Strategy

The largest economic cost of the COVID-19 pandemic could arise from changes in behavior long after the immediate health crisis is resolved. A potential source of such a long-lived change is scarring of beliefs, a persistent change in the perceived probability of an extreme, negative shock in the future. We show how to quantify the extent of such belief changes and determine their impact on future economic outcomes. We nd that the long-run costs for the U.S. economy from this channel is many times higher than the estimates of the short-run losses in output.

This paper estimates a structural model of unconventional monetary policy transmission through bank balance sheets using cross-sectional instruments for loan and deposit demand. We estimate the demand for banking at a branch-specific level from the response of a bank's quantities at one branch to interest rate changes caused by demand shocks at other branches. Depositors are considerably less sensitive to interest rates than corporate or mortgage borrowers.

The Great Recession was a deep downturn with long-lasting effects on credit, employment and output. While narratives about its causes abound, the persistence of GDP below pre-crisis trends remains puzzling. We propose a simple persistence mechanism that can be quantified and combined with existing models. Our key premise is that agents don't know the true distribution of shocks, but use data to estimate it non-parametrically. Then, transitory events, especially extreme ones, generate persistent changes in beliefs and macro outcomes.

"Big data" financial technology raises concerns about market inefficiency. A common concern is that the technology might induce traders to extract others' information, rather than to produce information themselves. We allow agents to choose how much they learn about future asset values or about others' demands, and we explore how improvements in data processing shape these information choices, trading strategies and market outcomes. Our main insight is that unbiased technological change can explain a market-wide shift in data collection and trading strategies.

This paper shows that when the bankruptcy code protects the creditors' rights with no impairments to secured creditors, issuance of debt such as repo with exemption from automatic stay adds no value. When the bankruptcy process admits violations of absolute priority rules or results in collateral impairments to secured creditors, the liability structure includes short-term debt, with safe harbor protection when the pledged collateral satisfies a minimum liquidity threshold.

An information system is a primitive structure that defines which agents can initially get information and how such information is then distributed to others. From political and organizational economics to privacy, information systems arise in various contexts and, unlike information itself, can be easily observed empirically. We introduce a methodology to characterize how information systems affect strategic behavior. This involves proving a revelation principle result for a novel class of constrained information design problems.

A key distinction between over-the-counter markets and centralized exchanges is the non-anonymity of the transactions. In this paper, we develop a model of non-anonymous trading and compare its prices, liquidity, and efficiency of asset allocations against a baseline with anonymous transactions. The non-anonymity improves the market liquidity by reducing the concerns for adverse selection. More specifically, it allows the market participants to learn valuable information about their counterparties through repeated interactions and consequently enables them to form trading relationships.

Matt Frisch, VP of Corporate Development for Canadian pharmaceutical wholesaler Kohl & Frisch, had successfully led the charge to buy out US-based rival AmerisourceBergen Canada (ABC). ABC's aggressive price cuts had disrupted the industry -- before squeezing its own revenues to the point where leaders at its Pennsylvania headquarters decided to divest the Canadian unit rather than subsidize an unprofitable operation.

We derive a measure of firm-level regulatory exposure from the text of corporate earnings calls. We use this measure to study the effect of regulation on companies’ growth, leverage, profitability, and equity returns. Higher regulatory exposure results in slower sales and asset growth, lower leverage, reduced profitability, but higher post-call equity returns. These effects are mitigated for larger firms. Our findings suggest that both compliance risk and physical operational cost are consequences of increased regulation, but the magnitude of the effects of compliance risk are larger.