Public reporting burden for the collection of information is estimated to average 1 hour per response, including the time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection of information. Send comments regarding this burden estimate or any other aspect of this collection of information, including suggestions for reducing this burden, to Washington Headquarters Services, Directorate for Information Operations and Reports, 1215 Jefferson Davis Highway, Suite 1204, Arlington VA 22202-4302. Respondents should be aware that notwithstanding any other provision of law, no person shall be subject to a penalty for failing to comply with a collection of information if it does not display a currently valid OMB control number. 1. REPORT DATE

The copyright to this Article is held by the Econometric Society. It may be downloaded, printed and reproduced only for educational or research purposes, including use in course packs. No downloading or copying may be done for any commercial purpose without the explicit permission of the Econometric Society. For such commercial purposes contact the Office of the Econometric Society (contact information may be found at the website

b-"."- " ",%"' " "" "... 'r ",. ¢ ' 'o ";".". "'""- '-.' " '-"q,'.-. "-:'._4"L,. *, *- "".*".5* '- *..*, *.'-,* * ew

It is commonly assumed that binding collateral constraints amplify the impact of aggregate shocks on the economy. However, we show that when firms can hedge against aggregate risk with state-contingent lending contracts, binding collateral constraints no longer amplify shocks relative to the basic

and to delay exerting effort. We show that in the principal’s optimal contract, deadlines and payment schemes can be used jointly as effective instruments to motivate the agent to exert e¤ort and to avoid delay so that a better outcome can be achieved for the principal. Specifically, if a time-contingent wage

We examine banking competition when deposit or loan contracts contingent on macroeconomic shocks become feasible. We show that the risk allocation is ef-ficient, provided that banks are not bailed out. In this case, banks may shift part of the risk to depositors. The private sector insures

Approved for public release; distribution is unlimited. THIS PAGE INTENTIONALLY LEFT BLANK i

We gratefully acknowledge Kalyan Chaterjee and Vidyanand Choudhary for providing useful comments

There is a mistake in the proof of Lemma 2 (the statement of which is correct) in Deb and Mishra (2014)- the partition created in Lemma 2 is not f-ordered partitioned as claimed. We are very grateful to Kiho Yoon who brought this error to our attention. Below is the corrected proof of Lemma 2. Lemma 2: Suppose the type space is finite and f is an acyclic scf. Then, the type space can be f-ordered partitioned. Corrected Proof: We define a new relation Bf as follows: for every vi, v′i, we say vi Bf v′i if there is a finite sequence {v1i,..., vki} such that vi ≡ v1i f v2i f... f vki ≡ v′i, with at least one of the above relations strict (f). Now, we do the proof in several steps. Step 1. First, we show that Bf is acyclic. Consider a sequence v1i,..., vki such that v1i Bf... Bf vki. Assume for contradiction vki Bf v1i. So, we get v1i Bf... Bf vki Bf vk+1i ≡ v1i. Between any consecutive types vji and v j+1 i in this sequence, we have v j i f... f vj+1i, with strict relation holding for at least one. Hence, we get a finite sequence v1i f... f vk+1i ≡ v1i with strict relation holding for at least one. Acyclicity of f implies that v1i f v1i, contra-dicting the reflexivity of f. Step 2. Next, choose any nonempty subset V ′i ⊆ Vi, and let M(V ′i) ⊆ V ′i be the set of maximal elements of V ′i corresponding to the relation Bf. Formally M(V ′i): = {vi | vi ∈ V ′i and there is no v′i ∈ V ′i such that v′i Bf vi}. Since Bf is acyclic, M(V ′i) is non-empty. Step 2(a). v′i f vi for every vi, v′i ∈ M(V ′i). To see this, if v′i f vi, then v′i Bf vi, contradicting vi ∈M(V ′i). Step 2(b). v′i f vi for every vi ∈M(V ′i) and every v′i ∈ (V ′i \M(V ′i)). Assume for contra-diction v′i f vi. Since v′i / ∈ M(V ′i), there exists a v′′i such that v′′i Bf v′i. Hence, there is a

to make decisions on the basis of their beliefs. We assume that agents adopt Rational Beliefs as in Kurz [1994a]. The trading of endogenous uncertainty is accomplished by using Price Contingent Contracts (PCC) rather than the Arrow-Debreu state contingent contracts. The paper provides a full construction