A seniority arrangement for sovereign debt
A sovereign's inability to commit to a course of action regarding future borrowing and default behavior makes long-term debt costly (the problem of debt dilution). One mechanism to mitigate the debt dilution problem is the inclusion of a seniority clause in sovereign debt contracts. In the event of default, creditors are to be paid off in the order in which they lent (the ?absolute priority" or ?first-in-time" rule). In this paper, we propose a modification of the absolute priority rule that is more suited to the sovereign debt context and analyze its positive and normative implications ...
House Price Booms, Then and Now
House prices rose rapidly in the run-up to the crash of 2007, but not everywhere. Understanding why can help us prepare for future recessions.
Foreclosures and house price dynamics: a quantitative analysis of the mortgage crisis and the foreclosure prevention policy
This paper is superseded by WP 15-15 <p>The authors construct a quantitative equilibrium model of the housing market in which an unanticipated increase in the supply of housing triggers default mortgages via its effect on house prices. The decline in house prices creates an incentive to increase the consumption of housing space, but leverage makes it costly for homeowners to sell their homes and buy bigger ones (they must absorb large capital losses). Instead, leveraged households find it advantageous to default and rent housing space. Since renters demand less housing space than homeowners, ...
The Firm Size and Leverage Relationship and Its Implications for Entry and Concentration in a Low Interest Rate World
Larger firms (by sales or employment) have higher leverage. This pattern is explained using a model in which firms produce multiple varieties and borrow with the option to default against their future cash ow. A variety can die with a constant probability, implying that bigger firms (those with more varieties) have lower coefficient of variation of sales and higher leverage. A lower risk-free rate benefits bigger firms more as they are able to lever more and existing firms buy more of the new varieties arriving into the economy. This leads to lower startup rates and greater concentration of ...
Maturity, indebtedness, and default risk
In this paper, the authors advance the theory and computation of Eaton-Gersovitz style models of sovereign debt by incorporating long-term debt and proving the existence of an equilibrium price function with the property that the interest rate on debt is increasing in the amount borrowed and implementing a novel method of computing the equilibrium accurately. Using Argentina as a test case, they show that incorporating long-term debt allows the model to match the average external debt-to-output ratio, average spread on external debt, the standard deviation of spreads and simultaneously ...
Debt dilution and seniority in a model of defaultable sovereign debt
An important source of inefficiency in long-term debt contracts is the debt dilution problem, wherein a borrower ignores the adverse impact of new borrowing on the market value of outstanding debt and, therefore, borrows too much and defaults too frequently. A commonly proposed remedy to the debt dilution problem is seniority of debt, wherein creditors who lent first are given priority in any bankruptcy or restructuring proceedings. The goal of this paper is to incorporate seniority in a quantitatively realistic, infinite horizon model of sovereign debt and default and examine, both ...
The Firm Size and Leverage Relationship and Its Implications for Entry and Business Concentration
Larger firms (by sales or employment) have higher leverage. This pattern is explained using a model in which firms produce multiple varieties and borrow with the option to default against their future cash flow. A variety can die with a constant probability, implying that bigger firms (those with more varieties) have a lower coefficient of variation of sales and higher leverage. A lower risk-free rate benefits bigger firms more as they are able to lever more and existing firms buy more of the new varieties arriving into the economy. This leads to lower startup rates and greater concentration ...
Incumbency Disadvantage in U.S. National Politics: The Role of Policy Inertia and Prospective Voting
We document that postwar U.S. national elections show a strong pattern of incumbency disadvantage": If the presidency has been held by a party for some time, that party tends to lose seats in Congress. We develop a model of partisan politics with policy inertia and prospective voting to explain this finding. Positive and normative implications of the model are explored.
A tractable circular city model with an application to the effects of development constraints on land rents
Superseded by working paper 13-37.> A tractable production-externality-based circular city model in which both firms and workers choose location as well as intensity of land use is presented. The equilibrium structure of the city has either (i) no commuting ("mixed-use" form) or (ii) a central business district (CBD) of positive radius and a surrounding residential ring. Regardless of which form prevails, the intra-city variation in all endogenous variables displays the negative exponential form: x(r) = x(0)exr (where r is the distance from the city center and x depends only on preference ...
A tractable city model for aggregative analysis
An analytically tractable city model with external increasing returns is presented. The equilibrium city structure is either monocentric or decentralized. Regardless of which structure prevails, intracity variation in endogenous variables displays exponential decay from the city center, where the decay rates depend only on parameters. Given population, the equilibrium of the model is generically unique. Tractability permits explicit expressions for when a central business district (CBD) will emerge in equilibrium, how external increasing returns affect the steepness of downtown rent ...