The Capital Matthew Effect: Directed Technical Change and International Capital Flows (2025)
[Publisher Version] [SSRN] [Replication Files] [Abstract]
This study shows that technological specialization is one plausible driver of long-term international capital flows. The underlying mechanism comprises the two sides of capital scarcity: although a shortage of capital currently generates a higher marginal product, it also makes a country inclined toward capital-saving technology. Therefore, in equilibrium, the rate of capital returns is jointly determined by a convergence effect from the law of diminishing return and an opposing divergence effect from directed technological change. Initially capital-rich countries favor capital-complements-biased technology and continuously import capital from capital-poor countries that develop capital-substitutes-biased technology. We name this anti-convergence force on capital allocation the capital Matthew effect. This new perspective is consistent with many related international finance puzzles, including the Lucas paradox, global imbalance, and allocation puzzle. Finally, we provide both country-level and firm-level evidence supporting this new model mechanism.
International Economic Review
Surges and Instability: the Maturity Shortening Channel (2022)
with Xiang Li
[Publisher Version] [SSRN] [Replication Files] [Abstract]
Capital inflow surges destabilize the economy through a maturity shortening mechanism. The underlying reason is that firms have incentives to redeem their debt on demand to accommodate the potential liquidity needs of global investors, which makes international borrowing endogenously fragile. Based on a theoretical model and empirical evidence at both the firm and macro levels, our main findings are twofold. First, a significant association exists between surges and shortened corporate debt maturity, especially for firms with foreign bank relationships and higher redeployability. Second, the probability of a crisis following surges with a flattened yield curve is significantly higher than that following surges without one. Our study suggests that debt maturity is the key to understand the financial instability consequences of capital inflow bonanzas.
Journal of International Economics
Best Paper Award, MLU School of Economics and Business
Total Factor Productivity Growth at the Firm-Level: The Effects of Capital Account Liberalization (2022)
with Xiang Li
[Publisher Version] [SSRN] [Replication Files] [Abstract]
This study provides firm-level evidence on the effect of capital account liberalization on total factor productivity (TFP) growth. We find that a one standard deviation increase in the capital account openness indicator constructed by Fernández et al. (2016) is significantly associated with a 0.18 standard deviation increase in firms’ TFP growth rates. The productivity-enhancing effects are stronger for sectors with higher external finance dependence and capital-skill complementarity, and are persistent five years after liberalization. Moreover, we show that potential transmission mechanisms include improved financing conditions, greater skilled labor utilization, and technology upgrades. Finally, we document heterogeneous effects across firm size and tradability, and threshold effects with respect to the country's institutional quality.
Journal of International Economics
The Green Value of BigTech Credit (Latest version: June 2025)
with Peng Wang, Xinyi Wang, and Xiaoyun Yu
[Draft] [Abstract]
This study identifies an incentive-compatible mechanism to foster individual environmental engagement. Leveraging a dataset of 100,000 randomly selected users from Ant Forest—a prominent personal carbon accounting platform embedded within Alipay, China's leading BigTech super-app—we provide causal evidence that individuals strategically engage in eco-friendly behaviors to expand their credit limits, especially when nearing borrowing constraints. These behaviors not only illustrate the green nudging potential of BigTech platforms but also generate value for the platform itself. By intentionally designing green actions to foster sustained engagement, the platform enables a mechanism that distinguishes intrinsically green and financially responsible individuals from others. Our structural model estimates that the implementation of a credit limit scheme tied to costly green behaviors yields an annual green value of $427.52 million. Moreover, this incentive-based approach outperforms traditional green mandates and subsidies in improving both consumer and overall societal welfare. Our findings highlight the role of an incentive-aligned approach, such as integrating personal carbon accounts into credit reporting frameworks, in addressing environmental challenges.
Corporate Finance Best Paper Award, China Financial Research Conference (CFRC)
Best Paper Award, China Fintech Research Conference
Best Paper Award, CFRN Young Scholars Workshop
Magic Formula or Futile Effort: Lessons from China's Two-Tiered Government Guided Funds (Latest version: June 2025)
with Erica Xuenan Li, Zhao Jin, and Daniel Yi Xu
[Abstract]
The Global Change in the Corporate Production Function (Latest version: May 2025)
with Erica Xuenan Li and Guoliang Ma
[Draft] [Bloomberg] [Abstract]
The assumption of a concave production function has long been a cornerstone in economics literature. However, using Bayesian Markov Chain Monte Carlo (MCMC) to estimate structural breaks, we find that since the 1980s, corporate production functions have transitioned to a sigmoidal (convex-concave) shape, with the convex region becoming increasingly dominant over time. This structural shift, observed across various countries and industries, quantitatively explains the growing share of firms with negative net earnings. Lastly, we explore the implications of this transformation for corporate market power.
BigTech Credit, Small Business, and Monetary Policy Transmission: Theory and Evidence (Latest version: May 2025)
with Yiping Huang, Xiang Li, Han Qiu, and Changhua Yu
[Draft] [Abstract]
This paper provides both theoretical and empirical analyses of the differences between BigTech lenders and traditional banks in response to monetary policy changes. Our model integrates Knightian uncertainty into portfolio selection and posits that BigTech lenders possess a diminishing informational advantage as firm size increases, resulting in reduced ambiguity when lending to smaller firms. It predicts that the key distinction between BigTech lenders and traditional banks emerges primarily at the extensive margin, particularly during periods of monetary easing, rather than at the intensive margin. Using a micro-level dataset of small business loans from both types of lenders, we provide empirical support for these theoretical predictions. Our results show that BigTech lenders are more responsive in establishing new lending relationships during monetary easing, while differences in loan amounts are not statistically significant. We also examine other loan terms and discuss the implications of regulatory policies.
Returns-to-scale, Risk, and Misallocation (Latest version: March 2025)
[Draft] [All About Finance] [Abstract]
This paper shows that increasing returns to scale steepen the earnings-productivity gradient, redistributing both income and risk toward more productive firms. In the presence of financing frictions, the negative impact of heightened risk dominates the positive effects of increased income. As a result, more productive firms accumulate larger cash reserves and reduce investment further below their first-best levels, exacerbating capital misallocation. The calibrated model replicates key empirical patterns, including the rise in cash reserves and the decline in capital allocation efficiency among U.S. public firms.
Ph.D. Candidate Awards For Outstanding Research, Western Finance Association (WFA)
Firm-level Uncertainty and Productivity: the Financial Friction Channel (Latest version: Febuary 2025)
with Xiang Li
[Draft] [Abstract]
This paper examines the real effects of firm-level uncertainty amid financial friction. Empirically, we show that productivity explains 68% of the negative impact of firm-level uncertainty on output, while reduced physical investment accounts for only 3%. Using a dynamic model with endogenous productivity growth and defaultable debt, we show that uncertainty tightens borrowing limits by raising default risk. Unlike aggregate uncertainty, firm-level uncertainty has little effect on asset reallocation value, leading firms to favor physical capital accumulation over productivity-enhancing efforts to support liquidation value and debt pricing.
Trust, Finance, and the Intangible Economy (Latest version: July 2024)
with Rusi Yan
[Draft] [Abstract]
We emphasize the significant social and financial hurdles in a country's transition to an intangible economy. Our findings reveal a strong correlation between a country's social trust, its economic structure —reflected by the proportion of intangible-intensive sectors—and its financial structure, marked by the prevalence of cash-flow-based over asset-based lending. This relationship is explained through a two-sector growth model with endogenous economic and financial structures, where trust affects the difficulty of borrowing without collateral. Our model identifies multiple steady states and illustrates that in a high-trust equilibrium, the feedback loop between the development of earnings-based lending technology and the growth of the intangible-intensive sector significantly boosts aggregate productivity. Lastly, our quantitative analysis underscores the crucial role of social trust in explaining cross-country differences in productivity and intangible capital via the type of financial friction channel.
The Macroeconomics of BigTech (Latest version: July 2023)
[Draft] [Abstract]
This paper investigates the macroeconomics of BigTech. Compared to banks whose key characteristic is the standard collateral-based borrowing constraint, the essential feature of BigTech is the expected-earnings-based lending. Our model implications are twofold. First, BigTech has an efficiency-instability tradeoff as it leads to less misallocation but a higher default rate in the steady state. Second, BigTech can be interpreted as a different financial accelerator from the classical one as it generates persistent impacts on aggregate outputs through amplifying and propagating the second-moment micro-uncertainty shocks. Finally, we discuss the role of algorithm bias and optimal BigTech development.
Best Paper Award, Journal of Finance and Data Science Conference
Within Gain, Structural Pain (Latest version: July 2018)
with Xiang Li
[Draft] [Abstract]
This paper is the first to study the effects of capital account liberalization on structural transformation and compare the contribution of within term and structural term to economic growth. We use a 10-sector-level productivity data set to decompose the effects of opening capital account on within-sector productivity growth and cross-sector structural transformation. We find that opening capital account is associated with labor productivity and employment share increment in sectors with higher human capital intensity and external financial dependence, as well as non-trad-able sectors. But it results in a growth-reducing structural transformation by directing labor into sectors with lower productivity. Moreover, in the ten years after capital account liberalization, the contribution share of structural transformation decreases while that of within productivity growth increases. We conclude that the relationship between capital account liberalization and economic growth is within gain and structural pain.
The Crumbling Wall between Crypto and Non-crypto Markets: Risk Transmission through Stablecoins (2025)
with Yiping Huang, Yang Ji, Juan Lin, and Peng Wang
[Draft] [Abstract]
We develop a theoretical model to explain the shift in risk transmission between the dollar and crypto markets, focusing on stablecoins while excluding other channels like institutional investors. Our model shows that risk flows from the dollar market into the crypto market as stablecoin supply expands, and flows into the dollar market when stablecoin reserves contract. This transmission mechanism can be asymmetric when stablecoins hold sufficient reserves to absorb crypto-market shocks. Copula-based CoVaR tests support our model. Akin to securitization during the 2007-08 financial crisis, stablecoins’ role as a bridge highlights how niche markets can amplify systemic risks.
Journal of Financial Markets
Naive Attention and Extrapolative Beliefs: Evidence from Digital Footprints of Mutual Fund
by Lei Huang, Tse-Chun Lin, Fangzhou Lu, and He Tang
2025 Annual Conference on Capital Market Research in the Era of AI
Best Discussant Award
ETFs: Guilty?
by Thomas Marta
2025 Indonesian FMA Conference
How Do Robot Subsidies Affect Aggregate Productivity and Firm Dispersion? Theory and Evidence from China
by Yuxiao Hu and Runhong Ma
2025 CFRC
The Value of Brand, Sustainability, and Ideology: Evidence from Government Procurement
by Winston Wei Dou, Yan Ji, David Reibstein, and Di Tian
2025 SAIF Annual Research Conference
Technology-Driven Market Concentration through Idea Allocation
by Yueyuan Ma and Shaoshuang Yang
2025 China International Conference in Macroeconomics
Equilibrium Value and Profitability Premiums
by Hengjie Ai, Jun Li, and Jincheng Tong
2nd PHBS Finance Symposium
How do government guidance funds affect enterprise digital transformation? Evidence from China’s new energy industry
by 韩洁 刘涛 伍骏骞
第六届微观经济数据与经济学理论创新论坛
Misallocation and Asset Prices
by Winston Wei Dou, Yan Ji, Di Tian, and Pengfei Wang
2024 CFRC
Technology Adoption and Leapfrogging: Racing for Mobile Payments
by Pengfei Han and Zhu Wang
2024 CFRC
Optimal Inflation Rate in a Heterogeneous Agent Economy
by Yitong Wang and Shenghao Zhu
2024 NSD Money Study Group Workshop
Diversity, Equity, and Inclusion
by Simon Glossner, Alex Edmans, and Caroline Flammer
2023 Paris December Meeting
Consumption-led Industrial Upgrading
by Xuewen Liu and Sichuang Xu
2023 CFRC
How does Strategic Cooperation in Fintech Field Affect the Efficiency of Commercial Banks? Evidence from China
by Zhiming Ao, Yonghong Jiang, Bin Mo, and He Nie
2023 AMES China
法治建设与债券市场⾼质量发展：基于破产法庭成⽴的准⾃然实验
by 李松楠 李劢 李波 刘晓蕾
2022 光华国际⾦融研讨会
Competitiveness, 'Superstar' Firms and Capital Flows
by Lidia Smitkova
2022 Lisbon Macro Workshop