Abstract: Banking is increasingly a complex activity. We investigate the output and welfare consequences of banking structures in an economy where lenders use information to screen investment quality and to recover value from failed investments. Complex banking (lenders' joint production of information) eases information production but also facilitates the detection and liquidation of fragile investments. We find that complex banking enhances the resilience to small investment shocks but can amplify the output and welfare responses to large negative shocks. Investment opacity preserves the stabilizing properties of complex banking following small shocks but increases the chances that complex banking harms welfare after large shocks. The predictions are broadly consistent with evidence from matched bank-firm US data.
Abstract: This paper examines how internally generated intangible capital shapes merger patterns and postmerger performance in the U.S. banking sector. We construct a novel measure of intangible capital using granular regulatory expense data and quantify assortative matching between acquirers and targets. Employing a difference-in-differences design with propensity score matching, we causally show that higher assortative matching in intangible capital leads to significant improvements in post-merger bank performance. We complement the empirical analysis with a dynamic search-theoretic model of bank mergers, demonstrating that strategic complementarities in intangibles give rise to assortative matching equilibria. Our findings provide new insights into banking consolidation.
Abstract: We leverage the Reserve Bank of India’s 2006 Bank Authorization Policy as a quasi-natural experiment to study effects on credit markets, capital misallocation, and firm outcomes. We find asymmetric responses: private-sector bank branches expanded by 16.3% in underbanked districts relative to banked districts, while public-sector banks showed no systematic expansion. The resulting private-sector lending reduced the marginal revenue product of capital (MRPK) of ex-ante high-MRPK firms by about 60%, lowering capital misallocation. However, this decline did not raise firm sales or value added. We highlight the efficacy of financial reforms in alleviating misallocation under mixed-ownership banking environments in developing economies.
Abstract: This paper presents a new dynamic stochastic general equilibrium (DSGE) framework via recursive quantile preferences (quantile certainty equivalent) in which household downside risk attitudes are a model primitive. In this economy, infinitely lived households maximize the discounted value of the stream of future τ-quantile utilities for τ ∈ (0, 1) with standard consumption and disutility of labor. The quantile parameter τ captures the households' downside risk attitude, independent of the elasticity of intertemporal substitution. Representative firms are price takers, and prices are determined endogenously. We establish central properties of the model, including: (i) existence and uniqueness of a fixed point for household value functions, (ii) envelope condition, and the quantile Euler equation. We define the quantile recursive competitive equilibrium and establish its existence and uniqueness. We also provide an algorithm and numerically compute the quantile DSGE procedure. Lastly, we employ nonlinear impulse response functions, and present empirical results for the varying one-time technology shock impulse response functions for augmented MaCurdy and KPR utility functions. We find significant heterogeneity in downside risk attitudes with the potential for countercyclical labor responses for a shallow shock in an otherwise frictionless environment. Rates of dissipation of the shock also vary with the configuration.
Abstract: This paper examines how firms responded to a joint policy shock introduced by the 2017 U.S. Tax Cuts and Jobs Act (TCJA), which simultaneously replaced the progressive corporate tax schedule with a flat 21% rate and eliminated the deductibility of performance-based executive compensation under Section 162(m). We exploit cross-sectional variation in pre-reform reliance on performance-based pay and changes in marginal tax rates to show how ex-ante compensation structures shaped firm responses in innovation and intangible investment. We find that, relative to firms with lower pre-TCJA incentive-pay intensity, firms with higher exposure to ex-ante performance-based compensation increased R&D spending, patenting, and intangible investment after the reform—particularly when their marginal tax rates rose. These higher-exposure firms also reallocated performance-based pay away from tax-disfavored executives toward non-eligible executives. These effects are most pronounced in growth firms with high internal funding reliance. This pattern suggests a more complex relationship between executive pay design and intangible investment incentives under tax constraints.