• Deterring Fraud by Looking Away RAND Journal of Economics, Fall 2016

    Individuals being audited potentially learn how to exploit the weaknesses inherent in any audit methodology if they face the same method many times. Hence, an auditor better deters fraud by randomizing her choice of methodology over time, thereby frustrating a would-be fraudster’s ability to learn. In the extreme, an auditor benefits from refusing to audit even though audits are costless to her.

Working Papers

  • Agency Problems in Young Firms (with Mikael Paaso)

    We document the existence of manager-shareholder agency problems caused by excess cash in young firms. Firms receiving quasi-random cash windfalls from the exercise of the overallotment option during their IPO are more likely to make value-destroying acquisitions. We hand-collect executive compensation data for these firms and find that the CEOs of these firms receive direct pecuniary benefits in the form of higher executive compensation. We run several tests to account for the potential endogeneity of the overallotment option with respect to investment. While previous work on the free cash flow hypothesis has focused on mature firms, we show that these problems also exist in young firms.
  • Going the Extra Mile: What Taxi Rides Tell Us about the Long-Hour Culture in Finance (with Ellapulli V. Vasudevan)

    We analyze banks’ “protected-weekend” policies that restrict junior bankers from working during weekends. We use taxi rides from bank addresses in New York City to infer bankers’ working hours. We find the policies induced bankers, perhaps unintentionally, to shift their work to late-night hours on weekdays. We then investigate whether such shifts in working hours affected the quality of work. After the policy, analysts of the policy-implementing banks make more errors in their earnings forecasts. They also herd more toward the consensus in their forecasts. We further provide evidence that junior bankers are the most adversely affected by the policy.
  • Delegating Trial and Error (with John Nash)

    A principal delegates a problem to an agent who solves it using trial and error. The principal cannot observe the agent’s actions or the outcomes of the trials. Trials are independent, heterogeneous, and privately costly. The optimal contract with commitment balances the agent’s compensation against the timeliness of a solution. In equilibrium, the agent earns rents and inefficiently idles. The optimal renegotiation-proof contract eliminates idleness, restores the first-best, but cedes significant additional rents to the agent. A principal that lacks commitment might optimally slow down problem solving by inhibiting the agent’s ability to perform trial and error.
  • Fire Sales and Financial Integration (with John Nash)

    Financial intermediaries often respond to liquidity shortages by selling assets. These asset sales can depress prices, compromise the balance sheets of other intermediaries, and trigger further asset sales in previously unaffected markets. We develop a model of fire sale spillovers in which intermediaries’ balance sheets connect distinct markets together in a financial network. We characterize the cross-sectional pattern of fire sales, and prove that strengthening financial integration improves efficiency. Against conventional wisdom, we show that poorly-connected small intermediaries can have an outsized impact on aggregate prices and interventions exclusively targeting large intermediaries which connect multiple markets together might be inefficient. 
  • Too Big to Rush

    A sudden need for liquidity prompts banks to sell their assets at a discount to obtain cash. This sale disturbs the economy and slows down growth because the buyers of the assets reduce their investments in positive NPV projects. Small banks do not internalize their own impact on prices, which encourages them to start a fire sale too early. A (relatively) small probability of a liquidity shock might trigger a fire sale, causing a real crisis. Big banks internalize their own price impact, which reduces the severity of a crisis. Their sale decision is more in line with that of the social planner because they are too big to rush to sell their assets.
  • Compromising Welfare

    The U.S. Constitution includes many checks and balances that necessitate the ruling party to compromise with the opposition. I develop a model in which this feature prompts the President to compromise on the strength of the candidates nominated for positions in the federal government and judiciary. I test the model by using data of the nominations of federal judges from 1989 to 2014. Because federal judges are appointed for life, appointments of competent younger judges extend the productive period they spend on the bench and improve welfare. Consistent with the predictions of the model, and controlling for each candidate’s competence with the rating assigned by the American Bar Association, I find that the confirmation in the Senate is more likely and faster when the President compromises on the strength of the candidate by nominating an older individual. These findings suggest that the system of checks and balances comes with a price.
  • Active Takeover Markets and Climate Policies (with Vidhan K. Goyal and Arkodipta Sarkar)

    This paper characterizes a clean environment as an implicit promise of a firm to its workers. We argue that firms break their promises when faced with the possibility of a takeover; they pollute more to inflate their share price. Consistent with the model predictions, plants owned by firms insulated from takeovers pollute less compared to plants located in the same state but owned by other firms more exposed to the threat of hostile takeovers. As expected, the effects are more pronounced for plants located in counties with less growth and for firms with highly redeployable assets.

My Research in the Media