A Theory of Disclosure in Speculative Markets; forthcoming in Management Science
Abstract: This paper presents a theory of disclosure in a market where investors have heterogeneous beliefs and face short-sale constraints. Assets trade above fundamentals reflecting the value of the option to sell to more optimistic investors in the future. The initial seller has an incentive to commit to an imprecise disclosure policy, despite the negative effect this has on the fundamental value of the asset, in order to increase the potential for disagreement and hence the magnitude of the speculative premium. I show that there is a strategic complementarity between sellers in their disclosure decisions. This explains why financial misreporting and episodes of speculation occur together in waves and demonstrates that the endogenous choice of imprecise disclosure amplifies the extent to which assets are overpriced.
Time-Consistent Individuals, Time-Inconsistent Households; forthcoming in The Journal of Finance
Abstract. I present a model of consumption and savings for multi-person households in which members are imperfectly altruistic and share wealth. I show that, despite having standard exponential time preferences, the household is time-inconsistent: members save too little and overspend on private consumption goods. Access to private illiquid durable goods can exacerbate overconsumption by providing a way for members to lock-up wealth from each other. The household remains time-inconsistent, even when it is possible for members to save separately, whenever intra-household relative-wealth shocks create the possibility that one member will choose to transfer wealth to the other in the future.
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 Online Consumer Credit (with Andres Liberman and Daniel Pavivinisi)
Abstract: Loan maturity provides insurance against changes in the price of credit. We examine whether, consistent with theories of insurance markets with private information, maturity choice leads to adverse selection. We compare two groups of observationally equivalent borrowers that took identical unsecured 36-month loans, only one of which had also a 60-month maturity choice available. We find that when long maturity is available, fewer borrowers take the short-term loan, and those that do, default less. Additional findings suggest borrowers self-select on private information about their future ability to repay. Thus, maturity can be used to screen borrowers on this private information.
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.