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Want to stay on top of cutting-edge finance research from Wharton? Every two months, the Rodney White Center highlights the latest studies by Wharton’s finance faculty. In this issue: racial bias in bankruptcies, imperfect competition in the repo market, behavioral biases in the housing market, optimal strategies for crypto issuers, and the value of undiversified shareholder engagement.

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Itamar Drechsler and Luke Taylor

Professor Sasha Indarte uncovers racial bias in personal bankruptcy outcomes

Racial disparities exist across the board in the finances of U.S. households, from the median wealth they control to the interest rates they pay. In a new study, Professor Indarte sheds light on yet another instance of racial disparity: personal bankruptcy outcomes. Black Chapter 13 filers are 21% more likely to have their personal bankruptcy petitions dismissed without any debt relief relative to non-Black filers. Moreover, when Black Chapter 13 filers are randomly assigned to a white trustee, their dismissal rate rises by 10%, consistent with racial bias. 

Professor Amy Huber documents imperfect competition in the Triparty repo market

The $2 trillion Triparty repo market is a key part of the money and bond markets. Security dealers in this market obtain short-term funding from cash-lenders using repurchase agreements, or repos. Surprisingly, when cash-lenders (e.g., BlackRock) lend to different dealers simultaneously (e.g., Goldman Sachs and Wells Fargo), the rates that cash-lenders accept show persistent cross-dealer differences. Professor Huber links these differences to imperfect competition, showing that dealers gain substantial market power due to cash-lenders’ aversion to portfolio concentration and preference for stable lending. 

Professor Lu Liu shows strong behavioral biases in the housing market

Two central principles in behavioral economics are reference dependence, the idea that people measure outcomes relative to a reference point, and loss aversion, the notion that losses reduce utility more than equivalent gains increase it. Professor Liu shows that both behaviors have large impacts on the housing market. Households derive substantial utility from selling their homes at a profit relative to the original purchase price, and losses impact households’ utility 2 to 2.5 times more than equivalent gains. 

Professor Urban Jermann provides optimal strategies for crypto issuers

The boom in popularity of cryptocurrencies (tokens) in the last decade has attracted much attention toward optimal policy design. From the perspective of a token issuer, how should issuance and fees be optimized to maximize profits? Professor Jermann provides the first model to answer these questions. Optimal policies depend crucially on the issuer’s ability to commit to future policies.

Ph.D. candidate Felix Nockher shows a bright side to low diversification

The benefits of portfolio diversification are well understood and widely praised. Undiversified institutional investors, however, play an important role in the financial system. Ph.D. candidate Felix Nockher shows that companies owned by such undiversified investors are monitored more in corporate conference calls and have higher profits as well as valuations than those owned by large, diversified shareholders. These results suggest that having a lot of skin in the game incentivizes greater shareholder engagement, which improves firms’ performance through better corporate monitoring.

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