Nika Koreli

Strategic default, investment and the resolution of
financial distress (joint with Giulio Trigilia) -2018


Strategic default increases the expected recovery rate from bankruptcy, which is a costly event. When investors cannot commit upfront to bankrupt defaulting borrowers, recovery rates are essential in sustaining investment, and optimal financing contracts may generate incentives for borrowers to strategically default on their debts ex post. Where bankruptcy costs are high (at the extensive margin), strategic default is necessary for the marginal firm to be able to invest. Where costs are low (at the intensive margin), high profitability firms optimally choose financing terms that induce strategic default, even if this is anticipated by all parties and other feasible terms could prevent it. These firms are characterized by high probabil- ity of default and low expected losses given default. It follows that distinguishing between credit events is critical for estimating expected default costs. 

Mediation in Competition - 2018

I examine how a market mediator can help disseminate financial information among market players. I introduce a mediator whose function is collecting financial information from the players and sharing this information with other market players. The crucial assumption is that information disclosure to the mediator by the participants is voluntary, so there is no third party who forces the market players to disclose private information. Given that the mediator has power to commit to the reporting policies to the bidders, the paper finds the information reporting policy that the mediator should adopt to minimize the probability of investment in unprofitable projects by an uninformed players. I show that the manipulation of first order beliefs of an uninformed player is not sufficient to extract information from an informed player. The main insight of the paper suggests that allowing a player who shares information to know the degree to which his information will be shared with other participants incentivises information disclosure.