Research

Working Papers

Price Discrimination and Adverse Selection in the U.S. Mortgage Market [new!]

I document substantial price dispersion in the U.S. mortgage market, where each given lender charges observably similar borrowers different interest rates for similar loans. To explain the conditional price dispersion, I estimate a structural model that features borrowers' demand for mortgages and lenders' individualized optimal pricing decisions. I find evidence consistent with adverse selection in the form of a positive correlation between the unobserved determinants of borrowers' demand and lenders' costs. Moreover, lenders' ability to learn borrowers' private information from signals and tailor interest rates alleviates the severity of adverse selection. I find that the signals convey more information about lenders' costs rather than borrowers' demand, implying that the conditional price dispersion is explained more by lenders' optimal risk adjustments rather than demand-based price discrimination. I evaluate a counterfactual scenario where lenders must set the same interest rates for the observably same borrowers and loans. As a result, interest rates increase and consumer surplus decreases. The effect is heterogeneous across income groups with higher-income borrowers' interest rates increasing more.

Discounts through Loan Guarantee: A Study of Shadow Bank Lending in the U.S. Mortgage Market (draft coming soon)

In recent decades, there has been a shift in the US mortgage market from traditional banks' balance sheet lending to shadow banks' originate-to-distribute lending. I show evidence that non-banks lend more to the low-income and charge lower interest rates than banks, with price differences greater among the low-income. To explain why non-banks can offer lower prices, I study the loan guarantee scheme offered by government-sponsored entities (GSEs). I exploit a regression discontinuity design at the eligibility cutoff for GSEs' loan guarantees. I find that interest rates jump discontinuously at the eligibility cutoff for non-banks but not banks. To explain this price gap, I estimate a structural model of mortgage demand and mortgage lender competition. The results suggest that shadow banks charge similar mark-ups to banks, have lower marginal costs, and hence offer lower prices than banks. I conclude that nonbanks' lower rates are mostly driven by their cost savings, with a possible channel being GSE's loan guarantee scheme.

Dynamics of Consumer Payment Choice

Using a panel data set from the Survey of Consumer Payment Choices, this paper studies the effects of uncertainty and learning on the adoption and usage of payment instruments in the US. Consumers are heterogeneous in their `match' values with alternative payment instruments. Understanding how quickly consumers learn about their true match values is important for banks and card networks in designing card reward policies. I begin by presenting stylized facts that consumers exhibit substantial switching in the adoption of alternative payment methods over the years and they use card payments more frequently as time passes since adoption. Motivated by the stylized facts, I estimate a dynamic discrete choice model for consumer payment choice where consumers learn from experience about the usage values of alternative payment instruments. The structural estimates suggest that the adoption costs for all types of cards are positive with credit cards having greater costs than debit and prepaid cards, whereas the termination costs are heterogeneous across card types with only the credit cards having positive costs. The learning costs for credit cards than other types of card payments. This difference in costs could be due to stricter credit requirements for credit cards than other card types.

Research in Progress

A Retrospective Analysis of U.S. Bank Mergers (with Tim Lee)

Anecdotal evidence suggests the antitrust agencies approved several "anti-competitive" bank mergers during the 2008 Financial Crisis to prevent the financial market from collapsing further. Using data from the Summary of Deposits (SOD) combined with mergers identification data, we revisit the bank mergers during the Financial Crisis. We begin by classifying bank mergers into normal and anti-competitive mergers using a threshold set by the Department of Justice (DOJ) and verify the leniency of antitrust enforcement during the Financial Crisis. We further exploit an event study model to quantify the impact of these mergers on equilibrium market outcomes including deposit amounts, deposit rates, and bank branch closure. Preliminary results suggest that mergers lead to fewer branches and lower deposit amounts, but no changes in deposit rates.

Pre-doctoral Writings

"Social Origin, Gender Differences, and Intergenerational Education Mobility in China," (April 2018)

Children of well-educated parents are often well-educated. This intergenerational association can be explained by selection (genetic transmission) or causation (education alters one's type, leading to higher education in offspring), with the latter being more important for policies. However, distinguishing the two channels is challenging due to endogeneity concerns. I estimate the causal intergenerational education mobility (IEM) for the peasant's social class in China using a natural experiment that exogenously affected people's educational attainment by their social origin and gender: the Maoist education reform in the 1950s. The Mao government implemented several targeted programs to boost the educational level of the poor peasants. A differences-in-differences (DID) estimator suggests that the reform increases peasants' education by 1.2 years on average relative to other social classes. The results are heterogeneous by gender with female peasants gaining 1.7 years of education and male peasants gaining 0.6 years. I further estimate that about 0.5 years of gain in education is transmitted to the next generation. Using the DID estimator as an instrumental variable for parents' education, I find that the causal IEM for the peasant group is 0.4 - 0.6 which is greater than the OLS estimate of 0.2 - 0.3 for the general population during the early 2000s. This suggests a greater pass-through of educational attainments to the next generation for the peasant group compared to the general population. Moreover, intergenerational education mobility has decreased in the post-reform period compared to the pre-reform period. I investigate the transition matrices to show that the reduction in educational mobility comes from the top and bottom education quintiles, which suggests an increase in educational disparity post-reform in China.