Knowledge that Transforms

This paper investigates the origin and propagation of balance sheet recessions. I first show that in standard models driven by TFP shocks, the balance sheet channel disappears when agents can write contracts on the aggregate state of the economy. Optimal contracts sever the link between leverage and aggregate risk sharing, eliminating the concentration of aggregate risk that drives balance sheet recessions. I then show that uncertainty shocks can help explain this concentration of aggregate risk and drive balance sheet recessions, even with contracts on aggregate shocks. The mechanism is quantitatively important, and I explore implications for financial regulation.

After the fall of the Berlin Wall, East Germany experienced an unprecedented temporary drop in fertility driven by economic uncertainty. We show that the children born during this transition period performed worse on a range of educational outcomes from an early age onward. The mothers of these children exhibit personal characteristics and family structures consistent with negative parental selection. Investigating the underlying mechanisms reveals that parental educational input and emotional attachment were also lower for these children. Finally, our ability to compare siblings means that we can reject that our results stem from a time of birth effect.

To study the impact of macroprudential policy on credit supply cycles and real effects, we analyze dynamic provisioning. Introduced in Spain in 2000, revised four times, and tested in its countercyclicality during the crisis, it affected banks differentially. We find that dynamic provisioning smooths credit supply cycles and, in bad times, supports firm performance. A 1 percentage point increase in capital buffers extends credit to firms by 9 percentage points, increasing firm employment (6 percentage points) and survival (1 percentage point). Moreover, there are important compositional effects in credit supply related to risk and regulatory arbitrage by nonregulated and regulated but less affected banks.

Does access to credit explain the gap in schooling attainment between children from richer and poorer families? I present new evidence on this important question based on the causal effects of two college loan programs in Chile that are available to students scoring above a threshold on the national college admission test, enabling a regression discontinuity design. I find that credit access leads to a 100 percent increase in immediate college enrollment and a 50 percent increase in the probability of ever enrolling. Moreover, access to loans effectively eliminates the income gap in enrollment and number of years of college attainment.

Taxation affects the allocation of talented individuals across professions by blunting material incentives and thus magnifying nonpecuniary incentives of pursuing a “calling.” Estimates from the literature suggest that high-paying professions have negative externalities, whereas low-paying professions have positive externalities. A calibrated model therefore prescribes negative marginal tax rates on middle-class incomes and positive rates on the rich. The welfare gains from implementing such a policy are small and are dwarfed by the gains from profession-specific taxes and subsidies. These results depend crucially on externality estimates and labor substitution patterns across professions, both of which are very uncertain given existing empirical evidence.

We study contests for innovation with learning about the innovation’s feasibility and opponents’ outcomes. We characterize contests that maximize innovation when the designer chooses a prize-sharing scheme and a disclosure policy. A “public winner-takes-all” contest dominates public contests—where any success is immediately disclosed—with any other prize-sharing scheme as well as winner-takes-all contests with any other disclosure policy. Yet, jointly modifying prize sharing and disclosure can increase innovation. In a broad class of mechanisms, it is optimal to share the prize with disclosure following a certain number of successes; under simple conditions, a “hidden equal-sharing” contest is optimal.

Pathways to Education is a comprehensive support program developed to improve academic outcomes of high school students from very poor social-economic backgrounds. The program includes proactive mentoring, daily tutoring, and group activities, combined with intermediate and long-term incentives to reinforce a minimum degree of mandatory participation; it began in 2001 for entering grade 9 students living in Regent Park, the largest public housing project in Toronto. It expanded in 2007 to include two additional Toronto projects. Comparing students from other housing projects before and after the introduction of the program, high school graduation and postsecondary enrollment rates rose dramatically for Pathways-eligible students, in some cases by more than 50 percent.