"Dynamic Adverse Selection and Belief Update in Credit Markets," with Kee-Youn Kang
We develop a dynamic model of debt contracts with adverse selection and belief updates. In the model, entrepreneurs borrow investment goods from lenders to run businesses whose returns depend on entrepreneurial productivity and common productivity. Entrepreneurial productivity is the entrepreneur's private information, and the lender constructs beliefs about the entrepreneur's productivity based on the entrepreneur's business operation history, common productivity history, and terms of the contract. The model provides insights into the dynamic and cross-sectional relations between firm age and credit risk, persistency of the effects of a temporary productivity shock, cyclical asymmetry of the business cycle, slow recovery after a crisis, and constructive and destructive economic downturns.
"Adverse Selection and Costly Information Acquisition in Asset Markets," Review and Resubmit at the Journal of Mathematical Economics, with Kee-Youn Kang
We develop an asset exchange model with adverse selection and costly information acquisition incentives. A seller of an asset knows the true value of the asset, while a buyer can obtain information about the asset's quality at a cost. An equilibrium offer is pooling, but a buyer can purchase only good assets after producing the costly information about the asset's quality. When the probability that the seller holds good assets is above the threshold value, a trade can occur with and without information acquisition, depending on the information acquisition cost, and the trade volume and social welfare are higher in equilibrium without information production than in equilibrium with information production. When the probability of facing good assets is below the threshold value, a trade occurs only after screening the quality of assets, and, hence, the market collapses if the information acquisition cost is sufficiently high. As the information acquisition cost increases, social welfare can increase or decrease depending on the probability of facing good and bad assets.
"Priority and Egalitarian Allocation in the Capability Approach," with Biung-Ghi Ju
We consider the problem of allocating economic resources to individuals who have potentially different capabilities of transforming resources into basic human functionings. The priority principle for allocation rules adopts Derek Parfit's (Parfit~1997) priority view that benefiting people matters more the worse off those people are. We propose axiomatization foundation of a family of extended egalitarian allocation rules proposed by Moreno-Ternero and Roemer (2006, 2012) in a setting with single dimensional output (human functioning). Our egalitarian rules select those allocations that make all persons achieve the same level of capability, measured by a (capability) index function (which aggregates the profile of resources and basic human functionings into a real number). Among these rules are resource and output egalitarian rules. The output egalitarian rule adopting the human development index is a central example in the latter family.
"On the Loss of Efficiency from Inequality," with Junnan He
We examine that inequality can cause inefficiency to the society. This paper shows that in the society without a central provider of protection so that individuals should privately protect their property from stealing, the society's welfare decreases as the level of inequality increases. We also show when there exist equilibria in which no stealing occurs.
"Leadership through reciprocity and temptation"
When people or institutions donate to a public good, why do they often announce their plans beforehand? I address this question in the context of menu choice: individuals first set their menus, or restrictions on future action choices, and later choose their actions. I study an environment in which two kinds of agents, called "selfish" and "normative," choose a level of public good provision. I assume that normative agents have a preference for incorporating reciprocity, but also a temptation to be selfish, as in Gul and Pesendorfer's temptation model. I determine under what conditions there exist subgame-perfect Nash equilibria in which selfish players contribute to the public good, avoiding the tragedy of the commons. I characterize two families of strongly renegotiation-proof equilibrium, and show that the best one exhibits a behavior that I call "moral leadership." Specifically, moral leaders pay the full temptation cost to motivate normative followers to partially pay the temptation cost and selfish followers to contribute partially.
WORK IN PROGRESS
"Decentralized Greedy Solutions in Minimum Cost Spanning Tree Problems," with Joosung Lee
"Understanding Individual Senses of Justice Through A Simple Lab Experiment," with Biung-ghi Ju