This paper quantifies the aggregate effects of financing constraints. We start from a standard dynamic investment model with collateral constraints. In contrast to the existing quantitative literature, our estimation does not target the mean leverage ratio to identify the scope of financing frictions. Instead, we use a reduced-form coefficient from the recent corporate finance literature that connects exogenous debt capacity shocks to corporate investment. Relative to a frictionless benchmark, collateral constraints induce losses of 7.1% for output and 1.4% for TFP (misallocation). We show these estimated losses tend to be more robust to misspecification than estimates obtained by targeting leverage.
The Risk of Implicit Guarantees: Evidence from Shadow Banks in China[Abstract][Paper] with Xiang Shao and Ji Huang Review of Finance, forthcoming
We study how risks spillover from shadow banking activities to traditional banks through implicit guarantees. Using data on wealth management products, China's largest shadow banking component, we find that banks with higher interbank borrowing rates strategically provide stronger implicit guarantees to their issued wealth management products. Extending implicit guarantees builds bank reputations and reduces rollover costs while exposing banks to losses from shadow banking activities. Our findings thus suggest a bank-specific approach to assessing the risk of implicit guarantees based on transparent and real-time interbank rates.
Working Papers
Asset-side Bank Runs and Liquidity Rationing: A Vicious Cycle [Abstract][Paper] Sole Author
Major Revision, Management Science Selected presentations: AFA(2018), EFA(2023)
I study asset-side runs on credit lines in an infinite-horizon banking model. Strategic complementarity between bankers and credit line borrowers arises: borrowers' panic drawdowns and bankers' liquidity rationing reinforce each other, leading to a vicious cycle.
Using data from U.S. banks, I estimate the model and quantify the amplification effect due to the strategic complementarity. This amplification effect accounts for two-thirds of the overall credit shortfalls during the 2008-09 crisis. My estimation also suggests policies targeting banks and borrowers simultaneously to support bank credit.
Security-bid Auctions with Information Acquisition [New Version, Nov. 2022][Abstract][Paper] with Yunan Li Selected presentations: Royal Economic Society(2021), SWFA(2021), Econometric Society European Meeting(2021), Econometric Society China Meeting(2021)
We study auctions in which buyers covertly acquire information at some cost and then bid securities contingent on the asset's realized value to them. In first- and second-price auctions, steeper securities lead to lower marginal returns to information and potentially lower revenues. We then consider the revenue-maximizing linear mechanism. The mechanism is efficient. The winner pays in cash if their expected values exceed a threshold and pays in stock otherwise. The threshold decreases as the marginal cost of acquiring information increases. Our empirical analysis supports the model's implications that stock payments are associated with lower takeover synergies and information costs.
Dynamic Optimal Taxation with Endogenous Skill Premia[Abstract][Paper] with Jason Ravit and Michael Sockin Selected presentations: Econometric Society North America Meeting(2017)
We embed imperfect substitutability across skill levels into a dynamic Mirrlees model and uncover a novel intertemporal wage compression channel in optimal labor taxation that can rationalize redistributive programs such as the Earned Income Tax Credit.
Haircuts and Credit Risk over the Cycle[Abstract] Selected presentations: Econometric Society World Congress(2015)
This paper develops a dynamic general equilibrium model with heterogeneous beliefs and collateral constraints. The endogenously determined haircuts are countercyclical and thus lead to a downward margin spiral that exacerbates financial instability.
Teaching
Options and Futures (CUHK Shenzhen, undergraduate, 2018-2023) Satisfaction with teacher: 4.84/6, 5.52/6, 5.63/6, 5.79/6
(Empirical) Research Methods in Finance (CUHK Shenzhen, undergraduate, 2020-present) Satisfaction with teacher: 6/6, 5.78/6
