Working papers results

We develop a new theory of delegated investment whereby managers compete in terms of composition of the portfolios they promise to acquire. We study the resulting asset pricing in the inter-manager market. We incentivize investors so that we obtain sharp predictions. Managers are paid a fixed fraction of fund size. In equilibrium, investors choose managers who offer portfolios that mimic Arrow-Debreu (state) securities. Prices in the inter-manager market are predicted to satisfy a weak version of the CAPM: state-price probability ratios implicit in prices of traded assets decrease in aggregate wealth across states. An experiment involving about one hundred participants over six weeks broadly supports the theoretical predictions. Pricing quality declines, however, when fund concentration increases because funds flow towards managers who offer portfolios closer to Arrow-Debreu securities (as in the theory) and who had better recent performance (an observation unrelated to the theory).

We propose a simple theory of predatory pricing, based on incumbency advantages, scale economies and sequential buyers (or markets). The prey needs to reach a critical scale to be successful. The incumbent (or predator) has an initial advantage and is ready to make losses on earlier buyers so as to deprive the prey of the scale the latter needs, thus making monopoly profits on later buyers. Several extensions are considered, including cases where scale economies exist because of demand externalities or two-sided market e ects, and where markets are characterized by common costs. Conditions under which predation may (or not) take place in actual cases are also discussed.

This paper estimates the effect of employment protection legislation (EPL) on workers' individual wages in a quasi-experimental setting, exploiting a reform that introduced unjust-dismissal costs in Italy for firms below 15 employees and left firing costs unchanged for bigger firms. Accounting for the endogeneity of the treatment status, we find that the slight average wage reduction (between -0:4 and -0:1 percent) that follows the increase in EPL hides highly heterogeneous effects. Workers who change firm during the reform period suffer a in the entry wage, while incumbent workers are left unaffected. Results also indicate that the negative wage effect of the EPL reform is stronger on young blue collars and on workers at the low-end of the wage distribution. Finally, workers in low-employment regions suffer higher wage reductions after the reform. This pattern suggests that the ability of the employers to shift EPL costs onto wages depends on workers' and firms' relative bargaining power.

The effects of public debt and redistribution are intimately related. We illustrate this in a model with heterogenous agents and imperfect credit markets. Our setup differs from the classic Savers-Spenders model of fiscal policy in that all agents engage in intertemporal optimization, but a fraction of them is subject to a borrowing limit. We show that, despite the credit frictions, Ricardian equivalence holds under flexible prices if the steady-state distribution of wealth is degenerate: income effects on labor supply deriving from a tax redistribution are entirely symmetric across agents. When the distribution of wealth is non-degenerate, a tax cut is, somewhat paradoxically, contractionary. Conversely, sticky prices generate empirically plausible deviations from Ricardian equivalence, even in the case of degenerate wealth distribution. A revenue-neutral redistribution from unconstrained to constrained agents is expansionary, while debt...nanced tax cuts have effects that go beyond their redistributional component: the present-value multiplier of a tax cut is positive due to an interplay of intertemporal substitution by those who hold the public debt and income effects on those who do not.

We study the interaction between a firm that invests in research and, if successful, undertakes a practice to exploit the innovation, and an enforcer that sets legal standards, fines and accuracy. In innovative industries deterrence on actions interacts with deterrence on research. A per-se legality rule prevails when the practice increases expected welfare, moving to a discriminating rule combined with type-I accuracy for higher probabilities of social harm. Moreover, discriminating rules should be adopted more frequently in traditional industries than in innovative environments; patent and antitrust policies are substitutes; additional room for per-se (illegality) rules emerges when fines are bounded.

We give a general integral representation theorem (Theorem 6) for nonadditive functionals de...ned on an Archimedean Riesz space X with order unit. Additivity is replaced by a weak form of modularity, or equivalently dual comonotonic additivity, and integrals are Choquet integrals. Those integrals are de...ned through the Kakutani [8] isometric identi...cation of X with a C (K) space. We further show that our novel notion of dual comonotonicity naturally generalizes and characterizes the notions of comonotonicity found in the literature when X is assumed to be a space of functions.

This paper argues that a stable broad money demand for the euro area over the period 1980-2011 can be obtained by modelling cross border international portfolio allocation. As a consequence, model-based excess liquidity measures, namely the difference between actual M3 growth (net of the inflation objective) and the expected money demand trend dynamics, can be useful to predict HICP inflation.

Unstability in the comovement among bond spreads in the euro area is an important feature for dynamic econometric modelling and forecasting. This paper proposes a non-linear GVAR approach to spreads in the euro area where the changing interdepence among these variables is modelled by making each country spread function of a global variable determined by fiscal fundamentals with a time-varying composition. The model naturally accommodates the possibility of multiple equilibria in the relation between default premia and local fiscal fundamentals. The estimation reveals a significant non-linear relation between spreads and fiscal fundamentals that generates time-varying impulse response of local spreads to shocks in other euro area countries spreads. The GVAR framework is then applied to the analysis of the dynamic effects of fiscal stabilization packages on the cost of government borrowing and to the evaluation of the importance of potential contagion effects determining a significant increase in cross-market linkages after a shock to a group of countries.

As governments around the world contemplate slashing budget deficits, the "expansionary fiscal consolidation hypothesis" is back in vogue. I argue that, as a statement about the short run, it should be taken with caution. Alesina and Perotti (1995) and Alesina and Ardagna (2010) (AAP) have argued that, contrary to conventional wisdom, fiscal consolidations may be expansionary if implemented mainly by cutting government spending. IMF (2010) criticizes the data used by AAP and shows that all consolidations are contractionary in the short run. I argue that this criticism is correct in principle, and that there are other important limitations in the AAP methodology. However, the implementation of the IMF methodology has several problems of its own, that make an interpretation of the IMF results difficult. I then argue that because of the multi-year nature of the large fiscal consolidations, which are precisely those that can tell us more on the mechanisms at work, using yearly panels of annual data is limiting. I present four detailed case studies of fiscal consolidations, two (Denmark and Ireland) carried out under fixed exchange rates (arguably the most relevant case for many European countries today) and two (Finland and Sweden) after floating the currency. All four consolidations were associated with an expansion; but only in Denmark the driver of growth was internal demand. However, as in most exchange rate based stabilizations, after three years a long slump set in as the economy lost competitiveness. In the other episodes for a long time the main driver of growth was exports. In the second exchange rate based stabilization, Ireland, this occurred because the sterling coincidentally appreciated. In Finland and Sweden the currency experienced an extremely large depreciation after floating. In all consolidations interest rate fell fast, and wage moderation played a key role in ensuring competitiveness and allowing the decrease in interest rates. Wage moderation was supported by incomes policies that saw the direct in tervention of the government in the wage negotiation process. These results cast doubt on at least some versions of the "expansionary fiscal consolidations" hypothesis, and on its applicability to many countries in the present circumstances. A depreciation is not available to EMU members today (except vis a vis countries outside the Eurozone). The current account channel is not available to the world as a whole. A further decline in interest rates is unlikely in the current situation. And incomes policies are not popular nowadays; moreover, international experience, and the Danish case, suggest that they are ineffective after a few years.

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With fiscal foresight, the shocks identified by standard Vector Autoregression (SVAR) techniques can be non-fundamental for the variables of interest. In an important paper, Ramey (2011) uses direct measures of the private sector's forecast revisions of defense or federal spending to estimate the effects of government spending shocks in a VAR, obtaining the 'expectations - augmented' VAR, or EVAR. The response of GDP to these shocks is smaller than 1, and consumption and the real wage fall: this is consistent with the neoclassical model, but the opposite of recent results from SVARs. In this paper, I make three points. First, EVARs and SVARs give virtually the same results. Ramey reaches the opposite conclusion because she never estimates the two specifications on the same sample and with the same government spending variable. Second, the evidence from EVARs is not robust. It is enough to dummy out just two quarters during WWII (when rationing was introduced) or during the Korean War (when new Fed regulation di couraging the purchase of durables was introduced) for the negative effects of defense spending shocks to disappear. Third, the forecast revision of federal spending from the Survey of Professional Forecasters has high explanatory power for government spending, but for the 'wrong' reason: the predictive power of expected government spending growth is extremely low, so that the forecast error is effectively actual spending growth less noise.