Thesis (Ph. D.)--Massachusetts Institute of Technology, Dept. of Economics, 2011. / Cataloged from PDF version of thesis. / Includes bibliographical references. / This thesis examines questions at the intersection of macroeconomics and finance. Chapter 1 studies the persistent effects of a decrease in firms' ability to borrow. I develop a tractable model of deleveraging that emphasizes (i) firms as suppliers of financial assets to consumers and (ii) the ability of firms and consumers to alleviate financial frictions by accumulating wealth. In the model, a permanent decrease in the ability of firms to borrow leads to: increased capital misallocation and decreased total factor productivity (TFP); an increased wedge between the average marginal product of capital and the interest rate; and increased riskiness of consumption. An endogenous decrease in the interest rate is shown to amplify these effects by discouraging wealth accumulation. In a calibration using U.S. firm-level data, I find these amplification effects are large. Chapter 2 studies how proprietary trading and advising are combined on Wall Street even though a firm that engages in both of these activities may be tempted to mislead its clients. Chapter 3 studies the effects of government purchases of long-term debt. According to one interpretation, the preferred-habitat model of Vayanos and Vila (2009) implies that Federal Reserve purchases of long-term bonds generate a reduction in long-term interest rates. In this paper, I clarify this interpretation. In particular, in a Vayanos and Vila (2009) preferred-habitat model, I show that maturity-lengthening open-market operations have no effect on long-term interest rates if agents in the economy ultimately receive the profits from the government's portfolio via lump-sum taxes or transfers. I then introduce limited participation - an assumption that some agents are restricted from trading bonds of certain or all maturities. I show that limited participation implies that open-market operations do reduce the long-term interest rate. What drives this result is limited participation, not preferred-habitat preferences. With this motivation, I develop a model, with a more reasonable form of limited participation and without preferred-habitat preferences, in which open-market operations are relevant. Finally, I use these models to discuss how arbitrageurs' wealth covaries with technology or endowment shocks, and how this covariance is affected by open-market operations. / by Jonathan E. Goldberg. / Ph.D.

Thesis (Ph. D.)--Massachusetts Institute of Technology, Dept. of Economics, 1992. / Vita. / Includes bibliographical references (leaves 109-110). / by Stephen Yung-li Jen. / Ph.D.

Massachusetts Institute of Technology. Dept. of Economics. Thesis. 1972. Ph.D. / MICROFICHE COPY ALSO AVAILABLE IN DEWEY LIBRARY. / Vita. / Includes bibliographies. / Ph.D.

Thesis (Ph. D.)--Massachusetts Institute of Technology, Dept. of Economics, 2011. / Cataloged from PDF version of thesis. / Includes bibliographical references. / In this thesis, I study the interactions between various aspects of the financial system and macroeconomic volatility in a globally integrated environment. In Chapter 1, I illustrate that an efficient allocation of liquidity across projects mitigates the economy's responsiveness to global liquidity supply shocks. Emerging economies in which the allocation of liquidity is distorted serve as a buffer zone that insulates developed economies from shocks to global liquidity supply. This suggests that, when functioning properly, the financial system in the developed world increases its stability by facilitating the efficient allocation of liquidity. However, I illustrate that in a global environment in which funding is cheap, the financial system will endogenously deteriorate and cease to carryout this role effectively. The conclusion is twofold: first, an efficient allocation of liquidity has a stabilizing effect on macroeconomic fluctuations. Second, in a low interest rate environment, the economy cannot rely on the financial system to maintain the capacity to implement an efficient allocation. In Chapter 2, I suggest that intermediation need not be necessary in order to achieve an efficient allocation of liquidity; by setting an appropriately high tax on production or subsidy on unproductive savings, the government can manipulate the equilibrium prices of production inputs such that an efficient allocation of resources is achieved. Compared to the optimal policy benchmark, the equilibrium financial system absorbs too many productive resources. Further, the mere existence of a financial system induces unnecessary macroeconomic volatility in the form of liquidity shortages and surges in unemployment. I conclude that while the efficient allocation of liquidity is important both for the level of output and for output stability. financial intermediation is an inferior way to achieve it. In Chapter 3, I study the distributional implications of allowing for the intermediation of liquidity from developed to emerging economies. Liquidity suppliers from developed economies extract rents from supplying liquidity to constrained entrepreneurs in emerging markets. Financial integration is therefore associated with a regressive transfer of surplus from emerging to developed economies. Further, as input prices in emerging economies appreciate following the inflow of liquidity, producers in emerging economies become increasingly reliant on foreign liquidity; a sudden reluctance of foreigners to supply liquidity results in a drop in output and consumption. Financial integration therefore not only decreases equilibrium consumption in emerging economies., but also increases the volatility of consumption due to shocks to external funding. / by Maya Rachel Eden. / Ph.D.

Thesis (Ph. D.)--Massachusetts Institute of Technology, Dept. of Economics, 2012. / Cataloged from PDF version of thesis. / Includes bibliographical references (p. 121-126). / This dissertation consists of three essays. The first chapter studies whether credit demand is sensitive to interest rates, to the prominence of interest rate disclosure, and to nudges. Consumer credit regulations usually require that lenders disclose interest rates. However, lenders can evade the spirit of these regulations by concealing rates in the fine print and highlighting low monthly payments. I explore the importance of such evasion in Brazil, where consumer credit for lower and middle income borrowers is expanding rapidly, despite particularly high interest rates. By randomizing contract interest rates and the degree of interest rate disclosure, I show that most borrowers are highly rate-sensitive, whether or not interest rates are prominently disclosed in marketing materials. An exception is high-risk borrowers, for whom rate disclosure matters. These clients are rate-sensitive only when disclosure is prominent. I also show that borrowers who choose this type of financing are responsive to nudges that favor longer-term plans. Despite this evidence, the financial consequences of information disclosure, even for high-risk borrowers, are relatively modest, and clients are less susceptible to nudges when the stakes are higher. Together, these results suggest that consumers in Brazil are surprisingly adept at decoding information even when lenders try to obfuscate the interest rate information, suggesting a fair amount of sophistication in this population. The second chapter (co-authored with Leonardo Bursztyn, Florian Ederer, and Noam Yuchtman) studies the importance of peer effects in financial decisions. Using a field experiment conducted with a financial brokerage, we attempt to disentangle channels through which a person's financial decisions affect his peers'. When someone purchases an asset, his peers may also want to purchase it because they learn from his choice ("social learning") and because his possession of the asset directly affects others' utility of owning the same asset ("social utility"). We randomize whether one member of a peer pair who chose to purchase an asset has that choice implemented, thus randomizing possession of the asset. Then, we randomize whether the second member of the pair: 1) receives no information about his peer, or 2) is informed of his peer's desire to purchase the asset and the result of the randomization determining possession. We thus estimate the effects of: (a) learning plus possession, and (b) learning alone, relative to a control group. In the control group, 42% of individuals purchased the asset, increasing to 71% in the "social learning only" group, and to 93% in the "social learning and social utility" group. These results suggest that herding behavior in financial markets may result from social learning, and also from a desire to own the same assets as one's peers. The third chapter (co-authored with Pedro Daniel Tavares) uses data on checking and savings accounts for a sample of clients from a large bank in Brazil to calculate the prevalence and cost of "borrowing high and lending low" behavior in a setting where the spread between the borrowing and saving rates is on the order of 150% per year. We find that most clients maintain an overdrawn account at least one day a year while having liquid assets. However, the yearly amount of avoidable financial charges would only correspond, on average, to less than 0.5% of clients' yearly earnings. We also show that consumers are less likely to engage in such behavior when the costs of doing so are higher. These results suggest that the spread between the borrowing and saving rates is a key determinant of this behavior. / by Bruno Ferman. / Ph.D.

Thesis (Ph. D.)--Massachusetts Institute of Technology, Dept. of Economics, 2013. / Cataloged from PDF version of thesis. / Includes bibliographical references (p. 189-201). / The first chapter quantifies the efficiency of a real-world bargaining game with two-sided incomplete information. Myerson and Satterthwaite (1983) and Williams (1987) derived the theoretical efficient frontier for bilateral trade under two-sided uncertainty, but little is known about how well real-world bargaining performs relative to the frontier. The setting is wholesale used-auto auctions, an $80 billion industry where buyers and sellers participate in alternating-offer bargaining when the auction price fails to reach a secret reserve price. Using 300,000 auction/bargaining sequences, this study nonparametrically estimates bounds on the distributions of buyer and seller valuations and then estimates where bargaining outcomes lie relative to the efficient frontier. Findings indicate that the observed auction-followed-by-bargaining mechanism is quite efficient, achieving 88-96% of the surplus and 92-99% of the trade volume which can be achieved on the efficient frontier. This second chapter examines a common form of entry restriction: occupational licensing. The chapter studies how occupational licensing laws affect the distribution of quality and how the effects of licensing on quality vary across regions of differing income levels. The study uses variation in state licensing requirements for teachers and two national datasets on teacher qualifications (input quality) and student test scores (output quality) from 1983-2008. Results show that more restrictive licensing may lead first-year teachers of high input quality to opt out of the occupation. For teachers who remain in the occupation longer, stricter licensing increases input quality at most quantiles. The distribution of student test scores increases with stricter licensing, primarily in the upper half of the distribution. For most forms of licensing studied, input and output quality improvements due to stricter licensing occur in high-income rather than low-income districts. The third chapter (co-authored with Denis Chetverikov and Christopher Palmer) proposes a simple approach for estimating distributional effects of a group-level treatment when there are unobservable components at the group level which may be correlated with the treatment. Standard quantile regression techniques are inconsistent in this setting, while grouped instrumental variables quantile regression is consistent. The study illustrates the estimation approach with several examples, including applications from the first two chapters of this thesis. / by Bradley Joseph Larsen. / Ph.D.

Thesis: Ph. D., Massachusetts Institute of Technology, Department of Economics, 2015. / Chapter 2 co-authored with Robert Townsend. Cataloged from PDF version of thesis. / Includes bibliographical references. / In the first chapter, I study how banks lend or borrow liquidity in the interbank market and what I can learn about the macro-economy from the interbank market. From a unique database of interbank loan transactions in Mexico, I observe that interest rates vary across different lender-borrower pairs. I find that this variation is driven by the variation across different banks in their cost from handling an excess or a deficit of liquidity. Using my model, I characterize the shape of the interest rate curve as a function of loan size. Moreover, I find that the increased disadvantage that small banks experienced in the interbank market during the 2008 financial crisis can largely be explained by a shift in the liquidity cost. In the second chapter, joint with Robert Townsend, we study how banks choose their level of cash holdings, taking into account potential payment demands and the short-term interest rate. We develop the notion of a rationing equilibrium in the money market, where a unique equilibrium exists for any given short-term rate. We characterize how changes in the short-term interest rate translate into changes in the banks' lending activities, thus affecting the economy. In addition, we discuss how banks with different characteristics may respond differently to such changes. In the third chapter, I study a recent change in the typical form of housing rental contracts in Korea. Traditionally, houses were mostly rented in exchange for a zero-interest loan from the renter to the owner of the house. However, during recent years, such a traditional form of rental agreement has been losing popularity and partially replaced by contracts based on monthly payments to the owner. Using a model of the interaction between the renter and the borrower, I explain how various financial market trends can potentially cause the observed change in the housing rental market. / by Kyungmin Kim. / Chapter 1. A Chapter 2. Chapter 3. price-differentiation model of the interbank market and Its empirical application -- Money demand for payments by banks and the money market rate -- Analysis of a transformation in housing rental contracts in Korea. / Ph. D.

Thesis (Ph. D.)--Massachusetts Institute of Technology, Dept. of Economics, 2002. / Includes bibliographical references. / Economies around the world are marked by major interventions in credit markets. Institutions ranging from central banks to the Grameen Bank operate under the assumptions that credit markets are imperfect, that these imperfections can be ameliorated, and that doing so increases output. There is surprisingly little empirical support for these propositions. Chapters 1 and 2 develop evidence on related questions by exploiting changes to a major intervention in U.S. credit markets, the Community Reinvestment Act (CRA). Using data on both banks and potential commercial borrowers, Chapter 1 develops evidence that CRA does increase credit to small businesses as intended. Chapter 2 then exploits these CRA-induced supply shocks to identify the impact of credit increases on county-level payroll and bankruptcies. There is some evidence of real benefits at plausible implied rates of return on CRA borrowing, and little suggestion of crowd-out or adverse effects on bank performance. The findings therefore appear consistent with a model where targeted credit market interventions can improve efficiency, although important questions remain. Despite a growing number of studies concluding that a substantial proportion of US households are liquidity constrained, there remains little consensus as to the quantitative importance or nature of these constraints. This paper develops a new type of evidence on the impacts of consumer credit markets on behavior by examining household-level responses to an exogenous liquidity shock. / (cont.) A United States Supreme Court decision effectively deregulated bank credit card interest rates in December 1978, and I develop evidence that consumers from states with binding usury ceilings before the decision became more likely to hold bank cards after the decision, relative to their counterparts in unaffected states. The marginal cardholders appear to have characteristics widely associated with credit constraints, and to borrow frequently on their new cards. Yet there is little evidence that these cardholders exploit their newfound liquidity by shifting into higher-yielding, less liquid, or riskier assets. This finding is at odds with most models of liquidity constraints, and motivates consideration of alternative explanations for the widely observed sensitivity of consumers to liquidity. / by Jonathan Zinman. / Ph.D.

Thesis (Ph. D.)--Massachusetts Institute of Technology, Dept. of Economics, 1988. / Bibliography: leaves 120-125. / by Richard Kent Lyons. / Ph.D.

Thesis (Ph. D.)--Massachusetts Institute of Technology, Dept. of Economics, 2012. / Cataloged from PDF version of thesis. / Includes bibliographical references (p. 135-138). / This thesis studies the impact of private information on the existence of insurance markets. In the first chapter, I study the case of insurance rejections. Across a wide set of non-group insurance markets, applicants are rejected based on observable, often high-risk, characteristics. I explore private information as a potential cause by developing and testing a model in which agents have private information about their risk. I derive a new no-trade result that can theoretically explain how private information could cause rejections. I use the no-trade condition to generate measures of the barrier to trade private information imposes. I develop a new empirical methodology to estimate these measures that uses subjective probability elicitations as noisy measures of agents' beliefs. I apply the approach to three non-group markets: long-term care (LTC), disability, and life insurance. Consistent with the predictions of the theory, in all three settings I find significant evidence of private information for those who would be rejected; I find that they have more private information than those who can purchase insurance; and I find that it is enough to cause a complete absence of trade. This presents the first empirical evidence that private information leads to a complete absence of trade. In the second chapter, I show that private information explains the absence of a private unemployment insurance market. I provide the empirical evidence that a private UI market would be afflicted by private information and suggest the amount of private information is sufficient to explain a complete absence of trade. I present evidence a private market would still not arise even if the government stopped providing unemployment benefits. Finally, in the third chapter I use the empirical and theoretical tools developed in the first chapter to explore the impact of an adjusted community rating policy that would force insurance companies to only price based on age. My results suggest such a policy would completely unravel the LTC insurance market. Not only would welfare not be improved for those who are currently rejected, but the regulation would prevent the healthy from being able to purchase long-term care insurance. / by Nathaniel Hendren. / Ph.D.