Optimal Bailouts in Diversified Financial Networks, 2024 (with Krishna Dasaratha & Santosh Venlatesh).
Click here for a notebookLM podcast version (a little over the top).
Widespread default involves substantial deadweight costs which could be countered by injecting capital into failing firms. Injections have positive spillovers that can trigger a repayment cascade. But which firms should a regulator bailout so as to minimize the total injection of capital while ensuring solvency of all firms? While the problem is, in general, NP-hard, for a wide range of networks that arise from a stochastic block model, we show that the optimal bailout can be implemented by a simple policy that targets firms based on their characteristics and position in the network. Specific examples of the setting include core-periphery networks.
Bayesian Bullshit, 2024 (with Sajan Srivastava and Tymofiy Mylovanov)
Click here for a notebookLM podcast version (who knew the paper had such depths).
A bullshitter neither knows nor cares about the truth, and therefore, it has been asserted, is more pernicious than a liar. We examine this assertion within the standard model of cheap talk communication where a bullshitter is modeled as an uninformed Sender. We show that that in some circumstances, uncertainty about whether the Sender is informed or not can increase the welfare of the Receiver.
Persuasion Made Transparent, 2024
This note highlight the fact that a number of results in information design can be obtained without fuss or muss via linear programming.
The Network Effect of Agency Conflicts, 2019 (with Yiqing Xing and Wu Zhu).
Click here for a notebookLM podcast version (an accurate and excellent sales job).
We argue that the nature of firm-level agency conflicts counters the role of network structure in the propagation of shocks. These conflicts can have an effect on system-wide behavior that is both significant and different from those predicted based on network structure alone. This implies that corporate governance can play an important role in macro fluctuations. We consider a collection of firms linked through equity cross-holdings whose managers can take investment decisions in response to an exogenous shock. Prior work concludes that more integrated networks amplify shocks. We find that if managers are subject to default costs or limited liability, this effect is reversed because their investment decisions mitigate the spread of an initial shock. In the face of moral hazard, however, their investment choices amplify an initial shock. In particular, when the network is fully diversified the aggregate effect of idiosyncratic shocks is not small as received wisdom would suggest.