Knowledge that Transforms

Over‐the‐counter (OTC) trading thrives despite competition from exchanges. We let OTC dealers cream skim from exchanges in an otherwise standard Glosten and Milgrom framework. Restricting the dealer's ability to cream skim induces “cheap substitution”: some traders exit while others with larger gains from trade enter. Cheap substitution implies trading costs, trade volumes, and market shares are poor policy indicators. In a benchmark case, restricting the dealer raises welfare only if trading cost increases, volume falls, and OTC market share is high. By contrast, the restriction improves welfare when adverse selection risk is low. A simple procedure implements the optimal Pigouvian tax.

An entrepreneur makes offers to multiple investors to fund a project that requires a minimum investment. Concerned about other investors' decisions, each investor strategically communicates information about the project to others. When investors have conflicts of interest, those with contractually stronger incentives to invest attempt to persuade others to invest. Depending on the project's ex ante quality, the entrepreneur may promise investors different returns to create conflicts of interest and induce persuasion, or may promise investors an identical return to align their interests and induce truthful communication. The paper illustrates a new motivation for syndication and hierarchy within syndicates.

Recent influential work finds large increases in inequality in the United States based on measures of wealth concentration that notably exclude the value of social insurance programs. This paper shows that top wealth shares have not changed much over the last three decades when Social Security is properly accounted for. This is because Social Security wealth increased substantially from $7.2 trillion in 1989 to $40.6 trillion in 2019 and now represents nearly 50% of the wealth of the bottom 90% of the wealth distribution. This finding is robust to potential changes to taxes and benefits in response to system financing concerns.

This paper examines venture capital's (VC) role in the geographic clustering of high‐growth startups. We exploit a rule change that disproportionately impacted U.S. regions that historically lacked VC financing via a restriction of banks to invest in the asset class. A one‐standard‐deviation increase in VCs' exposure to the rule led to a 20% decline in fund size and a 10% decrease in the likelihood of raising a follow‐on fund. Startups were not wholly cushioned: financing and valuations declined. Startups also moved out of impacted states after the rule change, likely exacerbating existing geographic disparity in entrepreneurship.

We study theoretically how the proliferation of new data (“data abundance”) affects the allocation of capital between quantitative and nonquantitative asset managers (“data miners” and “experts”), their performance, and price informativeness. Data miners search for predictors of asset payoffs and select those with a sufficiently high precision. Data abundance raises the precision of the best predictors, but it can induce data miners to search less intensively for high‐precision signals. In this case, their performance becomes more dispersed and they receive less capital. Nevertheless, data abundance always raises price informativeness and can therefore reduce asset managers' average performance.

This paper investigates the role of private equity (PE) in failed‐bank resolutions after the 2008 financial crisis, using proprietary Federal Deposit Insurance Corporation failed‐bank acquisition data. PE investors made substantial investments in underperforming and riskier failed banks, particularly in geographies where local banks were also distressed, filling the gap created by a weak, undercapitalized banking sector. Using a quasi‐random empirical design based on detailed bidding information, we show that PE‐acquired banks performed better ex post, with positive real effects for the local economy. Overall, PE investors played a positive role in stabilizing the financial system through their involvement in failed‐bank resolution.

The reordering of transactions from “high‐to‐low” is a controversial bank practice thought to maximize fees paid by low‐income customers on overdrawn accounts. We exploit a series of class‐action lawsuits that mandated that some banks cease the practice. Using alternative credit bureau data, we find that after banks cease high‐to‐low reordering, low‐income individuals reduce payday borrowing, increase consumption, realize long‐term improvements in financial health, and gain access to lower‐cost loans in the traditional financial system. These findings suggest that aggressive bank practices can create demand for alternative financial services and highlight an important link between the traditional and alternative financial systems.

We study the effects on corporate loan rates of an unexpected change in the Italian legislation that forbade interlocking directorates between banks. Exploiting multiple firm‐bank relationships to fully account for all unobserved heterogeneity, we find that prohibiting interlocks decreased the interest rates of previously interlocked banks by 14 basis points relative to other banks. The effect is stronger for high‐quality firms and for loans extended by interlocked banks with a large joint market share. Interest rates on loans from previously interlocked banks become more dispersed. Finally, firms borrowing more from previously interlocked banks expand investment, employment, and sales.

I show that households work and earn more (less) when their floating‐rate mortgage payments quasi‐exogenously increase (decrease). The response is sizable and asymmetric: on average, households adjust their income by 35% of the change in their mortgage payment, but the response is significantly stronger following an increase in payments. While men in dual‐earner, childless households respond the most on average, the asymmetry is most pronounced for women and young workers, who respond particularly strongly to payment increases. The asymmetry of the labor supply elasticity may help explain the wide range of elasticities found in previous research.

We study the impact of an MBA‐style executive education course in finance on corporate policies and firm performance targeting top managers of medium and large Mozambican enterprises. Using a randomized controlled trial, we find that the educational treatment induces changes in financial policies that improve firm performance. Specifically, a reduction in working capital (0.4 to 0.5 standard deviations) increases cash flow, and in turn long‐term investments. This effect operates primarily through a reduction in accounts receivable (0.4 to 1 standard deviations). Our findings show that targeted educational interventions can build managerial capital and enhance corporate performance by improving financial decision making among executives.