Selfish Bakers, Caring Nurses? A Model of Work Motivation

Work contributes to people’s self-image in important ways. We propose a model in which individuals have a preference for being important to others. This leads to the following predictions: 1) In fully competitive markets with performance pay, behavior coincides with the standard model (bakers). 2) In jobs where e¤ort is not rewarded according to its social marginal value, behavior is more socially bene…cial than predicted by the standard model (nurses). 3) Even if unemployment bene…ts provide full income compensation, many workers’ utility strictly decreases when losing their job. 4) Similarly, many workers will prefer to work rather than to live o¤ welfare, even with full income compensation. 5) To keep shirkers out of the public sector, nurses’wages must be strictly lower than private sector income. At this wage level, however, the public sector will be too small. 6) It is possible to attract motivated workers to the public sector, without simultaneously attracting shirkers, through capital input improving nurses’opportunity to do a good job.Homo Oeconomicus; Work Motivation; Labour Market

Multiple Unit Auctions and Short Squeezes

This paper develops a theory of multiple unit auctions with short squeezes in the post- auction market. This is especially relevant for financial and commodity markets where players may enter the auction with established forward positions. We study how a potential short squeeze impacts on bidders' strategies and auction performance. Conversely, we also study how the design of the auction affects the incidence of short squeezes. In particular, we model both uniform price and discriminatory price auctions in a true multiple unit setting, where bidders can submit multiple bids for multiple units. Our model is cast in what appears to be a common value framework. However, we show that the possibility of a short squeeze introduces different valuations of the to-be-auctioned asset between short and long bidders.Multiple unit auction, uniform auction, discriminatory auction, treasury auction, repo auction, short squeeze, market manipulation, market power

The price of liquidity: bank characteristics and market conditions

We study differences in the price paid for liquidity across banks using price data at the individual bank level. Unique to this paper, we also have data on individual banks' reserve requirements and actual reserve holdings, thus allowing us to gauge the extent to which a bank is short or long liquidity. We find that the price a bank pays for liquidity depends on the liquidity positions of other banks, as well as its own. There is evidence that liquidity squeezes occasionally occur and short banks pay more the larger is the potential for a squeeze. The price paid for liquidity is decreasing in bank size and small banks are more adversely affected by an increased potential for a squeeze. Contrary to what one might expect, banks in formal liquidity networks do not pay less. --liquidity,banking,squeezes,money markets,repo auctions

The price of liquidity: the effects of market conditions and bank characteristics

We study the prices that individual banks pay for liquidity (captured by borrowing rates in repos with the central bank and benchmarked by the overnight index swap) as a function of market conditions and bank characteristics. These prices depend in particular on the distribution of liquidity across banks, which is calculated over time using individual banklevel data on reserve requirements and actual holdings. Banks pay more for liquidity when positions are more imbalanced across banks, consistent with the existence of short squeezing. We also show that small banks pay more for liquidity and are more vulnerable to squeezes. Healthier banks pay less but, contrary to what one might expect, banks in formal liquidity networks do not. State guarantees reduce the price of liquidity but do not protect against squeezes. JEL Classification: G12, G21, E43, E58, D44banks, imbalance, liquidity, money markets, repos

Strategic Behavior and Underpricing in Uniform Price Auctions

We study uniform price auctions using a dataset which includes individual bidders' demand schedules in Finnish Treasury auctions during the period 1992-99. Average underpricing amounts to .041% of face value. Theory suggests that underpricing may result from monopsonistic market power. We develop and test robust implications from this theory and ¯nd that it has little support in the data. For example, bidders' individual demand functions do not respond to increased competition in the manner predicted by the theory. We also present evidence that the Finnish Treasury acts strategically, taking into account the fact that the auctions are part of a repeated game between the Treasury and the primary dealers. Empirically, the main driver behind bidder behavior and underpricing is the volatility of bond returns. Since there is no evidence that bidders are risk averse, this suggests that private information and the winner's curse may play an important role in these auctions.Multiunit auctions, uniform price auctions, treasury auctions, market power, demand functions, underpricing, supply uncertainty, seller behavior

Bank bailout menus

Bailing out banks requires overcoming debt overhang as well as dealing with adverse selection with respect to the quality of banks' balance sheets, in terms of heterogeneity in both the likelihood and extent of their potential shortfalls, of future asset values vis-a-vis contractual debt obligations. We examine bailouts that eliminate debt overhang, while attempting to minimize subsidies to banks' equity holders. When banks do not differ with respect to the extent of debt overhang, it can be fully overcome with the minimal amount of subsidies, providing each bank's equity holders no more than their pre-bailout values, with a partial new equity injection, or an asset buyout. When levels of debt overhang covary with underlying probabilities of default, we characterize the conditions for attaining a similar minimal subsidy outcome, with a Menu of either equity injection or asset buyout plans, satisfying suitable self-selection constraints among bank types. These involve global rather than local conditions, with multiple intersections of indifference curves among types, and imply strictly greater funds injections than those needed to make existing debt default-free. We also explore the role of coupling asset purchases with providing the bailout agency Options to buy bank equity, to enhance its capture of rents arising from new investments by banks. We compare its performance with equity injections on this dimension, as well as others such as post-bailout stakes held by prior inside equity holders of banks

Bidding and Performance in Repo Auctions: Evidence from ECB Open Market Operations

Repo auctions are used to inject central bank funds against collateral into the banking sector. The ECB uses standard discriminatory auctions and hundreds of banks participate. The amount auctioned over the monthly reserve maintenance period is in principle exactly what banks collectively need to fulfil reserve requirements. We study bidder-level data and find: (i) Bidder behavior is different from what is documented for treasury auctions. Private information and the winner’s curse seem to be relatively unimportant. (ii) Underpricing is positively related to the difference between the interbank rate and the auction minimum bid rate, with the latter appearing to be a binding constraint. (iii) Bidders are more aggressive when the imbalance of awards in the previous auction is larger. (iv) Large bidders do better than small bidders. Some of our findings suggests that bidders are concerned with the loser’s nightmare and have limited amounts of the cheapest eligible collateral.Repo auctions, Multiunit auctions, Reserve requirements, Loser’s nightmare, Money markets, Central bank, Collateral, Open market operations

Bank Bailout Menus

We study bailouts of banks that suffer from debt overhang problems and have private information about the quality of their assets-in-place and new investment opportunities. Menus of bailout plans are used as a screening device. Constrained optimality involves overcapitalization and nonlinear pricing, with worse types choosing larger bailouts. When investment opportunities follow the assets, we derive an equivalence result between equity injections and asset buyouts. The larger capital outlay under asset buyouts can be offset by borrowing against the assets. If investment opportunities follow the bank, equity injections offer more upside to the bailout agency. This may reduce or enhance efficiency, depending on whether screening intensity is needed mostly on assets-in-place or new investments. (JEL G28, G01, D82

The price of money: The reserves convertibility premium over the term structure

Central-bank money provides utility by serving as means of exchange for virtually all transactions in the economy. New reserves (money) are issued to banks in exchange for collateral such as government bonds. An asset's degree of direct convertibility into fresh reserves may affect its utility and, consequently, its market price. We show the existence of a government-bond reserves convertibility premium, which tapers off at longer maturities. Essentially, there is a pure monetary component to some asset prices. Our findings have implications for our understanding of liquidity premia, the term structure of interest rates, and the impact of central-bank collateral policy