Luca Gabriele Deidda

Non-linearity between finance and growth

We present a simple model which establishes a non linear and possibly non monotonic relationship between financial development and economic growth. Applying a threshold regression model to King and Levine™s (1993) data set, we find evidence that is consistent with the main implications stemming from the theoretical model.

Banks, Financial Markets and Growth

We analyze the interaction between bank and market finance in a model where bankers gather information through monitoring and screening.We show that,if a market is established characterized by a disclosure law such that entrepreneurs wishing to raise market finance can credibly disclose their sources of financing,this might undermine bankers incentive to screen,even when screening is effcient.Correspondingly,other things being equal,the change from a bank-based system to one in which market-finance and bank-finance coexist might have an adverse affect on economic growth.Consistent with this result,our empirical findings suggest that,althoug both bank and stock market development have a positive effect on growth, the growth impact of bank development is reduced by the development of the stock market.

Concentration in the banking industry and economic growth

We present an OLG endogenous growth model in which a reduction in the level of concentration in the banking industry exterts two opposite e.ects on economic growth. On the one hand, it induces economies of specialisation which enhances intermediation e.ciency and thereby eco- nomic growth. On the other hand, it results in duplication of fixed costs which is detrimental for e.ciency and growth. The trade o. between the two opposing e.ects is ambiguous and can vary along with the dynamic process of financial and economic development. Using cross country in- dustry data we find that banking concentration is negatively associated with industrial growth only in low income countries while there is no such asssociation in high income countries. These empirical findings support the model.s prediction that there exist a di.erent relationship between banking concentration and growth depending on the level of economic development.

Implementing the street-turn strategy by an optimization model

The street-turn option represents a major strategy for the profitability of shipping companies supplying container-based transportation. This option consists in the distribution of trucks delivering loaded containers to import customers, the subsequent allocation of empty containers to export customers and the final dispatch of loaded containers to departure ports. However, the determination of truck routes is a time-consuming activity for shipping companies, because available information can suddenly change while they are making their decisions. In this paper we aim to propose a decision support tool to quickly determine truck routes and implement the street-turn strategy. This tool is based on an optimization model determining the allocation of empty containers between customers and defining truck routes in a post-optimization phase. We compare routes resulting from the proposed model to the decisions of a real shipping company. Early results indicate that this approach represents a promising support for shipping companies in dealing with street-turns. It can significantly reduce distances travelled by trucks and times requested to determine routes.

Price Signaling and the Strategic Benefits of Price Rigidities

We analyze trade between a perfectly informed price setting party (seller) and an imperfectly informed price taker (buyer). Differently from most of the literature, we focus on the case in which, under full information, it would be inefficient to trade goods of sufficiently poor quality. We show that the unique equilibrium surviving D1 is characterized by market breakdown, although trade would be mutually beneficial in some state of nature. This occurs independently of the precision of the information available to the buyer. The model thus implies that signaling through prices may exacerbate the effect of adverse selection rather than mitigate it. Under D1, the seller would always benefit from committing to prices that do not reveal her information. We develop this intuition by analyzing the strategic advantages of price rigidities. We show that price rigidities help restore trade and could even enhance effectiveness of prices as signals of quality.

Loan production and monetary policy

We examine optimal monetary policy in a New Keynesian model with unemployment and financial frictions where banks produce loans using equity as collateral. Firms and households demand loans to finance externally a fraction of their flows of expenditures. Our findings show amplifying business-cycle effects of a more rigid loan production technology. In the monetary policy analysis, the optimal rule clearly outperforms Taylor (1993) rule. The optimized interest-rate response to the external finance premium turns significantly negative when either banking rigidities are high or when financial shocks are the only source of business cycle fluctuations.

Business cycle and monetary policy analysis with market rigidities and financial frictions

We describe a dynamic macroeconomic model that incorporates firm-level borrowing constraints, competitive CES loan production, and rigidities on both setting prices and wages. The external finance premium (interest-rate spread) is countercyclical with technology and financial shocks, and procyclical with consumption spending shocks. The real effects of financial shocks are significantly amplified when either considering greater rigidities for price/wage setting or a low elasticity of substitution in loan production (banking real rigidities). In the monetary policy analysis, a stabilizing Taylor (1983)-style rule performs slightly better when incorporating a positive and small response coefficient to the external finance premium.

Over-Signaling or Underpricing? The Role of Financial Intermediaries in Initial Public Offerings

We consider a model of Initial Public Offerings (IPOs) where issuing firms of better quality are more reluctant to go public. IPOs either generate or destroy value depending on the type of the issuing firm, which is only observed by the issuer. We show that, when the issuer directly offers the shares to the investors, market breakdown occurs. This is caused by the issuers attempts to signal his type through the offering price. Things change if we introduce a financial intermediary which: 1) acts as an underwriter, 2) influences the offering price. Underwriting creates a wedge between the interests of the intermediary and those of the issuer. This allows trade with outside investors to be restored. A by-product of the conflict of interest between issuer and intermediary is that trade is characterized by underpricing. In the benchmark case where her profits are zero, the intermediary acts as a screening device: she underwrites the shares only upon receiving positive information about the issuer.