· “Dynamic Competitive Economies with Complete Markets and Collateral
Constraints” (with
Felix Kubler), Feb. 2012 [download pdf]
Abstract: In this paper we examine
the competitive equilibria of a dynamic stochastic
economy with complete markets. We show that the completeness of the market
requires both the set of asset payoffs and collateral levels to be sufficiently
rich, so as to allow to decentralize the equilibrium
allocations obtained in Arrow-Debreu markets subject to a series of appropriate
limited pledgeability constraints. We provide then
sufficient conditions for equilibria to be Pareto
efficient and show that when collateral is scarce equilibria
are also often constrained inefficient, in the sense that imposing tighter
borrowing restrictions can make everybody in the economy better off. We derive sufficient conditions for the
existence of Markov equilibria and show that they
often have finite support. The model is then tractable and its equilibria can be computed with arbitrary accuracy. We
carry out on this basis a quantitative assessment of the risk sharing and
efficiency properties of equilibria.
· “Optimal taxation and constrained inefficiency in an
infinite-horizon economy with incomplete markets (with Atsushi Kajii and
Tomoyuki Nakajima), May 2011 [download pdf]
Abstract: We study the dynamic
Ramsey problem of finding optimal public debt and linear taxes on capital and
labor income within a tractable infinite horizon model with incomplete markets.
With zero public expenditure and debt, it is optimal to tax the risky labor
income and subsidize capital, while a positive amount of public debt is welfare
improving. A steady state optimality condition is derived which implies that
the tax on capital is positive, when savings are sufficiently inelastic to
returns. A calibration of our model to the US economy indicates positive
optimal taxes and a small but positive optimal debt level.
· “Risk Sharing and Retrading in Incomplete
Markets” (with
Rohit Rahi), Jan. 2012. [download pdf]
Abstract: At a competitive equilibrium of an incomplete-markets economy agents' marginal valuations for the tradable assets are equalized ex-ante. We characterize the finest partition of the state space conditional on which this equality holds for any economy. This leads naturally to a necessary and sufficient condition on information that would lead to retrade, if such information were to become publicly available after the initial round of trade.
· “Value
of Information in Competitive Economies with Incomplete Markets” (with Rohit
Rahi), revised Oct. 2011. [download pdf]
Abstract: We study the value of public information in competitive economies with incomplete asset markets. We show that generically the welfare effects of a change in the information available prior to trading can be in any direction: there exist changes in information that make all agents better off, and changes for which all agents are worse off. In contrast, for any change in information, a Pareto improvement is feasible, i.e. attainable by a planner facing the same informational and asset market constraints as agents. In this sense, the response of competitive markets to changes in information is typically not socially optimal.
· “Constrained Inefficiency and Optimal Taxation with Uninsurable Risks” (with Atsushi Kajii and Tomoyuki
Nakajima), revised March 2012 [download pdf]
Abstract:
When individuals' labor and capital income are subject to
uninsurable idiosyncratic risks, should capital and labor be taxed, and if so how?
In a two period general equilibrium model with production, we derive a
decomposition formula of the welfare effects of these taxes into insurance and
distribution effects. This allows us to determine how the sign of the optimal
taxes on capital and labor depend on the nature of the shocks, the degree of
heterogeneity among consumers' income as well as on the way in which the tax
revenue is used to provide lump sum transfers to consumers. When shocks affect
primarily labor income and heterogeneity is small, the optimal tax on capital
is positive. However in other cases a negative tax on capital is welfare
improving.
· “Equilibrium Corporate Finance: Makowski meets
Prescott and Townsend” (with Alberto Bisin and Guido Ruta), revised Oct. 2011 [download pdf]
Abstract:
We study a
general equilibrium model with production where financial markets are
incomplete. At a competitive equilibrium firms take their production and
financial decisions so as to maximize their value. If firms form perfectly
competitive conjectures, as shown by Makowski (1983a,
1983b), shareholders unanimously support value maximization and competitive equilibria are constrained Pareto optimal. We extend this
result to allow for intermediated short sales of firms' equity and default. We
also extend the analysis to encompass informational asymmetries. In this
context we show that perfectly competitive conjectures implicitly support the
equilibrium concept introduced by Prescott Townsend (1984) and unanimity and
constrained Pareto optimality are maintained. For all these economies the
Modigliani-Miller theorem typically does not hold and the firms' corporate
financing structure is determinate in equilibrium.
Appendix C to: “Equilibrium
Corporate Finance: Makowski meets Prescott and
Townsend” (with Alberto Bisin and Guido Ruta), revised Oct. 2011 [download pdf]
· “Flexible Contracts” (with Jean-Marc Tallon and Paolo Ghirardato),
revised Feb. 2012 [download pdf]
Abstract: This paper studies the costs and benefits of delegating decisions to superiorly informed agents, that is of adopting flexible contracts, relative to the use of rigid, non discretionary contracts. The main focus of the paper lies in the analysis of the costs of delegation, primarily agency costs, versus their benefits, primarily the flexibility of the action choice.
We first determine and characterize the properties of the
optimal flexible contract. We then show that the higher the agent's degree of
risk aversion, the higher is the agency costs of delegation and the less
profitable a flexible contract relative to a rigid one. The same is true the
lower is the variance of the productivity of the agent's actions. When the
parties do not have sharp probability beliefs, the agent's degree of
imprecision aversion introduces another agency cost, which again reduces the
relative profitability of flexible contracts.
Appendix to: Flexible
Contracts (with Jean-Marc Tallon and Paolo Ghirardato), June 2011 [download
pdf].
· “Markets for Information: Of Inefficient
Firewalls and Efficient Monopolies” (with Antonio Cabrales), revised Aug.
2011 [download pdf]
Abstract: In this paper we study market environments where information is
costly to acquire and is also of use to potential competitors. Agents may then sell, or buy, reports over
the information acquired and choose the trades in the market on the basis of
what they learnt. Reports are unverifiable - cheap talk messages - hence the
quality of the information transmitted depends on the conflicts of interest
faced by the senders. We find that, in equilibrium, information is acquired
when its costs are not too high and in that case it is also sold, though
reports are typically noisy. Also, the
market for information is in most cases a monopoly, and there is inefficiency
given by underinvestment in information acquisition. Regulatory interventions
in the form of firewalls, limiting the access to the sale of information to
agents uninterested in trading the underlying object, only make the inefficiency worse.
Efficiency can be attained with a monopolist selling differentiated
information, provided entry is blocked.
The above findings hold when information has a prevalent horizontal
differentiation component. When the vertical differentiation element is more
important firewalls can in fact be beneficial.
Appendix to: Markets for Information: Of Inefficient Firewalls and Efficient Monopolies (with Antonio Cabrales) [download pdf]
· “Bankruptcy: Is It Enough
to Forgive or Must We Also Forget?” (with
Ronel Elul), revised Sept. 2011. [download pdf]
Abstract: In many countries, lenders are restricted in their access to information
about borrowers’ past defaults. We study this provision in a model of repeated borrowing
and lending with moral hazard and adverse selection. We analyze its effects on
borrowers’ incentives and access to credit, and identify conditions under which
it is optimal. We argue that “forgetting” must be the outcome of a regulatory
intervention by the government. Our model’s predictions are consistent with the
cross-country relationship between credit bureau regulations and the provision
of credit, as well as the evidence on the impact of these regulations on
borrowers’ and lenders’ behavior.
Appendix to “Bankruptcy: Is It Enough to Forgive or
Must We Also Forget?” (with Ronel Elul) [download
pdf]
·
"Decentralizing
Efficient Allocations in Economies with
Adverse Selection: the General Case"
(with Alberto Bisin), revised
Sept. 2010 [download pdf]
Abstract:
We study competitive economies with adverse selection and fully
exclusive contractual relationships. We show that Walrasian
equilibria always exist and are efficient for the
general class of adverse selection insurance economies considered by Prescott
and Townsend (1984). The result requires an appropriate expansion of the set of
markets, in the spirit of Arrow (1969) and Lindahl
(1919), to include markets for consumption rights so as to internalize the
externality induced by the incentive constraints with adverse selection. Given
the non-convexities generated by these constraints, the commodity space is
enlarged to allow for lotteries. Our analysis has then also some useful
implications for the study of Arrow-Lindahl equilibria in general economies in the presence of
non-convexities.
· “Bankruptcy, Finance Constraints and the Value of the Firm” (with Douglas Gale), Aug. 2010, American Economic Journal:
Microeconomics 3 (May 2011),
1-37 [download pdf]
Abstract: We study a competitive model in which market incompleteness implies that debt-financed firms may default in some states of nature and default may lead to the sale of the firms' assets at fire sale prices when a finance constraint is binding. The only frictions in the model are the finance constraint and the incompleteness of markets. The only cost of default is the sale of assets at less than their fundamental or economic value, but since there is a representative consumer, this transfer does not reduce consumers’ wealth. The anticipation of such “losses” alone may distort firms’ investment decisions. We characterize the conditions under which fire sales occur in equilibrium and their consequences on firms’ investment decisions. We also show that endogenous financial crises may arise in this environment, with asset prices collapsing as a result of pure self-fulfilling beliefs. Finally, we examine alternative interventions to restore the efficiency of equilibria.
Abstract: In this paper we identify conditions under which the introduction of a pay-as-you-go social security system is ex-ante Pareto-improving in a stochastic overlapping generations economy with capital accumulation and land. We argue that these conditions are consistent with realistic specifications of the parameters of the economy. In our model financial markets are complete and competitive equilibria are interim Pareto efficient. Therefore, a welfare improvement can only be obtained if agents' welfare is evaluated ex ante, and arises from an improvement in intergenerational risk sharing.
We examine the various effects of social security, on the prices of long-lived assets and the stock of capital, and hence on output, wages and risky rates of returns, can be clearly identified. In addition, we analyze the optimal size of a given social security system as well as its optimal reform.
· "Markets and Contracts" (with Alberto Bisin, John Geanakoplos, Enrico Minelli and Heraklis
Polemarchakis), December 2010, Journal of Mathematical Economics 47 (May
2011), 279-288. [download pdf]
Abstract:
Economies with asymmetric information are encompassed by an
extension of the model of general competitive equilibrium that does not require
an explicit modeling of private information. Sellers have discretion over
deliveries on contracts; this is in common with economies with default,
incomplete contracts or price rigidities. Competitive equilibria
exist and anonymous markets are viable. But, for a generic economy, there exist
Pareto improving interventions via linear, anonymous taxes.
· “Comment on ‘Bertrand and Walras Equilibria under Moral Hazard’”, (with
Belén Jerez), Journal
of Political Economy 115 (October 2007), 893-900. [download pdf]
Abstract: In a fundamental contribution, Prescott and Townsend (1984) have shown that the existence and efficiency properties of Walrasian equilibria extend to economies with moral hazard and exclusive contracts. Recently, Bennardo and Chiappori (2003) have argued that Walrasian equilibria may (robustly) fail to exist when the class of moral hazard economies in Prescott-Townsend is generalized to allow for aggregate, in addition to idiosyncratic, uncertainty, if preferences are nonseparable in consumption and effort. This note shows that such claim is incorrect and that the existence and efficiency properties of Walrasian equilibria remain valid in the set-up considered by Bennardo and Chiappori.
· " Managerial Hedging and Portfolio Monitoring" (with Alberto Bisin and Adriano Rampini), revised
Dec. 2006, Journal of the European Economic Association 6 (March 2008), 158-209. [download pdf]
Abstract: Incentive
compensation induces correlation between the portfolio of managers and the cash
flow of the firms they manage. This correlation exposes managers to risk and
hence gives them an incentive to hedge against the poor performance of their
firms. We study the agency problem between shareholders and a manager when the
manager can hedge his compensation using financial markets and shareholders can
only imperfectly monitor the manager's portfolio in order to keep him from
hedging. We find that the optimal incentive compensation and governance
provisions have the following properties: (i) the
manager's portfolio is monitored only when the firm performs poorly, (ii) the
manager's compensation is more sensitive to firm performance when monitoring is
costly or when hedging markets are more developed, and (iii) conditional on the
firm's performance, the manager's compensation is lower when his portfolio is
monitored, even if no hedging is revealed by monitoring. Moreover, the model
suggests that the optimal level of portfolio monitoring is higher for managers
of firms whose performance can be hedged more easily, such as larger firms and
firms in more developed financial markets.
·
"Local
Sunspot Equilibria Reconsidered" (with Julio Davila and Atsushi Kajii), Jan.
2006, Economic
Theory 31 (June 2007), 401-425. [download pdf]
Abstract: In this paper we propose a generalization of
the usual notion of local sunspot equilibria: we say
local stationary sunspot equilibria exist around a
steady state of an overlapping generations economy
whenever stationary sunspot equilibria of arbitrarily
close economies can be found within any neighborhood
of the steady state. Unlike the usual notion, this generalized notion allows us
to address the following identification problem: Can an analyst distinguish
empirically small fluctuations due to small shocks to the fundamentals from
pure expectations-driven fluctuations? We study the conditions under which
local sunspot equilibria according to the proposed
notion exist in overlapping generations economies, and
show in particular that they may exist not only around indeterminate steady
states but also around determinate ones.
· "Efficient Competitive Equilibria with Adverse Selection" (with Alberto Bisin), revised
Jan. 2006, Journal of
Political Economy 114
(June 2006), 485 - 516. [download
pdf]
Abstract:
Do Walrasian markets function orderly in the
presence of adverse selection? In particular, Is their
outcome efficient when exclusive contracts are enforceable? This paper
addresses these questions in the context of a Rothschild and Stiglitz insurance economy. We identify an externality
associated with the presence of adverse selection as a special form of
consumption externality. Consequently, we show that competitive equilibria always exist but are not typically incentive
efficient. However, as markets for pollution rights can internalize
environmental externalities, markets for consumption rights can be designed to
internalize the consumption externality due to adverse selection.
With such
markets competitive equilibria exist and incentive
constrained versions of the first and second welfare theorems hold. are always incentive efficient.
Appendix to
"Efficient Competitive Equilibria with
Adverse Selection"
(with Alberto Bisin), Jan. 2004. [download pdf]
· "Efficiency Properties of Rational
Expectations Equilibria with Asymmetric Information"
(with Rohit Rahi), revised March 2001.
· "Market Power and
Information Revelation in Dynamic Trading" (with Roberto Serrano), Journal of the European Economic Association 3 (December 2005), 1279-1317 [download pdf]
Abstract: We study a strategic model of
dynamic trading where agents are asymmetrically informed over common value
sources of uncertainty. There is a continuum of buyers and a finite number n of
sellers. All buyers are uninformed, while at least one seller is privately
informed about the true state of the world. When n=1, full information
revelation never occurs in equilibrium and the only information transmission
happens in the first period. With n>1 the outcome depends both on the
structure of the sellers' information and, even more importantly, on the
intensity of competition allowed by the existing trading rules. When there is
intense competition (absence of clienteles), information is fully and
immediately revealed to the buyers in every equilibrium for n large enough,
regardless of the number of informed sellers. On the other hand, for trading
arrangements characterized by less intense forms of competition (presence of
clienteles), for any n we always have equilibria where
information is never fully revealed. Moreover, in that case, when only one
seller is informed, for many parameter configurations there are no equilibria with full information revelation, even for large
n.
Appendix to " Market
Power and Information Revelation in Dynamic Trading" (with Roberto
Serrano), Aug. 2004. [download pdf]
· "Competitive Markets for Non-Exclusive
Contracts with Adverse Selection: the Role of Entry Fees" (with Alberto Bisin), Review of Economic Dynamics 6 (April 2003), 313-338. [download pdf]
Abstract.
This paper studies competitive equilibria in
economies characterized by the presence of asymmetric information, where non-exclusive
contracts are traded on competitive markets and agents may be privately
informed over their payoff. For such economies competitive equilibria
may not exist when contracts trade at linear prices. We show that (non-trivial)
competitive equilibria exist, under general
conditions, with a minimal requirement on the observability
of agents' trades: two-part tariffs suffice, where the cost of trading each
contract consists of an entry fee and a linear component in the quantity
traded. The entry fee is determined at equilibrium and represents a measure of
adverse selection in the economy.
· "A Note on the Regularity of
Competitive Equilibria and Asset Structures" (with
Abstract:
In this note we show that if markets are
complete, the regularity of a given equilibrium allocation is invariant not
only with respect to the choice of the equilibrium system describing the
equilibrium but also with respect to the specification of the asset payoffs
supporting the same equilibrium. On the other hand, if markets are incomplete
regularity is typically not invariant with respect to the specification of the
asset payoffs supporting a given equilibrium allocation. A (fairly strong)
sufficient condition for invariance is presented.
· :"A Note
on the Decomposition (at a point) of Aggregate Excess Demand on the Grassmannian" (with Andreu Mas-Colell),
Journal of Mathematical Economics
33 (2000), 463-473.
· "Stochastic
OLG, Market Structure, and Optimality" (with Subir Chattopadhyay), Journal of Economic Theory, 89(1)
(November 1999), 21-67.
· "Competitive Equilibria with Asymmetric Information" (with
Alberto Bisin) Journal of Economic Theory 87(1) (July 1999),
1-48.
·
"A Note on the Convergence to Competitive Equilibria in Economies with Moral Hazard" (with Alberto Bisin and Danilo Guaitoli), in P.J.J. Herings, G. Van der Laan and A.J.J. Talman, "Theory
of Markets",