The Good, the Bad and the Missed Boom
joint with Enrico Perotti
Some credit booms result in financial crises. While excessive risk taking is a plausible cause, many investors do not anticipate increasing risk. We show that credit booms may be misunderstood as productivity-driven, due to opaque bank assets which disguise risk incentives. Balanced funding relative to productive prospects can sustain prudent lending (good boom), while funding imbalances may induce high risk exposure and boost asset prices (bad boom), or lead to asset under-pricing and insufficient lending (missed boom). Rational agents drawing inference from prices make mistakes that can amplify the effect of funding imbalances and propagate risk.
The Review of Financial Studies, Volume 35, Issue 11, November 2022, pages 5025-5056
The Review of Financial Studies, Volume 35, Issue 11, November 2022, pages 5025-5056
Voting on Public Goods: Citizens vs. Shareholders
joint with Robin Döttling, Doron Levit, Nadya Malenko
We study the interplay between a "one person-one vote" political system and a "one share-one vote" corporate governance regime. The political system sets Pigouvian subsidies, while corporate governance determines firm-specific public good investments. Our analysis highlights a two-way feedback effect. In a frictionless economy, shareholder democracy is irrelevant: the political system fully offsets any effects of shareholder influence. With frictions in public policy provision, pro-social corporations fill the void of a dysfunctional regulatory system and increase the provision of public goods—demonstrating the benefit of shareholder democracy. Nevertheless, shareholder democracy can hurt a typical citizen because of the representation problem: it favors the preferences of the wealthy. If shareholders have extreme views, there can be a backlash against ESG initiatives, and the political system may undo or tax corporate social responsibility measures. Advancements in financial technologies that increase investor diversification or enable pass-through voting have important implications for these trade-offs of shareholder democracy.
Too Levered for Pigou: Carbon Pricing, Financial Constraints, and Leverage Regulation
joint with Robin Döttling
We analyze jointly optimal carbon pricing and financial policies under financial constraints and endogenous climate-related transition and physical risks. The socially optimal emissions tax may be above or below a Pigouvian benchmark, depending on the impact of physical climate risk on collateral values. We derive necessary conditions for emissions taxes alone to implement a constrained-efficient allocation, and compare the welfare consequences of introducing a cap-and-trade system, green subsidies, or leverage regulation. Our analysis also shows that efficient carbon pricing can be supported by carbon price hedging markets but may be hindered by socially responsible investors in equilibrium.
My contribution has been prepared under the Lamfalussy Fellowship Programme sponsored by the ECB
My contribution has been prepared under the Lamfalussy Fellowship Programme sponsored by the ECB
The Political Economy of Prudential Regulation
This paper introduces a voting model into a framework with negative borrowing externalities to study how income inequality affects voter preferences for prudential regulation and the resulting equilibrium policy. When voting agents account for the general equilibrium impact of prudential policy on future asset prices and their access to credit. Consequently, borrowers support a universal limit on current debt. Curbing over-borrowing restricts future declines in asset prices, distributing wealth from high- to low-income borrowers, so the former prefer laxer regulation. Imperfections in enforcement distort the marginal value of regulation, so that borrowers who anticipate exemptions support an excessively strict policy. Imperfect enforcement can interact with income inequality to reverse the direction of the policy conflict between high- and low-income borrowers.
2020 Best Job Market Paper in Finance Theory
2020 Best Job Market Paper in Finance Theory
To Be Bribed or Lobbied: Political Control or Regulation
joint with Enrico Perotti and Marcel Vorage
The form of political governance determines the structure of competition among interest groups. A politician choosing direct control of firm entry can be bribed, while regulation based on minimum requirements makes her prone to lobbying. Direct control offers exclusive benefit to the winning group resulting in perfect competition among bribers, so all rents accrue to the politician. Under regulation some agents cannot be excluded from entry, giving their lobby a competitive advantage and allowing them to extract rents at the expense of the politician. If institutional quality is low the politician faces low risk of prosecution and thus prefers being bribed. Unequal distribution of legal power in oligarchic societies may give bargaining power also to bribers, allowing the most powerful individuals to share in political rents.