Sudipto Bhattacharya

The economics of bank regulation

The authors review the economics of bank regulation as developed in the contemporary literature. They begin with an examination of the central aspects of modern banking theories in explaining the asset transformation function of intermediaries, optimal bank liability contracts, coordination problems leading to bank failures and their empirical significance, and the regulatory interventions suggested by these considerations. In particular, the authors focus on regulations aimed primarily at ameliorating deposit-insurance-related moral hazards, such as: cash-asset reserve requirements, risk-sensitive capital requirements and deposit insurance premia, and bank closure policy. Moreover, they examine the impact of the competitive environment (bank charter value) and industry structure (scope of banks) on these moral hazards. They also examine the implications of banking theory for alternatives to deposit insurance.

Bank capital regulation with random audits

We consider a model of optimal bank closure rules (cum capital replenishment by banks), with Poisson-distributed audits of the banks asset value by the regulator, with the goal of eliminating (ameliorating) the incentives of levered bank shareholders/managers to take excessive risks in their choice of underlying assets. The roles of (tax or other) subsidies on deposit interest payments by the bank, and of the auditing frequency are examined.

Insider trading, investment and liquidity: a welfare analysis

We compare competitive equilibrium outcomes with and without trading by a privately informed ¶monopolistic¶ insider, in a model with real investment portfolio choices ex ante, and noise trading generated by aggregate uncertainty regarding other agents intertemporal consumption preferences. The welfare implications of insider trading for the ex ante expected utilities of outsiders are analysed. The role of interim information revelation due to insider trading, in improving the risk-sharing among outsiders with stochastic liquidity needs, is examined in detail.

Bank Bailout Menus

We study bailouts of banks that suffer from debt overhang problems and have private information about the quality of their assets-in-place and new investment opportunities. Menus of bailout plans are used as a screening device. Constrained-optimality involves over capitalization and nonlinear pricing, with worse types choosing larger bailouts. When investment opportunities follow the assets, we derive an equivalence result between equity injections and asset buyouts. The larger capital outlay under asset buyouts can be offset by borrowing against the assets. If investment opportunities follow the bank, equity injections offer more upside to the bailout agency. This may reduce as well as enhance efficiency, depending on whether screening intensity is needed mostly on assets-in-place or new investments.

Patents vs. Trade Secrets: Knowledge Licensing and Spillover

We develop a model of two-stage cumulative research and development (RD yet the contracting parties choose the closed sale whenever the interim knowledge is more valuable and leakage is sufficiently high. If the extent of leakage is lower, more RUs choose open sales, generating a nonmonotonic relationship between the strength of intellectual property rights and aggregate R&D expenditures and the overall likelihood of development by either DU. (JEL: D23, O32, O34) (c) 2006 by the European Economic Association.

Cooperation in R&D: patenting, licensing and contracting

In this paper we review some of the literature on R&D collective arrangements using game theoretical concepts and considering various settings, involving either complete or incomplete contracts. Patent protection, licensing in various industry contexts as well as the role of various factors such as product differentiation, innovation magnitude and asymmetric information are considered. The relation of innovative activity to the intensity of competition is reconsidered and the benefit of various types of cooperative R&D-agreements in presence of externalities are reviewed. The last two sections are devoted to contracting issues.

Incentives in Funds Management: A Literature Overview

This article is a revised version of an invited lecture delivered at the Jornadas di Economia Conference of the Banco Central di Uruguay on 30th and 31st of July 2001. We thank the officers of the bank and other conference participants for their comments.

Control Rights Over Intellectual Property

We consider an incomplete contracting model of bilateral trade in intellectual property (IP) with sequential investments in its quality and with financial constraints. A financially-constrained inventor invests in an idea which she then sells to a buyer. The buyer in turn invests in developing this idea into a marketable product. We propose a novel formulation of ex ante control rights of an IP buyer, over the financially-constrained IP seller. We do not assume alienability of the inventor’s ideas; the control right is defined as ex ante prescribed prohibition of ex interim financial contracting with third parties. We show that such an agreement strengthens the seller’s ex ante incentives to invest in the quality of her product which is to be traded at the interim stage. The enforcement of this control right is credible, or renegotiation-proof, only for the controlling buyer (a downstream user of the IP), and not for other potential partners of the seller, such as independent venture capitalists. We thereby obtain a rationale for a key role of Corporate Venturing in promoting innovative activities.

Control Rights over Intellectual Property: Corporate Venturing and Bankruptcy Regimes

We develop a theory of control rights in the context of licencing interim innovative knowledge for further development, which is consistent with the inalienability of initial innovators intellectual property rights. Control rights of a downstream development unit, a buyer of the interin innovation, arise from its ability to prevent the upstream research unit from forming financial coalitions at the ex interim stage of bargaining, over the amount and structure of licencing fees as well as the mode of licensing, based either in trade secrets or on patents. We model explicitly the equilibrium choice of the temporal structure of licensing fees, and show that the innovators ex interim financial constraint is more likely to bind when then value of her innovation is low. By constraining the financial flexibility of the upstream unit vis-a-vis her choice over the mode of licensing of her interim knowledge, the controlling development unit is able to reduce the research units payoff selectively in such contingencies. This serves to incentivise the research unit to expend more effort ex ante, to generate more promising interim innovations. We further show that such interim-inefficient control rights can nevertheless be renegotiation-proof.