risk sharing and contagion in networks we investigate the socially optimal design of financial networks that allows to tackle the trade off between risk sharing and contagion we identify conditions on the shock distribution under which full integration or maximal segmentation is optimal we also show that under different conditions the optimal network displays different levels of strength of linkages to other firms or intermediate degrees of segmentation in the latter case the individual and social incentives to establish linkages are not necessarily aligned when firms face heterogeneous distributions of risks they should optimally form linkages only with firms facing risks of the same kind

network models and financial stability abstract systemic risk is a key concern for central banks charged with safeguarding overall financial stability in this paper we investigate how systemic risk is affected by the structure of the financial system we construct banking systems that are composed of a number of banks that are connected by interbank linkages we then vary the key parameters that define the structure of the financial system including its level of capitalisation the degree to which banks are connected the size of interbank exposures and the degree of concentration of the system and analyse the influence of these parameters on the likelihood of knock on defaults first we find that the better capitalised banks are the more resilient is the banking system against contagious defaults and this effect is non linear second the effect of the degree of connectivity is non monotonic i e initially a small increase in connectivity increases the contagion effect but after a certain threshold value connectivity improves the ability of a banking system to absorb shocks third the size of interbank liabilities tends to increase the risk of knock on default even if banks hold capital against such exposures fourth more concentrated banking systems are shown to be prone to larger systemic risk all else equal in an extension to the main analysis we study how liquidity effects interact with banking structure to produce a greater chance of systemic breakdown we finally consider how the risk of contagion might depend on the degree of asymmetry tiering inherent in the structure of the banking system a number of our results have important implications for public policy which this paper also draws out

bank networks contagion systemic risk and prudential policy abstract we present a network model of the interbank market in which optimizing risk averse banks lend to each other and invest in non liquid assets market clearing takes place through a t tonnement process which yields the equilibrium price while traded quantities are determined by means of an assortative matching process contagion occurs through liquidity hoarding interbank interlinkages and fire sale externalities the resulting network configuration exhibits a core periphery structure dis assortative behavior and low density within this framework we analyze the effects of a stylized set of prudential policies on the stability efficiency trade off liquidity requirements unequivocally decrease systemic risk but at the cost of lower efficiency measured by aggregate investment in non liquid assets equity requirements also tend to reduce risk hence increase stability though without reducing significantly overall investment on this basis our results provide general support for the basel iii approach based on complementary regulatory metrics

modelling long run comovements in equity markets a flexible approach abstract international equity markets linkages are characterized by nonlinear dependence and asymmetries we investigate shifts in long run comovements in stock markets by means of an interrupted markov switching cointegration specification this flexible approach allow us to study to what extent documented changes in global integration are permanent or whether market linkages are subject to changes using an illustrative sample from 1980 to 2012 for usa uk and hong kong stock price indices we find evidence of interrupted cointegration across these markets between may 1997 and april 2002 which is consistent with the decoupling of stock prices from fundamentals during the dot com bubble

liquidity constraints in a monetary economy this article presents a microfounded model of money with a consumption and an investment market we consider an economy in which only part of the investment returns can be pledged a liquidity constraint arises when the pledgeable part of the returns are not enough to pay for investment costs we show that when the liquidity constraint is binding agents may make a cash downpayment and money can perform two roles as a provider of liquidity services and exchange services the liquidity constraint constitutes a channel though which underinvestment occurs even at low inflation rates

retail pricing and clearance sales sellers of new products are faced with having to guess demand conditions to set price appropriately but sellers are able to adjustprice over time and to learn from past mistakes additionally it is not necessary that all goods be sold with certainty it is sometimes better to set a high price and to risk no sale this process is modeledto explain retail pricing behavior and the time distribution of transactions prices start high and fall as a function of time on theshelf the initial price and rate of decline can be predicted and depends on thinness of the market the proportion of customers who are window shoppers and other observable characteristics copyright 1986 by american economic association

a generalized quantity discount pricing model to increase supplier s profits in this paper the joint problem of ordering and offering price discount by a supplier to his sole major buyer is analyzed the objective is to induce the buyer to alter his order schedule and size so that the supplier can benefit from lower set up ordering and inventory holding costs we generalize the quantity discount pricing model of monahan monahan j p 1984 a quantity discount pricing model to increase vendor profits management sci 30 6 720 726 to 1 explicitly incorporate constraints imposed on the amount of discount that can be offered and 2 relax the implicit assumption of a lot for lot or order for order policy adopted by the supplier an algorithm is developed to solve the supplier s joint ordering and price discount problem

banking a new monetarist approach we develop a model where i banks take deposits and make investments ii their liabilities facilitate third party transactions other models have i or ii not both although we argue they are intimately connected we show that they both emerge from limited commitment we describe an environment characterize desirable allocations and interpret the outcomes as banking arrangements banks are essential without them the set of feasible allocations is inferior as a technical contribution we characterize dynamically optimal credit allocations with frictions show they involve backloading and analyse how this interacts with banking we also confront the theory with economic history copyright 2013 oxford university press

the governance structure of the japanese financial keiretsu abstract we rationalize the cross holdings of debt and equity within the japanese keiretsu as a contingent governance mechanism through which internal discipline is sustained over time the reciprocal allocation of control rights supports cooperation and mutual monitoring among managers through a coalition enforced threat of removal from control in financial distress this threat is less effective and the governance mode shifts to hierarchical enforcement under main bank leadership the model is consistent with the capital structure the distribution of claims the extent of intragroup trading and patterns of investor intervention within the groups

is the glass steagall act justified a study of the u s experience with universal banking before the glass steagall act of 1933 removed commercial banks from the securities underwriting business we evaluate the argument for the separation of commercial and investment banking that conflicts of interest induce commercial banks to fool the public into investing in securities which turn out to be of low quality a comparison of the performance of securities underwritten by commercial and investment banks prior to the act shows no evidence of this instead the public appears to have rationally accounted for the possibility of conflicts of interest and this appears to have constrained the banks to underwrite high quality securities jel g21 g24 n22

intercorporate shareholdings and corporate control in the japanese firm abstract the purpose of this paper is to specify a formal model that rationalizes the intercorporate shareholdings observed in the japanese equity market as a mechanism for mutual commitment and risk sharing that creates greater possibilities to resolve managerial myopic problems caused by the threat of external takeovers we show that under certain conditions all agents including the existing shareholders of the firm are strictly better off when participating in an implicit contract associated with intercorporate shareholdings the results also suggest that intercorporate ownership raises the stock prices of the member firms

evil is the root of all money plenary talk delivered at the annual meeting of the society for economic dynamics this abstract was borrowed from another version of this item

the role of networks in antitrust investigations antitrust investigations typically focus on the competitive pressures coming from within the defined markets of interest however competitive pressures can also come from other markets even when individually these markets place only weak constraints on one another collectively they may matter a networks approach to modelling competition permits a systemic view of competition that can sometimes paint a more accurate picture we demonstrate this through some simple examples and show more generally how tools from the networks literature can be applied to capture competition across a system of interrelated markets as a leading example we consider antitrust investigations into supermarkets where local geographic markets have been used as the basis of investigation

money and collateral this paper presents a model in which money and collateral are both essential and complement each other as media of exchange the model has implications for asset prices output in ation and monetary policy both in steady state and

production networks and economic policy in this paper we show how to combine data on input output tables and recent insights from the theory of production networks in order to inform policy we first describe the information contained in input output tables compiled by statistical agencies and show how to derive relevant statistics of production networks we then discuss the implications of production networks for policy intervention in a series of domains such as fiscal policy industrial policy or finance finally we present a quantitative exercise applied to french data in order to illustrate that production networks shape the overall impact of competition policy on the economy

on the welfare gains of price dispersion can price dispersion be associated with higher levels of welfare to answer we compare two economies that differ only in the way prices are formed in the first sellers post a unique price quantity pair with no price dispersion in the second sellers post a quantity only and let prices be determined ex post by realized demand resulting in price dispersion we show that while agents trade lower quantities when prices are dispersed an intensive margin effect they also trade more often an extensive margin effect at low inflation the extensive margin dominates making agents better off with price dispersion

optimal best price policy abstract a best price policy bp is a promise by a seller to give her customer a refund if she reduces her price after the customer has already purchased the product we characterize the optimal bp policy as when the seller can control both the policy length when the promise expires and the refund scale what portion of the price difference is refunded we explain why the policy length is finite and varies across industries in a setting where consumers valuations decline over time we show that a finite length bp allows the seller to commit to not lowering her price too soon while at the same time letting her capture some of the benefits of intertemporal price discrimination however because the decline in consumers valuations is uncertain a bp does not allow the monopolist to achieve the profit she could earn with a full commitment

the continuing muddles of monetary theory a steadfast refusal to face facts lionel robbins was concerned about the methodology of economic science when he discussed the relationship between theory and reality two of the examples of inappropriate relationships were taken from monetary economics such shortcomings continue among the worst are 1 is lm whereby the monetary authorities set the monetary base and the interest rate is market determined 2 the monetary base multiplier of bank deposits and the role of reserve ratios 3 the current three equation neoclassical consensus assuming perfect creditworthiness and hence no need for banks 4 the analysis of the evolution of money

money in search equilibrium in competitive equilibrium and in competitive search equilibrium we compare three market structures for monetary economies bargaining search equilibrium price taking competitive equilibrium and price posting competitive search equilibrium we also extend work on the microfoundations of money by allowing a general matching technology and entry we study how equilibrium and the effects of policy depend on market structure under bargaining trade and entry are both inefficient and inflation implies first order welfare losses under price taking the friedman rule solves the first inefficiency but not the second and inflation may actually improve welfare under posting the friedman rule yields the first best and inflation implies second order welfare losses

the essentiality of money in environments with centralized trade abstract lagos and wright 2005 introduced an influential model of monetary exchange in which trade alternates between centralized and decentralized markets and money is essential a limitation of their model and of the literature that follows is that they do not provide a microfoundation for the process of exchange in the centralized market in this paper we show that how one models exchange in the centralized market matters for the essentiality of money by describing the centralized market as a strategic market game and studying conditions under which money is essential

asymmetric information and intermediation chains we propose a parsimonious model of bilateral trade under asymmetric information to shed light on the prevalence of intermediation chains that stand between buyers and sellers in many decentralized markets our model features a classic problem in economics where an agent uses his market power to inefficiently screen a privately informed counterparty paradoxically involving moderately informed intermediaries also endowed with market power can improve trade efficiency long intermediation chains in which each trader s information set is similar to those of his direct counterparties limit traders incentives to post prices that reduce trade volume and jeopardize gains to trade

rehypothecation and liquidity abstract we develop a dynamic general equilibrium monetary model where a shortage of collateral and incomplete markets motivate the formation of credit relationships and the rehypothecation of assets rehypothecation improves resource allocation because it permits liquidity to flow where it is most needed the liquidity benefits associated with rehypothecation are shown to be more important in high inflation high interest rate regimes regulations restricting the practice are shown to have very different consequences depending on how they are designed assigning collateral to segregated accounts as prescribed in the dodd frank act is generally welfare reducing in contrast an sec15c3 3 type regulation can improve welfare through the regulatory premium it confers on cash holdings which are inefficiently low when interest rates and inflation are high

banks as secret keepers banks are optimally opaque institutions they produce debt for use as a transaction medium bank money which requires that information about the backing assets loans not be revealed so that bank money does not fluctuate in value reducing the efficiency of trade this need for opacity conflicts with the production of information about investment projects needed for allocative efficiency intermediaries exist to hide such information so banks select portfolios of information insensitive assets for the economy as a whole firms endogenously separate into bank finance and capital market stock market finance depending on the cost of producing information about their projects

the paradox of pledgeability abstract we develop a model in which collateral serves to protect creditors from the claims of other creditors we find that paradoxically borrowers rely most on collateral when pledgeability is high this is when taking on new debt is easy which dilutes existing creditors creditors thus require collateral for protection against possible dilution by collateralized debt there is a collateral rat race but collateralized borrowing has a cost it encumbers assets constraining future borrowing and investment there is a collateral overhang our results suggest that policies aimed at increasing the supply of collateral can backfire triggering an inefficient collateral rat race likewise upholding the absolute priority of secured debt can exacerbate the rat race

a flow network analysis of direct balance sheet contagion in financial networks this paper puts forward a novel approach to the analysis of direct contagion in financial networks financial systems are here represented as flow networks i e directed and weighted graphs endowed with source nodes and sink nodes and the propagation of losses and defaults originated by an exogenous shock is here represented as a flow that crosses such a network in establishing existence and uniqueness of such a flow function we address a know problem of indeterminacy that arise in financial networks from the intercyclicity of payments sufficient and necessary conditions for uniqueness are pinned down we embed this result in an algorithm that while computing the propagation caused by a shock controls for the emergence of possible indeterminacies we then apply some properties of network flows to investigate the relation between the structures of a financial network i e the size and the pattern of obligations and its exposure to default contagion

buyer s response to a temporary price reduction incorporating freight costs abstract in this paper we characterize the buyer s response to a temporary price reduction although there have been many studies that have considered the above problem most of those studies assume that the buyer orders fob free on board destination and that the freight charges are included in the supplier s unit price our model thus becomes applicable for a buyer whose strategy is to include transportation costs in their purchase decisions the buyer may want direct control on his inbound logistics costs the company may have outsourced its logistics function and as a result is charged for freight as invoiced by the public motor carrier in some cases the supplier may only allow for orders that are fob origin our model allows for less than truckload as well as truckload rates freight cost for a ltl shipment is modeled using tariffs set by public carriers in practice these tariffs generally involve 6 7 breakpoints in terms of the weight of the shipment another complication in practice is that the shipper buyer has an option to over declare the weight of the shipment

money intermediation and banking the business of money creation is conceptually distinct from that of intermediation yet these two activities are frequently but not always combined together in the form of a banking system we develop a simple model to examine the question when is banking essential there is a role for money due to a lack of record keeping and a role for intermediation due to the existence of private information both money and intermediation are essential when monitoring costs associated with intermediation are sufficiently low the two activities can be separated from one another however when monitoring costs are sufficiently high a banking system that combines these two activities is essential

transferability finality and debt settlement abstract payment fundamental to exchange in a decentralized economy often takes the form of transfers of inside money i e specialized forms of debt associated with each type of inside money is a set of rules that governs both the legitimacy of such transfers as means of extinguishing other debts and the allocation of the ensuing risks in this paper we develop a model of debt as inside money in a simple mechanism design framework we show that transferable debt that can be used to settle other debt obligations with finality can be a welfare improving arrangement in the presence of limited enforcement powers transferable debt has two advantages over simple chains of credit it allows for removal of less than perfectly reliable agents from the chain in a timely fashion and it allows agents to direct payments to the proper party without direct communication with other members of the credit chain

financial intermediaries and liquidity creation trading losses associated with information asymmetries can be mitigated by designing securities which split the cash flows of underlying assets these securities which can arise endogenously have values that do not depend on the information known only to informed agents bank debt deposits is an example of this type of liquid security which protect relatively uninformed agents and we provide a rationale for deposit insurance in this content high grade corporate debt and government bonds are other examples implying that a money market mutual fund based payments system may be an alternative to one based on insured bank deposits

risk and global economic architecture why full financial integration may be undesirable integration of global financial markets was supposed to lead to greater financial stability as risks were spread around the world the finan cial crisis has thrown doubt on this conclusion a failure in one part of the global economic system caused a global meltdown the recent crisis has shown that in the absence of appro priate government intervention privately profit able transactions may lead to systemic risk this paper provides a general analytic framework within which we can analyze the optimal degree and form of financial integration within this general framework full integration is not in general optimal indeed faced with a choice between two polar regimes full integration or autarky in the simplified model autarky may be superior

debt inflation and central bank independence abstract increasing the independence of a central bank from political influence although ex ante socially beneficial and initially successful in reducing inflation would ultimately fail to lower inflation permanently the smaller anticipated policy distortions implemented by a more independent central bank would induce the fiscal authority to decrease current distortions by increasing the deficit over time inflation would increase to accommodate a higher public debt by contrast imposing a strict inflation target would lower inflation permanently and insulate the primary deficit from political distortions

a generalized discount structure and some dominance rules for selecting the price break eoq abstract this paper introduces a generalized discount structure that combines the features of incremental and all units quantity discount policies general properties of the eoq model under this discount structure are studied and dominance rules for comparing order quantity intervals under either type of discount policy are established in addition procedures for developing an iso cost function and the minimal feasible set for optimal order quantity are proposed

a model of financial fragility abstract this article presents a dynamic stochastic game theoretic model with two essential features first agents hold diversified portfolios that link their financial positions to those of other agents second shocks to fundamentals at the initial date cause some portfolio losses agents who incur losses reallocate their portfolios thereby breaking some linkages in the pareto efficient symmetric equilibrium studied two related types of financial crisis can occur in response one occurs gradually as losses spread breaking more links the other type occurs instantaneously when forward looking agents preemptively shift to safer portfolios to avoid future losses from contagion an economy is more fragile the earlier its last remaining link breaks from such a crisis journal of economic literature classification numbers c7 e00 e3 e44 g1

auction failures and the market for auction rate securities abstract the market for auction rate securities ars made headlines during the second week of february 2008 when auctions at which the bonds interest rates reset experienced a wave of failures contrary to headlines that attribute the failures to a frozen market or investors irrationality we find that 1 even at their height less than 50 of ars experienced auction failures 2 the likelihood of auction failure was directly related to the level of the bonds maximum auction rates 3 the implied market clearing yields of bonds with failed auctions were significantly above their maximum auction rates and 4 ars yields were generally higher than yields of various cash equivalent investment alternatives we infer that investors priced the possibility of auctions failures into ars yields and rationally declined to bid for bonds for which required market yields exceeded their maximum auction rates

quantity discounts managerial issues and research opportunities marketing managers frequently administer pricing policies involving substantial quantity discounts however our understanding of the precise role of these discounts and their design is quite limited this paper reviews and integrates the economics and marketing literature and presents a detailed analysis of the policies of four firms in order to i specify the variety of motivations for quantity discounts ii provide guidelines to managers in designing quantity discount schedules and iii set out the most fruitful directions for future research

measuring financial asset return and volatility spillovers with application to global equity markets we provide a simple and intuitive measure of interdependence of asset returns and or volatilities in particular we formulate and examine precise and separate measures of return spillovers and volatility spillovers our framework facilitates study of both non crisis and crisis episodes including trends and bursts in spillovers and both turn out to be empirically important in particular in an analysis of sixteen global equity markets from the early 1990s to the present we find striking evidence of divergent behavior in the dynamics of return spillovers vs volatility spillovers return spillovers display a gently increasing trend but no bursts whereas volatility spillovers display no trend but clear bursts

asset commonality debt maturity and systemic risk we develop a model in which asset commonality and short term debt of banks interact to generate excessive systemic risk banks swap assets to diversify their individual risk two asset structures arise in a clustered structure groups of banks hold common asset portfolios and default together in an unclustered structure defaults are more dispersed portfolio quality of individual banks is opaque but can be inferred by creditors from aggregate signals about bank solvency when bank debt is short term creditors do not roll over in response to adverse signals and all banks are ine ciently liquidated this information contagion is more likely under clustered asset structures in contrast when bank debt is long term welfare is the same under both asset structures

networks and systemic risk in the financial system the complex web of exposures and interlinkages across the financial system highlights the relevance of network analysis in understanding systemic risk and guiding the design of financial regulation this paper discusses how network models and those based on epidemiological approaches in particular offer a compelling description of the structure of real world financial systems and shed light on different contagion mechanisms seen during the global financial crisis we also review how these insights may inform macroprudential risk assessment and policy in the areas of stress testing the financial system and the regulation of systemically important institutions the role of non bank financial intermediation and social networks in shaping financial system risk is also briefly considered

repo runs evidence from the tri party repo market the repo market has been viewed as a potential source of financial instability since the 2007 to 2009 financial crisis based in part on findings that margins increased sharply in a segment of this market this paper provides evidence suggesting that there was no system wide run on repo using confidential data on tri party repo a major segment of this market we show that the level of margins and the amount of funding were surprisingly stable for most borrowers during the crisis however we also document a sharp decline in the tri party repo funding of lehman in september 2008

structural holes in social networks we consider a setting where every pair of players that undertake a transaction e g exchange goods or information creates a unit surplus a transaction can take place only if the players involved have a connection if the connection is direct the two players split the surplus equally while if it is indirect then intermediate players also get an equal share of the surplus thus individuals form links with others to create surplus to gain intermediation rents and to circumvent others who are trying to become intermediary our analysis clarifies the interplay between these forces in the process of strategic network formation first we show that in the absence of capacity constraints on links it leads to the emergence of a star network where a single agent acts as an intermediary for all transactions and enjoys significantly higher payoffs second we study the implications of capacity constraints in the ability of agents to form links in this case distances between players must be long which induces players who are far off to connect in order to avoid paying large intermediation rents a cycle network then emerges payoffs being equal across all players

note on a quantity discount pricing model to increase vendor profits monahan monahan james p 1984 a quantity discount pricing model to increase vendor profits management sci 30 june 720 726 develops a model for establishing an optimal quantity discount schedule from a vendor s viewpoint in this note we show that this model is limited to the case where the vendor buys from another supplier incorporating vendor s inventory carrying costs we develop a generalized version of monahan s model and demonstrate its equivalence with the joint economic lot size approach suggested by banerjee banerjee avijit 1986 a joint economic lot size model for purchaser and vendor decision sci 17 summer 292 311

comment managing channel profits comment in a recent paper in this journal jeuland and shugan jeuland a s shugan 1983 managing channel profits marketing sci 2 summer 239 272 proposed a quantity discount schedule as a way of coordinating a channel as they put it on p 253 of their paper a quantity discount schedule which would fix the retailer s and hence the manufacturer s profits to some fixed linear function of total channel profits would lead the channel to maximize profits the purpose of this note is to show that a quantity discount schedule is not necessary for channel coordination

inventory policies under various optimizing criteria and variable markup rates this paper extends the deterministic eoq model to reflect various optimizing criteria and alternative demand and price structures its primary purpose is to develop decision rules for the management of finished goods inventories especially in retailing where inventories are evaluated in the same way as any other investment namely on their ability to generate profits rather than on the traditional least cost basis to that effect the models developed here consider demand to be a function of price with price defined as a markup of unit cost the decision variables are the order quantity and the markup rate possible optimizing objectives include profits return on investment or residual income the three most widely used evaluators of short term investment performance optimal solutions for each case are obtained and the resulting inventory policies evaluated

incomplete record keeping and optimal payment arrangements abstract we study a random matching absence of double coincidence environment in which people cannot precommit and in which there are two imperfect ways to keep track of what other people have done in the past money and a public record of all past actions that is updated with an average lag we study how the magnitude of that lag affects the allocations that are optimal from among allocations that are stationary and feasible and that satisfy incentive constraints which arise from the absence of commitment and the imperfect ways of keeping track of what others have done in the past journal of economic literature classification numbers e40 c73 d82

intertemporal price discrimination and sales strategy under incomplete information this article examines intertemporal price variations to provide a theoretical explanation for them when firms have only incomplete information about consumers reservation prices for the commodity we contend that some intertemporal price variations can result from attempts by firms to discriminate among consumers we demonstrate that such price discrimination is the optimal policy for a seller if consumers have a higher time discount rate than producers

a strategic model of social and economic networks we study the stability and efficiency of social and economic networks when self interested individuals can form or sever links first for two stylized models we characterize the stable and efficient networks there does not always exist a stable network that is efficient next we show that this tension persists generally to assure that there exists a stable network that is efficient one is forced to allocate resources to nodes that are not responsible for any of the production we characterize one such allocation rule the equal split rule and another rule that arises naturally from bargaining of the players

in efficient interbank networks we study the efficiency properties of the formation of an interbank network banks face a trade off by establishing connections in the interbank market on the one hand banks improve the diversification of their liquidity risk and therefore can obtain a higher expected payoff on the other hand banks not sufficiently capitalized have risk shifting incentives that expose them to the risk of bankruptcy connecting to such risky banks negatively affects expected payoff we show that both the optimal and the decentralized networks are characterized by a core periphery structure the core is made of the safe banks whereas the periphery is populated by the risky banks nevertheless the two network structures coincide only if counterparty risk is sufficiently low otherwise the decentralized network is underconnected as compared to the optimal one finally we analyze mechanisms that can avoid the formation of inefficient interbank networks

financial networks and contagion we study cascades of failures in a network of interdependent financial organizations how discontinuous changes in asset values e g defaults and shutdowns trigger further failures and how this depends on network structure integration greater dependence on counterparties and diversification more counterparties per organization have different nonmonotonic effects on the extent of cascades diversification connects the network initially permitting cascades to travel but as it increases further organizations are better insured against one another s failures integration also faces trade offs increased dependence on other organizations versus less sensitivity to own investments finally we illustrate the model with data on european debt cross holdings jel d85 f15 f34 f36 f65 g15 g32 g33 g38 globalization brings with it increased financial interdependencies among many kinds of organizations governments central banks investment banks firms etc that hold each other s shares debts and other obligations such interdependencies can lead to cascading defaults and failures which are often avoided through massive bailouts of institutions deemed too big to fail recent examples include the us government s interventions in aig fannie mae freddie mac and general motors and the european commission s interventions in greece and spain although such bailouts circumvent the widespread failures that were more prevalent in the nineteenth and early twentieth centuries they emphasize the need to study the risks created by a network of interdependencies understanding these risks is crucial to designing incentives and regulatory responses which defuse cascades before they are imminent in this paper we develop a general model that produces new insights regarding financial contagions and cascades of failures among organizations linked through a network of financial interdependencies organizations values depend on each other e g through cross holdings of shares debt or other liabilities if an

financial networks contagion commitment and private sector bailouts i develop a model of financial networks in which linkages not only spread contagion but also induce private sector bailouts where liquid banks bail out illiquid banks because of the threat of contagion introducing this bailout possibility i show that linkages may be optimal ex ante because they allow banks to obtain some mutual insurance even though formal commitments are impossible however in some cases e g when liquidity is concentrated among a small group of banks the whole network may collapse i also characterize the optimal network size and apply the results to joint liability arrangements and payment systems linkages among agents in financial markets are a concern because of the risk of financial contagion that is the risk that a small shock to one agent will spread to other agents in a domino effect whether we should worry about these linkages is an open question the main goal of this paper is to show that a network in which agents are closely interlinked may be optimal both because of and despite the potential for contagion another goal is to characterize optimal networks that is whether and how agents should be linked to one another the basic intuition is as follows linkages present the threat of contagion to prevent collapse of the whole network agents who are lucky ex post may be willing to bail out those who are not in this way agents obtain the benefits of mutual insurance even though they cannot precommit to making payments

money is memory abstract this paper examines the sets of feasible allocations in a large class of economic environments in which commitment is impossible following myerson 8 the standard definition of feasibility is adapted to take account of the lack of commitment the environments feature either memory or money memory is defined as knowledge on the part of an agent of the full histories of all agents with whom he has had direct or indirect contact in the past money is defined as an object that does not enter utility or production functions and is available in fixed supply the main proposition is that any allocation that is feasible in an environment with money is also feasible in the same environment with memory depending on the environment the converse may or may not be true hence from a technological point of view money is equivalent to a primitive form of memory journal of economic literature classification numbers e40 c73 d82

the payments system liquidity and rediscounting in an economy where fiat money serves both as a medium of exchange and the means by which debts are cleared it is shown that nonoptimal equilibria of constrained liquidity may arise optimality may be restored by temporary expansions of the monetary base e g an active central bank discount window copyright 1996 by american economic association

consistency and heterogeneity of individual behavior under uncertainty by using graphical representations of simple portfolio choice problems we generate a very rich dataset to study behavior under uncertainty at the level of the individual subject we test the data for consistency with the maximization hypothesis and we estimate preferences using a two parameter utility function based on faruk gul 1991 this specification provides a good interpretation of the data at the individual level and can account for the highly heterogeneous behaviors observed in the laboratory the parameter estimates jointly describe attitudes toward risk and allow us to characterize the distribution of risk preferences in the population

all units quantity freight discounts with disposals abstract this paper examines the effect of various freight rate structures and quantity discounts on the inventory policies of roi and profit maximizing firms with downward sloping price elastic demand lot sizing policies and price set at a markup on unit cost units not sold at the regular price are disposed of at a reduced price both the markup and the order quantity are decision variables numerical examples are used throughout to illustrate the properties of the model and the sensitivity of the optimal solutions to fluctuations in the parameters

private money and banking regulation we show that the regulation of lending practices is desirable for the optimal provision of private money in an environment in which bankers cannot commit to repay their creditors neither an unregulated banking system nor a form of narrow banking in which banks hold 100 in reserves can provide the socially efficient amount of money if bankers provided such an amount then they would prefer to default on their liabilities we show that a regulation that increases the value of the banking sector s assets e g by limiting competition in credit markets will mitigate the commitment problem if the return on the banking sector s assets is made sufficiently large then it is possible to implement an efficient allocation

consumption risk sharing in social networks we develop a model of informal risk sharing in social networks where relationships between individuals can be used as social collateral to enforce insurance payments we characterize incentive compatible risk sharing arrangements and obtain two results 1 the degree of informal insurance is governed by the expansiveness of the network measured by the number of connections that groups of agents have with the rest of the community relative to group size twodimensional networks where people have connections in multiple directions are su ciently expansive to allow very good risk sharing we show that social networks in peruvian villages satisfy this dimensionality property thus our model can explain townsend s 1994 puzzling observation that village communities often exhibit close to full insurance 2 in second best arrangements agents organize in endogenous risk sharing islands in the network where shocks are shared fully within but imperfectly across islands as a result network based risk sharing is local socially closer agents insure each other more

fashion and sales abstract when there is unpredictable fashion in taste it will be optimal to limit the stock of each variety of a horizontally differentiated durable good if consumers are uncertain about one another s taste they will then accept higher first period prices for perfect matches in order to avoid finding only bad matches on sale thus there exists a mechanism which allows a monopolist to price discriminate inter temporally even when it has predictable clearance sales and consumers are infinitely patient there is no distortion in product selection when this equilibrium arises

retail pricing and the costs of clearance sales the formalisation of a rule of thumb abstract this paper deals with the phenomenon of clearance sales these can be considered as cases of intertemporal price discrimination at first the good or service is sold at a high price and after a first period the price is reduced in mass consumption retailing the price reduction policy is applied as a matter of routine with typically one two or three reductions to understand such a policy we have to realize that there are costs involved with clearance sales in the paper a model is presented which can be used to answer questions like what is the optimal number of price reductions or what is the optimal price reduction schedule the paper also presents a matrix formulation of the model in addition some numerical examples are given

liquidity a new monetarist perspective this essay surveys the new monetarist approach to liquidity work in this literature strives for empirical and policy relevance plus rigorous foundations questions include what is liquidity is money essential in achieving desirable outcomes which objects can or should serve in this capacity when can asset prices differ from fundamentals what are the functions of commitment and collateral in credit markets how does money interact with credit and intermediation what can and should monetary policy do the research summarized emphasizes the micro structure of frictional transactions and studies how institutions like monetary exchange credit arrangements or intermediation facilitate the exchange process

debt constrained asset markets we develop a theory of general equilibrium with endogenous debt limits in the form of individual rationality constraints similar to those in the dynamic consistency literature if an agent defaults on a contract he can be excluded from future contingent claims markets trading and can have his assets seized he cannot be excluded from spot markets trading however and he has some private endowments that cannot be seized all information is publicly held and common knowledge and there is a complete set of contingent claims markets since there is complete information an agent cannot enter into a contract in which he would have an incentive to default in some state in general there is only partial insurance variations in consumption may be imperfectly correlated across agents interest rates may be lower than they would be without constraints and equilibria may be pareto ranked

resaleable debt and systemic risk many debt claims such as bonds are resaleable whereas others such as repos are not there was a fivefold increase in repo borrowing before the 2008 crisis why did banks dependence on non resaleable debt precipitate the crisis in this paper we develop a model of bank lending with credit frictions the key feature of the model is that debt claims are heterogeneous in their resaleability we find that decreasing credit market frictions leads to an increase in borrowing via non resaleable debt borrowing via non resaleable debt has a dark side it causes credit chains to form since if a bank makes a loan via non resaleable debt and needs liquidity it cannot sell the loan but must borrow via a new contract these credit chains are a source of systemic risk since one bank s default harms not only its creditors but also its creditors creditors overall our model suggests that reducing credit market frictions may have an adverse effect on the financial system and may even lead to the failures of financial institutions

default and renegotiation a dynamic model of debt we analyze the role of debt in persuading an entrepreneur to pay out cash e ows rather than to divertthem in the e rstpartof the paper we study the optimal debt contract specie cally the trade off between the size of the loan and the repayment under the assumption that some debt contract is optimal in the second part we consider a more general class of nondebt contracts and derive sufficient conditions for debt to be optimal among these

market power in a securities market with endogenous information a rational expectations model of a securities market is developed in which one agent the monopolist behaves like a stackelberg leader and other agents behave competitively two information structures one in which each agent has identical information and the other in which each agent has independent information are examined equilibrium is shown to exist and is characterized in both cases but monopoly has a significant effect on the equilibrium only in the latter the optimal strategy of the stackelberg leader is also studied and it is shown that he will not randomize his strategy by adding white noise to his demand function even though this obfuscates the information content of the market price

the formation of financial networks modern banking systems are highly interconnected despite various benefits linkages between banks carry the risk of contagion in this article i investigate whether banks can commit ex ante to mutually insure each other when there is contagion risk in the financial system i model banks decisions to share this risk through bilateral agreements a financial network that allows losses to be shared among various counterparties arises endogenously i characterize the probability of systemic risk defined as the event that contagion occurs conditional on one bank failing in equilibrium interbank networks i show that there exist equilibria in which contagion does not occur