Research

Work in Progress

The Soft Carbon Budget Problem (with Philipp Koenig and Vincent Maurin)

Working Papers

Optimal Timing of Policy Interventions in Troubled Banks* (with Philipp Koenig and Paul Mayer)

Revise & Resubmit at the Journal of Financial Intermediation

When will a policy authority (PA) resolve a bank whose solvency is uncertain? Delaying resolution gives the PA time to obtain additional information about the bank's solvency. Delaying resolution also gives uninsured creditors time to withdraw funds, raising the cost of bailing out insured depositors. The optimal resolution date trades off these costs with the option value of making a more efficient resolution decision given new information. Providing the bank with liquidity support buys the PA time to wait for information, but increases its losses if the bank turns out to be insolvent. The PA may therefore optimally delay the provision of liquidity support. 

Media: SUERF Policy Brief

The Leverage Effect of Bank Disclosures* (with Philipp Koenig and Christian Laux)

Revise & Resubmit at the Accounting Review

We develop a model showing that bank disclosures can induce banks to increase their leverage and risk. Banks sell assets to pay back uninsured short-term debt that is not rolled over, which dilutes insured deposits. This dilution effect benefits shareholders and reduces banks’ monitoring incentives. However, issuing uninsured debt also involves agency costs that are borne by shareholders. These agency costs limit the amount of short-term debt that banks optimally use.  Disclosures reduce the agency costs of uninsured debt and lead banks to issue more short-term debt. We identify conditions under which the increase in leverage associated with bank disclosures increases banks' risk. 

Media: Columbia Law School Blog, SUERF Policy Brief

Publications

Safe but Fragile: Information Acquisition, Liquidity Support and Redemption Runs (with Philipp Koenig)

Journal of Financial Intermediation (Vol. 52, October 2022)

This paper proposes a theory of redemption runs based on strategic information acquisition by fund managers. We argue that liquidity lines provided by third parties can be a source of financial fragility, as they incentivize fund managers to acquire private information about the value of their assets. This strategic information acquisition can lead to inefficient market liquidity dry-ups caused by self-fulfilling fears of adverse selection. By lowering asset prices, information acquisition also reduces the value of funds' assets-under-management and may spur inefficient redemption runs by investors. Two different regimes can arise: one in which funds' information acquisition incentives are unaffected by the volume of redemptions, and another where market and funding liquidity risk mutually reinforce each other.

Occupational Segregation and the (Mis)allocation of Talent

Scandinavian Journal of Economics (Vol. 120, January 2018)

In this paper, I study how occupational segregation affects the allocation of talent in a competitive labour market. I propose a model of occupational choice in which heterogeneous workers must rely on their social contacts to acquire job‐vacancy information. While occupational segregation implies benefits in terms of job‐finding probability, it also leads to allocative inefficiencies. Efficient and equilibrium outcomes differ due to a network externality that leads workers to segregate too little, and a pecuniary externality that leads workers to segregate too much. Which effect dominates depends on the elasticity of wages to changes in the degree of occupational segregation.

Too Much of a Good Thing: A Theory of Short-Term Debt as a Sorting Device (with Philipp Koenig)

Journal of Financial Intermediation (Vol. 26, April 2016) 

This paper shows that the liquidity risk associated with short-term debt financing can be used to sort insolvent firms out of financial markets when their solvency risk is private information. Notwithstanding this sorting role of short-term debt, unregulated financial firms tend to choose an inefficiently short debt maturity structure. This inefficiency arises for two reasons. First, by issuing more short-term debt, low-risk firms reduce their expected funding costs. This leads to a misalignment of private and social incentives as firms fail to fully internalize the social costs of becoming illiquid. Second, while the sorting role of short-term debt is reflected in a decline of long-term interest rates, creditors’ inability to observe firms’ solvency risk leads to an excessive reduction of long-term interest rates. This further distorts firms’ funding choice towards short-term debt.