We propose a method to estimate the effect of firm policies (e.g., bankruptcy laws) on allocative efficiency using (quasi-)experimental evidence. Our approach takes general equilibrium effects into account and requires neither a structural estimation nor a precise assumption on how the experiment affects firms. Our aggregation formula relies on treatment effects of the policy on the distribution of output-to-capital ratios, which are easily estimated. We show this method is valid for a large class of commonly used models in macrofinance. We apply it to the French banking deregulation episode of the mid- 1980s and find an increase in aggregate TFP of 5 percent.

What is the impact of real estate prices on corporate investment? In the presence of financing frictions, firms use pledgeable assets as collateral to finance new projects. Through this collateral channel, shocks to the value of real estate can have a large impact on aggregate investment. To compute the sensitivity of investment to collateral value, we use local variations in real estate prices as shocks to the collateral value of firms that own real estate. Over the 1993–2007 period, the representative US corporation invests $0.06 out of each $1 of collateral.

The recent turmoil on credit markets has drawn attention to the risk management function. On many trading oors around the world, traders have been writing insurance against rare events: examples include keeping long positions on CDO tranches or selling protection against default (CDS). In normal times, it is the role of risk management to ensure that the received insurance premia are not entirely considered as income, and that enough capital is set aside to protect the institution against the risk that it is taking. In the period that led to the current crisis, however, risk management has failed to play this role.1 This is particularly troubling as the nance industry is one that has embraced the notion of using counter-powers to limit risk and the importance of dissent within organizations. For instance, the Head of Risk Management at KfW, a German bank, argued for the superiority of having a “central” risk management function, independent of the business units: “The great advantage [of central risk management] is the absence of conict of interest. The central risk management is not driven by the market. We look at the business from a different angle; we are not involved at the personal level.” (quoted by PriceWaterHouseCoopers, 2007). The purpose of this paper is to study when such virtuous organizational design may fail. We rst propose a model of risk management. Following Augustin Landier et al (forthcoming), we model the trading oor as a simple hierarchy. The role of the trader (T) is to select an asset to invest in, while the risk manager (RM) can decide to approve, or not. Due to his

We propose a simple model of the sovereign-bank diabolic loop, and establish four results. First, the diabolic loop can be avoided by restricting banks' domestic sovereign exposures relative to their equity. Second, equity requirements can be lowered if banks only hold senior domestic sovereign debt. Third, such requirements shrink even further if banks only hold the senior tranche of an internationally diversified sovereign portfolio--known as ESBies in the euro-area context. Finally, ESBies generate more safe assets than domestic debt tranching alone; and, insofar as the diabolic loop is defused, the junior tranche generated by the securitization is itself risk-free.