Firm Quality Dynamics and the Slippery Slope of Credit Intervention
Time: 10:00 am- 11:30 am, Sept. 27th, 2024
Speaker: Wenhao Li
(University of Southern California)
Venue: 1F, Wanzhong Building, Langrun Garden, Peking University
Platform: Zoom
Meeting ID: 994 5991 6531
Passcode: inse
Abstract:
A salient trend in crisis intervention has emerged in recent decades: Government and central banks offered funding directly to nonfinancial firms, bypassing banks and other credit intermediaries. We analyze the long-term consequences of such policies by focusing on firm quality dynamics. In a laissez-faire economy, firms with high productivity are more likely to survive crises than those with low productivity. The government funding support saves more firms but cannot be customized based on firm productivity, dampening the cleansing effect of crises. The policy distortion is self-perpetuating: A downward bias in firm quality distribution necessitates interventions of greater scale in future crises. Our mechanism is quantitatively important: we show that if policy makers ignore such distortionary effects on firm quality dynamics, the resultant credit intervention would almost double the optimal amount.
Speaker:
Wenhao Li is an assistant professor of finance and business economics at USC Marshall School of Business. His research is at the intersection of macroeconomics and finance. His research aims to answer broad, policy-relevant questions: How is government debt priced, and how does debt supply affect the financial sector and the real economy? What are the mechanisms of financial crises, and what roles do government and central bank interventions play? His research approach combines equilibrium modeling with empirical analysis on time-series and panel data, and quantification of dynamic models. He has published in top economic and finance journals, including Journal of Political Economy, American Economic Journal: Macroeconomics, Review of Financial Studies, and Journal of Financial Economics.
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