Research

Home Field Advantage: Local Credit Specialization and Demand Capture 

Sole-authored

Through proximity and specialization, local lenders can gather and verify borrower information that distant lenders cannot. What is an informed lender worth to borrowers? Through what channel does that value reach them? This paper answers these questions by exploiting the 2005 ethanol mandate, a demand shock that raised the value of informed lenders. Across the U.S. Corn Belt, farmers in counties with more specialized local lenders captured more of the boom. Farm earnings rise 9.5% more per standard deviation of local credit specialization, roughly $2.8 billion over 2005–2010. Yet farm-bank lending does not grow faster in more specialized counties. Farmers pay less for operating credit, the margin where lender information is hardest to replace. Their cost of real-estate credit, secured by land that any lender can readily appraise, does not change. These results are consistent with informed lenders guiding credit allocation rather than expanding it. Lending volumes alone may therefore understate the cost of community-bank consolidation. 

Contests with Ambiguous Prizes 

with Cary Deck, Emma Kate Henry, Tigran Melkonyan, and Samuel Redinger, Journal of Risk and Uncertainty 

This paper examines behavior in contests where the prize value is ambiguous. We develop a theoretical model of bidding in a Tullock contest with an ambiguous prize where contestants account for the ambiguity attitude of their rival. Ambiguity affects optimal behavior via two countervailing channels - a direct effect arising from contestants’ ambiguity about the value of the prize and an indirect effect corresponding to the effect of ambiguity on the opponent’s behavior. Using a controlled laboratory experiment, we elicit individual risk and ambiguity attitudes and compare predicted and observed behavior in contests with an ambiguous prize, a risky prize and certain prizes. A comparison between contests with ambiguous and risky prizes, shows that participants invest significantly less under ambiguity. Additionally, we decompose the effect of changing from a certain prize to an ambiguous prize into two components - the first is the effect of introducing risk and the second is the effect of introducing ambiguity. Empirically, we find that both effects are significant, but work in opposite directions. 

Large and Small Depositors in the Banking System: Pooling and Financial Stability 

with Robert Reed and Jiahong Gao

Banks simultaneously serve both large and small depositors, yet the motivation for pooling funds across such diverse deposit bases has not been formalized in a micro-founded model of banking. As documented in recent empirical work, large depositors provide greater deposit resources than small depositors but also carry higher degrees of liquidity risk. In this context, what are the advantages of pooling? What are the implications of pooling for financial stability? Our framework shows that large depositors implicitly provide small depositors with access to higher yielding investment opportunities by supplementing bank scale. On the flip side, small depositors reduce the liquidity risk of the deposit pool, enabling banks to provide liquidity insurance to large depositors. In this setting, we characterize the full structure of deposit rates under pooling and segregation. Notably, in our setup with segregated depositors, banks are not fragile. Yet, under endogenous pooling, the opposite occurs. Consequently, pooling by itself leads to fragility. Interestingly, participation by small depositors also introduces an information externality: because they bear less liquidity risk, withdrawals in excess of redemption demand under normal circumstances give the bank an early signal of the aggregate liquidity state. In this manner, the model suggests there are informational costs from deposit insurance – when the lower risk group does not have an incentive to run, the bank loses its early signal about the aggregate liquidity state.