Knowledge that Transforms

To account for the uneven distribution of economic activity in space, I propose a theory of the location choices of heterogeneous firms in a variety of sectors across cities. In equilibrium, the distribution of city sizes and the sorting patterns of firms are uniquely determined and affect aggregate TFP and welfare. I estimate the model using French firm-level data and find that nearly half of the productivity advantage of large cities is due to firm sorting, the rest coming from agglomeration economies. I quantify the general equilibrium effects of place-based policies: policies that subsidize smaller cities have negative aggregate effects.

Macro developments leading up to the 2008 crisis displayed an unprecedented degree of international synchronization. Before the crisis, all G7 countries experienced credit growth and, around the time of the Lehman bankruptcy, they all faced sharp and large contractions in both real and financial activity. Using a two-country model with financial frictions, we show that a global liquidity shortage induced by pessimistic self-fulfilling expectations can quantitatively generate patterns like those observed in the data. The model also suggests that crises are less frequent with more international financial integration but, when they hit, they are larger and more synchronized across countries.

Between 1990 and 2008, air pollution emissions from US manufacturing fell by 60 percent despite a substantial increase in manufacturing output. We show that these emissions reductions are primarily driven by within-product changes in emissions intensity rather than changes in output or in the composition of products produced. We then develop and estimate a quantitative model linking trade with the environment to better understand the economic forces driving these changes. Our estimates suggest that the implicit pollution tax that manufacturers face doubled between 1990 and 2008. These changes in environmental regulation, rather than changes in productivity and trade, account for most of the emissions reductions.

Employment and hours are more cyclical than dictated by productivity and consumption. This intratemporal labor wedge can arise from product or labor market distortions. Based on employee wages, the literature has attributed the intratemporal wedge almost entirely to labor market distortions. Because wages may be smoothed versions of labor's true cyclical price, we instead examine the self-employed and intermediate inputs, respectively. For recent decades in the United States, we find price markup movements are at least as cyclical as wage markup movements. Thus, countercyclical price markups deserve a central place in business-cycle research, alongside sticky wages and matching frictions.

In many developing countries, the average firm is small, does not grow, and has low productivity. Lack of market integration and limited information on non-local products often leave consumers unaware of the prices and quality of non-local firms. They therefore mostly buy locally, limiting firms’ potential market size (and competition). We explore this hypothesis using a natural experiment in the Kerala boat-building industry. As consumers learn more about non-local builders, high-quality builders gain market share and grow, while low-quality firms exit. Aggregate quality increases, as does labor specialization, and average production costs decrease. Finally, quality-adjusted consumer prices decline.

The entry and exit of products, rather than firms, serve as the main equilibrating force in many markets, so accurately predicting changes from a merger or bankruptcy should incorporate this behavior. This paper estimates a structural model of the US commercial vehicle market and demonstrates the importance of allowing for endogenous product offerings in the context of the $85 billion automotive industry bailout in 2009. Under alternate policies that facilitate an acquisition or liquidation of GM and Chrysler, product entry and exit moderate markup increases and output decreases by up to three-quarters.

Before filing suit, a plaintiff can take a financial position in a defendant firm. A short position benefits the plaintiff by transforming a negative expected-value claim into a positive expected-value one and by enhancing the claim's settlement value. If the capital market is less than strong-form efficient, the plaintiff also benefits directly from the decline in the defendant's stock price. When the defendant is privately informed about the case's merits, bargaining failures can arise. While aggressive short-selling benefits the plaintiff at the expense of the defendant, moderate levels of short-selling can benefit the defendant and raise the settlement rate.

A salient characteristic of sovereign defaults is that they are typically accompanied by large devaluations. This paper presents new evidence of this empirical regularity known as the Twin Ds and proposes a model that rationalizes it as an optimal policy outcome. The model combines limited enforcement of debt contracts and downward nominal wage rigidity. Under optimal policy, default is shown to occur during contractions. The role of default is to free up resources for domestic absorption, and the role of exchange rate devaluation is to lower the real value of wages, thereby reducing involuntary unemployment.

In the US Senate, roll calls are held in alphabetical order. We document that senators early in the order are less likely to vote with the majority of their own party than those whose last name places them at the end of the alphabet. To speak to the mechanism behind this result, we develop a simple model of sequential voting, in which forward-looking senators rely on backward induction in order to free ride on their colleagues. Estimating our model structurally, we find that this form of strategic behavior is an important part of equilibrium play. We also consider, but ultimately dismiss, alternative explanations related to learning about common values and vote buying.

This paper studies the business-cycle dynamics of secondary markets for physical capital and their effects on the macroeconomy. In the data, both capital reallocation and the price of used capital are procyclical. To rationalize these facts, I propose a model with endogenous partial irreversibility, where used investment goods are imperfect substitutes for new ones because of firm-level capital specificity. Equilibrium dynamics in the market for used capital induce countercyclical dispersion of marginal products of capital, propagate movements in aggregate TFP, and provide a microfoundation for state-dependent nonconvex capital adjustment costs.