Frictional Capital Markets and Economic GrowthÂ
This paper develops an endogenous growth model where firms face idiosyncratic productivity shocks, necessitating capital reallocation. Capital goods trade in a frictional dealer market, giving rise to a distribution of capital holdings and Tobin's q across firms. The model highlights the intricate relationship between capital misallocation and growth. Absent externalities, market frictions worsen capital misallocation and hinder growth. When brokers are perfect monopolists, vanishing search frictions eliminate capital misallocation but leave growth inefficiently low. With learning-by-doing externalities, removing market frictions eradicates capital misallocation but may reduce both growth and welfare. With entry, higher dealer's bargaining power can reduce misallocation and growth.
Breaking Up With M: Cashless Limits Under Limited Commitment. Joint with Tai-Wei Hu.
We examine the welfare implications of eliminating cash in nearly cashless economies. Our model features money and credit coexisting under limited commitment. The analysis yields four key insights. First, banks' market power is neither necessary nor sufficient for cash elimination to affect aggregate welfare, but it is sufficient to generate distributional effects. Second, the welfare consequences depend on the source of bank market power, bargaining strength versus information. Third, removing cash generates positive welfare gains if limited commitment is mitigated through public record-keeping. Finally, cash elimination can create financial exclusion even when all agents are initially banked.
Inconvenient Liquidity. Joint with Yidan Yan.
This paper develops a theory of positive and negative liquidity premia. Liquid assets facilitate decentralized exchange, but as their supply increases, their nonpecuniary yield turns negative---liquidity becomes inconvenient at the margin despite its positive social value. The theory predicts that liquidity premia initially decline with asset supply and become negative above a threshold. It also predicts that, in the presence of multiple assets, positive and negative liquidity premia can coexist. Equilibrium can exhibit ex post heterogeneity in asset portfolios, with liquidity-constrained and unconstrained agents coexisting endogenously. Finally, the socially optimal real return on money exceeds the Friedman rule.