Working Papers

Regulatory Model Secrecy and Bank Reporting Discretion

Revise and Resubmit at The Review of Financial Studies

The Brattle Group Ph.D. Candidate Award For Outstanding Research, WFA, 2024

This paper examines how banking regulators should disclose the models used to assess banks when banks may misreport to influence these assessments. Disclosing these models provides banks with system-wide information, but it also creates opportunities for banks with low-value assets to manipulate reports in order to obtain favorable assessments. Although regulators can mitigate manipulation by adjusting assessment rules, disclosure decisions remain crucial. The optimal policy is to disclose the models when banks' manipulation is more likely to distort assessments and keep them secret otherwise. Thus, disclosing the models complements the assessment rules by reducing manipulation when it poses greater harm to regulators.

Selected presentations: WFA, Chicago-Minnesota Theory Conference, European Winter Meeting of the Econometric Society...

Intellectual Property Protection for AI-Generated Output

with Robin Döttling and Logan Emery

Generative AI has the potential to transform corporate innovation, but intellectual property (IP) created without sufficient human input is ineligible for protection by IP systems. We model a firm's choice of AI versus human-capital use when investing in innovation, with IP protection granted based on a noisy signal of human-capital use. We derive a sufficient statistic for the IP policy's effect on incentives and show that the IP system can "kill" AI use. Alternatively, low AI costs can "kill" the IP system or shift its role to providing a human-capital subsidy, depending on signal noise and the social value of human-capital use in innovation. When consumers value human-created works, human-capital use is distorted by an adverse selection discount. The IP policy can mitigate this by deterring high-cost firms' investment, or by acting as a credible signal of incentives for human-capital use that triggers a positive feedback loop through consumer beliefs.

Banks Incentive Pay, Diversification and Systemic Risk

with Fabio Castiglionesi, Journal of Banking and Finance, Volume 169, December 2024, 107299

This paper analyzes the impact of incentive pay for bank managers on financial stability. The study focuses on two banks owned by risk-neutral principals but operated by risk-averse managers who decide on leverage and the extent of diversification into the other bank’s assets, both of which determine the systemic risk. To begin, we establish the optimal incentive pay contract assuming a planner seeks to maximize the total value of the banks. In equilibrium, we find that the contract excessively relies on relative performance evaluation, leading to an inefficiently high degree of diversification, leverage, and systemic risk. This outcome obtains even when the principal represents the interests of all stakeholders in an individual bank. We demonstrate that only regulation specifically targeting relative performance evaluation can restore efficiency, while existing regulations on managerial pay can inadvertently amplify systemic risk.