Research

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1. Information about Climate Transition Risk and Bank Lending [Job Market Paper] (SSRN link)

​Abstract: Do banks price their borrowers' exposure to climate transition risk? I find that in the E.U., firms negatively exposed to climate transition risk face higher lending rates by banks specialized in their borrowers' industry. However, I also find evidence of lower lending rates to more exposed firms after an oil supply news shock relevant for energy-intensive firms, especially during periods of high aggregate financial stress. Interpreting bank specialization as a source of heterogeneity in costs of private information acquisition, I develop a bank lending model with competitive lending, costly information acquisition, and non-Bayesian belief updating. Because of screening, specialized banks can better distinguish between borrowers' risk exposure, resulting in relatively higher lending rates to more exposed firms. However, this interest rate differential decreases in favor of more exposed borrowers when banks underreact to relevant public information. This effect is more pronounced during periods of poor borrower quality or increased financial stress. These results imply that lowering banks' cost of acquiring firm-level transition-risk exposure information is crucial to reduce green firms' financing costs, even when there is high quality public information and communication about decarbonization.​

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2. How climate-awake are financial markets? (with Dr. Galina Hale)

​Abstract: As physical manifestations of climate change become more apparent, are we to expect massive asset repricing and financial destabilization?  The answer to this question crucially depends on whether climate risks are priced-in already in different asset classes.  Climate-related events are unique in that they are drawn from a distribution that shifts and becomes more disperse over time along an uncertain trend, making belief formation a crucial component of asset pricing. We simulate the response of asset prices to changes in the arrival rate of climate-related disasters in the context of the rare events asset pricing framework based on Gabaix (2012), in which we allow for varying degrees of climate optimism and belief rigidity. We quantify ``fully priced in'' response in various structures of subjective belief formation. We survey the empirical literature on the pricing of physical climate risk in equity and fixed income markets to evaluate what belief formation structures may be consistent with assumption of fully priced-in beliefs.  While there is no consensus in empirical literature, our preliminary results show that in recent years, asset price responses to disasters documented in the literature are more consistent with low climate optimism and relatively low belief rigidity.

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3. How much is a formal job worth? Evidence from Mexico (with Dr. Brenda Samaniego de la Parra)

Abstract: We estimate the value of a formal job in Mexico. For the median household, the value  ranges from MXN\$610 and MXN\$860 pesos (USD\$30-42) per month. This valuation encompasses the various social benefits available to formal employees, differences in job stability and career prospects, and any other attributes that make a formal job desirable. We obtain this estimate using a partial equilibrium model of joint labor supply with informal and formal contracts and search frictions estimated using simulated method of moments. We validate our structural estimates for the value of a formal job using an employer-employee-household matched panel dataset and exogenous variation in access to a formal job from over 300,000 work-site inspections. Model and reduced-form approaches yield consistent changes in reservation wages of a spouse after a change in their partner's formal job probability and similar values of a formal job based on compensating income differential estimates. We find substantial heterogeneity in the value of formal employment across income deciles.