Publications

Regulatory Forbearance in the U.S. Insurance Industry: The Effects of Removing Capital Requirements for an Asset Class (with Bo Becker and Marcus Opp) 

Review of Financial Studies (forthcoming)

We analyze the effects of a reform of capital regulation for U.S. insurance companies in 2009. Its design eliminates capital buffers against unexpected losses associated with portfolio holdings of MBS, but not for other fixed-income assets. After the reform, insurance companies are much more likely to retain downgraded MBS compared to other downgraded assets. This pattern is more pronounced for financially constrained insurers. Exploiting discontinuities in the reform's implementation, we can identify the relevance of the capital-requirements channel. We also document that the insurance industry crowds outs other investors in the new issuance of (high-yield) MBS.

Banks and Negative Interest Rates
(with Florian Heider and Glenn Schepens) 

Annual Review of Financial Economics (November 2021)

In this paper, we survey the nascent literature on the transmission of negative policy rates. We discuss the theory of how the transmission depends on bank balance sheets, and how this changes once policy rates become negative. We review the growing evidence that negative policy rates are special because the pass-through to banks' retail deposit rates is hindered by a zero lower bound. We summarize existing work on the impact of negative rates on banks' lending and securities portfolios, and the consequences for the real economy. Finally, we discuss the role of different "initial" conditions when the policy rate becomes negative, and potential interactions between negative policy rates and other unconventional monetary policies.

Bank Concentration and Product Market Competition
(with Daniel Streitz) 

Review of Financial Studies (October 2021)

This paper documents a link from bank concentration to markups in non-financial sectors. Exploiting concentration-increasing bank mergers and variation in banks' market shares across industries, we show that higher credit concentration is associated with higher markups, and high-market-share lenders charge lower loan rates. We argue that this is due to the greater incidence of competing firms sharing common lenders that induce less aggressive product market behavior among their borrowers, thereby internalizing potential adverse effects of higher rates. Consistent with our conjecture, the effect is stronger in industries with competition in strategic substitutes where negative product market externalities would be greatest.

How Does Firms' Innovation Disclosure Affect Their Banking Relationships? (with Alminas Zaldokas) 

Management Science (February 2021)

Firms face a trade-off between patenting, thereby disclosing innovation, and secrecy. We show that this trade-off interacts with firms' financing choices. As a shock to innovation disclosure, we study the American Inventor's Protection Act that made firms' patent applications public 18 months after filing, rather than when granted. We find that such increased innovation disclosure helps firms switch lenders, resulting in lower cost of debt, and facilitates their access to syndicated-loan and public capital markets. Our evidence lends support to the idea that public-information provision through patents and private information in financial relationships are substitutes, and that innovation disclosure makes credit markets more contestable.

Life below Zero: Bank Lending under Negative Policy Rates
(with Florian Heider and Glenn Schepens) 

Review of Financial Studies (September 2019), Editor's Choice

We show that negative policy rates affect the supply of bank credit in a novel way. Banks are reluctant to pass on negative rates to depositors, which increases the funding cost of high-deposit banks, and reduces their net worth, relative to low-deposit banks. As a consequence, the introduction of negative policy rates by the European Central Bank in mid-2014 leads to more risk taking and less lending by euro-area banks with greater reliance on deposit funding. Our results suggest that negative rates are less accommodative, and could pose a risk to financial stability, if lending is done by high-deposit banks.

Shock Propagation and Banking Structure
(with Mariassunta Giannetti) 

Review of Financial Studies (July 2019), Editor's Choice

We explore whether lenders' decisions to provide liquidity in periods of distress are affected by the extent to which they internalize the negative spillovers of industry downturns. We conjecture that high-market-share lenders are more likely to internalize negative spillovers and show that they provide liquidity to industries in distress when fire sales are likely to ensue. High-market-share lenders also provide liquidity to customers and suppliers of distressed industries when the disruption of supply chains is expected to be costly. Our results suggest a novel channel to explain why credit concentration may favor financial stability.

Informational Inequity Aversion and Performance (with Iris Bohnet) 

Journal of Economic Behavior & Organization (March 2019)

In labor markets, some individuals have, or believe to have, less data on the determinants of success than others, e.g., due to differential access to technology or role models. We provide experimental evidence on when and how informational differences translate into performance differences. In a laboratory tournament setting, we varied the degree to which individuals were informed about the effort-reward relationship, and whether their competitor received the same or a different amount of information. We find performance is adversely affected only by worse relative, but not absolute, informedness. This suggests that inequity aversion applies not only to outcomes but also to information that helps achieve them, and stresses the importance of inequality in initial information conditions for performance-dependent outcomes.

Do Universal Banks Finance Riskier But More Productive Firms?
(with Daniel Neuhann) 

Journal of Financial Economics (April 2018)

Using variation in bank scope generated by the stepwise repeal of the Glass-Steagall Act in the U.S., we show that the deregulation of universal banks allowed them to finance firms with 14% higher volatility. This increase in risk is compensated by lasting improvements in firms' total factor productivity of 3%. Using bank-scope-expanding mergers to identify shocks to universal banks' private information about borrower firms, we provide evidence that informational economies of scope across loans and non-loan products account for the firm-level real effects of universal banking.

Target Revaluation after Failed Takeover Attempts: Cash versus Stock
(with Ulrike Malmendier and Marcus Opp) 

Journal of Financial Economics (January 2016), Jensen Prize for the best paper published in the Journal of Financial Economics in the areas of corporate finance and organizations (first place)

Cash- and stock-financed takeover bids induce strikingly different target revaluations. We exploit detailed data on unsuccessful takeover bids between 1980 and 2008, and we show that targets of cash offers are revalued on average by +15% after deal failure, whereas stock targets return to their pre-announcement levels. The differences in revaluation do not revert over longer horizons. We find no evidence that future takeover activities or operational changes explain these differences. While the targets of failed cash and stock offers are both more likely to be acquired over the following eight years than matched control firms, no differences exist between cash and stock targets, either in the timing or in the value of future offers. Similarly, we cannot detect differential operational policies following the failed bid. Our results are most consistent with cash bids revealing prior undervaluation of the target. We reconcile our findings with the opposite conclusion in earlier literature (Bradley, Desai, and Kim, 1983) by identifying a look-ahead bias built into their sample construction.

Understanding the Gender Pay Gap: What's Competition Got to Do with It? (with Alan Manning) 

Industrial and Labor Relations Review (July 2010)

A number of researchers have argued that men and women have different attitudes toward and behavioral responses to competition; that is, women are more likely to opt out of jobs in which performance pay is the norm. Laboratory experiments suggest that these gender differences are rather large. To check these hypotheses and findings against differences in the field, the authors use performance pay as an indicator of competition in the workplace and compare the gender gap not only in incidence of performance pay but also in earnings and work effort under these contracts. They find that although women are less likely than men to work under performance pay contracts, the gender gap is small. Furthermore, the effect of performance pay on earnings is modest and does not differ markedly by gender. Consequently, the authors argue, the ability of these competition hypotheses to explain the gender pay gap seems very limited.

Works in Progress

Why So Negative? The Effect of Monetary Policy on Bank Credit Supply across the Euro Area (with Christian Bittner, Diana Bonfim, Florian Heider, Glenn Schepens, and Carla Soares) 

We study the transmission of monetary policy to banks' credit supply in both a high-rate and a low-rate environment. We use the European Central Bank's interest-rate cuts to below zero in mid-2014 and credit-registry data from Germany (euro-area core) and Portugal (euro-area periphery). We provide a simple model of a bank with costly external financing, risk taking, and a zero lower bound (ZLB) on deposit rates. We exploit the core-periphery variation in the distance to the ZLB alongside cross-sectional heterogeneity in banks' balance sheets to show when and how the external-financing constraint and risk taking matter for the transmission mechanism.

Liquidity Regulation and Bank Risk Taking on the Horizon (with Joshua Bosshardt and Ali Kakhbod) 

This paper examines how banks increase the liquidity of their asset portfolios to comply with tighter liquidity requirements, and how this in turn affects their incentives to take risk with their remaining illiquid assets. We find that U.S. banks subject to the Liquidity Coverage Ratio (LCR) comply with it by reducing illiquid assets rather than by increasing liquid assets. We then develop a simple model to motivate channels by which liquidity risk interacts with credit risk. The model predicts that banks with a greater share of stable liabilities are relatively more likely to engage in risk taking in response to tighter liquidity requirements. This prediction is borne out in transaction-level data from syndicated lending. For identification, we exploit variation in investment in long-term bank bonds by insurance companies that are not affected by the LCR. Our results point to a trade-off in ensuring funding resilience over different horizons.

The Bank Liquidity Channel of Financial (In)stability (with Joshua Bosshardt and Ali Kakhbod) 

We examine the system-wide effects of liquidity regulation on banks' balance sheets. In the general equilibrium model, banks have to hold liquid assets, and choose among illiquid assets varying in the extent to which they are difficult to value before maturity, e.g., structured securities. By improving the liquidity of interbank markets, tighter liquidity requirements induce banks to invest in such complex assets. We evaluate the welfare properties of combining liquidity regulation with other financial-stability policies, and show that it can complement ex-ante policies, such as asset-specific taxes, whereas it can undermine the benefits of ex-post interventions, such as quantitative easing.

Mixing QE and Interest Rate Policies at the Effective Lower Bound: Micro Evidence from the Euro Area (with Christian Bittner, Alexander Rodnyansky, and Yannick Timmer) 

In the presence of negative monetary-policy rates and a zero lower bound on deposit rates, banks that are more exposed to central banks' asset-purchase programs reduce their lending to the real economy by more than their counterparts. When banks face a lower bound on customer deposit rates, an asset swap between securities and reserves reduces banks' net worth as the cost of holding reserves cannot be matched with a reduction in their cost of funding. Exploiting euro-area syndicated lending data and the German credit registry, we provide evidence that deposit-reliant banks with relatively higher funding costs and greater exposure to large-scale asset purchases reduce corporate lending relatively more, have lower stock returns, and rebalance their interbank lending from safe to risky countries.

The Allocative Effects of Banks' Funding Costs (with Anne Duquerroy and Adrien Matray) 

In this paper, we document when and how banks adjust their credit supply in response to variations in their funding costs. Using administrative credit-registry and regulatory bank data, we find that higher funding costs lead banks to contract their lending, but they can absorb an increase of up to 21 basis points before doing so. For identification, we exploit the existence of regulated-deposit accounts in France whose interest rates are set by the government. To counterbalance adverse effects on their profits, banks shift their portfolios toward higher-yielding loans when their funding costs increase. Banks' portfolio rebalancing toward smaller, more opaque firms has repercussions for the economy by altering credit allocation at the more aggregate city level and affecting firms' investment behavior therein.

Credit Supply, Firms, and Earnings Inequality (with Christian Moser, Benjamin Wirth, and Stefanie Wolter) 

We study the distributional consequences of monetary policy-induced credit supply in the labor market. To this end, we construct a novel dataset that links worker employment histories to firm financials and banking relationships in Germany. Firms in relationships with banks that are more exposed to the introduction of negative interest rates in 2014 experience a relative contraction in credit supply, associated with lower average wages and employment. These effects are heterogeneous within and between firms. Within firms, initially lower-paid workers are more likely to leave employment, while initially higher-paid workers see a relative decline in wages. Between firms, wages fall by more at initially higher-paying employers. In this way, credit affects the distribution of pay and employment in line with predictions of an equilibrium model with both credit and search frictions.

Health Externalities and Policy: The Role of Social Preferences (with Laura Alfaro, Ester Faia, and Nora Lamersdorf) 

revise & resubmit, Management Science

Social preferences facilitate the internalization of health externalities, for example by reducing mobility during a pandemic. We test this hypothesis using mobility data from 258 cities worldwide alongside experimentally validated measures of social preferences. Controlling for time-varying heterogeneity that could arise at the level at which mitigation policies are implemented, we find that they matter less in regions that are more altruistic, patient, or exhibit less negative reciprocity. In those regions, mobility falls ahead of lockdowns, and remains low after the lifting thereof. Our results elucidate the importance, independent of the cultural context, of social preferences in fostering cooperative behavior.

Social Interactions in a Pandemic (with Laura Alfaro, Ester Faia, and Nora Lamersdorf) 

Externalities and social preferences, such as patience and altruism, play a key role in the endogenous choice of social interactions, which in turn affect the diffusion of a pandemic or patterns of social segregation. We build a dynamic model, augmented with an SIR block, in which agents optimally choose the intensity of both general and group-specific social interactions. The equilibria in the baseline and the SIR-network model result from a matching process governed by optimally chosen contact rates. Taking into account agents' endogenous behavior generates markedly different predictions relative to a naïve SIR model. Through a planner's problem, we show that neglecting agents' response to risk leads to misguided policy decisions. Mobility restrictions beyond agents' restraint are needed to the extent that aggregate externalities are not curtailed by social preferences.

Bank Deregulation and the Rise of Institutional Lending
(with Seung Lee and Daniel Neuhann) 

We study the determinants of increased participation of non-bank financial intermediaries in the market for syndicated loans prior to the 2008 financial crisis. Institutional investors who do not have monitoring expertise disproportionately purchase loan tranches originated by banks able to offer both loans and underwriting services to firms. Our argument is that non-loan exposures to firm performance ensure monitoring incentives even when banks retain small loan shares. Since such universal banking was permitted only after the repeal of the Glass-Steagall Act, our findings suggest a direct link from bank deregulation to the rise of non-bank intermediaries.

Informal Finance, Risk Sharing, and Networks: Evidence from Hunter-Gatherers 

This paper analyzes the relationship between informal finance and the risk-sharing properties of networks. I show that in addition to sharing idiosyncratic risk, network members can also support one another in dealing with aggregate shocks. To identify this, I use data from an Amazonian foraging-farming society, and exploit a flood shock in 2006. Villagers outside the network demanded significantly more credit following the flood than did network members, suggesting that networks allow their members to cope with aggregate shocks through non-financial resources rather than through costly loans. The increased credit demand by villagers outside the network was in turn served through a temporary extension of network benefits across the two groups.

Inequality, Relative Income, and Human Capital Investment
(with Jere Behrman, Ricardo Godoy, and Eduardo Undurraga) 

Do investment responses to income transfers depend on the implied level of redistribution because of social comparisons? In a field experiment in 53 villages of an Amazonian foraging-farming society, we allocated substantial in-kind transfers, varied their associated degree of village income inequality, and measured the short-run effects on individual-level determinants of development. We find that the poorest households invested significantly less in human capital and engaged less with the labor market under an inequality-reducing treatment than under income-distribution neutrality. Our evidence suggests that inequality shapes the development process through social comparisons, and has implications for the effectiveness of transfer programs.