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.
Bank lending to (zombie?) firms. (with Ali Choudhary), Revision requested.
In principle, an increase in corporate debt at risk should be associated with an increase in bank nonperforming loans but we show that there is little correlation between these two measures in emerging market economies and test different causes for this lack of a correlation. We also investigate this relationship more directly using a unique dataset of firm-bank pairs in Pakistan. We find that those banks with lower capital ratios were evergreening some of their loans. This suggest that additional oversight on bank reporting of nonperforming loans is required, especially in emerging market economies.
A Model of Intermediation in a Walrasian Framework (with Robert Townsend) [pdf]
Abstract. We present a tractable model of platform competition in a general equilibrium setting, allowing multiple platforms to emerge. We endogenize the size, number and type of each platform, allowing for different utility functions, different endowments for varying types of agents, and different capital costs. Contrary to the prior literature, both the macro-financial literature on network architecture and the partial equilibrium industrial organization of two sided markets, our economy is efficient. Platforms internalize the network effects of adding more and different types of users by offering bundles which state both the number and composition of users. We use a Walrasian equilibrium concept and allow the price of joining a platform to depend not only on the characteristics of the platform, but the identified type of user. The sum of fees paid for a given active platform will cover its costs. With this extended commodity space, bundling and exclusivity (no multihoming), the first and second welfare theorems apply.
Our model suggests how the equilibrium characterization of two-sided markets changes when we alter the cost structure, as if there is technological innovation which reduces costs, or alter the level and distribution of wealth in the economy, so we can examine the positive implications and the equity/distributional issues. We argue against distortions created through fees or debates on the allocations of costs and against the presumption that platforms with externalities have to be regulated. In the concluding section we also highlight the limitations of our analysis.
Efficient Public Good Provision in Networks: Revising the Lindahl Solution [pdf]
Abstract: 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.
Finance and Inequality: The Distributional Impacts of Credit Rationing. (with Ali Choudhary) [pdf]
Abstract. 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.