Alkis Georgiadis-Harris

Working Papers

Preparing to Act: Information Acquisition and the Timing of Actions (Online Appendix)

 [Revise and Resubmit, Econometrica]

This paper develops a dynamic model of information acquisition in which the decision maker lacks control over the timing of her action. Dynamic experiments are constrained only in the quantity of information they can generate over any time interval. At the optimum, the decision maker concentrates resources in seeking a single piece of breakthrough evidence falsifying the current plan of action. Whenever the decision maker fails to obtain this evidence she becomes more confident in her intended action. Moreover, the arrival of breakthroughs leaves (shadow) costs unchanged. These features reveal three key motives driving the decision maker: a desire to hedge against the failure to obtain breakthroughs, the cost efficiency of the experiment, and a need to expedite the falsification of current plans.

Smart Banks, with Maximilian Guennewig and Yuliyan Mitkov

Since Diamond and Dybvig (1983) banks have been viewed as inherently fragile. We challenge this view in a general mechanism selection game, where we allow for flexibility in the design of banking mechanisms, while maintaining limited commitment of the intermediary to future mechanisms. We find that the unique equilibrium outcome is efficient. Consequently, runs cannot occur in equilibrium. Our analysis points to the ultimate source of fragility: banks are fragile if they cannot collect and optimally respond to useful information during a run, and not just because they engage in maturity transformation. We link our banking mechanisms to recent technological advances surrounding 'smart contracts,' which enrich the practical possibilities for banking arrangements.

Bank Resolution, Deposit Insurance and Fragility, with Maximilian Guennewig

Since the Great Financial Crisis, the share of deposits - both insured and uninsured - in bank liabilities has increased substantially. In this paper, we document this fact for the largest US banks. We show that it can be theoretically explained by the introduction of resolution powers, i.e. the ability to impose losses on bank shareholders and creditors. In such a world, banks issue deposits in order to channel resources towards uninsured depositors, imposing losses on insured depositors and forcing the government to conduct bailouts. Our model suggests that resolution and deposit insurance must be complemented by equity or long-term debt requirements.

Bank Resolution and the Disciplining Effect of Demandable Debt, with Maximilian Guennewig

In a model with asymmetric information on asset returns, banks issue demandable debt if the government's preferred resolution strategy takes the form of bail-ins. Creditors then respond to news on bank fundamentals and subsequent runs on loss-absorbing debt render bail-ins ineffective. Controlling the maturity structure of debt has two benefits. First, longer maturity debt disciplines markets ex-post while avoiding government bailouts. Second, ex-ante market discipline, measured by the average quality of projects, increases. The model provides an explanation why regulators impose minimum maturity requirements for bail-in debt and a motivation to treat short-term debt preferentially during intervention.

The Evolution of Asymmetric Risk Preferences in Dynamic Competitions

This paper analyzes a dynamic competition in which two players gamble independently, and fairly to affect their wealths. At each instant in time, a prize is allocated to the player with the highest wealth. There is a unique equilibrium in which the player lagging in wealth takes maximal risks, while the leading player takes no risks at all. An evolutionary interpretation of the result is offered, which provides a foundation for reference-dependent, asymmetric risk preferences. In particular, when fitness is determined by such dynamic competitions, S-shaped Bernoulli utility functions emerge uniquely.