Altruism, Social Interactions, and the Course of a Pandemic
(with Laura Alfaro, Ester Faia, and Nora Lamersdorf) 

European Economic Review (January 2024)

Externalities and social preferences, such as altruism, play a key role in the choice of social interactions, which in turn affect the diffusion of a pandemic. We build a dynamic epidemiological model with endogenous social interactions in a frictional environment, also in a variant with heterogeneous agents and a network structure. Taking into account agents' endogenous behavior and altruism generates markedly different predictions relative to a naïve epidemiological model with exogenous contact rates. Congestion and commitment inefficiencies arise, even under full altruism, and call for policy intervention. We derive the efficient allocation, and show how the Ramsey planner can mitigate the respective externalities.

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 (December 2022)

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.

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

Management Science (September 2022)

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.

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

Army of Mortgagors: Long-Run Evidence on Credit Externalities and the Housing Market (with Tobias Herbst and Moritz Kuhn) 

Houses are the most important asset on American households' balance sheets, rendering the U.S. economy sensitive to house prices. There is a consensus that credit conditions affect house prices, but to what extent remains controversial, as an expansion in credit supply often coincides with changes in house price expectations. To address this long-standing question, we rely on novel microdata on the universe of mortgages guaranteed under the Veterans Administration (VA) loan program. We use the expansion of eligibility of veterans for the VA loan program following the Gulf War to estimate a long-lived effect of credit supply on house prices. We then exploit the segmentation of the conventional mortgage market from program eligibility to link this sustained house price growth to developments in the initially unaffected segment of the credit market. We uncover a net increase in credit for all other residential mortgage applicants that aligns closely with the evolution of house price growth, which supports the view that credit-induced house price shocks are amplified by beliefs.

Insurers Monitor Shocks to Collateral: Micro Evidence from Mortgage-backed Securities
(with Thiemo Fetzer, Benjamin Guin, and Felipe Netto) 

This paper uncovers if and how insurance companies react to shocks to collateral in their portfolio of securitized assets. We address this question in the context of commercial real estate (CRE) cash flow shocks, which are informationally opaque to holders of commercial mortgage-backed securities (CMBS). Using detailed micro data, we show that cash flow shocks caused by lease expiration cause CRE mortgage delinquency and especially so for offices after the COVID-19 pandemic, reflecting lower demand for these properties. Insurers react to such cash flow shocks by selling more exposed bonds, and the composition of their CMBS portfolio affects their trading behavior in other assets. Our results indicate that institutional investors actively monitor underlying asset risk, and highlight the role played by cash flow shocks in CRE lending.

The Augmented Bank Balance-Sheet Channel of Monetary Policy
(with Christian Bittner, Diana Bonfim, Florian Heider, Glenn Schepens, and Carla Soares) 

We study how banks' balance sheets and funding costs interact in the transmission of monetary-policy rates to banks' lending behavior. We use credit-registry data from Germany and Portugal together with the European Central Bank's policy-rate cuts in mid-2014. When deposit rates are closer to the zero lower bound, heterogeneity in banks' financing constraints matters less for credit supply and there is more risk taking. To rationalize these findings, we provide a model of an augmented bank balance-sheet channel where an impaired pass-through of monetary policy to banks' funding costs reduces their ability to lever up and weakens their lending standards.

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) 

We study the interaction of expansionary rate-based monetary policy and quantitative easing, despite their concurrent implementation, by exploiting heterogeneous banks and the introduction of negative monetary-policy rates in a fragmented euro area. Quantitative easing increases credit supply less, translating into weaker employment growth, when banks' funding costs do not decrease. Using administrative data from Germany, we uncover that among banks selling their securities, central-bank reserves remain disproportionately with high-deposit banks that are constrained due to sticky customer deposits at the zero lower bound. Affected German banks lend relatively less to firms while increasing their interbank exposure in the euro area.

Tracing Banks' Credit Allocation to their Profits
(with Anne Duquerroy and Adrien Matray) 

We quantify how banks' funding-related expenses affect their lending behavior. For identification, we exploit banks' heterogeneous liability composition and the existence of regulated deposits in France whose rates are set by the government. Using administrative credit-registry and regulatory bank data, we find that a one-percentage-point increase in average funding costs reduces banks' credit supply by 17%. To insulate their profits, affected banks also reach for yield and rebalance their lending towards smaller and riskier firms. These changes are not compensated for by less affected banks at the aggregate city level, which implies that large firms have to reduce their investment.

Banking on the Edge: Liquidity Constraints and Illiquid Asset Risk
(with Joshua Bosshardt and Ali Kakhbod) 

We examine how banks' liquidity requirements affect their incentives to take risk with their remaining illiquid assets. Our model predicts that banks with more stable liabilities are more likely to increase risk taking in response to tighter liquidity requirements. This prediction is borne out in transaction-level data on corporate and household lending by U.S. banks subject to the liquidity coverage ratio (LCR). For identification, we exploit variation in long-term bank bonds held by insurance companies that are not affected by the LCR. Our results highlight a trade-off between bank risk taking and simultaneously curbing short-term and long-term liquidity-risk exposures.

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, liquidity requirements can 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.

Strategic Communication among Banks (with Christian Bittner, Falko Fecht, and Melissa Pala) 

Do economic incentives govern information diffusion in markets? Using international banks' advisory activities in corporate takeovers as their source of private information, we show in supervisory data that banks with closer ties to the target, but not the acquirer, advisor trade profitably in the target's stock prior to the deal announcement. This trading behavior is associated with a higher premium paid by the acquirer without compromising the deal success. As the incentives of informed traders are aligned only with those of the target shareholders, which are represented by the target advisor, our evidence suggests deliberate private-information disclosure among these banks.

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.

Less Bank Regulation, More Non-Bank Lending
(with Mary Chen, Seung Lee, and Daniel Neuhann) 

revise & resubmit, Review of Finance

Bank deregulation in the form of the repeal of the Glass-Steagall Act facilitated the entry of non-bank lenders into the market for syndicated loans during the pre-2008 credit boom. Institutional investors disproportionately purchase tranches of loans originated by universal banks able to cross-sell loans and underwriting services to firms (as permitted by the repeal). A shock to cross-selling intensity increases loan liquidity at origination and over time. The mechanism is that non-loan exposures ensure monitoring even when banks retain small loan shares. Our findings complement the conventional view that regulatory arbitrage caused the rise of non-bank lenders.

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.