Working papers results

I study the coexistence of formal and informal finance in underdeveloped credit markets. Formal banks have access to unlimited funds but are unable to control the use of credit. Informal lenders can prevent non-diligent behavior but often lack the needed capital. The model implies that formal and informal credit can be either complements or substitutes. The model also explains why weak legal institutions raise the prevalence of informal finance in some markets and reduce it in others, why financial market segmentation persists, and why informal interest rates can be highly variable within the same sub economy.

The wage paid to elected officials affects both the choice of citizens to run for office and the performance of those who are appointed. On the one hand, if skilled individuals shy away from politics because of higher opportunities in the private sector, an increase in politicians' pay may change their mind. On the other hand, if the reelection prospects of incumbents depend on their in-office deeds, a higher wage may foster performance. We use data on all Italian municipalities from 1993 to 2007 to test these hypotheses in a quasi-experimental framework. In Italy, the wage of the mayor depends on population size and sharply increases at nine thresholds. We apply a regression discontinuity design to two thresholds that uniquely identify a wage increase (1,000 and 5,000 inhabitants) to control for unobservable town characteristics. Exploiting the existence of a two-term limit, we further disentangle the composition from the incentive component of the impact of the wage on performance. The empirical results show that a higher wage attracts more educated and high-skilled candidates, and that better paid politicians lessen the government machinery by reducing per-capita taxes, tariffs, and current expenditure, while leaving investments unchanged. Importantly, most of the performance effect is driven by the selection of better candidates, rather than the incentive to be reelected.

The dynamic dividend growth model (Campbell&Shiller, 1988) linking the log dividend yield to future expected dividend growth and stock market returns has been extensively used in the literature for forecasting stock returns. The empirical evidence on the performance of the model is mixed as its strength varies with the sample choice. This model is derived on the assumption of stationary dpt, dividend-yield. The empirical validity of such hypothesis has been challenged in recent literature (Lettau&Van Nieuwerburgh, 2007) with strong evidence on a time varying mean, due to breaks, in this financial ratio. In this paper, we show that the slowly evolving mean toward which the dividend price ratio is reverting is determined by demographic factors. We also show that a forecasting model based on demographics and a demand factor as captured by excess consumption in the sense of Lettau and Ludvigson(2004) overperforms virtually all alternative models proposed in the empirical literature in the framework of the dynamic dividend growth model. Finally, we exploit the predictability of demographic factors to project the equity risk premium up to 2050.

This paper investigates whether or not the adoption of the Euro has
facilitated the introduction of structural reforms, defined as deregulation
in the product markets and liberalization and deregulation in the labor
markets. After reviewing the theoretical arguments that may link the
adoption of the Euro and structural reforms, we investigate the empirical
evidence. We find that the adoption of the Euro has been associated with
an acceleration of the pace of structural reforms in the product market.
The adoption of the Euro does not seem to have accelerated labor market
reforms in the "primary labor market;" however, the run up to the Euro
adoption seems to have been accompanied by wage moderation. We also
investigate issues concerning the sequencing of goods and labor market
reforms.

Why do people have kids in developed societies? We propose an empirical test of
two alternative theories - children as consumption vs. investment good. We use
as a natural experiment the Italian pension reforms of the 90s that introduced a clear
discontinuity in the treatment across workers. This policy experiment is particularly
well suited, since the consumption motive predicts lower future pensions to reduce
fertility, while the old-age security to increase it. Our empirical analysis identifies
a clear and robust positive effect of less generous future pensions on post-reform
fertility. These findings are consistent with old-age security even for contemporary
fertility.

In a stochastic two-period OLG model, featuring an aggregate shock to the economy,
ex-ante optimality requires intergenerational risk sharing. We compare the level
of time-consistent intergenerational risk sharing chosen by a social planner and by office
seeking politicians. In the political setting, the transfer of resources across generations
- a PAYG pension system - is determined as a Markov equilibrium of a probabilistic
voting game. Negative shocks represented by low realized returns on the risky asset
induce politicians to compensate the old through a PAYG system. Unless the young are
crucial to win the election, this political system generates more intergenerational risk
sharing than the (time consistent) social optimum. In particular, these transfers are
more persistent and less responsive to the realization of the shock than optimal. This is
because politicians anticipate their current transfers to the elderly to be compensated
through offsetting transfers by future politicians, and thus have an incentive to overspend.
Perhaps surprisingly, aging increases the socially optimal transfer but makes
politicians less likely to overspend, by making it more costly for future politicians to
compensate the current young.

We develop and estimate a medium scale macroeconomic model that allows for unemployment
and staggered nominal wage contracting. In contrast to most existing quantitative models,
employment adjustment is on the extensive margain and the employment of existing workers is
efficient. Wage rigidity, however, affects the hiring of new workers. The former is introduced
via the staggered Nash bargaing setup of Gertler and Trigari (2006). A robust finding is that
the model with wage rigidity provides a better description of the data than does a flexible wage
version. Overall, the model fits the data roughly as well as existing quantitative macroeconomic
models, such as Smets and Wouters (2007) or Christiano, Eichenbaum and Evans (2005). More
work is necessary, however, to ensure a robust identification of the key labor market parameters.

We use an interactive epistemology framework to provide a systematic analysis of some solu- tion concepts for games with asymmetric information. We characterize solution concepts using expressible epistemic assumptions, represented as events in the canonical space generated by primitive uncertainty about the payoff relevant state, payoff irrelevant information, and actions. In most of the paper we adopt an interim perspective, which is appropriate to analyze genuine incomplete information. We relate Delta-rationalizability (Battigalli and Siniscalchi, 2003) to interim correlated rationalizability (Dekel, Fudenberg, and Morris, 2007) and to rationalizability in the interim strategic form. We also consider the ex ante perspective, which is appropriate to ana- lyze asymmetric information about an initial chance move. We prove the equivalence between interim correlated rationalizability and an ex ante notion of correlated rationalizability.

We study the relation between the off-shoring of intermediates and services
and productivity growth in the Italian manufacturing industries in 1995-2003.
Our results indicate that the off-shoring of intermediates within the same
industry (narrow off-shoring) is beneficial for productivity growth, while
the off-shoring of services is not. We also find that the way in which off-
shoring is measured may matter considerably. The positive relation between off-
shoring of intermediates and productivity growth is there with our direct
measures based on input-output data but disappears when either a broad measure
or the Feenstra-Hanson off-shoring measure employed in other studies are used
instead.

We consider a model in which voters over time receive more information about
their preferences concerning an irreversible social decision. Voters can either implement
the project in the first period, or they can postpone the decision to the
second period. We analyze the effects of different majority rules. Individual first
period voting behavior may become "less conservative" under supermajority rules,
and it is even possible that a project is implemented in the first period under a
supermajority rule that would not be implemented under simple majority rule.
We characterize the optimal majority rule, which is a supermajority rule. In
contrast to individual investment problems, society may be better off if the option
to postpone the decision did not exist. These results are qualitatively robust to
natural generalizations of our model.