- Information complementarities with short-term trades (Theoretical Economics, December 2007)
In a financial market where agents trade for short-term profit and where news can increase the uncertainty of the public belief, there are strategic complementarities in the acquisition of private information, and if the cost of information is sufficiently small, is a continuum of equilibrium strategies. Imperfect observation of past prices reduces the continuum of Nash-equilibria to a Strongly Rational-Expectations Equilibrium. In that equilibrium, there are two sharply different regimes for the evolution of price, the volume trade and the information acquisition.
- Strategic complementarity of information in financial markets with large shocks (Annals of Finance, 2009)
In a simple model of a frictionless financial market with rational agents, the value of private information increases when large discrete shocks independently affect the fundamental value of the asset and the exogenous trading. The complementarity in information gathering generates multiple equilibria.
- From search to match: when loan contracts are too long, with C. Rochon, (2011), Journal of Money, Credit and Banking, 43, 385-411.
A model of lending is presented where loans are established in matches between banks (lenders) and entrepreneurs (borrowers) who meet in a search process. Projects turn out randomly a quick payoff or a long-term payoff that requires a rollover of the loan. The model generates, under proper parameter conditions, two steady states without or with rollover, and rollover is socially inefficient. Under imperfect information, the standard debt contract is privately efficient. However, it extends the domains of equilibria with socially inefficient rollover. The global dynamics displays a continuum of equilibrium paths that each exhibits sudden discontinuities - crises - in which the mass of outstanding loans is reduced by a quantum amount of terminations. Crises have a cleansing effect.
- A paradox of thrift in general equilibrium without forward markets Search to Match, forthcoming in the Journal of the European Economic Association.
The coordination of saving and investment is analyzed in a general equilibrium model with rational expectations and no forward market. Shocks affect preferences for future consumption. A paradox of thrift is proven within a general equilibrium model. The model formalizes an argument in the General Theory of Keynes but the equilibrium is a constrained Pareto optimum. Textbook fiscal policies are neutral at best, or inefficient.
- Limited Purpose Banking - Moving from "Trust Me" to "Show Me" Banking, with Laurence Kotlikoff and Herakles Polemarchakis, American Economic Review, Papers and Proceedings, May 2012, 113-119.