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- When Muth's entrepreneurs meet Schrödinger's catPublication . Ferreira, Rodolphe dos SantosIn his 1961 seminal paper, Muth applied his "rational expectations" hypothesis to a simple model of a competitive market for a homogeneous good produced under random shocks. The hypothesis goes beyond the Marshallian expectational approach to equilibrium in attributing to entrepreneurs the capacity to form theory-based price predictions. We find this capacity already in Cournot [1838], although in a model without explicit fundamental uncertainty. The purpose of this note is to show within the same model that oligopolistic competition adds indeterminacy, hence market uncertainty, to the picture, weakening in some sense the rational expectations hypothesis. Before equilibrium is realised, each entrepreneur stands in a hawkish-dovish superposition, very much as the Schrödinger's cat is in a dead-living superposition.
- Competition and the risk of bank failure: breaking with the representative borrower assumptionPublication . Ferreira, Rodolphe dos Santos; Modesto, LeonorWe examine the relation between intensity of competition in the loan market and risk of bank failure, in a model with adverse selection. As well established, the presence of the two opposite margin and risk-shifting effects creates conditions for nonmonotonicity: the conventional competition-fragility view may be challenged at high interest rates. These rates may however be too high to be compatible with oligopolistic equilibrium conditions. The challenging competition-stability view has been argued in terms of a representative borrower managing the profitability-safeness trade-off under moral hazard. However, the representative borrower assumption is not innocuous, playing down by construction the margin effect. The paper considers the adverse selection situation where that trade-off is managed by banks facing heterogeneous borrowers, and shows analytically, in the case of a trapezoidal distribution of idiosyncratic and systemic risk factors, that the conventional view is always valid.