Christine A. Parlour
Current Working Papers
Payment System Externalities Joint with Uday Rajan and Johan Walden (forthcoming Journal of Finance)
We examine how the payment processing role of banks affects their lending activity. In our model, banks operate in separate zones, and issue claims to entrepreneurs who purchase some inputs outside their own zone. Settling bank claims across zones incurs a cost. In equilibrium, a liquidity externality arises when zones are sufficiently different in their outsourcing propensities---a bank may restrict its own lending because it needs to hold liquidity against claims issued by another bank. Our work highlights that the disparate motives for interbank borrowing (investing in productive projects and managing liquidity) can have different effects on efficiency.
Consumers as Financiers: Consumer Surplus, Crowdfunding and ICOs joint with Jeongmin ``Mina'' Lee (forthcoming Review of Financial Studies)
We study the efficiency implications of funding directly provided by consumers. Intermediaries fail to finance all efficient projects, and crowdfunding can improve efficiency. Whereas intermediaries value projects based on cash flows, consumers also receive a consumption benefit. Unique to crowdfunding is the ability of consumers to commit to pay for the benefit, and the degree to which they can do so determines its efficiency. We discuss the implications of introducing a resale market for consumers' claims, as in the case of initial coin offerings, and the speculation that necessarily accompanies such markets. Finally, we provide testable and policy-related implications.
The Bitcoin protocol and Miner Collusion joint with Alfred Lehar
Bitcoin users can offer fees to miners who record their transactions in the Blockchain. We document high variation of Bitcoin fees, not only over time, but also within blocks. Further, the blockchain rarely runs at capacity, even though fees tend to be higher when blocks are fuller, so miners appear to be leaving ``money on the table.'' We present a simple model of price discrimination to explain our results. We note that mining pools facilitate collusive equilibria, and estimate that they have extracted least 200 million USD a year in excess fees by making processing capacity scarce.
When FinTech competes for Payment Flows joint with Uday Rajan and Haoxiang Zhu
We study the impact of FinTech competition in payment services when banks rely on consumers' payment data to obtain information about their credit quality. Competition from FinTech payment providers disrupts this information spillover, reducing the bank's loan quality and profit. FinTech competition benefits consumers with weak bank affinity (financial inclusion improves), but may hurt consumers with strong bank affinity. We consider three regimes in which payment information flows back into the credit market: FinTech lending, data sales, and consumer data portability. All three regimes improve the quality of loans, although their effects for bank profit and consumer welfare are ambiguous.
Strategic Intermediation in liquidity markets joint with Shawn O'Donoghue and Uday Rajan (draft coming soon)
We develop a model of competition between two exchanges, which we view as platforms on which liquidity is demanded and supplied. The model has a single financial asset, and features competitive liquidity suppliers, a liquidity demander, and two kinds of strategic intermediaries. The first kind is an HFT that can act as a strategic intermediary between the competitive suppliers and the liquidity demander. The second kind is a broker who has the technology to determine optimal order routing across the exchanges. Each exchange earns revenue by charging make fees to liquidity suppliers and take fees to liquidity demanders. We highlight how the make-take fees on each exchange affect the strategies of the HFT and the broker, and thus the properties of each exchange such as volume and spread. We present empirical evidence on the importance of fee splits.