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Industrial Organization and Financial Markets

Paper Session

Sunday, Jan. 5, 2020 8:00 AM - 10:00 AM (PDT)

Marriott Marquis, Del Mar
Hosted By: Econometric Society
  • Chair: Vivek Bhattacharya, Northwestern University

Beyond the Balance Sheet Model of Banking: Implications for Bank Regulation and Monetary Policy

Greg Buchak
,
University of Chicago
Gregor Matvos
,
University of Texas-Austin
Tomasz Piskorski
,
Columbia University
Amit Seru
,
Stanford University

Abstract

We study which types of activities migrate to the shadow banking sector, why migration occurs in some sectors, and not others, and the quantitative importance of this migration. We explore this question in the $10 trillion US residential mortgage market, in which shadow banks account for more than half of new lending. Using micro data, we document a large degree of market segmentation in shadow bank penetration. They substitute for traditional —deposit taking—banks in easily securitized lending, but are limited from engaging in activities requiring on-balance sheet financing. Traditional banks adjust their financing and lending activities to balance sheet shocks, and behave more like shadow banks following negative shocks. Motivated by this evidence, we build a structural model. Banks and shadow banks compete for borrowers. Banks face regulatory constraints, but benefit from the ability to engage in balance sheet lending. Like shadow banks, banks can choose to access the securitization market. To evaluate distributional consequences, we model a rich demand system with income and house price differences across borrowers. The model is estimated using spatial pricing rules and bunching at the regulatory threshold for identification. We study the consequences of capital requirements, access to securitization market, and unconventional monetary policy on lending volume and pricing, bank stability and the distribution of consumer surplus across rich and poor households. Disruptions in securitization markets rather than capital requirements have the largest quantitative impact on aggregate lending volume and pricing.

The Fragility of Market Risk Insurance

Ralph Koijen
,
University of Chicago
Motohiro Yogo
,
Princeton University

Abstract

Insurers sell retail financial products called variable annuities that package mutual funds with minimum return guarantees over long horizons. Variable annuities accounted for $1.5 trillion or 35% of U.S. life insurer liabilities in 2015. Sales fell and fees increased after the 2008 financial crisis as the higher valuation of existing liabilities stressed risk-based capital. Insurers also made guarantees less generous or stopped offering guarantees to reduce risk exposure. We develop an equilibrium model of insurance markets in which financial frictions and market power are important determinants of pricing, contract characteristics, and the degree of market incompleteness.

Interbank Trading, Collusion, and Financial Regulation

Dean Corbae
,
University of Wisconsin
Michael Gofman
,
University of Rochester

Abstract

We show theoretically and empirically that interbank markets provide a channel for banks to collude in the market for business loans. By lending funds to a competitor, a bank commits not to compete. Interbank interest rates allow banks to split the benefits from such collusion. Using global syndicated loans data, we find that firms paid 31 basis points higher spread on $239 billion of loans provided by banks that took an interbank loan from a competitor. We compare the decentralized solution with interbank market to the planner's solution and to the decentralized equilibrium without interbank market. The results suggest that restricting interbank trading may increase aggregate welfare.

Auctioning Annuities

Gaurab Aryal
,
University of Virginia
Eduardo Fajnzylber
,
Adolfo Ibáñez University
Maria Florencia Gabrielli
,
CONICET-UNCuyo
Manuel Willington
,
Adolfo Ibáñez University

Abstract

This paper examines the performance (efficiency and welfare) of a privatized market for annuities. For that we use detailed data from Chilean annuity market on retirees, their savings, pensions offered by insurance companies and the final choices. To capture salient features we develop and estimate a model of demand (from rationally inatten- tive retirees) and supply (firms who select to “enter,” offer pensions in a modified auction) of annuities. Our model allows for two-sided asym- metric information between retirees and companies, where retirees have heterogenous preference over both pecuniary (pensions and bequests) and non-pecuniary (e.g., credit-ratings) aspects of a company. We es- tablish the identification of the distribution of random preferences and the distribution of companies’ private returns.

Bargaining and the Design of Defined Contribution Plans

Vivek Bhattacharya
,
Northwestern University
Gaston Illanes
,
Northwestern University

Abstract

Defined contribution plans constitute a large share of retirement income for Americans, and there has been considerable policy debate over reforms that aim to increase access to these plans or to improve the quality of the set of funds that are offered. However, since fund offerings and plan fees are jointly determined by negotiations between employers and plan administrators, such reforms can create unintended consequences on fees or other plan characteristics, such as matching rates and vesting periods, as well as on wages or other sources of employee compensation. This project leverages novel datasets from the Department of Labor and from Brightscope that contain detailed information on all relevant features of a large set of 401(k) plans in the US—such as investment options, allocations, fees, and the set of firms involved in the administration of the plan—to study how bargaining between employers, 401(k) administrators (trustees), and fund providers determines the set of funds available to workers and the fees they pay. We propose to estimate a structural bargaining model to learn how the costs of providing a 401(k) plan vary with firm size, to recover firm’s valuations of offering additional benefits to workers, and to determine the share of surplus that is allocated to trustees and fund providers. Armed with the model estimates, we can also evaluate the equilibrium effects of proposed reforms to the 401(k) system, such as the barring of discrimination (in price and product offerings) across employers, “must-carry” clauses for funds, the expansion of state run defined contribution plans, and the expansion of multi-employer plans proposed in the Retirement Enhancement and Savings Act.
JEL Classifications
  • L2 - Firm Objectives, Organization, and Behavior