DRUM Collection: Economics Theses and Dissertations

Essays on Auction Theory

Sun, 01 Jan 2012 00:00:00 GMT

Title: Essays on Auction Theory Authors: Burkett, Justin Ellis Abstract: This dissertation studies two features of high-value auctions that are not explicitly captured by the standard models in the auction theory literature. The first is that bidders in auctions for valuable assets sometimes have binding budget constraints. Standard models of auctions assume that bidders can submit any bid up to their valuation (or willingness to pay). An existing literature has developed models where bidders may face binding budget constraints and from these models has concluded that the presence of budget constraints has important implications for the relative performance of different auction formats, and as a consequence argues that the presence of budget constraints should be an important factor used in choosing an auction format. Chapters 2 and 3 develop and study a model of budget constraints where the budget constraint is chosen explicitly in the model in response to a principal-agent problem between each bidder and a corresponding principal. In previous literature, the budget constraint is assumed to be given by some exogenous procedure, and hence is not affected by changes in the auction rules. The model presented here, however, allows the choice of budget constraint to depend on the auction rules, and the main result of Chapter 2 shows that allowing for this effect leads to outcomes that closely resemble the classic results from the auction literature without budget constraints. Chapter 3 investigates the theoretical predictions of Chapter 2 in an experiment involving undergraduate students at the University of Maryland. The experiment is designed to evaluate the decisions made by the subjects acting as the person responsible for deciding on a budget for the bidder. We perform treatments where the bidding behavior is simulated by computerized agents and ones where half the subjects in each session play the role of the bidder. Our results indicate that the subjects take the auction rules into account when deciding on their respective bidder's budget, and the direction of the response in the data agrees with the theoretical predictions. Chapter 4 studies a separate feature of high-value auctions that is not captured by the standard auction models. That is, the bidders in the auction may have valuations for the auctioned item that depend on the the identities of the other winning bidders. If the auction determines the structure of the market the bidders will compete in after the auction, the bidders' values for the items will be affected by who participates in that market. The typical notion of efficiency in the auction literature corresponds to maximization of producer surplus in this model, but the auctioneer may also be concerned with total surplus in this environment. The main results show that these two notions of efficiency do not agree in this model, and that a sequential auction favors maximization of producer surplus, while a sealed-bid auction can favor maximization of total surplus. The key distinction between the two is that the sequential auction is assumed to reveal the identity of early winners to the later winners, while the sealed-bid auction reveals no information to the participants until the auction concludes.

Essays on Sovereign Debt Crises

Sun, 01 Jan 2012 00:00:00 GMT

Title: Essays on Sovereign Debt Crises Authors: Sosa Padilla Araujo, Cesar Abstract: This study analyzes two aspects of sovereign debt crises: first, the relationship between banking crises and sovereign defaults, second, how the debt dilution phenomenon affects sovereign default risk. Episodes of sovereign default feature three key empirical regularities in connection with the banking systems of the countries where they occur: (i) sovereign defaults and banking crises tend to happen together, (ii) commercial banks have substantial holdings of government debt, and (iii) sovereign defaults result in major contractions in bank credit and production. The first essay provides a rationale for these phenomena by extending the traditional sovereign default framework to incorporate bankers that lend to both the government and the corporate sector. When these bankers are highly exposed to government debt a default triggers a banking crisis which leads to a corporate credit collapse and subsequently to an output decline. When calibrated to Argentina's 2001 default episode the model produces default on equilibrium with a frequency in line with actual default frequencies, and when it happens credit experiences a sharp contraction which generates an output drop similar in magnitude to the one observed in the data. Moreover, the model also matches several moments of the cyclical dynamics of macroeconomic aggregates. In the second essay we measure the effects of debt dilution on sovereign default risk and show how these effects can be mitigated with debt contracts promising borrowing-contingent payments. First, we calibrate a baseline model a la Eaton and Gersovitz (1981) to match features of the data. In this model, bonds' values can be diluted. Second, we present a model in which sovereign bonds contain a covenant promising that after each time the government borrows it pays to the holder of each bond issued in previous periods the difference between the bond market price that would have been observed absent current-period borrowing and the observed market price. This covenant eliminates debt dilution by making the value of each bond independent from future borrowing decisions. We quantify the effects of dilution by comparing the simulations of the model with and without borrowing-contingent payments. We find that dilution accounts for 84% of the default risk in the baseline economy. Similar default risk reductions can be obtained with borrowing-contingent payments that depend only on the bond market price. Using borrowing-contingent payments is welfare enhancing because it reduces the frequency of default episodes.

Essays in Economics and International Finance

Sun, 01 Jan 2012 00:00:00 GMT

Title: Essays in Economics and International Finance Authors: Hernaiz Diez de Medina, Daniel Abstract: This document is a collection of essays in two issues of interest in macroeconomics and international finance. Chapter 2 introduces price promotions in a monetary DSGE model where consumers differ in their price sensitivity and look for promotions, and where firms choose their regular and promotional prices as well as the frequency of promotions. In this environment, regular and promotional prices coexist, firm-level prices show rigidity in the form of inertial reference values from which weekly prices temporarily deviate, and promotions provide a new channel of price adjustment in the face of shocks. As a result, the economy displays near neutrality with respect to monetary shocks, with an impact response of output equal to one third of the one obtained in a model with no promotions. This result contrasts sharply with those of similar studies which, using alternative rationales for price promotions, find that price promotions do not fundamentally alter the real effects of monetary shocks. Chapter 3 studies the currency substitution phenomenon and develops a two-currency model that introduces "dollarization capital" as a means to capture the economy's accumulated experience in using the foreign currency. The model is able to generate a low-inflation-high-substitution equilibrium consistent the data, and explains 1/6 of the gap between the observed currency substitution ratios and those generated by a model with no dollarization capital dynamics. The model, however, does not generate asymmetries in the relationship between inflation and currency substitution before and after high inflation episodes. Therefore, Chapter 4 presents a simple framework that creates non-linearities between inflation and currency substitution. The model has two consumers who can differ in their distance from money exchange points provided by the financial sector, who decides whether or not to pay a fixed cost necessary to install these exchange points. In this environment, a sequence of episodes of high and moderate inflation may push the financial sector into expanding the number of available money exchange points, therefore permanently reducing the consumers' cost of using the foreign currency and decreasing the inflation threshold at which households are willing to substitute foreign for domestic currency.

Essays on International Finance

Sun, 01 Jan 2012 00:00:00 GMT

Title: Essays on International Finance Authors: Im, Fernando Gabriel Abstract: In the first paper, I use industry-level data to investigate the impact of exchange rate arrangements on the productive structure of the economy. The identification strategy has similarities with the methodology followed in the literature on heterogeneous effects of financial development. A de facto exchange rate regime classification is used to sort pegs and floats. My findings suggest that industries that have higher working capital needs grow faster under exchange rate stability. A fixed exchange rate regime could lower currency or country risk, leading to greater availability of funds and a reduction in the cost of financing. Since loans are often denominated in foreign currency or indexed to the exchange rate in developing countries, firms with higher working capital needs would prefer exchange rate stability, which may lower interest rates in foreign currency and provide easier access to credit. The second paper investigates the behavior of output across large devaluations and depreciations. First, I define a currency crisis as an episode in which the nominal exchange rate increases by 15%. Then I proceed to classify them into devaluations and depreciations using Reinhart and Rogoff (2004) exchange rate classification. Once these episodes are sorted out, I analyze the behavior of output across them. As in previous studies, I find that the majority of the currency crisis episodes have been contractionary for 1970-2007. When I separate currency crisis episodes between devaluations and depreciations, I find that the former have been associated with larger output losses for middle income economies. These findings are consistent with the fact that middle income countries are often subject to currency mismatches. As a result, they may opt for an exchange rate regime that exhibits relatively more stability. This is well documented in Calvo and Reinhart (2002), a behavior they termed "fear of floating". However, in the case of a currency crisis, the negative impact on output growth is likely to be larger for countries that have adopted a fixed exchange rate regime. This result is also supported by the larger magnitude of the estimated output losses when we use a higher threshold to define currency crisis episodes.