Academic publications

Why are Manufacturing Plants Smaller in Developing Countries? Theory and Evidence from India, [pdf] with Siddharth Kothari (IMF). Forthcoming, Journal of Political Economy — Macroeconomics.
Poorer countries (and poorer states within India) have a larger share of manufacturing employment in small plants. This paper presents empirical evidence and a theoretical model to show that this relationship is driven by greater demand for lower quality goods in poorer regions, which can be produced efficiently in small plants. First, using data for India, we show that richer households buy higher price goods and larger plants produce higher price products. Second, we develop a model that matches these facts. Finally, we find that our model explains about forty percent of the cross-state variation in the size distribution of manufacturing plants in India.

Finance and Inequality: The Distributional Impacts of Credit Rationing, with Ali Choudhary, [link], October 2022, Journal of Financial Intermediation.
We analyze reductions in bank credit using a natural experiment where unprecedented flooding differentially affected banks that were more exposed to flooded regions in Pakistan. Using a unique dataset that covers the universe of consumer loans in Pakistan and this exogenous shock to bank funding, we find two key results. First, banks disproportionately reduce credit to new and less-educated borrowers, following an increase in their funding costs. Second, the credit reduction is not compensated by relatively more lending by less-affected banks. The empirical evidence suggests that adverse selection is the primary cause for banks disproportionately reducing credit to new borrowers.

Corporate stress and bank nonperforming loans: Evidence from Pakistan, with Ali Choudhary, [pdf], December 2021, Journal of Banking and Finance.
Using detailed administrative Pakistani credit registry data, we show that banks with low leverage ratios are both significantly slower and less likely to recognize a loan as nonperforming than other banks that lend to the same firm. Moreover, we find suggestive evidence that this lack of recognition impedes loan curing, with banks with low leverage ratios reporting significantly higher final default rates than other banks for the same borrower (even after controlling for differences in loan terms). Our empirical findings are consistent with the theoretical prediction that classifying a nonperforming loan is more expensive for banks with less capital. A previous version of this paper was called “Bank lending to (zombie?) firms.”

A Model of Intermediation in a Walrasian Framework, with Robert Townsend [pdf], April 2021, Economic Theory.
We present a tractable model of platform competition in a general equilibrium setting. We endogenize the size, number, and type of each platform, while allowing for different user types in utility and impact on platform costs. The model is applicable to the recent growth in digital currency platforms. The economy is Pareto efficient because platforms internalize the network effects of adding more or different types of users by offering type-specific contracts that state both the number and composition of platform users. Using the Walrasian equilibrium concept, the sum of type-specific fees paid cover platform costs. Given the Pareto efficiency of our environment, we argue against the presumption that platforms with externalities need be regulated.

How Public Information Affects Asymmetrically Informed Lenders: Evidence from a Credit Registry Reform, with Ali Choudhary, March 2020, Journal of Development Economics. [pdf]
We exploit exogenous variation in a firm’s public information available to banks to empirically evaluate the importance of adverse selection in the credit market using a Pakistani banking reform that reduced public information. Originally, the central bank published credit information about the firm and (aggregate) credit information about the firm’s group. After the reform, the central bank stopped providing the aggregate group-level information. We construct a measure for the amount of information each lender has about a firm’s group using the set of firm-bank lending pairs prior to the reform. We show those banks with private information about a firm lent relatively more to that firm than other, less-informed banks following the reform. Remarkably, this reduction in lending by less informed banks is true even for banks that had a preexisting relationship with the firm, suggesting that the strength of prior relationships does not eliminate the problem of imperfect information.

Policy-orientated publications

Global Spillovers of a Chinese Growth Slowdown with S. Ahmed, R. Correa, D. Dias, N. Gornermann, J. Hoek, Edith Liu, and A. Wong, December 2022, Journal of Risk and Financial Management. [PDF]
This paper analyzes the potential spillovers of a slowdown in Chinese growth to the United States and the rest of the world. Through a combination of structural VAR and DSGE analyses, we find that (1) spillovers from China to the rest of the world have grown significantly in the past decade; (2) the negative growth spillovers to the United States are more modest than to emerging market economies—particularly for commodity exporters—or other advanced economies, primarily because the latter group has larger direct exposure in trade to China; and (3) although the United States has limited direct financial exposure to China, the negative spillovers to the U.S. economy are amplified significantly if the negative Chinese growth shock leads to adverse global risk sentiment and monetary policy in the United States is constrained in its reaction.

Working papers

Timing Lumpy Investments with informal bridging loans and clunky formal loans: Evidence from Thailand [pdf], with Robert Townsend (MIT) and Fan Wang (University of Houston), Revision requested, Review of Financial Studies
This paper theoretically and empirically explores formal and informal credit market interactions where informal credit access can help to complete a borrower’s choice set. First, using Thai household data, we empirically document: the co-existence of formal and informal loans for the same household; informal loans are short with high interest rates; formal loan terms are rigid; and, little long-term borrowing.
Second, we model a less-studied aspect of formal microfinance lending—short-term formal loans that with a bullet payment, where the borrower must repay the principal and interest at maturity–in a dynamic setting. We show that households can exploit flexible short-term informal loans as bridging loans, thereby, in effect, rolling a sequence of short-term formal loans into longer-term debt. Third, we characterize the conditions under which formal and informal loans are available. Finally, we evaluate the short and long-term effects of increasing the supply of formal loans and easing constraints on formal lenders (such as interest rate subsidies) on household welfare in village economies.

The Sources of Researcher Variation in Economics, with Nick Huntington-Klein (Seattle University), Claus C. Pörtner (Seattle University), and others [pdf]. Revision Requested, Journal of Economic Literature
We use a rigorous three-stage many-analysts design to assess how different researcher decisions—specifically data cleaning, research design, and the interpretation of a policy question—affect the variation in estimated treatment effects. A total of 146 research teams each completed the same causal inference task three times each: first with few constraints, then using a shared research design, and finally with pre-cleaned data in addition to a specified design. We find that even when analyzing the same data, teams reach different conclusions. In the first stage, the interquartile range (IQR) of the reported policy effect was 3.1 percentage points, with substantial outliers. Surprisingly, the second stage, which restricted research design choices, exhibited slightly higher IQR (4.0 percentage points), largely attributable to imperfect adherence to the prescribed protocol. By contrast, the final stage, featuring standardized data cleaning, narrowed variation in estimated effects, achieving an IQR of 2.4 percentage points. Reported sample sizes also displayed significant convergence under more restrictive conditions, with the IQR dropping from 295,187 in the first stage to 29,144 in the second, and effectively zero by the third. Our findings underscore the critical importance of data cleaning in shaping applied microeconomic results and highlight avenues for future replication efforts.

Identifying the marginal borrower under adverse selection: A simple model, [pdf], Revision requested, Journal of Financial Services Research.
This paper presents a simple model of financial intermediation between a monopolist lender and credit-constrained entrepreneurs with private information. To specifically examine heterogeneity in credit outcomes, we introduce different groups of entrepreneurs that vary in the likelihood of repaying a loan both within groups and across groups. Our paper’s main result is that as we increase the lender’s funding cost, those entrepreneur groups that have a higher degree of adverse selection are more affected. That is, the reduction in credit is larger and the increase in interest is higher for these groups. The intuition for this result is that as the lender increases the interest rate, the share of “bad” borrowers rises faster for those groups with a higher degree of adverse selection. In turn, this forces the lender to increase the interest rate more for these groups, and consequently, causing a larger credit reduction.

Do banks gain from inflation? Evidence from inflation surprises, [pdf] with Nathan Converse (Federal Reserve Board). Under review.
Using a high-frequency event study, we examine the effect of inflation on bank profitability by analyzing banks’ risk-adjusted stock returns in a narrow time-window around U.S. consumer price inflation releases. We find that bank stock prices outperform the broader stock market on higher-than-expected consumer price inflation prints. Moreover, we find that this relationship is substantially larger during periods of high inflation. We find evidence that the key channel for this outperformance of bank stock prices is through higher-than-expected inflation causing interest rates to rise, and consequently, bank profits to rise due to incomplete passthrough of higher rates into bank deposit rates.

Credit access and relational contracts: An experiment testing informational and contractual frictions for Pakistani farmers, [pdf] with Ali Choudhary (State Bank of Pakistan).
Credit access is limited in rural areas, especially in developing economies. Using a novel three-stage experimental design in Pakistan, first, we document that bank lending only serves a small fraction of rural credit demand. Second, we test the importance of information and enforcement technology frictions for limiting bank lending by randomly varying loan contractual terms across farmers. We find that enforcement technology is the primary friction for limiting bank lending. Third, using a final survey, we document that farmers tend to correctly identify the financial consequences of non-repayment. Fourth, our results suggest one possible solution to overcome this financial friction—a motivated and interlinked intermediary.

Financing Repeat Borrowers: Designing Credible Incentives for Today and Tomorrow, [pdf] with Piruz Saboury (University of Houston)
We analyze relationship lending when borrower cash flows are not contractible and the costs of intermediation vary over time. Because lenders provide repayment incentives to borrowers through the continuation value of the lending relationship, borrowers will condition loan repayment on the likelihood of receiving loans in the future. Therefore, the borrower’s beliefs about the lender’s future liquidity become an important component of the borrower’s repayment decision. Consequently, the possibility of high lending costs in the future weakens repayment incentives and causes an inefficient under-provision of credit. Moreover, as the likelihood of a prolonged period of high liquidity cost increases, the adverse effect of future liquidity constraints on today’s lending decisions exacerbates. We discuss the application of our model to the case of microfinance.

Efficient Public Good Provision in Networks: Revising the Lindahl Solution [pdf].
The provision of public goods in developing countries is a central challenge. I examine a model where each agent’s effort provides heterogeneous benefits to the others, inducing a network of opportunities for favor-trading. I focus on a classical efficient benchmark — the Lindahl solution — that can be derived from a bargaining game. Does the optimistic assumption that agents use an efficient mechanism (rather than succumbing to the tragedy of the commons) imply incentives for efficient investment in the technology that is used to produce the public goods? To show that the answer is “no” in general, we give comparative statics of the Lindahl solution which have natural network interpretations. We then suggest some welfare-improving interventions.