The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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Household Debt Overhang and Unemployment
Published: 02/15/2019 | DOI: 10.1111/jofi.12760
JASON RODERICK DONALDSON, GIORGIA PIACENTINO, ANJAN THAKOR
We use a labor‐search model to explain why the worst employment slumps often follow expansions of household debt. We find that households protected by limited liability suffer from a household‐debt‐overhang problem that leads them to require high wages to work. Firms respond by posting high wages but few vacancies. This vacancy posting effect implies that high household debt leads to high unemployment. Even though households borrow from banks via bilaterally optimal contracts, the equilibrium level of household debt is inefficiently high due to a household‐debt externality. We analyze the role that a financial regulator can play in mitigating this externality.
Intermediation Variety
Published: 10/02/2021 | DOI: 10.1111/jofi.13084
JASON RODERICK DONALDSON, GIORGIA PIACENTINO, ANJAN THAKOR
We explain why banks and nonbank intermediaries coexist in a model based only on differences in their funding costs. Banks enjoy a low cost of capital due to safety nets and money‐like liabilities. We show that this can actually be a disadvantage: it generates a soft‐budget‐constraint problem that makes it difficult for banks to credibly threaten to withhold additional funding to failed projects. Nonbanks emerge to solve this problem. Their high cost of capital is an advantage: it allows them to commit to terminate funding. Still, nonbanks never take over the entire market, but other coexist with banks in equilibrium.