Balancing the banks Dewatripont, Mathias; Rochet, Jean-Charles; Tirole, Jean ...
2010., 20100419, 2010, 2010-04-19, 20100101
eBook
The financial crisis that began in 2007 in the United States swept the world, producing substantial bank failures and forcing unprecedented state aid for the crippled global financial system. ...Bringing together three leading financial economists to provide an international perspective, Balancing the Banks draws critical lessons from the causes of the crisis and proposes important regulatory reforms, including sound guidelines for the ways in which distressed banks might be dealt with in the future.
Two-sided markets: a progress report Rochet, Jean-Charles; Tirole, Jean
The Rand journal of economics,
10/2006, Volume:
37, Issue:
3
Journal Article
Peer reviewed
Open access
We provide a road map to the burgeoning literature on two-sided markets and present new results. We identify two-sided markets with markets in which the structure, and not only the level of prices ...charged by platforms, matters. The failure of the Coase theorem is necessary but not sufficient for two-sidedness. We build a model integrating usage and membership externalities that unifies two hitherto disparate strands of the literature emphasizing either form of externality, and obtain new results on the mix of membership and usage charges when price setting or bargaining determine payments between end-users.
A THEORY OF THE STAKEHOLDER CORPORATION Magill, Michael; Quinzii, Martine; Rochet, Jean-Charles
Econometrica,
September 2015, Volume:
83, Issue:
5
Journal Article
Peer reviewed
Open access
There is a widely held view within the general public that large corporations should act in the interests of a broader group of agents than just their shareholders (the stakeholder view). This paper ...presents a framework where this idea can be justified. The point of departure is the observation that a large firm typically faces endogenous risks that may have a significant impact on the workers it employs and the consumers it serves. These risks generate externalities on these stakeholders which are not internalized by shareholders. As a result, in the competitive equilibrium, there is underinvestment in the prevention of these risks. We suggest that this under-investment problem can be alleviated if firms are instructed to maximize the total welfare of their stakeholders rather than shareholder value alone (stakeholder equilibrium). The stakeholder equilibrium can be implemented by introducing new property rights (employee rights and consumer rights) and instructing managers to maximize the total value of the firm (the value of these rights plus shareholder value). If there is only one firm, the stakeholder equilibrium is Pareto optimal. However, this is not true with more than one firm and/or heterogeneous agents, which illustrates some of the limits of the stakeholder model.
Optimal dividend policies with random profitability Reppen, A. Max; Rochet, Jean‐Charles; Soner, H. Mete
IDEAS Working Paper Series from RePEc,
January 2020, 2020-01-00, 20200101, 2020-01, Volume:
30, Issue:
1
Journal Article, Paper
Peer reviewed
Open access
We study an optimal dividend problem under a bankruptcy constraint. Firms face a trade‐off between potential bankruptcy and extraction of profits. In contrast to previous works, general cash flow ...drifts, including Ornstein–Uhlenbeck and CIR processes, are considered. We provide rigorous proofs of continuity of the value function, whence dynamic programming, as well as comparison between discontinuous sub‐ and supersolutions of the Hamilton–Jacobi–Bellman equation, and we provide an efficient and convergent numerical scheme for finding the solution. The value function is given by a nonlinear partial differential equation (PDE) with a gradient constraint from below in one direction. We find that the optimal strategy is both a barrier and a band strategy and that it includes voluntary liquidation in parts of the state space. Finally, we present and numerically study extensions of the model, including equity issuance and gambling for resurrection.
This expository article surveys the literature that has followed my paper “A Necessary and Sufficient Condition for Rationalizability in a Quasi-linear Context” that was published in the Journal of ...Mathematical Economics in 1987.
We study the two-product monopoly profit maximization problem for a seller who can commit to a dynamic pricing strategy. We show that if consumers' valuations are not strongly ordered, then ...optimality for the seller can require intertemporal price discrimination: the seller offers a choice between supplying a complete bundle now, or delaying the supply of a component of that bundle until a later date. For general valuations, we establish a sufficient condition for such dynamic pricing to be more profitable than mixed bundling. So we show that the established no-discrimination-across-time result does not extend to two-product sellers under standard taste distributions.
Free Cash Flow, Issuance Costs, and Stock Prices DÉCAMPS, JEAN-PAUL; MARIOTTI, THOMAS; ROCHET, JEAN-CHARLES ...
The Journal of finance (New York),
October 2011, Volume:
66, Issue:
5
Journal Article
Peer reviewed
Open access
We develop a dynamic model of a firm facing agency costs of free cash flow and external financing costs, and derive an explicit solution for the firm's optimal balance sheet dynamics. Financial ...frictions affect issuance and dividend policies, the value of cash holdings, and the dynamics of stock prices. The model predicts that the marginal value of cash varies negatively with the stock price, and positively with the volatility of the stock price. This yields novel insights on the asymmetric volatility phenomenon, on risk management policies, and on how business cycles and agency costs affect the volatility of stock returns.
The classical doctrine of the Lender of Last Resort (LOLR), elaborated by Bagehot (1873), asserts that the central bank should lend to "illiquid but solvent" banks under certain conditions. Several ...authors have argued that this view is now obsolete: in modern interbank markets, a solvent bank cannot be illiquid. This paper provides a possible theoretical foundation for rescuing Bagehot' s view. Our theory does not rely on the multiplicity of equilibria that arises in classical models of bank runs. We built a model of banks' liquidity crises that possesses a unique Bayesian equilibrium. In this equilibrium, there is a positive probability that a solvent bank cannot find liquidity assistance in the market. We derive policy implications about banking regulation (solvency and liquidity ratios) and interventions of the Lender of Last Resort. Furthermore, we find that public (bailout) and private (bail-in) involvement are complementary in implementing the incentive efficient solution and that Bagehot's Lender of Last Resort facility must work together with institutions providing prompt corrective action and orderly failure resolution. Finally, we derive similar implications for an International Lender of Last Resort (ILOLR).
•We provide a rationale for imposing counter-cyclical capital requirements on banks.•Banks lend too much in good times and too little in bad times.•This occurs even when financial markets are ...complete.•Capital requirements in good times correct capital misallocation across sectors.•Counter-cyclical capital requirements can be an effective stabilization tool.
Credit cycle stabilization can be a rationale for imposing counter-cyclical capital requirements on banks. The model comprises two productive sectors: in one sector, firms can finance investments through a bond market. In the other, firms rely on bank credit. Financial frictions limit banks’ borrowing capacity. Aggregate shocks impact firms’ productivity. From a welfare perspective, banks lend too much in high productivity states and too little in bad states, although financial markets are complete. Imposing a (stricter) capital requirement in good states corrects capital misallocation, increases expected output and social welfare. Even with risk-neutral agents, stabilization of credit cycles is socially beneficial.
We study a continuous-time principal—agent model in which a risk-neutral agent with limited liability must exert unobservable effort to reduce the likelihood of large but relatively infrequent ...losses. Firm size can be decreased at no cost or increased subject to adjustment costs. In the optimal contract, investment takes place only if a long enough period of time elapses with no losses occurring. Then, if good performance continues, the agent is paid. As soon as a loss occurs, payments to the agent are suspended, and so is investment if further losses occur. Accumulated bad performance leads to downsizing. We derive explicit formulae for the dynamics of firm size and its asymptotic growth rate, and we provide conditions under which firm size eventually goes to zero or grows without bounds.
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