Research
Publication
Market intelligence gathering, asymmetric information, and the instability of money demand (With Alessandro Marchesiani. Accepted for publication in Economic Inquiry. 2024.) The observed money demand in the U.S. had a stable negative relation with the interest rate up until the 1990s. After this period, this relation fell apart and has never been restored. We show that the central bank's ability to gather information, referred to as market intelligence, matters to generate an upward-sloping money demand curve. We calibrate the model to the U.S. data for the period from 1990 to 2019 and show that market intelligence helps to match the money demand. We also show that it is beneficial for the society, since it mitigates the inefficiency associated with asymmetric information.
The Attention Economy: Measuring the Value of Free Goods on the Internet. (With Erik Brynjolfsson and JooHee Oh. Accepted for publication in Information Systems Research (one of the Financial Times top 50 journals). 2023.) We develop a framework to measure the value of free goods and services available on the Internet. The conventional method of measuring consumer surplus based on monetary expenditures is ineffective because these goods’ prices are predominantly zero. Our proposed method addresses this challenge by quantifying the economic value of the time that consumers devote to consuming these free goods. Using data on consumers’ time and monetary expenditures, we calibrate an economic model of the allocation of individuals’ time among Internet, television, leisure, and work. We measure the consumer surplus of free goods on the Internet as the reduction in GDP required to create an equivalent welfare loss to that which would occur if these free goods were no longer available. We find that the average incremental welfare gain from the Internet between 2002 and 2011 was about $38 billion per year in the United States, equivalent to approximately 0.29% of the annual GDP. In contrast, if we had not considered the value of time, then the estimated annual incremental welfare gain would have been significantly smaller at about $2.7 billion, only 7% of the estimate derived from our proposed time-based model. Our approach can be readily extended to the valuation of other zero-priced goods and services such as television. In addition, our results show the importance of not only quantity but also quality (e.g., Internet speed) in determining the welfare contributions of free goods.
Global Value Chain and Misallocation: Evidence from South Korea (With Bongseok Choi. Journal of Korea Trade, 2022, 26(4):1-22.) This paper empirically investigates the effect of a rise in the global value chain (GVC) on the industry-level efficiency of resource allocation (based on plant-level inefficiency measures) in Korea, with a focus on various channels through which a rise in the GVC can increase competition among firms and thus induce resources to be allocated more efficiently across firms. We examine the relationship between the industry-specific importance of GVC and the industry-level allocative inefficiency that is measured as the dispersion of the plant-level marginal revenue of capital (MRK) as in Hsieh and Klenow’s (2009) influential model. We compute the average industry-level MRK dispersion for industries sorted by industry-specific importance of GVC and compute the difference between the two groups of industries (higher vs. lower than the median GVC); we also calculate the difference between industries sorted by industry-specific export (import) intensity. This is our difference-in-difference estimate of the MRK dispersion associated with the GVC for the export (import)-intensive industry versus the non-export (non-import)-intensive industry. Our findings are as follows: A rise in GVC is associated with a decrease in the MRK dispersion in the export-intensive industry compared to the non-export-intensive industry. The same is true for industries that rely heavily on imports versus those that do not (i.e., import intensive vs. non-intensive). Furthermore, the reduction in the MRK dispersion in the export-intensive industry associated with an increase in the GVC is disproportionately greater for high-productivity firms (i.e., triple-difference estimate). In contrast, the negative relationship between GVC and MRK dispersion in the import-intensive industry is disproportionately smaller for high-productivity firms. This paper is the first study to provide plant-level evidence of how GVC affects MRK dispersion. Our findings provide insight into how GVC can affect firms’ exposure to competition in the global market differently depending on market conditions and thus generate trade-related productivity gains.
Music Intelligence: Granular Data and Prediction of Top Ten Hit Songs (With JooHee Oh. Decision Support Systems, 2021, 145: 113535.) In the music market, superstars significantly dominate the market share, while predicting the top hit songs is notoriously difficult. The music intelligence technology, retrieving and utilizing granular acoustic features of songs, provides opportunities to improve the prediction of top hit songs. Using data on 6,209 unique songs that appeared in the weekly Billboard Hot 100 charts from 1998 to 2016, especially acoustic features provided by Spotify, we investigate empirically how the top-10-hit-songs likelihood prediction is improved by acoustic features. We find that some acoustic features (e.g., danceability, happiness, and some metrics of timbre and pitch) significantly improve the model’s ability to predict the top-10-hit-songs probability. These results suggest that the granular data, provided by the music intelligence technology, carries a substantial predictive value in the era of online music streaming.
Financial Intermediation, Costly Information Production, and Small Industry Growth (With Bongseok Choi. Global Economic Review, 2020, 49(1): 60-96.) This paper studies the mechanism of financial intermediaries' information production and its impact on industry-level growth, especially its difference between industries that differ in the technological composition of small firms. We build a growth model in which (i) both loan contracts and production of information on borrowing firms' productivities are endogenously determined, and (ii) the smaller firm’s productivity is more costly to assess. Analytic results show that the smaller firm's innately greater degree of informational opaqueness hinders its growth, especially in the early stage of a country's financial development. We provide some evidence supporting the key mechanism.
Price Risk Management and Capital Structure of Oil and Gas Project Companies: Difference between Upstream and Downstream Industries (With Bongseok Choi. Energy Economics, 2019, 83:361–374.) We estimate the causal effect of hedging the future price risk on the debt-to-equity ratio of oil and gas project companies. In particular, we examine how such an effect differs between the upstream and downstream industries, given that relative to downstream projects, upstream projects are exposed to the price risk to magnitude greater. With a sample of 230 loans made to oil and gas projects in 32 countries over the period 1997-2017, we investigate the determinants of the debt-to-equity ratio of oil and gas project loans. To identify the causal effect of the project company's hedging decision that is endogenous, we use the sponsor company's oil (or gas) risk exposure as the instrumental variable for the oil (or gas) project company's hedging decision. Our IV/2SLS regression results show that hedging the future price risk increases disproportionately the upstream project's debt-to-equity ratio relative to that of the downstream project. This suggests that hedging the price risk is an important way to increase lenders' funding amount to the upstream oil (or gas) project but not so much for a downstream oil (or gas) project. We also find the substantial differences in the hedging likelihood between upstream and downstream projects: (i) the upstream company is more likely to adopt the hedging contract; and (ii) the upstream company owned by a sponsor company with the smaller oil exposure is more likely to adopt the hedging contract, whereas the opposite is the case for a downstream company. Taken together, our findings suggest that between upstream and downstream oil (or gas) projects, there are substantial differences in both likelihood and effect of hedging the price risk.
Price Volatility and Risk Management of Oil and Gas Companies: Evidence from Oil and Gas Project Finance Deals (With Bongseok Choi. Energy Economics, 2018, 76:594–605.) We investigate how the oil and gas project companies’ decisions to hedge the risk of future prices of oil and gas respond to the changes in the price volatility of oil and gas, especially the role of the exposure of the sponsor company’s stock returns to the risk of oil and gas prices. With a sample of 328 loans made to oil and gas development projects in 30 countries during 1996-2011 period, we find that the oil (or gas) price volatility increases the oil (or gas) project company’s hedging likelihood, especially to a greater extent for the case in which the sponsor company’s oil (or gas) exposure is smaller. Our findings suggest that the sponsor company’s willingness to reduce its exposure to the risk of oil and gas prices increases the likelihood that the subsidiary project company will hedge the risk of future prices of oil and gas.
Monetary Policy Shocks and Distressed Firms' Stock Returns: Evidence from the Publicly Traded U.S. Firms (With Luca Rescigno. Economics Letters, 2017, 160:91-94.) We study U.S. firms’ stock-return sensitivities to monetary policy shocks over the 2001-2015 period. Expansionary monetary shocks disproportionately increase returns of a distressed firm which has profit substantially smaller than its interest expense and is in need of external financing.
The Payment Schedule of Sovereign Debt (With Yan Bai and Gabriel Mihalache. Economics Letters, 2017, 161:19-23.) We document cyclical fluctuations in scheduled payments of newly issued sovereign debt. During recessions, scheduled payments become more back-loaded. Our results provide direct evidence on a key parameter governing the functional form of cash flows in the long-term debt literature.
The Impacts of the Optimal Non-Financial Contractual Structure on the Leverage Ratio in Project Finance (With Changmin Lee and Bongseok Choi). 자원・환경경제연구 (Environmental and Resource Economics Review), 2014, 23(4):643-665. (Written in Korean) We study the optimal policy of the contractual arrangement in raising the debt-to-equity ratio for oil, gas and mining project finance deals. We investigate the impact of the optimal contractual relationship between counterparties on the soundness of projects, differing in output price volatility and country risk. Key findings are: first, the existence of EPC sponsors and off-takers generally raises the debt-to-equity ratio. In particular, EPC sponsors and off-taking sponsors jointly mitigate the credit risk caused by country risk. Seocond, off-taking and EPC contracts jointly help mitigate the credit risk caused by the country risk, rather than the price volatility. Indeed, the contractual structure raises the debt-to-equity ratio.
The price of imports and TFP: Application to the Korean crisis of 1997-1998 (Review of Economic Dynamics, 2014, 17: 39-51.) This paper studies the effects of import-price shocks on measured output and productivity in a standard small open economy model and quantifies such effects in the case of the Korean crisis of 1997-98. I argue that it is the price of imported goods relative to the price of domestic goods but not the terms of trade that determine measured output and productivity. The simulated results show that shocks to the price of imports account for about half of the output deviation (from trend), one third of the TFP deviation and two thirds of the labor deviation in 1998. For the quantitative results, the extent to which the usage of imported goods is distorted is critical and substantially larger than tariffs because of significantly sizable non-tariff distortions.
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Working Papers
User-Generated Capital and Firm Value: Theory and Evidence from Internet Media Firms (With Erik Brynjolfsson and JooHee Oh). User-generated content produces a stream of value for fellow users and host site, labeled user-generated capital (UGC). We provide an equilibrium framework to quantify the impact of UGC on the Internet firm’s value. We build a dynamic general equilibrium model that incorporates dynamics of and interactions among user- and firm-side decisions about UGC. Using COMPUSTAT data, we find that both user viewership and per-user monetization capability are significantly associated with the Internet firm’s higher market-to-book ratio than other firms’. We calibrate the model to U.S. data on Internet firms’ financials and household time spending during the 2011-2013 period. We conduct counterfactual experiments in which an Internet firm’s UGC permanently increases by ten percent due to improvements in user-investment efficiency and monetization capability. In this case, the firm value increases substantially, by seven percent or more, especially for the case of the improved monetization capability.
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Work In Progress
Idiosyncratic Risk and Monetary Stabilization Policy. (With Alessandro Marchesiani.)
Risk Aversion and Monetary Stabilization Policy. (With Alessandro Marchesiani and Asif Iqbal.)
Whither Bitcoin? Medium of Exchange vs. Store of Value. (With JooHee Oh.)
Systemic Risk of Financial Products. (With Kyu-Bong Cho.)
Evolution of Global Value Chains. (With Bongseok Choi.)
Intellectual Property Rights and Firm Performance. (With Hye-Seo Yoon.)