Research

Last updated:  


    Refereed book chapters

    Others
    Distinguishing Limited Liability from Moral Hazard in a Model of Entrepreneurship
    reprinted as ch. 5 in T. Beck (ed.) "Entrepreneurship in Developing Countries", Edward Elgar Publishing, 2009 (with A. Paulson and R. Townsend)
Working Papers and Work in Progress
    Dynamic Financial Constraints: Distinguishing Mechanism Design from Exogenously Incomplete Regimes (with R. Townsend) *revised version will be available soon*
    revise and re-submit requested, Econometrica
We formulate and solve a range of dynamic models of constrained credit/insurance that allow for moral hazard, limited commitment and unobservable investment. We compare them to full insurance and exogenously incomplete financial regimes (autarky, saving only, and borrowing and lending in a risk-free asset). We develop computational methods based on mechanism design, linear programming, and maximum likelihood to estimate, compare, and statistically test these alternative dynamic models of financial constraints. Our methods work with both cross-sectional and panel data and allow for measurement error and unobserved heterogeneity. We estimate the models using data on Thai households running small businesses. We find that, overall, the borrowing and saving only regimes provide the best fit using joint data on consumption, investment, and income. However, there is evidence that family networks are helpful in consumption smoothing as in a moral hazard constrained regime. The full insurance, autarky and limited commitment regimes are rejected in virtually all estimation runs.
This paper analyzes dynamic risk-sharing contracts between profit-maximizing insurers and risk-averse agents who face idiosyncratic income uncertainty and may self-insure through savings. We study Markov-perfect contracts in which neither party can commit beyond the current period. We show that the limited commitment assumption on the insurer's side is only restrictive when he is endowed with a rate of return advantage and the agent has sufficiently large initial assets. In such a case, the consumption profile is distorted relative to the first best. In a Markov-perfect equilibrium, the agent's asset holdings determine his period outside option and are thus, an integral part of insurance contracts unlike the case when the insurer can commit. Whether the parties can contract on savings decisions or not affects the insurance contract as long as the insurer makes positive profits.
This paper examines whether financial constraints affect firms' investment decisions for older (larger) firms. We combine data from the Spanish Mercantile Registry and the Bank of Spain Credit Registry (CIR) to classify firms according to their number of banking relations: one, several, or none. Our empirical strategy combines two approaches based on a common theoretical model. First, using a standard Euler equation adjustment cost approach to investment, we find that banked firms in our sample are most likely to exhibit cash flow sensitivity while unbanked firms are not. Second, using structural maximum likelihood estimation, we find that unbanked firms' investment behavior fits best a model of credit subject to moral hazard with unobserved effort, while single-banked and multiple-banked firms behave as if operating in a more limited financial environment, as in an exogenously imposed traditional debt model. Firms in the unbanked category do not rely on bonds, equity, or formal financial markets, but rather on other firms in a financial or family-tied group. To the best of our knowledge, we are among the first to document the importance of such groups in a European country. We control for reverse causality by treating bank relationships as endogenous and/or by appropriate stratifications of the relatively large sample.
We analyze optimal contract forms and optimal matching patterns in a double-sided moral hazard model of sharecropping similar to Eswaran and Kotwal (1985). We show that once we allow for endogenous matching the presence of moral hazard can reverse the optimal matching pattern relative to the first best, and that even if sharecropping is optimal for an exogenously given pair of types, it may not be observed in equilibrium with endogenous matching. This suggests that empirical studies on agency costs in sharecropping may underestimate their extent if only focusing on the intensive margin and ignoring the extensive margin.
We revisit the role of limited commitment in a dynamic risk-sharing setting with private information. We show that a Markov-perfect equilibrium, in which agent and insurer cannot commit beyond the current period, and an innitely-long contract to which only the insurer can commit, implement identical consumption, effort and welfare outcomes. Unlike contracts with full commitment by the insurer, Markov-perfect contracts feature non-trivial and determinate asset dynamics. Numerically, we show that Markov-perfect contracts provide sizable insurance, especially at low asset levels, and are able to explain a significant part of wealth inequality beyond what can be explained by self-insurance. The welfare gains from resolving the commitment friction are larger than those from resolving the moral hazard problem at low asset levels, while the opposite holds for high asset levels.
    Distinguishing Across Models of International Capital Flows (with M. Wright, in progress)
    A Friend in Need is a Friend Indeed? Theory and Evidence on the (Dis)Advantages of Family Loans (with A. Kessler and I. Livshits, in progress)
    Economics of Crime Networks (with S. Easton, in progress)
    Social Insurance and Status (with B. Xia, in progress)
    Development Dynamics with Credit Rationing and Occupational Choice (2008)
    Altruism in the Principal-Agent Model: The Samaritan's Dilemma Revisited (with S. Ghosh, 2008)
This paper provides a step-by-step hands-on introduction to the techniques used in setting up and solving moral hazard programs with lotteries using Matlab. It uses a linear programming approach due to its relative simplicity and the high reliability of the available optimization algorithms.

Home