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Essays in financial fragility

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Title
Essays in financial fragility
Name (type = personal)
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Mitkov
NamePart (type = given)
Yuliyan
NamePart (type = date)
1986-
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Yuliyan Mitkov
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author
Name (type = personal)
NamePart (type = family)
Keister
NamePart (type = given)
Todd
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Todd Keister
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Advisory Committee
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chair
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Chang
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Roberto
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Roberto Chang
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Advisory Committee
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internal member
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Sjostrom
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Tomas
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Tomas Sjostrom
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Advisory Committee
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Ennis
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Huberto
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Huberto Ennis
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Advisory Committee
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outside member
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Rutgers University
Role
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degree grantor
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School of Graduate Studies
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Text
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theses
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2017
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2017-10
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2017
Place
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xx
Language
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eng
Abstract (type = abstract)
This dissertation is composed of three separate, but closely related, essays on financial instability. Chapter 1 offers new insights into the fragility-enhancing economic mechanisms at work during the Financial Crisis of 2007-08. Chapter 2 reexamines the effectiveness of recent regulatory measures aiming to mitigate future episodes of financial turmoil. Chapter 3 proposes a novel approach to an old problem in the literature on financial instability, namely how to derive sharper predictions in models with multiple equilibria. In Chapter 1, I explore how the distribution of wealth across households influences the government’s response to a banking crisis and the fragility of the financial system. In particular, I analyze a version of the Diamond and Dybvig (1983) model of financial intermediation where households have heterogeneous endowments and a government collects taxes and uses the proceeds to finance the provision of a public good. In addition, if there is a financial panic, the government can use some tax revenue to bail out banks experiencing a run. I show that when the wealth distribution is unequal, the government’s bailout policy during a systemic crisis will be shaped in part by distributional concerns. In particular, government guarantees of deposits will tend to be credible for relatively poor investors, but may not be credible for wealthier investors. As a result, wealthier investors will have a stronger incentive to panic and, in equilibrium, the institutions in which they invest are more likely to experience a run and receive a bailout. Thus bailouts, when they occur, will tend to benefit relatively wealthy investors at the expense of the general public. Notice that this result obtains naturally in my setting, without any appeal to political frictions or other factors that would give the wealthy undue influence over government policy. Rising inequality can strengthen this pattern. In particular, one of the effects of higher inequality is to make the panic-and-bailout cycle for the wealthy investors easier to obtain in equilibrium. In some cases, more progressive taxation reduces financial fragility and can even raise equilibrium welfare for all agents. In Chapter 2, which is joint work with Todd Keister, we study the interaction between a government’s bailout policy during a banking crisis and individual banks’ willingness to impose losses on (or “bail in”) their investors. Our interest in this topic is motivated by the fact that, in recent years, policy makers in several jurisdictions have drafted rules requiring financial institutions to impose losses on their investors in any future crisis. These rules aim both to protect taxpayers in the event of a future crisis and to change the incentives of banks and investors in a way that makes such a crisis less likely. While the specific requirements vary, and are often yet to be finalized, in many cases the bail-in will be triggered by an announcement or action taken by the institution facing losses. This fact raises the question of what incentives banks will face when deciding whether and when to bail in their investors. Banks in our model hold risky assets and are free to write complete, state-contingent contracts with investors. In the constrained efficient allocation, banks experiencing a loss immediately cut payments to withdrawing investors. In a competitive equilibrium, however, these banks often delay cutting payments in anticipation of being bailed out. In some cases, the costs associated with this delay are large enough that investors will choose to run on their bank, creating further distortions and deepening the crisis. We discuss the implications of the model for banking regulation and optimal policy design. In Chapter 3, I investigate a new approach to endogenizing the probability of a self-fulfilling outcome in games of coordination. Specifically, a number of important economic phenomena such as currency attacks, bank runs and sovereign defaults can be understood as collective action problems where the players can end up coordinating on one of two different outcomes with markedly different consequences. This multiplicity of possible equilibrium outcomes presents a theoretical challenge since it renders the model predictions and its comparative statics relatively ambiguous. One approach to deriving sharper predictions in collective action problems is the global games framework initially proposed by Carlson and Van Damn (1993) and further developed by Frankel, Morris, and Pauzner (2000). The private sunspot approach is an alternative way of endogenizing the probability of a self-fulfilling event. The purpose of Chapter 3 is to illustrate the logic of the private sunspot approach through a simple example referred to as the Bandit Game. In particular, I analyze a coordination game where two bandits receive an idiosyncratic signal of the realization of a random variable and want to coordinate on attacking a village in order to seize whatever it had produced. By being unrelated to the fundamentals of the environment, this random variable adds uncertainty to the model that is purely extrinsic (i.e. a sunspot). I refer to the bandits' idiosyncratic signals of this random variable as private sunspots (as opposed to public sunspots, which are perfectly observed) and study equilibria where the strategies of the bandits are conditioned on their private sunspot signals. In other words, the private sunspot generalizes the public sunspot approach by introducing strategic uncertainty in the bandits’ actions. I show that under certain condition, the private sunspot equilibrium involving an attack on the village will be unique, with the probability of an attack pinned down by the features of the environment.
Subject (authority = RUETD)
Topic
Economics
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Title
Rutgers University Electronic Theses and Dissertations
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ETD
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ETD_8225
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electronic resource
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application/pdf
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Extent
1 online resource (x, 152 p. : ill.)
Note (type = degree)
Ph.D.
Note (type = bibliography)
Includes bibliographical references
Subject (authority = ETD-LCSH)
Topic
Global Financial Crisis, 2008-2009
Subject (authority = ETD-LCSH)
Topic
Bank failures
Note (type = statement of responsibility)
by Yuliyan Mitkov
RelatedItem (type = host)
TitleInfo
Title
School of Graduate Studies Electronic Theses and Dissertations
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rucore10001600001
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NjNbRU
Identifier (type = doi)
doi:10.7282/T3M61PCB
Genre (authority = ExL-Esploro)
ETD doctoral
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The author owns the copyright to this work.
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Mitkov
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Yuliyan
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2017-06-06 12:11:31
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Yuliyan Mitkov
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Rutgers University. School of Graduate Studies
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I hereby grant to the Rutgers University Libraries and to my school the non-exclusive right to archive, reproduce and distribute my thesis or dissertation, in whole or in part, and/or my abstract, in whole or in part, in and from an electronic format, subject to the release date subsequently stipulated in this submittal form and approved by my school. I represent and stipulate that the thesis or dissertation and its abstract are my original work, that they do not infringe or violate any rights of others, and that I make these grants as the sole owner of the rights to my thesis or dissertation and its abstract. I represent that I have obtained written permissions, when necessary, from the owner(s) of each third party copyrighted matter to be included in my thesis or dissertation and will supply copies of such upon request by my school. I acknowledge that RU ETD and my school will not distribute my thesis or dissertation or its abstract if, in their reasonable judgment, they believe all such rights have not been secured. I acknowledge that I retain ownership rights to the copyright of my work. I also retain the right to use all or part of this thesis or dissertation in future works, such as articles or books.
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