Knowledge that Transforms

This paper presents a puzzle in the behavior of experimental subjects in what we call common-probability auctions. In common-value auctions, uncertainty is defined over values, while in common-probability auctions, uncertainty is defined over probabilities. We find that in contrast to the substantial overbidding found in common-value auctions, bidding in strategically equivalent common-probability auctions is consistent with Nash equilibrium. To explain our results, we run treatments to identify whether this difference stems from the way subjects estimate the good’s value in a competitive environment rather than the way they bid conditional on these valuations. We conclude it is the former. (JEL C70, C90, D44, D81)

Does armed conflict reduce trade, even in noncombat areas, through the destruction of intergroup social capital? We analyze Ukrainian trade transactions before and after the 2014 Russia-Ukraine conflict. In a difference-in-differences framework, we find that Ukrainian firms from districts with fewer ethnic Russians experienced a deeper decline in trade with Russia. This decline is economically signifi-cant, persistent, and can be explained by erosion of intergroup trust. Affected Ukrainian firms suffered a decrease in performance and diverted trade to other countries. Our results suggest that, through social effects, conflict can be economically damaging even away from combat areas. (JEL D74, F14, F51, J15, P31, P33, Z13)

The reversal interest rate is the rate at which accommodative monetary policy reverses and becomes contractionary for lending. We theoretically demonstrate its existence in a macroeconomic model featuring imperfectly competitive banks that face financial frictions. When interest rates are cut too low, further monetary stimulus cuts into banks’ profit margins, depressing their net worth and curtailing their credit supply. Similarly, when interest rates are low for too long, the persistent drag on bank profitability eventually outweighs banks’ initial capital gains, also stifling credit supply. We quantify the importance of this mechanism within a calibrated New Keynesian model. (JEL E12, E32, E43, E44, E52, G21, L25)

Greece experienced a boom until 2007, followed by a collapse of unprecedented magnitude and persistence. We assess the sources of the boom and the bust, using a rich estimated dynamic general equilibrium model. External demand and government consumption fueled the boom in production, whereas transfers fueled the boom in consumption. Different from the standard narrative, wages and prices declined substantially during the bust. Tax policy accounts for the largest fraction of the bust in production, whereas uninsurable risk accounts for the bust in consumption and wages. We assess how the composition of fiscal adjustment and bailouts affected the crisis. (JEL E21, E23, E24, E32, E62, F41, H20)

We propose a nonparametric test for the exclusion and monotonicity assumptions invoked in instrumental variable (IV) designs based on the random assignment of cases to judges. We show its asymptotic validity and demonstrate its finite-sample performance in simulations. We apply our test in an empirical setting from the literature examining the effects of pretrial detention on defendant outcomes in New York. When the assumptions are not satisfied, we propose weaker versions of the usual exclusion and monotonicity restrictions under which the IV estimator still converges to a proper weighted average of treatment effects. (JEL H76, K41)