Nov 4, 2008

What really caused the financial crisis

The answer in our new Rigotnomics working paper.


Cam said...

Am I right in understanding that in your paper, social capital is a proxy of the level of trust between economic agents in society?

Daniela said...

Very interesting indeed. And congratulations on writing this paper in such a short time.

In any case, my understanding was that in the paper the erosion of social capital is assumed to imply greater dispersion of risk (the fat tails). It would be interesting to check that assumption.

Pierre-Louis said...

yeah that's excatly it daniela! it is also a proxy for trust (empirically)...appreciate your furtehr comments guys, we wenat to make this a good one!

Pierre-Louis said...

seems like Obama will follows our policy recommendation!!!

From the President-elect's website(

The Obama Administration will call on Americans to serve in order to meet the nation’s challenges. President-Elect Obama will expand national service programs like AmeriCorps and Peace Corps and will create a new Classroom Corps to help teachers in underserved schools, as well as a new Health Corps, Clean Energy Corps, and Veterans Corps. Obama will call on citizens of all ages to serve America, by developing a plan to require 50 hours of community service in middle school and high school and 100 hours of community service in college every year. Obama will encourage retiring Americans to serve by improving programs available for individuals over age 55, while at the same time promoting youth programs such as Youth Build and Head Start.

T-Viddy said...

This is a fantastic idea for paper.
But I do have two objections. You assume that var(Pl) > Var(Ph), but I dont quite understand why the fact that we have similar values should decrease my probability of defaulting.
It almost seems to me like in your model, this is an implicit assumption on the income distribution in disguise.

On the empirical part, as with most social capital/trust studies, there is a reverse causality problem. How do you know that the causality does not run the other way around ?

and What about level of education ? Low social capital can also be a result of education and information. If I am not smart/informed enough to make the right decision regarding my financial fuutre, I will take a loan no matter what.......

So maybe social capital is capturing something else.... So there is a lot of things to control for, but the idea is in general amazing.