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 (2018): 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) Journal of Financial Economics, 133.3 (2019): 751-763
    • 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.
  • The Market for Conflicted Advice (jointly w/ Martin Szydlowski) Journal of Finance,  75.2 (2020): 867-903
    • We analyze the quality of financial advice in a competitive equilibrium and establish that while conflicted fee structure leads to distorted information, it is irrelevant for customers' welfare.
Working Papers

  • Endogenous Market Making and Network Formation  (jointly w/ Shengxing Zhang) R&R, Journal of Finance.
    • Abstract:This paper develops a dynamic trading framework that determines jointly agents' counterparties as part of the equilibrium, instead of assuming that agents match exogenously. We show that because of limited information in the decentralized market, the roles of market makers or customers emerge endogenously: certain agents specialize in market making and become highly interconnected, forming the core of the financial network. Having a model with endogenous trading links and transaction prices allows us to show that such a highly asymmetric market structure is constrained efficient, as market makers are compensated correctly for their services. It also allows us to obtain new insights regarding market resilience and intermediation costs. [Online Appendix]
  • Risk Concentration and Interconnectedness in OTC Markets (jointly w/ Shengxing Zhang
    • Abstract: We analyze the impact of a regulatory reform in a novel framework that jointly determines banks’ bilateral networks and platform access. In our model, banks use their bilateral connections to obtain indirect access to the platform, which saves direct entry costs but results in risk concentration. This trade-off leads to a unique market structure, which is generally asymmetric with multiple layers even if all banks are ex ante homogeneous. Policies that increase balance sheet costs relative to entry costs could result in a more symmetric market structure but have ambiguous effects on transaction costs. Our results underscore that policies aiming to achieve all-to-all trading, reduce risk concentration, or lower transaction costs can be counterproductive.
  • Sorting Out the Real Effects of Credit Supply  (jointly w/ Harrison Hong, Matthieu Gomez)
    • Abstract: We document that banks which cut lending more during the Great Recession lent to riskier firms. To reconcile this evidence, we build a competitive matching model of bank-firm relationships. Riskier firms borrow from banks with lower holding costs or higher abilities to securitize. We use our sorting model to recover bank holding costs based on default probabilities and equilibrium loan rates. Our model attributes 60% of the Great Recession decline in corporate loans to higher bank holding costs or credit supply and 40% to elevated firm risks or credit demand. We interpret reduced-form panel regression estimates of the bank lending channel using our framework.
  • 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 paper contributes a theoretical framework to analyze how the labor market responds differently to aggregate and sectoral shocks in the presence of search frictions and imperfect mobility. In contrast to the previous literature, which views sectoral shocks as exogenous shocks on matching efficiency, the aggregate impacts of sectoral shocks are the endogenous outcome of the optimal hiring and moving decisions of firm and workers. It shows that, perhaps surprisingly, consistent with recent empirical findings, a pure sectoral shock will not affect the aggregate unemployment. Moreover, during the transition, the aggregate wage increases despite of the decrease in the aggregate productivity.  

In Progress: