Research

Working Papers

Liquidity Policies with Opacity, December 2023

We examine liquidity policies in an environment in which banks can cover liquidity needs by hoarding liquidity or selling legacy assets to expert investors. They can acquire costly information regarding asset quality and deprive banks with bad assets from accessing the asset market. To prevent expert scrutiny, banks must accept fire sale prices for their assets. These depressed prices induce banks to hoard inefficiently low (high) amounts of liquidity when the likelihood of a liquidity shock is relatively low (high). We show that policy interventions aimed at maintaining opacity in the asset market encourage (discourage) liquidity hoarding when there is underhoarding (overhoarding) of liquidity. This suggests that ex-post interventions can serve as substitutes for ex-ante liquidity regulations.

Reputation and the Wall Street Walk, August 2023

This study examines whether the threat of exit by blockholders can alleviate managers' moral hazard problems when they have reputation concerns in stock markets. When future cash flows decline over time, the threat of exit and reputation concerns both discipline managers. However, when future cash flows rise over time, blockholders trade based on information about the managers' commitment ability rather than their past performance, thereby weakening reputational discipline.

Ignorant Experts and Financial Fragility, June 2021

We examine expertise acquisition incentives in a model of debt funding markets in which expertise reduces the cost of acquiring information about underlying collateral. Lenders acquiring expertise gain advantages in financial contracts with borrowers and extract rents from them by creating fear of information production that gives rise to illiquidity. As information about collateral decays over time, there is growth in credit and expertise acquisition, making the economy more vulnerable to an aggregate shock. This result suggests that the growth in the financial sector is associated with the prevalence of opaque assets and a subsequent crisis.

Publications

Managing Financial Expertise, International Review of Economics and Finance, 89 (Part A), 351-365, January 2024 [Working paper version]

We study credit markets in which lenders can invest in financial expertise to reduce the cost of acquiring information about underlying collateral. If the pledgeability of corporate income is low, information acquisition increases lending, but lenders reduce expertise acquisition because of the hold-up problem. By contrast, if the pledgeability is high, information acquisition reduces lending so that lenders can extract rents from firms by investing in financial expertise and creating fear of information acquisition. Optimal policy involves subsidizing investment in financial expertise when the pledgeability is low and taxing investment in financial expertise when the pledgeability is high.

Trust and Law in Credit Markets, Economica 89 (354), 332-361, April 2022 [Working paper version]

This study examines the coevolution of trust and legal institutions in a model of competitive credit markets plagued by asymmetric information. When entrepreneurs’ relative payoff to productive activities versus cheating is private information, dishonest ones, who intend to cheat, can enter credit markets and be cross-subsidized by honest ones, who engage in productive activities. To exploit this benefit, dishonest entrepreneurs demand weak legal enforcement through the political process. This rent-seeking behaviour interacts with the formation of trust, generating an underdevelopment trap with weak enforcement and distrust. Technological advancement may encourage entrepreneurs’ rent-seeking and aggravate distrust.

Managerial Reputation, Risk-Taking, and Imperfect Capital Markets, The B.E. Journal of Theoretical Economics 17(1), January 2017

This paper presents a model of portfolio management with reputation concerns in imperfect capital markets. Managers with financial constraints raise funds from investors and select a project that is characterized by the degree of risk. Managers differ in their ability to determine the probability of success. Based on past performance, all agents revise beliefs about managers' ability, and the beliefs affect the availability of funds in the future. This provides motivation for managers to build reputation by manipulating their performance through project selection. We show that the quality of investor protection changes fund flows, thereby influencing  managers' project selection. Our model predicts that strong investor protection causes risk-taking behavior, whereas weak investor protection leads to risk-averse behavior.

Reputation Acquisition in Imperfect Financial Markets, Economics Letters 139, 76-78, February 2016

This paper incorporates financial market imperfections into the Diamond (1989) [Diamond, D. W. (1989). Reputation Acquisition in Debt Markets. Journal of Political Economy, 97(4), 828–862.] model where reputation concerns limit managers' excessive risk-taking. We show that the reputational discipline collapses because of an increase in pledgeability and a decline in interest rates over time.