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Working Paper
Mixed Signals: Investment Distortions with Adverse Selection
Darst, Matt; Refayet, Ehraz (2019-06-21)
We study how adverse selection distorts equilibrium investment allocations in a Walrasian credit market with two-sided heterogeneity. Representative investor and partial equilibrium economies are special cases where investment allocations are distorted above perfect information allocations. By contrast, the general setting features a pecuniary externality that leads to trade and investment allocations below perfect information levels. The degree of heterogeneity between informed agents' type governs the direction of the distortion. Moreover, contracts that complete markets dampen the impact ...
Finance and Economics Discussion Series , Paper 2019-044

Working Paper
Relative Wealth Concerns, Executive Compensation, and Systemic Risk-Taking
Sun, Bo; Liu, Qi (2016-05)
Given the recent empirical evidence on peer effects in CEO compensation, this paper theoretically examines how relative wealth concerns, in which a manager?s satisfaction with his own compensation depends on the compensation of other managers, affect the equilibrium contracting strategy and managerial risk-taking. We find that such externalities can generate pay-for-luck as an efficient compensation vehicle in equilibrium. In expectation of pay-for-luck in other firms, tying managerial pay to luck provides insurance to managers against a compensation shortfall relative to executive peers ...
International Finance Discussion Papers , Paper 1164

Working Paper
The boy who cried bubble: public warnings against riding bubbles
Asako, Yasushi; Ueda, Kozo (2014-01-16)
Attempts by governments to stop bubbles by issuing warnings seem unsuccessful. This paper examines the effects of public warnings using a simple model of riding bubbles. We show that public warnings against a bubble can stop it if investors believe that a warning is issued in a definite range of periods commencing around the starting period of the bubble. If a warning involves the possibility of being issued too early, regardless of the starting period of the bubble, it cannot stop the bubble immediately. Bubble duration can be shortened by a premature public warning, but lengthened if it is ...
Globalization Institute Working Papers , Paper 167

Working Paper
Optimal Delegation Under Unknown Bias: The Role of Concavity
Tanner, Noam (2018-03-30)
A principal is uncertain of an agent's preferences and cannot provide monetary transfers. The principal, however, does control the discretion granted to the agent. In this paper, we provide a simple characterization of when it is optimal for the principal to screen by offering different terms of discretion to the agent. When the principal's utility is sufficiently concave, it is optimal for the principal to pool and to offer all agents the same discretion. Thus, for any number of agents and any distribution over agent preferences, the optimal contract is simple: the principal sets a cap and ...
Supervisory Research and Analysis Working Papers , Paper RPA 18-1

Report
Signaling with Private Monitoring
Kolb, Aaron; Cisternas, Gonzalo (2021-12-01)
A sender signals her private information to a receiver who privately monitors the sender’s behavior, while the receiver transmits his private inferences back through an imperfect public signal of his actions. In a linear-quadratic-Gaussian setup in continuous time, we construct linear Markov equilibria, where the state variables are the players’ beliefs up to the sender’s second order belief. This state is an explicit function of the sender’s past play—hence, her private information—which leads to separation through the second-order belief channel. We examine the implications of ...
Staff Reports , Paper 994

Working Paper
Insurance and Inequality with Persistent Private Information
Bloedel, Alex; Krishna, R. Vijay; Leukhina, Oksana (2021-12-10)
This paper studies the implications of optimal insurance provision for long-run welfare and inequality in economies with persistent private information. We consider a model in which a principal insures an agent whose privately observed endowment follows an ergodic, finite Markov chain. The optimal contract always induces immiseration: the agent’s consumption and utility decrease without bound. Under positive serial correlation, the optimal contract also features backloaded high-powered incentives: the sensitivity of the agent’s utility with respect to his report increases without bound. ...
Working Papers , Paper 2018-020

Working Paper
FOMC Responses to Calls for Transparency
Acosta, Miguel (2015-07-10)
I apply latent semantic analysis to Federal Open Market Committee (FOMC) transcripts and minutes from 1976 to 2008 in order to analyze the Fed's responses to calls for transparency. Using a newly constructed measure of the transparency of deliberations, I study two events that define markedly different periods of transparency over this 32-year period. First, the 1978 Humphrey-Hawkins Act increased the degree to which the FOMC used meeting minutes to convey the content of its meetings. Historical evidence suggests that this increased transparency reflected a response to the Act's requirement ...
Finance and Economics Discussion Series , Paper 2015-60

Report
Financial Transaction Taxes and the Informational Efficiency of Financial Markets: A Structural Estimation
Cipriani, Marco; Guarino, Antonio; Uthemann, Andreas (2021-12-01)
We develop a new methodology to estimate the impact of a financial transaction tax (FTT) on financial market outcomes. In our sequential trading model, there are price-elastic noise and informed traders. We estimate the model through maximum likelihood for a sample of sixty New York Stock Exchange (NYSE) stocks in 2017. We quantify the effect of introducing an FTT given the parameter estimates. An FTT increases the proportion of informed trading, improves information aggregation, but lowers trading volume and welfare. For some less-liquid stocks, however, an FTT blocks private information ...
Staff Reports , Paper 993

Working Paper
Screening and adverse selection in frictional markets
Lester, Benjamin; Venkateswaran, Venky; Shourideh, Ali; Zetlin-Jones, Ariel (2016-03-10)
We incorporate a search-theoretic model of imperfect competition into an otherwise standard model of asymmetric information with unrestricted contracts. We develop a methodology that allows for a sharp analytical characterization of the unique equilibrium and then use this characterization to explore the interaction between adverse selection, screening, and imperfect competition. On the positive side, we show how the structure of equilibrium contracts?and, hence, the relationship between an agent?s type, the quantity he trades, and the corresponding price?is jointly determined by the severity ...
Working Papers , Paper 16-10

Report
Uncertain booms and fragility
Lee, Michael Junho (2018-07-23)
I develop a framework of the buildup and outbreak of financial crises in an asymmetric information setting. In equilibrium, two distinct economic states arise endogenously: ?normal times,? periods of modest investment, and ?booms,? periods of expansionary investment. Normal times occur when the intermediary sector realizes moderate investment opportunities. Booms occur when the intermediary sector realizes many investment opportunities, but also occur when it realizes very few opportunities. As a result, investors face greater uncertainty in booms. During a boom, subsequent arrival of ...
Staff Reports , Paper 861

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