WORKING PAPERS:
This paper studies how recovery rates shape equilibrium credit allocation and aggregate outcomes in an economy with heterogeneous firms and endogenous default. Recovery rates affect lenders’ expected repayment and therefore influence debt pricing, borrowing capacity, and capital accumulation. Motivated by the rise of intangible capital in the U.S. economy, we document that firms and industries with higher asset tangibility issue more debt and exhibit lower distance to default, consistent with differences in recovery values across firms. To quantify the aggregate implications, we develop a heterogeneous-firm general equilibrium model with risky debt, endogenous default, and capital investment. We structurally estimate the model using simulated method of moments (SMM), matching moments related to investment, debt issuance, credit spreads, and default rates. The baseline estimated recovery rate is 74%. Counterfactual exercises show that lower recovery rates reduce aggregate output, credit, and welfare by tightening financial constraints and limiting capital accumulation. Extending the analysis to broader measures of capital that include intangible assets yields an estimated recovery rate of 46%, implying that rising intangibility can generate economically meaningful output and welfare losses through equilibrium financial frictions and reduced borrowing capacity.
2. The Impact of Monetary Policy Innovations on Firm Investment: The Role of Intangible Assets in China (PDF), with Wenyi Zhang. Revise and Resubmit at Macroeconomic Dynamics.
This paper studies the effects of monetary policy innovations on firm investment in China and the role of intangible assets in shaping monetary policy transmission. We construct a composite monetary policy index and extract policy innovations to study firm-level investment responses. The results show that expansionary monetary policy increases firm investment on average, but the response is significantly weaker for firms with higher intangible asset intensity. A one standard deviation increase in the intangible asset ratio reduces the investment response to a one standard deviation expansionary policy innovation by 23 to 39 basis points. A simple dynamic investment model, along with supporting evidence, highlights the financing and depreciation channels. Additionally, the moderation effect differs across ownership types, strategic industries, and regional financial development. These findings suggest that the rising importance of intangible capital dampens monetary policy transmission through the investment channel.
3. Supply-chain Risk Perceptions and Corporate Investment: The Roles of Uncertainty and Sentiment (PDF), with Rui Zeng. Under review.
How do firms adjust investment in response to supply-chain risk perceptions? This paper distinguishes between first-moment (directional outlook) and second-moment (uncertainty) components of supply-chain risk using text-based measures derived from earnings-call transcripts. Using data on U.S. publicly listed firms, we show that these two dimensions have distinct and economically meaningful effects on investment. Perceived supply-chain uncertainty is associated with a short-run decline in investment, consistent with precautionary behavior, whereas supply-chain sentiment is linked to persistent investment expansion. These effects differ systematically across capital types: physical investment responds primarily to the directional outlook, while intangible investment is more sensitive to uncertainty. Within intangible capital, knowledge and organizational capital exhibit distinct dynamic adjustment patterns. We further show that financing constraints and adjustment frictions shape these responses. Firms facing tighter financial conditions contract investment more strongly in response to uncertainty, while capital that is less redeployable responds less to improvements in sentiment. Overall, the results indicate that heterogeneity in investment responses arises primarily across types of capital rather than across firms, highlighting the central role of capital characteristics in shaping firms’ responses to supply-chain risk perceptions.
4. Strategic Green Behavior: Conceptual Foundations and Index Development, with Zhiwei Yang, Sufang Zhang, Jiaying Wang, and Yi Niu. Corresponding author. Accepted at Business Strategy and the Environment.
Amid intensifying pressures for green transition and ESG governance, firms’ environmental responses are becoming increasingly strategic. Existing research has mainly examined greenwashing, symbolic compliance, and decoupling, but pays less attention to how firms allocate real green effort under formal compliance. This paper develops the concept of Strategic Green Behavior (SGB), defined as an allocation pattern in which firms place greater emphasis on recognizable green actions than on deep transformation-oriented actions. Using panel data on Chinese listed firms from 2013 to 2023, we construct an action-based SGB index from observable corporate green action choices. The results show that SGB has increased over time and exhibits clear regional disparities, with higher levels concentrated in eastern coastal and capital-market-active regions. Further analysis shows that SGB is not clearly reflected in firms’ external financing and information environment, but is associated with greater financial vulnerability and lower market valuation. We also find significant peer diffusion within industries, mainly through recognizable green actions. This study shifts attention from whether firms are green to how they structure their green effort, and provides evidence for improving environmental disclosure, ESG evaluation, and green governance policies.
5. When Legitimacy Backfires: Symbolic Policy Signals and Strategic Green Compliance in China's Multi-Level Governance, with Zhiwei Yang, Sufang Zhang, Yi Niu, and Jiaying Wang. Corresponding author. Revise and Resubmit at Environmental Politics.
Low-carbon transition depends on policy ambition and on how environmental policies are implemented on the ground. Using matched panel data on Chinese prefecture-level cities and listed firms from 2013 to 2023, this study examines whether local governments’ implementation gaps shape firms’ strategic green behavior (SGB), defined as a strategic allocation of green efforts toward visible and externally recognizable actions within formal compliance boundaries, while devoting relatively less effort to deeper substantive transformation. Building on a two-dimensional framework of policy implementation gaps, we employ firm fixed-effects models to examine the relationship between local implementation gaps and firm-level SGB. The results show a clear asymmetry: the Word–Action Gap significantly increases firm-level SGB, while the Action–Result Gap has a weaker effect. Additional evidence from government–firm ties suggests that firms with stronger relational exposure to local governments are more responsive to the policy signals embedded in the Word–Action Gap. The relationship is also more pronounced in southern regions. These findings suggest that firms respond more directly to weak commitment credibility than to weak outcome credibility. This study extends research on multi-level climate governance and policy implementation by showing that local execution gaps are not only signs of weak implementation, but also policy signals that shape firms’ strategic green responses.
6. Environmental Policy Effectiveness under Alternative Monetary Policy Regimes in Small Open Economies (PDF), with Wenbo He.
This paper studies the interaction between environmental policy and monetary policy in a small open economy using a two-sector Environmental Dynamic Stochastic General Equilibrium (E-DSGE) model. The economy features a brown sector and a green sector and incorporates two widely used environmental policy instruments: a carbon tax and a cap-and-trade system. We embed this framework in a small open economy with alternative monetary policy and exchange rate regimes to examine how macroeconomic policy design affects the transmission and effectiveness of environmental regulation. We first characterize steady-state outcomes under varying degrees of carbon tax rates and cap-and-trade stringency, allowing for static comparisons across environmental policy instruments. We then study the dynamic responses of macroeconomic variables to productivity and monetary policy shocks under each environmental policy regime across four small open economy configurations. We conduct both static and dynamic welfare analyses to compare carbon taxation and cap-and-trade in open economies.
7. Capacity-Constrained Regulation and the Location of Electricity-Intensive Investment: Evidence from China's Dual-Control Policy (PDF), with Zhiwei Yang, and Sufang Zhang.
How does regulation reshape spatial allocation when it binds through local capacity rather than marginal compliance costs? Using panel data for Chinese prefecture-level cities from 2013 to 2024, this study exploits the 2021 high-pressure warning issued under China’s Dual Control of Energy Consumption policy as a quasi-natural experiment to examine how tightening energy constraints affect the entry and expansion of intelligent computing centers. We find that tightening energy constraints significantly reduces both new deployment and firm expansion. The negative effect is concentrated in cities with higher marginal deployment capacity prior to the policy shock. Further evidence shows that local generation structure influences the policy effect: stable low-carbon power partially mitigates the adverse effect, while the positive expansion effect associated with variable renewable green energy is largely offset under significant energy constraints. At the spatial level, the policy shock does not simply redirect investment toward less constrained or resource-abundant locations. It mainly generates aggregate contraction, with only limited absorption by non-warning cities and no systematic sorting toward more favorable resource endowments. Overall, these findings show that capacity-constrained regulation can shift spatial adjustment from reallocation to aggregate contraction, highlighting the role of local power-system capacity, supply stability, and adjustment frictions in shaping electricity-intensive investment.
8. Money Illusion in Earnings Growth Expectations (PDF), with Yeow Hwee Chua and Wenyi Zhang.
We study whether inflation expectations generate money illusion in professional forecasts. Using U.S. analyst forecasts matched to measures of expected inflation, we show that higher inflation expectations are associated with upward revisions in long-term growth forecasts, even though realized earnings growth does not increase commensurately. These revisions generate predictable and systematic forecast errors. The evidence suggests that analysts partially interpret nominal inflation signals as information about real earnings growth rather than fully adjusting for inflation. Cross-sectional patterns across analysts and firms reinforce this interpretation. Our findings identify a growth-based form of money illusion in earnings growth forecasts.
9. Diagnostic Expectations and Carbon Taxation: Amplification, Allocation, and Welfare in a Two-Sector DSGE Model, with Wenbo He.
This paper studies how diagnostic expectations change the transmission of carbon taxation in a two-sector New Keynesian environmental DSGE model. Relative to the rational-expectations benchmark, diagnostic expectations generate stronger short-run overreaction and more persistent adjustment following productivity and monetary policy shocks. Quantitatively, we identify two distinct transmission mechanisms. Distorted consumption expectations primarily amplify aggregate and sectoral fluctuations, while distorted pricing expectations primarily reshape brown-green allocation by strengthening relative-price adjustment and expenditure switching toward the green sector. These effects become larger as the carbon tax rises. We further show that diagnostic expectations increase transition welfare losses at all tax rates considered. A welfare decomposition reveals that the additional welfare cost is driven mainly by the consumption channel, even though the pricing channel is central for sectoral reallocation. The results imply that expectation distortions affect environmental policy through separate amplification and allocation margins, and that ignoring these margins understates the transition costs of carbon taxation.
10. Immigration and Entrepreneurship
I demonstrate that immigration has a causal effect on local entrepreneurship in US counties. I use the exogenous variation in ancestry composition taken from Burchardi et al. (2020) as an instrumental variable to predict the total number of migrants flowing into each US county from 1990 to 2010. First, I find a strong and significant causal impact of immigration on the number of new business registrants per person. A one standard deviation increase in the number of migrants increases the change of new start-ups by 10% relative to its mean. Second, I find a significant causal impact of immigration on the quality of start-ups. A one standard deviation increase in local immigration increases the probability of a start-up achieving growth by 9% relative to the mean decline. Taking into account both the quantity and quality of start-ups, I find a significant causal impact of immigration on the expected number of start-ups with growth per person. A one standard deviation increase in the number of migrants increases the change in the number of start-ups achieving growth by 39% relative to its mean.