1) financial regulation, financial intermediaries (banks, rating agencies)
2) contracting theory: dynamic contracting, static contracting
3) international/ macro: trade theory, DSGE models
"Expropriation risk and technology,'' 2012, Journal of Financial Economics, 103, 113-129.
"Tariff wars in a Ricardian model with a continuum of goods," 2010, Journal of International Economics, 80 (2), 212-225.
"Rybczynski's theorem in the Heckscher-Ohlin world - anything goes," 2009, joint with Hugo Sonnenschein and Christis Tombazos, Journal of International Economics, 79 (1), 137-142.
“Impatience vs. Incentives,” March 2013, joint with John Zhu, Revise and Resubmit Econometrica.
Abstract: This paper studies the long-run dynamics of Pareto-optimal self-enforcing contracts in a repeated principal-agent framework with differential discounting. Impatience concerns encourage contracts to favor the more patient player in the long run, and incentives concerns encourage contracts to favor the agent in the long run. When the agent is relatively impatient, the impatience and incentives forces are in conflict. If the conflict is strong, we show that optimal contracts oscillate between favoring the principal and favoring the agent as a way to cater to both forces in the long-run. This occurs in the absence of uncertainty or any need to randomize. When the impatience and incentives forces are aligned or one force dominates the other, we show that every optimal contract converges to a steady state in the long run in a well-behaved way. The results of Ray (2002) and Lehrer and Pauzner (1999) can be recovered as limiting cases.
“Macroprudential Bank Capital Regulation - Local vs. Global Optima,” October 2013, joint with Milton Harris and Christian Opp.
Abstract: In this paper we propose a general equilibrium framework to analyze the effectiveness of bank capital regulations when the banking sector faces competition from less efficient, unregulated outside investors. In our model an implicit bail-out guarantee for banks may generate excessive incentives to invest in high risk, negative NPV projects. When competition from unregulated investors is low, the banking sector has a natural incentive to fund positive NPV projects first and to engage in risk-shifting only when the banking sector's funding capacity exceeds the supply of positive NPV projects ("natural pecking order"). Good projects might face lower funding cost when capital requirements for banks are increased. Regulation in the form of simple equity-capital ratio requirements can achieve the first-best outcome. However, when banks face sufficiently strong competition from unregulated investors, they prefer to focus on the funding of high-risk issuers, since government-insured banks then have a comparative advantage in the market for bad assets. This "reverse pecking order" of bank investment can make the portfolio of banking sector riskier as a response to increases in capital requirements and hence may make it impossible to achieve the first-best outcome. Second-best regulation then requires substantial increases in capital requirements that might force good projects to be financed outside of the regulated banking system.
“Regulating Deferred Incentive Pay,” October 2013, joint with Florian Hoffmann and Roman Inderst.
Abstract: Our paper evaluates recent regulatory proposals mandating the deferral of bonus payments and claw-back clauses in the financial sector. We study a broadly applicable principal agent setting, in which the agent exerts effort for an immediately observable task (acquisition) and a task for which information is only gradually available over time (diligence). Optimal compensation contracts trade off the cost and benefit of delay resulting from agent impatience and the informational gain. Mandatory deferral may increase or decrease equilibrium diligence depending on the importance of the acquisition task. We provide concrete conditions on economic primitives that make mandatory deferral socially (un)desirable.
“Replacing Ratings,” July 2013, joint with Bo Becker.
Abstract: Since the financial crisis, replacing ratings has been a key item on the regulatory agenda. We examine a unique change in how capital requirements are assigned to insurance holdings of mortgage-backed securities. The change replaced credit ratings with regulator-paid risk assessments by Pimco and BlackRock. We find no evidence for exploitation of the new system for trading purposes by the providers of the credit risk measure. However, replacing ratings has led to significant reductions in aggregate capital requirements: By 2012, equity capital requirements for structured securities were at $3.73bn compared to of $19.36bn if the old system had been maintained. These savings reflect the new measures of risk, and new rules allowing companies to economize on capital charges if assets are held below par. These book-value adjustments dilute the predictive power of the underlying risk measures, Our results are consistent with a regulatory change being largely driven by industry interests rather than maintaining financial stability.
“A Theory of Dynamic Resource Misallocation and Amplification," October 2013, joint with Christine Parlour and Johan Walden.
“Cash is King - Revaluation of Targets after Merger Bids”, December 2012, joint with Ulrike Malmendier and Farzad Saidi.
Abstract: We provide evidence that a significant fraction of the returns to merger announcements reflects target revaluation rather than the causal effect of the merger. In a sample of unsuccessful merger bids from 1980 to 2008, we find that targets of cash offers are revalued by 15% after deal failure, which is a sizeable portion of the average announcement effect of 25%. In contrast, stock targets revert to their pre-announcement levels. These results hold for deals where failure is exogenous to the target's stand-alone value. We show that the differential revaluation of cash and stock targets is not explained by differences in future takeover activity. We also find that the values of cash bidders revert to pre-announcement levels, while stock bidders fall below. Our revaluation estimates imply economically large mismeasurement when using naive announcement-based estimates of the causal effect of mergers.
work in progress:
"Industrial Asset Pricing," joint with Christine Parlour and Johan Walden.
Project on "Systematic risk, ratings, and the structuring of securities."
additional references :
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