Knowledge that Transforms

The conventional wisdom in finance is that competition is fierce among investors: if a group changes its behavior, others adjust their strategies such that nothing happens to prices. We estimate a demand system with flexible strategic responses for institutional investors in the US stock market. When less aggressive traders surround an investor, she adjusts by trading more aggressively. However, this strategic reaction only counteracts two-thirds of the impact of the initial change in behavior. In light of these estimates, the rise in passive investing over the last 20 years has made the demand for individual stocks 11 percent more inelastic.

This paper estimates the direct effects and indirect spillover effects of investment tax credits on firms. Exploiting a differential tax credit rate change by firm size in the German manufacturing sector, I find that lowering a firm's investment cost by 7.6 percent increases its capital stock by 17.7 percent and employment by 12.0 percent. Positive local spillovers generate one additional manufacturing job for each directly created job, are strongest between firms in industries connected through input-output linkages, and arise within distances of five kilometers. Firms dependent on local consumer demand also increase employment, while within-industry spillovers generate small negative effects.

Adverse selection benefits firms able to identify talent. An informed intermediary expropriates agents’ ability by threatening to fire and expose them to undervaluation of their skill. An agent’s track record gradually reduces intermediary’s information advantage. In response, the intermediary starts churning well-performing agents she knows are less skilled. The accelerated reduction in information advantage boosts profits, as retained agents accept below-reservation wages to build reputation faster. Agents prefer starting their careers working for an intermediary, as benefits from building reputation faster more than offset expropriation costs. Our analysis applies to professions where talent is essential and performance is publicly observable.

We conduct a field experiment with US households to study how expectations about long-run home price growth shape spending decisions. We exogenously vary survey respondents' expectations by providing different expert forecasts. Homeowners' spending, measured using rich home-scanner data, is inelastic to home price expectations. By contrast, renters reduce their spending when expecting higher home price growth. These patterns reflect positive wealth effects for owners from higher future wealth and negative income effects for both groups due to higher future housing costs. Our study highlights consequences of asset price growth and long-term expectations about the economy for household behavior.

We introduce a new model of stochastic choice that assigns each choice option a utility, along with a salience parameter reflecting economic frictions. We characterize our model behaviorally and investigate its comparative statics properties. We show that the model generates intuitive closed-form solutions in equilibrium settings where firms can choose price, quality, and advertising. In addition, we show that the model allows for flexible substitution patterns and changes in market shares across choice sets. We demonstrate that our model can be easily identified and can outperform alternatives in demand prediction.

We demonstrate that predictable uninformed cash flows forecast aggregate market stock returns. Buying pressure from dividend payments (announced weeks prior) predicts higher value-weighted market returns, with returns for the top quintile of payment days four times higher than the lowest. This holds internationally and increases when reinvestment is high and market liquidity is low. We estimate a market-level price multiplier of 1.9. These results suggest price pressure is a widespread result of flows, not an anomaly.

We study whether the quality of managers can affect public service provision in the context of public health. Using novel data from public hospitals in Chile, we show how the introduction of a competitive recruitment system and better pay for public hospital CEOs reduced hospital mortality by 8 percent. The effect is not explained by a change in patient composition. We find that the policy changed the pool of CEOs by displacing doctors with no management training in favor of CEOs who had studied management. Productivity improvements were driven by hospitals that recruited higher quality CEOs.

We conducted a randomized trial among 14,545 households in rural Burkina Faso to test the oft-cited hypothesis that limited access to contraception is an important driver of high fertility rates in West Africa. We do not find support for this hypothesis. Women who were given free access to modern contraception for three years did not have lower birth rates; we can reject even modest effects. We cross-randomized additional interventions to address inefficiencies that might depress demand for free contraception, specifically misperceptions about the child mortality rate and social norms. Free contraception did not significantly influence fertility even in combination with these interventions.

My research suggests that world inequality is explained by the incidence of extractive and inclusive institutions. But why do some countries have extractive institutions? I distinguish between two main reasons; first, power relations; second, the “normative order.” Normative orders provide justifications and legitimacy for institutions which may not generate prosperity, but may achieve other goals. These distinctions are critical because they create very different challenges in trying to make institutions more inclusive and create prosperity. I show how countries move from the economic periphery as a consequence of changing both. My own intellectual journey has been in the other direction, however, hence the title of the paper: I was fortunate to be born in Britain, but I have had to unlearn much of my own experience, socialization and training in order to see other societies on their own terms. That’s crucial to be able to help them, but also to learn from them.

We measure how cuts to public procurement propagate through the banking system in a financial crisis. During the European sovereign debt crisis, the Portuguese government cut procurement spending by 4.3 percent of GDP. We find that this cut saddled banks with nonperforming loans from government contractors, which led to a persistent reduction in credit supply to other firms. We estimate a bank-level elasticity of credit supply with respect to procurement demand of 2.5. In a general equilibrium model, our findings point to large effects of fiscal policy on credit supply and output in a crisis.