Research Interests:

My research focuses on how frictions (e.g., asymmetric information, agency problem, and search friction) affect prices, liquidity, and allocation in decentralized markets, with particular interests on the role of intermediaries and market microstructure.

  • Adverse Selection and Liquidity Distortion  Review of Economic Studies, 85.1 (2017): 275-306
    • Market freezes vs fire sales? Two distinct notions of illiquidity arise endogenously, depending on the information structure and market conditions. 
  • Selection versus Talent Effects on Firm Value (jointly w/ Harrison Hong) Forthcoming, Journal of Financial Economics
    • Quantifying the impact of talent (e.g., CEO or underwriters) on firm value is fundamentally difficult due to the selection.  Using an assignment model, we establish how to use wage and firm output information to disentangle selection vs. talent effects.
Working Papers

  • Endogenous Market Making and Network Formation  (jointly w/ Shengxing Zhang)
    • Abstract:This paper proposes a theory of intermediation that explains the existing financial network with a few highly interconnected institutions. In contrast to the previous trading models based on random matching or exogenous networks, we allow institutions to choose their counterparties and the number of trading links in a dynamic framework. We show that banks with lower risk exposure endogenously specialize in the role of intermediary, forming the core of the network. Moreover, such a highly asymmetric structure is in fact efficient. This tractable framework further allows us to derive normative implications, taking into account the endogenous response of financial markets.

  • The Market for Conflicted Advice (jointly w/ Martin Szydlowski) R&R, Journal of Finance
    • Abstract: We present a model of the market for advice, where advisers have conflicts of interest and compete for heterogeneous customers through information provision. The competitive equilibrium features information dispersion and partial disclosure. While conflicted fees lead to distorted information, they are irrelevant for customers’ welfare: banning conflicted fees only improves the information quality but not customers’ welfare. It is the underlying distribution of financial literacy that matters. Furthermore, even though distorted information leads to lower returns, investors find it optimal to trade through advisers, which rationalizes empirical findings.
  • Hedging and Pricing Rent Risk with Search Frictions  (jointly w/ Hyun-Soo Choi, Harrison Hong, Jeffrey Kubik)
    • Abstract: The desire of risk-averse households to hedge rent risk is thought to increase home ownership and prices. While evidence for the ownership implication is compelling, support for the price effect is mixed. We show that an important reason is search frictions. Rent risk reduces outside options, leading to less-picky buyers and worse home/buyer matches. This attenuates the rise in the price-to-rent ratio that would otherwise occur without frictions. Consistent with our model, a house remains on the market for fewer days when rent risk is higher. Accounting for frictions significantly increases the effect of rent risk on home prices.
  • A Search Theory of Sectoral Reallocation
    • Abstract: The sectoral shock is often viewed as an exogenous shock to the matching efficiency in a search model in literature. We find this approach of describing structural change unsatisfying. This paper therefore contributes a theoretical framework to understand how the labor market responds differently to aggregate and sectoral shocks, when both search friction and imperfect mobility play roles. Both the steady state and dynamics in general equilibrium are characterized. The main result shows that if the TFP shock hits different sectors unequally, the need for reallocation results in a much more persistent dynamics, as implied by the standard model. This model therefore provides an explanation for the current observation of the coexistence of a high vacancy rate and a high unemployment rate. It further sheds light on an important question: how much unemployment can be attributed to a structural problem? 

In Progress:
  • Volatility Seeking Talent (Jointly w/ Harrison Hong)