By Jessica McCann
Welcome to Working Papers of the Week! Our goal is to highlight the valuable and interesting research Kennedy School faculty members are doing here and abroad by featuring new working papers recently uploaded to the site.
This week in working papers:
Loss Sequencing in Banking Networks: Threatened Banks as Strategic Dominoes
Tran, Ngoc-Khanh, Thao Vuong, and Richard Zeckhauser, August 2016
Abstract: We demonstrate in a stylized banking network that a single large loss has the potential to leave markedly different impacts on the financial system than does a sequence of moderate losses of the same cumulative magnitude. Loss sequencing matters because banks make strategic bailout decisions based on their myopic assessment of losses, yet these decisions are highly consequential to subsequent decisions and eventual losses at other banks in the network. In particular, the network mechanism enables banks to choose to bail out their creditors after every moderate loss incurred in a sequence, while walking away from the creditors should they experience a single large loss. Government policy can force threatened banks to liquidate or sell themselves or, at the opposite pole, can bail out some such banks or overlook their threatened status. The former policy would concentrate a string of losses into a single large event; the latter could prevent a massive single loss at the expense of multiple subsequent smaller losses. As this analysis shows, either policy could prove optimal depending on identifiable circumstances. These findings have important implications for on-going policy debates that emanated from the 2008 meltdown.
Measuring Judicial Ideology Using Law Clerk Hiring
Bonica, Adam, Adam Chilton, Jacob Goldin, Kyle Rozema, and Maya Sen, July 2016
Abstract: We present a new measure of judicial ideology based on judicial hiring behavior. Specifically, we utilize the ideology of the law clerks hired by federal judges to estimate the ideology of the judges themselves. These Clerk-Based Ideology (CBI) scores complement existing measures of judicial ideology in several ways. First, CBI scores can be estimated for judges across the federal judicial hierarchy. Second, CBI scores can capture temporal changes in ideology. Third, CBI scores avoid case selection and strategic behavior concerns that plague existing vote-based measures. We illustrate the promise of CBI scores through a number of applications.
A Quantum Leap over High Hurdles to Financial Inclusion: The Mobile Banking Revolution in Kenya
Rosengard, Jay K., June 2016
Abstract: A powerful tool to achieve equitable development is promotion of economic empowerment for marginalized citizens by increasing formal financial services access and utilization. The provision of these services via mobile phones has shown great promise in overcoming geographic, demographic, and institutional constraints to financial inclusion, especially in Africa and led by the mobile banking revolution in Kenya. This is exemplified by the extraordinary success since 2007 of Safaricom’s M-PESA, a mobile phone-based money transfer, payment, and banking service: as of June 2015, Safaricom had more than 22 million M-PESA subscribers served by over 90,000 M-PESA agents. The confluence of several factors have contributed to M-PESA's success, including Kenya's political and economic context, demographics, telecommunications sector structure, lack of affordable consumer options, and enabling regulatory policies. Equally important have been Safaricom's internal astute management and marketing of M-PESA. But M-PESA is now facing a strong new rival in Airtel Money, offered by Equity Bank, Kenya's third largest bank. Now two different models for mobile financial services are competing vigorously in Kenya: Safaricom, an example of telecom-led mobile banking and Equity Bank, an example of bank-led mobile banking. There are three key challenges in Kenya to further promotion of financial inclusion via development of mobile financial services: facilitation of increased competition; transformation of non-digital microfinance institutions; and enactment of greater consumer protection. Where Kenya’s success factors might be present, many of Kenya’s lessons can be adapted. Where conditions are significantly different, the challenge becomes how best to nurture home-grown innovative solutions to address specific local constraints.
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