Essays on the economics of firms and of financial institutions

Defence date: 7 June 2019Examining Board: Prof. Evi Pappa, Universidad Carlos III Madrid, (Supervisor); Prof. Juan Dolado, Universidad Carlos III Madrid; Prof. Steven Ongena, University of Zurich; Prof. Saverio Simonelli, University of Naples Federico IIUnderstanding the propagation of shocks throughout the economy is crucial for the design of policies and for their evaluation. Shock propagation hinges on a number of factors, among which market structure and the level of competition play a relevant role. In this dissertation I investigate the role of competition on firms’ pricing behavior and on banks’ funding stability when hit by a shock. Moreover, I also assess the implications of greater capital requirements on banks’ liquidity provision. The first chapter assesses how firms set their markups following a positive demand shock. I use the 2012 Emilia-Romagna earthquake as a natural experiment and I exploit within-firm variation of construction firms to identify the causal effect of interest. I find that markups decreased on average by 4 percentage points following the demand shock and that this drop is driven by higher competition due to firm-entry in the face of increasing marginal costs of labor. The second chapter, joint with Tommaso Oliviero, studies the effect of an increase in deposit insurance limit to e100,000 per bank account, set by the EU in early 2009, on the market for deposits. To evaluate the impact of the new directive we use Italian banks as a control group as they were not affected by the change. We find that the increase of deposit insurance limit reduces banks’ cost of financing through deposits between 0.3 and 0.7 percentage points. The third chapter studies the effect of a change in capital requirements on the market for collateralized debt obligations (CDOs). In a framework where securitization lowers banks’ monitoring effort over loans’ quality, I provide evidence of optimal risk-adjusted capital requirements that trade off the benefits of higher liquidity with the costs of lower monitoring incentives.1 Markups and Firm Entry: Evidence From the 2012 Emilia Earthquake 1.1 Introduction 1.2 Setting and Data 1.2.1 Government Subsidies for Reconstruction 1.2.2 The Italian construction industry 1.2.3 Data 1.3 Firm level evidence 1.3.1 Markup estimation and identification 1.3.2 Difference-in-differences 1.3.3 Heterogeneity 1.3.4 Selected Firms 1.4 Contract-Level Analysis 1.4.1 Identification 1.4.2 Demand Shock 1.4.3 Contract Level Baseline 1.4.4 Interpretation of Results 1.4.5 Assessing Firm-Entry 1.4.6 Reduced Form Interaction 1.4.7 Firm entry 1.4.8 Contract-level marginal costs 1.5 Marginal Costs 1.5.1 Procyclical Marginal Costs 1.5.2 Firm-Entry and Distance 1.6 Conclusion -- Appendix 1.A Robustness on ITT - Definition of treatment -- Appendix 1.B Robustness on ITT - Definition of Control Group -- Appendix 1.C Figures 2 Deposit Insurance and Banks’ Deposit Rates: Evidence from the 2009 EU Policy 2.1 Introduction 2.2 Institutional Setting and Data 2.2.1 The 2009/14/EC Directive 2.2.2 Data Sources 2.3 Country-Level Analysis 2.4 Bank-Level analysis 2.4.1 Propensity Score Matching 2.4.2 Empirical Results 2.4.3 Impact on risk 2.4.4 Interpretation of the Results 2.4.5 Heterogeneous Effects of the Policy 2.5 Conclusions -- Appendix 2.A Propensity Score Matching -- Appendix 2.B Alternative risk measures 3 Regulatory Capital and Securitization 3.1 Introduction 3.2 Literature review 3.3 The Model 3.4 Active and Inactive Securitized Markets 3.4.1 Optimal Contracts with no Active Secondary Markets 3.4.2 Optimal Contracts with Active Secondary Markets 3.5 Efficiency and Liquidity 3.5.1 Optimal Contracts and Efficiency 3.5.2 Optimal Contracts and Liquidity 3.5.3 Optimal Capital Requirements 3.6 Yield Spread and Securitized Assets 3.6.1 Empirics 3.6.2 Yield Spreads 3.6.3 From Basel I to Basel II 3.6.4 A Tightening of Basel II Capital Requirements 3.7 Conclusion -- Appendix 3.A Proof of Proposition 1 -- Appendix 3.B Alternative Specification -- Bibliography -- Reference