Michael Sockin - Academia.edu (original) (raw)
Papers by Michael Sockin
Social Science Research Network, 2023
and the Virtual Finance and Paris Dauphine Digital Activities Seminars for helpful comments and s... more and the Virtual Finance and Paris Dauphine Digital Activities Seminars for helpful comments and suggestions. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.
Management Science
We model cryptocurrencies as utility tokens used by a decentralized digital platform to facilitat... more We model cryptocurrencies as utility tokens used by a decentralized digital platform to facilitate transactions between users of certain goods or services. The network effect governing user participation, in conjunction with the nonneutrality of the token price, can cause the token market to break down. We show that token retradeability mitigates this risk of breakdown on younger platforms by harnessing user optimism but worsens this fragility when sentiment trading by speculators crowds out users. Elastic token issuance mitigates this fragility, but strategic attacks by miners exacerbate it because users’ anticipation of future losses depresses the token’s resale value. This paper was accepted by Agostino Capponi, Special Issue of Management Science: Blockchains and crypto economics.
Review of Finance
We examine the pecuniary externalities that arise when active fund manager compensation contracts... more We examine the pecuniary externalities that arise when active fund manager compensation contracts have common components. This commonality in the compensation structure and loadings on each component across funds reduces asset price informativeness, amplifies the distortions from active managers’ benchmark-hedging demand, and lowers the price of risk in financial markets. This is because contract commonality distorts investors’ capital allocation to active management, and active managers’ information acquisition and trading decisions. From a normative perspective, contract commonality increases the rigidity of the active industry size and performance-based fee. As a result, they do not vary enough with financial market conditions compared with a Planner’s economy. Quantitatively, an increase in asset payoff uncertainty increases the size and performance-based fee twice as much in the Planner economy compared with the decentralized economy. From a positive perspective, contract commo...
We model a cryptocurrency as membership in a decentralized digital platform developed to facilita... more We model a cryptocurrency as membership in a decentralized digital platform developed to facilitate transactions between users of certain goods or services. The rigidity induced by the cryptocurrency price having to clear membership demand with supply of token by speculators, especially with strong complementarity in membership demand, can lead to market breakdown. While user optimism mitigates the market fragility by increasing user participation, speculator sentiment exacerbates it by crowding users out. Informational frictions attenuate the risk of breakdown by dampening price volatility and platform performance. Furthermore, the users' anticipation of losses from strategic attacks by miners exacerbates the market fragility. Michael Sockin Department of Finance UT Austin McCombs School of Business Austin, TX 78712 michael.sockin@mccombs.utexas.edu Wei Xiong Princeton University Department of Economics Bendheim Center for Finance Princeton, NJ 08450 and NBER wxiong@princeton.e...
This package contains all the Matlab code necessary to reproduce the four figures in the Brunnerm... more This package contains all the Matlab code necessary to reproduce the four figures in the Brunnermeier, Sockin, and Xiong (forthcoming). "China's Model of Managing the Financial System." Review of Economic Studies. Detailed instructions about the files needed to reproduce each figure.
SSRN Electronic Journal, 2021
Using Glassdoor salary data on six U.S. industries, we show that non-base pay not only contribute... more Using Glassdoor salary data on six U.S. industries, we show that non-base pay not only contributes more to income inequality than base pay, but also represents a sizable and stable fraction of employee compensation. Even within an industry, there is substantial heterogeneity in how firms pay bonuses and which employees receive cash, stock, profit-sharing, or sales commission. The size and incidence of bonuses is intimately related to job hierarchy and skill. More senior employees and occupations that require interpersonal (routine) skills receive higher (lower) bonuses, while employees with comparable roles (same job title) within a firm receive similar non-base compensation. Non-base pay also responds more to firm and, across the corporate hierarchy, industry shocks than base, and therefore represents an important mechanism through which changes in firm productivity are passed on to workers. ∗University of Pennsylvania. Email: jsockin@sas.upenn.edu †University of Texas at Austin. E...
This paper develops a tractable model to analyze information aggregation and learning in housing ... more This paper develops a tractable model to analyze information aggregation and learning in housing markets. In the presence of informational frictions, households face a realistic problem in learning about the quality of a neighborhood and housing prices serve as important signals. Our model highlights how the learning by households interacts with local housing supply and demand characteristics and a¤ects housing price dynamics. These learning e¤ects are particularly strong when supply elasticity is in an intermediate range, and can cause short-run price momentum even when shocks to both housing supply and demand mean-revert over time. We wish to thank Nick Barberis and Zhenyu Gao for helpful discussion. yPrinceton University. Email: msockin@princeton.edu. zPrinceton University and NBER. Email: wxiong@princeton.edu. People buy a house not just for shelter but also for the neighborhood to which the house belongs. There are many characteristics that a¤ect the living conditions in a neig...
In this online appendix, we present the technical detail of the model extension presented in Sect... more In this online appendix, we present the technical detail of the model extension presented in Section 4.1 of the main paper. Our model features a noisy rational expectations equilibrium, which requires clearing of the two housing markets that are consistent with the optimal behavior of both households and home builders:
SSRN Electronic Journal, 2021
In the presence of informational frictions, bond markets aggregate the private information of fir... more In the presence of informational frictions, bond markets aggregate the private information of firms and intermediaries, and bond prices serve as signals about the financial sector and the real economy. Such frictions amplify the credit constraints faced by intermediaries, depressing firm investment, leverage, and asset valuations and raising credit spreads. These observations are consistent with evidence on the introduction of TRACE and help explain the under-leverage and credit spread puzzles, the excess bond premium, intermediary asset pricing in bond markets, and bond market dysfunction during the last financial crisis. Informational frictions can improve welfare, suggesting limits to promoting market transparency.
This paper microfounds a consumer's preference for data privacy as a mechanism for concealing beh... more This paper microfounds a consumer's preference for data privacy as a mechanism for concealing behavioral vulnerabilities. This approach facilitates a welfare analysis of di¤erent data privacy regulations, such as the GDPR and CCPA. Sharing data with a digital platform bene…ts a consumer through improved matching e¢ ciency with normal consumption goods at the expense of exposing those with self-control issues to temptation goods. Although the GDPR and CCPA empower consumers to opt in or out of data sharing, these regulations may not su¢ ciently protect exceptionally vulnerable individuals because of nuanced data sharing externalities induced by consumers'active and default choices.
What Happened in China in 2015? • A taxi-driver's tale. Slide 2/24-Discussion by Will Cong (Chica... more What Happened in China in 2015? • A taxi-driver's tale. Slide 2/24-Discussion by Will Cong (Chicago Booth)-China's Model of Managing the Financial System Overview Model Comments Summary What Happened in China in 2015? • A taxi-driver's tale.
We develop a model to analyze information aggregation and learning in housing markets. Households... more We develop a model to analyze information aggregation and learning in housing markets. Households enter a neighborhood by buying houses and consuming each other's final goods. In the presence of pervasive informational frictions, housing prices serve as important signals to households and capital producers about the neighborhood's economic strength. Our model provides a novel amplification mechanism in which noise from housing markets propagates throughout the local economy via learning because of the complementarity in households' decisions, distorting migration into the neighborhood and the supply of capital and labor. We provide consistent evidence based on the recent U.S. housing cycle.
By exploiting variation in capital gains taxation across U.S. states as an instrument, we provide... more By exploiting variation in capital gains taxation across U.S. states as an instrument, we provide novel evidence that housing speculation during the boom period of 2004 to 2006, measured by the fraction of non-owner-occupied home purchases, helps to explain not only the severity of the housing price bust in 2007 to 2009, but also the depth of the subsequent economic recession. Housing speculation, anchored, in part, on extrapolation of past housing price changes, was more pronounced in zip codes with low capital gains taxation. Zip codes that had greater speculation, in turn, experienced more new housing construction during the boom, and more severe declines in employment, per capita income, real payroll, and new business establishment growth during the bust. Our analysis also indicates that supply overhang and local household demand are two key channels for transmitting the adverse effects of housing speculation. This paper supersedes an earlier draft circulated under the title "Housing Speculation and Supply Overhang."
SSRN Electronic Journal, 2018
We study investment and risk sharing in complete markets when agents internalize their impact on ... more We study investment and risk sharing in complete markets when agents internalize their impact on asset prices. Quantity shading of state-contingent claims by buyers and sellers generates excess exposure to idiosyncratic risk and low asset pledgeability. This depresses investment, the risk-free rate, and aggregate productivity. Rents from market power distort and misalign agents' marginal valuations of state-contingent returns, rendering risk-sharing constrained inefficient and as if markets were competitive but incomplete. When there is limited commitment, sellers face borrowing constraints that limit their ability to strategically restrict supply, thereby reallocating market power to buyers. When markets are decentralized, agents distort investment to capture arbitrage profits by acting as pass-through intermediaries.
We would like to thank participants at the AEA 2017 annual meetings and especially our discussant... more We would like to thank participants at the AEA 2017 annual meetings and especially our discussant Darrell Duffie. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. At least one co-author has disclosed a financial relationship of potential relevance for this research. Further information is available online at http://www.nber.org/papers/w23194.ack NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.
SSRN Electronic Journal, 2013
This review is prepared for the Annual Review of Financial Economics. We thank James Smith and Mi... more This review is prepared for the Annual Review of Financial Economics. We thank James Smith and Michael Sockin for helpful comments. Xiong acknowledges financial support from Smith Richardson Foundation grant #2011-8691. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.
for helpful discussion and comments. We are especially grateful to Bruno Biais, an Associate Edit... more for helpful discussion and comments. We are especially grateful to Bruno Biais, an Associate Editor, and three referees for many constructive suggestions. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.
This paper develops a model with a tractable log-linear equilibrium to analyze the effects of inf... more This paper develops a model with a tractable log-linear equilibrium to analyze the effects of informational frictions in commodity markets. By aggregating dispersed information about the strength of the global economy among goods producers whose production has complementarity, commodity prices serve as price signals to guide producers' production decisions and commodity demand. Our model highlights important feedback effects of informational noise originating from supply shocks and futures market trading on commodity demand and spot prices. Our analysis illustrates the weakness common in empirical studies on commodity markets of assuming that different types of shocks are publicly observable to market participants.
Social Science Research Network, 2023
and the Virtual Finance and Paris Dauphine Digital Activities Seminars for helpful comments and s... more and the Virtual Finance and Paris Dauphine Digital Activities Seminars for helpful comments and suggestions. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.
Management Science
We model cryptocurrencies as utility tokens used by a decentralized digital platform to facilitat... more We model cryptocurrencies as utility tokens used by a decentralized digital platform to facilitate transactions between users of certain goods or services. The network effect governing user participation, in conjunction with the nonneutrality of the token price, can cause the token market to break down. We show that token retradeability mitigates this risk of breakdown on younger platforms by harnessing user optimism but worsens this fragility when sentiment trading by speculators crowds out users. Elastic token issuance mitigates this fragility, but strategic attacks by miners exacerbate it because users’ anticipation of future losses depresses the token’s resale value. This paper was accepted by Agostino Capponi, Special Issue of Management Science: Blockchains and crypto economics.
Review of Finance
We examine the pecuniary externalities that arise when active fund manager compensation contracts... more We examine the pecuniary externalities that arise when active fund manager compensation contracts have common components. This commonality in the compensation structure and loadings on each component across funds reduces asset price informativeness, amplifies the distortions from active managers’ benchmark-hedging demand, and lowers the price of risk in financial markets. This is because contract commonality distorts investors’ capital allocation to active management, and active managers’ information acquisition and trading decisions. From a normative perspective, contract commonality increases the rigidity of the active industry size and performance-based fee. As a result, they do not vary enough with financial market conditions compared with a Planner’s economy. Quantitatively, an increase in asset payoff uncertainty increases the size and performance-based fee twice as much in the Planner economy compared with the decentralized economy. From a positive perspective, contract commo...
We model a cryptocurrency as membership in a decentralized digital platform developed to facilita... more We model a cryptocurrency as membership in a decentralized digital platform developed to facilitate transactions between users of certain goods or services. The rigidity induced by the cryptocurrency price having to clear membership demand with supply of token by speculators, especially with strong complementarity in membership demand, can lead to market breakdown. While user optimism mitigates the market fragility by increasing user participation, speculator sentiment exacerbates it by crowding users out. Informational frictions attenuate the risk of breakdown by dampening price volatility and platform performance. Furthermore, the users' anticipation of losses from strategic attacks by miners exacerbates the market fragility. Michael Sockin Department of Finance UT Austin McCombs School of Business Austin, TX 78712 michael.sockin@mccombs.utexas.edu Wei Xiong Princeton University Department of Economics Bendheim Center for Finance Princeton, NJ 08450 and NBER wxiong@princeton.e...
This package contains all the Matlab code necessary to reproduce the four figures in the Brunnerm... more This package contains all the Matlab code necessary to reproduce the four figures in the Brunnermeier, Sockin, and Xiong (forthcoming). "China's Model of Managing the Financial System." Review of Economic Studies. Detailed instructions about the files needed to reproduce each figure.
SSRN Electronic Journal, 2021
Using Glassdoor salary data on six U.S. industries, we show that non-base pay not only contribute... more Using Glassdoor salary data on six U.S. industries, we show that non-base pay not only contributes more to income inequality than base pay, but also represents a sizable and stable fraction of employee compensation. Even within an industry, there is substantial heterogeneity in how firms pay bonuses and which employees receive cash, stock, profit-sharing, or sales commission. The size and incidence of bonuses is intimately related to job hierarchy and skill. More senior employees and occupations that require interpersonal (routine) skills receive higher (lower) bonuses, while employees with comparable roles (same job title) within a firm receive similar non-base compensation. Non-base pay also responds more to firm and, across the corporate hierarchy, industry shocks than base, and therefore represents an important mechanism through which changes in firm productivity are passed on to workers. ∗University of Pennsylvania. Email: jsockin@sas.upenn.edu †University of Texas at Austin. E...
This paper develops a tractable model to analyze information aggregation and learning in housing ... more This paper develops a tractable model to analyze information aggregation and learning in housing markets. In the presence of informational frictions, households face a realistic problem in learning about the quality of a neighborhood and housing prices serve as important signals. Our model highlights how the learning by households interacts with local housing supply and demand characteristics and a¤ects housing price dynamics. These learning e¤ects are particularly strong when supply elasticity is in an intermediate range, and can cause short-run price momentum even when shocks to both housing supply and demand mean-revert over time. We wish to thank Nick Barberis and Zhenyu Gao for helpful discussion. yPrinceton University. Email: msockin@princeton.edu. zPrinceton University and NBER. Email: wxiong@princeton.edu. People buy a house not just for shelter but also for the neighborhood to which the house belongs. There are many characteristics that a¤ect the living conditions in a neig...
In this online appendix, we present the technical detail of the model extension presented in Sect... more In this online appendix, we present the technical detail of the model extension presented in Section 4.1 of the main paper. Our model features a noisy rational expectations equilibrium, which requires clearing of the two housing markets that are consistent with the optimal behavior of both households and home builders:
SSRN Electronic Journal, 2021
In the presence of informational frictions, bond markets aggregate the private information of fir... more In the presence of informational frictions, bond markets aggregate the private information of firms and intermediaries, and bond prices serve as signals about the financial sector and the real economy. Such frictions amplify the credit constraints faced by intermediaries, depressing firm investment, leverage, and asset valuations and raising credit spreads. These observations are consistent with evidence on the introduction of TRACE and help explain the under-leverage and credit spread puzzles, the excess bond premium, intermediary asset pricing in bond markets, and bond market dysfunction during the last financial crisis. Informational frictions can improve welfare, suggesting limits to promoting market transparency.
This paper microfounds a consumer's preference for data privacy as a mechanism for concealing beh... more This paper microfounds a consumer's preference for data privacy as a mechanism for concealing behavioral vulnerabilities. This approach facilitates a welfare analysis of di¤erent data privacy regulations, such as the GDPR and CCPA. Sharing data with a digital platform bene…ts a consumer through improved matching e¢ ciency with normal consumption goods at the expense of exposing those with self-control issues to temptation goods. Although the GDPR and CCPA empower consumers to opt in or out of data sharing, these regulations may not su¢ ciently protect exceptionally vulnerable individuals because of nuanced data sharing externalities induced by consumers'active and default choices.
What Happened in China in 2015? • A taxi-driver's tale. Slide 2/24-Discussion by Will Cong (Chica... more What Happened in China in 2015? • A taxi-driver's tale. Slide 2/24-Discussion by Will Cong (Chicago Booth)-China's Model of Managing the Financial System Overview Model Comments Summary What Happened in China in 2015? • A taxi-driver's tale.
We develop a model to analyze information aggregation and learning in housing markets. Households... more We develop a model to analyze information aggregation and learning in housing markets. Households enter a neighborhood by buying houses and consuming each other's final goods. In the presence of pervasive informational frictions, housing prices serve as important signals to households and capital producers about the neighborhood's economic strength. Our model provides a novel amplification mechanism in which noise from housing markets propagates throughout the local economy via learning because of the complementarity in households' decisions, distorting migration into the neighborhood and the supply of capital and labor. We provide consistent evidence based on the recent U.S. housing cycle.
By exploiting variation in capital gains taxation across U.S. states as an instrument, we provide... more By exploiting variation in capital gains taxation across U.S. states as an instrument, we provide novel evidence that housing speculation during the boom period of 2004 to 2006, measured by the fraction of non-owner-occupied home purchases, helps to explain not only the severity of the housing price bust in 2007 to 2009, but also the depth of the subsequent economic recession. Housing speculation, anchored, in part, on extrapolation of past housing price changes, was more pronounced in zip codes with low capital gains taxation. Zip codes that had greater speculation, in turn, experienced more new housing construction during the boom, and more severe declines in employment, per capita income, real payroll, and new business establishment growth during the bust. Our analysis also indicates that supply overhang and local household demand are two key channels for transmitting the adverse effects of housing speculation. This paper supersedes an earlier draft circulated under the title "Housing Speculation and Supply Overhang."
SSRN Electronic Journal, 2018
We study investment and risk sharing in complete markets when agents internalize their impact on ... more We study investment and risk sharing in complete markets when agents internalize their impact on asset prices. Quantity shading of state-contingent claims by buyers and sellers generates excess exposure to idiosyncratic risk and low asset pledgeability. This depresses investment, the risk-free rate, and aggregate productivity. Rents from market power distort and misalign agents' marginal valuations of state-contingent returns, rendering risk-sharing constrained inefficient and as if markets were competitive but incomplete. When there is limited commitment, sellers face borrowing constraints that limit their ability to strategically restrict supply, thereby reallocating market power to buyers. When markets are decentralized, agents distort investment to capture arbitrage profits by acting as pass-through intermediaries.
We would like to thank participants at the AEA 2017 annual meetings and especially our discussant... more We would like to thank participants at the AEA 2017 annual meetings and especially our discussant Darrell Duffie. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. At least one co-author has disclosed a financial relationship of potential relevance for this research. Further information is available online at http://www.nber.org/papers/w23194.ack NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.
SSRN Electronic Journal, 2013
This review is prepared for the Annual Review of Financial Economics. We thank James Smith and Mi... more This review is prepared for the Annual Review of Financial Economics. We thank James Smith and Michael Sockin for helpful comments. Xiong acknowledges financial support from Smith Richardson Foundation grant #2011-8691. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.
for helpful discussion and comments. We are especially grateful to Bruno Biais, an Associate Edit... more for helpful discussion and comments. We are especially grateful to Bruno Biais, an Associate Editor, and three referees for many constructive suggestions. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.
This paper develops a model with a tractable log-linear equilibrium to analyze the effects of inf... more This paper develops a model with a tractable log-linear equilibrium to analyze the effects of informational frictions in commodity markets. By aggregating dispersed information about the strength of the global economy among goods producers whose production has complementarity, commodity prices serve as price signals to guide producers' production decisions and commodity demand. Our model highlights important feedback effects of informational noise originating from supply shocks and futures market trading on commodity demand and spot prices. Our analysis illustrates the weakness common in empirical studies on commodity markets of assuming that different types of shocks are publicly observable to market participants.