Marcus M. Opp, Ph.D.

Assistant Professor

Finance Group
UC Berkeley
Haas School of Business

mopp(št)haas.berkeley.edu

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research interests:

1) financial regulation, financial intermediaries (banks, rating agencies)

2) contracting theory: dynamic contracting, static contracting

3) international/ macro: trade theory, DSGE models

 

publications:

''Rating agencies in the face of regulation,'' 2013, joint with Christian C. Opp & Milton Harris, Journal of Financial Economics, 108, 46-61.

''Rating agencies in the face of regulation,'' condensed Fame magazine version.

"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.

 

working papers:

“Impatience vs. Incentives,” March 2014, 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 an impatient agent. Impatience concerns encourage contracts to favor the principal in the long run, whereas incentives concerns encourage contracts to favor the agent in the long run. Optimal dynamic contracts generically oscillate between favoring the principal and favoring the agent despite the absence of uncertainty or any need to randomize. The amplitude of oscillation relates to the sensitivity of the agent's incentive problem to monetary transfers. Arbitrarily low participation constraints of the agent or the principal may fundamentally change contract dynamics. Our results help reconcile the opposing predictions of Ray (2002) and Lehrer and Pauzner (1999).

 

“A Theory of Dynamic Resource Misallocation and Amplification," October 2013, joint with Christine Parlour and Johan Walden, Revise and Resubmit Journal of Economic Theory.
Abstract: We develop a tractable dynamic general equilibrium model of oligopolistic competition with a continuum of heterogeneous industries. Firms in each industry collude on value-maximizing state-contingent markups, taking as given the behavior of all other industries. Industries are exposed to aggregate (systematic) and industry-specific (idiosyncratic) productivity shocks. With risk-averse preferences, industry markups are countercyclical with regards to the idiosyncratic component, but may be procyclical with regards to the systematic component. The general equilibrium dispersion of markups implied by the optimization of heterogeneous industries creates misallocation of labor to industries. The misallocation, in turn, generates aggregate welfare losses state-by-state that feed back into the industry problem via a representative agent's marginal utility of aggregate consumption. In general, the resulting dynamics amplify technological shocks or may even be the only source of aggregate fluctuations. This amplification channel is strongest when the dispersion of markups is countercyclical.

 

“Higher Capital Requirements, Safer Banks? - Macroprudential Regulation in a Competitive Financial System,” March 2014, joint with Milton Harris and Christian Opp.

Abstract: We propose a tractable general equilibrium framework to analyze the effectiveness of bank capital regulations when banks face competition from other investors, such as institutions in the shadow-banking system. Our analysis shows that increased competition can not only render previously optimal bank capital regulations ineffective but also imply that, over some ranges, increases in capital requirements cause more banks in the economy to engage in value-destroying risk-shifting. To avoid this perverse outcome, the regulator has to set capital requirements high enough, so that risk-shifting activities become less profitable from a banker's perspective than socially valuable banking activities. Our model generates a set of novel implications that highlight the intricate dependencies between optimal bank capital regulation and the comparative advantages of various institutions in the financial system.

 

“Regulatory Reform and risk-taking,” March 2014, joint with Bo Becker. (formerly "Replacing ratings")

Abstract: We analyze a reform of insurance companies’ capital requirements for mortgage-backed securities occurring in the context of the regulatory overhaul of the financial system after the recent crisis. First, regulator-paid risk assessments replaced credit ratings as inputs to capital regulation. Second, using this new input as an assessment of the “intrinsic value” of a bond, the new capital regulation sets risk buffers in such a way that they barely cover expected losses. The new system provides no protection against aggregate movements in asset values, the type of risk structured securities are particularly exposed to. As a consequence, by 2012, aggregate capital requirements for structured securities have been reduced from $19.36bn (if the previous system had been maintained) to $3.73bn. Exploiting the differential capital regulation of corporate bonds and structured securities post regulatory reform, we provide evidence that insurance companies’ risk taking appears to be both distorted and increased in response to the new regulation.

 

“Regulating Deferred Incentive Pay,” March 2014, 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.

 

“Target Revaluation after Failed Takeover Attempts - Cash versus Stock”, January 2014, joint with Ulrike Malmendier and Farzad Saidi.

Abstract: Our paper analyzes revaluation and subsequent takeover activity of targets involved in failed takeover attempts between 1980 and 2008. Targets of cash offers are revalued by +15% after deal failure, whereas stock targets revert to pre-announcement levels. This result also holds for deals where failure is exogenous to the target's stand-alone value employing the news-search classification of Savor and Lu (2009). Targets of previously failed transactions are significantly more likely to be taken over relative to matched control firms over a horizon of up to 7 years. However, despite differential revaluation, cash and stock targets exhibit similar subsequent takeover activity as measured by the timing and valuation of future offers. We also do not find evidence for differential stock market performance post failure, even for targets that remain independent. These results are consistent with theories in which the medium of exchange partially signals information about the stand-alone value.

 

work in progress:

 

"Industrial Asset Pricing," joint with Christine Parlour and Johan Walden.

Project on "Systematic risk, ratings, and the structuring of securities."

 

dissertation committee:

Douglas W. Diamond (Chair)

Milton Harris

Raghuram G. Rajan

Morten Sorensen

(773) 702-7283

(773) 702-2549

(773) 702-4437

(773) 834-1726

Douglas.Diamond@ChicagoBooth.edu

Milton.Harris@ChicagoBooth.edu

Raghuram.Rajan@ChicagoBooth.edu

ms3814@columbia.edu

 

additional references :

Eugene F. Fama

Robert E. Lucas, Jr.

(773) 702-7282

(773) 702-8191

Eugene.Fama@ChicagoBooth.edu

ReLucas@Uchicago.edu

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