Gabriella Chiesa

Debt and warrants: Agency problems and mechanism design

Abstract This paper shows that a debt contract with warrants for the lender and cash/equity settlement options for the entrepreneur-borrower is the optimal contract in a setting with moral hazard and unverifiable states of nature. This contract makes it possible to contract optimally ex ante on unverifiable states; debt obligations are adjusted to state realizations so that debt is made safer. Moral hazard is reduced as a result.

Trading with a common agent under complete information: A characterization of Nash equilibria

We analyze an abstract model of trading where N principals submit quantity-payment schedules that describe the contracts they offer to an agent, and the agent then chooses how much to trade with every principal. This represents a special class of common agency games with complete information. We study all the subgame perfect Nash equilibria of these games, not only truthful ones, providing a complete characterization of equilibrium payoffs. In particular, we show that the equilibrium that is Pareto-dominant for the principals is not truthful when there are more than two of them. We also provide a partial characterization of equilibrium strategies.

Privatization and Financial Market Development: Theoretical Issues

Stock market capitalization in developed countries grew while massive privatization plans were in progress. It is however possible that stock market development would have occurred anyway. Below we identify features that are specific to share-issue privatizations (SIPs) and should a priori impact on market liquidity and market size. A positive correlation between such features and market development in a cross section of countries would support the claim that certain types of SIPs contribute to stock market development.

Safe Assets’ Scarcity, Liquidity and Spreads

This paper constructs a simple general equilibrium model to analyse the interactions between the financial and the real sector in an environment where liquidity holdings is an input of the credit/investment process. The supply of liquidity is constrained in that income pledgeability limits inside liquidity, and not all sovereign debt is safe/liquid. We pin down the determinants of liquidity/collateral premia and bond spreads, and with reference to the eurozone: (i) the implications of the ECB’s policies on liquidity provision and credit, and (ii) the debt management policy that would increase welfare with no need for transfer payments.

Bankruptcy Remoteness and Incentive-compatible Securitization: Bankruptcy Remoteness and Incentive-compatible Securitization

Securitization performs two functions. One refers to the risk allocation between the bank and outside investors; the other consists of creating transferable/liquid securities. A key ingredient of liquid/claimtransferability is bankruptcy remoteness - the insolvency of the sponsor (the loan originator) has no impact on the securities. We explore the implications of bankruptcy remoteness on risk allocation and regulatory/policy issues. Under traditional banking, when debt/deposits coexist with securitization, bankruptcy remoteness amounts to: i) a seniority structure when debt/deposits (the claim that insist on the bank as a whole) have the lowest priority; ii) the bank finds it optimal to grant securities maximum protection - securitization without risk transfer. This constrains incentive-compatible lending below the social optimum, whenever at an optimal allocation not all risk bears on the bank. Policies that implement the social optimum are derived.

Monetary and Fiscal Policy in a Small Open Economy

Abstract This paper presents an aggregate model of the Italian economy, discusses its properties, simulation results and the implications on the main macroeconomic variables of different reaction functions of the monetary authority. The main features of the model are: (a) specification in continuous time; (b) specification of the dynamics of the model as a disequilibrium process; (c) estimation procedure: full information maximum - likelihood technique with restrictions on parameters within and across the equations. The model specifies the real and financial sectors, their interactions and those with the rest of the world. The specification is based on the more recent theoretical work on the behaviour of small open economies, and it recognizes the implications of the size and degree of openness of the economy on price behaviour and assets substitutability. The main empirical findings are the relevant impact of financial variables on the economic activity and the type of adjustment process which works mainly through quantity adjustment with strong and rapid impact on the balance of payments