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Author:Grochulski, Borys 

Journal Article
Optimal Institutions in Economies with Private Information: Exclusive Contracts, Taxes, and Bankruptcy Law

In economies with private information, it is typically optimal to prohibit or otherwise discourage a subset of trades that individual agents want to enter. Economists often refer to such optimal distortions as wedges. In this article, we use a simple private-information Mirrleesian economy to, first, show examples of these wedges and, second, discuss institutions that may be used to implement them in practice. We discuss and compare three such institutions: exclusive contracts, taxes, and bankruptcy law. Our analysis underscores the multiplicity of possible implementations and, therefore, the ...
Economic Quarterly , Issue 4Q , Pages 353-385

Journal Article
Distortionary taxation for efficient redistribution

This article uses a simple model to review the economic theory of efficient redistributive taxation. The model economy is a Lucas-tree economy, in which income comes from a stock of productive capital. Agents, who own the capital stock, are heterogenous with respect to their preference for early versus late consumption. A competitive capital market, in equilibrium, supports a unique Pareto-efficient allocation of consumption among the agents, i.e., the First Welfare Theorem holds. The equilibrium allocation represents one efficient division of the total gains from trade that are available in ...
Economic Quarterly , Volume 95 , Issue Sum , Pages 235-267

Journal Article
Saving for Retirement with Job Loss Risk

This article studies a tractable theoretical model of optimal consumption and saving decisions with endogenous retirement. Particular attention is paid to the impact of an increase in the risk of losing one?s job on the optimal path of consumption and wealth accumulation. Even if one does not actually lose their job, an increase in the risk of a job loss is by itself sufficient to cause lower consumption, higher saving, and, through faster retirement, lower labor supply.
Economic Quarterly , Issue 1Q , Pages 45-81

Journal Article
Optimal nonlinear income taxation with costly tax avoidance

Economic Quarterly , Volume 93 , Issue Win , Pages 77-109

Journal Article
Opinion : When disclosure is not enough

Econ Focus , Volume 11 , Issue Fall , Pages 52

Briefing
Systemic risk regulation and the "too big to fail" problem

A single regulator tasked with preventing threats to systemic stability would need to have considerable power and discretion. But creating such a powerful entity could reinforce the moral hazard problem resulting from the idea that some firms are too big to fail.
Richmond Fed Economic Brief , Issue Jul

Journal Article
Pecuniary Externalities, Segregated Exchanges, and Market Liquidity in a Diamond-Dybvig Economy with Retrade

Pecuniary externalities often serve as a rationale for government intervention into financial markets. This article reviews the theory of market provision of liquidity in a Diamond-Dybvig economy and examines whether or not the possibility of retrade leads to pecuniary externalities and market failure. The answer hinges on the credibility of market participants' commitment to not enter into hidden transactions with non-participants. If such commitment is not credible, then unrestricted, hidden retrade leads to a pecuniary externality and market under-provision of liquidity. If such commitment ...
Economic Quarterly , Issue 4Q , Pages 305-340

Working Paper
Optimal Contracts with Reflection

In this paper, we show that whenever the agent's outside option is nonzero, the optimal contract in the continuous-time principal-agent model of Sannikov (2008) is reflective at the lower bound. This means the agent is never terminated or retired after poor performance. Instead, the agent is asked to put zero effort temporarily, which brings his continuation value up. The agent is then asked to resume effort, and the contract continues. We show that a nonzero agent's outside option arises endogenously if the agent is allowed to quit and find a new firm (after a random search time of finite ...
Working Paper , Paper 16-14

Journal Article
Cyclical Properties of Bank Margins: Small versus Large Banks

We study cyclical properties of the net interest margin (NIM) in the US banking sector in the aggregate as well as separately for small and large banks. In the aggregate and among large banks, NIM is countercyclical. Among small banks, however, NIM is procyclical. Further, we find that this result is driven by differences in the cyclical dynamics of small and large banks' funding costs rather than asset yields.
Economic Quarterly , Issue 1Q , Pages 1-33

Working Paper
Optimal Liquidity Regulation With Shadow Banking

We study the impact of shadow banking on optimal liquidity regulations in a Diamond-Dybvig maturity mismatch environment. A pecuniary externality arising out of the banks' access to private retrade renders competitive equilibrium inefficient. Shadow banking provides an outside option for banks, which adds a new constraint in the mechanism design problem that determines the optimal allocation. A tax on illiquid assets and a subsidy to the liquid asset similar to the payment of interest on reserves (IOR) constitute an optimal liquidity regulation policy in this economy. During expansions, i.e., ...
Working Paper , Paper 15-12

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