A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics National Bureau of Economic Research (NBER) (Ed.) Periodical Part NBER Reporter Online, Volume 2009 NBER Reporter Online Provided in Cooperation with: National Bureau of Economic Research (NBER), Cambridge, Mass. Suggested Citation: National Bureau of Economic Research (NBER) (Ed.) (2009) : NBER Reporter Online, Volume 2009, NBER Reporter Online, National Bureau of Economic Research (NBER), Cambridge, MA This Version is available at: http://hdl.handle.net/10419/61992 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. 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Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu NBER Reporter NATIONAL BUREAU OF ECONOMIC RESEARCH Reporter OnLine at: www.nber.org/reporter 2009 Number 4 Program Report IN THIS ISSUE Program Report Corporate Finance Corporate Finance 1 Raghuram G. Rajan* Research Summaries Home Production … and Labor Supply 6 The Effects of Medicaid Expansions … 9 Insider Econometrics … 13 The NBER’s Program on Corporate Finance was founded in 1991, and has initiated some very promising avenues of research since then. Narrowly NBER Profiles 16 interpreted, corporate finance is the study of the investment and financing Conferences 18 policies of corporations. Because firms are at the center of economic activ- NBER News 22 ity, and almost any topic of concern to economists — from microeconomic Program and Working Group Meetings 23 issues like incentives and risk sharing to macroeconomic issues such as cur- Bureau Books 33 rency crises — affects corporate financing and investment, it is however increasingly difficult to draw precise boundaries around the field. The range of subjects that Corporate Finance Program members have addressed in their research reflects this broad scope. Rather than offer- ing a broad brush survey of all the work currently being done, however, I thought it would be most useful to focus on what our researchers have contributed to the analysis of the ongoing financial crisis. Even here, I have had to be selective, given the large number of papers on this subject in the last two years. I should also note that even prior to the crisis, Corporate Finance Program members had done important work on such topics as credit booms, illiquidity, bank runs, and credit crunches. This work laid much of the foundation for the more recent analyses. In the interests of space, though, I will not survey that earlier work. A number of papers offer an overview of the crisis (Brunnermeier, 14612; Diamond and Rajan, 14739; Gorton, 14398). There is some con- sensus on its proximate causes: 1) the U.S. financial sector financed low- income borrowers who wanted to buy houses, and it raised money for such lending through the issuance of exotic new financial instruments; 2) banks seemed very willing to take risks during this time, and a significant portion of these instruments found their way, directly or indirectly, into commer- cial and investment bank balance sheets; 3) these investments were largely *Rajan directs the NBER’s Program on Corporate Finance and is the Eric J. Gleacher Distinguished Service Professor of Finance at the University of Chicago’s Booth School of Business. In this article, the numbers in parentheses refer to NBER Working Papers. NBER Reporter • 2009 Number 4 financed with short-term debt. But what were the more fundamental reasons for these proxi- NBER Reporter mate causes? Why Low Income Borrowers? Atif Mian and Amir Sufi (13936) offer persuasive evidence that it was an increase in The National Bureau of Economic Research is a private, nonprofit research orga- the supply of finance to low-income borrow- nization founded in 1920 and devoted to objective quantitative analysis of the ers — not an improvement in the credit quality American economy. Its officers and board of directors are: of those borrowers — that drove lending, appre- President and Chief Executive Officer — James M. Poterba ciation of house prices, and subsequent mort- Controller — Kelly Horak gage defaults. They argue that zip codes with BOARD OF DIRECTORS high unmet demand for credit in the mid-1990s Chairman — John S. Clarkeson (typically dominated by low-income potential Vice Chairman — Kathleen B. Cooper borrowers) experienced large increases in lend- Treasurer — Robert Mednick ing from 2001 to 2005. These increases occurred DIRECTORS AT LARGE even though these zip codes experienced signifi- Peter Aldrich Jessica P. Einhorn Alicia H. Munnell cantly negative relative income and employment Elizabeth E. Bailey Mohamed El-Erian Rudolph A. Oswald growth over this time period, suggesting that Richard Berner Jacob A. Frenkel Robert T. Parry John Herron Biggs Judith M. Gueron James M. Poterba improvements in demand did not drive lend- John S. Clarkeson Robert S. Hamada John S. Reed ing. The increase in the supply of credit seemed Don R. Conlan Karen N. Horn Marina v. N. Whitman to be associated with a sharp relative increase in Kathleen B. Cooper John Lipsky Martin B. Zimmerman Charles H. Dallara Laurence H. Meyer the fraction of loans from these zip codes sold George C. Eads Michael H. Moskow by originators for securitization. The increase in the supply of credit from 2001 to 2005 led to DIRECTORS BY UNIVERSITY APPOINTMENT subsequent large increases in mortgage defaults George Akerlof, California, Berkeley Joel Mokyr, Northwestern from 2005 to 2007. Mian and Sufi conclude that Jagdish W. Bhagwati, Columbia Andrew Postlewaite, Pennsylvania originators selling mortgages were a main cause Glen G. Cain, Wisconsin Uwe E. Reinhardt, Princeton Ray C. Fair, Yale Nathan Rosenberg, Stanford of the U.S. mortgage default crisis. Franklin Fisher, MIT Craig Swan, Minnesota Why did supply increase? One possibility is Mark Grinblatt, California, Los Angeles David B. Yoffie, Harvard that financial innovation— the process of securi- Saul H. Hymans, Michigan Arnold Zellner, Chicago Marjorie B. McElroy, Duke tization which spread risk — enabled the finan- cial sector to lend to risky borrowers who previ- DIRECTORS BY APPOINTMENT OF OTHER ORGANIZATIONS ously were rationed. The reality, though, is that Jean Paul Chavas, Agricultural and Applied Economics Association Martin Gruber, American Finance Association deep flaws in the process of securitization seem Timothy W. Guinnane, Economic History Association to have compromised quality. Efraim Benmelech Arthur B. Kennickell, American Statistical Association and Jennifer Dlugosz (14878, 15045) offer some Thea Lee, American Federation of Labor and Congress of Industrial Organizations evidence on the extent to which low quality William W. Lewis, Committee for Economic Development mortgage packages were transformed into highly Robert Mednick, American Institute of Certified Public Accountants rated securities. They suggest that “ratings shop- Angelo Melino, Canadian Economics Association Harvey Rosenblum, National Association for Business Economics ping” by some issuers of mortgage backed secu- John J. Siegfried, American Economic Association rities (which refers to the process by which an The NBER depends on funding from individuals, corporations, and private foun- issuer finds the rating agency that will offer the dations to maintain its independence and its flexibility in choosing its research most favorable rating), as well as a fall in stan- activities. Inquiries concerning contributions may be addressed to James M. dards at some rating agencies, must have played Poterba, President & CEO, NBER 1050 Massachusetts Avenue, Cambridge, MA 02138-5398. All contributions to the NBER are tax deductible. a role in the deterioration in quality. Vasiliki Skreta and Laura Veldkamp (14761) argue that The Reporter is issued for informational purposes and has not been reviewed by for complex products, where rating agencies the Board of Directors of the NBER. It is not copyrighted and can be freely repro- duced with appropriate attribution of source. Please provide the NBER’s Public could have produced a greater dispersion in rat- Information Department with copies of anything reproduced. ings even if totally unbiased, the incentive for Requests for subscriptions, changes of address, and cancellations should be sent the issuer to shop for the highest rating may have to Reporter, National Bureau of Economic Research, Inc., 1050 Massachusetts been higher, and therefore the inherent bias in Avenue, Cambridge, MA 02138-5398. Please include the current mailing label. published ratings larger. It would be interesting 2 NBER Reporter