Knowledge that Transforms

We document dramatic changes in euro area interbank money markets during the financial and sovereign debt crises: unsecured borrowing declined across the euro area, while secured market haircuts on sovereign bonds increased, and bank borrowing from the European Central Bank rose in southern countries. We construct a quantitative general equilibrium model to assess the macroeconomic impact of these developments and the associated policy response. Our model features heterogeneous banks and sovereign bonds, secured and unsecured money markets, and a central bank. We compare a benchmark policy—the central bank providing collateralized lending to banks at haircuts lower than the market—with an alternative policy that maintains a constant central bank balance sheet. We show that the fall in output, investment, and capital would have been twice as high under the alternative policy.

A common challenge in estimating the impact of interventions (e.g. job training programmes, educational programmes) is that many outcomes of interest (e.g. lifetime earnings or other labour market outcomes) are observed with a long delay. In biomedical settings, this is often addressed by using short-term outcomes as so-called “surrogates” for the outcome of interest, e.g. tumour size as a surrogate for mortality in cancer studies. We build on this literature by combining multiple, possibly qualitatively distinct, short-term outcomes (e.g. short-run earnings and employment indicators) systematically into a “surrogate index”. Under the Prentice surrogacy assumption, which requires that the primary outcome is independent of the treatment conditional on the surrogates, we show that the average treatment effect on the surrogate index equals the treatment effect on the long-term outcome. We also relate the surrogacy assumption to a set of structural, causal assumptions. We then characterize the bias that arises from violations of each of the key assumptions, and we provide simple methods to validate these assumptions using additional observed outcomes. We apply our method to analyse the long-term impacts of a multi-site job training experiment in California. Rather than waiting a full 9 years to directly observe the long-term impact, we show that it is possible to use short-term (the first six quarters) outcomes as surrogates. Given the surrogacy assumption one could have estimated the programme’s long-term impacts on mean employment rates using the employment rates observed in the first six quarters, with a 35% reduction in standard errors relative to a simple difference in means estimator based on all 9 years of data.

I study racial disparities in the criminal justice system by analysing abnormal bunching in the distribution of crack-cocaine amounts used in federal sentencing. I compare cases sentenced before and after the Fair Sentencing Act, a 2010 law that changed the 10-year mandatory minimum threshold for crack-cocaine from 50 g to 280 g. First, I find that after 2010, there is a sharp increase in the fraction of cases sentenced at 280 g (the point that now triggers a 10-year mandatory minimum), and that this increase is disproportionately large for black and Hispanic offenders. I then explore several possible explanations for the observed racial disparities, including racial discrimination that occurs after entry into the criminal justice system. I analyse data from multiple stages in the criminal justice system and find that the increased bunching for minority offenders is driven by prosecutorial discretion, specifically as used by about 20–30% of prosecutors. Moreover, the fraction of cases at 280 g falls in 2013 when evidentiary standards become stricter. Finally, the racial disparity in the increase cannot be explained by differences in education, sex, age, criminal history, seized drug amount, or other elements of the crime, but it can be largely explained by a measure of state-level racial animus. These results shed light on the role of prosecutorial discretion and racial discrimination as causes of racial disparities in sentencing.

We build a quantitative spatial model in which some workers can substitute on-site effort with work done from home. Ability and propensity to telecommute vary by education and industry. We quantify our framework to match the distribution of jobs and residents across 4,502 U.S. locations. Then, we simulate permanent increases in the attractiveness and productivity of telework that lead to greater adoption of hybrid and fully remote work. To validate our model, we show that our results are positively correlated with local changes in residents, jobs, and housing costs since 2019. The rise of telework results in a rich non-monotonic pattern of reallocations of residents and jobs within and across cities. Workers who can telecommute experience welfare gains, and those who cannot suffer losses. Broader access to jobs reduces wage inequality across residential locations, and heralds a partial reversal in the spatial concentration of talent and spending power known as the “Great Divergence”.

In a data economy, transactions of goods and services generate data, which is stored, traded and depreciates. How are the economics of this economy different from traditional production economies? How do these differences matter for measurement of GDP, firm values, depreciation rates, welfare and externalities? We incorporate active experimentation and data as an intangible asset to devise a tractable recursive representation of the data economy. The model rationalizes why apps are often “free” and why even non-digital economic activity might be greater than GDP suggests. Calibrating the model using a combination of macroeconomic and financial moments suggests that the mis-measurement in U.S. GDP due to missing value of data has been as high as 6% in 2018.

This paper develops a theory of competitive equilibrium with indivisible goods based entirely on economic conditions on demand. The key idea is to analyze complementarity and substitutability between bundles of goods, rather than merely between goods themselves. This approach allows us to formulate sufficient and essentially necessary conditions for equilibrium existence—which unify settings with complements and settings with substitutes. Our analysis has implications for auction design.

We define the (physical) opportunity cost of a choice x as the alternative that would be chosen if x were not available, and the opportunity cost of any unchosen alternative as x itself. The agent has preferences over pairs consisting of alternatives and their opportunity costs. Because costs affect choice and vice-versa, choice results from an intrapersonal equilibrium rather than from simple maximisation. In spite of significant rationality assumptions, the resulting behaviour can be highly non-standard, allowing intransitive choices. Rational utility maximisation is ensured by an additional new consistency condition on preferences. However, we argue that the maximised utility cannot be straightforwardly interpreted as a welfare relevant “revealed preference”. A generalisation of our model accommodates additional departures from standard rationality in the form of menu effects.

Many auctions and procurement contests entail non-trivial bidding costs, which makes the bidders’ participation decisions endogenous to the auction design. We analyse the effect of different auction rules on potential bidders’ incentives to participate. We focus on first-price auctions with affiliated common values and a large pool of potential bidders. Our main interest is on auctions where the realized number of bidders is unknown at the bidding stage. In contrast to the standard case, both participation and bidding decisions are often non-monotonic in the symmetric equilibrium of our model. The expected revenue to the seller is often higher in the auction where the realized number of participating bidders is not disclosed.

We study the effect of diminishing search frictions in markets with adverse selection by presenting a model in which agents with private information can simultaneously contact multiple trading partners. We highlight a new trade-off: facilitating contacts reduces coordination frictions but also the ability to screen agents’ types. We find that, when agents can contact sufficiently many trading partners, fully separating equilibria obtain only if adverse selection is sufficiently severe. When this condition fails, equilibria feature partial pooling and multiple equilibria co-exist. We show that facilitating contacts can lead to a reduction in welfare. In the limit, as the number of contacts becomes large, some of the equilibria converge to the competitive outcomes of Akerlof, including Pareto-dominated ones; other pooling equilibria continue to feature frictional trade in the limit, where entry is inefficiently high. Our findings provide a basis to assess the effects of recent technological innovations that have made meetings easier.

In this article, we provide direct evidence on the behaviour of markups in the retail sector across space and time. Markups are measured using gross margins. We consider three levels of aggregation: the retail sector as a whole, the firm, and the product level. We find that: (1) markups are relatively stable over time and mildly procyclical; (2) there is a large regional dispersion in markups; (3) there is a positive cross-sectional correlation between local income and local markups; and (4) differences in markups across regions result from differences in the assortment of goods sold in different regions, not from deviations from uniform pricing. We propose a simple model consistent with these facts.