It is argued that bidders in liquidity-providing central bank operations should typically possess declining marginal valuations. Based on this hypothesis, we construct an equilibrium in central bank refinancing operations organised as variable rate tenders. In the case of the discriminatory...

This article derives a central bank's optimal liquidity supply towards a money market with an unrestricted lending facility. We show that when the effect of liquidity on market rates is not too small, and the monetary authority is concerned with both interest rates and liquidity conditions, then...

The N-firm Cournot model with general technologies is reviewed to derive generalized and unified conditions for existence of a pure strategy Nash equilibrium. Tight conditions are formulated alternatively (i) in terms of concavity of two-sided transforms of inverse demand, or (ii) as linear...

We model the interbank market for overnight credit with heterogeneous banks and asymmetric information. An unsophisticated bank just trades to compensate its liquidity imbalance, while a sophisticated bank will exploit its private information about the liquidity situation in the market. It is...

This paper explores the consequences of assuming that agents may be unaware of certain outcomes in the state space. One way to construct such a setting is from what we call awareness types. When agents possess limited awareness of the state space, information may be delusive, but agents can...

We show that strictly competitive, finite games of perfect information that may end in one of three possible ways can be solved by applying only two rounds of elimination of dominated strategies.

In many developed countries, an essential part of a bank's capital requirement may be directly tied to a risk figure taken from the bank's own risk model. When capital is scarce, this creates a conflict of interests because the bank's management may want to manipulate its internal risk model in...

Interest rate derivatives are among the most actively traded financial instruments in the main currency areas. With values of positions reacting immediately to the underlying index of daily interbank rates, manipulation has become an increasing challenge for the operational implementation of...

This paper provides a non-technical discussion of the incomplete contracting approach to the theory of the firm developed by Grossman and Hart (1986). This approach offers an answer to the questions regarding the boundaries of the firm first raised by Coase (1937).

The theory of contracts is one of the most active research areas in economics. While classic contract theory failed to account for institutions such as property rights and authority, the theory of incomplete contracts has overcome these conceptual problems and produced a variety of interesting...