Knowledge that Transforms

We explore whether bank regulatory oversight affects the ability of environmental enforcement to reduce industrial emissions. A major objective of environmental enforcement is to reduce industrial emissions by encouraging firms to employ greener production processes and technologies. However, such changes often require external financing obtained from banks, and prior research shows that regulatory oversight of banks can affect bank lending. We find that, on average, the reduction in air pollution in response to county‐level environmental enforcement is attenuated in counties exposed to increased bank regulatory oversight, as measured by severe enforcement actions. Furthermore, we show that the negative impact of bank regulatory oversight on small business lending to affected counties is the likely mechanism behind this on‐average effect. However, when bank regulatory oversight targets banks with stronger capitalization, we find that the negative effect of bank regulatory oversight on environmental enforcement is mitigated. Collectively, our findings suggest that bank regulation has a nuanced effect on the extent to which environmental enforcement reduces emissions, indicating that one regulator's mission can impact the objectives of another.

Prevailing theories of financial intermediation assume an integrated financial sector with frictionless risk‐sharing. However, we identify substantial risk‐sharing frictions linked to intermediary specialization using currency derivatives markets as a laboratory. Using confidential supervisory data covering $25 trillion in daily bank exposures, we document imperfect hedging in banks' FX‐swap intermediation: banks rarely hedge their synthetic dollar lending with maturity‐matched foreign safe assets. Intermediaries specialize in markets in which they have expertise in managing the associated exposures, giving rise to cross‐market variation in deviations from covered‐interest parity. Our results highlight the importance of intermediary specialization and its impact on risk premia.

Prior research criticizes PCAOB inspection reports for focusing solely on audit deficiencies, arguing that this encourages auditors to pursue traditional procedures to demonstrate compliance with standards rather than procedures that maximize audit quality. We contribute to this debate by examining whether the PCAOB's approach discourages auditors from considering innovative audit procedures (that are potentially more effective), since they are, by definition, less standard. We compare the PCAOB's current inspection approach (which focuses on reporting audit deficiencies) to a balanced inspection approach that discloses examples of audit strengths as well as deficiencies discovered during inspections. We predict and find that when the risk of material misstatement (RMM) is moderate, a balanced inspection approach leads auditors to consider the potential effectiveness of innovative audit procedures to a greater extent, ultimately prioritizing more of them in audit plans. Our findings contribute to both research and practice by enhancing our understanding of ways to encourage audit innovation and ultimately improve overall audit quality.

We develop a complete-market production economy in which heterogeneous beliefs about productivity growth affect both asset prices and real activity. Firms must hire workers before productivity is realized, so operating leverage increases the exposure of profits to productivity risk. Because the firm’s discount factor depends on a wealth-weighted aggregation of investor beliefs, shifts in optimism compress risk premia and raise employment, while reversals trigger contractions. This mechanism generates an equilibrium feedback between asset prices, hiring, and risk exposure. A taxonomy of belief systems shows that only extrapolative beliefs produce amplification and endogenous risk build-up. Disciplined by survey expectations, the model jointly matches key asset-pricing, trading-volume, and business-cycle moments.

How do investor reactions to the mandatory disclosure of firm tax information influence managers' reporting choices? To answer this question, we build a structural model of reporting bias, which we test with a unique data set of Turkish firms that have been mandated to publicly disclose their tax returns since 2009. We find that both book and tax income numbers are informative to investors. Structural estimates are consistent with disclosure of the tax report reducing both market incentives to manage book earnings and investor uncertainty about underlying firm value. Tax disclosure is associated with higher reported tax income, though the increase is not statistically significant. Counterfactual estimates suggest that book‐tax‐conformity could change financial and tax reporting biases, but lead to a lower quality information environment relative to the separate disclosure of book and tax reports.

We study how online job search advice affects job search behavior and labor market outcomes of unemployed workers. In a large-scale field experiment embedded in the online platform of the Danish public employment service, we provide job seekers with vacancy information and occupational recommendations. Using a two-stage randomized design with regionally varying treatment intensities, we examine both direct effects of advice and treatment spillovers. We find that advice significantly increases employment and earnings when provided to a limited share of job seekers. As treatment intensity rises, these effects diminish and eventually disappear. The decline is driven by negative spillovers among treated job seekers, consistent with increased congestion in the occupations toward which job seekers redirect their search. Spillover effects on untreated job seekers are heterogeneous and depend on how advice alters occupation-specific competition in local labor markets.

Quality regulation seeks to ensure quality and foster competition by reducing vertical differentiation, but it may also have adverse effects on market structure. We study this trade-off in the context of pharmaceutical bioequivalence, which is the primary quality standard for generic drugs. By exploiting the introduction of bioequivalence in Chile, we find that stronger regulation reduced the number of drugs in the market by 18% and increased average paid prices by 13%. We estimate a model of drug entry, certification, and demand to study how drug quality, aversion to generics, and certification costs shape the equilibrium effects of quality regulation. We find that quality regulation increased demand for generic drugs by resolving asymmetric information and reducing aversion to unbranded generics, which induced the entry of high-quality drugs in place of low-quality drugs. Consumer welfare increased despite higher prices and a lower number of firms. We compare minimum quality standards with alternative designs of quality regulation, including quality disclosure.

We study competition between two payment instruments: bank deposits and digital platform tokens. Using a Hotelling model that integrates the theory of two-sided markets and payment economics, we assess how this competition is affected by a public payment infrastructure that makes private payment instruments interoperable. We show that interoperability, whether implemented as a fast payment system (FPS) or a central bank digital currency (CBDC), may eliminate payment access exclusion and increase trade volumes and social welfare, but at the cost of some disintermediation. When new payment service providers (PSPs) enter and compete for consumers, they soften competition for merchants: incumbent intermediaries then charge merchants higher fees and earn higher profits. This contrasts with entry of PSPs on the merchant side, which disciplines incumbent fees instead.