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

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

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

is 75 of the sales promotion bump due to brand switching no only 33 is abstract several researchers have decomposed sales promotion elasticities based on household scanner panel data a key result is that the majority of the sales promotion elasticity approximately 74 on average is attributed to secondary demand effects brand switching and the remainder is attributed to primary demand effects timing acceleration and quantity increases the authors demonstrate that this result does not imply that if a brand gains 100 units in sales during a promotion the other brands in the category lose 74 units the authors offer a complementary decomposition measure based on unit sales the measure shows the ratio of the current cross brand unit sales loss to the current own brand unit sales gain during promotion the authors report empirical results for this measure they also derive analytical expressions that transform the elasticity decomposition into a decomposition of unit sales effects these expressions show the nature of the difference between the two decompositions to ga

financial expertise as an arms race we show that firms intermediating trade have incentives to overinvest in financial expertise in our model expertise improves firms ability to estimate value when trading a security expertise creates asymmetric information which under normal circumstances works to the advantage of the expert as it deters opportunistic bargaining by counterparties this advantage is neutralized in equilibrium however by offsetting investments by competitors moreover when volatility rises the adverse selection created by expertise triggers breakdowns in liquidity destroying gains to trade and thus the benefits that firms hope to gain through high levels of expertise

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

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

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

the flexible coefficient multinomial logit fc mnl model of demand for differentiated products we show fc mnl is flexible in the sense of diewert thus its parameters can be chosen to match a well defined class of possible own and cross price elasticities of demand in contrast to models such as probit and random coefficient mnl models fc mnl does not require estimation via simulation it is fully analytic under well defined and testable parameter restrictions fc mnl is shown to be an unexplored member of mcfadden s class of multivariate extreme value discrete choice models therefore fc mnl is fully consistent with an underlying structural model of heterogeneous utility maximizing consumers we provide a monte carlo study to establish its properties and we illustrate its use by estimating the demand for new automobiles in italy

the invariant proportion of substitution property ips of discrete choice models this article introduces a newly discovered property of discrete choice models which i call the invariant proportion of substitution ips like the independence from irrelevant alternatives iia property ips implies individual behavior that is counterintuitive in the context of choice among similar alternatives but models that alleviate the concerns raised by iia such as generalized extreme value and covariance probit models do not necessarily alleviate the concerns raised by ips i explore the implications of the ips property on individual behavior in several choice contexts and discuss some models that alleviate the concerns raised by ips

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

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

a simultaneous approach to the whether what and how much to buy questions consumer s purchase decisions of whether to buy what to buy and how much to buy are examined simultaneously based on a consumer utility maximization problem an unobservable threshold price about which a consumer pivots from nonpurchase to purchase can be deduced with any model specification the interrelationships between purchase decisions can be explicitly derived the model is applied to coffee purchasing data in addition by suppressing the nonpurchase options the model is compared with an alternative approach appearing in the marketing literature

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

investigating purchase incidence brand choice and purchase quantity decisions of households we develop a comprehensive utility maximizing framework to study the impact of marketing variables on the category purchase brand choice and purchase quantity decisions of households for frequently purchased packaged goods the model allows for dependence among the three decisions while ensuring that these decisions provide in combination the greatest possible utility to the household by accounting for variations in reservation prices and intrinsic brand preferences across households the modeling framework explicitly captures the effects of unobserved heterogeneity on all three purchase decisions the principal empirical finding from analyzing the a c nielsen data for the yogurt product category is that the substantive implications for the effects of marketing variables are sensitive to whether these effects are determined conditional or unconditional on a product category purchase our results show that reservation prices and intrinsic brand preferences vary across households and not accounting for these variations in the estimation could lead to biased estimates for the coefficients of the marketing variables a comparison of our results to those obtained from a nested logit model of purchase incidence and brand choice reveals that our proposed model performs better using both a formal statistical test as well as the criterion of predictive validity in a holdout sample of panelists further the purchase quantity model compares favorably with two alternative models of quantity choice in the validation sample

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

measuring consumer and competitive impact with elasticity decompositions abstract marketing investments are designed to change consumer behavior in ways that help goods compete in the marketplace previous research has focused on using elasticity decompositions to measure how these investments affect either consumer decision making or competing goods on the one hand decision based decompositions attribute the growth in own good demand to changes in the consumers decision making processes on the other hand unit based and share based decompositions attribute the same growth to either rivalrous or nonrivalrous sources the objective of this article is to provide a clear and accurate method that simultaneously attributes the growth in own good demand to changes in 1 consumers decisions 2 competitive demand and 3 competitive market share the author accomplishes this by settling some confusion about what the decision and share based decompositions mean by discussing how each of the decompositions are related to the others and by discussing the research questions th

the decomposition of promotional response an empirical generalization price promotions are used extensively in marketing for one simple reason consumers respond the sales increase for a brand on promotion could be due to consumers accelerating their purchases i e buying earlier than usual and or buying more than usual and or consumers switching their choice from other brands purchase acceleration and brand switching relate to the primary demand and secondary demand effects of a promotion gupta 1988 captures these effects in a single model and decomposes a brand s total price elasticity into these components he reports for the coffee product category that the main impact of a price promotion is on brand choice 84 and that there is a smaller impact on purchase incidence 14 and stockpiling 2 in other words the majority of the effect of a promotion is at the secondary level 84 and there is a relatively small primary demand effect 16 this paper reports the decomposition of total price elasticity for 173 brands across 13 different product categories on average we find that 25 of the elasticity is due to primary demand expansion i e purchase acceleration and 75 to secondary demand effects or brand switching thus while gupta s finding that the majority of promotional response stems from brand switching is supported the average magnitude of the effect appears to be smaller than first thought more important there is ample evidence that promotions have a significant primary demand effect the relative emphasis on purchase acceleration and brand switching varies systematically across categories and the second goal of the paper is to explain this variation as a function of exogeneous covariates in doing this we recognize that promotional response is the consumer s reaction to a price promotion and therefore develop a framework for understanding variability in promotional response that is based on the consumer s perspective of the benefits from a price promotion these benefits are posited to be a function of i category specific factors ii brand specific factors and iii consumer characteristics the framework is formalized as a generalized least squares meta analysis in which the brand s price elasticity is the dependent variable several interesting results emerge from this analysis category specific factors brand specific factors and consumer demographics explain a significant amount of the variance in promotional response for a brand at both the primary and secondary demand levels category specific factors have greater influence on variability in promotional response and its decomposition than do brand specific factors there are several instances where exogenous variables do not affect total elasticities yet significantly affect individual components of total elasticity in fact the lack of a significant relationship between the variables and total elasticity is often due to offsetting effects within two or more of the three behavioral components of elasticity this is particularly true for brand specific factors which typically have no effect on total elasticity yet have important effects on the individual behaviors there is some evidence to suggest that not all promotion related increases in primary demand are due to forward buying in some cases promotions appear to increase consumption we use these results to illustrate how category and brand specific factors work to drive primary and secondary demand elasticities in different directions in short this paper offers an empirical generalization of a key finding on promotional response how elasticities decompose across brand choice purchase incidence and stockpiling and new insights into factors that explain variance in promotional response these findings are likely to be of interest to researchers who are concerned with theory development and the generalizability of marketing phenomena and to managers who plan promotion campaigns

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

strategic delay in bargaining this paper analyses a bargaining model with incomplete information in which the time between offers is an endogenous strategic variable we find equilibria involving a delay to agreement that is due to the use of strategic time delay by bargainers to signal their relative strength under some specifications of the parameters delay is present in the unique sequential equilibrium whose beliefs satisfy one intuitive restriction this delay does not vanish as the minimal time between offers becomes small