Working Papers

Regulating Competing Payment Networks [JMP, Updated 5/2023]

Payment markets are two-sided: networks charge fees to merchants to fund rewards for consumers. I study how regulation and competition affect prices, distribution, and aggregate welfare in consumer-to-business payments. Credit card merchant fee caps are progressive and increase annual welfare by $29 billion, whereas entry by new credit card networks has the opposite effect. I develop a two-sided model of consumer adoption, merchant pricing, merchant acceptance, and network competition. I estimate the model by matching data on consumers’ card holdings, network pricing, and the effects of a regulatory shock to debit card rewards. The estimated model matches external evidence on networks’ costs, merchants’ margins, and the effects of AmEx’s 2016–2019 cuts in merchant fees. Using the estimated model, I compare the effects of capping credit card merchant fees, increasing entry of private credit card networks, and introducing a low-fee public option like FedNow. Fee caps increase welfare by reducing rewards, retail prices, and credit card use. In contrast, because I estimate that consumers are reward-sensitive, but merchants are fee-insensitive, entry raises rewards without cutting fees, lowering welfare. A public option struggles to gain consumer adoption without rewards, limiting welfare gains.

Cornered Borrowers: Lender Segmentation in the Provision of Minority Mortgages (With Gregor Matvos and Amit Seru) [Draft Soon!]

We study the equilibrium consequences of differences in mortgage shopping behavior between majority and minority borrowers. We identify minority-specialized lenders, who disproportionately lend to minority borrowers and originate one-fifth of minority mortgages. These smaller lenders charge high mortgage rates and borrowing from them is partially responsible for the minority interest rate gap. Minority-specialized lenders are more likely to employ minority employees and have higher market shares in areas with more non-English speakers.  Borrowers are also less likely to withdraw mortgage applications from these lenders. These facts suggests that minority-specialized lenders provide costly minority-specialized services, rather than discriminate against these borrowers. To quantify the effect of minority-specialized service provision in equilibrium, we estimate a model in which minority specialized lenders compete with mainstream lenders, and majority and minority borrowers differ in loan demand as well as the types of lenders they consider. Our novel identification strategy uses withdrawn mortgage applications to separately identify borrower consideration sets and preferences. The estimated model can rationalize the minority gap in rates as well as consideration set size across groups. Minority-specialized lending attracts minorities by providing services valued by minorities, and by lowering search frictions. Minorities gain from a broader diffusion of minority-specialized lending, and these gains are large relative to potential gains from eliminating residual racial discrimination in interest rates. Our model suggests fair lending laws can disincentivize mainstream lenders' investments in minority-specialization, reducing competition and welfare for minority borrowers.

Startup Antitrust and Financial Frictions

Financial frictions can overturn conventional antitrust analysis of startup acquisitions. I extend Myers-Majluf to include the option to be acquired. Low types are acquired, medium types issue equity, and high types do not invest. Blocking acquisitions lowers the average type of equity issuers and raises the cost of capital for standalone startups. The welfare loss from lower investment can overwhelm the welfare gains from blocking anticompetitive acquisitions. A case study from the pharmaceutical industry suggests antitrust policy can have a large effect on the valuations of startups who are unlikely to be acquired for anticompetitive reasons.

 (Latest Draft: June 2022)

Work in Progress

Lending to Lemons (with Joseph Hall)

Minority Lenders and Monetary Policy Passthrough (with Gregor Matvos, Amit Seru, and Francesco Spizzuoco)

What Explains Fee Dispersion in Private Equity? (with Juliane Begenau, Claudia Robles-Garcia, and Emil Siriwardane)