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on Contract Theory and Applications |
| By: | Yan Liu; Ramon Marimon; Adrien Wicht |
| Abstract: | We develop an optimal design of a Financial Stability Fund that coexists with the international debt market. The sovereign can borrow long-term defaultable bonds on the private international market, while having with the Fund a long-term contingent contracts subject to limited enforcement constraints. There is a contract that minimizes the debt absorbed by the Fund, guaranteeing full debt stabilization. In equilibrium, the seniority of the Fund contract, with respect to the privately held debt, is irrelevant. We calibrate our model to the Italian economy and show it would have been a more efficient path of debt accumulation with the Fund. |
| Keywords: | recursive contracts, limited enforcement, debt stabilisation, Debt Overhang, safe assets, seniority structure |
| JEL: | E43 E44 E47 E62 F34 F36 F37 |
| Date: | 2022–03 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1829&r= |
| By: | Julian di Giovanni; Manuel García-Santana; Priit Jeenas; Enrique Moral-Benito; Josep Pijoan-Mas |
| Abstract: | We provide a framework to study how different allocation systems of public procurement contracts affect firm dynamics and long-run macroeconomic outcomes. We start by using a newly created panel data set of administrative data that merges Spanish credit register loan data, quasi-census firm-level data, and public procurement projects to study firm selection into procurement and the effects of procurement on credit growth and firm growth. We show evidence consistent with the hypotheses that there is selection of large firms into procurement, that procurement contracts provide useful collateral for firms more so than sales to the private sector and that procurement contracts facilitate firm growth beyond the contract duration. We next build a model of firm dynamics with both asset-based and earnings-based borrowing constraints and a government that buys goods and services from private sector firms. We use the calibrated model to quantify the long-run macroeconomic consequences of alternative procurement allocation systems. We find that granting procurement contracts to small firms, either by directly targeting them or by slicing large contracts into smaller ones, helps these firms grow and overcome financial constraints in the long run. However, we also find that reducing the average size of contracts or making it less likely for large firms to access them removes saving incentives for large firms, whose negative effects on capital accumulation can overcome the expansionary consequences for small firms and hence generate a drop in aggregate output. |
| Keywords: | government procurement; financial frictions; capital accumulation; aggregate productivity |
| JEL: | E22 E23 E62 G32 |
| Date: | 2022–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:93773&r= |
| By: | Árpád Ábrahám; Eva Cárceles-Poveda; Yan Liu; Ramon Marimon |
| Abstract: | We develop a model of a Financial Stability Fund (Fund) for a union of sovereign countries. By contract design, the Fund never has expected undesired losses while, being default-free, a participant country has greater ability to borrow and share risks than using sovereign debt financing. The Fund contract also provides better incentives for the country to reduce endogenous risks. These efficiency gains arise from the ability of the Fund to offer long-term contingent financial contracts, subject to limited enforcement (LE) and moral hazard (MH) constraints as part of the contingencies. We develop the theory (welfare theorems, with a new price decentralization) and quantitatively compare the constrained-efficient Fund economy with an incomplete markets economy with default. In particular, we characterize how prices and allocations differ, when the two economies are subject to exogenous productivity and endogenous government expenditure shocks. In our economies, calibrated to the euro area 'stressed countries', substantial welfare gains are achieved, particularly in times of crisis. The Fund is, in fact, a risk-sharing, crisis prevention and resolution mechanism, which transforms participant countries’ defaultable sovereign debts into union’s safe assets. In sum, our theory can help to improve current official lending practices and, eventually, to design an European Fiscal Fund. |
| Keywords: | fiscal unions, recursive contracts, Debt Contracts, partnerships, limited enforcement, moral hazard, debt restructuring, Debt Overhang, sovereign fund |
| JEL: | E43 E44 E47 E63 F34 F36 |
| Date: | 2022–03 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1827&r= |
| By: | Yamashita, Takuro; Smolin, Alex |
| Abstract: | We study information design in games with a continuum of actions such that the players’ payoffs are concave in their own actions. A designer chooses an information structure–a joint distribution of a state and a private signal of each player. The information structure induces a Bayesian game and is evaluated according to the expected designer’s payoff under the equilibrium play. We develop a method that facilitates the search for an optimal information structure, i.e., one that cannot be outperformed by any other information structure, however complex. We show an information structure is optimal whenever it induces the strategies that can be implemented by an incentive contract in a dual, principal-agent problem which aggregates marginal payoffs of the players in the original game. We use this result to establish the optimality of Gaussian information structures in settings with quadratic payoffs and a multivariate normally distributed state. We analyze the details of optimal structures in a differentiated Bertrand competition and in a prediction game. |
| Keywords: | Information design ; Bayesian persuasion ; Concave games ; Duality ; First-order approach |
| JEL: | D42 D82 D83 |
| Date: | 2022–03–08 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:126692&r= |