Research Interests: Market and Mechanism Design, Regulation, Antitrust and Theoretical Industrial Organization, Organizational Economics.

Papers (Note: I just post work that has been recently (2 years) revised. Older projects will be posted as newer versions become available):

“Coordinated Strategic Defaults and Financial Fragility in a Costly State Verification Model” (joint with Pablo Salgado. Forthcoming at the Journal of Financial Intermediation. This version contains the case of a finite number of borrowers and allows for general stochastic mechanisms)

Abstract: It is well know that diversification through a financial intermediary has the benefit of transforming loans that need costly monitoring into bank deposits that do not. We show that financial intermediation in a costly state verification model has a cost not yet analyzed: it allows for the existence of multiple equilibria, some of which are characterized by borrowers defaulting on their loans because they expect other borrowers to do the same (i.e.: bad equilibria arise due to the strategic complementarities among the entrepreneurs' decisions to default). We propose two mechanisms that fully implement the desired equilibrium allocation.

“Coordination and the Provision of Incentives to a Common Regulated Firm” (joint with Johann Caro. International Journal of Industrial Organization, September 2011)

Abstract: This paper considers the problem faced by two regulators in providing incentives to a common (privately informed) regulated firm under various degrees of coordination. In the model, the firm exerts effort toward cost reduction and self-dealing, and incentives can be input-based (monitoring) and output-based (demanded cost targets). Full coordination between the regulators leads to the second best allocation. A setting in which the regulators do not fully coordinate leads to (i) higher overall monitoring (more aggressive input-based incentives) and (ii) higher demanded cost targets (i.e., more lenience in terms of output-based incentives). As a consequence of (i), in all possible equilibria, effort toward cost reduction will be smaller when the agent reports to two regulators who do not coordinate. (i) and (ii) imply that the impact on effort toward self-dealing activities is ambiguous. In our leading example, self-dealing will be larger if the regulators coordinate on monitoring levels but smaller if they choose monitoring levels independently.

“Repeated Lending under Contractual Incompleteness” (joint with João M. P. De Mello. Annals of Finance, Vol. 3, N.1, 2010)

Abstract: We consider a model of repeated (relationship) lending in which some contingencies that are relevant for a bank's decision to finance a project cannot be described contractually. The hazards related to this lack of contractibility can be magnified by actions taken by an entrepreneur. The continuation value of a lending relationship induces borrowers to take actions that minimize the ex-post conflict of interests resulting from contractual incompleteness. The optimal lending relationship is stationary on the equilibrium path. A robust feature of an optimal lending relationship is that the action schedule (as a function of project types) adopted by the entrepreneur is either a constant or a step function. Hence, the bank imposes to the entrepreneur a finite set of decisions from which he can pick his action, bounding his discretion over decisions. This leads to lower interest rates charged by the bank and to efficient refinancing in a lending relationship when compared to arm's length financing.

“Common Agency, Organizational Desing and the Hold-Up Problem” (Economics Letters, Vol. 108, Issue 3, 2010).

Abstract: This paper shows that, in comparison to a single-regulator arrangement, when an agent reports to two regulators, he is confronted with more powerful ex-post incentives. This generates, from an ex-ante perspective, higher incentives for relationship-specific investment.

“Robust Decision Making” (joint with Humberto Moreira)

Abstract: We consider a setting in which a decision-maker (principal) has to rely on an informed (but biased) agent to make a decision and is uncertain about the distribution from which the relevant state is drawn. The decision-maker is uncertainty averse, i.e., she has maxmin objective. The optimal (robust) mechanism is fully characterized by the property that it ensures the same payoff to the decision-maker across all states with positive likelihood. The shape of the robust mechanism depends on the agent’s bias. When the bias is state-dependent, the mechanism is typically stochastic and can be interpreted as representing a contingent decision plan. However, if the agent’s bias is constant and the set of states is unbounded, the robust mechanism is deterministic and entails full delegation.

“Dynamic Procurement Auctions” (joint with Paulo Orenstein and Pablo Salgado)

Abstract: This paper considers the problem faced by a welfare maximizing government agency seeking, at each of T≥2 periods, to procure an indivisible good from one of N firms. The firms are privately informed about a time varying cost parameter and can exert unobservable effort toward cost reduction. In the benchmark case in which costs are observed by the government agency, the optimal mechanism calls, in every period t∈ {1,...,T}, for the selection of the firm with the lowest cost parameter in that period, who is then offered contracts that induce first best levels of efforts. Under private information, given a selection procedure, the government distorts downward the recommended effort levels in all periods so to reduce the informational rents left to the firms. Such distortions are more pronounced if the firms' privately observed cost parameters display a larger degree of persistence, but decrease over time. For all periods t≥2, the optimal selection procedure is biased in favor of firms that drew lower cost parameters in the first period, since it is cheaper (in terms of informational rents) to provide more powerful incentives toward cost reduction to those firms. In particular, the firm who produces in period 1 is given an advantage over competitors in all future periods. We also show, by example, that such ex-post bias may also induce more investments ex-ante from all firms.

“Optimal Dynamic Procurement and Investments” (joint with Paulo Orenstein)

Abstract: This paper considers the problem faced by a government agency in providing dynamic incentives to a supplier who is privately informed about a time-varying cost parameter. Before signing-up a long term contract with the supplier, the government agency can make an investment that reduces the expected costs of the provision of the good it wishes to procure. We first derive the optimal procurement scheme for a given amount of investment and establish that: at any given period of its interaction with the government agency, the supplier faces less powerful incentives (i) the larger the degree of persistence of the its privately known cost parameter, (ii) the larger the amount initially invested. We then characterize some properties of the agency's optimal investment. Since larger investments reduce the power of incentives induced by the procurement contract, the government agency underinvests relatively to the first best. More surprisingly, despite the fact that the social benefits of investments (measured as the reduction in the firm's expected costs to deliver the project over time) are increasing in the persistence of the supplier's private information, the government agency's optimal investment may be non-monotone in the degree of persistence of the supplier's private information.

“Robust Bargaining and Financial Syndication”

Abstract: This paper investigates the extent to which syndication in financial markets is related to the bargaining protocol adopted by potential lenders. A group of financiers who have private information regarding their capability of monitoring an entrepreneur must decide whether to provide a loan individually in a competitive fashion, or provide it collectively. When deciding whether to provide the loan collectively, the lenders bargain over their participation, on who will be monitoring the lender (the leader), and on pricing. It is shown that, if the bargaining stage is robust to timing of communication of their private information (Ex-Post Incentive Compatibility), and if the lenders believe it is better to agree on a collective deal than competing, positive participation in the loan is given to all lenders even when side payments are allowed. Hence, we show that syndication is the optimal response of a group of lenders to the communication costs resulting from the negotiations between them for a given loan. Syndication improves on pricing but introduces a distortion by leaving the most effective monitor with less than full participation in the loan. Necessary conditions for syndication prevailing over competition are provided.

“Dividing and Discarding: A Procedure to Take Decisions with Non-transferable Utility” (joint with Willie Fuchs and Humberto Moreira)

Abstract: We consider a setting in which two players must take a single action. The analysis is done within a private values model in which (i) the players' preferences over actions are private information, (ii) utility is quadratic (non-transferable), (iii) implementation is bayesian and (iv) the welfare criterion is utilitarian. We characterize an optimal monotonic allocation rule. Instead of asking the agents to directly report their types, this allocation can be implemented dynamically. The agents are asked if they are to the left or to the right of the midpoint of the interval of possible types (eg.1/2 for the initial interval [0,1]). If both reports agree, the section of the interval which none preferred is discarded and the remaining interval is divided in two parts and the process continued until one agent chooses left and the other right. In that case, the midpoint of this remaining interval is implemented. This implementation can be carried out by a Principal who lacks commitment, implying this process is an optimal communication protocol.

“From Equals to Despots: The Dynamics of Repeated Group Decision Taking with Private Information” (joint with Willie Fuchs)

Abstract: This paper considers the problem faced by n<∞ agents that repeatedly have to take a joint action, cannot resort to side payments, and each period are privately informed about their favorite actions. We study the properties of the optimal contract in this environment. We establish that first best values can be arbitrarily approximated (but not achieved) when the players are extremely patient. The dynamics of decision taking is fully determined by (i) a decision rule that, at each period, maximizes the weighted sum of the agents’ (instantaneous) virtual utilities, and (ii) a process that governs the evolution of the weights given to the agents’ virtual utilities on decisions. We show that the provision of intertemporal incentives necessarily leads to a dictatorial mechanism: in the long run the optimal scheme converges to the adoption of one player's favorite action.

“Outside Options and the Limiting Distribution of Power in Repeated Decision Taking” (joint with Johann Caro. First Draft)

Abstract: We introduce ex-post participation constraints in a setting in which, repeatedly, two agents have to take a joint action, cannot resort to side payments, and each period are privately informed about their favorite actions. We derive a number of results. First, we show that, irrespective of how patient the agents are, any mechanism satisfying ex-post participation constraints delivers outcomes that are bounded away from efficiency. Second, for an agent whose outside option became tempting, the optimal mechanism (i) gives, relatively to a forced participation setting, less weight on current actions and, so to allow the agents to continue to trading decision rights in the future, (ii) always promises continuation values that are higher than the value of his outside option. Finally, we derive properties of the dynamics of relative bargain power, and prove that it leads to a unique limiting distribution of power. This limiting distribution is non-degenerate, memoryless and such that power continually changes hands in the limit, meaning that the weight agents have on decisions necessarily varies from period to period.

“A Sticky-Dispersed Information Phillips Curve: A model with partial and delayed information” (joint with Waldyr Areosa e Marta Areosa)

Abstract: This paper puts to test Morris and Shin´s (2006) conjecture that a small incidence of informational stickiness can lead to a large amount of persistence in aggregate prices in a world of differential information. We do so by assuming that firms receive private noisy signals about the state in an otherwise standard model of price setting with sticky-information. We prove there exists a unique equilibrium of the incomplete information game induced by the firms' pricing decisions and derive the resulting Sticky-Dispersed Information (SDI) Phillips curve. The main effect of dispersion is to substantially magnify the immediate impact of a given shock when the degree of stickiness is small. Its effect for persistence, however, is minor: even when information is largely dispersed, a substantial amount of informational stickiness is needed to generate persistence in aggregate prices and inflation.

Work in Progress (the same disclaimer as the one above applies):

“Robust Selling Mechanisms for a Monopolist” (joint with Paulo Monteiro and Humberto Moreira, slides)

Description: Optimal “robust” selling mechanism for a monopolist who produces K non-divisible goods, is uncertain about a consumer’s (multidimensional) valuation and, in face of such uncertainty, has a maxmin objective.

Note: In late December 2012, we learned there was substantial overlap with work developed independently by Gabriel Carroll. We (the four of us) are now currently working on merging and extending the results into a single paper.

“Robust Financing Decisions” (joint with Magno Mendes, Humberto Moreira and Pablo Salgado)

Brief description: Optimal capital structure decision when there is uncertainty about the technology of a project to be financed.

“Robust Liquidity Provision”

Work in Portuguese:

“Inflationary Inertia, Evolutionary Learning, and Recessions”, Brazilian Review of Economics, vol.57(3): 663-681, 2003. (with Marco Bonomo, and Humberto Moreira)