Working Papers
- "The Real Effect of Financial Reporting: A Quantitative Assessment," Joint with Pierre Liang and Bo Sun). R&R.
To quantify the role of financial reporting in improving investment efficiency, we embed a real-effect model of financial reporting into the neoclassical dynamic investment theory. We calibrate the model to assess the degree of reporting quality in the data and evaluate its economic consequences through an investment channel. Our result suggests that a near doubling in reporting quality would lead to a 5.5% increase in firm output, representing a sizable benefit to the real economy. In addition, our analysis indicates that key aspects of recent economic developments collectively point to an increasingly prominent role of reporting quality in promoting investment efficiency.
- "The Macroeconomic and Distributional Implication of Fiscal Consolidations in Low-Income Countries," Joint with Adrian Peralta-Alva, Xin Tang, and Marina Mendes Tavares). Under Review.
Developing countries have substantially lower tax revenue to GDP ratios than richer economies.Paradoxically, developing countries are also the ones with the largest infrastructure development needs, and require larger fiscal buffers to smooth external and domestic shocks. Substantial efforts have been made during the last two decades to strengthen revenue collections in developing countries. Many of these reforms have had increases in effective VAT rates as a key component. In this paper, we investigate the impact on output and on the income distribution of raising revenue through VAT. Our tool of analysis is a heterogeneous multi-sector model carefully calibrated to capture key features of developing countries. We find that in low income countries (LICs) the cost of raising government revenue is higher in terms of both output and poverty than in middle income countries. This also means compensatory measures to alleviate the regressive aspects of VAT in LICS are costlier to implement than in more developed countries.
- "Managerial Incentives, Monitoring, and the Business Cycle," (Joint with Bo Sun and Eric Young). Under Review.
Regulatory investigations affect information in financial markets through two channels: (i) investigations detect financial manipulation and reveal hidden negative information;(ii) regulatory investigations impose adverse consequences for executives involved in manipulation and deter managerial incentives to manipulate ex ante. More- over, regulatory intensity varies over time, depending on the aggregate state of the economy. We propose a model to study the implications of cyclical regulatory intensity for stock market dynamics, and show that countercyclicality in financial regulation can lead to countercyclicality in crash risk in the stock markets. We also provide evidence that a strong relation between stock crash risk and the business cycle exists in the data. In addition, our model illustrates a unifying mechanism that contributes to a number of stylized facts including gradual booms and sudden crashes in the financial markets, increased crash risk, and countercyclical stock volatility.
This paper studies the effectiveness of longer-term unsecured credit contracts in improving credit access, consumption smoothing, and welfare. I find that longer-term contracts result in higher average borrowing interest rates and hence lower levels of borrowing and fewer borrowers in the equilibrium. In addition, I show that longer-term contracts reduce consumer welfare. I also investigate the welfare implications of interest rate ceilings and show that imposing a modest interest rate cap under long-term contracts improves welfare.