Self-fulfilling liquidity dry-ups

Secondary markets for long-term assets might be illiquid due to adverse selection. In a model in which moral hazard is confined to project initiation, I find that: (1) when agents expect a liquidity dry-up on such markets, they optimally choose to self-insure through the hoarding of non-productive but liquid assets; (2) such a response has negative externalities as it reduces ex-post market participation, which worsens adverse selection and dries up market liquidity; (3) liquidity dry-ups are Pareto inefficient equilibria; (4) the Government can rule them out. Additionally, when agents face idiosyncratic, privately known, illiquidity shocks, I show that: (5) it increases market liquidity; (6) illiquid agents are better-off when they can credibly disclose their liquidity position, but transparency has an ambiguous effect on risk-sharing possibilities.Liquidity, Liquidity Dry-ups, Financial Crises, Hoarding, Adverse Selection, Self-insurance

Employment protection reform in search economies

The design of employment protection legislation (EPL) is of particular importance in the European debate on the contours of labor market reform. In this article we appeal to an equilibrium unemployment model to investigate the virtues of EPL reform which reduces the red tape and legal costs associated with layos and introduces a U.S.-style experiencerating system, which we model as a combination of a layo tax and a payroll subsidy. The reform considered shows that it is possible to improve the eciency of employment protection policies without aecting the extent of worker protection on the labor market. These results are consistent with the conventional wisdom that experience rating is desirable, not only as an integral component of unemployment-compensation nance, as most studies acknowledge, but also as part and parcel of a virtuous EPL system.Search and Matching Models; Employment Protection; State-Contingent Layo Tax; Experience-Rating

Can prominences form in current sheets

Two-dimensional numerical simulations of the formation of cold condensations in a vertical current sheet have been performed using the radiative, resistive MHD equations with line-tied boundary conditions at one end of the sheet. Prominence-like condensations are observed to appear above and below an X-line produced by the onset of the tearing-mode instability. Cooling in the sheet is initiated by Ohmic decay, with the densest condensations occurring in the region downstream of a fast-mode shock. This shock, which is due to the line-tied boundary conditions, terminates one of the two supermagnetosonic reconnection jets that develop when the tearing is fully developed. The condensation properties of shock waves, which may trigger or considerably enhance the conditions for thermal condensation are emphasized