Past Webinars
Lending and Monitoring: Big Tech vs Banks
By Matthieu Bouvard, Catherine Casamattam and Rui Xiong
December 7, 2023
Seminar: 12:00 pm - 1:00 pm EDT
Virtual Coffee Break: 1:00 pm - 1:30 pm EDT
Presented by Matthieu Bouvard
Abstract: We show that by lending to merchants and monitoring them, an e-commerce platform can price-discriminate between merchants with high and low financial constraints: the platform offers credit priced below market rates and designed to select merchants with lower capital or collateral while simultaneously increasing the platform's access fees. The credit market then becomes endogenously segmented with banks focusing on less financially constrained borrowers. Lending by the platform expands with its monitoring efficiency but can arise even when the platform is less efficient than banks at monitoring. Platform credit benefits more financially constrained merchants as well as consumers, but can hurt less financially constrained merchants if cross-side network effects with consumers are too small. The platform's propensity to offer credit and the financial inclusion of more constrained merchants depends on the platform's market power in its core business.
Can Stablecoins Be Stable?
By Adrien d'Avernas, Vincent Maurin, and Quentin Vandeweyer
November 2, 2023
Seminar: 12:00 pm - 1:00 pm EDT
Virtual Coffee Break: 1:00 pm - 1:30 pm EDT
Presented by Nicolas Inostroza
Abstract: This paper proposes a framework to analyze the stability of stablecoins -- cryptocurrencies designed to peg their price to a currency. We study the problem of a monopolist platform earning seignorage revenues from issuing stablecoins and characterize equilibrium stablecoin issuance-redemption and pegging dynamics, allowing for various degrees of commitment over the system’s key policy decisions. Because of two-way feedback between the value of the stablecoin and its ability to peg the currency, uncollateralized (pure algorithmic) platforms always admit zero price equilibrium. However, with full commitment, an equilibrium in which the platform maintains the peg also exists. This equilibrium is stable locally but vulnerable to large demand shocks. Without a commitment technology on supply adjustments, a stable solution may still exist if the platform commits to paying an interest rate on stablecoins contingent on its implicit leverage. Collateral and decentralizing stablecoin issuance help stabilize the peg.
The Optimal Structure of Securities under Coordination Frictions
By Dan Luo and Ming Yang
October 5, 2023
Seminar: 12:00 pm - 1:00 pm EDT
Virtual Coffee Break: 1:00 pm - 1:30 pm EDT
Abstract: We study multi-agent security design in the presence of coordination frictions. A principal intends to develop a project whose value increases with an unknown state and the level of agents’ participation. To motivate the participation of ex ante homogeneous agents, the principal offers them multiple monotone securities backed by the project value. More participation results in a higher project value and thus higher security payment to participating agents, making participation decisions strategic complements. Miscoordination arises because agents cannot precisely infer others’ decisions from noisy signals about the state. We identify two objects in security design—"payoff sensitivity" and "perception of participation"—that determine the impact of miscoordination. To mitigate the adverse impact of miscoordination, the two objects should be matched assortatively over agents. This mechanism implies a multi-tranche security structure in which senior-tranche holders are more robust to potential miscoordination and participate more aggressively, helping alleviate the junior-tranche holders’ fear of miscoordination. We find that the principal’s ability to differentiate agents in security format is crucial to whether differentiation is desirable.
Optimal Information and Security Design
By Nicolas Inostroza and Anton Tsoy
September 7, 2023
Seminar: 12:00 pm - 1:00 pm EDT
Virtual Coffee Break: 1:00 pm - 1:30 pm EDT
Presented by Nicolas Inostroza
Abstract: An asset owner designs an asset-backed security and a signal about its value. After privately observing the signal, he sells the security to a monopolistic liquidity supplier. Any optimal signal distribution guarantees the security sale and reveals noisy information about high valuations of the security. The optimal security is pure equity – the most informationally sensitive security. It is risky debt under external liquidity requirements akin to regulatory requirements on banks, pension funds, insurance companies. Thus, the “folk intuition” behind debt optimality as the least informationally sensitive security holds only under additional restrictions (e.g., regulatory) on security or information design.
The Market for Attention
By Daniel Chen
June 1, 2023
Seminar: 12:00 pm - 1:00 pm EDT
Virtual Coffee Break: 1:00 pm - 1:30 pm EDT
Presented by Daniel Chen
Abstract: This paper builds a dynamic model of competing platforms that profit from targeted advertising. In the model, platforms offer quality services to consumers at zero prices in exchange for their attention. The attention is then monetized by platforms who use consumer data to sell targeted ads to firms seeking to market their products. To compete for attention, platforms invest in the quality of their services. The model shows how ad revenues, the quality of platforms’ services, and the allocation in the product market are determined in equilibrium. We find that accounting for interactions among the different market sides is essential: intuitive comparative statics based on single-sided reasoning can flip, the short run effects of policies may look very different from the long run effects, and there are nontrivial tradeoffs among the market sides. We illustrate these findings in the context of data and interoperability policies, two of the leading regulatory tools of this market.
ESG: A Panacea for Market Power?
by Philip Bond and Doron Levit
May 4, 2023
Seminar: 12:00 pm - 1:00 pm EDT
Virtual Coffee Break: 1:00 pm - 1:30 pm EDT
Presented by Philip Bond
Abstract: We study the equilibrium effects of the “S” of ESG in a model of imperfect competition in labor (and product) markets. All else equal, a profit maximizing firm can benefit from adopting ESG policies that give a competitive edge in attracting workers; “Doing Well by Doing Good” applies in our setting. ESG policies are strategic complements, and in equilibrium, they are adopted by all firms resulting with higher worker welfare but lower shareholder value. Thus, profit maximizing firms benefit from coordinating on low impact ESG policies, raising anti-trust concerns from the adoption of industry-wide ESG standards. A purposeful firm (lead by a socially conscious board) benefits from such ESG policies, and imperfect competition between purposeful firms obtains the first best in equilibrium. Thus, the social purpose of the corporation is a panacea to excessive marker power. More broadly, our analysis relates the adoption of ESG policies to the nature of competition between firms and their model of corporate governance.
How Competition Shapes Information in Auctions
by Agathe Pernoud and Simon Gleyze
April 6, 2023
Seminar: 12:00 pm - 1:00 pm EDT
Virtual Coffee Break: 1:00 pm - 1:30 pm EDT
Presented By Agathe Pernoud
Abstract: We consider auctions where buyers can acquire costly information about their valuations and those of others, and investigate how competition between buyers shapes their learning incentives. In equilibrium, buyers find it cost-efficient to ac- quire some information about their competitors so as to only learn their valuations when they have a fair chance of winning. We show that such learning incentives make competition between buyers less effective: losing buyers often fail to learn their valuations precisely and, as a result, compete less aggressively for the good. This depresses revenue, which remains bounded away from what the standard model with exogenous information predicts, even when information costs are neg- ligible. It also undermines price discovery. Finally, we examine the implications for auction design. First, setting an optimal reserve price is more valuable than attracting an extra buyer, which contrasts with the seminal result of Bulow and Klemperer (1996). Second, the seller can incentivize buyers to learn their valua- tions, hence restoring effective competition, by maintaining uncertainty over the set of auction participants.
The Political Economy of Prudential Regulation
Presented By Magdalena Rola-Janicka
March 2, 2023
Seminar: 12:00 pm - 1:00 pm EST
Virtual Coffee Break: 1:00 pm - 1:30 pm EST
Abstract: This paper studies how income inequality affects voter preferences for prudential regulation in a setting with negative borrowing externalities. When voting agents account for the effect of prudential policy on future collateral values. Consequently, borrowers support a universal limit on current debt. Curbing over-borrowing restricts future declines in asset prices, distributing wealth from high- to low-income borrowers, so the former prefer laxer regulation. Imperfections in the enforcement of regulation distort its marginal value and may reverse the direction of the policy conflict between high- and low-income borrowers.
Persuasion by Dimension Reductions
December 1, 2022
Presented By Semyon Malamud
By Semyon Malamud (EPFL) and Andreas Schrimpf
Abstract: How should an agent (the sender) observing multi-dimensional data (the state vector) persuade another agent to take the desired action? We show that it is always optimal for the sender to perform a (non-linear) dimension reduction by projecting the state vector onto a lower-dimensional object that we call the "optimal information manifold." We characterize geometric properties of this manifold and link them to the sender's preferences. Optimal policy splits information into "good" and "bad" components. When the sender's marginal utility is linear, it is always optimal to reveal the full magnitude of good information. In contrast, with concave marginal utility, optimal information design conceals the extreme realizations of good information and only reveals its direction (sign). We illustrate these effects by explicitly solving several multi-dimensional Bayesian persuasion problems.
Optimal Managerial Authority
By Joanne Juan Chen (Boston University)
Nov 3, 2022
Seminar: 11:00 am - 12:00 pm EST
Virtual Coffee Break: 12:00 pm - 12:30 pm EST
Presented By Joanne Juan Chen
Abstract: I develop a dynamic agency model to investigate optimal managerial authority and its interaction with managerial compensation. The model shows that when hiring a manager, the principal delegates authority that is unresponsive to either the manager's outside options or the firm's recruitment costs, in contrast to promised compensation, which increases in both. Over time, both the manager's authority and his compensation rise after good performances and decline after bad realizations. Authority-performance sensitivity decreases as the manager's authority grows, resembling entrenchment. In contrast, pay-performance sensitivity increases with the manager's authority. If managerial authority can be adjusted only infrequently, the optimal contract may allow for self-dealing. Moreover, the model reveals that early-career luck plays a disproportionate role in determining the manager's authority and lifetime utility.
The Design of a Central Counterparty
By John Kuong (Insead) and Vincent Maurin (Stockholm School of Economics)
Oct 6, 2022
Seminar: 11:00 am - 12:00 pm EST
Virtual Coffee Break: 12:00 pm - 12:30 pm EST
Presented By Vincent Maurin
Abstract: This paper analyzes the optimal allocation of losses via a Central Clearing Counterparty (CCP) in the presence of counterparty risk. A CCP can hedge this risk by mutualizing losses among its members. This protection, however, weakens members' incentives for risk management. Delegating members' risk monitoring to the CCP alleviates this tension in large markets. To discipline the CCP at minimum cost, members offer the CCP a junior tranche and demand a capital contribution. Our results endogenize key layers of the default waterfall and deliver novel predictions on its composition, collateral requirements, and CCP ownership structure.
Spoofing in Equilibrium
By Basil Williams (NYU) and Andrzej Skrzypacz (Stanford)
Sept 8, 2022
Seminar: 11:00 am - 12:00 pm EST
Virtual Coffee Break: 12:00 pm - 12:30 pm EST
Presented By Basil Williams
Abstract: We present a model of dynamic trading with exogenous and strategic cancellation of orders. We define spoofing as the strategic placing and canceling of orders in order to move prices and trade later in the opposite direction. We show that spoofing can occur in equilibrium. Consistent with regulator concerns, we show that spoofing slows price discovery, raises bid-ask spreads, and raises return volatility. A novel prediction is that the prevalence of equilibrium spoofing is single-peaked in the measure of informed traders, suggesting that spoofing should be more prevalent in markets of intermediate liquidity. We consider within-market and cross-market spoofing and discuss how regulators should allocate resources towards cross-market surveillance.
Mechanism Design with Limited Commitment
By Laura Doval (Columbia) and Vasiliki Skreta (UT Austin, UCL, and CEPR)
June 9, 2022
Seminar: 11:00 am - 12:00 pm EST
Virtual Coffee Break: 12:00 pm - 12:30 pm EST
Presented By Laura Doval
Abstract: We develop a tool akin to the revelation principle for mechanism design with limited commitment. We identify a canonical class of mechanisms rich enough to replicate the payoffs of any equilibrium in a mechanism-selection game between an uninformed designer and a privately informed agent. A cornerstone of our methodology is the idea that a mechanism should encode not only the rules that determine the allocation, but also the information the designer obtains from the interaction with the agent. Therefore, how much the designer learns, which is the key tension in design with limited commitment, becomes an explicit part of the design. We show how this insight can be used to transform the designer’s problem into a constrained optimization one: To the usual truthtelling and participation constraints, one must add the designer’s sequential rationality constraint.
Time Trumps Quantity in the Market for Lemons
By William Fuchs (UT Austin), Piero Gottardi (University of Essex), and Humberto Moreira (FGV/EPGE)
April 7, 2022
Seminar: 11:00 am - 12:00 pm EST
Virtual Coffee Break: 12:00 pm - 12:30 pm EST
Presented By William Fuchs
Abstract: We consider a dynamic adverse selection model where privately informed sellers of divisible assets can choose how much of their asset to sell at each point in time to a fringe of competitive buyers. With commitment to long term contracts delay and lower quantities are both equivalent ways to signal higher quality and only the discounted quantity traded is pinned down in equilibrium. With spot contracts and observable past trades we show that there is a unique path of trades in equilibrium which is fully separating. Irrespective of the horizon and the frequency of trades, the same welfare is attained by each type as in the commitment case. Furthermore, the timing of trades is the dominant way in which signalling takes place. In the limit, as trades can take place continuously, each type trades all of their asset at a unique point in time. When instead past trades are unobservable, the equilibrium depends on the horizon and frequency of trades. Yet, when trading can take place continuously (and only then), there is an equilibrium which coincides with the one with public histories and only time (delay) is used to signal higher quality.
Waiting for Capital: Dynamic Intermediation in Illiquid Markets
By Barney Hartman-Glaser (UCLA), Simon Mayer (Chicago Booth), and Konstantin Milbradt (Kellogg)
March 3, 2022
Seminar: 11:00 am - 12:00 pm EST
Virtual Coffee Break: 12:00 pm - 12:30 pm EST
Presented By Barney Hartman-Glaser
Abstract: We consider a firm with infrequent access to capital markets, continuous access to financing by a risk-averse intermediary, and a cost of holding cash. The intermediary absorbs a fraction of cash-flow risk that decreases with the firm's liquidity reserves and acquires a stake in the firm under distress. Implementing the optimal contract suggests an overlapping pecking order. The firm simultaneously finances shortfalls with cash reserves and a credit line and sells equity to the intermediary when it runs out of cash. The model helps explain empirical facts and trends in financial intermediation, such as the rise of private equity.
Harnessing the Overconfidence of the Crowd: A Theory of SPACs
By Snehal Banerjee and Martin Szydlowski
December 2, 2021
Seminar: 11:00 am - 12:00 pm EST
Virtual Coffee Break: 12:00 pm - 12:30 pm EST
Presented By Snehal Banerjee
Abstract: We provide a theory of Special Purpose Acquisition Companies, or SPACs. A sponsor raises financing for a new opportunity from a group of investors with differing ability to process information. We show that when all investors are rational, the sponsor prefers to issue straight equity. However, when sufficiently many investors are overconfident about their ability to process information, the sponsor prefers to issue units with redeemable shares and rights, because such investors overvalue the option to redeem shares. The model matches many empirical features, including the difference in returns for short-term and long-term investors and the overall underperformance of SPACs. We also evaluate the impact of policy interventions, such as greater mandatory disclosure and transparency, limiting investor access, and restricting the rights offered.
Optimal Rating Design
By Maryam Saeedi (CMU) and Ali Shourideh(CMU)
November 4, 2021
Seminar: 11:00 am - 12:00 pm EST
Virtual Coffee Break: 12:00 pm - 12:30 pm EST
Presented By Ali Shourideh
Abstract: We study the design of optimal rating systems in the presence of adverse selection and moral hazard. Buyers and sellers interact in a competitive market where goods are vertically differentiated according to their qualities. Sellers differ in their cost of quality provision, which is private information to them. An intermediary observes sellers’ quality and chooses a rating system, i.e., a signal of quality for buyers, in order to incentivize sellers to produce high-quality goods. We provide a full characterization of the set of payoffs and qualities that can arise in equilibrium under an arbitrary rating system. We use this characterization to analyze Pareto optimal rating systems when seller’s quality choice is deterministic and random.
Disclosing a Random Walk
By Ilan Kremer (Hebrew University and University of Warwick), Amnon Schreiber (Bar-Ilan University), and Andrzej Skrzypacz (Stanford)
October 7, 2021
Seminar: 11:00 am - 12:00 pm EST
Virtual Coffee Break: 12:00 pm - 12:30 pm EST
Presented By Andrzej Skrzypacz
Abstract: We examine a dynamic disclosure model in which the value of an asset follows a random walk. Every period, with some probability an agent learns the value and decides whether to disclose it. The agent maximizes the market perception of the asset's value which is based on disclosed information. We show that in equilibrium the agent follows a threshold strategy but also reveals pessimistic information that reduces market perception. We examine different variants and show for example that when he can disclose also stale information, he is less likely to disclose current values but over time discloses more.
Corrective Regulation with Imperfect Instruments
By Eduardo Dávila (Yale) and Ansgar Walther (Imperial).
September 2, 2021
Seminar: 11:00 am - 12:00 pm EST
Virtual Coffee Break: 12:00 pm - 12:30 pm EST
Presented By Eduardo Dávila
Abstract: This paper studies the optimal design of second-best corrective regulation, when some agents or activities cannot be perfectly regulated. We show that policy elasticities and Pigouvian wedges are sufficient statistics to characterize the marginal welfare impact of regulatory policies in a large class of environments. We show that the optimal second-best policy is determined by a subset of policy elasticities: leakage elasticities, and characterize the marginal value of relaxing regulatory constraints. We apply our results to scenarios with unregulated agents/activities and with uniform regulation across agents/activities. We illustrate our results in applications to shadow banking, scale-invariant regulation, asset substitution, and fire sales.
Private Renegotiations and Government Interventions in Debt Chains
By Vincent Glode (Wharton) and Christian Opp (Rochester).
June 3, 2021
Seminar: 11:00 am - 12:00 pm EST
Virtual Coffee Break: 12:00 pm - 12:30 pm EST
Presented By Christian Opp
Abstract: We propose a model of strategic debt renegotiation in which businesses are sequentially interconnected through their liabilities. This financing structure, which we refer to as a debt chain, gives rise to externalities, as a lender's willingness to provide concessions to its privately-informed borrower depends on how the lender's own liabilities are expected to be renegotiated. Our analysis reveals how government interventions that aim to prevent default waves should account for these private renegotiation incentives and their interlinkages. Our results shed light on the effectiveness of subsidies and debt reduction programs following economic shocks such as pandemics or financial crises
Creating Controversy in Proxy Voting Advice
By Andrey Malenko (Michigan), Nadya Malenko (Michigan), and Chester Spatt (Carnegie Mellon).
May 6, 2021
Seminar: 11:00 am - 12:00 pm EST
Virtual Coffee Break: 12:00 pm - 12:30 pm EST
Presented By Andrey Malenko
Abstract: The quality of proxy advisors' voting recommendations is important for policymakers and industry participants. We analyze the design of recommendations (available to all market participants) and research reports (available only to subscribers) by a proxy advisor, whose objective is to maximize its profits from selling information to shareholders. We show that even if all shareholders' interests are aligned and aim at maximizing firm value, the proxy advisor benefits from biasing its recommendations against the a priori more likely alternative. Such recommendations "create controversy" about the vote, increasing the probability that the outcome is close and raising each shareholder's willingness to pay for advice. In contrast, it serves the interest of the proxy advisor to make private research reports unbiased and precise. Our results help reinterpret empirical patterns of shareholders' voting behavior.
Information Chasing versus Adverse Selection in Over-the-Counter Markets
By Gabor Pinter (Bank of England), Chaojun Wang (Wharton), and Junyuan Zou (INSEAD)
April 1, 2021
Seminar: 11:00 am - 12:00 pm EST
Virtual Coffee Break: 12:00 pm - 12:30 pm EST
Presented By Chaojun Wang
Abstract: Contrary to the prediction of the classic adverse selection theory, a more informed trader receives better pricing relative to a less informed trader in over-the-counter finan- cial markets. Dealers aggressively chase informed orders to better position their future quotes and avoid winner’s curse in subsequent trades. On a multi-dealer platform, dealers’ incentive of information chasing exactly offsets their fear of adverse selection. In a more general setting of OTC trading, information chasing can dominate adverse selection when dealers face differentially informed speculators, while adverse selection always dominates when dealers face differentially informed trades from a given specula- tor. These two predictions—which contrast sharply with each other—both find strong empirical support in the UK government bond market.
Intermediary Financing without Commitment
By Yunzhi Hu (UNC) and Felipe Varas (Duke)
March 4, 2021
Seminar: 11:00 am - 12:00 pm EST
Virtual Coffee Break: 12:00 pm - 12:30 pm EST
Presented By Filipe Varas
Abstract: Intermediaries can reduce agency frictions in the credit market through monitoring. To be a credible monitor, an intermediary needs to retain a fraction of its loans; we study the credit market dynamics when it cannot commit to doing so. We compare the role of certification – monitoring to increase repayment – with the role of intermediation – channeling funds from depositors to the borrower. With commitment to retentions, certification and intermediation are equivalent. Without commitment, they lead to very different dynamics in loan sales and monitoring. A certifying bank sells its loans and reduces monitoring over time. By contrast, an intermediating bank issues short-term deposits to internalize the monitoring externalities and retain its loans. While the borrowing capacity is higher under intermediation, an entrepreneur may prefer to borrow from a certifying-only intermediary.
Incentive Design for Talent Discovery
By Erik Madsen (NYU), Andy Skrzypacz (Stanford), and Basil Williams (NYU).
[Slides]
February 4, 2021
Seminar: 11:00 am - 12:00 pm EST
Virtual Coffee Break: 12:00 pm - 12:30 pm EST
Presented By Basil Williams
Abstract: In many organizations, employees enjoy significant discretion regarding project selection. If projects differ in their informativeness about an employee’s quality, project choices will be distorted whenever career concerns are important. We analyze a model in which an organization can shape its employees’ career concerns by committing to a system for allocating a limited set of promotions. We show that the organization optimally overpromotes certain categories of underperforming employees, trading off efficient matching of employees to promotions in return for superior project selection. When organizations can additionally pay monetary bonuses, we find that overpromotion is a superior incentive tool when the organization needs to offer high-powered incentives; otherwise, bonuses perform better.
Credit Horizons
By Nobuhiro Kiyotaki (Princeton), John Moore (Edinburgh), and Shengxing Zhang (LSE) .
December 3, 2020
Seminar: 11:00 am - 12:00 pm EST
Virtual Coffee Break: 12:00 pm - 12:30 pm EST
Presented By Shengxing Zhang
Abstract: Why might firms borrow largely against near-term revenues? Does this mean they are unable to raise much funding against the long-term horizon? In this paper, we develop a model of credit horizons. A question of particular concern to us is whether persistently low interest rates can stifle aggregate investment and growth. With this in mind, our model is of a small open economy where the world interest rate is taken to be exogenous. We show that a permanent fall in the interest rate can reduce aggregate investment and growth, and even lead to a drop in the welfare of everyone: a Pareto deterioration. We use our framework to examine how credit horizons interact with firm dynamics and the evolution of productivity.
Restructuring vs. Bankruptcy
By Jason Donaldson (Wash U), Edward Morrison (Columbia), Giorgia Piacentino (Columbia), and Xiaobo Yu (Columbia)
November 5, 2020
Seminar: 11:00 am - 12:00 pm EST
Virtual Coffee Break: 12:00 pm - 12:30 pm EST
Presented By Jason Donaldson
Abstract: We develop a model of a firm in financial distress. Distress can be mitigated by filing for bankruptcy, which is costly, or preempted by restructuring, which is impeded by a collective action problem. We find that bankruptcy and restructuring are complements, not substitutes: Reducing bankruptcy costs facilitates restructuring, rather than crowding it out. And so does making bankruptcy more debtor-friendly, under a condition that seems likely to hold now in the United States. The model gives new perspectives on current relief policies (e.g., subsidized loans to firms in bankruptcy) and on long-standing legal debates (e.g., the efficiency of the absolute priority rule).
Due Diligence
By Brendan Daley (Johns Hopkins), Thomas Geelen (Copenhagen Business School), and Brett Green (Wash U)
October 6, 2020
Seminar: 11:00 am - 12:00 pm EDT
Virtual Coffee Break: 12:00 pm - 12:30 pm EDT
Presented By Thomas Geelen
Abstract: Due diligence is common practice prior to the execution of corporate transactions. We propose a model of the due diligence process and analyze its effect on prices, the division of surplus, and efficiency. In our model, if the seller accepts an offer, the winning buyer (the acquirer) has the right to gather information and chooses when (if ever) to execute the transaction. Our main result is that the acquirer engages in “too much” due diligence relative to the social optimum. Nevertheless, allowing for due diligence can improve both total surplus and the seller’s payoff compared to a setting with no due diligence. The optimal contract involves both a price contingent on execution as well as a non-contingent transfer, resembling features such as earnest money or break-up fees that are commonly observed in transactions involving due diligence.
Data Privacy and Temptation
By John Zhuang Liu (The Chinese University of Hong Kong, Shenzhen), Michael Sockin (UT Austin), and Wei Xiong (Princeton)
September 1, 2020
Seminar: 11:00 am - 12:00 pm EDT
Virtual Coffee Break: 12:00 pm - 12:30 pm EDT
Presented By Michael Sockin
Abstract: This paper derives a preference among consumers for data privacy from their preference over menus when consumers have limited self-control toward temptation goods, such as gambling and video games. This approach allows us to analyze the welfare consequences of different data privacy regulations, such as the GDPR enacted by the European Union and the CCPA by the State of California, when a fraction of the consumers have weak self-control and suffer from targeted advertising of temptation goods. While sharing consumer data with firms improves their matching efficiency of normal consumption goods, it also exposes weak-willed consumers to temptation goods. As a result, although the GDPR and the CCPA give each consumer the choice to opt in or out of data sharing, these regulations may not provide sufficient protection for severely tempted consumers because of a negative externality in which the decision of some consumers to opt in reduces the anonymity of those who opt out. Our analysis also shows that the difference in default choices instituted by the GDPR and the CCPA can lead to sharply different equilibrium outcomes.
Dynamic Contracting with Flexible Monitoring
By Liang Dai (Shanghai Jiao Tong University), Yenan Wang (Duke), and Ming Yang (Duke)
June 2, 2020
Seminar: 11:00 am - 12:00 pm EDT
Virtual Coffee Break: 12:00 pm - 12:30 pm EDT
Presented By Ming Yang
Abstract: We study a dynamic contracting problem in which the principal can allocatehis limited capacity between seeking evidence that confirms or that contradicts the agent’s effort, as the basis for reward or punishment. Such flexibility calls for jointly designed monitoring and compensation schemes practically relevant but novel in the literature. When the agent’s continuation value is low, theprincipal seeks only confirmatory evidence, but when the agent’s continuationvalue exceeds a threshold, the principal switches to seeking mainly contradic-tory evidence. Moreover, the agent’s effort can be perpetuated if and only ifboth synergy and flexibility in monitoring are sufficiently large.
Optimal Time Consistent Debt Policies
By Andrey Malenko (Boston College) and Anton Tsoy (Toronto)
May 5, 2020
Seminar: 11:00 am - 12:00 pm EDT
Virtual Coffee Break: 12:00 pm - 12:30 pm EDT
Presented By Anton Tsoy
Abstract: We study time-consistent debt policies in a trade-off model of debt in which the firm can freely issue new debt and repurchase existing debt. A debt policy is time-consistent if in any state equity holders prefer to follow it rather than to deviate from it but lose credibility in sustaining debt discipline in the future. In a class of policies, the optimal time-consistent debt policy consists of an interest coverage ratio (ICR) target and two regions for the ICR: the stable and the distress regions. In the stable region, the firm actively manages liabilities to the ICR target by issuing/repurchasing debt. A sufficiently large negative shock to cash flows pushes the firm into the distress region, where it abandons the target and waits until either cash flows recover or further negative shocks trigger bankruptcy. Credit spreads are sensitive to cash flow shocks in the distress region but not in the stable region. The optimal policy captures realistic features of debt dynamics, such as active debt management in both directions, interior optimal debt maturity, and dynamics of “fallen angels.”
Security Design in Non-Exclusive Markets with Asymmetric Information
By Vladimir Asriyan (CREi) and Victoria Vanasco (CREI)
April 7, 2020
Seminar: 11:00 am - 12:00 pm EDT
Virtual Coffee Break: 12:00 pm - 12:30 pm EDT
Presented By Victoria Vanasco
Abstract: We revisit the classic problem of a seller (e.g. firm) who is privately informed about her asset and needs to raise funds from uninformed buyers (e.g. investors) by issuing securities backed by her asset cash flows. In our setting, buyers post menus of contracts to screen the seller, but the seller cannot commit to accept contracts from only one buyer, i.e., markets are non-exclusive. We show that an equilibrium of this screening game always exists, it is unique and features semi-pooling allocations for a wide range of parameters. In equilibrium, the seller tranches her asset cash flows into a debt security (senior tranche) and a levered-equity security (junior tranche). Whereas the seller of a high quality asset only issues her senior tranche, the seller of a low quality asset issues both tranches but to distinct buyers. Consistent with this, whereas the senior tranche is priced at pooling valuation, the junior tranche is priced at low valuation. Our theory's positive predictions are consistent with recent empirical evidence on issuance and pricing of mortgage-backed securities, and we analyze its normative implications within the context of recent reforms aimed at enhancing transparency of financial markets.