The Great Recession marks the worst downturn since those of the early 1980s. A large literature considers how the public safety net responded to this shock. We instead consider the responsiveness of one dimension of the private safety net. Families can react to negative shocks by moving in with relatives or downsizing. We use across-state over-time variation to estimate the effects of cycles on living arrangements, paying particular attention to young adults. We find living arrangements are cyclical, but effects are small. Surprisingly given the press attention, we find no evidence that things are different in the Great Recession.
We consider vertical contracting arrangements between a manufacturer and a retailing network when retailers have private information and the organization is run through bilateral contracts. We highlight a new form of informational opportunism arising when the manufacturer manipulates information learned separately in each relationship. We characterize the set of allocations robust to such opportunism by means of simple ex post incentive compatibility constraints. Those constraints limit the manufacturer's ability to use yardstick competition among retailers. They simplify contracts and restore a rent/efficiency trade-off even with correlated information. We show that sell-out contracts are optimal under a wide range of circumstances.
The experience of first Japan and now Europe and the USA suggests that Hansen's concept of secular stagnation is highly relevant. Recovery has been anemic and follows a generation of financially unsustainable and often lackluster growth. Investment demand has declined while the supply of saving has increased, leaving the economy vulnerable to liquidity traps. Although some US indicators have improved, forward real rates have declined sharply, European prospects remain muddled, and the zero-bound will likely constrain again during the next recession. Infrastructure and private investment are the best ways to both minimize the risk of secular stagnation and raise demand.
This paper tests whether the 2003 dividend tax cut—one of the largest reforms ever to a US capital tax rate—stimulated corporate investment and increased labor earnings, using a quasi-experimental design and US corporate tax returns from years 1996–2008. I estimate that the tax cut caused zero change in corporate investment and employee compensation. Economically, the statistical precision challenges leading estimates of the cost-of-capital elasticity of investment, or undermines models in which dividend tax reforms affect the cost of capital. Either way, it may be difficult to implement an alternative dividend tax cut that has substantially larger near-term effects.
In this paper I compare the relationship between first-birth timing and post-birth labor supply for high school and college graduate mothers. Given that pre-birth wages are increasing in fertility delay, the rising opportunity cost of time would suggest that among both groups, later mothers work more. Yet I only find this pattern for high school graduates. For college graduates, I instead find that there is a strong U-shaped pattern between hours worked within motherhood, and the career timing of first birth.
A quantitative investigation of financial intermediation in the United States over the past 130 years yields the following results: (i) the finance industry's share of gross domestic product (GDP) is high in the 1920s, low in the 1960s, and high again after 1980; (ii) most of these variations can be explained by corresponding changes in the quantity of intermediated assets (equity, household and corporate debt, liquidity); (iii) intermediation has constant returns to scale and an annual cost of 1.5–2 percent of intermediated assets; (iv) secular changes in the characteristics of firms and households are quantitatively important.
Does credit availability exacerbate asset price inflation? Are there long-run consequences? During the farm land price boom and bust before the Great Depression, we find that credit availability directly inflated land prices. Credit also amplified the relationship between positive fundamentals and land prices, leading to greater indebtedness. When fundamentals soured, areas with higher credit availability suffered a greater fall in land prices and had more bank failures. Land prices and credit availability also remained disproportionately low for decades in these areas, suggesting that leverage might render temporary credit-induced booms and busts persistent. We draw lessons for regulatory policy.
This paper shows how in Medicare Part D insurers' gaming of the subsidy paid to low-income enrollees distorts premiums and raises the program cost. Using plan-level data from the first five years of the program, I find multiple instances of pricing strategy distortions for the largest insurers. Instrumental variable estimates indicate that the changes in a concentration index measuring the manipulability of the subsidy can explain a large share of the premium growth observed between 2006 and 2011. Removing this distortion could reduce the cost of the program without worsening consumer welfare.
During the financial crisis, life insurers sold long-term policies at deep discounts relative to actuarial value. The average markup was as low as −19 percent for annuities and −57 percent for life insurance. This extraordinary pricing behavior was due to financial and product market frictions, interacting with statutory reserve regulation that allowed life insurers to record far less than a dollar of reserve per dollar of future insurance liability. We identify the shadow cost of capital through exogenous variation in required reserves across different types of policies. The shadow cost was $0.96 per dollar of statutory capital for the average company in November 2008.
We provide a result on prospect theory decision makers who are naïve about the time inconsistency induced by probability weighting. If a market offers a sufficiently rich set of investment strategies, investors postpone their trading decisions indefinitely due to a strong preference for skewness. We conclude that probability weighting in combination with naïveté leads to unrealistic predictions for a wide range of dynamic setups.