Research

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.

Publications
  • Adverse Selection and Liquidity Distortion  Forthcoming, Review of Economic Studies
    • Market freezes vs fire sales? Two distinct notions of illiquidity arise endogenously, depending on the information structure and market conditions. 
 
Working Papers

  • Endogenous Market Making and Network Formation  (jointly w/ Shengxing Zhang) R&R Journal of Political Economy
    • 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)
    • 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: advisers with expertise in more information-sensitive assets attract less informed customers, provide worse information, and earn higher rents. Even though distorted information leads to lower returns, investors choose to trade through advisers, which rationalizes empirical findings. Banning conflicted payments only improves the information quality but not customers’ welfare. It is the underlying distribution of financial literacy that determines welfare, and the fee structure is irrelevant. 
  • Selection versus Talent Effects on Firm Value (jointly w/ Harrison Hong) R&R Journal of Financial Economics
    • Abstract: Measuring the value of labor market hires on stock prices, be it the choice of underwriters when firms go public (IPOs) or chief executive officers (CEOs), is difficult due to selection. For instance, firms facing a higher cost of capital might pay more for talent to raise their stock valuations. Using an assignment model, we show that selection affects both the cross-sectional correlation of firm value and talent and the convexity of the wage distribution. The net of these two quantities is invariant to selection and can be used to understand changes over time in IPO underpricing and CEO wages.
  • 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)