Search Results
Working Paper
The emergence and future of central counterparties
The authors explain why central counterparties (CCPs) emerged historically. With standardized contracts, it is optimal to insure counterparty risk by clearing those contracts through a CCP that uses novation and mutualization. As netting is not essential for these services, it does not explain why CCPs exist. In over-the-counter markets, as contracts are customized and not fungible, a CCP cannot fully guarantee contract performance. Still, a CCP can help: As bargaining leads to an inefficient allocation of default risk relative to the gains from customization, a transfer scheme is needed. A ...
Conference Paper
Social capital and the cost of business loan contracting
Report
Financial Intermediary Balance Sheet Management
We consider a simple variant of the standard real business cycle model in which shareholders hire a self-interested executive to manage the firm on their behalf. A generic family of compensation contracts similar to those employed in practice is studied. When compensation is convex in the firm?s own dividend (or share price), a given increase in the firm?s output generated by an additional unit of physical investment results in a more than proportional increase in the manager?s income. Incentive contracts of sufficient yet modest convexity are shown to result in an indeterminate general ...
Working Paper
Non-exclusive contracts, collateralized trade, and a theory of an exchange
Liquid markets where agents have limited capacity to sign exclusive contracts may permit agents to promise the same asset to multiple counterparties and subsequently default. I show that in such markets an exchange can arise as an intermediary whose only role is to set limits on the number of contracts that agents can report voluntarily. In some cases, these limits must be non-binding in equilibrium, and reported trades must not be made public. A (costly) alternative to an exchange is collateralized trade, and the gains from an exchange increase when agents have more intangible capital (e.g., ...
Journal Article
Legal uncertainty and contractual innovation
Although innovative contracts are important for economic growth, when firms face uncertainty as to whether contracts will be enforced, they may choose not to innovate. Legal uncertainty can arise if a judge interprets the terms of a contract in a way that is antithetical to the intentions of the parties to the contract. Or sometimes a judge may understand the contract but overrule it for other reasons. How does legal uncertainty affect firms? decisions to innovate? In ?Legal Uncertainty and Contractual Innovation,? Yaron Leitner explores issues related to legal uncertainty, particularly the ...
Conference Paper
Lending relationships and loan contract terms: does size matter?
Conference Paper
Contracting costs, inflation, and relative price variability
Working Paper
Competition, syndication, and entry in the venture capital market
There are two ways for a venture capital (VC) firm to enter a new market: initiate a new deal or form a syndicate with an incumbent. Both types of entry are extensively observed in the data. In this paper, I examine (i) the causes of syndication between entrant and incumbent VC firms, (ii) the impact of entry on VC contract terms and survival rates of VC-backed start-up companies, and (iii) the effect of syndication between entrant and incumbent VC firms on the competition in the VC market and the outcomes of incumbent-backed ventures. By developing a theoretical model featuring endogenous ...
Working Paper
Moral hazard in the Diamond-Dybvig model of banking
We modify the Diamond-Dybvig model studied in Green and Lin to incorporate a self-interested banker who has a private record-keeping technology. A public record-keeping device does not exist. We find that there is a trade-off between sophisticated contracts that possess relatively good risk-sharing properties but allocate resources inefficiently for incentive reasons, and simple contracts that possess relatively poor risk-sharing properties but economize on the inefficient use of resources. While this trade-off depends on model parameters, we find that simple contracts prevail under a wide ...
Working Paper
The replacement problem in frictional economies : a near equivalence result
We examine how technological change affects wage inequality and unemployment in a calibrated model of matching frictions in the labor market. We distinguish between two polar cases studied in the literature: a "creative destruction" economy where new machines enter chiefly through new matches and an "upgrading" economy where machines in existing matches are replaced by new machines. Our main results are: (i) these two economies produce very similar quantitative outcomes, and (ii) the total amount of wage inequality generated by frictions is very small. We explain these findings in light ...