Junior Faculty Awardee Profile: Giorgia Piacentino, PhD
Tell me a little bit about your background and what brought you to Columbia.
I was born and raised in Rome, where I went to university. Then I spent a year in Toulouse, for a Master's degree at the Toulouse School of Economics, and four years in London, for a PhD at the London School of Economics. Before coming to Columbia, my first job in the US was at Washington University in St. Louis.
What are your general research interests, and how did these come to be?
I'm a finance theorist. My work is organized around basic questions of capital allocation: how does the economy allocate capital from investors who have money but no ideas to entrepreneurs with ideas but no money? What frictions prevent capital from being allocated efficiently? And what financial arrangements arise to improve capital allocation in the presence of these frictions? In most of my work, I study either financial intermediaries—the institutions that arise to allocate capital from investors to entrepreneurs—or financial instruments—the contracts that arise to do the same thing.
How did your interest in this area emerge?
My research agenda is constantly evolving. I got into finance because my dad is an economist and my mom is a mathematician, and when I was a student I thought finance was a compromise between the two. My mom is still very upset that I didn’t do math.
"How does the economy allocate capital from investors who have money but no ideas to entrepreneurs with ideas but no money? What frictions prevent capital from being allocated efficiently? And what financial arrangements arise to improve capital allocation in the presence of these frictions?"
What broader problems or issues do you hope to either address or bring to light in your work?
I want to understand why financial institutions are the way they are and try to figure out how to improve them. Typically, I start with an empirical observation in need of an explanation. Then, I develop a model based on a small set of fundamental frictions to rationalize and understand it. This approach allows me to explore policy implications—I model people making choices and the institutions in my models arise as the result of these choices, and not my own modeling assumptions. This allows me to explore how they respond to policies. Sometimes, it leads to unexpected results.
For example, in one paper I explore why banks consistently evolved from ancient warehouses. Indeed, before modern banking, depositories of barley and silver in ancient Mesopotamia and grain silos in ancient Egypt started to resemble banks. I write a model to explain why and then I study the implications of various contemporary regulatory policies. I find that narrow banking, a policy proposal by which deposit-taking institutions would hold only liquid securities, could have unintended consequences. In particular, it could prevent lending.
In another paper, I look at why firms borrow using debt backed by collateral—secured debt—only as one part, but not all, of their debt structure. Indeed, often they borrow using unsecured debt, despite the fact that secured debt is cheaper. I show that too much secured debt leads to too much rigidity but too little leads to too much flexibility. I find that policies intended to increase the supply of collateral can backfire. Indeed, they can hurt borrowing.
Where does your work intersect with the idea of regulation?
Because I model how institutions come to be, I can model how they respond to the policies that policy makers are thinking about implementing and examine the trade-offs of different policies. For example, right now, economic policy needs to respond to the spread of COVID-19. This is an urgent issue of public health, more than of financial stimulus.
But it is still an economic issue, because it is an issue of resource allocation. For example, hotels, now largely empty, should be redeployed as quarantine centers. How can policy makers intervene to ensure that these resources be allocated to mitigate the spread of the virus and the severity of infections?
In my current research, I am trying to understand why assets are misallocated, especially in recessions. I discovered that misallocation is connected with firm’s debt structure: if firms borrow with secured debt (like mortgages) it is hard for them to reallocate assets used as collateral (like hotels). If they borrow with unsecured debt (like most bonds) it is easier. Thus, my work suggests a clear policy intervention: write down secured debt. This doesn’t have to be a debt forgiveness program, because creditors can receive unsecured debt in exchange, possibly with an interest rate premium. Thus, the policy can implement a Pareto improvement, making everyone better off, most importantly by saving lives.
What project did you complete as a result of the Provost's award?
My work is interdisciplinary. I am interested in finance, law, economics, and history. With the grant funds, I put together a conference called New Topics in Banking, inviting experts in all of these fields as well as some policy makers. Just to give you an example, I had two keynotes: Viral Archarya, the Deputy Governor of the Bank of India, and Kate Judge, a professor at Columbia Law School.
What courses are you teaching and what is your approach?
I usually teach corporate finance to the MBA students and intermediation theory to PhD students. This year, I'm only teaching PhD students, and I'm excited because that's going to give me more time to improve the course, which I developed.
In the corporate MBA class, we do firm valuation and it is both case-based and theory-based. I think that to understand topics deeply, it is important to first understand the theory and then put it to practice. A fun case study we do as a class is about Soul Cycle; we pick that case because the first Soul Cycle location was on the Upper West Side. The owners had the idea of creating spinning classes; the idea was successful and they were thinking of taking the company public. With the class, we think about how to come up with the price for the company. We even go as a group to a Soul Cycle class—the students love it.
How is your PhD class different?
In my PhD class, I cover mostly theory papers. During my first year at Columbia, I realized that a lot of students wanted to do empirical work in banking, but they need to understand the theories first. I designed the course completely from scratch. I review the most important banking theories of the past 40 years. I cover two papers per three-hour class in excruciating detail.
Is there another class that you'd like to develop or to teach?
For PhDs, I would like to teach contract theory, which is another research agenda that I have. The class I have in mind is contracting with a law spin to it. Currently, Patrick Bolton is teaching it, and he is amazing. For MBAs, I'd like to teach a more advanced corporate finance class.
What is your favorite part of your job here?
I can't think of myself doing anything else. There is constant learning and it's never boring or repetitive (well, actually, revising a paper for publication can get tiring). But then, you know, every week you have a seminar, you speak to a colleague, you read a paper, and you're learning something new. I cannot think of another job like this. It's really a luxury.
What is it like to study and teach economics in a city like New York, which is home to so many institutions?
I feel like if I choose the right topics and the right questions to ask, I can make a difference. It's not only research for its own sake, but hopefully contributing to something greater.
And what part of your job is the most challenging?
That positive reinforcement is rare. Publishing a 30-page paper can take years, but it builds character!
What has your experience been as a woman in this field?
There are relatively few women in the field, but there are a lot more than there were when I joined. There are a lot of conferences with only women, so we are not always in the minority anymore. It's nice to see familiar faces.
How do you spend your free time?
I don't have much of it these days. I like to swim, read, and cook. I love spending time with friends and family. I have my friends over for dinner and cook a big meal. The next morning, I go for a long swim to burn the calories.
You mentioned that you like to read. Do you have any books that you would recommend?
I love autobiographies, because I love to hear about people's lives. Right now, I'm reading Marina von Neumann Whitman's autobiography. She did her PhD at Columbia in the 50s, and was one of the first PhDs in economics. She's also the daughter of Jon von Neumann, the mathematician and game theorist. I also enjoyed Elena Ferrante’s Neapolitan quadrilogy. I received the fourth book just before some friends came over for dinner. I was so eager to read it that I wanted to kick them out!