"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.
"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.
"Collateral risk, information sensitivity, and default frictions on collateralized debt," with Kee-Youn Kang
We develop a theory of collateralized debt that emphasizes collateral risk, incentives to acquire information about collateral, and opportunistic default to study the determinants of the loan size, interest rates, and haircuts. The model predicts that safe assets are traded without haircuts and that risky collateral tends to be associated with higher interest rates and haircuts and with smaller loan sizes. When both interest rates and haircuts exist, there is a substitution effect between interest rates and haircuts, keeping all other factors constant. The model also provides new perspectives on the effects of an increase in collateral risk.
"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
"On the Loss of Efficiency from Inequality," with Junnan He