Finance Seminar（2019-11)

Topic: A Dynamic Model of Loan Stacking

Speaker: Ernest Liu, Princeton University

Time: Wednesday, 3 April, 10:30-12:00

Location: Room 217, Guanghua Building 2

Abstract:

Loan stacking—that a borrower takes out overlapping loans from multiple lenders—is a common phenomenon in many credit markets. We build a dynamic model of loan stacking and show that, because overlapping creditors may impose default externalities to each other, expanding financial access by introducing more lenders may severely backfire. Capital allocation is distorted away from the most productive uses. Entrepreneurs choose inefficient and limited-growth endeavors. These problems are exacerbated when borrowers have access to more lenders, explaining why increased access to finance does not always improve outcomes. We estimate the model using loan-level, credit registry data from Mexico and perform various policy counterfactuals.

Introduction:

Ernest Liu is a postdoctoral research associate at Princeton University, where he will start as an assistant professor in July 2019. His research studies the implications of weak financial institutions for economic growth, allocation of resources, and economic development. He has done work that uses production network theory to understand industrial policies, specifically the strong government support for upstream industries that are widely adopted in developing economies. His other work shows how low long-term interest rates encourage market concentration and slow down productivity growth; how financial market imperfections not only distort economic allocations via underinvestment, but may have much amplifying effects because of the interactions across economic sectors or because the relationships between borrowers and lenders create underdevelopment traps. He received his PhD in Economics from MIT in 2017.

//scholar.princeton.edu/ernestliu/

Your participation is warmly welcomed!