Knowledge that Transforms

Moretti (2021) reports a positive elasticity between technology cluster size and patenting, and uses an event study and instrumental variables regressions to justify a causal interpretation. The event study does not use the variation generated by inventors moving across cities, and the instrument is constructed incorrectly due to a coding error. I run a corrected event study and fix the coding error, and find null effects. The reported elasticity may not be causal. (JEL J24, L60, O31, O34, R32)

We show that in heterogeneous agent New Keynesian (HANK) economies with countercyclical risk, the natural interest rate is endogenous and co-moves with output, leaving the economy susceptible to self-fulfilling fluctuations. Unlike in representative agent New Keynesian models, the Taylor principle is not sufficient to guarantee uniqueness of equilibrium in HANK if risk is even mildly countercyclical: Multiple bounded equilibria exist, no matter how strongly monetary policy responds to changes in inflation. For an active monetary policy to eliminate self-fulfilling fluctuations, it must stabilize the endogenous natural rate fluctuations. Alternatively, a passive monetary and active fiscal regime can also eliminate equilibrium multiplicity. (JEL E12, E23, E31, E32, E43, E52, E62)

We use firm-level data to document that private businesses experience large fluctuations in their profit shares. These are due to large, fat-tailed, and transitory changes in output that are not fully accompanied by changes in their inputs. We interpret this evidence using a model of entrepreneurial dynamics. Because firms can limit their exposure to risk by operating at a smaller scale, our model predicts large macroeconomic losses from uninsurable business risk, much larger than those stemming from credit constraints. While self-financing allows entrepreneurs to quickly overcome credit constraints, even wealthy entrepreneurs remain considerably exposed to risk. (JEL D33, E02, E44, G32, L25, L26)

Lack of market transparency can impair the liquidity provision of nonstandard liquidity suppliers and make liquidity demand increasing in illiquidity. This can yield strategic complementarities and induce multiple equilibria. Then an initial dearth of liquidity may degenerate into a liquidity rout (as in a “flash crash”), and traders faced with the largest cost of trading are those trading more intensely at equilibrium. An increase in order flow transparency and/or in the mass of dealers who are in the market at all times has a positive impact on total welfare. (JEL G12, G14, G41)

I study how firm market power and worker bargaining power shape wages and welfare. Using French micro-data, I document patterns linking wages and firm market power that existing models cannot explain. A model in which firms produce vertically differentiated goods and share profits with workers explains those patterns. The model (i) reveals new challenges in estimating monopsony and bargaining power, proposing an alternative approach; (ii) shows that the passthrough of firm-specific shocks to wages depends on the type of shock; (iii) explains how markups shape firm wage premia; and (iv) formalizes how strengthening worker bargaining power affects wages and welfare. (JEL D22, J31, J42, J52, L12, L22)

We evaluate equity-efficiency trade-offs from admissions quotas by examining effects on output once beneficiaries start producing in the relevant industry. We estimate the impact of abolishing a 40 percent quota for male primary school teachers on their pupils’ long-run outcomes. We combine this reform with the timing of union-bargained teacher retirements to isolate quasi-random variation in male quota teachers. Pupils exposed to male quota teachers transition more smoothly to postcompulsory education and have higher educational attainment and labor force attachment at age 25. Evidence suggests the quota improved the allocation of talent by mending imperfections in the unconstrained selection process. (JEL I21, I23, I28, J16, J24, J45)

This paper develops an asset market-based test for preference for the timing of resolution of uncertainty. Our main theorem provides a characterization of preference for early resolution of uncertainty in terms of the risk premium realized during the period when the informativeness of macroeconomic announcements is resolved. Empirically, we find support for preference for early resolution of uncertainty based on evidence on the dynamics of the implied volatility of S&P 500 index options before Federal Open Market Committee announcements. (JEL D81, D83, G13, G14, G41)