Essays in applied microeconomics and finance

Abstract

The topics covered in this paper cover a broad range of subjects, from a reputation system in a discrete and infinite time model over to a three period game on a network and concluding with the optimal default decision in continuous time framework. The first paper, entitled Firms’ Strategic Competition and The Dynamics of Reputation: The Case of an Online Market”, a joint work with Clodomiro Ferreira, analyzes, both theoretically and quantitatively, how sellers strategic competition for high valuation buyers in a context resembling on-line markets shapes reputation building incentives, and how it determines the dynamics of prices and reputation itself. The second paper, joint work with Agnese Leonello, investigates interbank market freeze and contagion that arises through asset sales in a financial network in which mark-to-market is the accounting standard in place. The paper develops a simple three-period theoretical model in which banks can borrow liquidity on the interbank market or sell assets at fire sale prices to meet their liquidity needs. Interbank market freeze and contagion arise in equilibrium as consequence of uncertainty of the counterparty risk and miscoordination in the sell of assets. Finally, the third paper written together with Mariana Khapko analyzes the issue of debt overhang in a Leland(1994) type of model and shows how the presence of a credit rating agency can mitigate this problem to some extent. Our results point out to the fact that a firm with performance sensitive debt in place might find it worthwhile to invest earlier in better projects whenever the investment reduces the coupon payments. The effect of the credit rating agency’s policy in the underinvestment issue is nevertheless non-monotonic.