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 Working Papers
- 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.
- The Market for Conflicted Advice (jointly w/ Martin Szydlowski)
- Abstract: We
study decentralized markets in which advisers have conflicts of interest
and compete for customers via information provision. We show that
competition partially disciplines conflicted advisers. The equilibrium
features information dispersion and sorting of heterogeneous customers
and advisers: advisers with expertise in more information sensitive
assets attract less informed customers, provide worse information, and
earn higher profits. We further apply our framework to the market for
financial advice and establish new insights: it is the underlying
distribution of financial literacy that determines the consumers’
welfare. When advisers are scarce, the fee structure of advisers is
irrelevant for the welfare of consumers.
- Assignment of Stock Market Coverage (jointly w/ Harrison Hong)
- Abstract: Price
efficiency plays an important role in financial markets. Firms influence
it, particularly when they issue public equity. They can hire a
reputable underwriter with a star analyst to generate public signals
about profits to reduce uncertainty and increase valuations. We develop
an assignment model of this labor market. The value of a match between
firms, that differ in multiple dimensions, and agents, that differ in
precision, is endogenously generated from a stock-market equilibrium. We
characterize the multidimensional-to-one assignment and obtain testable
predictions. Extensions allow firms to value efficiency for other
reasons and apply to other labor markets like media-or-investor
- 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.
- 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?
- Volatility Seeking Talent (Jointly w/ Harrison Hong)