Matthew Bloomfield, Catarina Marvão, Giancarlo Spagnolo, 09 October 2020

Theory suggests that the use of relative performance evaluation in managerial compensation should be widespread, but the evidence shows that this is not the case. This column argues that the potential for executives to seek to improve their relative standing by employing costly sabotage – for example, in the form of overly aggressive product market strategies – is an important deterrent to firms' use of relative performance evaluation. Explicit collusion mitigates this possibility, thereby facilitating more efficient risk-sharing between shareholders and executives.

Arnoud Boot, Elena Carletti, Hans‐Helmut Kotz, Jan Pieter Krahnen, Loriana Pelizzon, Marti Subrahmanyam, 25 April 2020

The involvement of the EU in fighting the detrimental consequences of the Covid crisis has to be increased. This column expands on an earlier proposal for a European Pandemic Equity Fund – a programme of government assistance for firms hurt by the crisis in the EU – and discusses the principles and conditions relevant for the operationalisation of such a fund.

Arnoud Boot, Elena Carletti, Hans‐Helmut Kotz, Jan Pieter Krahnen, Loriana Pelizzon, Marti Subrahmanyam, 03 April 2020

COVID-19 is a disaster for many firms – especially small and medium-sized ones. This column proposes a scheme that could bring funding to firms quickly without increasing their leverage or default risk. The plan combines outright cash transfers with a temporary, elevated corporate profit tax at the firm level as a form of conditional payback. The implied equity-like payment structure has positive risk-sharing features for firms, without impinging on ownership structures. The proposal should be implemented at the European level to strengthen euro area resilience. 

Michel Heijdra, Tjalle Aarden, Jesper Hanson, Toep van Dijk, 30 November 2018

A central fiscal capacity is a recurring topic in discussions on reform of the Economic and Monetary Union, but no consensus on the usefulness and necessity of a such a capacity has been reached. This column, part of the Vox debate on euro area reform, argues that the potential stability benefits of a central fiscal capacity can be achieved through stronger financial market risk sharing and more effective use of fiscal stabilisers, without any additional fiscal risk sharing.

Guillaume Vuillemey, 17 November 2018

A key function of financial markets is to share risks, and thus to mitigate the transmission of shocks to the real economy. This column analyses one historical setup in which risk-sharing possibilities in financial markets suddenly increased – the creation of the first central clearing counterparty in 1882 in France in the market for coffee futures. The ability to better hedge coffee prices had real effects and increased trade flows Europe-wide. 

Ramon Marimon, 25 October 2018

Ramon Marimon of the European University Institute discusses the work under ADEMU on risk-sharing and designing contracts and institutions.

Antonio Cabrales, 07 June 2018

The Great Moderation was characterised by a period of risk-pooling. Antonio Cabrales discusses his research on the socially optimal design of financial networks for tackling the trade-off between risk sharing and contagion. When firms face heterogeneous distributions of risks, they should optimally form linkages only with firms facing risks of the same kind.

Nina Boyarchenko, David Lucca, Laura Veldkamp, 19 November 2016

Information sharing has come under increased scrutiny in the context of interbank lending, foreign exchange markets, and US Treasury auctions. This column explores the benefits and drawbacks of information sharing by dealers in US Treasury auctions. Information sharing is found to benefit first and foremost the issuer, i.e. the Treasury. The model provides insight on auction revenue, risk-sharing, and the decision to bid through a dealer, with information sharing having a sizeable effect on each.

Giancarlo Corsetti, Matthew Higgins, Paolo Pesenti, 12 February 2016

James Tobin’s classic ‘funnel’ theory questioned how best to calibrate the overall stance of macroeconomic policy in an economic region. This column revisits key questions that emerged out of the EZ crisis through the lens of Tobin’s theory. A key insight is that monetary policy cannot achieve stabilisation objectives without stronger mechanisms for fiscal burden-sharing and risk-pooling. Although short-run solutions are possible under the existing circumstances, long-run stability will require a policy mix that convincingly deals with the issue of fiscal risk-sharing.

Angus Armstrong, Francesco Caselli, Jagjit Chadha, Wouter den Haan, 23 October 2015

Will the risk-sharing arrangements within the ECB’s quantitative easing programme reduce its effectiveness? The views of leading UK-based macroeconomists are exactly evenly divided on this question, according to the latest survey by the Centre for Macroeconomics. The responses reported in this column suggest that this divergence reflects differences in views about the channels through which quantitative easing operates.

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