Research

Selected Publications:

1. Tax Policy Transmission and Household Expenditure (with S. Agarwal and P. Ghosh) Review of Economics and Statistics, accepted.
   Abstract

   Using a novel scanner data and difference-in-differences strategy, we assess how consumers respond to a large-scale tax reform in India that introduces exogenous variations in tax rate changes at the product level. We show evidence of a strong and persistent spending response to tax rate changes. The response is highly asymmetrical, with consumers responding significantly more strongly to tax rate increases than to decreases. We find empirical support for both intertemporal and cross-product substitution effects: Households (1) shift consumption forward preceding a tax increase and (2) substitute one good for another and alter their relative weight in the consumption basket to avoid paying higher tax. Heterogeneity analysis indicates that consumers with more personal shopping experience exhibit stronger consumption responses. Our findings have empirical implications for the efficacy of tax policy initiatives.
   
2. Liberalizing Home-Based Business (with S. Agarwal, T. Sing and C. Song) Management Science, 70(12), 2024, 8217-9119.
   Abstract

   Working at home benefits entrepreneurs by lowering fixed costs and allowing them to engage in joint market and household production. We evaluate a large-scale reform in Singapore, the Home Office Scheme, that allowed business creation at one's residential property and study whether home-based entrepreneurship spurs entrepreneurial activities. The difference-in-differences estimate shows that the reform led to a significantly higher level of business creation and that the firms newly created in response to the reform had a higher survival rate. The effect is more pronounced for low-income female individuals and industries with high startup capital, implying that financial constraints and nonpecuniary benefits likely drive the effect. The reform also encourages entrepreneurs to become serial entrepreneurs, and they open a larger business with a similar survival rate for their second firm. Overall, our findings suggest that the program effectively attracted more entry into self-employment without significantly lowering the average quality of the pool.
   
3. Investing in Low-Trust Countries: on the Role of Social Trust in the Global Mutual Fund Industry (with Massa, M., C. Wang, and H. Zhang) Journal of Financial and Quantitative Analysis, 57(1), 2022, 240-290.
   Abstract

   We hypothesize that social trust, in mitigating contracting incompleteness, may have an important effect on the activeness and effectiveness of delegated portfolio management. Using a complete sample of worldwide open-end mutual funds, we find that trust is positively associated with the activeness of funds and that trust-related active share delivers superior performance (e.g., approximately 2% per year for cross-border investments). Moreover, “trust in the market” and “trust in managers” play important yet different roles for different types of cross-border delegated portfolio management. Our results suggest that trust acts as a fundamental building block for delegated portfolio management.
   
4. Air Pollution, Behavioral Bias, and the Disposition Effect in China (with Li, J., M. Massa,and H. Zhang) Journal of Financial Economics, 142(2), 2021, 641-673.
   Abstract

   Inspired by the recent health science findings that air pollution affects mental health and cognition, we examine whether air pollution can intensify the cognitive bias observed in the financial markets. Based on a proprietary data set obtained from a large Chinese mutual fund family consisting of complete trading information for more than 773,198 accounts in 247 cities, we find that air pollution significantly increases investors’ disposition effects. Analysis based on two plausible exogenous variations in air quality (the vast dissipation of air pollution caused by strong winds and the Huai River policy) supports a causal interpretation. Mood regulation provides a potential mechanism.
   
5. Interest Rate Pass-Through and Consumption Response: The Deposit Channel (with Agarwal, S., S. Chomsisengphet,and Y. Yildirim) Review of Economics and Statistics, 103(5), 2021, 922-938.
   Abstract

   This study assesses a new mechanism, the deposit channel, in the transmission of interest rate shock to household consumption using an administrative panel data set of financial transactions for Turkey. Our empirical strategy exploits variation in consumers' adherence to the Islamic laws that forbid earning interest and employs a standard difference-in-difference design. Following an unanticipated announcement of interest rate hike, rate-sensitive consumers significantly reduce their overall spending, and the response persists throughout the post-announcement period. The response of debt payment, disparate exposure to inflation, exchange rate, and the demographic difference can hardly fully account for the documented consumption response heterogeneity.
   
6. Good Days, Bad Days: Stock Market Fluctuation and Taxi Tipping Decisions (with Tan W.) Management Science, 67(6), 2021, 3965-3984.
   Abstract

   Using taxicab tipping records in New York City (NYC), we develop a novel measure of real-time utility and quantitatively assess the impact of wealth change on the well-being of individuals based on the core tenet of prospect theory. The baseline estimate suggests that a one-standard-deviation increase in the stock market index is associated with a 0.3% increase in the daily average tipping ratio, which translates to an elasticity estimate of 0.3. The impact is short-lived and in line with the wealth effect interpretation. Consistent with loss aversion, we find that the impact is primarily driven by wealth loss rather than gain. We exploit Global Positioning System and timestamp information and design two difference-in-differences tests to establish causal inference. Exploitation of the characteristics of individual stocks suggests that the effect of wealth change on real-time utility is more pronounced in the stocks of firms with large market capitalization. Finally, our aggregate estimate suggests that annual tip revenue in the NYC taxi industry is associated with stock market fluctuations, ranging from −$17.5 million to $12.9 million.
   
7. Disguised Corruption: Evidence from Consumer Credit in China (with Agarwal, S., W. Qian, and A. Seru) Journal of Financial Economics, 137(2), 2020, 430-450.
   Abstract

   Using a comprehensive sample of credit card data from a leading Chinese bank, we show that government bureaucrats receive 16% higher credit lines than non-bureaucrats with similar income and demographics, but their accounts experience a significantly higher likelihood of delinquency and debt forgiveness. Regions associated with greater credit provision to bureaucrats open more branches and receive more deposits from the local government. After staggered corruption crackdowns of provincial-level political officials, the new credit cards originated to bureaucrats in exposed regions do not enjoy a credit line premium, and bureaucrats’ delinquency and reinstatement rates are similar to those of non-bureaucrats.
   
8. Gender Gap in Personal Bankruptcy Risks: Empirical Evidence from Singapore (with Agarwal, S., J. He, and T. Sing) Review of Finance, 22(2), 2018, 813-847.
   Abstract

   Gender gap can arise due to various factors—socio-economic, culture, risk attitudes, and macro-economic circumstances. Using a unique dataset that merges motor vehicle events with bankruptcy outcomes and personal data from Singapore, this study finds significant evidence of a gender gap in personal bankruptcy risk. We show that women’s odds of being involved in bankruptcy events are 28% of those of men after controlling for demographic variables, housing type, cultural and spatial fixed effects. Using motor vehicle accidents as an instrument, we confirm that the gender gap in bankruptcy risk is mainly driven by risk-taking behavior. The heterogeneity analyses show that culture also explains part of the difference. Chinese, Indian, and Malay women have differential bankruptcy rates in Singapore.
   

Book Reviews, Literature Reviews, and Other Publications (selected):

1. Household Finance (with S. Agarwal and X. Zou) Oxford Research Encyclopedia of Economics and Finance, Oxford University Press, 2022.

2. “FinTech, Lending and Payment Innovation: A Review (with S. Agarwal) Asia-Pacific Journal of Financial Studies, 49(3), 2020, 347-509.

Selected Working Papers(SSRN):

1. Dirty Air and Clean Investments: The impact of pollution information on ESG investment (with R. Fisman, P. Ghosh and A. Sarkar).
   Abstract

   We study exposure to pollution information and investment portfolio allocations, exploiting the rollout of air quality monitoring stations in India. Using a triple-differences framework, we show that retail investors' investments in ``brown'' stocks are negatively related to local air pollution after a monitoring station appears nearby, with particularly pronounced effects on ``alert'' dates when air quality is listed as harmful to the general population. The effect of pollution information on investment choices is most prominent amongst tech-savvy investors who are most plausibly ``treated'' by real-time pollution data, and by younger investors who tend to be more sensitive to environmental concerns. Overall, our results provide micro-level support for the view that salience of environmental conditions affect investors' tastes for green investments.
   
2. Co-Collateral and the Shadow Cost of Margin Constraints (with M. Massa, C. Wang and H. Zhang).
   Abstract

   We propose a novel stock-level measure of the tightness of margin constraints by decomposing a stock’s cash collateral requests in the short-selling market into two components: comovements with the market (co-collateral) and idiosyncratic movements. Consistent with the notion that co-collateral tightens margin requests, we find that co-collateral reduces short-selling activities and is associated with a positive return premium. Moreover, this premium peaked during the crisis (especially the Lehman bankruptcy) and is unexplained by traditional asset pricing factors or mispricing. Our results highlight the importance of collateral requests and the associated shadow costs in influencing asset prices.
   
3. Opioid Crisis and Local Economic Pain: Evidence from Commercial Real Estate Loan (with Y. Yildirim and B. Zhu).
   Abstract

   This study examines the local economic impacts of the opioid epidemic by focusing on the performance of commercial real estate loan. We establish causal identification by leveraging plausible exogenous variation in primary physicians per capita and staggered adoption of state-level Opioid Misuse Prevention Legislation. Our findings indicate that opioid abuse decreases net operating income and increases vacancy rates, leading to a surge in loan defaults. We present direct evidence for economic channels showing that opioid abuse disrupts local economies through reduced business sales and eroded neighborhood desirability, which decreases net operating income and lowers occupancy rates of commercial real estate properties, ultimately leading to higher default rate. The effect is more severe in residential and retail properties, areas with weaker economic conditions, communities with higher proportions of Black and Asian populations, younger individuals, and Republican states. Our study underscores a new negative externality of the opioid crisis on local economies and its spillover effects on financial markets.
   
4. The Digital Revolution: Bridging the Information Gap in the Consumer Credit Market (with S. Agarwal and Y. Wang).
   Abstract

   We analyze how an information communication technology shock resolves information friction in the largest and most significant consumer credit markets. Using granular spatial variation of broadband diffusion, we find that high-speed Internet access enables consumers to save an average of $327 – $738 on mortgage broker fees. These savings are economically meaningful and can partially offset the annual broadband subscription cost of $444. The effect is more pronounced for well-educated, high-FICO, and high-income customers, and in areas with a competitive broker market ex-ante. We identify greater bargaining power and reduced search costs as mechanisms behind the fee reductions.
   
5. Does Geopolitical Risk Exposure Lead to Higher Cost of Debt? Evidence from Multinational Companies (with F. Hu, T. Lin and W. Tan).
   Abstract

   Multinational companies (MNCs) listed in the U.S. and their global subsidiaries with greater exposure to geopolitical risk (GPR) have higher bank loan costs. The effect is robust to alternative model specifications, interpretations, and measurements. Horserace tests suggest that GPR is a distinct and superior proxy for host-country-level risk factors and has a more robust effect on a firm's cost of debt. We find consistent results when employing two identification strategies – a Bartik-type instrument and a difference-in-differences design around the 2014 Russia-Ukraine conflict and 2022 Russia-Ukraine War – to isolate exogenous variations in GPR exposure. We also identify two economic channels, i.e., operational flexibility and currency risk, that explain our findings. The effect is stronger among MNCs which have larger geo-political risk exposure, higher credit risk, no prior banking relationship and facing weaker formal institutions. Finally, we document a positive relation between global subsidiaries’ GPR and an MNC’s cost of equity.
   
6. A Tale of Two Zoos: Machine Learning Insights on Retail Investors (with P. Ghosh, H. Lu and H. Zhang).
   Abstract

   We employ various machine learning models to analyze the returns for millions of retail investors in India. We observe that Neural Networks outperform other machine learning and OLS models in uniquely predicting both good and bad out-of-sample performance. Behavioral biases exert a more significant influence on their returns than holding-weighted firm characteristics.
   
7. When Human Met Algorithm: Evidence from Retail Investor Trading (with P. Ghosh and Y. Li).
   Abstract

   We study the adoption and economic impact of artificial intelligence technology by retail investors in a developing economy. We document new facts to characterize the human-algorithm interaction in the context of retail investor trading using administrative account-level data of all individual investors from National Stock Exchange of India, the world's 8th largest stock exchange. While the retail algorithmic trading market is dominated by male investors, the relative share of female algorithmic participation increases steadily from 5% in 2012 to 10% in 2019. We find that algorithmic trades by male-young investors take up most of the overall increase in recent years and are highly procyclical to the market condition. Investors adapting to algorithmic trading experience better performance as measured by higher market-adjusted return and Sharpe ratio. The benefit is greater for less wealthy investors and those who are holding less diversified portfolio or exhibit more behavioral bias \textit{ex ante}. We find evidence that improved performance is likely due to enhanced trading responsiveness to new market information and reduced behavioral biases. Consistent with “learning by algorithmic trading”, unprofitable algorithmic traders are more likely to quit than profitable traders. Algorithmic trade size is also sensitive to past performance and retail algorithmic investors initially execute very small trades during the first few trials and increase trade size significantly after profitable trades.
   
8. Value Added Tax and Corporate Product Mix Decisions (with P. Ghosh, Y. Kang and M. Jacob).
   Abstract

   This paper investigates the effect of consumption taxes on firms’ product mix decision. Using a stacked difference-in-differences approach that exploits the staggered transition from a sales tax with the risk of tax cascading to a value added tax (VAT) with credits on inputs across states in India and detailed data on listed manufacturing firms’ production decisions, we document that the switch to a VAT system induces affected firms to narrow their product scope. That is, firms cut the internal production of input goods and instead focus their production toward their best-performing products. Firms affected by the switch to the VAT reduce their firm size and are more likely to outsource production of input goods, consistent with vertical disintegration following VAT adoption. We also show that this VAT-induced vertical disintegration results in lower manufacturing costs, higher profitability and firm value, and increased investment efficiency for affected firms. Overall, the paper shows that VAT adoption can reduce investment and productivity distortions induced by a sales tax that bears the risk of tax cascading.