Professor of Finance and Business Economics
Edward E. Carlson Distinguished Professor in Business Administration
Co-editor, Journal of Finance
President, Finance Theory Group (2016-2017)
"The equilibrium consequences of indexing," with Diego García
Title is self-explanatory. We focus especially on welfare consequences. (New version in preparation.)
"Failing to forecast rare events," with James Dow
Analyzes the distribution of talent across different activities within the financial sector. Main results stem from jointly analyzing the financial market equilibrium and the labor market equilibrium.
Develops tools for ordering the informativeness of actions and prices when linearity doesn't hold, making use of Lehmann's (1988) information ordering.
"Commitment contracts," with Gustav Sigurdsson, accepted, Review of Economic Studies
Can an individual resolve commitment problems stemming from time-inconsistent preferences?
Does Junior Inherit? Refinancing and the Blocking Power of Second Mortgages, with Ronel Elul, Sharon Garyn-Tal, David Musto, January 2017, Volume 30, Issue 1, pages 211-244, Review of Financial Studies.
Some states allow a borrower to refinance a first-mortgage in a way that allows the new lender to retain seniority. Other states do not. We empirically show that this legal difference affects refinancing propensity.
Buying high and selling low: Stock repurchases and persistent asymmetric information, with Hongda Zhong, June 2016, Volume 29, Issue 6, pages 1409-1452, Review of Financial Studies.
Analyzes a dynamic version of Myers and Majluf's classic model. Equilibria feature repurchases, even though all firms want to raise cash. Some firms strictly profit from the repurchase transaction.
Government intervention and information aggregation by prices, with Itay Goldstein, December 2015, Volume 70, Issue 6, pages 2777-2812, Journal of Finance.
Title is self-explanatory.
Wall Street occupations, with Ulf Axelson, October 2015, Volume 70, Issue 5, pages 1949-1996, Journal of Finance.
Financial sector jobs involve employees overseeing large resources. Combined with a standard moral hazard problem, this leads to equilibrium contracts that feature high pay, long hours, must be entered early in an individual's career, and bonuses that are largest exactly when employees work least (i.e., are most careless). The high compensation more than offsets the long hours, but nonetheless market entry doesn't drive compensation down.
Market Run-Ups, Market Freezes, Inventories, and Leverage, with Yaron Leitner, January 2015, volume 115, issue 1, pages 155-167, Journal of Financial Economics.
Do traders stop trading to prevent the release of bad news about other assets on their balance sheets? The effect of inventories on trading decisions, prices, and information dissemination.
The Labor Market for Bankers and Regulators, with Vincent Glode, September 2014, volume 27, number 9, pages 2539-2579, Review of Financial Studies.
Who becomes a financial regulator and who becomes a banker?
"The real effects of financial markets," with Alex Edmans and Itay Goldstein, 2012, volume 4, pages 339-360, Annual Review of Financial Economics.
Survey of the real effects of the secondary financial markets.
Information-based trade, with Hülya Eraslan, September 2010, volume 145, issue 5, pages 1675-1703, Journal of Economic Theory.
Contrary to standard interpretations of no-trade theorems, trade based solely on information differences may be possible when information is used to make real decisions.
Note: This paper previously circulated under the title "Information, trade and common knowledge with endogenous asset values."
Preventing crime waves, with Kathleen Hagerty, August 2010, volume 2, number 3, pages 138-159, American Economic Journal: Microeconomics.
An old question is why minor offenses are not deterred using maximal penalties levied with small probability. The prevention of crime waves, which arise because of congestion effects, justifies the use of non-maximal penalties.
Strategic voting over strategic proposals, with Hülya Eraslan, April 2010, volume 77, issue 2, pages 459-490, Review of Economic Studies.
``Strategic voting'' means that differentially informed voters try to infer information from outcome of vote. Literature has produced some famous results: unanimity requirements may not protect the innocent! We advance the literature by determining what is being voted over. Includes application to debt restructuring.
Note: This paper previously circulated under the title "Bargaining collectively."
Market-based corrective actions, with Itay Goldstein and Edward S. Prescott, February 2010, volume 23, number 2, pages 781-820, Review of Financial Studies.
What happens when agents try to use market security prices as a source of information for whether or not to take actions that affect cash flows? Are prices still a useful source of information? Applications include whether government regulation of banks can be based on bank security prices.
Note: This paper previously circulated under the title "Market-Based Intervention and Non-Revealing Prices: The Case of Government Supervision of Banks,"
Predatory mortgage lending, with David Musto and Bilge Yilmaz, December 2009, volume 94, issue 3, pages 412-427, Journal of Financial Economics.
Predatory lending can arise even in the absence of lender fraud and borrower confusion.
Note: This paper previously circulated under the title "Predatory lending in a rational world."
Prohibitions on penalties in private contracts, with Andrew Newman, October 2009, volume 18, issue 4, pages 526 - 540, Journal of Financial Intermediation.
Why do modern legal systems prohibit the use of certain types of penalty (such as imprisonment) in private contracts?
Judges have agency conflicts too. How does this affect contracting?
Multitask principal-agent problems, with Armando Gomes, January 2009, issue 1, volume 144, pages 175-211, Journal of Economic Theory.
Analysis of the moral hazard problem when the agent simultaneously performs multiple versions of the same task. The first-order approach (FOA) fails, but tractable analysis is still possible. Because the FOA fails, solution is ``fragile:'' small changes lead to collapse in effort.
Borrower runs, with Ashok Rai, March 2009, issue 2, volume 88, pages 185 - 191, Journal of Development Economics.
Bank runs on the asset side of the balance sheet. If borrowers repay to preserve credit access, they'll default when they think other borrowers are going to default, since the carrot of further credit is gone.
Profiled in this article in Microfinance Insights
Persistent court corruption, August 2008, volume 118, issue 531, pages 1333-1353, Economic Journal.
Corrupt courts lead to high-powered contracts and laws; which engender large bribes; which attract court officials with the taste or skill required for corruption.
Cosigned vs group loans, with Ashok Rai, February 2008, volume 85, issues 1-2, pages 58-80, Journal of Development Economics.
Cosigned loans are an extreme form of group lending. We compare cosigned loans with equal-size group loans, and identify a force that pushes lending arrangements to one of these two extremes.
Coordinating development: can income-based incentive schemes eliminate Pareto inferior equilibria? with Rohini Pande, volume 83, Issue 2, July 2007, Pages 368-391, Journal of Development Economics.
Can government policies implement the "big push" and overcome coordination failures in development?
Smoke-free laws and bar revenues in California - the last call, with David Cowling, December 2005, volume 14, issue 12, pages 1273-1281, Health Economics.
Democracy and economic growth: a historical perspective, with John Gerring, William Barndt, and Carola Moreno, April 2005, volume 57, number 3, pages 323-64, World Politics.
Bank and nonbank financial intermediation," December 2004, volume 59, issue 6, pages 2489-2529, Journal of Finance.
A parsimonious unified model of different forms of financial intermediation (e.g., banks, conglomerates, etc). In particular, explains contagion across borrowers: if one borrower does badly, other borrowers are impacted.
Regulating exclusion from financial markets, with Arvind Krishnamurthy, July 2004, volume 71, issue 3, pages 581-913, Review of Economic Studies.
Many dynamic contracting models assume that individuals can be threatened with financial autarky. We show how this punishment can be decentralized.
Note: This paper previously circulated under the title "Credit denial as a threat".
Joint liability among bank borrowers," January 2004, volume 23, issue 2, pages 383-394, Economic Theory.
Related to "Bank and nonbank financial intermediation" above. Relative to that paper, it has results for an economy with a large number of projects, but at the cost of imposing that investor contracts are symmetric.
Incentive compatible contractible information, September 2003, volume 22, issue 2, pages 375-394, Economic Theory.
A general characterization of what shared information agents can be induced to reveal.
"Small business finance in two Chicago minority neighborhoods," with Paul Huck, Sherrie Rhine, and Robert Townsend, 1999, Volume 23, 2nd Quarter, pages 46-62, Economic Perspectives, Federal Reserve Bank of Chicago.
"Formal and informal financing in a Chicago ethnic neighborhood," with Robert Townsend, 1996, Volume 20, number 4, pages 3-27, Economic Perspectives, Federal Reserve Bank of Chicago.
"Debt restructuring and voting rules," with Hülya Eraslan.
"Deterrence and plaintiff incentives," October 2007.
Note: This paper previously circulated under the title "Laws and contracts."
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