Academic Research

Abstract: Two changes in US business cycle patterns have emerged since the mid-1980s. Recovery in employment has become slower and the procyclicality of labor productivity has vanished or even reversed. An increase in the importance of firm-specific human capital partially accounts for both phenomena. Firm-specific human capital introduces a hold-up problem between firms and workers. This hold-up problem breaks the relationship between marginal productivity and wage, converting the hiring decision into a form of investment. A larger importance of firm-specific human capital increases the risk of hiring new workers. As a result, firms trade off faster hiring for lower risk of default. Our estimated increase in firm-specific human capital accounts for a quarter of the slowdown in employment recovery and also reverses the cyclicality of labor productivity.

Abstract: During the 2008 recession, significant changes have happened to the investment and financing behavior of the largest 20% of the US corporations. First, these large corporations reduced their capital investment by 24.4% after the collapse of Lehman, despite having more internally generated funds to fund their capital expenditure. Second, these large corporations increased their holding of liquid assets as well as bond issuance when bank lending standard has been tightened. 

Standard models of financial frictions impose collateral or borrowing constraints on firms. However, large corporations have sufficient internally generated cash flow and do not have to borrow externally to finance their capital investment. Hence it is unclear how they would be affected by the tightening of collateral constraints.

We propose a liquidity channel through which financial frictions could affect these large corporations. We develop a model where bank credit line and liquid assets are substitutes for financing liquidity shocks to capital investment. In the model, a tightening of the bank credit line forces firms to hold more liquid assets, increasing the effective cost of capital expenditure, hence reducing corporate investment. The calibrated model also matches the fact that after the collapse of Lehman firms increased their liquid assets holdings and bonds issuance. 

Abstract: We analyze the optimal capital requirement in a model of banks with heterogeneous investment risks and asymmetric information. Asymmetric information prevents depositors from charging an actuarially-fair interest rate and leads to cross-subsidization across banks. A leverage constraint reduces the investment of riskier banks, mitigating the pecuniary externality on deposit rates. When policymakers lack information about banking risk, the optimal leverage constraint is tighter than the first-best leverage ratio. When policymakers observe a noisy signal of banking risk, the optimal signal-based leverage constraint is tighter when the signal has worse precision, rather than a larger level of expected risk. 

Abstract: Reforms to agricultural policy have been stalling in OECD economies. In this paper, we quantify the potential for public savings from switching to an optimal transfer system in small open economies. Following the insights from the literature on repeated moral hazard, optimal subsidies are front-loaded, which provides stronger incentives for farmers to transition out of agriculture, compared to the existing policies. In our counterfactual experiments, we find substantial savings for Japan (44%), South Korea (45%), Switzerland (24%), and Turkey (42%). Optimal subsidies also more than doubles the speed of employment transitions outside agriculture. 

Abstract: Agricultural subsidies and transfers distort the allocation of workers across sectors, and may keep too many workers in agriculture. What are the benefits of implementing an optimal transfer system? We analyze this question in a general equilibrium model with endogenous sector selection calibrated to the US economy. Eliminating distortions has three main effects: (1) small efficiency gains, (2) small income losses for agricultural workers, (3) a significant rise in the price of agricultural goods, which hurts lower-income agents in all sectors.