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01 February 2015  

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See the latest research from the ECGI published in the ECGI Finance Working Paper series
Sat, 10 Jan 2015 00:50 GMT  
ECGI Finance Working Paper 445/2015

Viral Acharya, New York University, CEPR, NBER and ECGI
Anjan Thakor, Washington University in St. Louis and ECGI

Submitted by
Viral Acharya
micro-prudential regulation, macro-prudential regulation, market discipline, contagion, lender of last resort, bailout, capital requirements

We consider a model in which the threat of bank liquidations by creditors as well as equity-based compensation incentives both discipline bankers, but with different consequences. Greater use of equity leads to lower ex ante bank liquidity, whereas greater use of debt leads to a higher probability of inefficient bank liquidation. The bank’s privately-optimal capital structure trades off these two costs. With uncertainty about aggregate risk, bank creditors learn from other banks’ liquidation decisions. Such inference can lead to contagious liquidations, some of which are inefficient; this is a negative externality that is ignored in privately-optimal bank capital structures. Thus, under plausible conditions, banks choose excessive leverage relative to the socially optimal level, providing a rationale for bank capital regulation. While a blanket regulatory forbearance policy can eliminate contagion, it also eliminates all market discipline. However, a regulator generating its own information about aggregate risk, rather than relying on market signals, can restore efficiency by intervening selectively.

to view details and download this Working Paper from the SSRN website

All ECGI Working Papers in the Law and Finance series are available on the ECGI website at www.ecgi.org/wp
See the latest research from the ECGI published in the ECGI Law Working Paper series
Sun, 25 Jan 2015 02:53 GMT  
ECGI Law Working Paper 279/2015

Paul Davies, University of Oxford and ECGI

Submitted by
Paul Davies
Employee involvement, codetermination, consultation, labour contracting costs

The dominant agency-cost paradigm for the analysis of corporate law is based on the proposition that the welfare of society is best met by rules which minimise the costs of production through the corporate form. This is typically interpreted to mean that the agency costs of shareholders should be minimised, so as to reduce the company’s cost of capital. However, it is clear that the agency cost analysis admits of the theoretical possibility that a company’s overall costs of production might be minimised even in the presence of sub-optimal rules relating to the cost of capital if those additional capital costs were outweighed by a greater reduction in the costs of contracting for other inputs necessary for the company’s productive activities. It has often been asserted that this situation obtains in relation to labour inputs. This essay seeks to establish the basis on which this argument might be formulated, dealing in particular with the proposition that employees can obtain full protection for their exchange relationship through contracting with the company. It then considers what empirical evidence is available about the production costs of companies in systems with high levels of mandatory employee involvement in decision-making. It focuses in particular on the tripartite system of employee representation in Germany – board representation, works councils and collective bargaining. Finally, it speculates about the conditions under which high levels of employee involvement might reduce a company’s overall costs of production or, by contrast, might increase those costs.

to view details and download this Working Paper from the SSRN website

All ECGI Working Papers in the Law and Finance series are available on the ECGI website at www.ecgi.org/wp