Knowledge that Transforms

We construct mechanisms that can robustly implement any desired social choice function when (1) agents may incur a cost to learn the state of the world, (2) with small probability, agents’ preferences can be arbitrarily different from some baseline known to the mechanism designer, and (3) the mechanism designer does not know agents’ beliefs and higher-order beliefs about one another’s preferences. The mechanisms we propose have a natural interpretation and do not require the mechanism designer to be able to verify the state ex post. We also establish impossibility results for stronger notions of robust implementation.

In the U.S., market hours worked are approximately flat across the wealth distribution. Accounting for this phenomenon is a standing challenge for standard heterogeneous-agent macro models. In these models, wealthier households consume more and work fewer hours. We propose a theory that generates the cross-sectional wealth-hours relation as in the data. We quantify this theory in a heterogeneous-agent incomplete-markets model with three key features: a quality choice in consumption, non-homothetic preferences, and a multi-sector production structure. We show that the model produces consumption expenditure patterns consistent with the data and realistic “quality Engel curves”.

Criminal groups govern millions worldwide. Even in strong states, gangs resolve disputes and provide security. Why do these duopolies of coercion emerge? Often, gangs fill vacuums of official power, suggesting that increasing state presence should crowd out criminal governance. We show, however, that state and gang rule can be strategic complements. In particular, gangs could minimize seizures and arrests by keeping neighbourhoods orderly and loyal. If true, increasing state presence could increase incentives for gang rule. In Medellín, Colombia, criminal leaders told us they rule to protect drug rents from police. We test gang responses to state presence using a geographic discontinuity. Internal border changes in 1987 assigned blocks to be closer or further from state security for three decades. Gangs exogenously closer to state presence developed more governance over time. They primarily did so in neighbourhoods with the greatest potential drug rents. This suggests new strategies for countering criminal governance.

Public health systems are dominant in much of the world but often face fiscal constraints that lead to rationing of care. As a result, private sector healthcare providers could in theory beneficially supplement public systems, but evaluating the benefits of private alternatives has been challenging. We evaluate a private supplement to the free public health system for one of the world’s deadliest health problems, diabetes. We estimate enormous impacts of the private supplement, increasing the share of those treated who are under control by 69%. This effect arises through both improved treatment compliance and health behavior. We find diabetes complications fall in the short run, and that the net costs of this intervention are one-third of the gross costs. The returns to private care do not appear to reflect more productive delivery but rather more attachment to medical care, offering lessons for improving the public system.

Can the judiciary help root out government corruption? This article exploits the random assignment of court cases to justices who exhibit varying degrees of strictness to examine how convicting corrupt officials affects local government outcomes in the Philippines. I document that convictions improve the management of local public finances and reduce associated corruption. An exploration of mechanisms suggests that legal deterrence effects contribute to these findings. The results further indicate that convictions are effective at stifling corruption among bureaucrats, but not politicians. Consistent with this heterogeneity, convictions reduce electoral competition and consequently weaken accountability for incumbent politicians.

We show that in a canonical model with heterogeneous entrepreneurs, financial frictions, and an imperfectly elastic supply of capital, a fall in the interest rate has an ambiguous effect on aggregate economic activity. In partial equilibrium, a lower interest rate raises aggregate investment both by relaxing financial constraints and by prompting relatively less productive entrepreneurs to invest. In general equilibrium, however, this higher demand for capital raises its price and crowds out investment by more productive entrepreneurs. When this reallocation is strong enough, a fall in the interest rate reduces aggregate output. A numerical exploration of the model suggests that this reallocation effect is quantitatively significant and—in response to persistent changes in the interest rate—stronger than the traditional balance-sheet channel. We provide evidence of the reallocation effect using U.S. firm-level data.

In most national elections, voters face a key choice between continuity and change. Electoral turnovers occur when the incumbent candidate or party fails to win reelection. To understand how turnovers affect national outcomes, we study all presidential and parliamentary elections held globally between 1946 and 2018. We document the prevalence of turnovers over time and estimate their effects on economic performance, human development, and the quality of democracy. Using a close-elections regression discontinuity design across countries, we show that turnovers improve several measures of country performance. To explain these positive effects, we explore how electoral turnovers affect leader characteristics, shape policy decisions, reduce perceived corruption, and foster accountability.

How should the government respond to automation? We study this question in a heterogeneous agent model that takes worker displacement seriously. We recognize that displaced workers face two frictions in practice: reallocation is slow and borrowing is limited. We analyze a second best problem where the government can tax automation but lacks redistributive tools to fully alleviate borrowing frictions. The equilibrium is (constrained) inefficient and automation is excessive. Firms do not internalize that automation depresses the income of automated workers early on during the transition, precisely when they become borrowing constrained. The government finds it optimal to slow down automation on efficiency grounds, even when it does not value equity. Quantitatively, the optimal speed of automation is considerably lower than at the laissez-faire. The optimal policy improves efficiency and delivers meaningful welfare gains.

We present a novel algorithm called Dynamic Perturbation for solving large-scale macroeconomic models. Our approach involves computing first-order Taylor expansions of the policy functions along the entire equilibrium path. This method applies to a wide range of models and offers significantly higher accuracy than traditional perturbation approaches. Remarkably, even when utilising first-order approximations, our method can effectively handle models with strong nonlinearities and occasionally binding constraints, such as the zero lower bound.

In theory, market-based regulatory instruments correct market failures at least cost. However, evidence on their efficacy remains scarce. Using administrative data, we estimate that, on average, the European Union Emissions Trading System (EU ETS)—the world’s first and largest market-based climate policy—induced regulated manufacturing firms to reduce carbon dioxide emissions by 14–16% with no detectable contractions in economic activity. We find no evidence of outsourcing to unregulated firms or markets; instead, firms made targeted investments, reducing the emissions intensity of production. These results indicate that the EU ETS induced global emissions reductions, a necessary and sufficient condition for mitigating climate change. We show that the absence of any negative economic effects can be rationalized in a model where pricing the externality induces firms to make fixed-cost investments in energy-saving capital that reduce marginal variable costs.