Knowledge that Transforms

We estimate the effect of temporary tax incentives on equipment investment using shifts in accelerated depreciation. Analyzing data for over 120,000 firms, we present three findings. First, bonus depreciation raised investment in eligible capital relative to ineligible capital by 10.4 percent between 2001 and 2004 and 16.9 percent between 2008 and 2010. Second, small firms respond 95 percent more than big firms. Third, firms respond strongly when the policy generates immediate cash flows, but not when cash flows only come in the future. This heterogeneity materially affects investment-weighted estimates and supports models in which financial frictions or fixed costs amplify investment responses.

This paper examines the aftermath of postwar financial crises in advanced countries. We construct a new semiannual series on financial distress in 24 OECD countries for the period 1967–2012. The series is based on assessments of the health of countries' financial systems from a consistent, real-time narrative source, and classifies financial distress on a relatively fine scale. We find that the average decline in output following a financial crisis is statistically significant and persistent, but only moderate in size. More important, we find that the average decline is sensitive to the specification and sample, and that the aftermath of crises is highly variable across major episodes. A simple forecasting exercise suggests that one important driver of the variation is the severity and persistence of financial distress itself. At the same time, we find little evidence of nonlinearities in the relationship between financial distress and the aftermaths of crises.

We show that the stock market may fail to aggregate information even if it appears to be efficient, and that the resulting decrease in the information content of prices may drastically reduce welfare. We solve a macroeconomic model in which information about fundamentals is dispersed and households make small, correlated errors when forming expectations about future productivity. As information aggregates in the market, these errors amplify and crowd out the information content of stock prices. When prices reflect less information, the conditional variance of stock returns rises, causing an increase in uncertainty and costly distortions in consumption, capital accumulation, and labor supply.

Exploiting variation in the timing of resets of adjustable-rate mortgages (ARMs), we find that a sizable decline in mortgage payments (up to 50 percent) induces a significant increase in car purchases (up to 35 percent). This effect is attenuated by voluntary deleveraging. Borrowers with lower incomes and housing wealth have significantly higher marginal propensity to consume. Areas with a larger share of ARMs were more responsive to lower interest rates and saw a relative decline in defaults and an increase in house prices, car purchases, and employment. Household balance sheets and mortgage contract rigidity are important for monetary policy pass-through.

I introduce and study dynamic persuasion mechanisms. A principal privately observes the evolution of a stochastic process and sends messages over time to an agent. The agent takes actions in each period based on her beliefs about the state of the process and the principal wishes to influence the agent’s action. I characterize the optimal persuasion mechanism and show how to derive it in applications. I then consider the extension to multiple agents where higher-order beliefs matter.

We study the effect of wealth on labor supply using the randomized assignment of monetary prizes in a large sample of Swedish lottery players. Winning a lottery prize modestly reduces earnings, with the reduction being immediate, persistent, and quite similar by age, education, and sex. A calibrated dynamic model implies lifetime marginal propensities to earn out of unearned income from −0.17 at age 20 to −0.04 at age 60, and labor supply elasticities in the lower range of previously reported estimates. The earnings response is stronger for winners than their spouses, which is inconsistent with unitary household labor supply models.

We document in the Survey of Income and Program Participation covering the period 1990–2013 that a surprisingly large share of workers return to their previous employer after a jobless spell, and experience very different unemployment and employment outcomes than job switchers. The probability of recall is much less procyclical and volatile than the probability of finding a new employer. We add to a quantitative, and otherwise canonical, search-and-matching model of the labor market a recall option, which can be activated freely following aggregate and job-specific productivity shocks. Recall and search effort significantly amplify the cyclical volatility of new job-finding and separation probabilities.

We study the effect of financial relationships on firms' investment decisions and access to external finance. In the early twentieth century, securities underwriters commonly held directorships with American corporations. Section 10 of the Clayton Antitrust Act prohibited bankers from serving on the boards of railroads for which they underwrote securities. We find that following the implementation of Section 10, railroads with strong preexisting relationships with underwriters saw declines in their investment rates, valuations, and leverage, and increases in their costs of external funds. Reassuringly, we do not observe similar effects among industrials and utilities, which were not subject to Section 10. Our results are consistent with underwriters on corporate boards acting as delegated monitors, and highlight the potential for regulations intended to address conflicts of interest to disrupt valuable information flows.

Multiplicity of equilibria and the dependence on strong common knowledge assumptions are well-known problems in mechanism design. We address them by studying full implementation via transfer schemes, under general restrictions on agents' beliefs. We show that incentive-compatible transfers ensure uniqueness—and hence full implementation—if they induce sufficiently weak strategic externalities. We then design transfers for full implementation by using information on beliefs in order to weaken the strategic externalities of the baseline canonical transfers. Our results rely on minimal restrictions on agents' beliefs, specifically on moments of the distribution of types, that arise naturally in applications.

In many competitive settings, consumers buy multiple product categories, and some prefer to use a single firm, generating complementary cross-category price effects. To study pricing in supermarkets, an organizational form where these effects are internalized, we develop a multi-category, multi-seller demand model and estimate it using UK consumer data. This class of model is used widely in theoretical analysis of retail pricing. We quantify cross-category pricing effects and find that internalizing them substantially reduces market power. We find that consumers inclined to one-stop (rather than multi-stop) shopping have a greater pro-competitive impact because they generate relatively large cross-category effects.