Some of my recent research covers topics such as the relationship of venture capital investment allocation and banking regulation, the impact of personal bankruptcy law on entrepreneurship, and how government supplied small business loan guarantee help entrepreneurs in the presence of aggregate uncertainty. Here are some of my papers: 


The Impact of Personal Bankruptcy Law on Entrepreneurship (Canadian Journal of Economics, Volume 48, No. 2) Previous version: Northwestern University, Searle Center Working Paper Series, Paper No.2009-010

Abstract:  I study the two competing effects of limited personal liability on entrepreneurship in a life-cycle model: an insurance effect through debt relief in the event of business failure, and a borrowing cost effect where the borrowing cost rises with default premiums. I first calibrate the model to the US economy by taking a simplified version of the US chapter 7 bankruptcy code and then consider the effects of alternative regimes. I find that personal bankruptcy law affects entrepreneurship primarily by altering the decisions of agents with moderate entrepreneurial ability through the insurance effect rather than the borrowing cost effect.

Small Business Loan Guarantees as Insurance Against Aggregate risks  (The B.E. Journal of Macroeconomics. Contribution, Volume 13, Issue 1 )

Abstract: This paper assesses whether insurance against aggregate risk (such as the current economic downturn) could be an important rationale for popular government operated loan-guarantee programs for small and medium enterprises (SME). I demonstrate in a model that firms could be credit-constrained due to aggregate uncertainty, because financial institutions face high borrowing cost during economic downturns. Since it enjoys relatively lower borrowing costs during a recession, the government could offer insurance in the form of loan guarantees to ease borrowing constraints for small businesses. I prove that under certain conditions, a program with a net present value of zero could be socially beneficial. Furthermore, I show that a guarantee program with a fixed fee is associated with adverse selection, and leads to the “over-lending” problem. Then, the high cost of obtaining guarantees and thorough qualification requirements can be viewed as tools to mitigate this problem.

Financing High-tech Start-ups: Moral Hazard, Information Asymmetry and the Reallocation of Control Rights (The B.E. Journal of Economic Analysis and Policy, Contribution, Volume 15,  Issue 2)

Abstract: Recent data suggests that venture capital investments concentrate in the high-tech sector only in those countries where banks are not allowed to offer equity financing. To help explain this fact, I develop a simple principal-agent model of start-up financing with both private information and hidden actions, where the equity investor can vary the level of control over the firm and the debt investor cannot. The model shows that when three commonly documented characteristics of the high-tech industry coexist, namely: (i) a high degree of information asymmetry, (ii) a high level of uncertainty about returns, and (iii) a large amount of R\&D investment preceding production, then the ability to reallocate control rights contingent on performance becomes key. Unlike debt contract, equity contract specifies detailed provisions on the allocation of control rights. Thus venture capitalists as equity holders have a clear advantage in financing young high-tech firms where banks are not allowed to; in countries with no such restriction, they no longer have such advantage. This result helps explain why most European governments’ efforts in promoting venture capital activities failed to attract such investments in the high-tech sector.

Working Papers:

Small Business Dynamics and the Financial Crisis: 

Abstract: It is well acknowledged that the small business/entrepreneurship sector in the US has been severely dampened by the 2008 financial crisis; the number of employer startups has decreased drastically as exits among all sizes of firms increased during that period. It is normal that the small businesses suffered disproportionately because they rely more on credit and its harder for them to downsize; what is surprising is that the sector has barely recovered ever since. This paper aims to utilize various data sources to document the changes in small business/entrepreneurship dynamics during and after the Great Recession to provide evidence for the lack of recovery. Decomposition of the business dynamics data into different size group and ownership structures is performed to offer potential explanations for the lack of recovery, such as the extension of unemployment benefits. In addition, a model is proposed for analyzing the interactions of entrepreneurship and unemployment benefits policy.

Health Insurance Coverage and Self-Employment Among Young US Adults (In submission)

Abstract:  Many have argued that the health insurance-related  “job-lock” could potentially depress the entrepreneurial sector in the US. We utilize information in the NLSY97  to study the relationship between health insurance and the decision to enter into self-employment. We find that, in addition to the typical demographic and economic variables that influence the decision to become self-employed, employer insurance coverage has a strong “pull” effect on the decision, especially among older male in our sample. Older females among our sample who gain dependent coverage are more likely to start a business, but we cannot establish a causal relationship due to endogeneity. In addition, health insurance coverage has little impact on the entry decision for those who are starting a corporation or who claim to be the manager of their own businesses. This suggests that the introduction of universal health care coverage will only have modest effect on the self-employed sector.

Energy Price Fluctuations and Small-Business Dynamics
(Joint with Jason Stevens) In progress

Change in business turnover is a potential but often overlooked channel through which energy price shocks are transmitted to the economy. By utilizing annual business turnover information and various energy prices for all U.S. states between 1979 and 2012, we confirm that changes in energy prices do have a sizable impact on small-business dynamics. We were also able to provide a richer characterization of this impact. Formal statistical tests are unable to reject the hypothesis of symmetric and linear responses to energy price movements for both entry and exit. In addition, small-business exits appear to react differently to local and national price changes, suggesting that firm relocation may play a key role here.

Slides: Aggregate Risks, Collateral Value and the Role of Loan Guarantee in Small Business Financing Work in progress