Knowledge that Transforms

We argue that models coming from a variety of fields, such as matching models and discrete choice models among others, share a common structure that we call matching function equilibria with partial assignment. This structure includes an aggregate matching function and a system of nonlinear equations. We provide a proof of existence and uniqueness of an equilibrium and propose an efficient algorithm to compute it. For a subclass of matching models, we also develop a new parameter-free approach for constructing the counterfactual matching equilibrium. It has the advantage of not requiring parametric estimation when computing counterfactuals. We use our procedure to analyze the impact of the elimination of the Social Security Student Benefit Program in 1982 on the marriage market in the United States. We estimate several candidate models from our general class of matching functions and select the best fitting model using information based criterion.

Financial crises can generate aggregate losses that substantially exceed the losses associated with the shocks that initiate them. This paper develops a framework in which systemic losses consist of baseline losses and additional amplification losses arising from capacity-constrained public financial infrastructure. Financial activity places demands on supervisory, informational, settlement, and coordination capacity. A canonical capacity-congestion mechanism implies that congestion rises increasingly sharply as financial activity approaches effective infrastructure capacity, generating nonlinear amplification losses. Because these losses occur in adverse states, they increase consumption losses when marginal utility is high and raise required equity returns when equity payoffs are weak in the same states. The paper also studies a stylized funding mechanism—Market Usage Fees (MUFs)—under which publicly listed firms contribute a fraction of operating income to finance public financial infrastructure. MUFs reduce distributable income but expand infrastructure capacity, lower amplification risk, and reduce required returns. When the marginal discount-rate benefit initially exceeds the income cost of the fee, the interaction generates a non-monotonic valuation response and an interior value-maximizing contribution rate.

We derive bounds on the rational variation in option‐implied beliefs about market returns. While risk preferences distort option‐implied (or risk‐neutral ) beliefs away from subjective beliefs, one can nonetheless bound risk‐neutral belief movement under a general assumption on the stochastic discount factor. The resulting test requires no knowledge of the objective distribution and allows significantly more flexibility in discount rates than standard volatility tests. Implementing our test empirically using index options, we find that there is so much movement in risk‐neutral beliefs that the bounds are routinely violated. Our results imply significant excess index‐price volatility.