Knowledge that Transforms

We show that the Dodd-Frank Act stress tests worsened bank loan terms and reduced vacancy postings by 16% among private firms with prior relationships with stress-tested banks. The decline is concentrated in postings for less-educated workers, indicating a contraction in hiring along this margin. These effects are temporary. Firms respond to tighter credit by shifting toward smaller financial institutions. This adjustment increases loan sizes from both new and existing lenders, which mitigates the impact of stress tests on labor demand over time.

We analyze the potential impact of the recent US reform that permits employers to match retirement plan contributions when employees repay their student loans. Our calibrated lifecycle model measures the impact of this policy on heterogeneous household financial behavior and welfare. We show that, post-reform, workers optimally reduce their own retirement plan contributions in exchange for the employer matches and repay student loans more slowly and smoothly. The reform also boosts financial wealth and annual pre-retirement consumption. Workers with high student debt relative to expected lifetime income gain the most from the reform, reflecting their greater repayment burden.

This paper investigates how historically intensive irrigation systems influenced enduring institutional and cultural traits that constrain firms’ access to finance. Combining geo-climatic measures of irrigation potential with firm-level data from 174 ethnic regions across 146 countries, we find that historically irrigated societies are characterised by weaker property rights, lower trust in financial institutions, and greater reliance on internal financing. Firms in these regions report more severe financial obstacles and higher rejection rates from banks. Implementing a spatial regression discontinuity design around the Lower Rhine and using irrigation potential as an instrument, we provide evidence consistent with a long-term influence of historical irrigation on modern credit frictions. The effects are most evident among privately owned domestic firms, unaffiliated firms, and those with higher female ownership. These findings indicate that ancient irrigation infrastructure is associated with persistent imprints on contemporary financial markets.

We introduce a novel measure for investors' Degree of Rejoicing and Regret (DRR) and test its power to explain cross-sectional stock returns. Consistent with investors demanding compensation for anticipated regret, a portfolio of low-DRR stocks outperforms that of high-DRR stocks by 16.45% annually in the U.S. market. This DRR effect is present globally across 44 markets and is stronger in countries characterized by higher individualism, greater uncertainty avoidance, and weaker investor protection. Our analysis highlights the crucial role of rejoicing, a previously underemphasized component of regret theory, and demonstrates that our DRR measure subsumes the pricing power of existing regret-only proxies.