Knowledge that Transforms

Using a broad set of national industry trade shocks, I employ a novel approach to estimate agglomeration effects by exploiting within industry variation in indirect exposure to the other local industries’ (national) trade shocks across local labour markets. This variation stems from differences in local industry composition and allows to test for the existence of heterogeneous agglomeration effects across industries. I find considerable employment spillovers from other tradable industries’ trade shocks and even stronger effects within the same broad sector. Spillovers are larger for industries employing similar workers and are triggered predominantly by shocks to high-technology industries.

This article establishes a new fact about educational production: ordinal academic rank during primary school has lasting impacts on secondary school achievement that are independent of underlying ability. Using data on the universe of English school students, we exploit naturally occurring differences in achievement distributions across primary school classes to estimate the impact of class rank. We find large effects on test scores, confidence, and subject choice during secondary school, even though these students have a new set of peers and teachers who are unaware of the students’ prior ranking in primary school. The effects are especially pronounced for boys, contributing to an observed gender gap in the number of Maths courses chosen at the end of secondary school. Using a basic model of student effort allocation across subjects, we distinguish between learning and non-cognitive skills mechanisms, finding support for the latter.

We extend Duffie et al.’s (2005) search-theoretic model of over-the-counter (OTC) asset markets, allowing for a decentralized inter-dealer market with arbitrary heterogeneity in dealers’ valuations (or, equivalently, inventory costs). We develop a solution technique that makes the model fully tractable and allows us to derive, in closed form, theoretical formulas for key statistics analysed in empirical studies of the intermediation process in OTC markets. A calibration to the market for municipal bonds allows us to quantify important unobservable characteristics of this market, including the severity of search and bargaining frictions and the nature of heterogeneity across dealers. We use our calibrated model to study the effect of these market characteristics on total welfare and the distribution of gains from trade across customers and dealers.

This article presents a dynamic political-economic model of total government obligations. Its focus is on the interplay between debt and entitlements. In our model, both are tools by which temporarily powerful groups can extract resources from groups that will be powerful in the future: debt transfers resources across periods; entitlements directly target the future allocation of resources. We prove the following results. First, the presence of endogenous entitlements dampens the incentives of politically powerful groups to accumulate debt, but it leads to an increase in total government obligations. Second, fiscal rules can have perverse effects: if entitlements are unconstrained, and there are capital market frictions, debt limits lead to an increase in total government obligations and to worse outcomes for all groups. Analogous results hold for entitlement limits. Third, our model sheds some lights on the influence of capital market frictions on the incentives of governments to adopt fiscal rules, and implement entitlement programs. Finally, we identify preference polarization as a possible explanation for the joint growth of debt and entitlements.

We provide evidence on the relationship between aggregate uncertainty and the macroeconomy. Identifying uncertainty shocks using methods from the news shocks literature, the analysis finds that innovations in realized stock market volatility are robustly followed by contractions, while shocks to forward-looking uncertainty have no significant effect on the economy. Moreover, investors have historically paid large premia to hedge shocks to realized but not implied volatility. A model in which fundamental shocks are skewed left can match those facts. Aggregate volatility matters, but it is the realization of volatility, rather than uncertainty about the future, that has been associated with declines.

We study a two-country setting in which leveraged investors generate fire-sale externalities, leading to financial crises and contagion. Governments can affect the incidence of financial crisis and the degree of contagion by injecting public liquidity and, additionally, by segmenting the countries’ liquidity markets. We show that segmentation allows a country to avoid contagion and fend off mild financial crises caused by a small shock to its liquidity demand, at the cost of exposing it to more severe financial crises caused by a large shock. We derive a “pecking order” result, whereby segmentation is a second-best measure that coordinated governments should use only when tax capacity constrains them from injecting liquidity. Even when segmentation is welfare-enhancing, it should be applied to public liquidity alone, never restricting the free flow of private liquidity across countries. Uncoordinated governments tend to use segmentation excessively.

We study the effects of European immigration to the U.S. during the Age of Mass Migration (1850–1920) on economic prosperity. Exploiting cross-county variation in immigration that arises from the interaction of fluctuations in aggregate immigrant flows and of the gradual expansion of the railway network, we find that counties with more historical immigration have higher income, less poverty, less unemployment, higher rates of urbanization, and greater educational attainment today. The long-run effects seem to capture the persistence of short-run benefits, including greater industrialization, increased agricultural productivity, and more innovation.

We study the role of housing wealth in financing retirement consumption. In our model retirees: 1. derive utility benefits from remaining in their home (aging in place); and 2. choose in each period whether to maintain their house. The evidence that we present shows that these features are important in explaining the saving decisions of the elderly. The costs and the maintenance requirement of reverse mortgages (RMs) reduce (or eliminate) the benefits of the loans for retirees who wish to do less maintenance. We evaluate the impact of different loan features on retirees’ utility, cash-flows to lenders, and to the government agency that provides mortgage insurance. We show that combining RMs with insurance against a forced home sale (e.g. due to a move to a nursing home) is Pareto improving and can lead to increased demand for the loans due to product complementarities.

In this article we study consumption network effects. Does the consumption of our peers affect our own consumption? How large is such effect? What are the economic mechanisms behind it? We use administrative panel data on Danish households to construct a measure of consumption based on tax records on income and assets. We combine tax record data with matched employer–employee data to identify peer groups based on workplace, which gives us a much tighter and credible definition of networks than used in previous literature. We use the non-overlapping network structure of one’s peers group, as well as firm-level shocks, to build valid instruments for peer consumption. We estimate non-negligible and statistically significant network effects, capable of generating sizable multiplier effect at the macro-level. We also investigate what mechanisms generate such effects, distinguishing between intertemporal and intratemporal consumption effects as well as a more traditional risk sharing view.

In this article, I jointly investigate the political and the economic effects of immigration, and study the causes of anti-immigrant sentiments. I exploit exogenous variation in European immigration to U.S. cities between 1910 and 1930 induced by World War I and the Immigration Acts of the 1920s, and instrument immigrants’ location decision relying on pre-existing settlement patterns. I find that immigration triggered hostile political reactions, such as the election of more conservative legislators, higher support for anti-immigration legislation, and lower redistribution. Exploring the causes of natives’ backlash, I document that immigration increased natives’ employment, spurred industrial production, and did not generate losses even among natives working in highly exposed sectors. These findings suggest that opposition to immigration was unlikely to have economic roots. Instead, I provide evidence that natives’ political discontent was increasing in the cultural differences between immigrants and natives. Results in this article indicate that, even when diversity is economically beneficial, it may nonetheless be socially hard to manage.