Credit contracting and bidding under wealth constraints

Summary. We model credit contracting and bidding in a first-price sealed-bid auction when bidder valuation and wealth are private information. An efficient separating equilibrium exists only if the wealth levels of both bidder types are sufficiently different. If not, high-valuation bidders signal by borrowing more and using less of their wealth – this is inefficient as wealth is a cheaper source of funds. An increase in the amount of borrowing required to signal does not necessarily decrease seller expected revenue. In contrast to separating equilibria, high-valuation bidders adopt pure strategy bids in pooling equilibria. Conditions are identified under which the lower bound on winning bids is higher in pooling than separating equilibria. Received: January 22, 2001; revised version: August 28, 2001     

Evaluating international financial integration under leverage constraints

The global financial crisis has undermined many economists' views about the benefits of open financial markets. Anecdotal evidence seems to indicate that financial linkages may propagate shocks during crises. This paper develops a simple two-country model in which financial liberalisation across countries takes place in the presence of credit market distortions within countries. Countries may be subject to macro risk coming from productivity shocks and direct shocks to the credit system (‘financial shocks’). Three different degrees of financial linkages between countries are examined. It is shown that the type of financial integration is critical for both macroeconomic outcomes and welfare. In particular, financial integration in bond markets alone may increase aggregate consumption volatility and reduce welfare. Financial integration in both bond and equity markets generates high positive co-movement across countries, but is welfare-improving.     

Coalition-proof supply function equilibria under capacity constraints

Whereas in the absence of capacity constraints the Cournot outcome is the unique coalition-proof supply function equilibrium outcome, the presence of capacity constraints may enlarge the set of equilibrium outcomes. Interestingly, if capacities are sufficiently asymmetric the new equilibrium prices are below the Cournot price. These results have important implications for merger and privatization policies: specifically, capacity divestiture will not necessarily imply lower market prices.This article is based on the second chapter of my PhD dissertation. I benefited from the comments and suggestions of Diego Moreno and Bill Hogan. I thank three anonymous referees for helpful comments. Seminar audiences at Carlos III and Harvard are gratefully acknowledged. The author is currently a Repsol YPF fellow at the Harvard John F. Kennedy School of Government. I am grateful to the Repsol YPF-Harvard Fellowship Program for financial support.     

A note on budget balance under interim participation constraints: the case of independent types

We provide a simple proof of the equivalence between ex ante and ex post budget balance constraints in Bayesian mechanism design with independent types when participation decisions are made at the interim stage. The result is given an interpretation in terms of efficient allocation of risk.     

Optimal collective dichotomous choice under quota constraints

Summary. This paper presents optimal collective dichotomous choices under quota constraints. We focus on committees that have to decide whether to accept or reject a set of projects under quota constraints. We provide a method for optimal ranking of projects which is suitable for solving this problem. The main result generalizes a number of earlier results in the subject. To outline the applicability of our method, we demonstrate its usage in the area of information filtering. Received: February 14, 2000; revised version: January 19, 2001