Knowledge that Transforms

In the U.S., large firms now account for a greater share of economic activity, new firms are being created at slower rates, and workers are receiving a smaller share of GDP. Changes in population growth provide a unified quantitative explanation. A decrease in population growth lowers firm entry rates, shifting the firm‐age distribution toward older firms. Firm aging accounts for (i) the concentration of employment in large firms, (ii) and trends in average firm size and exit rates, key determinants of firm entry rates. Feedback effects from firm demographics generate two‐thirds of the effect. Prior to the decrease, entry rates rose steadily reflecting the earlier baby boom. The glut of firms due to the baby boom lead to rich transitional dynamics within the feedback effects, accounting for more than half the total change. Baby boom induced changes in the firm‐age distribution provide a driving force for the post‐WWII rise and fall in the aggregate labor share. Ignoring changes in population growth attributes all the long run decline in entry rates to a decrease in firm exit rates, which in reality have been only one‐third as large.

This study provides a new theoretical result that a decline in the long‐term interest rate can trigger a stronger investment response by market leaders relative to market followers, thereby leading to more concentrated markets, higher profits, and lower aggregate productivity growth. This strategic effect of lower interest rates on market concentration implies that aggregate productivity growth declines as the interest rate approaches zero. The framework is relevant for antitrust policy in a low interest rate environment, and it provides a unified explanation for rising market concentration and falling productivity growth as interest rates in the economy have fallen to extremely low levels.

We propose an analytical method to analyze the propagation of an aggregate shock in a broad class of sticky‐price models. The method is based on the eigenvalue‐eigenfunction representation of the dynamics of the cross‐sectional distribution of firms' desired adjustments. A key novelty is that we can approximate the whole profile of the impulse response for any moment of interest in response to an aggregate shock (any displacement of the invariant distribution). We present several applications for an economy with low inflation and idiosyncratic shocks. We show that the shape of the impulse response of the canonical menu cost model is fully encoded by a single parameter, just like the Calvo model, although the shapes are very different. A model with a quadratic hazard function, arguably a good fit to the micro data on price setting, yields an impulse response that is close to the canonical menu cost model.

More than two decades ago, a well‐known study on heart attack treatments provided evidence suggesting that, when appropriately adjusted for quality, medical care prices were actually declining (Cutler, McClellan, Newhouse, and Remler (1998)). Our paper revisits this subject by leveraging estimates from more than 8000 cost‐effectiveness studies across a broad range of conditions and treatments. We find large quality‐adjusted price declines associated with treatment innovations. To incorporate these quality‐adjusted indexes into an aggregate measure of inflation, we combine an unadjusted medical‐care price index, quality‐adjusted price indexes from treatment innovations, and proxies for the diffusion rate of new technologies. In contrast to official statistics that suggest medical care prices increased by 0.53 percent per year relative to economy‐wide inflation from 2000 to 2017, we find that quality‐adjusted medical care prices declined by 1.33 percent per year over the same period.

We explore patterns of price competition in an oligopoly where consumers vary in the set of firms they consider for their purchase and buy from the lowest‐priced firm they consider. We study a pattern of consideration, termed “symmetric interactions,” that generalizes models used in existing work (duopoly, symmetric firms, and firms with independent reach). Within this class, equilibrium profits are proportional to a firm's reach, firms with a larger reach set higher average prices, and a reduction in the number of firms (either by exit or by merger) harms consumers. However, increased competition (either by entry or by increased consumer awareness) does not always benefit consumers. We go on to study patterns of consideration with asymmetric interactions. In situations with disjoint reach and with nested reach, we find equilibria in which price competition is “duopolistic”: only two firms compete within each price range. We characterize the contrasting equilibrium patterns of price competition for all patterns of consideration in the three‐firm case.

We investigate the impact of job loss on crime and the mitigating role of unemployment benefits, exploiting detailed individual‐level data linking employment careers, criminal records, and welfare registries for the universe of male workers in Brazil. The probability of committing crimes increases on average by 23% for workers displaced by mass layoffs, and by slightly less for their cohabiting sons. Using causal forests, we show that the effect is entirely driven by young and low‐tenure workers, while there is no heterogeneity by education and income. Regression discontinuity estimates indicate that unemployment benefit eligibility completely offsets potential crime increases upon job loss, but this effect vanishes completely immediately after benefit expiration. Our findings point to liquidity constraints and psychological stress as the main drivers of criminal behavior upon job loss, while substitution between time on the job and leisure does not seem to play an important role.

We study a class of models of moral hazard in which a principal contracts with a counterparty, which may have its own internal organizational structure. The principal has non‐Bayesian uncertainty as to what actions might be taken in response to the contract, and wishes to maximize her worst‐case payoff. We identify conditions on the counterparty's possible responses to any given contract that imply that a linear contract solves this maxmin problem. In conjunction with a Richness property motivated by much previous literature, we identify a Responsiveness property that is sufficient—and, in an appropriate sense, also necessary—to ensure that linear contracts are optimal. We illustrate by contrasting several possible models of contracting in hierarchies. The analysis demonstrates how one can distill key features of contracting models that allow their findings to be carried beyond the bilateral setting.

We study a fiscal policy model in which the government is present‐biased towards public spending. Society chooses a fiscal rule to trade off the benefit of committing the government to not overspend against the benefit of granting it flexibility to react to privately observed shocks to the value of spending. Unlike prior work, we examine rules under limited enforcement: the government has full policy discretion and can only be incentivized to comply with a rule via the use of penalties which are joint and bounded. We show that optimal incentives must be bang‐bang. Moreover, under a distributional condition, the optimal rule is a maximally enforced deficit limit, triggering the maximum feasible penalty whenever violated. Violation optimally occurs under high enough shocks if and only if available penalties are weak and such shocks are relatively unlikely. We derive comparative statics showing how rules should be calibrated to features of the environment.

We propose a robust solution concept for Bayesian persuasion that accounts for the Sender's concern that her Bayesian belief about the environment—which we call the conjecture —may be false. Specifically, the Sender is uncertain about the exogenous sources of information the Receivers may learn from, and about strategy selection. She first identifies all information policies that yield the largest payoff in the “worst‐case scenario,” that is, when Nature provides information and coordinates the Receivers' play to minimize the Sender's payoff. Then she uses the conjecture to pick the optimal policy among the worst‐case optimal ones. We characterize properties of robust solutions, identify conditions under which robustness requires separation of certain states, and qualify in what sense robustness calls for more information disclosure than standard Bayesian persuasion. Finally, we discuss how some of the results in the Bayesian persuasion literature change once robustness is accounted for, and develop a few new applications.