Archive for March 25th, 2011

Mistrust in financial markets, professional cycling and cricket

March 25, 2011

Antonio Fatas in his super blog has a nice post. He points to this article by Luigi Zingales who laments on the way the whole the insider-trading trial of Raj Rajaratnam has come up.

If you thought that America’s financial sector had gotten enough of bad publicity, think again. The insider-trading trial of Raj Rajaratnam, a billionaire hedge-fund manager, has now begun. It is likely to provide an especially lurid exposé of the corrupt underbelly of the financial world.

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The Bribery game: Changing incentives of the bribe giver and taker

March 25, 2011

We usually assume in a bribe, both the giver of the bribe and taker of the bribe are equally responsible and  punished equally as well.

Kaushik Basu, Chief Economic Adviser of Ministry of Finance gives this game an interesting twist.

  • He says the punishment to the giver and taker should be asymmetric.
  • The giver should not be penalised but the taker should be doubly penalised. Hence, the total amount of fine remains the same.
  • This should apply to bribes which are harassment bribes i.e. those bribes where the giver is entitled to something but only gets it after paying a bribe. Like passport, driving licence, income tax refund etc
  • THis change will do two things. One the giver will try and get the taker trapped. Two, this might discourage the taker itself from taking the bribe.

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Government Bonds: No Longer a World Without Risk

March 25, 2011

José Viñals of IMF writes this superb post on the topic.

So far, most books and models treated govt bonds as risk-free. Not any more. Another major impact of this crisis has been that government bonds can no more be seen as risk-free.

One thing is now very clear: government bonds are no longer the risk-free assets they once were. This carries far reaching implications for policymakers, central bankers, debt managers, and how the demand and supply sides of government bond markets function.

After a recent IMF conference on a new approach to government risk, I’d like to highlight three key aspects:

  • In a world without a risk free rate, the health of the financial sector and the government are closely interconnected.
  • Countries with large potential liabilities from their banking sectors need to identify, assess, monitor, and report related risks closely.
  • The risks involved call for stronger emphasis on stress tests. 

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