VERTICAL INTEGRATION AND SHARED FACILITIES IN UNREGULATED INDUSTRIES

In this paper we analyze the equilibrium market structure, following liberalization, of an industry involving an essential facility. Two alternative modes of market entry are considered, in conjunction with vertical integration, namely: (i) full entry, which means building a new and more efficient facility at a positive fixed cost; and (ii) partial entry, which means purchasing existing capacity from the incumbent, at a fixed price per unit that is freely negotiated between the incumbent and the entrant. We show that vertical integration is a dominant strategy for each firm under either entry mode, and that upstream firms choose to share the incumbent's facility when the entrant's fixed cost exceeds a positive threshold. In addition, welfare analysis shows that in many situations the market can efficiently solve the trade-off between fixed-cost savings and softened downstream competition, thus providing a rationale for the liberalization of such industries. Several competition policy implications are discussed.     

Financial Crisis, Fiscal Policy, and the 1995 GDP Contraction in Mexico

In 1995 Mexico experienced its largest contraction of gross domestic product (GDP) since the early twentieth century. I propose a simple mechanism to partially account for the contraction: the effects of changes in fiscal policy. The contraction of GDP was preceded by a financial crisis. The government responded by raising taxes and reducing spending. Using a model with taxation and government consumption, and the business cycle accounting methodology, I measure the impact of fiscal policy. Fiscal policy accounts for 20.7% of the fall in output.     

CEO Horizon,Optimal Pay Duration,and the Escalation of Short‐Termism

This paper studies optimal contracts when managers manipulate their performance measure at the expense of firm value. Optimal contracts defer compensation. The manager's incentives vest over time at an increasing rate, and compensation becomes very sensitive to short‐term performance. This generates an endogenous horizon problem whereby managers intensify performance manipulation in their final years in office. Contracts are designed to encourage effort while minimizing the adverse effects of manipulation. We characterize the optimal mix of short‐ and long‐term compensation along the manager's tenure, the optimal vesting period of incentive pay, and the dynamics of short‐termism over the CEO's tenure.     

ASYMMETRIC DYNAMIC PRICING IN A LOCAL GASOLINE RETAIL MARKET*

Asymmetric‐price adjustment is a common phenomenon in many markets around the world, particularly in retail gasoline markets. This paper studies the existence of this phenomenon in the retail gasoline market in the city of Santiago, Chile, using a data set of weekly gas station prices that covers a period of almost four years. We found that prices adjust asymmetrically, and the asymmetry is different for branded gas stations and unbranded stations. In addition, we found that the asymmetry for high‐margin stations is statistically equivalent to that for low‐margin stations. This evidence is suggestive of collusion as a rationale for the asymmetric pricing policy observed.     

Real Options, Product Market Competition, and Asset Returns

We study how competition in the product market affects the link between firms' real investment decisions and their asset return dynamics. In our model, assets in place and growth options have different sensitivities to market wide uncertainty. The strategic behavior of market participants influences the relative importance of these components of firm value. We show that the relationship between the degree of competition and assets' expected rates of return varies with product market demand. When demand is low, firms in more competitive industries earn higher returns, whereas when demand is high firms in more concentrated industries earn higher returns.     

The Real Effects of Credit Ratings: The Sovereign Ceiling Channel

We show that sovereign debt impairments can have a significant effect on financial markets and real economies through a credit ratings channel. Specifically, we find that firms reduce their investment and reliance on credit markets due to a rising cost of debt capital following a sovereign rating downgrade. We identify these effects by exploiting exogenous variation in corporate ratings due to rating agencies' sovereign ceiling policies, which require that firms' ratings remain at or below the sovereign rating of their country of domicile.     

Funding Liquidity without Banks: Evidence from a Shock to the Cost of Very Short‐Term Debt

In 2011, Colombia instituted a tax on repayment of bank loans, which increased the cost of short‐term bank credit more than long‐term credit. Firms responded by cutting short‐term loans for liquidity management purposes and increasing the use of cash and trade credit. In industries in which trade credit is more accessible (based on U.S. Compustat firms), we find substitution into accounts payable and little effect on cash and investment. Where trade credit is less available, firms increase cash and cut investment. Thus, trade credit provides an alternative source of liquidity that can insulate some firms from bank liquidity shocks.     

Global Liquidity,House Prices,and the Macroeconomy: Evidence from Advanced and Emerging Economies

In this paper, we first compare house price cycles in advanced and emerging economies using a new quarterly house price data set covering the period 1990–2012. We find that house prices in emerging economies grow faster, are more volatile, less persistent, and less synchronized across countries than in advanced economies (AEs). We also find that they correlate with capital flows more closely than in AEs. We then condition the analysis on an exogenous change to a particular component of capital flows: global liquidity, broadly understood as a proxy for the international supply of credit. We identify this shock by aggregating bank‐to‐bank cross‐border credit and by using the external instrumental variable approach introduced by Stock and Watson (2012) and Mertens and Ravn (2013). We find that in emerging markets (EMs) a global liquidity shock has a much stronger impact on house prices and consumption than in AEs. We finally show that holding house prices constant in response to this shock tends to dampen its effects on consumption in both AEs and EMs, but possibly through different channels: in AEs by boosting the value of housing collateral and hence supporting domestic borrowing; in EMs, by appreciating the exchange rate and hence supporting the international borrowing capacity of the economy.     

A Further Look at the Propagation of Monetary Policy Shocks in HANK

We provide quantitative guidance on whether and to what extent different elements of Heterogeneous Agent New Keynesian (HANK) models amplify or dampen the response of aggregate consumption to a monetary policy shock. We emphasize four findings. First, the introduction of capital adjustment costs does not affect the aggregate response, but does change the transmission mechanism so that a larger share of indirect effects originates from equity prices rather than from labor income. Second, incorporating estimated unequal incidence functions for aggregate labor income fluctuations leads to either amplification or dampening, depending on the data and estimation methods. Third, distribution rules for monopoly profits that allocate a larger share to liquid assets lead to greater amplification. Fourth, assumptions about the fiscal reaction to a monetary policy shock have a stronger effect on the aggregate consumption response than any of the other three elements.     

Learning,Monetary Policy,and Asset Prices

We explore the stability properties of interest rate rules granting an explicit response to stock prices in a New Keynesian DSGE model where the presence of non‐Ricardian households makes stock prices nonredundant for the business cycle. We find that responding to stock prices enlarges the policy space for which the equilibrium is both determinate and E‐stable (learnable). In particular, the Taylor principle ceases to be necessary, and determinacy/E‐stability is granted also by mildly passive policy rules. Our results appear to be more prominent in economies featuring a lower elasticity of substitution across differentiated products and/or more rigid labor markets.