Working Paper
Trust and Credit (with Zhiheng He) First Draft: March 2024
Over the past 35 years, high-trust countries have experienced faster growth in credit to pri- vate sector. We model trust as a collective reputation to understand its role in shaping different credit growth paths. The co-existence of equilibria with different trust levels suggests distrust to be a self-fulfilling prophecy: borrowers in a “low-trust” equilibrium opting for strate- gic default, driving up population-average default rates and borrowing costs, forcing credit supply and switching into informal credit market, and ultimately limiting economic growth. Both country-level implications and micro-mechanisms are empirically investigated. In par- ticular, distrust persistently predicts lower GDP growth, which can be partially explained by slower credit expansion; lower trust forces people’s credit-related activities from financial in- stitutions to private channels, either due to narrower formal inclusion or less active adoption. Our model also rationalizes the heterogeneous effects of financial regulation tightening under different trust levels, which discourages low-trust countries from imitating financial liberal- ization in high-trust economies. Empirically, financial liberalization corresponds to higher GDP growth in high-trust countries but lower GDP growth in low-trust countries, implying that regulation serves as an additional mechanism for credit divergence.
Self-Collateral and Crypto Run (with Wenjing Kang, Ke Tang, Jiaqing Zeng) First Draft: October 2023
The sudden FTX collapse alerts that centralized cryptocurrency exchange can function as an unregulated crypto-bank. We build a crypto-run model highlighting that the fragility of crypto- exchange arises from its self-collateralness — FTX misappropriated its clients’ funds to invest in the self-issued tokens FTT, whose value depends on the performance of the exchange itself. We find that a higher level of self-collateralness makes the crypto-run more likely to occur. Our model highlights a new degree of strategic complementarity — investors want to withdraw their funds from the exchange before other investors’ withdrawals dampen the exchange’s growth expectation and crash the token price. Unlike a bank run, suspension of convertibility alone is insufficient to prevent a crypto-run. A cryptocurrency custody mechanism can be considered to ensure the safety of clients’ funds and avert such crises in the future.
Convergence in Financial Development and Growth (with Zhiheng He) First Draft: December 2023
We evaluate the cross-country convergence of financial development and its relationship with GDP growth. Financial inclusion variables have been widely converged across countries, and the catch-up effect of countries with poor financial coverage mainly drives the convergence. In contrast, financial development measures — including domestic credit, liability, mutual fund size, and stock market capitalization — have diverged since 1985 despite the absolute convergence in GDP and financial inclusion. The GDP growth rates strongly correlate with the change in financial development but not the improvement in financial inclusion.
Ponzi Games on Blockchain (with Yifei Shuang, Ke Tang, and Xi Zhao) First Draft: June 2023
--- We analyze 512 ``vanilla'' Ponzi scheme contracts on Ethereum by examining Solidity code with a machine learning algorithm and further manual validation. The unpunished Ponzi crime is quite sizable, ranging from 7,513 to 12,563 months under the current legal system. We investigate the Ponzi's features and incentive design and show that Ponzi schemes lure more victims and investment if (1) the interest rate is reasonably low, (2) the contract design is more innovative and sophisticated, (3) the Ponzi schemer exploits more affinity network, and early investors are more experienced with blockchain, and (4) incentive design encourages reinvestment, allow users to profit through their network, and charges lower fees.
Cultural Price Premium: Evidence from Cryptopunks (with Fai Lim Loi, and Ke Tang) First Draft: June 2023.
--- Do investors value the cultural traits in alternative investments? We study CryptoPunks, a pioneer non-fungible token (NFT) project that features the punk subculture, and document price premiums in token prices --- punk tokens are 3.4 ETH, equivalent to 5.7\% on average, more expensive than tokens without punk attributes. The punk premium only appeared after NFT gained massive public attention when Beeple sold for 69.3 million dollars on March 11, 2021. Our findings suggest that investors derive utility by owning digital arts with conspicuous cultural traits that help them distinguish from others.
Cyber Income Inequality (with Lu Liu, Chen Lin, Li Liao, and Xincheng Wang ) First Draft: June 2023, Last Updated: June 2023
--- We study the income inequality among streamers using the administrative data of a leading Chinese live-streaming platform. Income inequality increased rapidly as the platform expanded from 2018 to 2020 — for example, the income share of the platform’s top 10 streamers increased from 14.82% to 45.15% as its revenue grew by 142%. We employ both IV and regression discontinuity design to estimate how platform expansion causally increases income inequality.
Subjective Risk-Return Trade-off (with Chen Lin, and Chanik Jo) First Draft: July 2022
--- We conduct a novel survey and document a robust “higher risk, lower return” relationship among risky assets. This relationship remains significant even for wealthy, highly educated, and financially-literate individuals. Negative risk-return trade-offs translate into under-diversified portfolios and over-investment in assets with high subjective Sharpe ratios.
Main Street's Pain, Wall Street's Gain (with Nancy Xu) Updated March 2023, First Draft: Dec 2021 R&R Journal of Financial Economics
--- In the Covid period, a one standard deviation increase in the initial jobless claims (IJC) surprise (8.7%) significantly predicts higher daily major stock index returns of 26-38 basis points. We highlight fiscal policy expectation as a new channel that explains the "bad is good" stock price responses, and provide time-series and cross-section evidence.
Persistence despite Revolutions (with Alberto Alesina, Marlon Seror, David Yang, and Weihong Zeng) Updated August 2022, First Draft: August 2020. R&R Review of Economic Studies
--- Intergenerational Income persistence across Communist revolutions in China. The paper emphasizes the importance of intra-household culture transmission.
Distrust and Cryptocurrency Price Deviations (with Bo Tang and Yulin Zhong) Updated May 2023, First Draft: Dec 2020
--- Distrust in domestic institutions contributes to cryptocurrency demand and explains the price deviation dynamics.
--- International Conference on Smart Finance (ICSF) 2022 Best Paper Award
Work in Progress
Language Unification and Identity
Low-quality Issuance (with Shushu Liang)
Millionaire or Tiger Parents (with Mingzhu Tai, Tianwang Liu, Wanting Yan)
Rarity Premium in Non-fungible Tokens (with Li Liao, Xincheng Wang, Chen Lin, and Zhiwen Zhuang)
Return and Holding Periods of Collectibles: Theory and Evidence from Non-fungible Tokens (with Tingjun Liu and Chen Lin)
Over the past 35 years, high-trust countries have experienced faster growth in credit to pri- vate sector. We model trust as a collective reputation to understand its role in shaping different credit growth paths. The co-existence of equilibria with different trust levels suggests distrust to be a self-fulfilling prophecy: borrowers in a “low-trust” equilibrium opting for strate- gic default, driving up population-average default rates and borrowing costs, forcing credit supply and switching into informal credit market, and ultimately limiting economic growth. Both country-level implications and micro-mechanisms are empirically investigated. In par- ticular, distrust persistently predicts lower GDP growth, which can be partially explained by slower credit expansion; lower trust forces people’s credit-related activities from financial in- stitutions to private channels, either due to narrower formal inclusion or less active adoption. Our model also rationalizes the heterogeneous effects of financial regulation tightening under different trust levels, which discourages low-trust countries from imitating financial liberal- ization in high-trust economies. Empirically, financial liberalization corresponds to higher GDP growth in high-trust countries but lower GDP growth in low-trust countries, implying that regulation serves as an additional mechanism for credit divergence.
Self-Collateral and Crypto Run (with Wenjing Kang, Ke Tang, Jiaqing Zeng) First Draft: October 2023
The sudden FTX collapse alerts that centralized cryptocurrency exchange can function as an unregulated crypto-bank. We build a crypto-run model highlighting that the fragility of crypto- exchange arises from its self-collateralness — FTX misappropriated its clients’ funds to invest in the self-issued tokens FTT, whose value depends on the performance of the exchange itself. We find that a higher level of self-collateralness makes the crypto-run more likely to occur. Our model highlights a new degree of strategic complementarity — investors want to withdraw their funds from the exchange before other investors’ withdrawals dampen the exchange’s growth expectation and crash the token price. Unlike a bank run, suspension of convertibility alone is insufficient to prevent a crypto-run. A cryptocurrency custody mechanism can be considered to ensure the safety of clients’ funds and avert such crises in the future.
Convergence in Financial Development and Growth (with Zhiheng He) First Draft: December 2023
We evaluate the cross-country convergence of financial development and its relationship with GDP growth. Financial inclusion variables have been widely converged across countries, and the catch-up effect of countries with poor financial coverage mainly drives the convergence. In contrast, financial development measures — including domestic credit, liability, mutual fund size, and stock market capitalization — have diverged since 1985 despite the absolute convergence in GDP and financial inclusion. The GDP growth rates strongly correlate with the change in financial development but not the improvement in financial inclusion.
Ponzi Games on Blockchain (with Yifei Shuang, Ke Tang, and Xi Zhao) First Draft: June 2023
--- We analyze 512 ``vanilla'' Ponzi scheme contracts on Ethereum by examining Solidity code with a machine learning algorithm and further manual validation. The unpunished Ponzi crime is quite sizable, ranging from 7,513 to 12,563 months under the current legal system. We investigate the Ponzi's features and incentive design and show that Ponzi schemes lure more victims and investment if (1) the interest rate is reasonably low, (2) the contract design is more innovative and sophisticated, (3) the Ponzi schemer exploits more affinity network, and early investors are more experienced with blockchain, and (4) incentive design encourages reinvestment, allow users to profit through their network, and charges lower fees.
Cultural Price Premium: Evidence from Cryptopunks (with Fai Lim Loi, and Ke Tang) First Draft: June 2023.
--- Do investors value the cultural traits in alternative investments? We study CryptoPunks, a pioneer non-fungible token (NFT) project that features the punk subculture, and document price premiums in token prices --- punk tokens are 3.4 ETH, equivalent to 5.7\% on average, more expensive than tokens without punk attributes. The punk premium only appeared after NFT gained massive public attention when Beeple sold for 69.3 million dollars on March 11, 2021. Our findings suggest that investors derive utility by owning digital arts with conspicuous cultural traits that help them distinguish from others.
Cyber Income Inequality (with Lu Liu, Chen Lin, Li Liao, and Xincheng Wang ) First Draft: June 2023, Last Updated: June 2023
--- We study the income inequality among streamers using the administrative data of a leading Chinese live-streaming platform. Income inequality increased rapidly as the platform expanded from 2018 to 2020 — for example, the income share of the platform’s top 10 streamers increased from 14.82% to 45.15% as its revenue grew by 142%. We employ both IV and regression discontinuity design to estimate how platform expansion causally increases income inequality.
Subjective Risk-Return Trade-off (with Chen Lin, and Chanik Jo) First Draft: July 2022
--- We conduct a novel survey and document a robust “higher risk, lower return” relationship among risky assets. This relationship remains significant even for wealthy, highly educated, and financially-literate individuals. Negative risk-return trade-offs translate into under-diversified portfolios and over-investment in assets with high subjective Sharpe ratios.
Main Street's Pain, Wall Street's Gain (with Nancy Xu) Updated March 2023, First Draft: Dec 2021 R&R Journal of Financial Economics
--- In the Covid period, a one standard deviation increase in the initial jobless claims (IJC) surprise (8.7%) significantly predicts higher daily major stock index returns of 26-38 basis points. We highlight fiscal policy expectation as a new channel that explains the "bad is good" stock price responses, and provide time-series and cross-section evidence.
Persistence despite Revolutions (with Alberto Alesina, Marlon Seror, David Yang, and Weihong Zeng) Updated August 2022, First Draft: August 2020. R&R Review of Economic Studies
--- Intergenerational Income persistence across Communist revolutions in China. The paper emphasizes the importance of intra-household culture transmission.
Distrust and Cryptocurrency Price Deviations (with Bo Tang and Yulin Zhong) Updated May 2023, First Draft: Dec 2020
--- Distrust in domestic institutions contributes to cryptocurrency demand and explains the price deviation dynamics.
--- International Conference on Smart Finance (ICSF) 2022 Best Paper Award
Work in Progress
Language Unification and Identity
Low-quality Issuance (with Shushu Liang)
Millionaire or Tiger Parents (with Mingzhu Tai, Tianwang Liu, Wanting Yan)
Rarity Premium in Non-fungible Tokens (with Li Liao, Xincheng Wang, Chen Lin, and Zhiwen Zhuang)
Return and Holding Periods of Collectibles: Theory and Evidence from Non-fungible Tokens (with Tingjun Liu and Chen Lin)
Publication
Redeemable Platform Currencies (with Kenneth Rogoff) August 2021, Review of Economic Studies, Published in May 2022
--- A model of digital currency backed by redemptions on internet platforms. We discuss the platform currency features and optimal design.
Converging to Convergence (with Michael Kremer, and Jack Willis) August 2020, NBER Macroeconomic Annual 2021, Published in May 2022
--- Absolute convergence holds in the recent two decades. Institutions also converge and contribute to the economic convergence.
Bubble for Fama (with Andrei Shleifer and Robin Greenwood) July 2018, Journal of Financial Economics, Published in January 2019
--- Empirical predictability in stock market bubble
--- JFE Fama - DFA Best Paper Award
--- A model of digital currency backed by redemptions on internet platforms. We discuss the platform currency features and optimal design.
Converging to Convergence (with Michael Kremer, and Jack Willis) August 2020, NBER Macroeconomic Annual 2021, Published in May 2022
--- Absolute convergence holds in the recent two decades. Institutions also converge and contribute to the economic convergence.
Bubble for Fama (with Andrei Shleifer and Robin Greenwood) July 2018, Journal of Financial Economics, Published in January 2019
--- Empirical predictability in stock market bubble
--- JFE Fama - DFA Best Paper Award
Policy Writing
Devise more controls to protect cryptocurrency investors (with Wenzhi Ding, Chen Lin) Nature Correspondence (short comment)
--- Separate regulatory norms for CEX and DEX
How Hong Kong Could Maintain its Competitiveness as an International Financial Centre (with Pingyang Gao, Ruijing Meng) Hong Kong Economic Policy Green Paper
--- Hong Kong stock market low-valuation (P/B ratio less than 1) puzzle and corporate governance
--- Separate regulatory norms for CEX and DEX
How Hong Kong Could Maintain its Competitiveness as an International Financial Centre (with Pingyang Gao, Ruijing Meng) Hong Kong Economic Policy Green Paper
--- Hong Kong stock market low-valuation (P/B ratio less than 1) puzzle and corporate governance
Unpublished Manuscripts
Educated Youth Should Go to the Rural Areas: A Tale of Education, Employment and Social Values July 2018 (Last Updated)
--- Sent-down youth movement induces more rural educational attainment, higher level of trust, subjective well-being, and better job satisfaction.
--- Sent-down youth movement induces more rural educational attainment, higher level of trust, subjective well-being, and better job satisfaction.