Credible Reforms: A Robust Implementation Approach

Consideration Sets in Storable Goods Markets

Why Does the Health of Immigrants Deteriorate?

Market Structure and the Limits of Arbitrage

Time Inconsistency and Alcohol Sales Restrictions

The Human Capital Costs of Financial Constraint

Delayed Capital Reallocation

Credit Crunches, Information Failures, and the Persistence of Pessimism

Online Accessibility of Academic Articles and the Diversity of Economics

Efficient Sovereign Default

Market Turmoil and Destabilizing Speculation

Vertical Restraints in the Movie Exhibition Industry

The Rise of the Universal Bank: Financial Architecture and Firm Volatility in the United States

Do Institutional Investors Improve Capital Allocation?

Gambling for redemption and self-fulfilling debt crises

Endogenous Ranking and Equilibrium Lorenz Curve Across (ex-ante) Identical Countries

Financial Frictions, Occupational Choice, and Economic Inequality

Gold Returns

Asset Market Participation and Portfolio Choice over the Life-Cycle

Abstract:
We study the life cycle portfolio allocation using a random sample of 75,000 households drawn from the Norwegian Tax Registry followed over 15 years which contains exhaustive and error-free information on all components of households’ investments. We find that both participation in the stock market and the portfolio share in stocks have important life cycle patterns. Participation is limited at all ages but follows a hump-shaped profile which peaks around retirement; as households retire and begin decumulating wealth, they start exiting the stock market. The share invested in stocks among the participants is high and flat for the young but investors start reducing it as retirement comes into sight. Our data suggest a double adjustment as people age: a rebalancing of the portfolio away from stocks as they approach retirement, and stock market exit after retirement. Existing calibrated life cycle models can account for the first behavior but not the second. We show that extending standard computational models to incorporate reasonable per period participation costs can generate a joint pattern of participation and the risky asset share over the life cycle similar to the one observed in the data. In addition, if we add a small perceived probability of being cheated when investing in stocks, the model predicts a share in stocks much closer to the one observed in the data.

Means of Payment and Timing of Mergers and Acquisitions in a Dynamic Economy

Inflation Expectations and Behavior: Do Survey Respondents Act on their Beliefs?

Loss Aversion and the Asymmetric Transmission of Monetary Policy

This Is Only a Test? Long-Run Impacts of Prenatal Exposure to Radioactive Fallout

Abstract:

Research increasingly shows that differences in endowments at birth need not be genetic but instead are influenced by environmental factors while the fetus is in the womb. In addition, these differences may persist well beyond childhood. In this paper, we study one such environmental factor – exposure to radiation—that affects individuals across the socio-economic spectrum. We use variation in radioactive exposure throughout Norway in the 1950s and early 60s, resulting from the abundance of nuclear weapon testing during that time period, to examine the effect of nuclear exposure in utero on outcomes such as IQ scores, education, earnings, and adult height. At this time, there was very little awareness in Norway about nuclear testing so our estimates are likely to be unaffected by avoidance behavior or stress effects. We find that exposure to nuclear radiation, even in low doses, leads to a decline in IQ scores of men aged 18. Moreover, radiation exposure leads to declines in education attainment, high school completion, and earnings among men and women. These results are robust to the choice of specification and the inclusion of sibling fixed effects.

Pretesting and Model Averaging

In econometrics we typically use our available data to select a model and also, within the selected model, to estimate or predict. Then we report our estimates or predictions as if the selected model was never in doubt. We therefore ignore the uncertainty generated by the model selection process. This problem is called pretesting and it can have big effects. More general than pretesting is model averaging, where we do not select one single model, but let all models in a class play a role, though not all an equally important role. In the lectures we will develop the theory of pretesting and model averaging, concentrating primarily on weighted-average least squares (WALS). Hand-outs and papers used in the course will be posted or distributed. Course material.

Fiscal Policy in an Unemployment Crisis

Pretesting and Model Averaging

In econometrics we typically use our available data to select a model and also, within the selected model, to estimate or predict. Then we report our estimates or predictions as if the selected model was never in doubt. We therefore ignore the uncertainty generated by the model selection process. This problem is called pretesting and it can have big effects. More general than pretesting is model averaging, where we do not select one single model, but let all models in a class play a role, though not all an equally important role. In the lectures we will develop the theory of pretesting and model averaging, concentrating primarily on weighted-average least squares (WALS). Hand-outs and papers used in the course will be posted or distributed. Course material.

Impulse responses and cointegration: no country for young men?

The talk will be based on the following papers:
(a) Fanelli L., P. Paruolo (2010) “Speed of adjustment in cointegrated systems“, Journal of Econometrics 158, 130-141
(b) Omtzigt P., P. Paruolo (2005) “Impact Factors“, Journal of Econometrics 128, 31-68

Pretesting and Model Averaging

In econometrics we typically use our available data to select a model and also, within the selected model, to estimate or predict. Then we report our estimates or predictions as if the selected model was never in doubt. We therefore ignore the uncertainty generated by the model selection process. This problem is called pretesting and it can have big effects. More general than pretesting is model averaging, where we do not select one single model, but let all models in a class play a role, though not all an equally important role. In the lectures we will develop the theory of pretesting and model averaging, concentrating primarily on weighted-average least squares (WALS). Hand-outs and papers used in the course will be posted or distributed. Course material.

Mediation and Peace (with Johannes Horner and Massimo Morelli)

Abstract:
This paper applies mechanism design to con ict resolution. We determine when and how unmediated communication and mediation reduce the ex ante probability of conflict in a game with asymmetric information. Mediation improves upon unmediated communication when the intensity of conflict is high, or when asymmetric information is significant. The mediator improves upon unmediated communication by not precisely reporting information to conflicting parties, and precisely, by not revealing to a player with probability one that the opponent is weak. Arbitrators who can enforce settlements are no more effective than mediators who only make non-binding recommendations.

The Political Legacy of News-Free Television: Evidence from the Rise of Berlusconi

Assortative Matching With Large Firms - Span of Control over More vs Better Workers

Open Market Operations, Interbank Market and Over-collateralization (with Giuseppe Ferrero and Michele Loberto)

Abstract:
This paper provides a micro-founded general equilibrium description of interbank markets and analyzes positive implications of the effect of central bank’s open market operations on prices and quantities exchanged on the interbank market. First a model with only nominal and risk free government bonds is presented: in this setup open market operations that alter the composition of the central bank’s balance sheet can affect quantities exchanged on the interbank market even if the economy is in a liquidity trap equilibrium. Then a real asset is introduced in order to determine the effects on prices and quantities of different unconventional monetary policies that alter the dimension of the central bank’s balance sheet: a swap of real asset for money and a swap of real asset for bonds. Finally, the effect of volatility shocks on the efficacy of Central Bank’s unconventional monetary policies is discussed and some preliminary evidence is provided on the empirical validity of the model.

Precautionary Saving and Aggregate Demand (with Julien Matheron, Xavier Ragot and Juan Rubio-Ramirez)

Abstract:
This paper introduces incomplete insurance against idioyncratic labour income risk into an otherwise standard New Keynesian business cycle model with involuntary unemployment. Following an adverse monetary policy shock that lowers aggregate demand, job creation is discouraged and unemployment risk (as summarised by the job-loss rate) persistently rises. Imperfectly insured households rationally respond to the rise in indosyncratic income uncertainty by increasing precautionary saving, thereby cutting consumption and depleting aggregate demand even further; this in turn magnies the initial labour market contraction, further raises unemployment risk, and so on. A calibrated version of the model suggests that the aggregate demand- precautionary saving feedback loop may signi cantly amplify the impact of aggregate shocks on unemployment, relative to the full-insurance case.

Trading and Enforcing Patent Rights

Impact Factors in the Firm

Abstract:
Organizational economics predicts that communication patterns within an organization should reflect the relative value of their members to the organization. We propose to measure the impact factor of an agent by applying the Invariant Method–also known as Google’s PageRank algorithm–to electronic communication data. To explore the validity of this measure, we analyze email exchanges among the top executives of a large retail company. We construct their individual impact factors based only on email patterns and we compare them to standard economic measures of organizational importance. We find that: (i) The impact-factor ranking of executives mirrors perfectly their hierarchical ranking; (ii) Impact factor variability is significantly correlated with salary differences; (iii) Subsequent promotions (dismissals) affect executives with unusually high (low) impact factors. We conclude that simple communication-based impact factors may be a useful tool to measure the relative importance of agents in organizations.

Identifying Equilibrium Models of Labor Market Sorting

The Political Polarization of America’s Physicians

Tax cuts vs. government spending: Welfare at the zero lower bound (with Tommaso Monacelli and Roberto Perotti )

Abstract:
We study the welfare implications of two types of policies at the ZLB: (i) government spending; (ii) a tax cut financed with government debt. We show that, at the ZLB, government spending is always Pareto detrimental, irrespective of whether the economy features flexible or sticky prices, and of whether it features perfect or imperfect credit markets. A tax cut financed with government debt, by allowing an intertemporal redistribution between savers and constrained borrowers, is Pareto improving.

Parental Socialization Effort and the Intergenerational Transmission of Risk Preferences

Abstract:
We study the transmission of risk attitudes in a unique survey of mothers and children in which both participated in an incentivized risk preference elicitation task. We document that risk preferences are correlated between mothers and children when the children are just 7 to 8 years old. This correlation is only present for daughters. We show that a measure of parental involvement is a strong moderator of the association between mothers’ and daughters’ risk tolerance. These findings support a role for socialization in the intergenerational transmission of preferences that predict economic behavior.

Legal Investor Protection and Takeovers

Jobless Recoveries and the Revolving Credit Revolution

Abstract:

Access to revolving credit more than doubled between 1983 and 1992 among both employed and unemployed households, and new evidence suggests that close to 20\% of unemployed households use revolving credit to replace lost income. Labor markets have also experienced sluggish recoveries following the 1991, 2001, and 2007 recessions. These two facts motivate the following question: how has access to `on-demand’ credit changed the way labor markets respond to downturns? By answering the above question, my contribution to the literature is to provide both the measurements and the theoretic framework necessary to quantify the supply side of jobless recoveries. After measuring the interaction between job loss/credit markets and describing the innate endogeneity associated with any reduced form answer, I build a model that features risk averse agents who face both search frictions in the labor market and the credit market. The model mechanism is that easy credit conditions provide a safety net which incentivizes agents to search for better-paying but scarcer jobs. While this is welfare improving, the side effect is joblessness. Following a downturn, I find that an economy with easy credit access experiences a 10\% larger drop in employment per capita compared to an economy in which credit is tight (e.g. a 2.2\% drop in employment per capita with easy credit access versus a 2\% drop with tight credit access).

Trade Dynamics in the Market for Federal Funds

Pessimistic Optimal Choice for Risk-averse Agents

Micro-loans, Insecticide-Treated Bednets and Malaria: Evidence from a Randomized Controlled Trial in Orissa

Speed

“Durable Goods and the Transmission Mechanism of Monetary Policy: an Alternative Framework” (joint with Vincent Sterk - UCL)

Abstract:

A large empirical literature has documented statistically significant effects of monetary policy on economic activity. The central explanation for how monetary policy transmits to the real economy relies critically on nominal rigidities, which form the basis of the New Keynesian (NK) framework. A key limitation of the NK model is that, when durable goods are included in the analysis, the model counterfactually predicts that a monetary policy expansion causes a contraction in the durable good sector (and an expansion in the nondurable sector). This paper studies a different transmission mechanism that operates even in the absence of nominal rigidities. Monetary expansions and the subsequent increase in inflation rates generates a negative wealth effect on retired agents and impairs the ability of households to smooth consumption over their life-cycle. It causes working households to work and save more and to front-load their purchases of durable goods in order to avoid the erosion in the value of their savings, thus generating a temporary boom in durables and output, followed by a bust. The model can account for the empirical response of durables to monetary policy interventions, thus complementing the NK paradigm. The model nests the infinitely-lived representative agent model, in which money neutrality holds.

Costs and Bene?ts of Dynamic Trading in a Lemons Market

Political Bubbles: Financial Crises and the Failure of American Democracy

Fiscal Rules and Discretion under Persistent Shocks

Measuring the Bias of Technological Change

Abstract:

When technological change occurs, it can increase the productivity of capital, labor, and the other factors of production in equal terms or it can be biased towards a specific factor. Whether technological change favors some factors of production over others is an empirical question that is central to economics. The literatures in industrial organization, productivity, and economic growth rest on very specific assumptions about the bias of technological change. Yet, the evidence is sparse. In this paper we propose a general framework for estimating production functions that allows productivity to be multi-dimensional. Using firm-level panel data, we are able to directly assess the bias of technological change by measuring, at the level of the individual firm, how much of technological change is factor neutral and how much of it is labor augmenting. We further relate the speed and the direction of technological change to firms’ R&D activities.

Unfriendly Creditors (with Miguel Ferreira and Beatriz Mariano)

Abstract:

We develop a theory of how debt financing affects, and is affected by, the composition of the board of directors. We argue that shareholders and creditors have different preferences for the degree of board independence from management. Although shareholders often prefer a management-friendly board in order to improve communication between managers and directors, creditors usually prefer an unfriendly board. The model provides a useful framework for understanding many empirical regularities related to capital structure and corporate governance. In line with the existing evidence, we show that the optimal capital and board structures are such that firms with high leverage choose less friendly boards. We also show that the optimal debt contract includes covenants that allocate rights to appoint board directors to creditors in states of financial distress. Using a large sample of debt covenant violations, we test this prediction with a regression discontinuity design and find a significant increase in board independence following a covenant violation. A covenant violation implies a net addition of one independent director to the board, which is a sizeable effect. We conclude that creditors use the threat of accelerating loan payments to enhance the monitoring role of the board and maximize the repayment of outstanding debt.

Housing and Liquidity

Abstract:

Coinciding with the start of the US housing boom, there began large increases in home-equity lending and loan-to-equity ratios. We develop a model where housing bears a liquidity premium because it collateralizes consumption loans. Since liquidity can depend partly on beliefs, even with fundamentals constant, prices can display complicated trajectories, some of which resemble bubbles. Based only on changing fundamentals — i.e., financial innovation — we account for 40% of the empirical price boom. Further, since the liquidity premium is nonmonotone in loan-to-equity ratios, continuing innovation endogenously generates a bust. Finally, to study the impact of inflation, we explicitly introduce money and banking.

Redistributive Taxation in a Partial Insurance Economy (with Kjetil Storesletten & Giovanni L. Violante)

Abstract:

We investigate the welfare implications of varying the progressivity of earnings taxation in an incomplete markets model with idiosyncratic labor income risk and valued government spending. Agents choose skill investment and labor supply. More progressive taxation distorts these choices, but offers public insurance against privately uninsurable shocks. The model is tractable, and thus the trade-offs associated with more or less progressive taxation are transparent.

On the Spatial Economic Impact of Global Warming

Volatility Risk Premia and Exchange Rate Predictability

Information aggregation in a large two-stage market game

An Empirical Equilibrium Model of a Decentralized Asset Market

Inside Intel: Sales Forecasting using an Information Aggregation Mechanism

Sovereign Deleveraging and Maturity Management (joint with Manuel Amador)

Abstract:
We address the question of whether and how a sovereign should reduce its external indebtedness when default is a possibility, with a particular focus on whether a government should buy back or dilute existing long-term sovereign bonds. Our main finding is that when deleveraging is optimal, the government should remain passive in the long-term bond market, retiring long-term bonds as the mature but never actively issuing or buying back these bonds on the secondary market. The only active margin is the short-term bond market, which involves partial roll over of such debt. Any active maturity management, as will typically be required to address roll over crisis risk, will be delayed until the end of the deleveraging process. The result relies on the fact that long-term bonds generate a time consistency problem, making their prices particularly sensitive to the incentives to save going forward. This, combined with the model’s implication that short-term debt provides a greater incentive to save, implies that active maturity management shrinks the governments budget set. There exist a set of Pareto improving debt restructurings in which maturities are shortened; however, these cannot be implemented by trading in competitive secondary markets.

(Q; S; s) Pricing Rules

For further details, please see Scientific Events.

For further details, please see Scientific Events.

Giving in Probability

Abstract:

There is little economic evidence on the effect of the resolution of income uncertainty on other-regarding behavior. We consider a specific practical question: what is the best way to ask for a charitable donation from someone who may get an uncertain “bonus” income? Should you ask her beforehand to “commit to donate if she wins the bonus”; or ask her to donate after her bonus has been revealed? While a standard model of expected utility over consequences predicts these will be equivalent; models involving reference-dependent utility, tangibility, and self-signaling predict more giving before, while “affective mood” may predict more giving after. We ran a series of experiments to help answer this question. In a small-scale online field experiment in a university setting, significantly more subjects pledged to donate in the Before treatment than those asked after winning (and none after losing), while fulfilled donations were similar across treatments. We followed this with a similar field experiment making the contribution pledges binding and automatically deducted [preliminary results will be presented]. Finally, our laboratory experiment, with further treatments to isolate distinct mechanisms, found small treatment effects on average, but significant differences by gender. Male and female subjects reacted to “gains and losses” differently. Furthermore, men gave more in treatments where the donation was uncertain, suggesting a signaling or tangibility effect. Our results are directly relevant to fundraising and volunteer-solicitation strategies, and offer further evidence that we need to exercise caution in applying expected utility theory to models of pro-social behavior and social preferences.

Immigration and Crime in the United States: Lessons from the Mariel Boatlift

Abstract:

We exploit the exogenous arrival of Cuban immigrants in Miami during the Mariel Boatlift in the spring of 1980 to evaluate the impact of immigration on crime in the United States. The Boatlift represents an exception to the norm of the U.S. immigration legislation: 125,000, possibly negatively selected, immigrants landed in Miami between April and October 1980, and were not granted a path to citizenship until 1984. This increased Miami population by 4 percent and crime surged: homicide rates increased by 66 percent, robberies by 75 percent, and motor vehicle thefts by 20 percent. The increase in violent crimes is novel in the literature, and suggests that the impact of immigration on crime is increasing in the concentration of immigrants. Finally, we suggest that our findings are relevant also for emergency relief policy in which large populations are evacuated and concentrated in a small hosting area, as it was the case after hurricane Katrina.

For further details, please see Scientific Events.

Long-Lasting Effects of Socialist Education

Efficient Online Exchange via Fiat Money

Political Booms, Financial Crisis

Banks as Secret Keepers

Inter-Region Risk Sharing Through the U.S. Mortgage Market (with Ben Keys and Amit Seru)

Abstract:

In this paper, we use a variety of datasets to document that there is essentially no spatial variation in conventional mortgage rates across U.S. states or metropolitan areas conditional on borrower and loan characteristics. We also document that conventional mortgage rates — conditional on observables — do not vary with local economic conditions. This result is particularly surprising given that mortgage defaults conditional on observables vary substantially across regions and, more importantly, the subsequent default rates for these mortgages are correlated with local economic conditions when the loan is originated. We do find some evidence that conditional mortgage rates vary across regions in the sub-prime and jumbo market suggesting that the lack of spatial variation in interest rates is limited to mortgages securitized by Government Sponsored Enterprises. We then illustrate how a constant interest rule across regions that receive heterogeneous shocks serves as an inter-region risk sharing mechanism. In ongoing work, we are attempting to quantify the value of inter-region risk sharing provided through the U.S. mortgage market.

Demographic Structure and Household Savings Rates in China (with Abhijit Banerjee, Xin Meng and Tommaso Porzio)

Abstract:

This study investigates the effect of demographic change on household savings rates in the context of urban China. First, we exploit the introduction of family planning policies to provide empirical evidence that an exogenous reduction increases savings rates for households that have daughters. Second, we document that sons transfer more to elderly parents than daughters. Together with the fact that the cost of raising sons and daughters in our context is similar, the second fact implies that the relationship between fertility and savings is driven by transfers rather than consumption. Finally, to examine the general equilibrium effects, we use the empirical findings to construct a simple OLG model, where a decrease in fertility will reduce the labor/capital ratio, which will reduce interest rates and reduce savings. With standard utility assumptions, the GE effects can dominate such that a reduction in aggregate fertility can reduce savings. These results hold when we endogenies fertility and transfers.

For further details, please see Scientific Events.

For further details, please see Scientific Events.

For further details, please see Scientific Events.

Matching with transfers: an economist’s toolbox

Abstract:

The goal of the presentation is to summarize recent advances in matching models under Transferable Utility (TU) and Imperfectly Transferable Utility (ITU). A crucial property of these models is that the allocation of the surplus is either constrained or pinned down by stability conditions; in that sense, intragroup allocation of ‘power’ is endogenously determined. I first recall basic concepts and results, emphasizing the differences between TU, ITU and NTU (Non Transferable Utility) frameworks. I then discuss several extensions, including multidimensional matching, matching on endogenous characteristics, and matching to share risk. Finally, I discuss issues related to the empirical implementation of these models.

News Trading and Speed

Consumption Inequality and Family Labor Supply

Default Risk and Aggregate Fluctuations in an Economy with Production Heterogeneity (joint with Tatsuro Senga and Julia Thomas)

Abstract:

We study aggregate fluctuations in an economy where firms have persistent differences in total factor productivities, and firm-level investment is funded by retained earnings and non-contingent debt. Loans involve default risk and, in equilibrium, the unit cost of borrowing for any firm rises in its level of debt but falls with the value of its collateral. As the risk of default increases with the level of debt, our model endogenously determines debt limits that vary in firm characteristics, as well as risk premiums. Both evolve with the aggregate state of the economy. Larger firms, those with more collateral, have higher levels of investment than smaller firms with less collateral, causing an insufficient allocation of capital in small firms. This reduces aggregate productivity, yielding substantial reductions in long-run capital and GDP.

We consider business cycles driven by exogenous changes in total factor productivity and by credit shocks. The latter are modeled as changes to the fraction of assets lenders can seize in the event of default. When the model is driven by aggregate productivity shocks, our non-contingent loan contracts drive countercyclical default risk. Because a negative productivity shock raises default probabilities, it leads to a worsening of the allocation of capital that amplifies the effects of the shock. The recession following a negative credit shock is qualitatively different from that following a productivity shock. There is a large decline in the number of firms, while the allocation of capital across them is worsened, so TFP falls sharply for several periods, as do employment, investment and GDP. The recoveries in each of these series are far more gradual, given slow recoveries in TFP, aggregate capital, and the measure of firms.

“Gift-exchange versus monetary exchange: theory and evidence” (joint with J. Duffy)

Abstract:

We examine whether the presence of money as a medium of exchange promotes efficient trades and improves welfare by comparing trading outcomes between two environments: with money and without money. The environment with money is the Lagos-Wright (2005) model of monetary exchange. We find that subjects generally avoid the autarkic equilibrium of that model and make trading decisions consistent with the model’s monetary equilibrium. The environment without money is based on Aliprantis, Camera and Puzzello (ACP, 2007), who show that providing periodic access to centralized markets as in the Lagos and Wright framework may facilitate the sustainability of a social norm of gift exchange that is Pareto superior to the monetary equilibrium and thus renders money inessential for decentralized exchange. We explore this hypothesis by replacing the centralized market of the Lagos-Wright model with two different versions of the centralized market of ACP’s model. We find that the efficiency of allocations and welfare are significantly higher in the environment with money than without money, suggesting that money plays a role as an efficiency enhancing coordination device.

What Is European Integration Really About? A Political Guide for Economists

Optimal Dynamic Contracting (with Rohit Lamba)

Abstract:

We study a simple dynamic Principal-Agent model in which the agent’s types are serially correlated. In these models, the standard approach consists in first solving a relaxed version in which only local incentive compatibility constraints are considered, and then in proving that the local constraints are sufficient for implementability. We show that, with the exception of few notable examples highlighted in the literature, this approach is not generally valid: even assuming standard regularity conditions, both local and global incentive constraints are generally binding when serial correlation is sufficiently high. We uncover a number of interesting features of the optimal contract that cannot be observed in the special environments in which the standard approach works. Finally, we show that even in complex environments, approximately optimal allocations can be easily characterized by focusing on a particular class of contracts in which the allocation is forced to be monotonic.

Mandatory Disclosure and Financial Contagion

Moral Hazard in the Italian Car Insurance Market: Evidence From the Grace Period

Abstract:

In this paper we propose and implement parametric and non-parametric tests to detect the existence of moral hazard in the Italian car insurance market. We exploit the poor implementation of the Italian bonus-malus system which does not keep track of the claims filed in the last two months of the policy-a “grace period”- if the insured decides to change company. We illustrate a dynamic model which incorporates this feature to derive theory-based testable implications to detect the existence of different types of moral hazard. The dynamic nature of our tests allow us to separate moral hazard from adverse selection and state dependence. We implement our tests using a unique dataset covering the years 2008-2010 with detailed information on the policies subscribed by insured of multiple insurance companies. We find some evidence of moral hazard corroborating the idea the individuals respond to monetary incentives, while a correct implementation of the bonus-malus system is likely to deliver welfare gains.

Growing Up in a Recession

Abstract:
Does the historical macroeconomic environment affect preferences for redistribution? We find that individuals who experienced a recession when young believe that success in life depends more on luck than effort, support more government redistribution and tend to vote for left parties. The effect of recessions on beliefs is long-lasting. Our findings are supported using evidence from three different datasets. First, we identify the effect of recessions on beliefs exploiting time and regional variation in macroeconomic conditions using data from the 1972-2010 General Social Survey. Our specifications control for non-linear time-period, life-cycle and cohort-effects as well as a host of background variables. Second, we rely on data from the National Longitudinal Survey of the High School Class of 1972 (NLS72) to corroborate the age-period-cohort specification and look at heterogeneous effects of experiencing a recession during early adulthood. Finally, our findings are also confirmed with a sample of 37 countries whose citizens experienced macroeconomic disasters at different points in history, using data from the World Value Survey.

The Missing Swedish Skill Premium:Sweden versus the United States 1970-2002

“Marriage, Social Insurance and Labor Supply” (with Hamish Low, Costas Meghir and Luigi Pistaferri)

Abstract:
This paper develops a model of marriage, labor supply, savings and divorce under limited commitment and uses it to understand the impact of major welfare reforms, including the time-limited eligibility in the TANF program. In the model, taxes and welfare can affect whether marriage and divorce take place, the extent to which people work as single or as married individuals, as well as the allocation of resources within marriage. The model thus provides a framework for estimating not only the short-term effects of welfare reforms on labor supply, but also the extent to which welfare benefits affect family formation and the way that transfers are targeted within the family. This is particularly important because many of these benefits ultimately are designed to support the wellbeing of women and children. The limited commitment framework in our model allows us to capture the effects on existing marriages as well as marriages that will form after the reform has taken place, offering a better understanding of transitional impacts as well as longer run steady state effects. Using variation provided by the introduction of time limits in welfare benefits eligibility following the Personal Responsibility and Work Opportunity Act of 1996 (welfare reform) and data from the Survey of Income and Program Participation between 1985 and 2011, we provide reduced form evidence of the importance of these reforms on a number of outcomes n relevant to our model. We then estimate the parameters of the model using the same source of variation.

The Making Of A Great Contraction With A Liquidity Trap and A Jobless Recovery

For further details, please see Scientific Events.

For further details, please see Scientific Events.

For further details, please see Scientific Events.

Attention Discrimination: Theory and Field Experiments

Migration, Production Structure and Exports

Business Literacy and Development: Evidence from a Randomized Controlled Trial in Rural Mexico

Inattention to Rare Events (joint work with Bartosz Mackowiak)

Abstract:
Recently, the world experienced several events with disastrous consequences: the global financial crisis, the European debt crisis, the Fukushima nuclear accident. These events have in common that key decision-makers were unprepared for these events; which aggravated these events. Should decision-makers think more about optimal actions in rare events? The paper studies a model in which agents make state-contingent plans- think about actions in different contingencies - subject to the constraint that agents can process only a limited amount of information. In the model, different contingencies have different probabilities, mistakes may be more costly in some contingencies, agents may face limited liability, and actions may be strategic complements. We identify the forces that make agents prepare little for rare events. We then study whether a social planner would want agents to be more prepared for rare events. We find that under reasonable assumptions this is typically the case.

Large Banks, Loan Rate Markup and Monetary Policy

Estimating a Dynamic Game of Spatial Competition:The Case of the U.K. Supermarket Industry

Asset Pricing in a Monetary Model with Dealers (with Ed Nosal)

Abstract:

It is well know that asset prices tend to deviate from fundamental values and that their movements, often, are not explained by the arrival of new information about payoff streams and discount rates. We propose a monetary model where market illiquidity is capable of accounting for these facts. Illiquidity, in our environment is the consequence of two main frictions: i) assets are traded in OTC markets where traders bargain over the terms of trade ii) record keeping and imperfect commitment imply that assets are traded for money. Our model exhibits what Allen and Gale (2005) call “cash-in-the-market pricing”. Traders may experience sudden liquidity needs, and there might not be enough “cash” in the market to absorb them. This gives rise to large swings in asset prices. Moreover our OTC setup generates bid-ask spreads. The correlation between asset returns and bid-ask spreads is consistent with the data. Finally, consistently with the observation that in periods of low inflation asset prices are high, our model implies a negative relationship between inflation and asset prices.

Crime and the Depenalization of Cannabis: Evidence from a Localized Policing Experiment

Abstract:

We evaluate the impact on crime of a localized policing experiment that depenalized the possession of small quantities of cannabis in the London borough of Lambeth. Such a policy can: (i) impact the demand for cannabis in Lambeth as users move there to purchase cannabis; (ii) enable the Lambeth police to reallocate effort towards other types of crime. We investigate whether the depenalization policy impacts the level and composition of crime, using administrative records on criminal offences by drug type, and for seven types of non-drug crime. We find that depenalization in Lambeth led to significant increases in cannabis possession offences that persisted well after the policy experiment ended. We find evidence that the policy caused the police to reallocate effort towards crimes related to the supply of Class-A drugs, as well as reallocating effort towards non-drug crime: there are significant reductions in five types of non-drug crime, and significant improvements in police effectiveness against such crimes as measured by arrest and clear-up rates. Despite the overall fall in crime attributable to the policy, we find the total welfare of local residents likely fell, as measured by house prices. These welfare losses are concentrated in Lambeth zip codes where the illicit drug market was most active. Finally, we shed light on what would be the impacts on crime of a citywide depenalization policy, by developing and calibrating a structural model of the market for cannabis and crime, accounting for the behavior of police and cannabis users. This highlights that many of the gains of the policy can be retained, and some of the deleterious consequences ameliorated, if all jurisdictions depenalized cannabis possession. These results provide new insights for the current policy debate on the regulation of illicit drug markets.

Volatility and Pass-Through

Cooperation in a Peer Production Economy Experimental Evidence from Wikipedia

Government Spending Multipliers in Good Times and in Bad: Evidence from U.S. Historical Data

Technological Revolutions and Debt Hangovers: Is There a Link?

The Skill Complementarity of Broadband Internet (Co-authors A. Akerman and I. Gaarder)

News Driven Business Cycles: Insights and Challenges

Toxic arbitrage

Credit and Hiring

Speculative Runs on Interest Rate Pegs

What You Would Like To Know About Fundamentalness And You Never Dared To Ask

Abstract:

I will start by defining fundamentalness and non-fundamentalness from the point of view of time-series analysis: to one auto covariance function there corresponds many moving average representations, only one of them is fundamental. What characterizes the fundamental representation is that its white noise term is the one-step-ahead prediction error. This is why computer programs invariably provide us with the fundamental shock. (Alternatively, fundamentalness as an identification device.)From an economic point of view, the fundamentalness problem has been presented as arising from a possible difference between the information sets of agents and econometricians. I will discuss some well known examples and argue that VAR literature is responsible for some overlooking and confusion. I believe that , within a structural approach, the problem can arise only because the model is ill-formulated or incomplete and, that if we know the underlying structural model, non-fundamental shocks can be recovered, though not in the standard way.

Downward Nominal Wage Rigidities Bend the Phillips Curve

Hiring Through Referrals

Implications of Heterogeneity in Preferences, Beliefs and Asset Trading Technologies for the Macroeconomy

Price Flexibility in British Supermarkets: Moderation and Recession

Medicaid Insurance in Old Age

Centralization and Accountability: Theory and Evidence from the Clean Air Act

Endogenous Property Rights

Dynamic Squeezing: Marriage and Fertility in France After World War One

The Social Cost of Near-Rational Investment

Earthquakes, Universities, and Transition to Self-Government in Italian Cities

Abstract:

Using a longitudinal dataset of about 60 Italian medieval cities between the XIth and the XIVth centuries, we show that a city’s probability of shifting from a feudal regime (where the political leaders ruled, de facto and de jure, free of checks and balances) to communal institutions (where the political power was exercised by representatives and checked by constitutional limitations and collective assemblies) sharply decreases after an earthquake hits the city. We interpret this finding in the light of the trade-off between despotism (abuse of power by the political leaders) and disorder (expropriation of the private property by the citizens) faced by societies when choosing their institutions. In our historical context, the birth of the commune represented the institutional evolution of an agreement among citizens that aimed at self-regulating their economic and social relations and securing property rights. Earthquakes can be seen as exogenous shocks that favored the status quo feudal regime by increasing the cost of self government and, hence, hampering the ongoing modernization process. To support this interpretation, we show two facts. First, after the foundation of medieval universities, the probability that a given city becomes a commune is the greater the closer that city is to a newborn university; thus, a modernization process leading to broader-based political institutions was in progress. Second, the negative impact of earthquakes on institutional change is greater for cities that were closer to a university, thus, cities where the modernization process had more likely started.

The Labor Market Returns to Political Connections

Abstract:

In this paper we document the labor market returns to being a family member of a politician in office. To this purpose, we link data for 16 years on the universe of politicians in Italy with a 1/91 random sample of private sector employees, based on the city of birth and the first three consonants of the last name. Results show that one individual in office in a given year leads to sizable gains in employment outcomes among his family members, both in terms of months of work and earnings. The effect is stronger in sectors that depend more on public funds, for more powerful politicians, and in big cities. The latter result is driven both by a larger labor market size and a larger budget per politician.

Search Deterrence

A Theory of Cooperation with Self-Commitment Institution

Ain’t it “Suite”? Bundling in the PC Office Software Market

Financial Frictions and Investment Dynamics in Multi-Plant Firms

Optimality of Non-Competitive Allocation Rules

Compliance Behavior in Networks: Evidence from a Field Experiment

Abstract:

We study compliance behavior in neighborhood networks. Our study takes advantage of a large randomized field experiment run in Austria in 2005. The experiment varied the content of mailings that were sent to 50,000 potential evaders of TV license fees. As compared to an untreated control group, the mailings increased compliance among recipients. Using detailed micro data on compliance behavior and the precise location of the full population of all households in small Austrian municipalities [villages], we are able to compute neighborhood networks on the base of the spatial distance between households. We document that households who were not part of the experimental sample (and were therefore untreated) are more likely to switch from evasion to compliance in response to the mailings received by their neighbors in the same network. Several pieces of evidence suggest that this spillover effect from the mailings can be explained by communication, i.e. information passing from mailing recipients to untreated evaders.
We exploit variation in network structures and show that spillovers increase with the clustering coefficient of the targeted node. The results are consistent with a model of communication in networks.

Escaping the Great Recession