Works in progress

Firm Credit and Loan Guarantees in General Equilibrium 

Work with Roberto M. Samaniego, George Washington University

We develop a model of firm dynamics incorporating default risk and assess the general equilibrium implications of loan guarantees. Our model includes a financial sector that provides liquidity to firms facing productivity shocks and the risk of exit. The analysis encompasses both partial and general equilibrium settings, exploring how loan guarantees influence credit markets, firm survival, and economic aggregates. We compare the efficiency of allocations in environments with and without contractible productivity, shedding light on the welfare implications of these policies.


To be Saved or Not: the Role of Employment in a Crisis-rescue Plan 

Work with Hongchang Hou, Jie Li (Central University of Finance and Economics) and RM Samaniego

What does a government "implicitly" guarantee? Employment. To avoid potential social unrest associated with massive layoffs during a crisis, banks, with the government's guidance, may have to extend more loans to those firms with higher employment. We focus on crisis-rescue periods because they often reveal the government's implicit commitments most prominently. Using the firm-level dataset that accounts for the majority of China's manufacturing firms, we document that the number of employees plays a more important role in determining the amount of firms' credit during the crisis-rescue period than before. Moreover, the heterogeneity tests indicate that this effect is particularly significant among state-owned enterprises (SOEs) compared to non-SOEs.  We attribute this difference to SOEs' natural inclination to maintain a workforce, the higher social costs associated with their layoffs, and the stricter risk management practices adopted by banks during crisis-rescue period.  In essence, we interpret an "implicit" government guarantee as an explicit commitment to meet the credit needs of firms with higher employment during crisis-rescue periods.

Shifting Gears: The Impact of COVID-19 on the Equilibrium in Automobiles

This study explores the impact of the COVID-19 pandemic on the equilibrium dynamics of the used car market, with a focus on price adjustments and shifts in the distribution of car ages. We develop a dynamic household decision model inspired by the framework of Gillingham et al. (2022) to analyze how supply chain disruptions and shifts in consumer preferences influence market outcomes. The model incorporates transaction costs and aggregate preference shocks to explain the observed rise in used car prices and the shift towards older vehicles during the pandemic.

Protection by Power

This paper examines the relationship between political power and the implementation of industrial policies in the United States. Using data from the Global Trade Alert database, we explore how factors such as congressional representation, political alignment, and campaign donor influence shape trade interven- tions aimed at protecting domestic industries. We develop a framework that integrates local economic priorities with political incentives, capturing the role of local employment dominance and largest donor- driven lobbying in policy formation. Our findings suggest that politically powerful representatives, espe- cially those aligned with the majority party or the president, significantly influence the implementations of industry interventions.

Real Gains or Hidden Pains? The Impact of U.S. Localization Policies

Work with Roberto M. Samaniego, George Washington University

This study uses Global Trade Alerts(GTA) database to investigate the effects of U.S. localization policies—public procurement localization and local content policies—on firm performance. Localization policies have become the most prevalent intervention types since the 2008 financial crisis, aimed at enhancing domestic competitiveness and fostering economic growth. Our findings highlight distinct impacts: public procurement policies generally boost firm revenue, R&D investment, employment, and productivity but constrain capital expenditures. In contrast, local content policies tend to increase operational costs, reduce flexibility, and negatively affect productivity, revenue, and capital investments. These results underscore the trade-offs between promoting domestic supply chains and preserving firm competitiveness and flexibility. To address potential endogeneity—arising from the possibility that governments target already thriving industries—we employ an instrumental variable strategy based on the political alignment of congressional representatives and senators with the dominant party.


State Ownership: a Benevolent  Kitty or a Menacing Lion?        

Work with Jie Li, Central University of Finance and Economics,  click here for the slides.

We provide firm-level evidence that a private exporter may lower its financing costs by introducing a small (kitty) share of state ownership. However, if the state acquires a lion share, the exporter becomes inefficient. Therefore, there exists an inverse U-shape relationship between a firm's export performance and its share of state ownership. Specifically, a firm with a small share of state ownership has better export performance than a pure private firm in financially dependent sectors. But this superior performance deteriorates quickly and even turns negative, as the share of state ownership increases. These results are not driven by firm, sector, or time characteristics. This paper reconciles these findings with the fact that although a firm with state ownership is less liquidity constrained due to its low financing cost, while inefficiency, a frequent concomitant of state ownership, eventually outweighs this credit advantage as the share of state ownership rises.

Minimum Wage and Credit constraints   

Work with Jie Li, Central University of Finance and Economics, and Xinyu Zhaoclick here for the slides.

In this paper, we provide firm-level evidence that lower minimum wage standards alleviate credit con- straints on exports. We show that firms located in cities with lower minimum wage standards exhibit superior export performance compared to those operating in cities with higher minimum wage stan- dards, in financially vulnerable sectors. This is consistent with the fact that minimum wage policy is associated with wage rigidity and firms’ high costs. Our findings highlight the effect of minimum wage policies on firm exports from the perspective of credit constraints.


Learning Effect of Processing Trade

Work with Jie Li, Central University of Finance and Economics and Zeyu Wang, China Construction Bank 

We provide firm-level evidence of the existence of processing trade's learning effect. We find that the higher share of processing trade would increase a firm's total factor productivity. A firm engaged in processing trade imports all or part of intermediate goods and exports finished products. Through import and export, this processing-trade firm gains two opportunities to get access to and learn from international markets, while ordinary-trade firms can only learn via exporting. Our findings highlight the importance of processing trade in firms' productivity, particularly in developing countries. We establish a Melitz-type model to confirm the learning effect associated with processing trade.