Essays on the economics of firms and of financial institutions

Abstract

Understanding the propagation of shocks throughout the economy is crucial for the design of policies and for their evaluation. Shock propagation hinges on a number of factors, among which market structure and the level of competition play a relevant role. In this dissertation I investigate the role of competition on firms’ pricing behavior and on banks’ funding stability when hit by a shock. Moreover, I also assess the implications of greater capital requirements on banks’ liquidity provision. The first chapter assesses how firms set their markups following a positive demand shock. I use the 2012 Emilia-Romagna earthquake as a natural experiment and I exploit within-firm variation of construction firms to identify the causal effect of interest. I find that markups decreased on average by 4 percentage points following the demand shock and that this drop is driven by higher competition due to firm-entry in the face of increasing marginal costs of labor. The second chapter, joint with Tommaso Oliviero, studies the effect of an increase in deposit insurance limit to e100,000 per bank account, set by the EU in early 2009, on the market for deposits. To evaluate the impact of the new directive we use Italian banks as a control group as they were not affected by the change. We find that the increase of deposit insurance limit reduces banks’ cost of financing through deposits between 0.3 and 0.7 percentage points. The third chapter studies the effect of a change in capital requirements on the market for collateralized debt obligations (CDOs). In a framework where securitization lowers banks’ monitoring effort over loans’ quality, I provide evidence of optimal risk-adjusted capital requirements that trade off the benefits of higher liquidity with the costs of lower monitoring incentives.