We present a rational expectations model of credit-driven crises, providing a new perspective to explain why credit booms can lead to severe financial crises and aftermath slow economic recoveries. In our model economy, banks can operate in two types of business. They are sequentially aware of the deterioration of fundamentals of the speculative business and decide whether to continue credit extension in that business or liquidate capital and move into the traditional business. However, because individual banks face uncertainty about how many of their peers have been aware, they rationally choose to extend credit in the speculative business for a longer time than is socially optimal, leading to an over-delayed crisis and consequently more banks being caught by the crisis. This in turn renders the financial crisis more severe and the subsequent economic recovery slower. Extending to a standard textbook macroeconomic growth setting, our model also generates rich dynamics of economic booms, slowdowns, crashes, and recoveries.
Journal of Financial Economics
We provide the first quantitative evaluation of the impacts and interactions of the US-China trade wars and industrial policy competitions. We extend the model in Caliendo and Parro (2015) by incorporating sectoral external economies of scale. We find that (i) under our baseline calibration of scale economies, the “Made-in-China 2025” (“MIC 2025”) subsidies tend to improve the welfare of both China and the U.S.; (ii) the US gains from Trumpian tariffs if China does not retaliate, and the gain is larger if China had implemented the “MIC 2025” project; (iii) in a non-cooperative tariff game targeting on high-tech industries supported by the “MIC 2025”, both China and the U.S. impose high tariffs and endure welfare losses; and (iv) if it is feasible for the U.S. to subsidize its own high-tech industries, the U.S. would reduce its tariffs on high-tech imports from China and benefit from its own industrial subsidies. These results (i) provide a rationale for trade wars and industrial policy competitions between the U.S. and China and (ii) suggest that industrial subsidies, if properly implemented, may generate less distortion than import tariffs as a means of international competition.
Journal of Monetary Economics
Intertemporal Pricing via Nonparametric Estimation: Integrating Reference Effects and Consumer Heterogeneity
Problem definition: We consider intertemporal pricing in the presence of reference effects and consumer heterogeneity. Our research question encompasses how to estimate heterogeneous consumer reference effects from data and how to efficiently compute the optimal pricing policy. Academic/practical relevance: Understanding reference effects is essential for designing pricing policies in modern retailing. Our work contributes to this area by incorporating consumer heterogeneity under arbitrary distributions. Methodology: We propose a mixed logit demand model that allows arbitrary joint distributions of valuations, responsiveness to prices, and responsiveness to reference prices among consumers. We use a nonparametric estimation method to learn consumer heterogeneity from transaction data. Further, we formulate the pricing optimization as an infinite horizon dynamic programming problem and solve it by applying a modified policy iteration algorithm. Results: Moreover, we investigate the structure of optimal pricing policies and prove the suboptimality of constant pricing policies even when all consumers are loss-averse according to the classical definition. Our numerical studies show that our estimation and optimization framework improves the expected revenue of retailers via accounting for heterogeneity. We validate our model using real data from JD.com, a large E-commerce retailer, and find empirical evidence of consumer heterogeneity. Managerial implications: In practice, ignoring consumer heterogeneity may lead to a significant loss of revenue. Furthermore, heterogeneous reference effect offers a strong motive for promotions and price fluctuations.
Manufacturing & Service Operations Management
International Financial Reporting Standard (IFRS) 9 is of practical relevance to banks because it requires intense monitoring of borrowers to record timely loan losses. Using data from 50 countries, we find that accounting-driven bank monitoring due to IFRS 9 adoption reduces firms’ reliance on bank debt relative to public debt. This finding is consistent with firms experiencing more costly bank monitoring after a shift in regulatory reporting that requires banks to monitor borrowers more intensely. In further analyses, we find that the negative effect of IFRS 9 adoption on bank debt reliance is more pronounced with more stringent regulatory supervision of banks, consistent with regulatory stringency exacerbating costly bank monitoring for firms. We also find that the negative effect is stronger when firms can more easily switch from bank debt to public debt financing, consistent with the relevance of switching costs in firms’ decisions to avoid costly bank monitoring.
We develop a quantitative spatial equilibrium model with endogenous migration and remittance decisions within households to examine the joint effect of migration and remittances on economic development. We apply the model to internal migration in China. Counterfactual analysis of the calibrated model shows that the presence of remittances increases migration and welfare, reduces regional inequality and facilitates structural change. Compared to a conventional single-person migration model, our household model suggests a larger reduction in regional inequality and stronger reallocation of employment from agriculture to manufacturing and services in response to the decline in migration costs over the period of 2000 to 2010.
Journal of International Economics
We quantify the effects of changes in international input–output linkages on the nature of business cycles. We build a multi-country international business cycle model with manufacturing and non-manufacturing sectors that matches the input–output structure within and across countries. We find that, in our 23-country sample, changes in the international input–output linkages between 1970 and 2007 have led to a drop in output volatility in all countries, explaining up to a half of the drop in output volatility in a median country observed in the data. In the model, stronger international linkages tend to stabilize output in response to domestic shocks, and destabilize for foreign shocks. Since foreign shocks still play a modest role in driving domestic business cycles, the stabilization effects dominate. Nevertheless, changing international linkages have generated larger shock transmission across countries, increasing the risk of a global recession.
Journal of International Economics
Satisfaction to Stay, Regret to Switch: Understanding Post-adoption Regret in Choosing Competing Technologies When Herding
Faced with uncertainty when choosing among a wide range of similar competing technologies, users often take a herding in technology adoption (HTA) strategy to make heuristic adoption decisions. The HTA strategy brings users cost and time savings and casts doubt on user staying power. The extant adoption research has long focused on user satisfaction with the performance of the chosen technology (also known as the expectation-disconfirmation theory perspective) but does not sufficiently account for the consideration of the decision process across competing alternatives. To fill this void, this research uses a holistic post-adoptive evaluation by introducing a regret perspective in relation to competing technologies. Specifically, we theorize and operationalize a new multidimensional construct of post-adoption regret and construct a research model to examine how HTA leads to post-adoption regret and how such regret influences user staying power. The results suggest that post-adoption regret is formed primarily through two routes, outcome and process, and it is found to be more related to user switching, whereas satisfaction is related to user retention. The research model is supported by two longitudinal field studies of users in Asia and Europe who chose between competing technologies in both forms of free software and paid hardware. Findings from this research have significant implications for information systems research and industry practice.
Information Systems Research
We show that managerial learning from stock prices can lead to feedback loop vulnerability: corrective actions based on perceived negative market signals reduce the sensitivity of asset payoffs to stock market information. Less sensitivity discourages liquidity provision and increases the price impact of liquidity shocks. Interestingly, overconfident managers who disregard stock price information may be less vulnerable to the adverse price impact of nonfundamental liquidity shocks. Our empirical evidence strongly supports the model’s underlying premises and predictions: First, investment decisions of overconfident CEOs are significantly less responsive to stock price fluctuations. Second, the price impact of liquidity shocks, for example, mutual fund fire sales, is substantially smaller for firms with overconfident CEOs.
We examine whether the Environmental Protection Agency (EPA) uniformly enforces the Clean Air Act for politically connected and unconnected firms using a close election setting. We find no difference in regulated pollutant emissions or EPA investigations between the two groups, although connected firms experience less regulatory enforcement and lower penalties. These results are more pronounced for firms connected to politicians capable of influencing regulatory bureaucrats and for connected firms that are more important to their supported politicians. Taken together, our results show that campaign contributions can indirectly benefit firms by way of reduced environmental regulatory enforcement and penalties.