Knowledge that Transforms

Abstract We study the mechanisms driving bank losses across historical banking crises in 46 economies and the effectiveness of policy interventions in restoring bank capitalization. We find that bank stocks experience large, permanent declines at the onset of crises. These losses predict commensurate long-term declines in banks’ earnings and dividends, rather than elevated future equity returns. Bank losses are primarily driven by write-downs of nonperforming assets, not asset sales during panics. Forceful liquidity-based interventions during crises predict only small, temporary increases in bank market value. Overall, these results suggest that bank losses during crises are not primarily due to temporary price dislocations. Early liquidity interventions can avert banking crises, but only under specific conditions. Once large bank equity declines have occurred, policy responses have historically failed to prevent persistent undercapitalization in the banking sector.

Abstract Nearly 400,000 Black men were drafted into the National Army during World War I, where they toiled primarily as menial laborers in segregated units. Leveraging novel variation from the World War I draft lottery and millions of digitized military and NAACP records, we document the pioneering role these men played in the early civil rights movement. Relative to observably similar individuals from the same draft board, Black men randomly inducted into the Army were significantly more likely to join the nascent NAACP and become prominent community leaders in the New Negro era. We find little evidence that these effects are explained by migration or improved socioeconomic status. Rather, corroborating historical accounts about the catalyzing influence of institutional racism in the military, we show that increased civic activism was driven by soldiers who experienced the most discriminatory treatment while serving their country.

Abstract This article investigates how a government should manage international reserves when it faces the risk of a rollover crisis. We ask: Should the government accumulate reserves or reduce debt to make itself less vulnerable? We show that the optimal policy entails initially reducing debt, followed by a subsequent increase in both debt and reserves as the government approaches a safe zone. Furthermore, we find that issuing additional debt to accumulate reserves can lead to a reduction in sovereign spreads. Evidence from a panel of emerging economies is consistent with these predictions: increases in reserves financed by public external borrowing are associated with lower spreads, and reserve holdings are not systematically drawn down during crisis episodes.

Abstract We study how people’s beliefs about the economy covary with household-level events, utilizing a unique link between Danish administrative data and a large-scale survey of consumer expectations. We find that compared to actual inflation, people’s inflation forecasts covary much more strongly (and negatively) with both recently realized household income changes and measures of expected future household income changes. We formally establish that these findings are stark deviations from the Bayesian rational expectations benchmark. Similar results hold for perceptions of past inflation (“backcasts” ), suggesting that imperfect recall is a key mechanism for biased forecasts. Building on this, a series of additional tests, some of which utilize data on adverse health events, suggests that the forecast biases are at least partly due to affect-cued recall. That is, negative (positive) household-level events cue negative (positive) recollections, which lead to pessimistic (optimistic) forecasts.

Abstract Since 1967, all French firms with more than 100 employees have been required to share a fraction of their excess profits with their employees. Through this scheme, firms with excess profits distribute, on average, 10.5% of their pretax income to workers. In 1990, the eligibility threshold was reduced to 50 employees. We exploit this regulatory change to identify the effects of mandated profit-sharing on firms and their employees. The cost of mandated profit-sharing for firms is evident in the significant bunching at the 100-employee threshold observed prior to the reform, which completely disappears post-reform. Using a difference-in-differences strategy, we find that at the firm level, mandated profit-sharing (i) increases the labor share by 1.8 percentage points, (ii) reduces the profit share by 1.4 percentage points, and (iii) has small to nonexistent effects on investment and productivity. At the employee level, mandated profit-sharing increases lower-skilled workers’ total compensation and leaves high-skilled workers’ total compensation unchanged. Overall, mandated profit-sharing redistributes excess profits to lower-skilled workers in the firm without generating significant distortions or productivity effects.

Abstract We test for stereotyping—the exaggeration of representative traits—in a high-stakes economic environment. Using surveys administered among undergraduates at the Ohio State University as well as large-scale nationally representative data, we measure how U.S. first-year students perceive the relationship between college majors and occupations. We show that students greatly overestimate the likelihood that majors lead to their representative jobs (e.g., counselor for psychology, journalist for journalism). Using an implicit association test, we show that students associate majors with their representative careers and that these associations strongly predict belief biases, in line with a stereotyping mechanism. A simple equilibrium model of the labor market predicts that stereotyping reduces welfare by increasing misallocation, which we corroborate with correlational evidence on job/major mismatch. In a field experiment, we test a light-touch policy to reduce stereotyping and find significant effects on students’ intentions about what to study as well as the classes and majors they enroll in.

Abstract How does proximity to coworkers affect training and productivity? We study software engineers at a Fortune 500 firm from 2019 to 2024, leveraging two shocks to proximity: the office closures in 2020 and the subsequent return-to-office mandates in 2022 and 2023. In both cases, co-located teams experienced bigger changes in proximity than distributed ones, facilitating difference-in-differences designs. We find that sitting near teammates increases coding feedback by 18.3% and improves code quality. Gains are concentrated among less-tenured and younger employees, who are building human capital. However, there is a trade-off: experienced engineers write less code when sitting near teammates. In national U.S. data, we find evidence that the rise of remote work has had scarring effects on young college graduates. In remotable jobs, young graduates’ unemployment rate increased relative to older graduates’ post-pandemic (2022–2024) compared to pre-pandemic (2017–2019), a pattern we do not observe in non-remotable jobs.

Abstract Theory predicts that outsourcing public services to the private sector can reduce costs and improve efficiency but can also induce cost-cutting and compromise quality. We assess the Brazilian Organizações Sociais de Saude model (OSS), which outsources management of public hospital services to the private sector while the state remains the residual claimant. We show that this enhances hospital production and operational efficiency without adverse effects on hospital quality and equity. Increased inpatient production addresses previously unmet demand, expanding local access to hospital care and reducing population mortality. Performance gains arise from improved operational efficiency achieved through increased hospital management capacity. This facilitates staffing adjustments, favoring higher-skilled personnel, dismissing lower-productivity staff, and adopting flexible, performance-tied employment contracts. Effects are larger among private organizations with more management experience, underscoring returns to managerial capacity. Our findings show that incentive-ownership structures can address the quantity-quality trade-off in public service delivery, even when contracts are incomplete and quality is hard to measure.

Abstract We study rainmaking as an instrumental religious belief. We present a model in which a religious leader tries to persuade people to believe. Praying for rain can persuade only where the hazard of rainfall during a dry spell is increasing over time, so that prayer is most likely to succeed when people most want rain. We present evidence from prayers for rain in Murcia, Spain, where the hazard rate is increasing, that the church’s prayers for rain predict rainfall over two centuries. To generalize this finding, we gather an original data set of whether ethnic groups around the world traditionally prayed for rain. We find that ethnic groups facing an increasing rainfall hazard are 47% more likely to pray for rain, consistent with our model’s prediction that societies are more likely to pray for rain where prayer is persuasive.

Abstract This article examines how the American Medical Association (AMA) helped shape the development of the U.S. health insurance system in the critical period after World War II. Working with the political public relations firm Campaigns, Inc., the AMA launched a nationwide campaign to weaken support for national health insurance by framing it as “socialized medicine,” while simultaneously enrolling people in private health insurance plans to shift demand away from a public alternative. Drawing on newly assembled archival data, we find that greater exposure to the campaign explains about 20% of the rise in private health insurance enrollment and a comparable decline in public support for a national program. The campaign also appears to have influenced policy making through coordinated messaging, resolutions passed by civic organizations, congressional rhetoric, and political donations. These findings suggest that the rise of private health insurance in the United States was not solely due to macroeconomic forces or collective bargaining; rather, it was also enabled by a strategic, interest group–financed effort to shape citizen views and influence policy.