Information and Incentives Inside the Firm: Evidence from Loan Officer Rotation, joint with Jose Liberti and Daniel Paravisini, 2010, Journal of Finance 65, 795-828.
Brattle First Prize in Corporate Finance 2010
Abstract. We present evidence that reassigning tasks among agents can alleviate moral hazard in communication. A rotation policy that routinely reassigns loan officers to borrowers of a commercial bank affects the officers' reporting behavior. When an officer anticipates rotation, reports are more accurate and contain more bad news about the borrower's repayment prospects. As a result, the rotation policy makes bank lending decisions more sensitive to officer reports. The threat of rotation improves communication because self-reporting bad news has a smaller negative effect on an officer's career prospects than bad news exposed by a successor.
Public Information and Coordination: Evidence from a Credit Registry Expansion, joint with Jose Liberti and Daniel Paravisini, 2011, Journal of Finance 66, 379-412.
Brattle Prize Distinguished Paper in Corporate Finance 2011
Abstract. This paper provides evidence that lenders to a firm close to distress have incentives to coordinate: lower financing by one lender reduces firm creditworthiness and causes other lenders to reduce financing. To isolate the coordination channel from lenders' joint reaction to new information, we exploit a natural experiment that made lenders' negative private assessments about their borrowers public. We show that lenders, while learning nothing new about the firm, reduce credit in anticipation of the reaction by other lenders to the same firm. The results show that public information exacerbates lender coordination and increases the incidence of firm financial distress.
Adverse Selection on Maturity: Evidence from On-Line Consumer Credit (with Andres Liberman and Daniel Pavivinisi)
Abstract: We provide evidence of adverse selection on maturity in consumer credit. Our estimation compares two groups of observationally equivalent borrowers that took identical 36-month loans, but where only one of the groups is selected on maturity: borrowers chose the 36-month loan when a 60-month maturity option was also available. Borrowers who self-select into short maturity loans default less a year after origination, and have future credit ratings that are higher and less volatile. Consistent with the insurance role of long term credit, the findings suggest borrowers self-select on their exposure to shocks to their future ability to repay.
Exponential Individuals, Hyperbolic Households
Abstract. This paper introduces a model of household consumption and savings in which each household member values their own consumption more than their partner's. In equilibrium the household consumes a higher fraction of wealth each period than under the agreed full commitment Pareto optimum. Despite both members individually having the same time consistent exponential discount rate, the representative agent for the household has a hyperbolic discount factor that is microfounded in the degree of internal preference misalignment. The model rationalizes savings commitment technologies such as assets that require joint approval for withdrawal, a feature that is mandated for most retirement plans.
Heterogeneous Time Preferences within the Household
Abstract. Substantial evidence suggests that discount factors vary significantly between individuals and that this variation exists between members of the same household. This paper introduces a model of consumption and savings in which household members discount the utility from their future consumption at different rates. Each period household members bargain efficiently over their consumption and saving choices. The ex-ante optimal consumption plan will prescribe a declining share of household consumption to the impatient household member and a savings rate later in life that is determined primarily by the time preferences of the patient member. However, as evidence suggests, the household lacks dynamic commitment and can renegotiate any consumption plan that was made in an earlier period. I show that if both members have constant bargaining power the ex-ante optimal consumption plan is time inconsistent despite both members being rational forward looking agents with time consistent preferences. Later in life the impatient member will bargain for both a higher share of consumption and a higher propensity to consume out of wealth than under the agreed ex-ante optimum. The household can achieve a optimal path of consumption and savings by increasing the bargaining power of the patient member over time. The household's ability to achieve the full commitment optimum is constrained by the altruism between household members.
A Theory of Disclosure in Speculative Markets
Managerial Incentives, Corporate Misreporting, and the Timing of Social Learning: A Theory of Slow Booms and Rapid Recessions