Vol. 25, No.1

J.-P. Niinimäki:
Optimal Design of Bank Bailouts: The Case of Prompt Corrective Action (pp. 1–19)

The paper investigates the optimal design of bank bailouts in economies where banks can hide loan losses, and focuses on banking regulation via two Prompt Corrective Action instruments: prohibition of dividends and early closure policy. The first has a mitigating effort on moral hazard and regulator’s costs but the second instrument has a damaging impact. As to bad debts and the cleaning of banks’ balance sheets, asset insurance for the bank’s loan portfolio, bank capital and prohibition of dividends motivate banks to disclose loan losses.

(JEL: G21, G28)

Uuganbaatar Ninjbat:
An Axiomatization of the Leontief Preferences (pp. 20–27)

An axiomatic characterization of the well known Leontief preferences is given. The key axiom is upper consistency, which states that for any two bundles, another bundle is weakly preferred to at least one of them if and only if it is weakly preferred to the bundle that contains the least amount of each commodity in them.

(JEL: D01, D11)

Mikko Puhakka and Matti Viren:
Social Security, Saving and Fertility (pp. 28–42)

We investigate the effect of government policies on fertility in a model where children are mainly seen as investment goods. To illustrate this effect we construct a simple overlapping generations economy in which households (parents) can invest both in children and financial assets. An introduction of the public social security system lowers the incentive to have children, i.e. fertility will be lower. This is an important negative externality. We test some of the model’s basic implications using unique long historical panel data from 11 countries for the period 1750–2000. In addition, we use two additional, more recent, data sets to reinforce the empirical results obtained with historical data. These analyses show that there is a positive relationship between ageing and fertility if we control for the key determinants of fertility. By contrast, there is a strong negative relationship between (various indicators of) social security and fertility. Empirical evidence is found for the notion that child support increases fertility.

(JEL: E21, E32)

Finnish Economic Papers 1/2012