Collateral, Financial Arrangements and Pareto Optimality

The existence of collateral requirements to guarantee repayment on issued securities reduces in general the efficiency of competitive equilibria. The general equilibrium analysis is presented in a world where reputation plays no role, and the lender always expects a future payment equal to the future market value of provided collateral. In this context I show that collateral requirements result in two distinct problems for efficiency. I argue that two financial arrangements, tranching and financial pyramiding, arise in developed capital markets in response to the challenges posed by collateral requirements. If these arrangements are sufficiently developed, then the pareto efficiency of competitive equilibria is restored, even in the presence of collateral requirements.Collateral, Pareto Optimality, Financial Arrangements, Tranching, Financial Pyramiding.

Equity Premium: Interaction of Belief Heterogeneity and Distribution of Wealth?

Introducing heterogeneity of beliefs across different agents builds a link between wealth distribution and the equity premium. We demonstrate that an economy populated only by risk neutral agents may nonetheless display a strictly positive equity premium. We then place our notion of belief heterogeneity within the popular representative agent construct. We show that any level of belief heterogeneity in the multi agent economy can be mapped into some specific degree of risk aversion of the representative agent economy that keeps equilibrium prices constant. A fully dynamic model follows. Finally, we suggest an explanation for the recent behavior of the equity premium: a story of "heterogeneous optimism" versus "homogeneous pessimism" is presented.Belief Heterogeneity, Equity Premium Puzzle, Representative Agent, Risk Aversion, Wealth Distribution.

Liquidity and Economic Fluctuations

This paper shows that private information may be crucial in explaining the relationship between liquidity, investment and economic fluctuations. First, it defines liquidity in a way that is clearly connected to investment and output. Second, it models economies where privately informed entrepreneurs issue debt to fund their investment opportunities and identifies a theoretically based, empirically usable, and macroeconomic relevant measure of liquidity of the economy: the cross-firm dispersion in debt yields. Finally, it rationalizes one novel stylized fact regarding the US corporate bond market: the positive relationship between the proposed meaure of liquidity - the cross-firm dispersion in the "yields to maturity" on newly issued publicly traded debt - and subsequent aggregate economic activity.Liquidity; private information; robust pooling equilibrium; bond yield

Real Estate Prices and the Importance of Bequest Taxation

In the context of a general equilibrium model with overlapping generations and intergenerational altruism we show that, ceteris paribus, a decrease in taxes on inter vivos donations and bequests brings about an increase in real estate prices. This result has relevant policy implications. We test the predictions of our theory exploiting the abolition of bequest and donation taxation that took place in Italy in 2001. We implement this test by using an original and unique dataset on sales, donations and real estate prices for 13 italian cities between 1993 and 2004. Our estimates suggest that, controlling for other explanatory variables, the 2001 abolition of taxation on bequests and donations contributed substantially to the appreciation of Italian residential real estate.bequest tax; donations; real estate

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

Indexed Sovereign Debt: An Applied Framework

In recent years, some countries have issued sovereign bonds indexed to real variables such as GDP. Moreover, there has been discussions about this issue during the European crisis. This paper analyzes the effects of introducing this type of contracts in a standard DSGE model with sovereign default risk. We solved the model numerically calibrating it to the Argentine economy and show that the introduction of GDP-indexed sovereign debt contracts reduces the probability of default and makes the government willing to hold non-contingent assets and issue real-indexed bonds at the same time. The magnitude of the welfare effect that this type of instruments could generate is equivalent to an increase of approximately half a percentage point per year in certainty equivalent aggregate consumption.

Real estate prices and the importance of bequest taxation

Taxation of bequests and donations is an important determinant of real estate prices. We show that, ceteris paribus, a decrease in taxes on inter vivos donations and bequests brings about an increase in real estate prices. We provide a general equilibrium rationalization in the context of OLG economies featuring intergenerational altruism. This has relevant policy implications. We test the predictions of our theory employing a unique policy shock: the abolition of bequest and donation taxation that took place in Italy in 2001. Considering this policy shift provides the first evidence that a drastic reduction in bequest and donation taxation significantly increased real estate prices. Our estimates suggest that the 2001 abolition of taxation on bequests and donations alone led to an appreciation of residential real estate in excess of 10%

Intergenerational altruism and house prices: evidence from bequest tax reforms in Italy

We identify the degree of intergenerational altruism in an OLG framework à la Barro exploiting the quasi-experimental variation generated by reforms of bequest taxation (estate or inheritance tax, in the U.S.) and taxes on inter vivos real estate donations (gift tax, in the U.S.) that were enacted in Italy between 2000 and 2001. Employing a unique data set containing information on the housing stock and house prices in 13 large Italian cities between 1993 and 2004, we identify the structural parameter of interest via the effect of changes in the tax rate on house prices. We find that the intergenerational altruism parameter is about 20%. Given the possible anticipation of the reform this estimate should be interpreted as a lower bound

Exchangeable random partitions for statistical and economic modelling

Review of exchangeable random partitions and possible applications to growth models in Economics