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I am a microeconomic theorist. My main research interests are banking, corporate finance, bargaining, and industrial organisation.
I am also interested in contract and information economics, auctions, and the theory of organisations.
If you want to see a copy of my CV, click here. Abstracts and links to my papers are provided below. Please feel free to contact me with any questions.
Joint work with Giacinta Cestone, CSEF, Salerno, Italy
This paper presents the first model where entry deterrence takes place through financial rather than product-market channels. In standard models of the interaction between product and financial markets, a firm's use of financial instruments deters entry by affecting product market behaviour, whereas in our model entry deterrence occurs by affecting the credit market behaviour of investors towards entrant firms. We find that in order to deter entry, the claims held on incumbent firms should be sufficiently risky, i.e. equity, in contrast to the standard Brander-Lewis (1986) result that debt deters entry. The model sheds light on the policy debate on the separation of banking as to whether banks should be permitted to hold equity in firms. It also provides an explanation for why venture capitalists hold automatically convertible securities in start-up firms.
Keywords: Coase Problem, Over-funding, Venture Capital, Convertible Debt
JEL Classification:G3
Click here to download a .pdf version of this paper, which appeared in the Journal of Finance, October 2003.
Joint work with Alexander Gümbel, Saïd Business School and Lincoln College Oxford
In this paper we examine how the quantity of information generated about firm prospects can be improved by splitting a firm's cash flow into a `safe' claim (debt) and a `risky' claim (equity). The former, being relatively insensitive to upside risk, provides a commitment to shut down the firm in the absence of good news. This commitment provides the latter a greater incentive to collect information than a monitor holding the aggregate claim would have. Thus debt and equity are shown to be complementary instruments in firm finance. We show that stock markets can play a useful role in transmitting information from equity to debt holders. This provides a novel argument as to why information contained in stock prices affects the real value of a corporation. It also allows us to make empirical predictions regarding the relation between shareholder dispersion, market liquidity and capital structure.
Keywords: Debt, Equity, Soft Budget Constraint, Information Production.
JEL Classification: D82, G3
Click here to download a .pdf version of this paper.
previously entitled: The Role of Capital Adequacy Requirements in Sound Banking Systems
Joint work with Alan Morrison, Saïd Business School, Oxford.We analyse a model in which there is both adverse selection of and moral hazard by banks. The regulator has two tools at her disposal to combat these problems - she can audit banks to learn their type prior to giving them a licence, and she can impose capital adequacy requirements. We show that, contrary to existing practice, the tightness of capital adequacy requirements should be decreasing in the perceived competence of the regulator. We also show that if and only if the regulator has a sufficiently poor reputation, the banking system exhibits multiple equilibria so that crises of confidence in the banking system can occur.
Click here to download a .pdf version of this paper, which appeared in the American Economic Review, December 2005.
Deposit insurance schemes are becoming increasingly popular around the world and yet there is little understanding of how they should be designed and what their consequences are. In this model we provide a new rationale for the provision of deposit insurance. We analyse a model in which depositors choose between placing their funds with banks and self-managing them. Bankers have valuable but costly project management skills and the banking sector exhibits both adverse selection and moral hazard. Depositors fail fully to account for the social benefits which accrue from bank management of projects and as a consequence there is under-depositing. The regulator can correct this market failure by providing deposit insurance. Contrary to received opinion, we find that deposit insurance should be funded not by bankers or depositors but through general taxation.
Click here to download a .pdf version of this paper.
We study a model of featuring two economies with adverse selection of and moral hazard by bankers. We demonstrate that in such a set-up, removing barriers to capital flow between economies may reduce total welfare by harming the average efficiency of the banking sector. With international capital mobility, bankers who fail to obtain a charter in the economy with the better regulator will be able to turn to the lower quality regulators for a licence, so worsening the pool of banks in the already poorly regulated economy. This effect can be countered by setting level capital requirements across economies, which penalises bankers operating under the higher quality regulator, or it can be ignored, which penalises bankers under the lower quality regulator. We determine the circumstances under which each policy is preferred and comment upon the optimality of an international "level playing field" for capital requirements.
Keywords: Bank regulation, capital, multinational banks, exchange controls, international financial regulation, level playing field.
Click here to download a .pdf version of this paper.
We investigate the outcome of Rubinstein’s (1982) alternating-offer bargaining game when noise is added to a player’s pay-off. We find that a risk-averse player typically increases his equilibrium receipts when his pay-off is made risky. This is because the presence of risk makes individuals behave “more patiently” in bargaining, analogously to the precautionary saving literature. We show that the effect of risk on receipts can be sufficiently strong that a decreasingly risk-averse player may be better off receiving a risky pay-off than a certain pay-off.
JEL Classification: C71, C72, C78, C90, D23, D80
Keywords: Nash Bargaining, Rubinstein Bargaining, Uncertainty, Prudence.
Click here to download a .pdf version of this paper.
The game-theoretic bargaining literature insists on non-cooperative bargaining procedure but allows cooperative implementation of agreements. The effect of this is to allow free-reign of bargaining power with no check upon it. In reality, courts cannot implement agreements costlessly, and parties often prefer to use non-cooperative implementation. We present the first model of non-cooperative implementation of bargains, showing that this has a substantial impact in limiting the inequality of agreements, and results in a non-montonicity of the discount rate. The general need to maintain incentives for co-operation means that apparently “other-regarding” elements must enter the utility function. Thus we explain why experimental subjects might have a rule of thumb of proposing “fair” bargains. The model also explains why some parties may deliberately write incomplete contracts which cannot be enforced in a court of law.
JEL Classification: C72, C78, C91, D23
Keywords: Non-Cooperative Bargaining, Enforcement, Strength in Weakness, Incomplete Contracts.
Click here to download a .pdf version of this paper.
Joint work with Chen-Ying Huang, National Taiwan University.
We provide the first investigation of the politically important question of whether wealthy individuals are advantaged or disadvantaged in bargaining. We show that in a simple Nash-Rubinstein style model, wealth is a disadvantage because it reduces boldness. We then develop a model in which consumption of wealth can occur independently of agreement over pie. We show that in this model, if there are no credit constraints, wealth has no impact on bargaining power. Credit constraints reduce bargaining power, however, and wealth can help to alleviate these. Finally we show that when income is perishable so it is impossible either to save or borrow, wealth is an advantage when it reduces absolute risk aversion.
This paper is not yet available to download.
Trade unions often seem to behave in a more militant fashion when inflation rises. We provide the first theory as to why this should be so. We argue that uncertainty about the rate of inflation makes each extra dollar more valuable to the trade union, thus increasing its desire to hold out for a larger share of the pie. Thus inflation uncertainty increases trade union bargaining power. By contrast, when firms are free to set employment after price levels are known, uncertainty reduces firm bargaining power. Thus inflation leads to a redistribution from capital to labour. We test the theory using a data set of G7 countries since 1973.
This paper is not yet available to download.
In this paper we investigate the robustness of the widely-used new foreclosure doctrine and its associated welfare implications to the introduction of incomplete information. In particular, we make the realistic assumption that the upstream firm’s marginal cost is private information, unknown to the downstream firms. We find that this simple modification dramatically affects the “over-selling” result which characterises the previous literature. With incomplete information, high-cost firms will often “under-sell” in equilibrium, that is, supply less than their monopoly output. Low-cost firms continue to over-sell, so all types of firms have a reason to foreclose downstream, but only for low-cost types is this necessarily harmful. For high-cost types foreclosure can be Pareto-improving, resulting in higher output, profits and consumer surplus.
Click here to download a .pdf version of this paper, which has been accepted by the Journal of Economics and Management Strategy.
In this paper we investigate the impact of vertical mergers on upstream firms' ability to sustain collusion. We show in a number of models that the net effect of vertical integration is to facilitate collusion. Several effects arise. When upstream offers are secret, vertical mergers faciliate collusion through the operation of an outlets effect: Cheating unintegrated firms can no longer profitably sell to the downstream affiliates of their integrated rivals. Vertical integration also facilitates collusion through a reaction effect: the vertically integrated firm's `contract' with its downstream affiliate can be more flexible and thus allows a swifter reaction in punishing defectors. Offsetting these two effects is a possible punishment effect which arises if the integrated structure is able to make more profits in the punishment phase than a disintegrated structure.
Keywords: vertical mergers, collusion
JEL Classification: L13, L42
Joint work with George Mailath, University of Pennsylvania, and Volker Nocke, University of Pennsylvania.
In repeated normal-form games, simple penal codes (Abreu 1986, 1988) permit an elegant characterization of the set of subgame-perfect outcomes. We show that the logic of simple penal codes fails in repeated extensive-form games. We provide two examples illustrating that a subgame-perfect outcome may be supported only by a profile with the property that the continuation play after a deviation is tailored not only to the identity of the deviator, but also to the nature of the deviation.
Keywords: Simple Penal Code, Subgame Perfect Equilibrium, Repeated Extensive Game, Optimal Punishment
JEL Classification Codes: C70, C72, C73.
We analyze bidding behavior in auctions when risk-averse bidders bid for an object whose value is risky. We show that, as risk increases, decreasingly risk-averse bidders will reduce their bids by more than the risk premium. Ceteris paribus, bidders will be better off bidding for a more risky object in first-price, second-price, English, and all-pay auctions with affiliated private values. We then extend the results to common value settings. This "precautionary bidding" effect arises because the expected marginal utility of income increases with risk, so bidders are reluctant to bid so highly. We show that precautionary bidding also arises in response to common values risk. This precautionary bidding behavior can make decreasingly risk-averse bidders better off when they face a "winner's curse" than when they do not.
Last Updated: July 10, 2006.