Maya Eden

Papers

Financial Distortions and the Distribution of Global Volatility (2010) (Job market paper)

A generic feature of financial frictions, whatever their origins may be, is to distort the allocation of funds to projects, causing some less productive projects to be funded while more productive projects are not. I formalize this idea by introducing a log supermodularity condition which requires that, at the margin, the difference in productivity between funded and unfunded projects is smaller in more distorted economies. Using this condition, I then revisit the relationship between financial distortions and macroeconomic volatility. My first set of results establish that financial integration shifts the margin of adjustment to global liquidity shocks disproportionately to financially distorted regions, thereby providing a new and simple explanation for the divergent trends in the volatility of emerging and developed economies up to the recent crisis. My second set of results show that a global environment in which liquidity is cheap is conducive to a deterioration of the financial system in the developed world. While cheap liquidity increases and stabilizes output in that region, it amplifies large adverse shocks.

The Inefficiency of Financial Intermediation in General Equilibrium (2010)

In the presence of liquidity constraints, there are rents from supplying liquidity to constrained entrepreneurs. In partial equilibrium, when the price of inputs is fixed, a financial system facilitates the efficient allocation of resources by relaxing liquidity constraints. However, in general equilibrium, the presence of a financial sector is associated with two costs: first, intermediation activities absorb productive resources. Second, financial intermediation bids up the price of inputs in terms of liquidity, increasing the economy's dependence on the financial sector and making it increasingly vulnerable to financial crises. Consequently, the presence of a financial sector may reduce equilibrium welfare. I show that an optimal policy is to tilt the tradeoff between production and liquidity hoarding in favor of liquidity hoarding. The optimal policy serves both to relax liquidity constraints and to crowd out the financial sector.

Global Imbalances in a Monetary Model of Liquidity Constraints (2011)

I construct a monetary model in which liquidity constraints emerge in equilibrium. For fast-growing economies, financial integration is associated with lower consumption and increased consumption volatility. Foreigners extract rents from supplying liquidity to the constrained productive sector. Input prices appreciate, but equilibrium output remains unchanged. This results in lower consumption, as some of the output is used as payment to liquidity suppliers. The magnitude of the flows implied by the model are roughly 2%-6% of GDP. In the presence of sticky input prices, the reliance on foreign liquidity supply is a potential source of instability, as contractions in foreign liquidity supply lead to drops in employment, output and consumption.

Tournaments as Optimal Contracts (2007)

There is a rich literature on tournaments demonstrating that various forms of optimal tournaments can help rationalize observed labor contracts. However, there are important negative results stating that tournaments are practically never optimal contracts. In this paper I partially fill this gap by adding an assumption that the principal is liquidity constrained, and deriving conditions under which tournaments are optimal contracts in the two-agent case. The key result is that the optimal contract takes a tournament form if the principal’s liquidity constraint is sufficiently binding. I derive this result under the assumption that the aggregate shock to output is large, so that only relative output is informative of effort. Aside from providing a theoretical explanation for the existence of tournaments, the analysis suggests circumstances in which tournaments are more likely to be observed. These are situations in which the aggregate shock to output is large and the principal is credit constrained.