Knowledge that Transforms

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I show that home ownership decisions across countries and individuals are shaped by a cultural heritage from agriculture. For centuries, dominant assets in preindustrial economies were either land or cattle. Consequently, the type of farming prevailing locally shaped preferences and beliefs about the relative value of immovable and movable assets. This cultural heritage had long-lasting consequences. Today, individuals originating from societies with a history of crop agriculture—where the dominant asset was land—are more likely to be homeowners. For identification, I rely both on home ownership decisions of second-generation immigrants in the United States and on an instrument.

China’s Belt and Road Initiative (BRI) aims to create economic corridors encompassing two-thirds of the world’s population and 40% of global GDP. Using the inauguration of a railway tunnel between Europe and Asia as a quasi-natural experiment, I demonstrate that countries gaining access to BRI’s freight routes issue significant amounts of high-yield debt. This debt is largely absorbed domestically, reallocating capital away from firms without translating into infrastructure investment. State-owned enterprises appear insulated from tightening financial conditions. I document mechanisms involving political alignment with China, exposure to trade policy uncertainty, and topographic fit based on historical Orient Express routes.

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Equity returns follow a pronounced V-shape pattern around the onset of recessions. They sharply drop into negative territory just before business cycle peaks and then strongly recover as the recession unfolds. Recessions are typically preceded by a flat yield curve. Probit models relying on the term spread as a predictor therefore time the beginning of recessions well. We show that model-implied recession probabilities based on the term spread strongly improve equity premium prediction in- and out-of-sample and outperform several benchmark predictors. Correcting for a structural break in the mean of the term spread in 1982 further strengthens the forecast performance.

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Using the near universe of online job postings from 2007 to 2021, we construct a firm-level metric of labor market power. We find that firms with higher labor market power tend to have higher financial leverage. Our findings are not driven by product market competition or correlated labor market characteristics. The evidence is less pronounced among firms hiring in occupations with high labor mobility and skill transferability. To establish causality, we exploit the establishment of Amazon HQ2 in Crystal City as a shock to the labor market power of local firms and show consistent findings with our baseline results.