Papers by Pasqualina Arca
RePEc: Research Papers in Economics, 2016
If an entrepreneur files for bankruptcy under Chapter 7, (i) most of her debt is discharged, and ... more If an entrepreneur files for bankruptcy under Chapter 7, (i) most of her debt is discharged, and (ii) only her non-exempt assets are liquidated. Entrepreneurs can undo this "insurance" by posting collateral. The opportunity cost of doing so is lower for safer entrepreneurs who face a lower probability of default. Accordingly, we show that under adverse selection, as exemption increases, collateral becomes a more e↵ective sorting device. As a result, an entrepreneur's decision to post collateral improves access to credit and reduces the cost of credit to a greater extent the larger the exemption is. Econometric tests using data from the US Survey of Small Business support our theory.
We analyze debt discharge in personal bankruptcy-according to which some of the borrower's assets... more We analyze debt discharge in personal bankruptcy-according to which some of the borrower's assets are exempt from liquidation in the event of default-in the context of a competitive credit market characterized by adverse selection. In particular, we study how the level of such exemption affects the role of collateral as a sorting device. The decision to post collateral results in a lower cost of credit and a lower level of credit rationing, to the extent to which in equilibrium, safer borrowers self-select into contracts different from those chosen by riskier ones. An increase in the level of exemption strengthens the role of collateral as a sorting device: 1) the effect of posting collateral on cost of credit is enhanced, and; 2) The decision to post collateral results in a lower probability to be rationed. We exploit cross State variability in the level of asset exemption from liquidation-according to personal bankruptcy US State laws prior to 2005 federal reform-in order to test some of the implications of the model in a sample of american small business taken from the Survey of Small Business Finances.
Essays on strategic information acquisition
This thesis studies information acquisition in settings where agents can strategically acquire, a... more This thesis studies information acquisition in settings where agents can strategically acquire, at cost or freely, some informative signals about the underlying state of the world prior to make a decision. Chapter 2 studies how agents select information sources in a model with potentially delusional agents. Agents with anticipatory utility must decide whether to undertake a common project. Ex-ante, they can select which information sources to pay attention to. When choosing the information sources, agents take into account the fact that they may ex-post have to engage in costly denial. We show that multiple equilibria coexist: one in which agents are fully informed and one where agents pay attention only to the information source most likely to reveal favourable information. Chapter 3 studies endogenous information acquisition in an investment tradinggame à la Angeletos, Lorenzoni, and Pavan (2010). In such a game if agents have dispersed information, endogenous strategic complementarity in actions emerges owing to the information spillover between real sector and financial sector and generates inefficiency in the economy. By introducing endogenous information acquisition, this chapter aims at studying what information is acquired and how it affects the equilibrium outcome. It is shown that there exists complementarity in entrepreneurs’ information acquisition. It also investigates the conditions under which information is not acquired at all. Chapter 4 studies information acquisition in a network-formation game. It investigates how the desire to coordinate with some people and anti-coordinate with some others determines the information acquired and shapes the network formed in equilibrium. In an economy populated by N agents divided into two groups, in the first period agents can acquire informative signals about the state of the world by forming costly connections with other players. In the second period each agent chooses an action balancing the desire to be close to the fundamental, be close to the average action of players in his own group and be far from the average action of players in the opposite group. Acknowledgements I would like to express my Thanks to my supervisors Fabrizio Adriani, André Stenzel and my former supervisor Chris Wallace. Each of you contributed in a different manner to my progress towards a Good Researcher. Thank you Chris for all the support and encouragement you gave me during your supervision and also after you left. Thanks for having given me the freedom to explore on my own and for building my confidence. Thank you Fabrizio for your constructive criticism. Thanks for having warn me about risky research projects. Thanks for having taught me how to ask the right research questions and for having challenged my skills many times while discussing an intuition. A special Thanks to André, for all your effort and time you spent supervising me during the last phase of this journey. Your comments, suggestions and scrupulousness were very valuable to me. Thanks to Subir Bose for your continuous availability to discuss any matter. I must thank the administrative staff and academics of the Division of Economics (previously Department of Economics) for their help and support. I am grateful to the Division for granting me the graduate teaching assistantship. Thank you to all my friends and colleagues in Leicester that made great the time there: Efi, Molly, Valeria, Nadia, Nikita, Emma, Katerina. I cannot forget the hours we spent chatting together in the kitchen of the Phd centre. Thanks to my friend and co-author Matteo, you have been an example for me. Thanks Ale, my brother, for introducing me to your friends. Thanks Sneha, my sister. I am really grateful for having met such a wonderful person, friend and woman you are. Thanks Alex, I have always admired your philosophy of life. A special Thanks to Vaggelis, Natassa and Arpita. You made the last year of this journey less hard than what would have been. I have memories I will keep always with me. Thanks to My Family: mum, my sister, my brothers and my nephews. I am such fortunate to have you. Dad, I wish you were here. Thanks Gianfranco, you changed my life. Without you this journey would haven’t been possible. Declaration Chapter 2 is joint work with Fabrizio Adriani and Chapter 4 is joint work with Matteo Foschi. Chapter 3 is single authored. A version of Chapter 3 has been presented at the following conferences: • 22nd Spring Meeting of Young Economist (2017) • Stony Brook 27th International Conference on Game Theory (2017).
The signaling role of trade credit: Evidence from a counterfactual analysis
Journal of Corporate Finance
Debt discharge in personal bankruptcy and the role of collateral as a sorting device
We analyze debt discharge in personal bankruptcy { according to which some of the borrower’s asse... more We analyze debt discharge in personal bankruptcy { according to which some of the borrower’s assets are exempt from liquidation in the event of default { in the context of a competitive credit market characterized by adverse selection. In particular, we study how the level of such exemption aects the role of collateral as a sorting device. The decision to post collateral results in a lower cost of credit and a lower level of credit rationing, to the extent to which in equilibrium, safer borrowers self-select into contracts dierent from those chosen by riskier ones. An increase in the level of exemption strengthens the role of collateral as a sorting device: 1) the eect of posting collateral on cost of credit is enhanced, and; 2) The decision to post collateral results in a lower probability to be rationed. We exploit cross State variability in the level of asset exemption from liquidation { according to personal bankruptcy US State laws prior to 2005 federal reform { in order to tes...
Access to credit for SMEs: theories and evidence
In this thesis we focus on firms’ access to credit under different sources of asymmetric informat... more In this thesis we focus on firms’ access to credit under different sources of asymmetric information. In Chapter 1 we analyze how the institution of debt discharge of bankruptcy law affects loan contracts. In particular we evaluates the effects of debt discharge on access to credit and cost of credit by taking into account its impact on the role of collateral as a signaling device. In the theoretical model we take explicitly into account the fact that borrowers can undo the effects of exemption by posting collateral to secure debt. Using the results of the theoretical analysis we test for the signaling effect of collateral in a sample of US small businesses. In Chapter 2 we study the emergence of the phenomenon of firms’ bor- rowing discouragement. This becomes a relevant issue in the credit market especially when credit worthy firms do not apply causing a po- tential misallocation of financial resources. Regarding this aspect of access to credit, our work aims to give a new theoret...
Debt discharge in personal bankruptcy and the role of collateral as a sorting device
We analyze debt discharge in personal bankruptcy { according to which some of the borrower’s asse... more We analyze debt discharge in personal bankruptcy { according to which some of the borrower’s assets are exempt from liquidation in the event of default { in the context of a competitive credit market characterized by adverse selection. In particular, we study how the level of such exemption aects the role of collateral as a sorting device. The decision to post collateral results in a lower cost of credit and a lower level of credit rationing, to the extent to which in equilibrium, safer borrowers self-select into contracts dierent from those chosen by riskier ones. An increase in the level of exemption strengthens the role of collateral as a sorting device: 1) the eect of posting collateral on cost of credit is enhanced, and; 2) The decision to post collateral results in a lower probability to be rationed. We exploit cross State variability in the level of asset exemption from liquidation { according to personal bankruptcy US State laws prior to 2005 federal reform { in order to test some of the implications of the model in a sample of american small business taken from the Survey of Small Business Finances.
Bankruptcy exemption, cost of credit and access to credit
In an investment trading game where the profitability of the new investment (the fundamental) is ... more In an investment trading game where the profitability of the new investment (the fundamental) is a random variable, entrepreneurs’ higherorder beliefs about the future asset price of the realized investment enter in their investment decisions. On the other hand, the financial market uses the aggregate investment as a signal of the underlying fundamental. If agents have dispersed information, endogenous strategic complementarity in actions emerges owing to the information spillover and generates inefficiency in the economy. We introduce endogenous information acquisition and study what information is acquired and how it affects the equilibrium outcome. We also study the welfare properties of the equilibrium.
Essays on strategic information acquisition
This thesis studies information acquisition in settings where agents can strategically acquire, a... more This thesis studies information acquisition in settings where agents can strategically acquire, at cost or freely, some informative signals about the underlying state of the world prior to make a decision. Chapter 2 studies how agents select information sources in a model with potentially delusional agents. Agents with anticipatory utility must decide whether to undertake a common project. Ex-ante, they can select which information sources to pay attention to. When choosing the information sources, agents take into account the fact that they may ex-post have to engage in costly denial. We show that multiple equilibria coexist: one in which agents are fully informed and one where agents pay attention only to the information source most likely to reveal favourable information. Chapter 3 studies endogenous information acquisition in an investment tradinggame à la Angeletos, Lorenzoni, and Pavan (2010). In such a game if agents have dispersed information, endogenous strategic complement...
Information Avoidance, Echo Chambers and Uninformed Decisions
We study how agents select information sources in a model with potentially delusional agents. Age... more We study how agents select information sources in a model with potentially delusional agents. Agents have access to multiple sources of information of different informativeness about the underlying state of the world. Before investing in a common project with uncertain productivity, agents select which information sources to pay attention to. Once they receive the signals about the future productivity of the project and before the investment decision takes place, they decide whether to exactly recall the signal received or to engage in costly denial. We show that if in the low state the expected productivity is negative, multiple equilibria coexist: one in which agents are fully informed and one where agents pay attention only to the information source most likely to reveal favourable information. From a welfare perspective, full information is always desirable both in the high state and in the low state. This model provides a rationale for the raise of echo chambers.
SSRN Electronic Journal
If an entrepreneur files for bankruptcy under Chapter 7, (i) most of her debt is discharged, and ... more If an entrepreneur files for bankruptcy under Chapter 7, (i) most of her debt is discharged, and (ii) only her non-exempt assets are liquidated. Entrepreneurs can undo this "insurance" by posting collateral. The opportunity cost of doing so is lower for safer entrepreneurs who face a lower probability of default. Accordingly, we show that under adverse selection, as exemption increases, collateral becomes a more e↵ective sorting device. As a result, an entrepreneur's decision to post collateral improves access to credit and reduces the cost of credit to a greater extent the larger the exemption is. Econometric tests using data from the US Survey of Small Business support our theory.
SSRN Electronic Journal
We analyze the effect of a bankruptcy law according to which some of the borrower's assets are ex... more We analyze the effect of a bankruptcy law according to which some of the borrower's assets are exempt from liquidation in the event of default in the context of a competitive credit market characterized either by moral hazard (MH) or by adverse selection (AS). In particular, we study how the level of such exemption affects the role of collateral depending on the dominant source of asymmetric information. Under MH, conditional on the level of exemption, the cost of credit is higher for borrowers who are requested to post collateral. Moreover, conditional on posting collateral, the cost of credit does not change with the level of asset exemption. Differently, in the case of AS, the decision to post collateral results in a lower cost of credit, whenever the equilibrium is separating. Finally, under AS, a higher level of exemption is generally associated with a lower level of credit rationing. Similarly, credit rationing either stays unchanged or goes down with exemption in the case of MH. We exploit cross State variability in the level of asset exemption from liquidation-according to personal bankruptcy US State laws prior to 2005 federal reform-in order to identify the signaling role played by collateral in a sample of american small business taken from the SBFF data.
Access to credit for SMEs: theories and evidence
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Papers by Pasqualina Arca