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My area of research is mainly industrial organization, auctions and financial markets. Financial support from the National Science Foundation under Grants No. SES-0752860 and SES-1123314 is gratefully acknowledged.

A short summary of my research is here.


Discrete Bids and Empirical Inference in Divisible Good Auctions  - last version June 2010 - (Review of Economic Studies, 78 (3), pp. 974-1014, 2011 )

I provide a model of a divisible good auction (such as auctions of treasury bills or electricity) in which bidders submit discrete bids and hence their demand functions are step functions rather than continuous downward sloping functions. I show that this feature has important implications for equilibrium behavior as bidders may submit bids which are higher than their marginal valuation for some units. The characterization theorem reveals the close relationship between behavior of a bidder in a uniform price auction and an oligopolist facing an uncertain demand.
I also use the model in structural estimation. I demonstrate that an indirect revenue comparison between uniform price and discriminatory auctions is not valid, since in a uniform price auction bidders may bid above their marginal valuations. Therefore I provide a new method for performance evaluation of the employed auction mechanism based on data on individual bids. Applying this method to a dataset consisting of all bids from 28 treasury auctions of the Czech government I conclude that the uniform price auction performs quite well in that setting since it fails to extract less than 3 basis points (in terms of the annual yield of a T-bill) of the expected surplus while achieving an allocation resulting in almost all of the efficient surplus.

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On the Properties of Equilibria in Private Value Divisible Good Auctions with Constrained Bidding - last version February 2011 ( Journal of Mathematical Economics , 48(6), pp.339-352, 2012)

I analyze a model of a private value divisible good auction with different payment rules, standard rationing rule pro-rata on-the-margin and both with and without a restriction on the number of bids (steps) bidders can submit. I characterize necessary conditions for equilibrium bidding in a model with restricted strategy sets and I show that these necessary conditions converge to those in the model with unrestricted strategy sets. In particular, these necessary conditions require that the Euler condition characterizing equilibrium strategies in the unrestricted model holds ''on average'' over the intervals defined by the length and height of each step, where the average is taken with respect to the (endogenous) distribution of the market clearing price. I also prove that the forgone surplus of bidders from using K steps rather than the optimal continuous bids diminishes at the rate of 1/K2. Sufficient conditions for equilibrium existence are also provided.

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When Should Manufacturers Want Fair Trade?: New Insights from Asymmetric Information, with David Martimort and Salvatore Piccolo - last version September 2009 (Journal of Economics and Management Strategy, 20(3), 2011)

We revisit the Chicago School argument, advocating for the lawfulness of resale price restrictions, in a setting of competing manufacturer-retailer pairs with both adverse selection and moral hazard. A ``laissez-faire" approach towards vertical price control might harm consumers when privately informed retailers impose non-market externalities on each other. We show that letting manufacturers free to control retail prices harms consumers as long as retailers impose positive non-market externalities on each other, and that the converse is true otherwise. In contrast to previous work, we show that, in these instances, consumers' and suppliers' preferences over contractual choices are not always aligned. These results underscore the scarce appeal of per se rules and predict circumstances where retail price restrictions should be forbidden.

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Delegation, Ownership Concentration and R&D Spending: Evidence from Italywith David Martimort and Salvatore Piccolo ( Journal of Industrial Economics, 61(1), pp. 84-107, 2013)

We use data from the Italian manufacturing industry to document the positive relationship between delegation of decisions within organizations and innovation incentives. In order to obtain the causal effect, we build  a contract theory model with asymmetric information and moral hazard which predicts that awarding autonomy to the manager spurs innovation incentives relative to arrangements based on vertical control. We use the model to guide our search for suitable instruments. Using several alternative instrumental variables and different specifications we find a strong positive effect of delegation on R&D spending.



Wily Welfare Capitalists: Werner von Siemens and the Pension Fund, with Lyndon Moore, last version July 2008 (Cliometrica, 4(3), pp. 321-348, 2010)

The German firm of Siemens and Halske introduced many enterprising features of what later came to be known as welfare capitalism in the mid 19th century. Profit sharing, annual bonuses, a pension fund, a reduction in work hours, and an annual party were all means to ensure a productive, trouble-free workforce. We investigate the reasons why Siemens and Halske introduced a pension fund in 1872, more than a decade before the nation-wide social security system was implemented in Germany. We find that the pension fund increased labor productivity, and in addition discouraged workers from striking. Our main finding is that the annual cost of running the pension fund was roughly equal to the profit that would have been lost in that year if Siemens had to face a strike of average duration. This suggests that (i) the introduction of a pension fund is consistent with simple profit maximizing behavior on the firm's side and (ii) increased labor unionization induced firms to introduce subjective components of workers' remuneration packages.

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Valuing Dealers' Informational Advantage: A Study of Canadian Treasury Auctions , with Ali Hortacsu, last version January 2012 ( Econometrica, 80(6), pp.2511-2542, 2012) (previous title: Do Bidders in Canadian Treasury Bill Auctions Have Private Values?)

Several important auction settings, including treasury auctions in Canada and the U.S., have the feature that some bidders (dealers) observe the bids of a subset of other bidders (customers). Quantifying the economic advantage that informationally advantaged bidders derive from this institutional feature requires that we empirically distinguish between private vs. interdependent values paradigms. Bidders with private values who obtain information about rivals' bids use this information to update their beliefs about the distribution of residual supply. With interdependent values, bidders also update their beliefs about the value of the good being auctioned. We use these differential updating effects to construct formal hypothesis tests of the presence of private vs. interdependent values. Using data from Canadian treasury auctions, we cannot reject the null hypothesis of private values in auctions of 3- and 12-month treasury bills. We also do not find evidence supporting the alternative hypothesis of interdependent values. We use the estimated model to quantify the value of observing customer bids to a dealer. We find that the extra information contained in customers' bids leads on average to an increase in payoff equal to 13-35% of the expected surplus of dealers.

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The 2007 Subprime Market Crisis Through the Lens of European Central Bank Auctions for Short-Term Funds, with Nuno Cassola and Ali Hortacsu, 2009 (Econometrica, 81(4), pp.1309-1345, 2013)  

We study European banks' demand for short-term funds (liquidity) during the summer 2007 subprime market crisis. We use bidding data from the European Central Bank's auctions for one-week loans, their main channel of monetary policy implementation. Our analysis provides a high-frequency, disaggregated perspective on the 2007 crisis, which was previously studied through comparisons of collateralized and uncollateralized interbank money market rates which do not capture the heterogeneous impact of the crisis on individual banks. Through a model of bidding, we show that banks' bids reflect their cost of obtaining short-term funds elsewhere (e.g., in the interbank market) as well as a strategic response to other bidders. The strategic response is empirically important: while a na\"{i}ve interpretation of the raw bidding data may suggest that virtually all banks suffered an increase in the cost of short-term funding, we find that for about one third of the banks, the change in bidding behavior was simply a strategic response. We also find considerable heterogeneity in the short-term funding costs among banks: for over one third of the bidders, funding costs increased by more than 20 basis points, and funding costs vary widely with respect to the country-of-origin. Estimated funding costs of banks are also predictive of market- and accounting-based measures of bank performance, suggesting the external validity of our findings.

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Crisis Management: Analyzing Default Risk and Liquidity Demand during Financial Stress, with Jason Allen and Ali Hortacsu, 2011 (submitted)  

This paper shows that strategies in, and reliance on the payments system as well as special liquidity-supplying tools provided by the central bank are important indicators of distress of individual banks. We conclude that central banks can benefit from using high-frequency data on liquidity demand to obtain a better picture of the financial health of individual participants of the financial system. For the particular case of Canada, using unique features of the payments system and information from the liquidity facilities we find that the willingness-to-pay for liquidity during the financial crisis stayed at low levels throughout the Canadian financial system and that there was no increase in counterparty risk. This suggests that the central bank's overall policy response might have been less pronounced if they had used the methods employed in this paper to analyze the crisis than the actual response.

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Liquidity Auctions, Fixed Rate Tenders & Bailouts in the EURO Zone, with Nuno Cassola and Ali Hortacsu  

At the end of September 2008, following the bankruptcy of Lehman Brothers, the European Central Bank (ECB) abandoned its usual procedure of allocating short-term funds using an auction and implemented a full-allottment procedure. We show that the data from auctions preceding this change can be used to gain insights about the health of the individual banks and their future recourse to ECB-provided lending. Based on an equilibrium model of bidding, we estimate individual banks' willingness-to-pay for loans, which we link to their cost of funding. We find that banks whose willingness-to-pay for short-term funds kept increasing through the months of 2008 benefited more from the switch: they were allocated relatively more liquidity and at a relatively cheaper rate than before. We also find that the dynamics of the willingness-to-pay during 2008 are correlated with changes in several balance sheet variables, such as write-offs, in the expected direction. Using data on targeted bailouts, we show that banks whose willingness-to-pay increased substantially already in 2007 are much more likely to receive a bailout than those whose willingness-to-pay did not increase or started increasing later as the situation on the financial markets deteriorated further.

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Empirical Analysis of Systemic Risk in the EURO Zone, with Pietro Bonaldi and Ali Hortacsu  

We propose a new measure of systemic risk, which is based on estimating spillovers between funding costs of individual banks. The estimation proceeds in three steps: First, using data from liquidity auctions of the European Central Bank, we estimate the funding costs in a given week for each individual bank. In the second step, we apply LASSO estimator to this panel to estimate the financial network. Finally, using the estimated network we propose a new measures of systemicness and vulnerability of each bank. Our measure of systemic-ness has quite a natural interpretation, since it can roughly be viewed as the total externality a bank would impose on the funding costs of all other banks in the system. We estimate that most of the banks have fairly weak links and, therefore, if one were to suffer an adverse shock there would likely be a rather limited effect on the other ones. On the other hand, there are a few banks that are quite central: an increase in their funding costs would result in a very significant increase (up to 44 basis points per 100 basis points shock) in the funding costs of the other banks.

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Impact of Emission Permits on Electricity Generation, with Federico Boffa and Frank Wolak
Horizontal Mergers without Price Effects: A Study of South-African Gold Mines, with Lyndon