Four essays on finance and the real economy

par Oana Peia

Thèse de doctorat en Sciences économiques - EM2C

Sous la direction de Radu Vranceanu et de Guillaume Chevillon.

Soutenue le 12-10-2016

à Cergy-Pontoise , dans le cadre de Ecole doctorale Économie, Management, Mathématiques et Physique (EM2P) (Cergy-Pontoise, Val d'Oise) , en partenariat avec Laboratoire THEMA (Cergy-Pontoise) (laboratoire) et de Théorie économique, modélisation et applications (laboratoire) .

Le président du jury était Panicos Demetriades.

Les rapporteurs étaient Kasper Roszbach, Nicolas Cœurdacier.

  • Titre traduit

    Quatre essais sur la finance et l’économie réelle


  • Résumé

    This thesis consists of four essays on finance and the real economy. Chapter 1 studies the effect of banking crises on the composition of investment. It builds a partial equilibrium growth model with a banking sector and two types of investment projects: a safe, low return technology and an innovative, high productivity one. Investments in innovation are risky since they are subject to a liquidity cost which entrepreneurs cover by borrowing from the banking sector. When bank creditors are sufficiently pessimistic about the aggregate liquidity needs of the real sector, they will run on the bank and cause a credit freeze. This leads banks to tighten credit supply after the crisis, which decreases disproportionately investment in innovation and slows down economic growth. An empirical investigation, employing industry-level data on R&D investment around 13 recent banking crises, confirms this hypothesis. Industries that depend more on external finance, in more bank-based economies, invest disproportionately less in R&D following episodes of banking distress. These industries also have a relatively lower share of R&D in total investment, suggesting a shift in the composition of investment after the crisis. Such differential effects across sectors imply that the drop in R&D spending is, at least partially, the result of the contraction in credit supply.Chapter 2 studies the impact of coordination frictions in financial markets on the cost of capital. In the model, a financial intermediary seeks to raise funds to finance a risky capital-intensive project. Capital is owned by a large number of small investors, who observe noisy signals about the project's implementation cost. Employing a global games equilibrium refinement, we characterize a unique threshold equilibrium of the coordination game between investors. We then show that the relationship between the probability of success of the project and the rate of return on capital is non-monotonic. There exists a socially optimal price of capital, which maximizes the probability that the project is profitable. However, fee-maximizing intermediaries will generally set an interest rate that is higher than the socially optimal rate. The model best characterizes project finance investments funded through the bond market.Chapter 3 proposes a laboratory experiment to study the impact of partial deposit insurance schemes on the risk of deposit withdrawals. In the experiment, depositors decide whether to withdraw or leave their money in a bank, triggering a default when too many participants choose to withdraw. When a bank run occurs, the amount of wealth each depositor can recover depends on the number of withdrawals and a deposit insurance fund whose size cannot cover in full all depositors. We consider two treatments: (i) a perfect information case when depositors know the size of the insurance fund and (ii) a heterogeneous information setting when they only observe noisy signals about its size. Our results show that uncertainty about the level of deposit coverage exerts a significant impact on the propensity to run. The frequency of runs is relatively high in both treatments. A majority of subjects follow a threshold strategy consistent with a risk-dominant equilibrium selection. Finally, the last chapter re-examines the empirical relationship between financial and economic development while (i) taking into account their dynamics and (ii) differentiating between stock market and banking sector development. We study the cointegration and causality between finance and growth for 22 advanced economies. Our time series analysis suggests that the evidence in support of a finance-led growth is weak once we take into account the dynamics of financial and economic development. We show that, causality patterns depend on whether countries' financial development stems from the stock market or the banking sector.


  • Résumé

    This thesis consists of four essays on finance and the real economy. Chapter 1 studies the effect of banking crises on the composition of investment. It builds a partial equilibrium growth model with a banking sector and two types of investment projects: a safe, low return technology and an innovative, high productivity one. Investments in innovation are risky since they are subject to a liquidity cost which entrepreneurs cover by borrowing from the banking sector. When bank creditors are sufficiently pessimistic about the aggregate liquidity needs of the real sector, they will run on the bank and cause a credit freeze. This leads banks to tighten credit supply after the crisis, which decreases disproportionately investment in innovation and slows down economic growth. An empirical investigation, employing industry-level data on R&D investment around 13 recent banking crises, confirms this hypothesis. Industries that depend more on external finance, in more bank-based economies, invest disproportionately less in R&D following episodes of banking distress. These industries also have a relatively lower share of R&D in total investment, suggesting a shift in the composition of investment after the crisis. Such differential effects across sectors imply that the drop in R&D spending is, at least partially, the result of the contraction in credit supply.Chapter 2 studies the impact of coordination frictions in financial markets on the cost of capital. In the model, a financial intermediary seeks to raise funds to finance a risky capital-intensive project. Capital is owned by a large number of small investors, who observe noisy signals about the project's implementation cost. Employing a global games equilibrium refinement, we characterize a unique threshold equilibrium of the coordination game between investors. We then show that the relationship between the probability of success of the project and the rate of return on capital is non-monotonic. There exists a socially optimal price of capital, which maximizes the probability that the project is profitable. However, fee-maximizing intermediaries will generally set an interest rate that is higher than the socially optimal rate. The model best characterizes project finance investments funded through the bond market.Chapter 3 proposes a laboratory experiment to study the impact of partial deposit insurance schemes on the risk of deposit withdrawals. In the experiment, depositors decide whether to withdraw or leave their money in a bank, triggering a default when too many participants choose to withdraw. When a bank run occurs, the amount of wealth each depositor can recover depends on the number of withdrawals and a deposit insurance fund whose size cannot cover in full all depositors. We consider two treatments: (i) a perfect information case when depositors know the size of the insurance fund and (ii) a heterogeneous information setting when they only observe noisy signals about its size. Our results show that uncertainty about the level of deposit coverage exerts a significant impact on the propensity to run. The frequency of runs is relatively high in both treatments. A majority of subjects follow a threshold strategy consistent with a risk-dominant equilibrium selection. Finally, the last chapter re-examines the empirical relationship between financial and economic development while (i) taking into account their dynamics and (ii) differentiating between stock market and banking sector development. We study the cointegration and causality between finance and growth for 22 advanced economies. Our time series analysis suggests that the evidence in support of a finance-led growth is weak once we take into account the dynamics of financial and economic development. We show that, causality patterns depend on whether countries' financial development stems from the stock market or the banking sector.


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