Working papers results

This paper studies the asset pricing implications of a general equilibrium model in which real investment is reversible at a cost. Firms face higher costs in contracting than in expanding their capital stock and decide to invest when their productive capital is scarce relative to the overall capital of the economy. Positive shocks to the production process of the firm increase the size of the firm and reduce the value of growth options. As a result, the firm is burdened with more unproductive capital and its value lowers with respect to the accumulated capital. The optimal consumption policy alters the optimal allocation of resources and affects firm's value, generating mean-reverting dynamics for the M/B ratios. The model (1) captures convergence of price-to-book ratios - negative for growth stocks and positive for value stocks - (firm migration), (2) generates deviations from the classic CAPM in line with the cross-sectional variation in expected stock returns and (3) generates a non-monotone relationship between Tobin's q and conditional volatility consistent with the empirical evidence.

This paper studies a model where exclusive dealing (ED) can both promote investment and foreclose a more effcient supplier. While investment promotion is usually regarded as a pro-competitive effect of ED, our paper shows that it may be the very reason why a contract that forecloses a more effcient supplier is signed. Absent the effect on investment, the contract would not be signed and foreclosure would not be a concern. For this reason, considering potential foreclosure and investment promotion in isolation and then summing them up may not be a suitable approach to assess the net effect of ED. The paper therefore invites a more cautious attitude towards accepting possible investment promotion arguments as a defense for ED.

The family is a primal institution, whose internal organization can be transferred to collective institutions, which come to substitute the family in one of its economic roles. We study how the family structure affected the initial design of pension systems. Our theoretical framework predicts that, when pensions systems are introduced in society with weak family ties, they act as a safety net, while in societies with strong ties pensions they replicate the tight link between generations and tend to provide generous benefits. Using Todd (1983) historical classification of family ties, we show that in societies dominated by absolute nuclear families, i.e. weak family ties (f.i. Anglo-Saxon countries), pension systems emerged as a safety net; and viceversa in societies dominated by strong families. Yet, historical family types are not correlated with the size of the pension systems, which have largely changed over time. These results are robust to controlling for alternative explanations, such as legal origin, religion, urbanization and democratization, electoral rules and forms of government. Moreover, evidence on individual data confirm the cross-country results: individuals whose ancestors came to the US from countries featuring communitarian or egalitarian nuclear families prefer to rely on the government as a provider of old age security through generous retirement benefits.

We study orders of risk and model uncertainty aversion in the smooth ambiguity model proposed by Klibano, Marinacci, and Mukerji [4]. We consider a quadratic approximation of their model and we show that both risk and model uncertainty attitudes have at most a second order effect. Specifically, the order depends on the properties of the support of the decision maker's limit prior, which we fully characterize. We find that model uncertainty attitudes have a second order effect unless the support is a singleton, that is, unless model uncertainty fades away in the limit. Special attention is given to the binomial state spaces often used in mathematical finance.

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We use a new dataset on eight Italian cities and a novel identification strategy to analyze the relationship between the employment status of migrants and the percentage of migrants living nearby. Our data contain information at the very local level (i.e. the residential block) and are representative of the population of both legal and illegal migrants. Identification is based on an instrumental variable strategy that exploits the physical characteristics of the local buildings as a source of exogenous variation in the incidence of migrants in each location. We find evidence that migrants who reside in areas with a high concentration of non-Italians are less likely to be employed compared to similar migrants who reside in more mixed areas. This penalty is higher if the migrants leaving nearby are illegal and it is not mitigated by living close to migrants who are from own's ethnic group nor who are more proficient in the Italian language. The employment prospects of natives do not appear to be affected by the vicinity of migrants.

Recent evidence on electronic limit order markets shows a growing use of undisclosed orders. This paper offers a theory for the optimal submission strategy in a limit order book where traders simultaneously select price, quantity and exposure, and choose among limit, market, reserve (partially undisclosed) and hidden (totally invisible) orders. Our findings show that to compete for the provision of liquidity in shallow markets relatively patient traders use reserve orders, whilst aggressive traders use hidden pegged orders to undercut depth at the top of liquid books. Undisclosed orders are effective defensive strategies against front running by parasitic traders, whereas they protect against picking-off by scalpers only in slow markets where Fill&Kill orders are not used. Finally, our results show that undisclosed orders increase market depth on the top of the book, but widen the inside spread; as a result they can benefit institutional investors but harm retail traders.

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In this paper we relate the very persistent component of interest rates to a specific demographic variable, MYt, the proportion of middle-aged to young population. We first reconsider the results in Fama (2006) to document how MYt captures the long run component identified by Fama in his analysis of the one-year spot rate. Using MYt to model this low frequency component of interest rates is particularly useful for forecasting the term structure as the demographic variable is exogenous and highly predictable, even at very long horizons. We then study the forecasting performance of a no-arbitrage affine term structure model that allows for the presence of a persistent component driven by demographics. This performance is superior to that of a traditional affine term structure model with macroeconomic factors (e.g. Ang, Dong and Piazzesi, 2005).

This paper proposes a test of racial bias in capital sentencing based upon patterns of judicial errors in lower courts. We model the behavior of the trial court as minimizing a weighted sum of the probability of sentencing an innocent and that of letting a guilty defendant free. We define racial bias as a situation where the relative weight on the two types of errors is a function of defendant and/or victim race. The key prediction of the model is that if the court is unbiased, ex post the error rate should be independent of the combination of defendant and victim race. We test this prediction using an original dataset that contains the the race of the defendant and of the victim(s) for all capital appeals that became final between 1973 and 1995. We find robust evidence of bias against minority defendants who killed white victims: in Direct Appeal and Habeas Corpus the probability of error in these cases is 3 and 9 percentage points higher, respectively, than for minority defendants who killed minority victims.

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We introduce and study finitely well-positioned sets, a class of asymptotically "narrow" sets that generalize the well-positioned sets recently investigated by Adly, Ernst and Thera in [1] and [3], as well as the plastering property of Krasnoselskii.

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There is a large literature on social interactions and still little is known about the economic mechanisms leading to the high level of clustering in behavior that is so commonly observed in the data. In this paper we present a model in which agents are allowed to interact according to three distinct mechanisms, and we derive testable implications on the mean and the variance of the outcomes within and across groups. The empirical tests allow us to distinguish which mechanism(s) generates the observed patterns in the data. In our application we study the performance of undergraduate students and we find that social interactions take the form of mutual insurance. Such a result bears crucial policy implications for all those situations in which social interactions are important, from teamwork to class formation in education and co-authorship in academic research.