Research

Working Papers

Revise and Resubmit at Review of Asset Pricing Studies

We analyze a setting in which some investors are all in and buy as much of a risky asset as their margin allows. A higher price of the asset increases all-in investors' wealth, and they borrow against this wealth to buy more shares. If all-in investors have enough wealth and access to enough leverage, then prices can spiral upward indefinitely. This is true even if there exist deep pocketed investors with no explicit limits to arbitrage. Our theory applies to markets as diverse as housing, meme stocks, and cryptocurrencies.


Non-fundamental trading motives drive significant and persistent flows in financial markets. This paper examines how an informed trader exploits information related to these flows. The informed trader faces a time-varying trade-off between immediately exploiting current non-fundamental information and creating additional information in the future. Exploitation stabilizes current prices by partially absorbing contemporaneous flows, while manipulation pushes other traders' beliefs about future flows further away from the truth. When the second motive dominates, the informed trader incurs short-term losses by trading in the same direction as non-fundamental flows today. This exacerbates rather than mitigates mispricing, magnifying return reversals.


We develop a model of asset pricing in which buyers are either unable or unwilling to buy an asset at a price substantially above its price in recent transactions. This constraint could result from legal restrictions on appraisals, behavioral preferences, or agency problems. The model features momentum, differential pricing for identical assets, buyers' and sellers' markets, and associations between price appreciation, volume, and liquidity. We apply the model to the market for residential real estate, in which a bank's willingness to lend for a home purchase is limited by the appraisal, which is, in turn, generated by recent transaction prices of similar properties. The model's predictions are consistent with known stylized facts in residential real estate markets and suggest several avenues for future research.


We develop a search-based model in which buyers face a constraint on how much they can pay for an asset. A home buyer, for example, cannot pay substantially more than the appraised value of a home if she wishes to obtain a mortgage. The existence of a constraint can result in multiple steady-state equilibria in which more liquid markets have lower prices. Sellers are willing to accept lower prices because they know they can reacquire the asset more easily later if needed; buyers are willing to pay less because they can delay purchasing and face a liquid market tomorrow. Uniqueness is restored when assets are relatively scarce. Our study explains why seemingly identical markets can experience markedly different prices and levels of trade, and illustrates the unpredictable effects of regulatory interventions, such as price controls, credit constraints, and transfer taxes.


Published and Accepted Papers

Journal of Development Economics, July 2016.

We derive an optimal lending contract in a two-period adverse selection model with limited commitment on the borrower side. The contract involves "penalty" interest rates after default, and favorable rates after success. Under some conditions, it also charges first-time borrowers higher rates than repeat borrowers, as in "relationship lending", because the lender is constrained to keep borrowing attractive while using revealed information to price for risk. We compare the efficiency of a group lending contract (of the kind popularized by the microcredit movement) to the dynamic, individual contract. Both types of contracts reveal the same information, but the contracts face different constraints on using the information to improve risk-pricing. As a result, either type of contract can lead to greater efficiency depending on specifics of the environment - opening the possibility that dynamic lending has played a role comparable to that of group lending in the success of microcredit. We also characterize the optimal dynamic group contract when both lending techniques are feasible, and find that it combines both approaches, but with varying emphases. A recurrent theme is that in more marginal environments, dynamic lending performs relatively better than, and is prioritized over, group lending. We also discuss a number of extensions, including (spatially and serially) correlated risk and the effect of competition.


Review of Financial Studies, March 2019.

We study joint financing between profit-motivated and socially-motivated (impact) investors and derive conditions under which impact investments improve social outcomes. When project owners cannot commit to social objectives, impact investors hold financial claims to counterbalance owners' profit motives.  Impact investors' ownership stakes are increasing in their value of social output, and pure nonprofit status may be optimal for the highest valued social projects. We provide guidance into the design of contingent social contracts such as social impact bonds and social impact guarantees.

Media: So You Want to Invest to Make Impact, How innovation in financial security design may boost impact investing in 2015, Investing for Impact - Harvard Law School Forum on Corporate Governance and Financial Regulation


Journal of Finance, June 2022.

We study market dynamics when an owner learns over time about the quality of her asset. Since this information is private, the owner sells strategically to a less informed buyer following sufficient negative information. In response, market prices feature a "U-shape" and trading probabilities a "hump-shape" with respect to the length of ownership prior to sale. As the owner initially acquires greater private information, buyers suffer greater adverse selection, and prices fall accordingly. Eventually, the probability of an informed sale shrinks, and prices subsequently rebound. We provide evidence consistent with our model in the markets for residential real estate, venture capital investments, and construction equipment.


Management Science, July 2022.

We present a general equilibrium model in which firms and workers coordinate compensation so that turnover is high in some periods and low in others. This ensures that firms and workers typically search for new matches when other firms and workers are available. If firms and workers find themselves in a periodic equilibrium, contracts often feature large bonuses paid just prior to periods of high labor market turnover. The theory's predictions match stylized facts concerning compensation and turnover in high finance and biglaw.


Forthcoming at Journal of Finance

Best Paper Prize, ASU Sonoran Winter Finance Conference 2020

We analyze a setting in which a board must hire a CEO after exerting effort to learn about the quality of each candidate. Optimal effort is asymmetric, implying asymmetric likelihoods of each candidate being chosen. If the board has a bias in favor of one candidate, it selects an effort allocation that maximizes the likelihood of that candidate being chosen. Even when the board's prior is that its preferred candidate is inferior, that candidate may still be chosen most often. A glass ceiling can also arise, in which the tendency to hire favored candidates increases as the importance of the position increases.