How do shocks to the banking sector travel through the corporate economy? Using a novel data set of interfirm sales, I show that suppliers exposed to a large and exogenous decline in bank financing pass this liquidity shock to their downstream customers. The spillover effect occurs through two channels: a reduction in trade credit offered and a reduction in the total supply of goods and services. After exposure to the spillover, downstream customers show a spike in credit risk and a reduction in employment. Overall, the paper highlights the importance of financial spillovers in explaining corporate sector outcomes.

Our new model of consumption-based habit formation preferences generates loglinear, homoskedastic macroeconomic dynamics and time-varying risk premia on bonds and stocks. Consumers' first-order condition for the real risk-free interest rate takes the form of an exactly loglinear consumption Euler equation, commonly assumed in New Keynesian models. Estimating the model separately for 1979-2001 and 2001-2011 explains why the exposure of US Treasury bonds to the stock market changed from positive to negative. A change in the comovement between inflation and the output gap explains changing bond risks, but only when risk premia change endogenously as predicted by the model.

We develop a dynastic human capital investment framework to study the importance of family borrowing constraints and uninsured labor market risk, as well as the process of intergenerational ability transmission, in determining human capital investments in children at different ages. We calibrate our model to data from the Children of the National Longitudinal Survey of Youth. While the effects of relaxing any borrowing limit at a single stage are modest, eliminating all life-cycle borrowing limits dramatically increases investments, earnings, and intergenerational mobility. The impacts of policy changes at college-going ages are greater when anticipated earlier, and shifting subsidies to earlier ages increases aggregate welfare and human capital.

Many markets are syndicated, including those for initial public offerings, club deal leveraged buyouts, and debt issuances; in such markets, each winning bidder invites competitors to join a syndicate to complete production. We show that in syndicated markets, collusion may become easier as market concentration falls and market entry may facilitate collusion. In particular, firms can sustain collusion by refusing to syndicate with any firm that undercuts the collusive price, thereby raising that firm’s production costs. Our results can thus rationalize the paradoxical empirical observations that many real-world syndicated markets exhibit seemingly collusive pricing despite low levels of market concentration.

Corrective taxes can solve many market failures, but actual policies frequently deviate from the theoretical ideal because of administrative or political constraints. We present a method to quantify the efficiency costs of constraints on externality-correcting policies or, more generally, the costs of imperfect pricing, using simple regression statistics. Under certain conditions, the R2 and the sum of squared residuals from a regression of true externalities on policy variables measure relative welfare gains from policies. We illustrate via four empirical applications: random mismeasurement of externalities, imperfect electricity pricing, heterogeneity in the longevity of energy-consuming durable goods, and imperfect spatial policy differentiation.

We propose a new framework for optimal experimentation, which we term the “A/B testing problem.” Our model departs from the existing literature by allowing for fat tails. Our key insight is that the optimal strategy depends on whether most gains accrue from typical innovations or from rare, unpredictable large successes. If the tails of the unobserved distribution of innovation quality are not too fat, the standard approach of using a few high-powered “big” experiments is optimal. However, if the distribution is very fat tailed, a “lean” strategy of trying more ideas, each with possibly smaller sample sizes, is preferred. Our theoretical results, along with an empirical analysis of Microsoft Bing’s EXP platform, suggest that simple changes to business practices could increase innovation productivity.