Existence and uniqueness of a fixed-point for local contractions

This paper proves the existence and uniqueness of a fixed-point for local contractions without assuming the family of contraction coefficients to be uniformly bounded away from 1. More importantly it shows how this fixed-point result can apply to study existence and uniqueness of solutions to some recursive equations that arise in economic dynamics.

Affiliation, equilibrium existence and the revenue ranking of auctions

We consider private value auctions where bidders’ types are dependent, a case usually treated by assuming affiliation. We show that affiliation is a restrictive assumption in three senses: topological, measure-theoretic and statistical (affiliation is a very restrictive characterization of positive dependence). We also show that affiliation’s main implications do not generalize for alternative definitions of positive dependence. From this, we propose new approaches to the problems of pure strategy equilibrium existence in first-price auctions (PSEE) and the characterization of the revenue ranking of auctions. For equilibrium existence, we slightly restrict the set of distributions considered, without loss of economic generality, and offer a complete characterization of PSEE. For revenue ranking, we obtain a characterization of the expected revenue differences between second and first price auctions with general dependence of types.

Essays on competition and returns of inside money

In an early paper, Cavalcanti and Wallace (2001) showed, using a computable version of Cavalcanti-Wallace model (CW-1999), that optimal regulation induces banks to pay interests, instead of contracting the money supply in an inside money allocation. Here, we generalize CW in two fashions, assuming inside money allocations, so that banks are supposed to issue money as they find a potential producer wishing to produce. The first generalization allows for seasonality due to real shocks on preferences with persistence and for monetary policy improvement. We found an asymmetric path for interest rates when constraints matter, even when shocks are independent. The second generalization allows for bank competition, in the sense that banks can choose between two different banking nets. We proof the existence of simple stable and unstable equilibria and also verify the existence of multiple equilibria.

Exchange rate policies, patterns of specialization and economic development: theory and evidence in developing countries

The objectives of this paper are twofold. First, it intends to provide theoretical elements to analyze the relation between real exchange rates and economic development. Our main hypothesis is very much in line with the Dutch disease literature, and states that competitive currencies contribute to the existence and maintenance of the anufacturing sector in the economy. This, in turn, brings about higher growth rates in the long run, given the existence of increasing returns in the industrial sector, and its importance in generating echnological change and increasing productivity in the overall economy. The second objective of this paper is empirical. It intends to analyze examples of successful exchange rate policies, such as Chile and Indonesia in the eighties, as a benchmark for comparison with countries where currency overvaluation has taken place, such as Brazil. In the latter case, the local currency is being inflated by large capital inflows, due to high domestic interest rates and to a boom in demand and prices of commodities in the international markets. It will be argued that the industrial sector bears most of the burden when the currency appreciates, and that Brazil risks at deindustrialization if there are no changes in the exchange rate regime

Legal enforcement, collateral and heterogeneity of project financing contracts

This paper employs mechanism design to study the effects of imperfect legal enforcement on optimal scale of projects, borrowing interest rates and the probability of default. The analysis departs from an environment that combines asymmetric information about cash flows and limited commitment by borrowers. Incentive for repayment comes from the possibility of liquidation of projects by a court, but courts are costly and may fail to liquidate. The value of liquidated assets can be used as collateral: it is transferred to the lender when courts liquidate. Examples reveal that costly use of courts may be optimal, which contrasts with results from most limited commitment models, where punishments are just threats, never applied in optimal arrangements. I show that when voluntary liquidation is allowed, both asymmetric information and uncertainty about courts are necessary conditions for legal punishments ever to be applied. Numerical solutions for several parametric specifications are presented, allowing for heterogeneity on initial wealth and variability of project returns. In all such solutions, wealthier individuals borrow with lower interest rates and run higher scale enterprises, which is consistent with stylized facts. The reliability of courts has a consistently positive effect on the scale of projects. However its effect on interest rates is subtler and depends essentially on the degree of curvature of the production function. Numerical results also show that the possibility of collateral seizing allows comovements of the interest rates and the probability of repayment.