Research
My research fields are macroeconomics, household finance, and firm dynamics.
Working Papers
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Financing Growth: Firm Heterogeneity, Financial Frictions, and Creative Destruction
Abstract
Does bankruptcy policy matter for innovation-led growth? To answer this question, I develop a general equilibrium model of Schumpeterian firm dynamics with heterogeneous innovative ability, defaultable debt, equity issuance costs, and endogenous entry and exit. I estimate the model using a Simulated Method of Moments procedure with innovation and capital structure moments calculated from Compustat microdata. I use the estimated model to quantify how changes in bankruptcy policy shape firm entry and exit dynamics, R&D investment, and aggregate growth. I also evaluate how financial frictions impact the effectiveness of innovation policy, such as R&D subsidies and grants.
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Borrowing in the Shadow of China
Abstract
China’s rise as a major lender to emerging economies since the early 2000s has also introduced a unique form of lender power: borrowers cannot default on the subsidized loans they receive, but may still face sudden rollover demands outside their control. We argue this distinctive structure—bilateral rollover risk without default risk—disciplines recipient countries’ borrowing on international markets. In a quantitative long-term sovereign debt model, we show that such rollover-prone nondefaultable Chinese loans expose market debt to dilution risk: governments may need to tap international lenders when repayment to China comes due, and therefore choose to deleverage from private markets when Chinese inflows arrive. Market debt and bond yield dynamics in the data are consistent with this disciplining effect. We then use the model to study two geopolitical scenarios: a bloc-formation exercise in which China offers take-it-or-leave-it loans to induce the borrower’s exit from international debt markets, and an optimal exposure to China under the risk of a permanent and sudden retrenchment of Chinese funding. Together, these results show how official finance à la China can simultaneously improve market borrowing conditions, and become a new destabilizing source to the global sovereign debt architecture as geopolitical alliances shift.
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Entrepreneurship, Credit Access, and Optimal Bankruptcy Policy
Abstract
It is widely known that a stricter bankruptcy system tends to deliver lower interest rates at the cost of reduced insurance. Under Chapter 7 bankruptcy in the U.S., filers retain a flag on their credit report for 10 years post-filing. Empirical evidence suggests that the presence of this flag significantly reduces the filer’s access to credit. In addition to diminished post-bankruptcy credit access, some filers need to repay a portion of the debt that they defaulted on. These costs of bankruptcy and the insurance-interest rate tradeoff are especially salient for entrepreneurs, who often rely on unsecured debt to finance start-up costs and other investments. This paper studies how distinct punishments for bankruptcy filing separately impact entrepreneurial activity, borrowing, default, and welfare. I build a general equilibrium heterogeneous agent model with an occupation choice between entrepreneurship and wage work, competitively priced defaultable debt, and a bankruptcy system that resembles Chapter 7. The model is estimated to match a well-identified micro-elasticity of employer firm ownership to bankruptcy flag removal from Herkenhoff et al. (2021). Matching this elasticity lends credibility to the model’s capacity to evaluate policies that impact entrepreneurial credit access. I then use the model as a laboratory to study how altering the duration of post-bankruptcy credit exclusion and personal bankruptcy exemptions affect the steady state economy. Finally, I solve for the optimal bankruptcy law using these two instruments.
Published Papers
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Disparities Old and New in U.S. Mental Health under COVID-19
Other Publications
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New COVID-19 data show disparities in access to employment safety valves
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Expanding and diversifying housing: Approaches and impacts on opportunity
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The Effects of the Minimum Wage: A Short Survey for the Diligent Voter
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Student Loan Debt – Opinions, Issues, and Solutions
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Summary: “Institution, Financial Openness, and Economic Growth” by Bella Yao