Optimal regulation under imperfect enforcement: Permits,tickets, or both?

Economic activity is often regulated through both permits and tickets (subsequent inspections). We study the effectiveness of such policies where corruption and an underground economy make enforcement imperfect. In the theoretical model, asymmetric information justifies regulatory action which is enforced by corruptible bureaucrats. We find that regulation through permits alone is useless when corruption exists, while tickets still offer some benefit. Surprisingly, we also find that a system with both permits and tickets achieves welfare that is higher than that which can be achieved with only tickets—that combining the two mechanisms has an effect that is greater than the “sum of the parts.”     

Production smoothing, firms' heterogeneity, and financial constraints: evidence from a panel of UK firms

In this paper we provide an empirical analysis of heterogeneityin firms' inventory behavior, using a panel of UK manufacturingfirms. We first investigate how the relative variance of productionand sales differs across firms. We then use variants of thelinear quadratic inventory model in order to analyze potentialheterogeneity in firms' incentives to smooth production. Theresults suggest that incentives to smooth production are notprevalent This conclusion also holds when firms are partitionedaccording to whether they are more or leu likely to face finanrialconstraints.     

A New Approach to the Study of Jobless Recoveries

This article is concerned with the measurement of jobless recoveries and the elements that may explain their emergence. We first introduce a measure that maps the various elements that define a jobless recovery into a single number that we label the jobless recovery depth. We then construct a database of 389 state‐level observations and study the cross‐sectional variations that emerge. We find that jobless recoveries in the United States are not a nation‐wide phenomena, but a local event confined within a cluster of states that expands slowly between 1975 and 2015. We find the state‐level evidence to be consistent with theories that link jobless recoveries to unusually long expansionary periods, less dynamic labor markets, and the advent of the great moderation. The evidence is not consistent with theories that link them to decreases in union power, increases in income inequality, or increases in health care costs.     

Assessing financial distress dependencies in OTC markets: a new approach using trade repositories data

In this paper, we study the relationships among financial market sub-segments as a way to identify potential financial distress through increased co-movements among them. To study how sub-markets are mutually co-dependent, we combine granular data on over-the-counter derivatives by trade repositories and the joint probability of distress (JPoD) approach introduced by the International Monetary Fund. We define an indicator that combines several distress drivers and observe that results on co-dependencies are similar to those that would be expected: similarities between financial and contractual terms seem to be responsible for stronger co-movements among sub-markets. However, high values for JPoD even in correspondence of quite dissimilar sub-markets suggest the presence of other drivers that should be investigated in future research. To the best of our knowledge, this is the first empirical study on systemic risk assessment based on micro-founded trade repositories’ data on interest rate swaps.     

Consumption optimization for recursive utility in a jump-diffusion model

In this paper, we consider a market model with prices and consumption following a jump-diffusion dynamics. In this setting, we first characterize the optimal consumption plan for an investor with recursive stochastic differential utility on the basis of his/her own beliefs, then we solve the inverse problem to find what beliefs make a given consumption plan optimal. The problem is viewed in general for a class of homogeneous recursive utility, and later we choose a logarithmic model for the utility aggregator as an explicitly computable example. When beliefs, represented via Girsanov’s theorem, get incorporated into the model, the change of measure gives rise, up to a transformation, to a backward stochastic differential equation whose generator exhibits a quadratic behavior in the Brownian component and a locally Lipschitz one in the jump component, which is solvable on the basis of some recent results.     

Pricing options under stochastic volatility: a power series approach

In this paper we present a new approach for solving the pricing equations (PDEs) of European call options for very general stochastic volatility models, including the Stein and Stein, the Hull and White, and the Heston models as particular cases. The main idea is to express the price in terms of a power series of the correlation parameter between the processes driving the dynamics of the price and of the volatility. The expansion is done around correlation zero and each term is identified via a probabilistic expression. It is shown that the power series converges with positive radius under some regularity conditions. Besides, we propose (as in Alós in Finance Stoch. 10:353–365, 2006) a further approximation to make the terms of the series easily computable and we estimate the error we commit. Finally we apply our methodology to some well-known financial models.      

Decisions on Production and the Behaviour of Savers in Recent General Equilibrium Models

Modern general equilibrium theory faces notorious difficulty in extending the analysis of production to economies without complete forward markets, since at the ‘initial date’ the owners of any firm will typically disagree about the choice of the production plan. This paper examines the main approaches to the problem, with the specific aim of verifying whether they allow a satisfactory account of the interplay between firms and savers. It is argued that the theory oscillates between assumptions that may prove incompatible with savers' rationality, and hypotheses that prevent this shortcoming but render the formation of production decisions quite hard to explain.     

Short- and long-run heterogeneous investment dynamics

In this paper, we model the dynamics of business investment taking into account asset-specific characteristics potentially affecting the reactivity of aggregate and disaggregate capital accumulation over the business cycle. We estimate Information and Communication Technologies (ICTs) and traditional investment (non-ICT) determinants within a Vector Error Correction Model testing the assumptions of the flexible accelerator and neoclassical model as well as the role of financial constraints and uncertainty. We evaluate our model on Italian data over the period 1980–2012, and we check our results also with Spanish and UK data. Our findings support the assumption that capital is heterogeneous since short- and long-run determinants are significantly different across the assets. Traditional assets experience stock adjustment costs while ICT investment incurs flow adjustment cost. In the short run, liquidity is a key determinant of investment independently of the asset type. In the long run, uncertainty significantly affects ICT. Finally, the results of the counterfactual exercises support the idea that ICT is a key policy variable to foster economic growth.