Project acronym Dynamic Delegation
Project Implications of the Dynamic Nature of Portfolio Delegation
Researcher (PI) Ron Kaniel
Host Institution (HI) INTERDISCIPLINARY CENTER (IDC) HERZLIYA
Call Details Starting Grant (StG), SH1, ERC-2012-StG_20111124
Summary The asset management industry is a 60 trillion euros industry world wide, with a ratio of assets under management by asset managers to GDP around 100 percent. Despite the prominence of financial intermediaries in financial markets, our understanding of the portfolio delegation relationship, and its equilibrium asset pricing and contracting implications is at its infancy. The recent financial crisis has further underscored the importance of better understanding the incentives of financial intermediaries, the distortions induced by these incentives, the contracts that can help mitigate these distortions, and the impact of their trading on asset pricing dynamics.
One key feature that is at the core of the asset management relationship is its dynamic nature: investors can, and do, periodically re-allocate funds between managers and between funds and other investment vehicles. The magnitude of fund flows, both over time and accross funds at a given point in time, have been shown to be quantitatively large relative to assets under management. The ability of investors to quickly pull money out of funds at a time of crisis can have significant ramifications for the stability of the financial system.
Understanding implications of the dynamic nature of the delegation relationship is imperative in order to understand multiple aspects related to delegation and financial markets at large, including: risk taking behavior by funds; welfare implications for investors who invest in funds; what regulatory restrictions should be imposed on contracts; the evolution, past and future, of the asset management industry; securities return dynamics.
The objective is to develope models that will incorporate dynamic flows in settings that will allow studying implications and deriving empirical predictions on multiple dimensions: portfolio choice; optimal contracting; distribution of assets across funds; equilibrium asset pricing dynamics.
Summary
The asset management industry is a 60 trillion euros industry world wide, with a ratio of assets under management by asset managers to GDP around 100 percent. Despite the prominence of financial intermediaries in financial markets, our understanding of the portfolio delegation relationship, and its equilibrium asset pricing and contracting implications is at its infancy. The recent financial crisis has further underscored the importance of better understanding the incentives of financial intermediaries, the distortions induced by these incentives, the contracts that can help mitigate these distortions, and the impact of their trading on asset pricing dynamics.
One key feature that is at the core of the asset management relationship is its dynamic nature: investors can, and do, periodically re-allocate funds between managers and between funds and other investment vehicles. The magnitude of fund flows, both over time and accross funds at a given point in time, have been shown to be quantitatively large relative to assets under management. The ability of investors to quickly pull money out of funds at a time of crisis can have significant ramifications for the stability of the financial system.
Understanding implications of the dynamic nature of the delegation relationship is imperative in order to understand multiple aspects related to delegation and financial markets at large, including: risk taking behavior by funds; welfare implications for investors who invest in funds; what regulatory restrictions should be imposed on contracts; the evolution, past and future, of the asset management industry; securities return dynamics.
The objective is to develope models that will incorporate dynamic flows in settings that will allow studying implications and deriving empirical predictions on multiple dimensions: portfolio choice; optimal contracting; distribution of assets across funds; equilibrium asset pricing dynamics.
Max ERC Funding
728 436 €
Duration
Start date: 2013-01-01, End date: 2017-12-31
Project acronym EDUCATION-LONG-RUN
Project Long-Run Effects of Education Interventions: Evidence from Randomized Trials
Researcher (PI) Haim Victor Lavy
Host Institution (HI) THE HEBREW UNIVERSITY OF JERUSALEM
Call Details Advanced Grant (AdG), SH1, ERC-2012-ADG_20120411
Summary The vast majority of published research on the impact of school interventions has examined their effects on short-run outcomes, primarily test scores. While important, a possibly deeper question of interest to society is the impact of such interventions on long-run life outcomes. This is a critical question because the ultimate goal of education is to improve lifetime well-being. Recent research has begun to look at this issue but much work remains to be done, particularly with regard to the long-term effects of interventions explicitly targeting improvement in general quality and students’ educational attainment. This proposal examines the impact of seven different schooling interventions – teachers’ quality, school quality, remedial education, school choice, teacher incentive payments, students' conditional cash transfers and an experiment with an increase in the return to schooling – on long-run life outcomes, including educational attainment, employment, income, marriage and fertility, crime and welfare dependency. To address this important question I will exploit unique data from seven experimental programs and natural experiments implemented simultaneously at different schools in Israel. All programs were successful in achieving their short-term objectives, though the cost of the programs varied. This undertaking presents a unique context with unusual data and very compelling empirical settings. I will examine whether these programs also achieved a longer-term measure of success by improving students’ life outcomes. Another unique feature of the proposed study is that the interventions vary widely and touch on some emergent educational trends. The body of empirical evidence from this study will provide a more complete picture of the individual and social returns from these educational interventions, and will allow policymakers to make more informed decisions when deciding which educational programs lead to the most beneficial use of limited school resources.
Summary
The vast majority of published research on the impact of school interventions has examined their effects on short-run outcomes, primarily test scores. While important, a possibly deeper question of interest to society is the impact of such interventions on long-run life outcomes. This is a critical question because the ultimate goal of education is to improve lifetime well-being. Recent research has begun to look at this issue but much work remains to be done, particularly with regard to the long-term effects of interventions explicitly targeting improvement in general quality and students’ educational attainment. This proposal examines the impact of seven different schooling interventions – teachers’ quality, school quality, remedial education, school choice, teacher incentive payments, students' conditional cash transfers and an experiment with an increase in the return to schooling – on long-run life outcomes, including educational attainment, employment, income, marriage and fertility, crime and welfare dependency. To address this important question I will exploit unique data from seven experimental programs and natural experiments implemented simultaneously at different schools in Israel. All programs were successful in achieving their short-term objectives, though the cost of the programs varied. This undertaking presents a unique context with unusual data and very compelling empirical settings. I will examine whether these programs also achieved a longer-term measure of success by improving students’ life outcomes. Another unique feature of the proposed study is that the interventions vary widely and touch on some emergent educational trends. The body of empirical evidence from this study will provide a more complete picture of the individual and social returns from these educational interventions, and will allow policymakers to make more informed decisions when deciding which educational programs lead to the most beneficial use of limited school resources.
Max ERC Funding
1 519 000 €
Duration
Start date: 2013-05-01, End date: 2019-04-30
Project acronym EUROEMP
Project Employment in Europe
Researcher (PI) Christoforos Pissarides
Host Institution (HI) UNIVERSITY OF CYPRUS
Call Details Advanced Grant (AdG), SH1, ERC-2012-ADG_20120411
Summary "The first part of this project is about employment in Europe, including the new members of the European Union. Both the level of employment and the type of jobs created will be examined. A thorough study of institutional structures and policies is proposed, with a view to arriving at conclusions about their influence on job creation and about the best policy needed to achieve national or European-level employment objectives. Job creation is investigated at the two-digit level and male and female employment, wage inequality and the role of policy will be studied in depth. The research will build on solid theoretical microfoundations taking into account the choices available to firms and workers/consumers about working at home or in the market and buying domestic or foreign goods. The project has a second part about unemployment, with special emphasis on recession. The same emphasis on institutions and policies as for employment is given to this part. A key component of the project is new theory on the evolution of institutions and policies in markets with friction, and on the impact that the policy changes that took place after the recession of the 1980s have had on the responses of European labour markets to the recent recession. Special attention will be given to the formerly planned economies and the reasons for their slow convergence to the western economies."
Summary
"The first part of this project is about employment in Europe, including the new members of the European Union. Both the level of employment and the type of jobs created will be examined. A thorough study of institutional structures and policies is proposed, with a view to arriving at conclusions about their influence on job creation and about the best policy needed to achieve national or European-level employment objectives. Job creation is investigated at the two-digit level and male and female employment, wage inequality and the role of policy will be studied in depth. The research will build on solid theoretical microfoundations taking into account the choices available to firms and workers/consumers about working at home or in the market and buying domestic or foreign goods. The project has a second part about unemployment, with special emphasis on recession. The same emphasis on institutions and policies as for employment is given to this part. A key component of the project is new theory on the evolution of institutions and policies in markets with friction, and on the impact that the policy changes that took place after the recession of the 1980s have had on the responses of European labour markets to the recent recession. Special attention will be given to the formerly planned economies and the reasons for their slow convergence to the western economies."
Max ERC Funding
2 200 143 €
Duration
Start date: 2013-06-01, End date: 2018-05-31
Project acronym Observable Stability
Project Evolutionary stability, observability, and efficiency
Researcher (PI) Yuval Heller
Host Institution (HI) BAR ILAN UNIVERSITY
Call Details Starting Grant (StG), SH1, ERC-2015-STG
Summary The existing literature mainly focuses on two kinds of interactions: short-term interactions in which the behavior today does not influence the future, and long-term interactions with the same partner. In the former model, the only stable outcomes are Nash equilibria (which are typically non-efficient), while the latter model allows one to achieve efficient outcomes. Many interesting situations lie somewhere in between, typically when people engage in short-term interactions but future partners may obtain some information about the behavior today. For example, how do people behave when interacting in one-off purchases in an online site with a feedback mechanism (e.g., eBay)?
In this project I will fill the large gap in the literature, by characterizing evolutionary stable outcomes when players have limited information about the partner’s past, and how this stable behavior depends on the richness and the structure of the observed information. This will shed new light on indirect reciprocity and its use to achieve efficiency in social dilemmas.
The evolutionary stable outcomes capture the long run behavior in a dynamic process of cultural learning. Agents are randomly matched in each round to play a game with a new partner. Each agent may observe some information about the partner’s past behavior. New agents, who join the interactions, usually mimic one of the existing behaviors, with a larger tendency to choose more successful incumbents. Occasionally, few agents experiment with a new behavior.
The research agenda includes several theoretical subprojects with various research questions, such as:
(1) Would non-material preferences be stable?
(2) What will be the influence of non-verifiable reports about past behavior?
(3) Which of the (locally) stable outcomes would be selected?
(4) What will happen in asymmetric interactions between professional sellers and non-experienced buyers?
The final subproject experimentally tests the various predictions and key implications.
Summary
The existing literature mainly focuses on two kinds of interactions: short-term interactions in which the behavior today does not influence the future, and long-term interactions with the same partner. In the former model, the only stable outcomes are Nash equilibria (which are typically non-efficient), while the latter model allows one to achieve efficient outcomes. Many interesting situations lie somewhere in between, typically when people engage in short-term interactions but future partners may obtain some information about the behavior today. For example, how do people behave when interacting in one-off purchases in an online site with a feedback mechanism (e.g., eBay)?
In this project I will fill the large gap in the literature, by characterizing evolutionary stable outcomes when players have limited information about the partner’s past, and how this stable behavior depends on the richness and the structure of the observed information. This will shed new light on indirect reciprocity and its use to achieve efficiency in social dilemmas.
The evolutionary stable outcomes capture the long run behavior in a dynamic process of cultural learning. Agents are randomly matched in each round to play a game with a new partner. Each agent may observe some information about the partner’s past behavior. New agents, who join the interactions, usually mimic one of the existing behaviors, with a larger tendency to choose more successful incumbents. Occasionally, few agents experiment with a new behavior.
The research agenda includes several theoretical subprojects with various research questions, such as:
(1) Would non-material preferences be stable?
(2) What will be the influence of non-verifiable reports about past behavior?
(3) Which of the (locally) stable outcomes would be selected?
(4) What will happen in asymmetric interactions between professional sellers and non-experienced buyers?
The final subproject experimentally tests the various predictions and key implications.
Max ERC Funding
831 488 €
Duration
Start date: 2016-10-01, End date: 2021-09-30
Project acronym Universal Banking
Project Universal Banking, Corporate Control and Crises
Researcher (PI) Miguel Luis Sousa De Almeida Ferreira
Host Institution (HI) FACULDADE DE ECONOMIA DA UNIVERSIDADE NOVA DE LISBOA
Call Details Starting Grant (StG), SH1, ERC-2012-StG_20111124
Summary Financial intermediaries play a vital role in providing capital to corporations. The 2007-2009 financial crisis had dramatic consequences on the organization of the financial system that led to the rise of universal banking and financial conglomerates. Financial conglomerates have been common in Europe, but the recent developments have eroded the separation of commercial and investment banking elsewhere. Financial conglomerates act as lenders but also underwrite and trade securities, have equity stakes and sit on the board of corporations, and manage mutual and pension funds that invest in corporations. These forms of corporate control by financial conglomerates are distinct in their incentives and costs and therefore can have distinct effects on non-financial corporations. We will study the effect of control by financial conglomerates on corporation’s performance, investment, financing, and corporate governance policies. A particular relevant channel through which financial conglomerates can affect firm’s policies is the credit channel. Firms establish relationships with financial conglomerates that give easier access to credit and potentially at a lower cost due to economies of scale in information collection and monitoring. There may be, however, costs to firms with a close relationship with a financial conglomerate as firms may be locked up due to an information monopoly. We will study the effects of bank-firm relationships on the loan market. In particular, we will examine the importance of these relationships for explaining differences in the cost of bank distress across firms. The hypothesis is that strong ties with banks reduce firms’ ability to substitute relationship bank loans with other sources of external finance, and therefore firms with stronger relationships could experience greater costs during financial crises. We will contribute to the understanding the consequences of shocks to the financial health of banks for nonfinancial firms.
Summary
Financial intermediaries play a vital role in providing capital to corporations. The 2007-2009 financial crisis had dramatic consequences on the organization of the financial system that led to the rise of universal banking and financial conglomerates. Financial conglomerates have been common in Europe, but the recent developments have eroded the separation of commercial and investment banking elsewhere. Financial conglomerates act as lenders but also underwrite and trade securities, have equity stakes and sit on the board of corporations, and manage mutual and pension funds that invest in corporations. These forms of corporate control by financial conglomerates are distinct in their incentives and costs and therefore can have distinct effects on non-financial corporations. We will study the effect of control by financial conglomerates on corporation’s performance, investment, financing, and corporate governance policies. A particular relevant channel through which financial conglomerates can affect firm’s policies is the credit channel. Firms establish relationships with financial conglomerates that give easier access to credit and potentially at a lower cost due to economies of scale in information collection and monitoring. There may be, however, costs to firms with a close relationship with a financial conglomerate as firms may be locked up due to an information monopoly. We will study the effects of bank-firm relationships on the loan market. In particular, we will examine the importance of these relationships for explaining differences in the cost of bank distress across firms. The hypothesis is that strong ties with banks reduce firms’ ability to substitute relationship bank loans with other sources of external finance, and therefore firms with stronger relationships could experience greater costs during financial crises. We will contribute to the understanding the consequences of shocks to the financial health of banks for nonfinancial firms.
Max ERC Funding
1 174 000 €
Duration
Start date: 2013-03-01, End date: 2018-02-28
