Research
Working Papers
Effect of Money in Judicial Elections on Factor Productivity (Draft available soon)
This paper studies the effect of campaign finance on judicial selection and industrial productivity. I exploit the variation across states in judicial selection procedures and campaign finance laws due to the Supreme Court’s surprise verdict in the Citizens United v. FEC case in 2010, that rendered bans on independent expenditure in elections unconstitutional. Using a difference-in-differences design, with states that imposed bans before the verdict as the treated states, I first confirm that the removal of such bans led to a 50 % ($ 200,000) increase in the average electoral expenditure of judicial candidates and increased electoral competition. Further, labor productivity measured as value added per worker increased by 8% in treated states with judicial elections. I propose that the productivity improvement is due to the alleviation of contract enforcement frictions. I find that for sectors more reliant on contract enforcement, labor productivity is higher in states with judicial elections and productivity gains are not experienced in states where the judges do not face elections.
Political Finance and Party Preferences
Politicians’ influence depends on their relationships with other powerful politicians. In a network of elected representatives based on their committee assignments, I use network centrality as a measure of such influence. I use plausibly exogenous variation in funding to show that well-funded politicians tend to be more central. I also estimate the political parties’ preferences over politicians’ attributes and document that the parties place candidates with higher funding in more central positions than candidates with a stronger legislative record. This bias in favour of well-funded representatives is robust to other measures of influence such as their legislative productivity.
Bank Stress Tests (Draft available soon)
- with Deepal Basak and Zhen Zhou
We study the design of stress tests along two key dimensions: strength and frequency. We evaluate the effectiveness of stress tests in informing bank stakeholders and persuade them to coordinate on not attacking the bank, thereby reducing the likelihood of bank failure during distress. The stakeholders are privately informed and move sequentially. We characterize all robustly persuasive stress tests, under which, even in the worst equilibrium, all bank stakeholders disregard their private information and perfectly coordinate their actions based on the test results (pass or fail). We show that more frequent tests can substitute for higher strength in making the stress tests persuasive. For a principal facing administrative costs in conducting stress tests, we characterize the optimal stress test design and investigate how it depends on macroeconomic conditions, the bank’s idiosyncratic characteristics, as well as the endogenous debt maturity structure of banks. We highlight how extant regulatory measures may complement the stress test policy in promoting financial stability.
Learning about Productivity and Search (Draft available soon)
- with Emre Ozdenoren
We examine contracts in performance-centric professions, such as entrepreneurship and scientific research, where matches between workers and firms are an experience good and parties face friction in the matching process. Both parties learn about match productivity through experimentation. We show that if the firms can offer fully flexible wages, the competitive search equilibrium is efficient, i.e. the equilibrium number of vacancies and the experimentation duration are the same as what a planner chooses to maximize output net of search cost. Under fixed-wage contracts, if the workers serve out their entire contract in equilibrium, then the competitive search equilibrium is efficient. This result rationalizes the commonly observed tenure-track contracts offered to scientific researchers. However, if the search costs are sufficiently high, then the equilibrium wages are lower and the workers quit before the contract ends and the experimentation is sub-optimal. Finally, we highlight the importance of firms’ commitment to contract duration and common priors for efficiency. We also discuss how minimum wage laws may affect equilibrium experimentation and efficiency.