Research
"On the Number and Size of Banks: Efficiency and Equilibrium."
Abstract:
I develop a model with limited commitment and endogenous monitoring to study the optimal number and size of banks. Banking arises endogenously because of economies of scale. The planner designates a fraction of ex-ante homogenous agents to be bankers and concentrates monitoring efforts on them. Having fewer bankers reduces total monitoring costs, but this means more deposits per banker. Having more deposits, however, increases the bankers’ incentives to divert deposits for their own profit. The result is that the planner needs to give the bankers some reward to dissuade such opportunistic behavior. The optimal number of banks is negatively related to the fixed and marginal monitoring costs, impatience, and the temptation to default, but positively related to the rate of return. To implement efficient allocations, there is a tension between equilibrium with free entry and having positive bank profit for incentive reasons. The equilibrium allocation is optimal only if the government limits entry of banks. One natural way is to charge a tax on bankers and give a transfer to non-bankers; another way is to simply impose a quota by limiting the number of bank charters.
"One-child Policy, Life Cycle Earnings and the Household Saving Puzzle in China." (with Zhewen Xu) (draft available upon request)
Abstract:
Using an overlapping generations model, we propose a resolution of the high household saving puzzle in China by analyzing the impact of the one-child policy and the resulting flattening of age-earning profiles on household saving behavior. Following Ben-Porath’s (1967) human capital accumulation technology, with the implementation of the one-child policy, the initial human capital of each young worker who enters into the job market increases, which results in a decrease of the worker’s on-the-job-training, and thus a flattening of age-earning profiles. The flattened age-earning profiles encourage younger cohorts to save more for consumption smoothing, and, therefore, provides an explanation for the high saving rates among the young at the household level. At the aggregate level, the demographic change due to the increase of the main savers' share also leads to higher saving rates. Moreover, we use the endogenous discount factor of Barro and Becker (1989), which assumes the time preference rate is a function of the number of children, and this amplifies the flattening of age-earning profiles. Both the data and the model demonstrate that our mechanism is valid.
"Rational Expectations, Difference of Opinions and Asset Pricing." (with Xu Wei) (draft available upon request)
Abstract:
This paper applies the concept of relative overconfidence (the measure of how heavily investors depend on others’ information) to combine the rational expectations equilibrium (REE) and difference of opinions (DO) models. We discuss the effects of relative overconfidence on asset price efficiency and trading volume. We find that when investors hold assets to maturity, relative overconfidence has no effect on price efficiency and trading volume. However, when investors speculate, relative overconfidence reduces price informativeness and trading volume because investors will reckon asset prices as noisier and find it meaningless to speculate on capital gains based on their private information. Our results highlight the role of speculation in differentiating REE and DO models and influencing the effects of overconfidence.
Abstract:
I develop a model with limited commitment and endogenous monitoring to study the optimal number and size of banks. Banking arises endogenously because of economies of scale. The planner designates a fraction of ex-ante homogenous agents to be bankers and concentrates monitoring efforts on them. Having fewer bankers reduces total monitoring costs, but this means more deposits per banker. Having more deposits, however, increases the bankers’ incentives to divert deposits for their own profit. The result is that the planner needs to give the bankers some reward to dissuade such opportunistic behavior. The optimal number of banks is negatively related to the fixed and marginal monitoring costs, impatience, and the temptation to default, but positively related to the rate of return. To implement efficient allocations, there is a tension between equilibrium with free entry and having positive bank profit for incentive reasons. The equilibrium allocation is optimal only if the government limits entry of banks. One natural way is to charge a tax on bankers and give a transfer to non-bankers; another way is to simply impose a quota by limiting the number of bank charters.
"One-child Policy, Life Cycle Earnings and the Household Saving Puzzle in China." (with Zhewen Xu) (draft available upon request)
Abstract:
Using an overlapping generations model, we propose a resolution of the high household saving puzzle in China by analyzing the impact of the one-child policy and the resulting flattening of age-earning profiles on household saving behavior. Following Ben-Porath’s (1967) human capital accumulation technology, with the implementation of the one-child policy, the initial human capital of each young worker who enters into the job market increases, which results in a decrease of the worker’s on-the-job-training, and thus a flattening of age-earning profiles. The flattened age-earning profiles encourage younger cohorts to save more for consumption smoothing, and, therefore, provides an explanation for the high saving rates among the young at the household level. At the aggregate level, the demographic change due to the increase of the main savers' share also leads to higher saving rates. Moreover, we use the endogenous discount factor of Barro and Becker (1989), which assumes the time preference rate is a function of the number of children, and this amplifies the flattening of age-earning profiles. Both the data and the model demonstrate that our mechanism is valid.
"Rational Expectations, Difference of Opinions and Asset Pricing." (with Xu Wei) (draft available upon request)
Abstract:
This paper applies the concept of relative overconfidence (the measure of how heavily investors depend on others’ information) to combine the rational expectations equilibrium (REE) and difference of opinions (DO) models. We discuss the effects of relative overconfidence on asset price efficiency and trading volume. We find that when investors hold assets to maturity, relative overconfidence has no effect on price efficiency and trading volume. However, when investors speculate, relative overconfidence reduces price informativeness and trading volume because investors will reckon asset prices as noisier and find it meaningless to speculate on capital gains based on their private information. Our results highlight the role of speculation in differentiating REE and DO models and influencing the effects of overconfidence.