We offer a theory of how inefficiently lax financial regulation could arise in a democratic society.
Staff working papers
When lenders cannot directly identify behavioural and rational borrowers, they use type scoring to track the likelihood of a borrower’s type. This leads to the partial pooling of borrowers, which results in rational borrowers subsidizing borrowing costs for behavioural borrowers. This, in turn, reduces the effectiveness of regulatory policies that target mistakes by behavioural borrowers.
This paper studies the choice between general and specific human capital. A trade-off arises because general human capital, while less productive, can easily be reallocated across firms.