The Limits to Partial Banking Unions: A Political Economy Approach (Job Market Paper)
Abstract: Would a banking union increase the welfare of the Eurozone countries? This paper examines how political economy considerations affect the desirability of a banking union. In my model, bank recapitalizations are carried out by rent-seeking policymakers. These policymakers face a trade-off between using public funds for needed recapitalizations and diverting them towards socially inefficient rents. In equilibrium, a banking union increases recapitalizations, but it can also increase rent-seeking and lead to a decrease in consumer welfare. I consider two policy proposals for countering the reduction in welfare: better electoral accountability and limits on public debt. When used alone, neither policy can increase welfare for all countries in the banking union. When used together, the policies have complementary effects and a Pareto improvement can be achieved in consumer welfare.
Research in Progress
Dynamic Incentives and Public Liquidity Provision
Abstract: This paper studies the optimal mix of direct and indirect government interventions during and after a crisis, in a political economy environment involving rent-seeking. I ask whether optimal incentives provision in a rent-seeking environment can lead to government interventions having persistent effects, and whether these effects can optimally lead to a shift from direct to indirect interventions following a crisis. The model uses a principal-agent framework in a private information environment. The size and type of government interventions are decided by a rent-seeking politician, and the politician's choices can be influenced by setting institutional limits on direct interventions. The incentives provision problem is dynamic: shocks hit the economy every period and the government has the resources to intervene each time. The main result of the model is that optimal incentives provision leads to persistent effects of government interventions. Following each intervention, the government is optimally more restricted from using direct interventions in the future, as a way of deterring rent-seeking.
Rent-Seeking and the Choice of Public Liquidity
Abstract: I study public liquidity provision in a liquidity-constrained economy in which government policy is decided by politicians subject to rent-seeking and electoral constraints. Public interventions are modeled as a choice between direct fiscal transfers to constrained entrepreneurs and non-targeted interventions through interest rate manipulation. The political equilibrium introduces time inconsistency in government policy as well as institutional constraints that place bounds on the size of public interventions. The liquidity provision patterns emerging from the political equilibrium involve several types of inefficiencies, compared to a benevolent government benchmark. First, the need to extract revenue for political rents increases equilibrium tax distortions. Second, interest rate interventions are part of the equilibrium even though they are not part of the benevolent government policy. This happens of the additional political and electoral constraints. Third, rent-seeking can lead to suboptimally low levels of public liquidity provision, as tax revenue is diverted towards rents.