Banks' Liquidity Management and Financial Fragility (with Ettore Panetti). Previously circulating as "Banks' Liquidity Management and Systemic Risk". Banco de Portugal Working Paper No. 2017-13. PDF
Abstract. Do banks manage liquidity against financial fragility? To answer this question, we study an economy where banks undertake maturity transformation and insure their depositors against idiosyncratic and aggregate shocks. Moreover, strategic complementarities might trigger depositors’ self-fulfilling runs, modeled as "global games". During runs, if depositors' risk aversion is sufficiently high, the banks engage either in liquidity hoarding when the productive asset in portfolio is sufficiently liquid, or in liquidity cushioning when it is sufficiently illiquid. Ex ante, if the probability of the idiosyncratic shock is sufficiently large, banks hold extra precautionary liquidity, and narrow banking is not viable.
Financial frictions with monopolistically competitive firms. With Miguel Casares and Jose E. Galdon-Sanchez. Previously circulating as Banco de Espana Working Paper No. 1929 (2019. R&R. PDF
Abstract. There are two opposing welfare effects of market power in a model with monopolistic competition, loan defaults and moral hazard. The loss of output produced if firms set a higher market-up over marginal costs confronts with some gain due to higher epected profits and the reduction of defaults. Such tradeoff results in an optimal level of market power that decreases with the efficiency of firm liquidation following bankruptcy. If moral hazard is pervasive, credit rationing cuts down the default rates and mitigates the welfare cost of bankruptcies.
Asset exemption in bankruptcy and access to credit. With Pasqualina Arca and Gianfranco Atzeni. R&R. PDF
Abstract. Under the US personal bankruptcy law, exempt assets are not liquidated following bankruptcy. Entrepreneurs can undo such a protection by posting collateral. We provide a complete characterization of the interplay between asset exemption from liquidation upon default and adverse selection in a competitive credit market. Severe adverse selection induces separation, with safer entrepreneurs choosing loan contracts characterized by high collateral requirements, lower cost of credit and credit rationing for wealth-constraints applicants. Irrespective of adverse selection, poor safe entrepreneurs pool as they face too much rationing, otherwise. Higher exemption makes collateral more informative. Evidence from the SSBF survey supports our theory.
The Signalling Role of Trade Credit: Evidence from a Counterfactual Analysis. With Pasqualina Arca and Gianfranco Atzeni. Submitted. PDF
A bstract. We quantify the signaling effect of trade credit on bank credit in a sample of US firms. Our identification strategy relies on the signaling model by Biais and Gollier (1997) and accounts for the endogeneity due to the possibility of self-selection and the simultaneity between banks’ and firms’ credit decisions. We find that: i) firms’ self-select into trade credit; ii) firms’ decision to use trade credit results in a higher chance of obtaining bank credit and a lower cost than the counterfactual ones they would have faced if not using trade credit.
Market power and welfare effects of immigration. With Gianfranco Atzeni, Marco Delogu, and Dimitri Paolini. PDF
Abstract. We analyze the effects of migration allowing for endogenous labor supply in a standard two-region model with monopolistically competitive producers and love for variety. We find that the welfare effects of migration depend on firms’ market power in the final good markets. If market power is sufficiently high, migration of low-skill individuals positively affects the welfare of native high skill individuals in the destination region, while low skill individuals are unaffected. Natives of the origin region are always better off, irrespective of their skills. Differently, if market power is sufficiently low, low skill migration makes both high and low individuals native of the destination region better off.
Skill premia, education race and the credit market. With Dimitri Paolini.