Research

I analyze the liquidity of a general security that is traded in a market with asymmetric information. The security's payoff is defined over the value of an underlying asset, and I show how changes in cash flow rights and in the distribution of the underlying value affect the financial security’s liquidity. I present two applications for the general theory. First, I compare the liquidity risk of different securities that have the same underlying asset. I show that, all else equals, debt minimizes liquidity risk. Second, I explore the liquidity of debt in an extended model where information asymmetry is a result of information acquisition by traders. I show how small changes in the value of information may have large effect on debt liquidity, which can explain the sharp deterioration of liquidity in debt markets during the financial crisis of 2008 and COVID-19 crisis.

We analyze a disclosure model in which information may be voluntarily disclosed by a firm or by a third party such as a financial analyst. Under plausible assumptions, analyst coverage crowds out disclosure by the firm. Despite this crowding out, we show that an increase in analyst coverage increases the quality of public information. While ranking based on Blackwell informativeness cannot be obtained, we base this claim on two measures of public information. The first is statistical in nature while the second is based on liquidity in a trading stage that follows the information disclosure. 

I analyze a dynamic model of over-the-counter asset sales in which a manager receives stock-sensitive compensation and a transaction conveys information about the firm's value. I examine how market response to an asset sale feeds back to the manager's decision on the timing and the price of the sale, and analyze the unique pattern of stock prices before and after the sale. The implications of bargaining power, inventories, gains from trade, and the introduction of a vesting period are discussed. The model sheds light on observed properties of corporate sell-offs, as well as explains market dry-ups during downturn periods.

We study the idea that seemingly unrelated behavioral biases can coevolve if they jointly compensate for the errors that any one of them would give rise to in isolation. We pay specific attention to barter trade of the kind that was common in prehistoric societies, and suggest that the “endowment effect” and the “winner's curse” could have jointly survived natural selection together. We first study a barter game with a standard payoff-monotone selection dynamic, and show that in the long run the population consists of biased individuals with two opposed biases that perfectly offset each other. In this population, all individuals play the barter game as if they were rational. Next we develop a new family of “hybrid-replicator” dynamics. We show that under such dynamics, biases are stable in the long run even if they only partially compensate for each other and despite the fact that the rational type's payoff is strictly larger than the payoffs of all other types.

Credit rating agencies have an incentive to maintain a public reputation for credibility amongst investors but also have an incentive to develop a second, private reputation for leniency amongst issuers. We show that in markets with a small number of issuers, such as markets for structured assets, these incentives may lead rating agencies to inflate ratings as a strategic tool to form a “double reputation”. The model extends existing literature on “cheap talk” reputation to the case of two audiences. Our results can explain why rating inflation occurred specifically in markets for MBSs and CDOs. Policy implications are discussed.

The level of competence that voters attribute to different candidates is an important determinant of election results. In addition, it is observed that some candidates tend to be more ambiguous in their campaigns regarding future plans, while others commit to specific policies. We offer a model where politicians who vary in their level of competence compete by making costly campaign declarations. We show that a separating equilibrium exists in which the ambiguity of a candidate's campaign declaration reveals her level of competence. The model explains how politicians may use an “issue”-based campaign to create a competent image, and provides an additional explanation for different levels of campaign ambiguity.