Knowledge that Transforms

This paper studies how municipal governments jointly manage spending, credit market borrowing, and a public employee pension system. I model governments as levered investors who must meet non-defaultable pension obligations and may value government spending more than citizens. I quantify the model using data on California cities, including a new record of fiscal emergencies, tax increases required to maintain essential city services. After the financial crisis depleted pension funds, cities engaged in excessive risk-taking: the fiscal emergency option encouraged gambling for resurrection that kept cities vulnerable to shocks well into the recovery. To correct this problem, a savings requirement works better than a restriction on risk-taking or a pension funding requirement. The policy experiments emphasize that effective policies need to target the combined pension and bond finances, as policies that only target one, such as a pension funding requirement, are undermined by endogenous changes to the other.

We experimentally study decentralized one-to-one matching markets with transfers. We vary the information available to participants, complete or incomplete, and the surplus structure, supermodular or submodular. Several insights emerge. First, while markets often culminate in efficient matchings, stability is more elusive, reflecting the difficulty of arranging attendant transfers. Second, incomplete information and submodularity present hurdles to efficiency and especially stability; their combination drastically diminishes stability's likelihood. Third, matchings form ``from the top down'' in complete-information supermodular markets, but exhibit many more and less-obviously ordered offers otherwise. Last, participants' market positions matter far more than their dynamic bargaining styles for outcomes.

We show that the emergence of new economic opportunities that draw women away from their traditional domestic roles has significantly influenced the adoption of religious veiling. We measure the prevalence of veiling among young women across Indonesia's districts for more than two decades by hand-coding around a quarter million photographs attached to Indonesia's public high school registers. To establish causality, we exploit exogenous variation generated by international demand for Indonesia's products, interacted with the gender and sectoral composition of local industries. Districts exposed to stronger positive economic shocks---and thus greater economic opportunities for women---exhibit higher rates of veiling adoption. Our findings suggest that veiling facilitates young women's participation in formal labor markets while safeguarding their personal and social image in society.

We estimate the impact of public pension incentives on labor supply far from the normal retirement age by exploiting Poland's switch from a Defined Benefit to a Notional Defined Contribution (NDC) scheme. This reform created a sharp cohort-based discontinuity in the link between current pension contributions and future benefits. Using this discontinuity and the universe of taxpayers, we estimate an employment elasticity with respect to the net return to work of 0.51 for men at ages 51-54. We estimate a lifecycle model to match these responses and discuss the broader implications of the reform. The shift to NDC reallocates work incentives over the lifecycle, strengthening incentives at younger ages, when labor supply is relatively inelastic, and weakening them at older ages, when labor supply is more elastic. This reallocation of work incentives tends to reduce aggregate lifecycle labor supply, which highlights the advantage of targeting pension incentives towards ages at which labor supply is most responsive.

We study opinion dynamics in a social network consisting of two groups. Agents update their opinions by conforming to members of their own group while rejecting the views of the opposing group (affective polarization), and by listening to a media outlet that may provide biased information. We characterize the long-run opinions and identify when affective polarization and media bias lead to ideological polarization, persistent disagreement, or failures of learning. We also derive when information interventions or censorship improve the accuracy of average opinions and reduce disagreement, and when they backfire: better information helps only under specific media bias configurations and when directed to the agents we identify as most effective at propagating it through the network.

Consider a setting where N players, partitioned into K observable types, form a directed network. Agents’ preferences over the form of the network consist of an arbitrary network benefit function (e.g., agents may have preferences over their network centrality) and a private, or dyadic, component which is additively separable in own links. This latter component allows for unobserved heterogeneity in the costs of sending and receiving links across agents (respectively out- and in- degree heterogeneity) as well as homophily/heterophily across the K types of agents. In contrast, the network benefit function allows agents’ preferences over links to vary with the presence or absence of links elsewhere in the network (and hence with the link formation behavior of their peers). In the null model, which excludes the network benefit function, links form independently across dyads in the manner described by Charbonneau (2017) among others. Under the alternative, there is interdependence across linking decisions (i.e., strategic interaction). We show how to test the null with power optimized in specific directions. These alternative directions include many common models of strategic network formation (e.g., “connections” models, “structural hole” models etc.). Our random utility specification induces an exponential family structure under the null which we exploit to construct a similar test which exactly controls size (despite the the null being a composite one with many nuisance parameters). We further show how to construct locally best tests for specific alternatives without making any assumptions about equilibrium selection. To make our tests feasible, we introduce a new MCMC algorithm for simulating the null distributions of our test statistics.

We study monopolistic certification in markets where sellers possess partial private information about product quality. A certifier can provide information through two channels: screening sellers’ private information (soft information) and acquiring new quality data (hard information). We prove that any certification menu achieving less than maximal screening is Pareto dominated by one with full screening. Among Pareto-efficient menus, the certifier’s profit-maximising menu provides maximal soft information while restricting hard information provision. The two channels diverge because screening creates value the certifier can fully capture, whereas hard information amplifies costly information rents. Using power value functions, we derive comparative statics showing that information restrictions target low-quality sellers when information value is moderate, but high-quality sellers receive perfect quality revelation when information value is high.

A principal (such as a centrist political party) can partially influence the allocation of power between two competing parties. The principal is closer to one party, the ``Friend'', than to the other, the ``Enemy''. The principal's optimal contract initially seeks to exclude the Enemy. However, once the Enemy gains power, the principal embraces him in exchange for policy moderation. Moderation also disciplines the Friend, inducing him to move closer to the principal's preferred policy. Principals close to the Friend fully embrace the Enemy; more centrist principals divide their support. Commitment benefits the principal only if she is close to the Friend and parties value power little.

We examine the welfare-based opportunity cost of foreign exchange (FX) intervention when both covered interest rate parity (CIP) and uncovered interest rate parity (UIP) deviations are present. We consider a small open economy that receives international capital flows through constrained international financial intermediaries. Deviations from CIP come from limited arbitrage or through a convenience yield, while UIP deviations are also affected by global risk. We show that the sign of CIP and UIP deviations may differ for safe haven countries. We find that FX reserves may provide a net benefit, rather than a cost, when international intermediaries value the safe-haven properties of a currency more than domestic households. We show that this has been the case for the Swiss franc and the Japanese Yen. We examine the optimal policy of a constrained central bank planner in this context.

This paper studies a multi-product monopolist facing a privately informed consumer with additive and type-increasing valuations. Separate monopoly pricing is robustly optimal with respect to the type distribution if and only if the marginal rate of substitution between each pair of goods is monotone. This result is obtained by extending the conventional Myersonian approach.