Financing Rivals (with Jorge Lemus), R&R at the Journal of Economic Behavior and Organization.
We study how a lender with market power shapes competition between liquidity-constrained rivals by choosing contract terms strategically. In our framework, two firms compete for a prize and a monopolistic lender decides which firms to finance and on what terms. We show that the lender finances both rivals when their internal resources are similar, but finances only the more constrained firm when asymmetries are large. When financing both firms, the lender optimally caps credit because full funding induces an inefficient investment arms race that lowers the surplus available for extraction. We also show that, even when the lender can use fees, caps, and interest rates, an optimal contract sets interest rates to zero and relies on non-distortionary instruments instead. Thus, the impact of common lenders on competition depends critically on the initial distribution of resources.
Dynamic Peace Renewal (with Benjamin Matta), submitted.
We develop a dynamic model of peace maintenance in which an existing state of peace must be repeatedly renewed through costly interventions. Players receive private stochastic opportunities to intervene. Each intervention resets a finite peace window and lowers the loss associated with eventual war, which occurs if the window expires without intervention. The unique symmetric Markov Perfect Equilibrium is characterized by a recursively determined sequence of thresholds. Within each peace window, players strategically delay intervention, free riding on others’ future opportunities and de-escalating only as expiration approaches. Across windows, declining benefits from successive renewals lead to later intervention thresholds, lower renewal probabilities, and longer waiting times conditional on renewal. A social planner, by contrast, internalizes the shared benefits of intervention and uses every opportunity until a terminal level of de-escalation is reached.
This paper investigates the impact of an intervention in Chile's fraudulent sick leave market, where 176 physicians were sanctioned for excessive sick leave certificate issuance. Physician decisions are influenced by patient needs and their own incentives, often leading to suboptimal healthcare practices. The study aims to determine if audits and sanctions can alter physician behavior, whether non-sanctioned doctors experience spillover effects, and how these changes affect patient behavior. Using data from approximately 22 million sick leaves issued between January 2018 and October 2022, the study employs a difference-in-differences (DiD) approach alongside a regression discontinuity in time (RDiT) model. Results indicate a significant decline in sick leave issuance among sanctioned doctors, with a 40.49% decrease observed in the DiD model compared to matched physicians, while the RDiT model shows reductions between 50.12% and 34.46%. Additionally, evidence suggests spillover effects, as non-sanctioned doctors’ sick leave issuance decreased by 14.19% to 9.33% post-intervention. On the demand side, high-receiving patients exposed to sanctioned doctors experienced an 18.94% reduction in sick leaves, translating to estimated savings of approximately $12.6 million for the public insurer. However, the findings indicate that these patients may substitute sick leaves imperfectly, revealing potential unintended consequences of the intervention. The paper concludes by suggesting further research into the channels of information transmission and the broader impacts on firm productivity.
We study a market in which the buyer has no information about product quality, while the seller has private probabilistic information about it. Buyers observe price and can procure an inspection, which provides valuable information about the good for sale. With costless inspections, there is no separating equilibrium. We then show that when information acquisition is costly, there is a separating equilibrium that satisfies the intuitive criterion, in which high prices signal high quality and furthermore, the dynamic separating equilibrium showing higher separating prices than the static one. Finally we discuss the implications of time-on-the-market on separating equilibria. Specifically, when there is only one asset on sale over both periods (therefore both price and time-on-the-market can signal quality) there is no separating equilibrium even if single-crossing is satisfied. The key to this result is that the second-period buyer cannot observe why the asset did not sell in the first period. Notably, the failure to sell can be attributed to overpricing or an unfavorable inspection outcome. Therefore the copycat behavior is more attractive to the poor-quality seller because he benefits more from an increase in buyer beliefs than his high-quality counterpart. Allowing only the first-period buyer to acquire information on quality, we show the existence of a separating equilibrium in which high prices and time-on-the-market signal high quality.