Research
Working Papers:
4. NEW! Spatial Inference in Financial Markets with Networks, with Adriana Cobas & Zachary Stangebye
Non-zero correlations in noise shocks can translate into non-orthogonal directions in an affine signal space, whose spatial effect we explore in a financial market with endogenous information acquisition and exogenous non-price networks. The spatial effect generates a strong, novel, positive externality that significantly impacts market information and efficiency and has the interpretation of investors `building' on the work of others for the purpose of better `triangulating' the return. We also create a new metric called ``information mesh" to capture both the network effect and the spatial effect.
3. NEW! Information, Asset Price Volatility, and Liquidity, with Daniel Friedman & Vivian Juehui Zheng (Appendix: Lab Instructions) R&R at Management Science
How are asset price volatility and liquidity impacted by public perception of the economic state and by market competitivity? We wish to understand the direct impacts as well as indirect impacts via information acquisition and aggregation. To investigate, we design a laboratory experiment with human subjects as investors, varying exogenously the bond default rate, the information cost schedules, and the market format. The laboratory data support most of our theoretical predictions. Liquidity (as indicated by the narrowness of bid/ask spread) increases when traders purchase more precise private information, when public information indicates a less ominous state, and when the market is less competitive. Overall price volatility also increases with more precise private information purchases and less competitivity, but it decreases with less ominous public information. We also point out distinct impacts on the ``good'' and ``bad'' components of price volatility, which are difficult to disentangle in field data. Moreover, our results on interactions between information and (perceived) default risk suggest a tradeoff between asset price volatility and liquidity during crises, which has possible policy implications.
2. Unemployment during Sovereign Debt Crises, with Zheng Liu.
1. Labor Compensation Projects, with Maury Gittleman & Eswar Prasad.
Refereed Publications and Forthcoming Articles:
11. Worker Reallocation, Firm Innovation, and Chinese Import Competition (Online Appendix) (2024), with Samreen Malik, Dario Pozzoli, & Vera Rocha. Accepted by Journal of International Economics.
Import competition raises firm-level innovation in Denmark. Such an improvement is observed only among firms that experience a large increase in the share of R&D workers, especially if the increase is achieved through between-firm worker reallocation, not within-firm workers switching to R&D jobs. A flexible labor market facilitates such between-firm worker mobilities.
Media: Portuguese Economy Research Report
10. Climate Risks and FDI (Online Appendix) (2023), with Galina Hale. Journal of International Economics, 146, December 2023. Also as NBER Working Paper No. 30452.
Do multinational firms react to climate risks (physical risk in terms of disasters and transition risk in terms of climate-change mitigation policies)? We answer this question by examining FDI dynamics in the aggregate as well as at the firm level. Our model predicts a reduction in FDI resulting from both risks but an ambiguous interaction effect from emission productivity. These predictions are largely consistent with our empirical findings, but in an extensive empirical analysis at six levels of aggregation we find only a minimal set of statistically significant effects. However, our firm-level results suggest that growing attention to climate risks is likely to increase the effects of such risks on FDI going forward.
9. Costly Information and Sovereign Risk (2023), with Zachary Stangebye, International Economic Review, 64(4), November 2023.
When investors' costly information acquisition and the sovereign's default decision are jointly endogenous, sovereign bond spread exhibits significant state-contingency and time-variation in its volatility. Without considering such state-contingent investor information acquisition behavior, model-based estimates of default risk from spread data could be downward biased during crisis periods. The welfare effects of costly information are small but non-monotone, as greater transparency can make the country mildly worse off by inducing more price volatility and default.
8. Chinese Import Competition, Offshoring, and Servitization and online appendix (2022), with Samreen Malik, Dario Pozzoli, & Vera Rocha, Economic Inquiry, 60(2): 901– 928. https://doi.org/10.1111/ecin.13055.
Import competition significantly increases manufacturing firms' expansion into the service industry. The probability of offshoring production activities abroad and of exiting the market are also positively affected by import competition. Import competition, however, does not induce firms to permanently switch out of the manufacturing sector.
7. The Determinants of China’s International Portfolio Equity Allocations (2020), with Isha Agarwal & Eswar Prasad, IMF Economic Review, 68: 643–692. Also as NBER Working Paper No. 26311.
Chinese institutional investors (IIs) overweight sectors in which China has a comparative disadvantage (e.g., software), and they concentrate such investments in countries that have a higher comparative advantage in those sectors (e.g., the software industry in the U.S.). Diversification and country-sector information advantages (related to imports to China) seem to influence patterns of foreign portfolio allocations, while yield-seeking and learning motives do not. Featured in VoxChina, December 18, 2019.
6. Trade-Induced Skill Polarization (2020), with Samreen Malik, Dario Pozzoli, & Vera Rocha, Economic Inquiry, 58(1): 241-259.
Trade has a positive effect on both the mean and the standard deviation of Danish municipality skill distribution, and wage-gap changes induced by trade shocks explain about 21-30 percent of the overall effects of trade on the skill distribution. In an earlier version (IZA Discussion Paper No. 10035), we also used Portuguese administrative data.
5. New Evidence on Cyclical Variation in Average Labor Costs in the U.S. (2020), with Eswar Prasad and Thomas Moehrle, Review of Economics and Statistics, 102 (5): 966–979.
Average straight-time wages have become countercyclical after the financial crisis and the subsequent Great Recession. So have employers’ real total benefit expenditures, health insurance and social security expenditures, and overall labor costs. The increasing countercyclicality of labor costs is largely attributable to periods with below-trend GDP that contain both the recession and the following recovery. In earlier versions (NBER Working Paper No. 24266, and IZA Discussion Paper No. 11311), we also speculate reasons (e.g., increased compensation rigidity and inflation cyclicality).
Notes: What distinguishes our paper from Grigsby, Hurst, and Yildirmaz (2019) and the previous literature is that, instead of focusing on workers, we document the average labor cost cyclicality "for specific jobs from the perspective of firms," which has potentially important implications for labor models that feature cyclical adjustments at the job level. Another difference is that we emphasize the real labor costs’ cyclicality "difference" before and after the Great Recession.
4. Sovereign Default, Trade, and Terms of Trade (2019), Macroeconomic Dynamics, 1-35.
This paper explores the role of vertical exports to affect sovereign debt contracts prior to default events, as well as income losses during debt crises for both creditor and borrower countries. The model endogenizes the terms of trade to interact with default risk, and generates the deterioration of terms of trade and the declines of trade flows during default crises.
3. Employment and Cyclical Cost of Worker Benefits (2018), Review of Economic Dynamics, 28: 96-120.
Both aggregate and micro-level data show that the firm-paid quasi-fixed cost of an employee's benefits declines when employment growth deteriorates (around economic peaks) and increases when employment growth improves (around economic troughs), a benefit-expenditure-level-to-employment-growth relationship. This cyclical quasi-fixed labor cost increases employment volatility, and delays employment recoveries when positive productivity shocks are relatively small as in the post-1990 period.
Featured in "Grace Weishi Gu on Benefit Costs and Jobless Recoveries," The Agenda, by Reihan Salam, November 25, 2012, and "Are Benefit Costs Increasingly Driving the Cyclicality of Employment?" Marginal Revolution, by Tyler Cowen, November 25, 2012.
2. Taxation and Leverage in International Banking (2015), with Ruud de Mooij and Tigran Poghosyan, International Tax and Public Finance, 22(2): 177-200. (Also IMF Working Paper No. 12/281.)
This paper explores how corporate taxes affect the capital structure of multinational banks.
1. Does Foreign Intellectual Property Rights Protection Affect U.S. Exports and FDI? (2013), with Titus Awokuse, Bulletin of Economic Research, 67: 256–264.
This paper investigates how foreign IPR protection affects how US firms jointly serve overseas markets through exports and FDI.
Book Chapters & Non-Refereed Publications:
3. Harnessing Globalization (2011), with Eswar Prasad, in Ejaz Ghani, ed., Reshaping Tomorrow: Is South Asia Ready for the Big Leap? Oxford University Press.
2. Rebalancing the U.S.-China Relationship (2011), with Eswar Prasad, Brookings Institution Report, January 2011.
1. An Awkward Dance: China and the United States (2009), with Eswar Prasad, Brookings Institution Report, November 2009.