We propose a multi-period model in which competitive arbitrageurs exploit discrepancies between the prices of two identical risky assets, traded in segmented markets. Arbitrageurs need to collateralize separately their positions in each asset, and this implies a financial constraint limiting...

We analyze a standard environment of adverse selection in credit markets. In our environment, entrepreneurs who are privately informed about the quality of their projects need to borrow in order to invest. Conventional wisdom says that, in this class of economies, the competitive equilibrium is...

We revisit the question of the efficiency of individual decisions to be protected against crime for the cases of both observable and unobservable protection. We obtain that observable protection is unambiguously associated with a negative externality and that at the individual level, it has a...

When today’s actions can affect tomorrow's value of an asset and when the principal does not have access to hard information, either about productive activity or monitoring activity, two incentive problems must be simultaneously solved: first, the ‘ex-ante’ moral hazard problem of inducing...

The paper explains how a country can fall into a 'low-skill, bad-job trap', in which workers acquire insufficient training and firms provide insufficient skilled vacancies. In particular, the paper argues that in countries where a large proportion of the workforce is unskilled, firms have little...

A 'folk theorem' originating, among others, in the work of Stiglitz maintains that competitive equilibria are always or 'generically' inefficient (unless contracts directly specify consumption levels as in Prescott and Townsend, thus bypassing trading in anonymous markets). This paper critically...

We study interventions to restore efficient lending and investment when financial markets fail because of adverse selection. We solve a design problem where the decision to participate in a program offered by the government can be a signal for private information. We charac terize optimal...

Two aspects of systemic risk, the risk that banks fail together, are modeled and their interaction examined. First, the ex-post aspect, in which the failure of a bank brings down a surviving bank as well, and second, the ex-ante aspect, in which banks endogenously hold correlated portfolios...

Systemic risk is modeled as the endogenously chosen correlation of returns on assets held by banks. The limited liability of banks and the presence of a negative externality of one bank’s failure on the health of other banks give rise to a systemic risk-shifting incentive where all banks...

Fire sales that occur during crises beg the question of why sufficient outside capital does not move in quickly to take advantage of fire sales, or in other words, why outside capital is so slow-moving. We propose an answer to this puzzle in the context of an equilibrium model of capital...