Jessie Jiaxu Wang

A Labor Capital Asset Pricing Model

We show that labor search frictions are an important determinant of the cross-section of equity returns. In the data, sorting firms by loadings on labor market tightness, the key statistic of search models, generates a spread in future returns of 6% annually. We propose a partial equilibrium labor market model in which heterogeneous firms make optimal employment decisions under labor search frictions. In the model, loadings on labor market tightness proxy for priced time variation in the efficiency of the matching technology. Firms with low loadings are not hedged against adverse matching efficiency shocks and require higher expected stock returns.

Distress Dispersion and Systemic Risk in Networks

I develop a model of contagion that stems from endogenous risk-sharing when financial firms differ in distress levels. Firms face costly liquidation and strategically trade assets, thereby forming links. A link with a distressed firm can be socially costly as it raises system-wide liquidation risk. When firms are highly dispersed in financial distress, the network composition is distorted in two ways: it features too many links with distressed firms and too few risk-sharing links among non-distressed firms. This inefficiency arises from an externality when bilateral trading terms are not contingent on links faraway in the network. Using insights from the model, I discuss policy implications for financial stability. I also show empirical evidence that the distress dispersion across financial firms provides a novel indicator for systemic risk.

Bank Networks and Systemic Risk: Evidence from the National Banking Acts

The National Banking Acts (NBAs) of 1863-1864 established rules governing the amounts and locations of interbank deposits, thereby reshaping the bank networks. Using unique data on bank balance sheets and detailed interbank deposits in 1862 and 1867 in Pennsylvania, we study how the NBAs changed the network structure and quantify the effect on financial stability in an interbank network model. We find that the NBAs induced a concentration of interbank deposits at both the city and bank levels, creating systemically important banks. Although the concentration facilitated diversification, contagion would have become more likely when financial center banks faced large shocks.

A Labor Capital Asset Pricing Model: A Labor Capital Asset Pricing Model

We show that labor search frictions are an important determinant of the cross-section of equity returns. Empirically, we find that firms with low loadings on labor market tightness outperform firms with high loadings by 6% annually. We propose a partial equilibrium labor market model in which heterogeneous firms make dynamic employment decisions under labor search frictions. In the model, loadings on labor market tightness proxy for priced time-variation in the efficiency of the aggregate matching technology. Firms with low loadings are more exposed to adverse matching efficiency shocks and require higher expected stock returns.

Labor Scarcity, Finance, and Innovation: Evidence from Antebellum America

This paper provides new evidence on how access to finance impacts technological innovation and establishes the role of labor practices in shaping the finance-innovation nexus. We exploit antebellum America, a unique setting where staggered adoption of free banking laws across states encouraged bank entry, and regional divergence in the use of exploited workers generated heterogeneity in agricultural labor cost. We find that greater access to finance spurred innovation, but the positive effect on agricultural innovation diminished with the extent of labor exploitation. Where exploitative labor practices were pervasive, free banking aggravated labor exploitation, reduced labor cost, and impeded agricultural innovation.This paper establishes labor scarcity as an important economic channel through which access to finance shapes technological innovation. We exploit antebellum America, a unique setting with (1) staggered passage of free banking laws across states and (2) sharp differences in labor scarcity between slave and free states. We find that greater access to finance spurred technological innovation as measured by patenting activities, especially in free states and the previously unbanked Midwest. Furthermore, in slave states where slave labor was prevalent, access to finance encouraged technological innovation that substituted for slave labor, but discouraged technological innovation that substituted for free labor.