Working Papers

Competing for Order Flow in OTC Markets (joint with Ben Lester and Pierre-Olivier Weill)

We develop a model of a two-sided asset market with the following characteristics: (i) Trades are intermediated by dealers and are bilateral; (ii) Dealers compete to attract order flow by posting the terms at which they execute trades, which can include prices, quantities, and execution times; (iii) Investors direct their orders toward dealers that offer the most attractive terms of trade. Equilibrium outcomes have the following properties. First, investors face a trade-off between trading costs and speeds of execution. Second, the asset market is endogenously segmented in the sense that investors with different asset valuations and different asset holdings will trade at different speeds and different costs. Third, dealers' implicit bargaining powers are endogenous and typically vary across submarkets. As an example, under a Leontief technology to match investors and dealers, per unit trading costs decrease with the size of the trade, in accordance with the evidence from the market for corporate bonds. Finally, we obtain a rich set of comparative statics both analytically, by studying a limiting economy where trading frictions are small, and numerically. For instance, we find that the relationship between trading costs and dealers' bargaining power can be hump-shaped.

Unemployment, Financial Frictions, and the Housing Market (joint with Nicolas Petrosky-Nadeau) 

We develop and calibrate a two-sector, search-matching model of the labor market augmented to incorporate a housing market and a frictional goods market. The labor market is divided into a construction sector and a non-housing sector, and there is perfect mobility of unemployed workers across sectors. In the frictional goods market households, who lack commitment, finance random consumption opportunities with home equity loans. The model can generate multiple steady-state equilibria across which housing prices are negatively correlated with unemployment. Relaxing lending standards typically reduces unemployment, but it can have non-monotonic effects on housing prices and supply. It also leads to a reallocation of workers across sectors, the direction of which depends on firms' market power in the goods market. Quantitatively, we find that innovations or regulations that affect household finance can have a sizeable effect on steady-state unemployment but only a modest effect on housing prices.

Unemployment and Household Unsecured Debt (joint with Zach Bethune and Peter Rupert)

This paper studies the relationship between the availability of unsecured credit to households and unemployment. We extend the Mortensen-Pissarides model to include a goods market with search and financial frictions. Households, who have limited commitment, face endogenous borrowing constraints when financing random consumption opportunities. We show that borrowing limits depend on the sophistication of the financial system, the frequency of liquidity shocks, and the rate of return on (partially) liquid assets that households can accumulate for self insurance. Moreover, firms' expected productivity is endogenous and depends on firms' market power in the goods market and the availability of unsecured credit to consumers. As a result of the complementarity between credit and labor markets, multiple steady states might exist. Across steady states unemployment and debt limits are negatively correlated. We calibrate the model to the U.S. labor market and illustrate the labor market effects of a contraction in unsecured debt similar to that seen in the U.S. from 2007 to 2010. Under the baseline calibration, the reduction in unsecured credit can only explain a small fraction of the increase in unemployment. However, the effect is highly dependent on the calibration target for the value of leisure. Under other, reasonable targets for this parameter the effect is magnified and can explain as much as 10% of the increase unemployment over this time period.

Monetary Policy and Asset Prices: A mechanism Design Approach (joint with Tai-Wei Hu)

We investigate the effects of monetary policy on asset prices in economies where assets are traded in over-the-counter (OTC) markets. The trading mechanism in pairwise meetings is designed to maximize social welfare taking as given the frictions in the environment (e.g., lack of commitment and limited enforcement) and monetary policy. We show that asset price "bubbles" emerge in a constrained-efficient monetary equilibrium only if liquidity is abundant and the first best is implementable. In contrast, if liquidity is scarce, assets are priced at their fundamental value in any constrained-efficient monetary equilibrium, in which case an increase in inflation has no effect on asset prices, but it reduces output and welfare. Finally, for low inflation rates the bursting of an asset price bubble can be an optimal response to a shock that reduces assets' resalability.