Working Papers

Hard Times Call for Fundamental Questions (JMP)

       Conference Presentations: Society of Economic Dynamics (2024), Federal Statistics Research Data Center Annual Conference (2024, Scheduled), Midwest
                                                        Macroeconomic Meeting (2024, Scheduled).

Using restricted firm-level data from the US Census, I show that private investment in basic research is counter-cyclical. At the aggregate level, I observe significant increases in private sector basic research investment during economic downturns: a 55% rise during the 1991 recession, a 20% during the 2001 dot-com bubble burst, and a 60% cumulative growth during the 2008-2009 financial crisis. At the micro level, I find a statistically significant negative correlation between a firm’s basic research investment and the growth rate of its industrial sector. This growth of basic research spending in downturns seems to be funded by reallocating resources from applied research. Focusing on the 2008-2009 period, I show that this pattern is widespread across US industries. I also demonstrate that firms that increased basic research also more likely to retain Ph.D.s and scientists compared to other firms. Consistent with Schumpeter’s theory of business cycles, I suggest that low returns encourage firms to shift their R&D efforts away from product development and towards building capacity for future innovation by exploring broader questions. This shift promotes rapid innovation in subsequent periods. To examine this mechanism, I calibrate a novel semi-endogenous growth model that distinguishes between two types of R&D activities: generating new knowledge (basic research) and applying existing knowledge (applied research and development).

Why We Should Start Thinking of Illiquidity Spells in Over-the-Counter Markets in Terms of Monopolistic Inefficiency

      Conference Presentations: The 19th Central Bank Conference on the Microstructure of Financial Markets (2024, Scheduled),   Third DC Search and Matching
                                                      Workshop (2024, Poster)

The paper investigates the connection between concentration and fragility in over-the-counter (OTC) markets. I argue that the increase in spreads in OTC markets during a crisis reflects an increase in dealer mark-ups and not merely an increase in dealer costs of facilitating trade. Using Regulatory TRACE data on the US Corporate Bonds market, I construct a bond-level HH-index to gauge concentration in the market for each bond. Focusing on the COVID-19 crisis that emerged in the first quarter of 2020, I show that concentrated markets exhibit a greater increase in spreads and a stronger decline in trade volumes during a crisis. I present a model in which trade in a bond is led by dealers who acquire information about it. Systemic distress incentivizes informed dealers to exercise market power more aggressively by submitting low bids that appeal solely to distressed customers. When calibrated to the behavior of spreads across different concentration levels before and during the COVID-19 crisis, the model successfully reproduces the data, including the response of volume to the crisis, which was not targeted.  Additionally, the calibration demonstrates that the increased uncertainty during the COVID-19 crisis was key for concentration to exacerbate the severity of the crisis as much as it did.

Small and disruptive: Non-Sticky Insured Deposits and Banking System Stability

Recent empirical work by Martin et al. (2018) document that banks facing  failure compensate for departing depositors by attracting insured deposits. This run-in reduces the bank’s liability cost and enhances its chances of weathering distress. However, it also weakens the discipline imposed by depositors and leads banks to take more risks. This paper introduces a theoretical model assessing the impact of insured deposit flows on the overarching stability of the banking system. The model underscores that sophisticated insured depositors seeking to maximize returns amplify the gravity of a banking crisis. Remarkably, even a minimal fraction of these non-sticky depositors can introduce destabilizing effects. In this context, I argue that regulatory measures limiting insured deposit flows, like strict controls on brokered deposits, are an all-or-nothing game. Unless they drastically reduce the activity of insured depositors, they are ineffective in sustaining the discipline deposits impose on bank risk-taking.

Publications and Forthcoming

Inventory, Market Making, and Liquidity (Joint with Mahyar Kargar, Benjamin Lester, and Pierre-Olivier Weill)

      Journal of Economic Theory 222 (2024): 105917 (Forthcoming).

We develop a search-theoretic model of over-the-counter markets in which customers with arbitrary preferences and asset holdings trade through dealers. Importantly, we assume that when a customer and a dealer meet, dealers can only sell assets that they already own. Within this environment, we derive the equilibrium relationship between dealers’ cost of holding assets as inventory and various measures of liquidity, including dealers’ inventory holdings (or “capital commitment”), bid-ask spreads, trade size, volume, and turnover. Using transaction level data from the corporate bond market, we calibrate the model to quantitatively assess the impact of post-crisis regulations on dealers’ inventory costs, liquidity, and welfare. We also exploit our structural framework to study the effects of other developments in the corporate bond market, including entry by non-regulated banks, the rise of electronic trading platforms, and the shift towards passive investment