Knowledge that Transforms

We study price competition and entry of platforms in multi-sided markets. Utilizing the simplicity of the equilibrium pricing formula in our setting with heterogeneity of customers’ membership benefits, we demonstrate that in the presence of externalities, the standard effects of competition can be reversed: as platform competition increases, prices, and platform profits can go up and consumer surplus can go down. We identify economic forces that jointly determine the social inefficiency of the free-entry equilibrium and provide conditions under which free entry is socially excessive as well as an example in which free entry is socially insufficient.

This article explores the consequences of extremely low real interest rates in a world with integrated but heterogeneous capital markets, nominal rigidities, and an effective lower bound [a zero lower bound (ZLB) for simplicity]. We establish four main results: (1) At the ZLB, creditor countries export their recession abroad, which we illustrate with a new Metzler diagram in quantities; (2) Beggar-thy-neighbour currency and trade wars provide stimulus to the undertaking country at the expense of other countries; (3) (Safe) public debt issuances and increases in government spending anywhere are expansionary everywhere; and (4) When there is a scarcity of safe assets, net issuers of these assets import the recession from abroad.

We develop a search model of informal labour markets with realistic labour regulations, including minimum wage, and heterogeneous workers and firms. Smaller firms and lower wages in the informal sector emerge endogenously as firms and workers decide whether to comply with regulations. Because skilled and unskilled workers are imperfect substitutes in production, the model uniquely captures the informality consequences of shocks that affect returns to skill, such as rising educational levels. The model also reproduces empirical patterns incompatible with other frameworks: the presence of skilled and unskilled workers in the formal and informal sectors, the rising share of skilled workers by firm size, and formal and firm-size wage premiums that vary by skill level. We estimate the model using 2003 data from Brazil and show that it successfully predicts labour market changes observed between 2003 and 2012. Under a range of different assumptions, changes in workforce composition appear as the main drivers of the reduction in informality over this period. Policy simulations using the estimated model suggest that progressive payroll taxes are a cost-effective way to reduce informality.

We formalize the idea that house price changes may drive rational waves of optimism and pessimism in the economy. In our model, a house price increase caused by aggregate disturbances may be misinterpreted as a sign of higher local permanent income, leading households to demand more consumption and housing. Higher demand reinforces the initial price increase in an amplification loop that drives comovement in output, labour, residential investment, land prices, and house prices even in response to aggregate supply shocks. The qualitative implications of our otherwise frictionless model are consistent with observed business cycles and it can explain the economic impact of apparently autonomous changes in sentiment without resorting to non-fundamental shocks or nominal rigidity.

Asymmetric information in the marriage market may cause adverse selection and delay marriage if partner quality is revealed over time. Sexual safety is an important but hidden partner attribute, especially in areas where HIV is endemic. A model of positive assortative matching with both observable (attractiveness) and hidden (sexual safety) attributes predicts that removing the asymmetric information about sexual safety accelerates marriage and pregnancy for safe respondents, and more so if they are also attractive. Frequent HIV testing may enable safe people to signal and screen. Consistent with these predictions, we show that a high-frequency, "opt-out" HIV testing intervention changed beliefs about partner's safety and accelerated marriage and pregnancy, increasing the probabilities of marriage and pregnancy by 26 and 27 percent for baseline-unmarried women over 28 months. Estimates are larger for safe and attractive respondents. Conversely, a single-test intervention lacks these effects, consistent with other HIV testing evaluations in the literature. Our findings suggest that an endogenous response to HIV risk may explain why the HIV/AIDS epidemic has coincided with systematic marriage and pregnancy delays.

This article studies the introduction of an EU-wide emission standard on the automobile market. Using panel data from 1998 to 2011, I find that firms decreased emission ratings by 14%. Firms use technology adoption and gaming of emission tests to decrease emissions, rather than shifting the sales mix or downsizing. I find that the standard missed its emission target, and from estimating a structural model, I find that the standard was not welfare improving. The political environment in the EU shaped the design and weak enforcement and resulted in firms’ choices for abatement by technology adoption and gaming.

In this article, we ask how bankruptcy law affects the financial decisions of corporations and its implications for firm dynamics. According to current U.S. law, firms have two bankruptcy options: Chapter 7 liquidation and Chapter 11 reorganization. Using Compustat data, we first document capital structure and investment decisions of non-bankrupt, Chapter 11, and Chapter 7 firms. Using those data moments, we then estimate parameters of a general equilibrium firm dynamics model with endogenous entry and exit to include both bankruptcy options. Finally, we evaluate a bankruptcy policy change similar to one recommended by the American Bankruptcy Institute that amounts to a “fresh start” for bankrupt firms. We find that changes to the law can have sizable consequences for borrowing costs and capital structure which via selection affects productivity, as well as long run welfare.

This article documents that parents accumulate savings to insure their children against income risk. I refer to this behaviour as dynastic precautionary saving. Using a sample of matched parent–child pairs from the Panel Study of Income Dynamics, I test for dynastic precautionary savings by examining the response of parental consumption to the child’s permanent income uncertainty. I exploit variation in permanent income risk across age and industry–occupation groups to confirm that, all else equal, higher uncertainty in the child’s permanent income depresses parental consumption, indicating a precautionary saving motive across generations.

We characterize when a stable and strategy-proof mechanism is guaranteed to exist in the setting of many-to-one matching with contracts. We introduce three novel conditions—observable substitutability, observable size monotonicity, and non-manipulability via contractual terms—and show that when these conditions are satisfied, the cumulative offer mechanism is the unique mechanism that is stable and strategy-proof (for workers). Moreover, we show that our three conditions are, in a sense, necessary: if the choice function of some firm fails any of our three conditions, we can construct unit-demand choice functions for the other firms such that no stable and strategy-proof mechanism exists. Thus, our results provide a rationale for the ubiquity of cumulative offer mechanisms in practice.

Does the pattern of social connections between individuals matter for macroeconomic outcomes? If so, where do differences in these patterns come from and how large are their effects? Using network analysis tools, we explore how different social network structures affect technology diffusion and thereby a country’s rate of growth. The correlation between high-diffusion networks and income is strongly positive. But when we use a model to isolate the effect of a change in social networks on growth, the effect can be positive, negative, or zero. The reason is that networks diffuse both ideas and disease. Low-diffusion networks have evolved in countries where disease is prevalent because limited connectivity protects residents from epidemics. But a low-diffusion network in a low-disease environment compromises the diffusion of good ideas. In general, social networks have evolved to fit their economic and epidemiological environment. Trying to change networks in one country to mimic those in a higher-income country may well be counterproductive.