Knowledge that Transforms

We study the optimal accumulation of international reserves in a quantitative model of sovereign default with long-term debt and a risk-free asset. Keeping higher levels of reserves provides a hedge against rollover risk, but this is costly because using reserves to pay down debt allows the government to reduce sovereign spreads. Our model, parameterized to mimic salient features of a typical emerging economy, can account for significant holdings of international reserves, and the larger accumulation of both debt and reserves in periods of low spreads and high income. We also show that income windfalls, improved policy frameworks, and an increase in the importance of rollover risk imply increases in the optimal holdings of reserves that are consistent with the upward trend in reserves in emerging economies. It is essential for our results that debt maturity exceeds one period.

To understand the elasticity of employment to local labor demand shocks, we develop a quantitative general equilibrium model that incorporates spatial linkages in goods markets (trade) and factor markets (commuting and migration). We show that local employment elasticities differ substantially across U.S. counties and commuting zones in ways that are not well explained by standard empirical controls but are captured by commuting measures. We provide independent evidence for these predictions from million dollar plants and find that empirically-observed reductions in commuting costs generate welfare gains of around 3.3 percent and employment reallocations from -20 to 30 percent.

We establish the importance of team-specific capital in the typical inventor's career. Using administrative tax and patent data for the population of US patent inventors from 1996 to 2012, we find that an inventor's premature death causes a large and long-lasting decline in their co-inventor's earnings and citation-weighted patents (−4 percent and −15 percent after 8 years, respectively). After ruling out firm disruption, network effects, and top-down spillovers as main channels, we show that the effect is driven by close-knit teams and that team-specific capital largely results from an “experience” component increasing collaboration value over time.

Over 20 percent of prison and jail inmates in the United States are currently awaiting trial, but little is known about the impact of pretrial detention on defendants. This paper uses the detention tendencies of quasi-randomly assigned bail judges to estimate the causal effects of pretrial detention on subsequent defendant outcomes. Using data from administrative court and tax records, we find that pretrial detention significantly increases the probability of conviction, primarily through an increase in guilty pleas. Pretrial detention has no net effect on future crime, but decreases formal sector employment and the receipt of employment- and tax-related government benefits. These results are consistent with (i) pretrial detention weakening defendants' bargaining positions during plea negotiations and (ii) a criminal conviction lowering defendants' prospects in the formal labor market.

We develop a quantifiable general equilibrium model of trade and multinational production (MP) in which countries can specialize in innovation or production. Home market effects or comparative advantage leads some countries to specialize in innovation and relegate manufacturing operations to other countries via outward MP. Counterfactual analysis reveals that the reduction in the cost of MP or the integration of China into the world economy may hurt countries that are driven to specialize in production, although these losses tend to be very small. Contrary to popular fears, production workers gain even in countries that further specialize in innovation.

A long-standing debate in political economy is whether voters are driven primarily by economic self-interest or by less pecuniary motives like ethnocentrism. Using newly available data, we reexamine one of the largest partisan shifts in a modern democracy: Southern whites' exodus from the Democratic Party. We show that defection among racially conservative whites explains the entire decline from 1958 to 1980. Racial attitudes also predict whites' earlier partisan shifts. Relative to recent work, we find a much larger role for racial views and essentially no role for income growth or (non-race-related) policy preferences in explaining why Democrats “lost” the South.

This paper provides a simple, yet robust framework to evaluate the time profile of benefits paid during an unemployment spell. We derive sufficient-statistics formulae capturing the marginal insurance value and incentive costs of unemployment benefits paid at different times during a spell. Our approach allows us to revisit separate arguments for inclining or declining profiles put forward in the theoretical literature and to identify welfare-improving changes in the benefit profile that account for all relevant arguments jointly. For the empirical implementation, we use administrative data on unemployment, linked to data on consumption, income, and wealth in Sweden. First, we exploit duration-dependent kinks in the replacement rate and find that, if anything, the moral hazard cost of benefits is larger when paid earlier in the spell. Second, we find that the drop in consumption affecting the insurance value of benefits is large from the start of the spell, but further increases throughout the spell. In trading off insurance and incentives, our analysis suggests that the flat benefit profile in Sweden has been too generous overall. However, both from the insurance and the incentives side, we find no evidence to support the introduction of a declining tilt in the profile.

Following mid-twentieth century predictions of Malthusian catastrophe, fertility in the developing world more than halved, while living standards more than doubled. We analyze how fertility change related to economic growth during this episode, using data on 2.3 million women from 255 household surveys. We find different responses to fluctuations and long-run growth, both heterogeneous over the life cycle. Fertility was procyclical but declined and delayed with long-run growth; fluctuations late (but not early) in the reproductive period affected lifetime fertility. The results are consistent with models of the escape from the Malthusian trap, extended with a life cycle and liquidity constraints.

We use a novel retail panel with detailed transaction records to study the effect of the Supplemental Nutrition Assistance Program (SNAP) on household spending. We use administrative data to motivate three approaches to causal inference. The marginal propensity to consume SNAP-eligible food (MPCF) out of SNAP benefits is 0.5 to 0.6. The MPCF out of cash is much smaller. These patterns obtain even for households for whom SNAP benefits are economically equivalent to cash because their benefits are below their food spending. Using a semiparametric framework, we reject the hypothesis that households respect the fungibility of money. A model with mental accounting can match the facts.

We report on an experiment examining why default options impact behavior. By randomly assigning employees to different varieties of a salary-linked savings account, we find that default enrollment increases participation by 40 percentage points—an effect equivalent to providing a 50 percent matching incentive. We then use a series of experimental interventions to differentiate between explanations for the default effect, which we conclude is driven largely by present-biased preferences and the cognitive cost of thinking through different savings scenarios. Default assignment also changes employees’ attitudes toward saving, and makes them more likely to actively decide to save after the study concludes.