Regulatory Competition in the US Life Insurance Industry [Job Market Paper]
Competition between jurisdictions is a central feature of many public policy problems. I examine the consequences of such competition in the US life insurance industry, where states vie to attract insurers by setting lower capital requirements, but the costs of such actions are borne by consumers in other states. I document empirical evidence of competition between state regulators and its effects on the supply of life insurance. I then develop a quantitative model of the insurance market to evaluate the effects of this competition. I find that competition leads regulators to set lower capital requirements, which increases default risks but also increases consumer surplus by lowering prices. On net, these effects decrease regulators' utility based on regulators' revealed-preference objective functions.
Winner, Bank of Canada Graduate Student Paper Award
Conflicting Interests and the Effect of Fiduciary Duty — Evidence from Variable Annuities
(with Mark Egan and Shan Ge)
Forthcoming, Review of Financial Studies
We show that sales of variable annuities are more responsive to the sales agents' financial interests than investors' and that a proposed US Department of Labor fiduciary rule drastically changed this market.
Extreme Events and Overreaction to News
(with Spencer Kwon)
Revise and Resubmit, Review of Economic Studies
We propose a systematic predictor of under-and-overreaction to news in financial markets: the extremeness of the associated distribution of fundamentals. We show that stock prices have more overreaction and greater trading volume to more extreme types of news. We show that this is consistent with diagnostic expectations, a model of belief formation based on the representativeness heuristic.
Previously titled "Reactions to News and Reasoning By Exemplars"
Investor Composition and Overreaction
(with Michael Blank and Spencer Kwon)
How do we predict which asset-price booms go bust? We develop a model of financial markets with investor heterogeneity that yields a summary statistic for the degree to which an asset price overreacts to news: the gap in holdings of the asset by oversensitive investors versus rational investors. We use quarterly institutional holdings data to measure investors’ news sensitivity according to their tendency to purchase stocks after positive news, and compute from this measure the asset-level holdings gaps between oversensitive and rational investors. We find that investor news sensitivity is persistent over time, with the holdings gap measure able to forecast reversals or continuation of asset-price run-ups. Furthermore, the holdings gap measure serves as a powerful aggregator of different channels of overreaction, reflecting not only price extrapolation but also overreaction to various sources of non-price information, such as industry winners and fundamental growth.
The Effects of a Global Minimum Tax on Corporate Balance Sheets and Real Activities: Evidence from the Insurance Industry
I show that the base erosion and anti-abuse tax (BEAT), a global minimum tax passed as part of the 2017 Tax Cuts and Jobs Act, significantly changed the internal capital allocation of multinational insurance companies, increased global risk-sharing, and increased product prices.
Presented at: NBER Economic Impacts of Interjurisdictional Tax Competition, University of Waterloo Tax Policy Symposium, Harvard Law School