Knowledge that Transforms

We investigate the bank lending channel of negative nominal policy rates from an empirical and theoretical perspective. For the empirical results, we rely on Swedish data, including daily bank-level lending rates. We find that retail household deposit rates are subject to a lower bound (DLB). Empirically, once the DLB is met, the pass-through to mortgage lending rates and credit volumes is substantially lower and bank equity values decline in response to further policy rate cuts. We construct a banking sector model and use our estimate of the pass-through of negative policy rates to lending rates as an identified moment to parameterize the model and assess the impact of negative policy rates in general equilibrium. Using the theoretical framework, we derive a sufficient statistic for when negative policy rates are expansionary and when they are not.

We present a model of online content sharing where agents sequentially observe an article and decide whether to share it with others. This content may or may not contain misinformation. Each agent starts with an ideological bias and gains utility from positive social media interactions but does not want to be called out for propagating misinformation. We characterize the (Bayesian–Nash) equilibria of this social media game and establish that it exhibits strategic complementarities. Under this framework, we study how a platform interested in maximizing engagement would design its algorithm. Our main result establishes that when the relevant articles have low-reliability and are thus likely to contain misinformation, the engagement-maximizing algorithm takes the form of a “filter bubble”—creating an echo chamber of like-minded users. Moreover, filter bubbles become more likely when there is greater polarization in society and content is more divisive. Finally, we discuss various regulatory solutions to such platform-manufactured misinformation.

We develop an economic model of transitions in and out of employment. Heterogeneous workers switch employment status when the net benefit from working, a Brownian motion with drift, hits optimally chosen barriers. This implies that the duration of jobless spells for each worker has an inverse Gaussian distribution. We allow for arbitrary heterogeneity across workers and prove that the distribution of inverse Gaussian distributions is partially identified from the duration of two non-employment spells for each worker. We estimate the model using Austrian social security data and find that dynamic selection is a critical source of duration dependence.

We develop a new approach for estimating average treatment effects in observational studies with unobserved group-level heterogeneity. We consider a general model with group-level unconfoundedness and provide conditions under which aggregate balancing statistics—group-level averages of functions of treatments and covariates—are sufficient to eliminate differences between groups. Building on these results, we re-interpret commonly used linear fixed-effect regression estimators by writing them in the Mundlak form as linear regression estimators without fixed effects but including group averages. We use this representation to develop Generalized Mundlak Estimators that capture group differences through group averages of (functions of) the unit-level variables and adjust for these group differences in flexible and robust ways in the spirit of the modern causal literature.

In disseminating information, policymakers face a choice between broadcasting to everyone and informing a small number of “seeds” who then spread the message. While broadcasting maximises the initial reach of messages, we offer theoretical and experimental evidence that it need not be the best strategy. In a field experiment during the 2016 Indian demonetisation, we delivered policy information, varying three dimensions of the delivery method at the village level: initial reach (broadcasting versus seeding); whether or not we induced common knowledge of who was initially informed; and number of facts delivered. We measured three outcomes: the volume of conversations about demonetisation, knowledge of demonetisation rules, and choice quality in a strongly incentivised policy-dependent decision. On all three outcomes, under common knowledge, seeding dominates broadcasting; moreover, adding common knowledge makes seeding more effective but broadcasting less so. We interpret our results via a model of image concerns deterring engagement in social learning, and we support this interpretation with evidence on differential behaviour across ability categories.

In many environments, including credit and online markets, records about participants are collected, published, and erased after some time. We study the effects of erasing past records in a dynamic market where the quality of sellers follows a Markov process, and buyers leave feedback about sellers to an information intermediary. When the average quality of sellers is low, unlimited records lead to a market breakdown in the long run. We consider the information design problem and characterize information policies that can sustain trade and that maximize social welfare. These policies hide some information from the market in order to foster socially desirable experimentation. We show that these outcomes can be implemented by appropriately deleting past records. Crucially, positive and negative records play opposite roles with different intensities and must have different lengths: negative records must be deleted sufficiently late, and positive ones sufficiently early.

Using exhaustive administrative data on Italian social security records, we construct measures of local labour market thickness for executives that vary by industry and location. We show that firm performance is strongly and persistently affected by executive death, but only in thin local labour markets. The new executives hired after death events in thin local labour markets have lower education levels and are more likely to be replaced. These predictions are consistent with a simple model of executive search in which market thickness determines the arrival rate of applications for executive positions.

What are the unequal effects of changes in consumer prices on the cost of living? In the context of changes in import prices (driven by, e.g. changes in trade costs or exchange rates), most analyses focus on variation across households in initial expenditure shares on imported goods. However, the unequal welfare effects of non-marginal foreign price changes also depend on differences in how consumers substitute between imported and domestic goods, on which there is scant evidence. Using data from Switzerland surrounding the 2015 appreciation of the Swiss franc, we provide evidence that lower-income households have higher price elasticities. We quantify the contribution of heterogeneous elasticities for the unequal welfare effects of observed price changes between 2014 and 2015 and for counterfactual shocks to the mean and dispersion of import price changes.

It is often desired to rank different populations according to the value of some feature of each population. For example, it may be desired to rank neighbourhoods according to some measure of intergenerational mobility or countries according to some measure of academic achievement. These rankings are invariably computed using estimates rather than the true values of these features. As a result, there may be considerable uncertainty concerning the rank of each population. In this paper, we consider the problem of accounting for such uncertainty by constructing confidence sets for the rank of each population. We consider both the problem of constructing marginal confidence sets for the rank of a particular population as well as simultaneous confidence sets for the ranks of all populations. We show how to construct such confidence sets under weak assumptions. An important feature of all of our constructions is that they remain computationally feasible even when the number of populations is very large. We apply our theoretical results to re-examine the rankings of both neighbourhoods in the U.S. in terms of intergenerational mobility and developed countries in terms of academic achievement. The conclusions about which countries do best and worst at reading, math, and science are fairly robust to accounting for uncertainty. The confidence sets for the ranking of the fifty most populous commuting zones by measures of mobility are also found to be small. These confidence sets, however, become much less informative if one includes all commuting zones, if one considers neighbourhoods at a more granular level (counties, census tracts), or if one uses movers across areas to address concerns about selection.

This article studies the effects of higher bank capital requirements. Using new firm-lender matched credit data from South Korea, we document that Basel III coincided with a 25% decline in credit from regulated banks, and an increase of similar magnitude from non-bank (shadow) lenders. We use our data to estimate the effect of capital requirements on bank credit, and the spillover effect of the reform on non-bank lending. We then build a general equilibrium model with heterogeneous banks and firms that replicates these micro estimates. We find that Basel III can account for most of the observed decrease in regulated bank lending and about three quarters of the increase in shadow lending. The latter is driven exclusively by general equilibrium effects of the reform.