This project has two parts. The first part is concerned with developing models for analyzing competition among financial intermediaries. The role of competition in the banking industry is of particular interest. In contrast to most other countries, the US has a long tradition of encouraging competition among a large number of banks. Banks have many special features which mean that standard economic analyses of competition cannot be directly applied. These special features include their role as information gathering and processing institutions and the fact that there are significant switching costs for customers. Models which take account of these features and allow their effect on competition to be analyzed will be developed. Four areas that the project will focus on are (i) competition and the costs of bank failure; (ii) branch networks and competition; (iii) price-setting competition; (iv) competition and risk-taking behavior by banks. The second part of the project is concerned with the issue of stock price manipulation and market microstructure. In recent years, there has been a large literature on how stock exchange specialists set prices when there is a group of investors that know more about the stock than the specialist. This literature has assumed that there is a group of liquidity traders who are forced to buy or sell their stock. It is plausible that some traders have cash needs and are forced to sell. However, buyers will typically be able to choose the best time to trade. This asymmetry between liquidity buyers and sellers means purchases are more likely to be by an informed buyer than sales so the price movement resulting from a purchase is larger. As a result, profitable manipulation by uninformed investors may occur. Standard models will be used to consider the possibilities for manipulation, whether these activities should be regulated and if so how.
