Job Market Paper:
I study the role of bank-firm lending relationships in determining the aggregate effects of credit supply shocks. I show two facts using a unique dataset. First, the loan balance between a lender-firm pair increases in the length of the lending relationship. Second, loan balances of longer relationships respond less to lender-level credit supply shocks. I interpret these findings using a competitive search model of credit markets. Banks write optimal lending contracts subject to firms' limited commitment that prescribe increasing lending over time to incentivize firms to stay in the relationship. I calibrate the model to match features of the data including the slope of relationship lending with respect to the relationship length. Then I validate the calibrated model by showing that, as in the data, the responsiveness of a relationship's loan balance to bank-level credit supply shocks is decreasing in the relationship length. Finally, I perform a counterfactual exercise to show how the aggregate impact of a credit supply shock depends on the distribution of relationship lengths across bank-firm pairs.
Work in Progress:
"The Product Market and Credit Market Competition Channels of Public Investment'' (with Sophia Chen and Yu Shi)
We study the importance of product market competition and credit market competition to the impact of public investment on private investment to understand the impact of China’s unprecedented soar in local government borrowing for public infrastructure investment after the Great Recession with varying degrees of competition in localised banking sector competition and real estate market competition. We build a model in which public infrastructure investment increases demand for housing but crowds out credit for private sectors. Real estate market competition enlarges each developer’s response to increased housing demand. Meanwhile, credit market competition implies more rapid adjustment of capital cost. The relative magnitudes of the two competition channels determine private real estate investment’s sensitivity to public infrastructure stimulus.