Working papers results

The recent financial crises, alongside a dramatic rise in unemployment on both sides of the Atlantic, suggest that financial shocks do translate into the labor markets. In this paper we first document that financial recessions amplify labor market volatility and Okun's elasticity over the business cycle. Second, we highlight a key mechanisms linking financial shocks to job destruction, presenting and solving a simple model of labor market search and endogenous finance. While finance increases job creation and net output in normal times, it also augments their aggregate response in the aftermath of a financial shock. Third, we present evidence coherent with the idea that more leveraged sectors experience larger employment volatility during financial recessions. Theoretically, the job destruction effect of finance works as follows. Leveraged firms may find themselves in a position in which their liquidity is suddenly called back by the lender. This has direct consequences on a firm ability to run and manage e xisting jobs. As a result, firms may be obliged to shut down part of their operations and destroy existing jobs. We argue that with well developed capital markets, firms will have an incentive to rely more on liquidity, and in normal times deep capital markets lead to tight labor markets. After an adverse liquidity shock, firms that rely much on liquidity, are hit disproportionally hard. This may explain why the unemployment rate in the US during the Great Recession increased more than in European countries experiencing larger output losses. Empirically, the paper uses a variety of datasets to test the implications of the model. At first we identify crises that, just like in the model, caused a sudden reduction of liquidity to firms. Next we draw on sector-level data on employment and leverage in a number of OECD countries at quarterly frequencies to assess whether highly leveraged equilibria originate more employment adjustment under financial recessions. We find that highly leveraged sectors and periods are associated with higher employment-to-output elasticities during banking crises and this effect explains the observation of higher Okun's elasticities during financial recessions. We also argue that the effect of leverage on employment adjustment can be interpreted as a causal effect, if our identification assumptions are considered plausible. All this amounts essentially for a test of the labor demand channel of adjustment.

This paper studies whether fiscal corrections cause large output losses. We find that it matters crucially how the fiscal correction occurs. Adjustments based upon spending cuts are much less costly in terms of output losses than tax-based ones. Spending-based adjustments have been associated with mild and short-lived recessions, in many cases with no recession at all. Tax-based adjustments have been associated with prolonged and deep recessions. The difference cannot be explained by different monetary policies during the two types of adjustments. Studying the effects of multi-year fiscal plans rather than individual shifts in fiscal variables we make progress on question of anticipated versus unanticipated policy shifts: we find that the correlation between unanticipated and anticipated shifts in taxes and spending is heterogenous across countries, suggesting that the degree of persistence of fiscal corrections varies..Estimating the effects of fiscal lans, rather than individual fiscal shocks, we obtain much more precise estimates of tax and spending multipliers.

Openness per se requires optimal monetary policy to deviate from the canonical closed-economy principle of domestic price stability, even if domestic prices are the only ones to be sticky. I review this argument using a simple partial equilibrium analysis in an economy that trades in ...nal consumption goods. I then extend the standard open economy New Keynesian model to include imported inputs of production. Production openness strengthens even further the incentive for the policymaker to deviate from strict domestic price stability. With both consumption and production openness variations in the world price of food and in the world price of imported oil act as exogenous cost-push factors.

In an economy with financial imperfections, Ricardian equivalence holds when prices are flexible and the steady-state distribution of consumption is uniform, or labor is inelastic. With different steady-state consumption levels, Ricardian equivalence fails, but tax cuts, somewhat paradoxically, are contractionary; the presentvalue multiplier on consumption is, however, zero. With sticky prices, Ricardian equivalence always fails. A Robin-Hood, revenue-neutral redistribution to borrowers is expansionary on aggregate activity. A uniform cut in taxes financed with public debt has a positive present-value multiplier on consumption, stemming from intertemporal substitution by the savers, who hold the public debt.

We extend the Fundamental Theorem of Finance and the Pricing Rule Representation Theorem of Cox and Ross (see Ross [35] and [37] and Cox and Ross [9]) to the case in which market frictions are aken into account but the Put-Call Parity is still assumed to hold. In turn, we obtain a representation of the pricing rule as a discounted expectation with respect to a nonadditive risk neutral probability. As a further contribution, in so doing we endogenize the state space structure and the contingent claim representation usually assumed to represent assets and markets.

This paper considers the optimal mechanism design problem of an expected revenue maximizing principal who wants to sell a single unit of a good to an agent who is ambiguity averse in the sense of Gilboa and Schmeidler (1989). We show that the optimal static mechanism is an ambiguous mechanism. An ambiguous mechanism specifies a message space and a set of outcome functions. After showing that (a version of) the Revelation Principle holds in our environment, we give an exact characterization of the (smallest) optimal ambiguous mechanism. If the type set is composed of N (finite) types, then the (smallest) optimal ambiguous mechanism contains N - 1 outcome functions. We show that the share of the surplus that the designer can extract from the agent increases as the type set becomes larger and the probability of each single type decreases. In the limiting case where the agent's type is drawn from a non-atomic distribution on an interval, the optimal ambiguous mechanism extracts all the rent from the agent.

Over the last millennium, the clan and the city have been the locus of cooperation in China and Europe respectively. This paper examines - analytically, historically,and empirically - the cultural, social, and institutional co-evolution that led to this bifurcation. We highlight that groups with which individuals identify are basic units of cooperation. Such groups impact institutional development because intra-group moral commitment reduces enforcement cost implying a comparative advantage in pursuing collective actions. Moral groups perpetuate due to positive feedbacks between morality, institutions, and the implied pattern of cooperation.

We develop a theory of corporate boards and their role in forcing CEO turnover. We consider a firm with an incumbent CEO of uncertain management ability and a board consisting of a number of directors whose role is to evaluate the CEO and fire her if a better replacement can be found. Each board member receives an independent private signal about the CEO's ability, after which board members vote on firing the CEO (or not). If the CEO is fired, the board hires a new CEO from the pool of candidates available. The true ability of the rm's CEO is revealed in the long run; the firm's long-run share price is determined by this ability. Each board member owns some equity in the firm, and thus prefers to fire a CEO of poor ability. However, if a board member votes to fire the incumbent CEO but the number of other board members also voting to fire her is not enough to successfully oust her, the CEO can impose significant costs of dissent on him. In this setting, we show that the board faces a coordination problem, leading it to retain an incompetent CEO even when a majority of board members receive private signals indicating that she is of poor quality. We solve for the optimal board size, and show that it depends on various board and rm characteristics: one size does not fit all firms. We develop extensions to our basic model to analyze the optimal composition of the board between firm insiders and outsiders and the effect of board members observing imprecise public signals in addition to their private signals on board decision-making. Finally, we develop a dynamic extension to our basic model to analyze why many boards do not fire CEOs even when they preside over a signi cant, publicly observable, reduction in shareholder wealth over a long period of time. We use this dynamic model to distinguish between the characteristics of such boards from those that fire bad CEOs proactively, before significant shareholder wealth reductions take place.

We investigate the role of government-provided loans on market outcomes. First, we show that government-provided financing can lead to asset bubbles when enough households have adaptive expectations and determine the minimum share of households with adaptive expectation that is sufficient for bubbles to arise. Second, we show that in addition to causing bubbles government-provided loans can generate a propagation mechanism behind them. Third, we show that bubbles can be avoided if financing is provided over a sufficiently large number of periods rather than all at once, even when households have adaptive expectations.

I examine the role of third-party debt collectors in consumer credit markets. Using law enforcement as an instrument for the number of debt collectors, I find that higher density of debt collectors increases the supply of unsecured credit. The estimated elasticity of the average credit card balance with respect to the number of debt collectors per capita is 0.49, the elasticity of the average balance on non-credit card unsecured loans with respect to the number of debt collectors per capita is 1.32. I also find evidence that creditors substitute unsecured credit for secured credit when the number of debt collectors increases. Higher density of debt collectors improves recoveries, which enables lenders to extend morecredit. Finally, creditors charge higher interest rates and lend to a larger pool of borrowers when the density of debt collectors increases, presumably because better collections enable them to extend credit to riskier applicants.