Understanding liquidity shortages during severe economic downturns

Atolia, Manoj; Einarsson, Tor; Marquis, Milton H.

doi:10.1016/j.jedc.2010.10.009

Cited by 6 publications

(16 citation statements)

References 21 publications

(13 reference statements)

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“…Following Tirole (), we will rewrite the ICC more compactly as

p_{H} (1 - s_{t}^{i}) {\overset{R^{^{'} i}}{true}}_{t + 1} \geq A s_{t}^{i},

where

A = p_{H} \frac{B}{Δ p}

denotes the entrepreneur's agency rent and the right‐hand side of equation is the minimum payment to the entrepreneur that would preserve his incentive to not shirk. The fact that the minimum incentive compatible payment is a function of

s_{t}^{i}

is consistent with the standard assumption that an individual's propensity to shirk is decreasing in their stake in the project (see Holmstrom and Tirole , , Tirole , Atolia, Einarson, and Marquis , and Atolia, Gibson, and Marquis ).…”

Section: The Modelsupporting

confidence: 74%

“…They enter the model through firm‐level moral hazard that exists between the entrepreneurs and their investors due to the entrepreneurs' ability to alter their funded project's probability of success through their choice of effort (high/low). This approach to modeling financial frictions is described in Holmstrom and Tirole (, ), Tirole (), and Atolia, Einarsson, and Marquis () and is shown by Atolia, Gibson, and Marquis () to produce realistically asymmetric business cycles within a calibrated DSGE model. As in Atolia, Gibson, and Marquis (), investors finance two‐period projects in an equity market, where the funding is used by the entrepreneurs to rent capital and pay workers.…”

mentioning

confidence: 99%

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Moral Hazard in Lending and Labor Market Volatility

Atolia¹,

Gibson²,

Marquis³

2018

J of Money Credit Banking

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When the economy experiences a sharp economic downturn, credit spreads widen and project financing costs for firms rise as funding sources begin to dry up. The economy experiences a lengthy recovery, with unemployment rates slow to return to “full employment” levels. We develop a model that displays these features. It relies on an interaction between labor search frictions and firm‐level moral hazard that is accentuated during recessions. The model is capable of addressing the “Shimer puzzle,” with labor market variables exhibiting significantly more volatility on average as a result of the heightened moral hazard concerns during these episodes that significantly deepen and prolong periods of high unemployment, as vacancy postings fall dramatically and the job‐finding rate declines. Our mechanism is also found to induce internal shock propagation causing the peak response of output, unemployment, and wages to occur with a several quarter delay relative to a model without such frictions. Many other labor market variables also show slower recovery—their return to preshock level occurs at a slower pace for a number of periods after the peak response.

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“…Following Tirole (), we will rewrite the ICC more compactly as

p_{H} (1 - s_{t}^{i}) {\overset{R^{^{'} i}}{true}}_{t + 1} \geq A s_{t}^{i},

where

A = p_{H} \frac{B}{Δ p}

s_{t}^{i}

Section: The Modelsupporting

confidence: 74%

mentioning

confidence: 99%

Moral Hazard in Lending and Labor Market Volatility

Atolia¹,

Gibson²,

Marquis³

2018

J of Money Credit Banking

Self Cite

View full text Add to dashboard Cite

show abstract

“…During the first period, time t, capital and labor must be acquired for use in the project. The inclusion of capital as a factor of production represents a departure from the model presented in Atolia et al (2011), who abstract from capital accumulation. As we show later, the addition of capital allows the current model to match the standard business cycle facts more closely and makes further quantitative exercises possible.…”

Section: Household Sector: the Entrepreneurs' Problemsmentioning

confidence: 99%

“…As project size is increasing in s i t , its presence in this term captures the fact that the entrepreneur's private benefit from shirking increases as the project becomes larger. [See Atolia et al (2011) for more details on this point. ]…”

Section: Household Sector: the Entrepreneurs' Problemsmentioning

confidence: 99%

Asymmetry and the Amplitude of Business Cycle Fluctuations: A Quantitative Investigation of the Role of Financial Frictions

Atolia¹,

Gibson

Marquis³

2016

Macroecon. Dynam.

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We examine the quantitative significance of financial frictions that reduce firms' access to credit in explaining asymmetric business cycles characterized by disproportionately severe downturns. Using rate spread data to calibrate the severity of these frictions, we successfully match several key features of U.S. data. Specifically, although output and consumption are relatively symmetric (with output being slightly more asymmetric), investment and hours worked display significant asymmetry over the business cycle. We also demonstrate that our financial frictions are capable of significantly amplifying adverse shocks during severe downturns. Although the data suggest that these frictions are only active occasionally, our results indicate that they are still a significant source of macroeconomic volatility over the business cycle.

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“…The first deals with the importance of liquidity constraints in financing. Liquidity shortages are characterized by Holmstrom and Tirole (), hereafter HT, and Atolia, Einarsson and Marquis (), hereafter AEM, as arising from the limited pledgeable income associated with funded projects in the presence of moral hazard. Adverse shocks to firms may result in termination of ongoing projects, which in aggregate could reduce overall economic activity if the provision of private liquidity is curtailed.…”

Section: Introductionmentioning

confidence: 99%

Equilibrium Shirking, Access to Credit and Endogenous TFP Fluctuations

2014

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This paper develops a model in which idea‐rich, cash‐poor entrepreneurs undertake risky investment projects that are subject to future liquidity needs and shirking due to moral hazard. The model suggests that the strength of the entrepreneur's incentive to shirk is countercyclical and that endogenous shirking adds volatility to the economy by increasing the persistence and volatility of TFP. This increase in persistence and volatility is driven by the variation in the number of successfully completed projects, compounded by the effect of the incentive to shirk on access to credit; changes in factor employment play only a minor role.

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Understanding liquidity shortages during severe economic downturns

Cited by 6 publications

References 21 publications

Moral Hazard in Lending and Labor Market Volatility

Moral Hazard in Lending and Labor Market Volatility

Asymmetry and the Amplitude of Business Cycle Fluctuations: A Quantitative Investigation of the Role of Financial Frictions

Equilibrium Shirking, Access to Credit and Endogenous TFP Fluctuations

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