Using transaction-level data from the Korean tri-party repo market, we study how repo contract terms interact with collateral quality. Both haircuts and interest rates rise with collateral risk, consistent with existing evidence. Conditional on collateral quality, however, we find a trade-off: a one-percentage-point increase in the spread is associated with a 1.3-percentage-point reduction in the haircut. The same increase in the interest rate is associated with a smaller reduction in the haircut under heightened market uncertainty, indicating that insurance against default becomes more valuable as default risk rises. We show that the interaction between lenders’ incentives to acquire information and borrowers’ opportunistic default risk explains both the positive unconditional relationship and the negative conditional relationship between haircuts and interest rates.
We provide a theorem on the role of risk and risk attitudes in macroeconomic models that clarifies and extends the Tallarini (2000) separation result. Under (1) separation of intertemporal and risk preferences, (2) separation of drivers of first and higher moments in the model primitives, and (3) approximate linearity of constraints, risk aversion and time-varying risk are irrelevant for the elasticity of any endogenous variable with respect to state variables that don’t drive variation in higher moments. We discuss how models generate a more prominent role for risk by “breaking” or “adapting” to the assumptions in the theorem.
This paper studies a model with wage bargaining, random on-the-job search and renegotiation. Wages are determined by a bargaining process in which the firm and the worker alternate in making offers and there is a probability that this process breaks down. In the model, a given wage contract ends at a Poisson rate, and then the firm and the worker bargain over a new wage. In this setting, a higher wage decreases the firm's markup, but this effect is partly offset by lowering turnover, which increases match surplus. This increase in match surplus enables the worker to capture a higher share of the surplus. This positive effect of a higher wage on match surplus diminishes when they renegotiate more frequently. Eventually, as the contract length tends to zero, the equilibrium of the model converges to the equilibrium payoffs discussed by Pissarides (1994). My model thereby justifies using the Nash bargaining solution with perfectly transferable values in models with on-the-job search. In contrast, when the Poisson rate goes to zero, the equilibrium in the model, which I show to be unique, converges to one of the equilibria found by Shimer (2006).