Knowledge that Transforms

This analysis extends the work of William Baumol and David Bradford, on efficient pricing with a multiproduct monopoly, to include the case of intermodal competition. A set of rules is developed, showing how second best processes deviate from marginal cost when economics of scale are present. The paper shows why these rules may be difficult to implement in some cases, with a direct application to surface freight transport and then suggests a variation in the theory of second best that may be useful given those difficulties.

This paper introduces a stylized model to capture distinctive features of waiting list allocation mechanisms. First, agents choose among items with associated expected wait times. Waiting times serve a similar role to that of monetary prices in directing agents' choices and rationing items. Second, the expected wait for an item is endogenously determined and randomly fluctuates over time. We evaluate welfare under these endogenously determined waiting times and find that waiting time fluctuations lead to misallocation and welfare loss. A simple randomized assignment policy can reduce misallocation and increase welfare. (JEL C78, D61, D82, D83)

This paper studies employer incentives in designing health insurance provider networks and whether observed offerings reflect preferences that are aligned with employees. I estimate a model of supply and demand where I endogenize employer health plan offerings with respect to hospital and physician networks. I find that employers “overprovide” broad networks by overweighting the preferences of certain employees, specifically older workers and those in regions with less provider competition, over the preferences of the average employee household. Shifting employers toward offering different provider networks in different geographic markets could yield substantial gains to surplus, with minimal distributional or selection effects. (JEL G22, G28, I13, J32, M52)

This paper examines how employer- and worker-specific productivity shocks transmit to earnings and employment. We develop an equilibrium search model and characterize the optimal contract offered by firms. Risk-neutral firms provide partial insurance against shocks to risk-averse workers and offer contingent contracts, where payments are backloaded in good times and frontloaded in bad times. The model is estimated on matched employer-employee data from Sweden. Firms absorb persistent worker and firm shocks, with respective passthrough values of 26 and 10 percent. We evaluate the effects of redistributive policies and find that 30 percent of government insurance is undone by crowding out firm insurance. (JEL D86, H23, J24, J31, J41, J62)

This paper investigates the 2013 threefold increase in the French dividend tax rate. Using administrative data covering the universe of firms from 2008 to 2017 and a quasi-experimental setting, we find that firms swiftly cut dividend payments and used this tax-induced increase in liquidity to invest more. Heterogeneity analyses show that firms with high demand and returns on capital responded most while no group of firms cut their investment. Our results reject models in which higher dividend taxes increase the cost of capital and show that the tax-induced increase in liquidity relaxes credit constraints, which can reduce capital misallocation. (JEL D22, G31, G35, H25, H32)

We investigate the heterogeneous boom and bust patterns across countries that emerge as a result of global shocks. Our analysis sheds light on the emergence of core and periphery countries, and the joint determination of the depth of recessions and tightness of credit markets across countries. The model implies that interest rates are similar across core and periphery countries in booms, with larger credit and output growth in periphery countries. However, a common global shock that leads to a credit crunch across the globe gives rise to a sharper spike in interest rates and a deeper recession in periphery countries, while a credit flight to the core alleviates the adverse consequences in these countries. We explore the implication of the model about credit spreads, portfolio rebalancing, investment, non-performing debt and concentration of debt ownership during booms and busts, both in the time series and in the cross-section, and connect them to existing stylized facts. We further demonstrate how the anatomy of the global economy evolves as a result of aggregate demand and supply shocks to financing, such as a global saving glut.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

We investigate the susceptibility of democracies to demagogues, studying tensions between representatives who guard voters’ long-run interests and demagogues who cater to voters’ short-run desires. Parties propose consumption and investment. Voters base choices on current-period consumption and valence shocks. Younger/poorer economies and economically disadvantaged voters are attracted to the demagogue’s disinvestment policies, forcing farsighted representatives to mimic them. This electoral competition can destroy democracy: if capital falls below a critical level, a death spiral ensues with capital stocks falling thereafter. We identify when economic development mitigates this risk and characterize how the death-spiral risk declines as capital grows large. (JEL D72, E21, E22, E32)

We present a news-based measure of adverse geopolitical events and associated risks. The geopolitical risk (GPR) index spikes around the two world wars, at the beginning of the Korean War, during the Cuban Missile Crisis, and after 9/11. Higher geopolitical risk foreshadows lower investment and employment and is associated with higher disaster probability and larger downside risks. The adverse consequences of the GPR index are driven by both the threat and the realization of adverse geopolitical events. We complement our aggregate measures with industry- and firm-level indicators of geopolitical risk. Investment drops more in industries that are exposed to aggregate geopolitical risk. Higher firm-level geopolitical risk is associated with lower firm-level investment. (JEL C43, E32, F51, F52, G31, H56, N40)