Knowledge that Transforms

How do localized conflicts disrupt supply chains and prompt firms to reorganize them? How do these forces affect firm-level and aggregate economic activity? Using firm-to-firm Ukrainian railway-shipment data before and during the 2014 Russia–Ukraine conflict, we document that firms with prior supplier and buyer exposure to the conflict areas substantially decreased their output. Simultaneously, firms reorganized their production linkages away from partners directly or indirectly exposed to the conflict shock. We build a general-equilibrium production-network model with endogeneous link formation, and we show that our model’s sufficient statistics accurately explains the observed relative decline in firm output once we account for network reorganization. Calibrating our model to the Ukrainian economy, we find that the localized conflict decreased aggregate output in nonconflict areas by 5.5%. This effect increases to 8.4% if we abstract from endogeneous link formation, suggesting that production-network reorganization partially mitigates the detrimental, far-reaching aggregate economic costs of conflicts.

This paper explores how state and religious providers of education compete during the nation building process. Using novel administrative data, we characterize the evolution of Indonesia’s Islamic education system and religious school choice after the introduction of mass public primary schooling in the 1970s. Funded through informal taxation, Islamic schools competed with the state by entering in the same markets. While primary enrollment shifted towards state schools, religious education increased overall as Islamic schools absorbed growing demand for secondary education. In the short run, electoral support for the secular regime weakened in markets with greater public school construction. Over the long run, Islamic schools established at this juncture are more differentiated in terms of religious curriculum, and cohorts exposed to mass public schooling as children are more invested in religion than in the national identity. Our findings offer a new perspective on the political economy of education reforms and the emergence of parallel systems of public goods provision.

We study the welfare implications of the rise of common ownership in the U.S. from 1995 to 2021. We build a general equilibrium model with a hedonic demand system in which firms compete in a network game of oligopoly. Firms are connected through two large networks: the first reflects ownership overlap, the second product market rivalry. In our model, common ownership of competing firms induces unilateral incentives to soften competition and the magnitude of the common ownership effect depends on how much the two networks overlap. We estimate our model for the universe of U.S. public corporations using a combination of firm financials, investor holdings, and text-based product similarity data. We perform counterfactual calculations to evaluate how the efficiency and the distributional impact of common ownership have evolved over time. Under the assumption that firms maximise a share-weighted average of their shareholders’ income, we find that the welfare cost of common ownership, measured as the ratio of deadweight loss to total surplus, has increased about ninefold between 1995 and 2021. Under alternative assumptions about corporate governance, the deadweight loss of common ownership ranges between 3.5 and 13.2% of total surplus in 2021. The rise of common ownership has also led to a significant reallocation of surplus from consumers to producers.

This paper shows that the growing disparities between big and small cities in the U.S. since 1980 can be explained by firms endogenously responding to a skill-biased technology shock. With the introduction of a new skill-biased technology that is high fixed cost but low marginal cost, firms endogenously adopt more in big cities, cities that offer abundant amenities for high-skilled workers, and cities that are more productive in using high-skilled labour. In cities with more adoption, small and unproductive firms are more likely to exit the market, increasing the equilibrium rate of turnover or business dynamism—a selection effect similar to Melitz (2003). Differences in technology adoption and selection account for three key components of the growing regional disparities, known as the Great Divergence: (1) big cities saw a larger increase in the relative wages and supply of skilled workers, (2) big cities saw a smaller decline in business dynamism, and (3) firms in big cities invest more intensively in information and communication technology.

We exploit information in patent applications to construct an instrumental variable for the identification of technology news shocks that relaxes all the identifying assumptions traditionally used in the literature. The instrument recovers news shocks that have no effect on aggregate productivity in the short-run, but are a significant driver of its trend component. The shock prompts a broad-based expansion in anticipation of the future increase in total factor productivity (TFP), with output, consumption, and investment all rising well before any material increase in TFP is recorded. Despite the positive conditional comovements, the shock only accounts for a modest share of fluctuations of macroeconomic aggregates at business cycle frequencies. Financial markets price-in news shocks on impact, while most of the macro aggregates respond with some delay.

This paper studies the effects of the court-ordered removal of children from home on health, crime, and education. To isolate causal effects, I exploit quasi-random variation in judge assignment together with across-judge variation in the tendency to favour removal in an instrumental variable design. Using a novel data set (N=26,579) based on Swedish court documents that I transcribe and link with detailed register data, I find that court-ordered out-of-home placement has large adverse effects on the mortality of the marginal child. These effects are primarily driven by suicides that occur while the removed child is still placed in out-of-home care. Removal also causes an increase in hospitalizations for mental illness and non-narcotic crimes. There is little evidence of adverse health effects for birth parents. I explore potential explanations for the detrimental effects on child health. Adverse care conditions and peer exposure appear to be important channels.

Non-family-based institutions for socializing young people may play a vital role in creating close-knit, inclusive communities. We study the potential for youth camps—integrating rituals, sports, and civics training—to strengthen intergroup cohesion. We randomly assigned Hindu and Muslim adolescent boys, from West Bengal, India, to 2-week camps or to a pure control arm. To isolate mechanisms, we cross-randomized collective rituals (such as singing the national anthem, wearing uniforms, chanting support during matches, and synchronous dancing) and the intensity of intergroup contact. We find that camps reduce ingroup bias, increase willingness to interact with outgroup members, and enhance psychological well-being. Campers continue to have twice as many outgroup friends than control participants 1 year after the camps ended. Meanwhile, additional camp elements have heterogeneous effects: rituals have more positive impacts for the Hindu majority than the Muslim minority, while higher intergroup contact backfires among Hindus but not Muslims. Our findings demonstrate that inclusive youth camps may be a powerful tool for bridging deep social divides. Yet, we also highlight the conceptual challenges in crafting optimal integrative camps that help all groups.

I quantitatively analyse the macroeconomic impacts of raising capital requirements in a model in which heterogeneous firms may choose either intermediated or direct finance. Heterogeneous banks compete with other banks and the bond market, fund loans with insured deposits and costly equity (subject to a minimum capital-to-asset ratio), and monitor borrowers. I find that tighter capital requirements reduce costly bank failures while having only small effects on key macroeconomic aggregates, and that raising capital requirements above current levels can be welfare-improving. Three main forces give rise to these results. First, even though banks cut loan supply for a given level of net worth under a tighter capital requirement, in equilibrium banks’ net worth rises to dampen this effect. Second, intense competition from the non-bank sector disciplines banks’ lending responses to tighter regulation. Third, substitution by corporate firms offsets much of the decline in debt financing associated with tighter bank loan supply. As a corollary, almost all of the modest costs associated with tighter capital requirements are concentrated within the bank-dependent non-corporate sector.

What characteristics of news generate over-or-underreaction? We study the asset-pricing consequences of diagnostic expectations, a model of belief formation based on the representativeness heuristic, in a setting where news events are drawn from categories with extreme distributions of fundamentals. Our model predicts greater overreaction to news belonging to categories with more extreme outliers, or tail events. We test our theory on a comprehensive database of corporate news that includes news from twenty-four different categories, including earnings announcements, product launches, mergers and acquisition, business expansions, and client-related news. We find theory-consistent heterogeneity in investor reaction to news, with more overreaction in the form of greater post-announcement return reversals and trading volume for news categories with more extreme distributions of fundamentals.

We study how incentive constraints can be relaxed by randomization in a repeated-game setting. Our study is motivated by the workings of a detected bidding cartel that adopted a protocol of keeping the winning bid secret from the designated losers when defection was a concern. Keeping the winning bid secret makes accurately undercutting the winning bid more difficult and makes defection less attractive as potential defectors risk not winning the auction even if they deviate. We formalize these ideas in the context of a repeated-game setting and show that a cartel can attain higher payoffs by having the pre-selected winner randomize its bid and keep it secret from other members. Calibration of the model to the bid data of the cartel suggests that randomization may increase firms’ profits by about 56%.