Radoslav Raykov is a Senior Economist in the Financial Stability Department at the Bank of Canada. His research focuses on the theory of risk and uncertainty with applications to central counterparties, insurance companies and firms with uncertain costs. Prior to joining the Bank of Canada, he worked at the Federal Reserve Bank of Boston and taught at Harvard University. He holds a B.A. from Harvard University a Ph.D. in Economics from Boston College.
Many decentralized markets are able to attain a stable outcome despite the absence of a central authority (Roth and Vande Vate, 1990). A stable matching, however, need not be efficient if preferences are weak. This raises the question whether a decentralized market with weak preferences can attain Pareto efficiency in the absence of a central matchmaker.
This paper studies how the allocation of residual losses affects trading and welfare in a central counterparty. I compare loss sharing under two loss-allocation mechanisms – variation margin haircutting and cash calls – and study the privately and socially optimal degree of loss sharing.
Classical oligopoly models predict that firms differentiate vertically as a way of softening price competition, but some metrics suggest very little quality differentiation in the U.S. auto insurance market.