the short run costs must be outweighed by the long term benefits that result from better labor market flexibility and income smoothing. We show that such policies are less likely to be adopted when workers are impatient and less risk averse workers, when production technologies display decreasing returns and when countries trade a share of their products.
Cambridge University Press eBooks, Oct 19, 1995
This paper surveys the literature on the role of financial factors in explaining economic fluctua... more This paper surveys the literature on the role of financial factors in explaining economic fluctuations. We begin by discussing the views of some prominent early macroeconomists and then examine the recent literature on the role of asymmetric information in the market for investment finance. This literature shows that in the presence of informational asymmetries, financial factors may affect real variables like investment and output. In dynamic models real variables may also affect financial factors and may generate persistent effects of shocks even in models which would not display persistence in the absence of the informational asymmetry. Preliminary: Comments welcome.
The Economic Journal, Mar 1, 1994
Various explanations of credit rationing are based upon asymmetries of information. It has been s... more Various explanations of credit rationing are based upon asymmetries of information. It has been suggested that rationing represents a sub-optimal allocation. We examine this claim using a general equilibrium model with hidden information and costly monitoring. If credit is rationed the equilibrium is indeed sub-optimal yet social efficiency requires that credit be more tightly rationed. The reason is that loan applicants are charged for the average expected monitoring costs whereas efficiency dictates that they should bear the marginal monitoring costs which includes the effect of a rise in the interest rate on the total number of defaulting loans. A similar inefficiency can occur even in the absence of rationing and may require the introduction of rationing to correct it.
RePEc: Research Papers in Economics, Nov 5, 2002
This paper analyses a model of private unemployment insurance under limited commitment and a mode... more This paper analyses a model of private unemployment insurance under limited commitment and a model of public unemployment insurance subject to moral hazard in an economy with a continuum of agents and an infinite time horizon. The dynamic and steady-state properties of the optimum private unemployment insurance scheme are established. The interaction between the public and private unemployment insurance schemes is examined. Examples are constructed to show that for some parameter values increased public insurance can reduce welfare by crowding out private insurance more than one-for-one and that for other parameter values a mix of both public and private insurance can be welfare maximising.
This paper analyses a model of private unemployment insurance under limited commitment and a mode... more This paper analyses a model of private unemployment insurance under limited commitment and a model of public unemployment insurance subject to moral hazard in an economy with a continuum of agents and an infinite time horizon. The dynamic and steady-state properties of the private unemployment insurance scheme are established. The interaction between the public and private unemployment insurance schemes is examined. Examples are constructed to show that for some parameter values increased public insurance can reduce welfare by crowding out private insurance more than one-to-one and that for other parameter values a mix of both public and private insurance can be welfare maximising.
The fluctuations in incomes inherent in rural communities can be attenuated by reciprocal insuran... more The fluctuations in incomes inherent in rural communities can be attenuated by reciprocal insurance. We develop a model of such insurance based on self-interested behaviour and voluntary participation. One individual assists another only if the costs of so doing are outweighed by the benefits from expected future reciprocation. A distinction is made between general reciprocity where the counter obligation is expected but not certain and balanced reciprocity where there is a firm counter obligation. This firm counter obligation is reflected by including a loan or quasi-credit element in any assistance. It is shown how this can increase the insurance provided and how it may explain the widespread use of quasi-credit in rural communities. Moreover it is shown that for a range of parameter values consistent with evidence from three villages in southern India, a simple scheme of gift-giving and quasi-credit can do almost as well as theoretically better but more complicated schemes.
RePEc: Research Papers in Economics, Mar 31, 2010
This paper considers a long-term relationship between two agents who undertake costly actions or ... more This paper considers a long-term relationship between two agents who undertake costly actions or investments which produce a joint benefit. Agents have an opportunity to expropriate some of the joint benefit for their own use. The question asked is how to structure the investments and division of the surplus over time so as to avoid expropriation. It is shown that investments may be either above or below the efficient level and that actions and the division of the surplus converges to a stationary solution at which either both investment levels are efficient or both are below the efficient level.
Social Science Research Network, 2000
Recent work on consumption allocations in village economies finds that idiosyncratic variation in... more Recent work on consumption allocations in village economies finds that idiosyncratic variation in consumption is systematically related to idiosyncratic variation in income, thus rejecting the hypothesis of full risk-pooling. We attempt to explain these observations by adding limited commitment as an impediment to risk-pooling. We provide a general dynamic model and completely characterise efficient informal insurance arrangements constrained by limited commitment, and test the model using data from three Indian villages. We find that the model can fully explain the dynamic response of consumption to income, but that it fails to explain the distribution of consumption across households.
Journal of Economic Theory, Aug 1, 1990
We examine a simple repeated principal-agent model with discounting. There are a risk averse borr... more We examine a simple repeated principal-agent model with discounting. There are a risk averse borrower with an unobservable random income and a risk neutral lender. The efficient contract is characterized. It tends to the first-best (constant consumption) contract as the discount factor tends to one and the time horizon extends to infinity. If the time horizon is infinite and the contract is legally enforceable the borrower's utility becomes arbitrarily negative with probability one. If the borrower has constant absolute risk aversion consumption is transferred between any two states at a constant interest rate which is less than the rate of time preference. Journal of Economic Literature Classification Numbers: 026, 315.
RePEc: Research Papers in Economics, 1987
How should successive generations insure each other when the enforcement of transfers between the... more How should successive generations insure each other when the enforcement of transfers between them is limited? This paper examines transfers that maximize the expected discounted utility of all generations subject to a participation constraint for each generation. The resulting optimal intergenerational insurance is history dependent even when the environment is stationary. Consequently, consumption is heteroskedastic and autocorrelated across generations. The optimal intergenerational insurance arrangement is interpreted as a pay-as-you-go social security scheme with means testing and a mixture of flat-rate and contributory-related elements. With logarithmic preferences, the pension received when old depends on the contribution rate paid when young.
Review of Economic Studies, 1988
European Economic Review, 1990
Lending across national boundaries is different from lending within national boundaries because o... more Lending across national boundaries is different from lending within national boundaries because of the difficulty of imposing legal sanctions. This paper examines a simple model of international lending where the borrower can repudiate, without legal sanction, if this is to ...
Mathematica Files For simulations depicted in Figures 1-5 and Tables 2 and 4 of the paper.
This paper considers a long-term relationship between two agents who undertake costly actions or ... more This paper considers a long-term relationship between two agents who undertake costly actions or investments which produce a joint benefit. Agents have an opportunity to expropriate some of the joint benefit for their own use. The question asked is how to structure the investments and division of the surplus over time so as to avoid expropriation. It is shown that investments may be either above or below the efficient level and that actions and the division of the surplus converges to a stationary solution at which either both investment levels are efficient or both are below the efficient level.
This paper considers a simple stochastic model of international trade with three countries. Two o... more This paper considers a simple stochastic model of international trade with three countries. Two of the tree countries are in an economic union. Comparisons are made between equilibrium welfare for these two countries under fixed and flexi-ble exchange rate regimes. Within the model it is shown that flexible exchange rate regimes generate greater welfare. However, we then consider comparisons of wel-farewhen the two countries also engage in some international assistance in order to share risk. Such risk-sharing is limited by enforcement constraints of cross border assistance. It is shown that taking into account limited commitment risk-sharing fixed exchange rates or currency areas can dominate flexible exchange rate regimes reversing the previous result.
Stock returns after a Brexit vote: the winners and the losers blogs.lse.ac.uk /politicsandpolicy/... more Stock returns after a Brexit vote: the winners and the losers blogs.lse.ac.uk /politicsandpolicy/ftse-and-brexit-sentiment/ Numerous reports warn that Brexit may have negative effects on the UK stock market. But whatever the outcome, it seems unlikely that the impact will be a uniform one, argue
Journal of Banking and Finance, Feb 1, 2019
This paper extends the DeMarzo and Duffie (1999) signaling model from single sales to portfolio s... more This paper extends the DeMarzo and Duffie (1999) signaling model from single sales to portfolio sales. It shows that the extended model can account for retention of low quality assets and help explain why retained assets may be of varying quality.
RePEc: Research Papers in Economics, Sep 1, 2011
This paper considers whether countries might mutually agree a policy of open borders, allowing fr... more This paper considers whether countries might mutually agree a policy of open borders, allowing free movement of workers across countries. For the countries to agree, the short run costs must outweighed by the long term benefits that result from better labor market flexibility and income smoothing. We show that such policies are less likely to be adopted when workers are less risk averse workers and when countries trade more. More surprisingly, we find that some congestion costs can help. This reverses the conventional wisdom that congestion costs tend to inhibit free migration policies.
Journal of International Economics, Nov 1, 2020
Fiscal integration is recognized as an important issue in determining whether countries establish... more Fiscal integration is recognized as an important issue in determining whether countries establish a common currency area. Fiscal integration between sovereign states is, however, limited by the ability of countries to commit to fiscal transfers. This paper supposes that fiscal transfers between countries must be voluntary and asks how this influences the choice between a currency area and a flexible exchange rate regime. It presents a model with wage rigidity in which, absent transfers, the flexible exchange rate regime is preferred. If there are transfers that equalize consumption, then the choice of exchange rate regime is irrelevant. Nevertheless, the currency area may be preferable if transfers are made voluntarily, because the currency area can sustain greater risk sharing. It is shown that the currency area can be optimal for a plausible set of parameter values. We consider the robustness of the conclusions to some modifications of the model.
RePEc: Research Papers in Economics, Mar 1, 2014
Is a Policy of Free Movement of Workers Sustainable? * This paper studies the costs and benefits ... more Is a Policy of Free Movement of Workers Sustainable? * This paper studies the costs and benefits of the adoption of the policy of free movement for workers. For the countries to agree on uncontrolled movement of workers, the short run costs must be outweighed by the long term benefits that result from better labor market flexibility and income smoothing. We show that such policies are less likely to be adopted when workers are impatient and less risk averse workers, when production technologies display decreasing returns and when countries trade a share of their products.
Cambridge University Press eBooks, Oct 19, 1995
This paper surveys the literature on the role of financial factors in explaining economic fluctua... more This paper surveys the literature on the role of financial factors in explaining economic fluctuations. We begin by discussing the views of some prominent early macroeconomists and then examine the recent literature on the role of asymmetric information in the market for investment finance. This literature shows that in the presence of informational asymmetries, financial factors may affect real variables like investment and output. In dynamic models real variables may also affect financial factors and may generate persistent effects of shocks even in models which would not display persistence in the absence of the informational asymmetry. Preliminary: Comments welcome.
The Economic Journal, Mar 1, 1994
Various explanations of credit rationing are based upon asymmetries of information. It has been s... more Various explanations of credit rationing are based upon asymmetries of information. It has been suggested that rationing represents a sub-optimal allocation. We examine this claim using a general equilibrium model with hidden information and costly monitoring. If credit is rationed the equilibrium is indeed sub-optimal yet social efficiency requires that credit be more tightly rationed. The reason is that loan applicants are charged for the average expected monitoring costs whereas efficiency dictates that they should bear the marginal monitoring costs which includes the effect of a rise in the interest rate on the total number of defaulting loans. A similar inefficiency can occur even in the absence of rationing and may require the introduction of rationing to correct it.
RePEc: Research Papers in Economics, Nov 5, 2002
This paper analyses a model of private unemployment insurance under limited commitment and a mode... more This paper analyses a model of private unemployment insurance under limited commitment and a model of public unemployment insurance subject to moral hazard in an economy with a continuum of agents and an infinite time horizon. The dynamic and steady-state properties of the optimum private unemployment insurance scheme are established. The interaction between the public and private unemployment insurance schemes is examined. Examples are constructed to show that for some parameter values increased public insurance can reduce welfare by crowding out private insurance more than one-for-one and that for other parameter values a mix of both public and private insurance can be welfare maximising.
This paper analyses a model of private unemployment insurance under limited commitment and a mode... more This paper analyses a model of private unemployment insurance under limited commitment and a model of public unemployment insurance subject to moral hazard in an economy with a continuum of agents and an infinite time horizon. The dynamic and steady-state properties of the private unemployment insurance scheme are established. The interaction between the public and private unemployment insurance schemes is examined. Examples are constructed to show that for some parameter values increased public insurance can reduce welfare by crowding out private insurance more than one-to-one and that for other parameter values a mix of both public and private insurance can be welfare maximising.
The fluctuations in incomes inherent in rural communities can be attenuated by reciprocal insuran... more The fluctuations in incomes inherent in rural communities can be attenuated by reciprocal insurance. We develop a model of such insurance based on self-interested behaviour and voluntary participation. One individual assists another only if the costs of so doing are outweighed by the benefits from expected future reciprocation. A distinction is made between general reciprocity where the counter obligation is expected but not certain and balanced reciprocity where there is a firm counter obligation. This firm counter obligation is reflected by including a loan or quasi-credit element in any assistance. It is shown how this can increase the insurance provided and how it may explain the widespread use of quasi-credit in rural communities. Moreover it is shown that for a range of parameter values consistent with evidence from three villages in southern India, a simple scheme of gift-giving and quasi-credit can do almost as well as theoretically better but more complicated schemes.
RePEc: Research Papers in Economics, Mar 31, 2010
This paper considers a long-term relationship between two agents who undertake costly actions or ... more This paper considers a long-term relationship between two agents who undertake costly actions or investments which produce a joint benefit. Agents have an opportunity to expropriate some of the joint benefit for their own use. The question asked is how to structure the investments and division of the surplus over time so as to avoid expropriation. It is shown that investments may be either above or below the efficient level and that actions and the division of the surplus converges to a stationary solution at which either both investment levels are efficient or both are below the efficient level.
Social Science Research Network, 2000
Recent work on consumption allocations in village economies finds that idiosyncratic variation in... more Recent work on consumption allocations in village economies finds that idiosyncratic variation in consumption is systematically related to idiosyncratic variation in income, thus rejecting the hypothesis of full risk-pooling. We attempt to explain these observations by adding limited commitment as an impediment to risk-pooling. We provide a general dynamic model and completely characterise efficient informal insurance arrangements constrained by limited commitment, and test the model using data from three Indian villages. We find that the model can fully explain the dynamic response of consumption to income, but that it fails to explain the distribution of consumption across households.
Journal of Economic Theory, Aug 1, 1990
We examine a simple repeated principal-agent model with discounting. There are a risk averse borr... more We examine a simple repeated principal-agent model with discounting. There are a risk averse borrower with an unobservable random income and a risk neutral lender. The efficient contract is characterized. It tends to the first-best (constant consumption) contract as the discount factor tends to one and the time horizon extends to infinity. If the time horizon is infinite and the contract is legally enforceable the borrower's utility becomes arbitrarily negative with probability one. If the borrower has constant absolute risk aversion consumption is transferred between any two states at a constant interest rate which is less than the rate of time preference. Journal of Economic Literature Classification Numbers: 026, 315.
RePEc: Research Papers in Economics, 1987
How should successive generations insure each other when the enforcement of transfers between the... more How should successive generations insure each other when the enforcement of transfers between them is limited? This paper examines transfers that maximize the expected discounted utility of all generations subject to a participation constraint for each generation. The resulting optimal intergenerational insurance is history dependent even when the environment is stationary. Consequently, consumption is heteroskedastic and autocorrelated across generations. The optimal intergenerational insurance arrangement is interpreted as a pay-as-you-go social security scheme with means testing and a mixture of flat-rate and contributory-related elements. With logarithmic preferences, the pension received when old depends on the contribution rate paid when young.
Review of Economic Studies, 1988
European Economic Review, 1990
Lending across national boundaries is different from lending within national boundaries because o... more Lending across national boundaries is different from lending within national boundaries because of the difficulty of imposing legal sanctions. This paper examines a simple model of international lending where the borrower can repudiate, without legal sanction, if this is to ...
Mathematica Files For simulations depicted in Figures 1-5 and Tables 2 and 4 of the paper.
This paper considers a long-term relationship between two agents who undertake costly actions or ... more This paper considers a long-term relationship between two agents who undertake costly actions or investments which produce a joint benefit. Agents have an opportunity to expropriate some of the joint benefit for their own use. The question asked is how to structure the investments and division of the surplus over time so as to avoid expropriation. It is shown that investments may be either above or below the efficient level and that actions and the division of the surplus converges to a stationary solution at which either both investment levels are efficient or both are below the efficient level.
This paper considers a simple stochastic model of international trade with three countries. Two o... more This paper considers a simple stochastic model of international trade with three countries. Two of the tree countries are in an economic union. Comparisons are made between equilibrium welfare for these two countries under fixed and flexi-ble exchange rate regimes. Within the model it is shown that flexible exchange rate regimes generate greater welfare. However, we then consider comparisons of wel-farewhen the two countries also engage in some international assistance in order to share risk. Such risk-sharing is limited by enforcement constraints of cross border assistance. It is shown that taking into account limited commitment risk-sharing fixed exchange rates or currency areas can dominate flexible exchange rate regimes reversing the previous result.