A model of collateral, investment and adverse selection

This paper characterizes the relationship between entrepreneurial wealth and aggregate investment under adverse selection. Its main finding is that such a relationship need not be monotonic. In particular, three results emerge from the analysis: (i) pooling equilibria, in which investment is independent of entrepreneurial wealth, are more likely to arise when entrepreneurial wealth is relatively low; (ii) separating equilibria, in which investment is increasing in entrepreneurial wealth, are most likely to arise when entrepreneurial wealth is relatively high and; (iii) for a given interest rate, an increase in entrepreneurial wealth may generate a discontinuous fall in investment.Adverse Selection, Collateral, Investment, Lending Standards, Screening

On Rothschild-Stiglitz as competitive pooling

Dubey and Geanakoplos [2002] have developed a theory of competitive pooling, which incorporates adverse selection and signaling into general equilibrium. By recasting the Rothschild-Stiglitz model of insurance in this framework, they find that a separating equilibrium always exists and is unique. We prove that their uniqueness result is not a consequence of the framework, but rather of their definition of refined equilibria. When other types of perturbations are used, the model allows for many pooling allocations to be supported as such: in particular, this is the case for pooling allocations that Pareto dominate the separating equilibrium.Competitive pooling, insurance, adverse selection, signalling, refined equilibrium, separating equilibrium

Antidumping: Welfare Enhancing Retaliation?

Over the last two decades, the use of antidumping (AD) measures has been characterized by two main features. First and foremost, it has increased dramatically. Additionally, it has not - to a large extent - been used to counteract the existence of dumping, but rather in a strategic or retaliatory fashion. These empirical findings have led many to propose the elimination of this instrument altogether, on the basis that its current use is arbitrary and, consequently, welfare reducing. We argue that these concerns may be unfounded since, in a world of restricted trade policy instruments, a retaliatory use of AD might be welfar enhancing. By modeling the trade relationship between countries as a repeated game of hidden information, we show that retaliation can be welfare increasing with respect to a rigid rule on the use of AD. We stress the fact that, underlying this result, is the unavailability of transfers or export subsidies in the current world trading system.

Theoretical notes on bubbles and the current crisis

We explore a view of the crisis as a shock to investor sentiment that led to the collapse of a bubble or pyramid scheme in financial markets. We embed this view in a standard model of the financial accelerator and explore its empirical and policy implications. In particular, we show how the model can account for: (i) a gradual and protracted expansionary phase followed by a sudden and sharp recession; (ii) the connection (or lack of connection!) between financial and real economic activity and; (iii) a fast and strong transmission of shocks across countries. We also use the model to explore the role of fiscal policy.bubbles, dynamic inefficiency, financial accelerator, credit constraints, financial crisis, pyramid schemes.

International capital flows and credit market imperfections: A tale of two frictions

The financial crisis of 2007-08 has underscored the importance of adverse selection in financial markets. This friction has been mostly neglected by macroeconomic models of financial imperfections, however, which have focused almost exclusively on the effects of limited pledgeability. In this paper, we fill this gap by developing a standard growth model with adverse selection. Our main results are that, by fostering unproductive investment, adverse selection: (i) leads to an increase in the economy’s equilibrium interest rate, and; (ii) it generates a negative wedge between the marginal return to investment and the equilibrium interest rate. Under financial integration, we show how this translates into excessive capital inflows and endogenous cycles. We also extend our model to the more general case in which adverse selection and limited pledgeability coexist. We conclude that both frictions complement one another and show that limited pledgeability exacerbates the effects of adverse selection.Limited Pledgeability, Adverse Selection, International Capital Flows, Credit Market Imperfections

International Capital Flows and Credit Market Imperfections: a Tale of Two Frictions

The financial crisis of 2007-08 has underscored the importance of adverse selection in financial markets. This friction has been mostly neglected by macroeconomic models of financial frictions, however, which have focused almost exclusively on the effects of limited pledgeability. In this paper, we fill this gap by developing a standard growth model with adverse selection. Our main results are that, by fostering unproductive investment, adverse selection: (i) leads to an increase in the economy's equilibrium interest rate, and (ii) it generates a negative wedge between the marginal return to investment and the equilibrium interest rate. Under financial integration, we show how this translates into excessive capital inflows and endogenous cycles. We also explore how these results change when limited pledgeability is added to the model. We conclude that both frictions complement one another and argue that limited pledgeability exacerbates the effects of adverse selection.Limited Pledgeability; Adverse Selection; International Capital Flows; Credit Market Imperfections

IIA/B, Wound and Wrapped

We examine the T-duality relation between 1+1 NCOS and the DLCQ limit of type IIA string theory. We show that, as long as there is a compact dimension, one can meaningfully define an `NCOS' limit of IIB/A string theory even in the absence of D-branes (and even if there is no B-field). This yields a theory of closed strings with strictly positive winding, which is T-dual to DLCQ IIA/B without any D-branes. We call this the Type IIB/A Wound String Theory. The existence of decoupled sectors can be seen directly from the energy spectrum, and mirrors that of the DLCQ theory. It becomes clear then that all of the different p+1 NCOS theories are simply different states of this single Wound IIA/B theory which contain D-branes. We study some of the properties of this theory. In particular, we show that upon toroidal compactification, Wound string theory is U-dual to various Wrapped Brane theories which contain OM theory and the ODp theories as special states.Comment: LaTeX 2e, 36+1 pages, 1 ps figur

Adverse selection, credit and efficiency: The case of the missing market

We analyze a standard environment of adverse selection in credit markets. In our environment, entrepreneurs who are privately informed about the quality of their projects need to borrow from banks. Conventional wisdom says that, in this class of economies, the competitive equilibrium is typically inefficient. We show that this conventional wisdom rests on one implicit assumption: entrepreneurs can only borrow from banks. If an additional market is added to provide entrepreneurs with additional funds, efficiency can be attained in equilibrium. An important characteristic of this additional market is that it must be non-exclusive, in the sense that entrepreneurs must be able to simultaneously borrow from many different lenders operating in it. This makes it possible to attain efficiency by pooling all entrepreneurs in the new market while separating them in the market for bank loans.Adverse Selection, Credit Markets, Collateral, Screening

Brane-Antibrane Systems at Finite Temperature and the Entropy of Black Branes

We consider D-brane/anti-D-brane systems at T>0. Starting at the closed string vacuum, we argue that a finite temperature leads to the reappearance of open string degrees of freedom. We also show that, at a sufficiently large temperature, the open string vacuum becomes stable. Building upon this observation and previous work by Horowitz, Maldacena and Strominger, we formulate a microscopic brane-antibrane model for the non-extremal black three-brane in ten dimensions (as well as for the black two- and five-branes in eleven dimensions). Under reasonable assumptions, and using known results from the AdS/CFT correspondence, the microscopic entropy agrees with the supergravity result up to a factor of 2^(p/p+1), with p the dimension of the brane. The negative specific heat and pressure of the black brane have a simple interpretation in terms of brane-antibrane annihilation. We also find in the model states resembling black holes and other lower-dimensional black branes.Comment: LaTeX 2e, 36 pages, 2 eps figures. v2: References adde