Managing Markets for Toxic Assets

We present a model in which banks trade toxic assets to fund investments. Adverse selection in toxic assets reduces liquidity and investment. Investment is inefficiently low because banks must sell high-quality assets below their "fair" value. We consider whether equity injections and asset purchases improve market outcomes. By allowing banks to fund investments without selling high-quality assets, equity injections reduce the number of high-quality assets traded and further contaminate the interbank market. If equity is directed to firms with the greatest liquidity needs, the contamination effect causes investment to fall. Asset purchase programs often improve liquidity, investment and welfare.Adverse selection; investment; TARP; financial crisis

A foundation for strategic agenda voting

We offer complete characterizations of the equilibrium outcomes of two prominent agenda voting institutions that are widely used in the democratic world: the amendment, also known as the Anglo-American procedure, and the successive, or equivalently the Euro-Latin procedure. Our axiomatic approach provides a proper understanding of these voting institutions, and allows comparisons between them, and with other voting procedures.Strategic Voting, Agendas, Committees, Institutions, Axioms

Completing Incomplete Revealed Preference Under Limited Attention

Peer Reviewedhttp://deepblue.lib.umich.edu/bitstream/2027.42/112203/1/jere12066.pd

Choice by iterative search

Peer Reviewedhttp://deepblue.lib.umich.edu/bitstream/2027.42/109653/1/TE1014.pd

A Random Attention Model

This paper illustrates how one can deduce preference from observed choices when attention is not only limited but also random. In contrast to earlier approaches, we introduce a Random Attention Model (RAM) where we abstain from any particular attention formation, and instead consider a large class of nonparametric random attention rules. Our model imposes one intuitive condition, termed Monotonic Attention, which captures the idea that each consideration set competes for the decision-maker's attention. We then develop revealed preference theory within RAM and obtain precise testable implications for observable choice probabilities. Based on these theoretical findings, we propose econometric methods for identification, estimation, and inference of the decision maker's preferences. To illustrate the applicability of our results and their concrete empirical content in specific settings, we also develop revealed preference theory and accompanying econometric methods under additional nonparametric assumptions on the consideration set for binary choice problems. Finally, we provide general purpose software implementation of our estimation and inference results, and showcase their performance using simulations

Managing Markets for Toxic Assets

We present a model in which banks trade toxic assets to raise funds for investment. The toxic assets generate an adverse selection problem and, as a consequence, the interbank asset market provides insufficient liquidity to finance investment. While the best investments are fully funded, socially efficient projects with modest payoffs are not. Investment is inefficiently low because acquiring funding requires banks to sell high-quality assets for less than their "fair" value. We then consider whether equity injections and asset purchases can improve market outcomes. Equity injections do not improve liquidity and may be counterproductive as a policy for increasing investment. By allowing banks to fund investments without having to sell high-quality assets, equity injections reduce the number of high-quality assets traded and further contaminate the interbank market. Paradoxically, if equity injections are directed to firms with the greatest liquidity needs, the contamination effect causes investment to fall. In contrast, asset purchase programs, like the Public-Private Investment Program, often have favorable impacts on liquidity, investment and welfare.

Managing Markets for Toxic Assets

We present a model in which banks trade toxic assets to fund investments. Adverse selection in toxic assets reduces liquidity and investment. Investment is inefficiently low because banks must sell high-quality assets below their "fair" value. We consider whether equity injections and asset purchases improve market outcomes. By allowing banks to fund investments without selling high-quality assets, equity injections reduce the number of high-quality assets traded and further contaminate the interbank market. If equity is directed to firms with the greatest liquidity needs, the contamination effect causes investment to fall. Asset purchase programs often improve liquidity, investment and welfare

Managing Markets for Toxic Assets

We present a model in which banks trade toxic assets to fund investments. Adverse selection in toxic assets reduces liquidity and investment. Investment is inefficiently low because banks must sell high-quality assets below their "fair" value. We consider whether equity injections and asset purchases improve market outcomes. By allowing banks to fund investments without selling high-quality assets, equity injections reduce the number of high-quality assets traded and further contaminate the interbank market. If equity is directed to firms with the greatest liquidity needs, the contamination effect causes investment to fall. Asset purchase programs often improve liquidity, investment and welfare