Working papers results

We investigate the effects of the Federal Reserve's quantitative easing and maturity extension programs on the yields of US dollar-denominated corporate bonds using a multiple-regime heteroskedasticity-based VAR identification approach. Impulse response functions suggest that a traditional, rate-based expansionary policy may lead to an increase in yields while quantitative easing is linked to a general and persistent decrease in yields, particularly for long-term bonds. The responses generated by the maturity extension program are significant and of larger magnitude. A decomposition shows that the unconventional programs reduce the cost of private debt primarily through a reduction in risk premia that cannot be entirely accounted for by a reduction in corporate default risk.

We determine optimal market access pricing for an exchange or Social Planner. Exchanges optimally use rebate-based pricing (vs. strictly positive fees) when ex ante gains-from-trade and trading activity are low (high). Exchange rebate-based pricing increases (decreases) welfare when investor valuation dispersion and trading activity are low (high). A Social Planner increases welfare using rebate-based pricing. High-frequency traders strengthen exchange incentives for rebate-based pricing; a new explanation for widespread Maker-Taker and Taker-Maker pricing. With HFTs, rebate-based pricing improves total welfare, but Pareto transfers are needed to improve investor welfare. Sequential bargaining games between competing exchanges setting fees have pure-strategy equilibria.

We show that rational but inattentive agents can become polarized, even in expectation. This is driven by agents' choice of not only how much information to acquire, but also what type of information. We present how optimal information acquisition, and subsequent belief formation, depends crucially on the agent-specific status quo valuation. Beliefs can systematically update away from the realized truth and even agents with the same initial beliefs might become polarized. We design a laboratory experiment to test the model's predictions; the results confirm our predictions about the mechanism (rational information acquisition) and its effect on beliefs (systematic polarization).

During the 2020 Corona virus crisis in Lombardy -a stranger time- the Game Design Workshop at Bocconi University studied the implementation of the algorithms proposed by Maccheroni (2020, SSRN paper 3622663) for digital play using only six-sided dice. Swords & Wizardry by Finch (2011, Frog God Games) is a popular restatement of the Original Dungeons & Dragons Game by Gygax and Arneson (1974, Tactical Studies Rules). A case study, the present paper presents an implementation of the aforementioned algorithms for this game.

The paper develops a foundational model of the decentralized allocation of subsidies through competitive grantmaking. Casting the problem in a simple supply and demand framework, we characterize the equilibrium acceptance standard and applications. The equilibrium success rate (grants over applications) decreases in the budget, consistent with some recent evidence, if and only if the distribution of types has decreasing hazard rate. In all stable equilibria resulting when funds are allocated across fields proportionally to applications-as well as under apportionment rules in a general class characterized in the paper-an increase in noise in the evaluation in a field perversely raises applications in that field and reduces applications in all the other fields. We characterize how the design of allocation rules can be modified to improve welfare.

Lower costs of international trade affect both firms' innovation incentives and theirmarket power. We develop a dynamic general equilibrium model with endogenous innovation and endogenous markups to study the interaction between these effects. Lower trade costs stimulate innovation by large firms that are technologically close to their rivals. However, as innovators increase their productivity advantage over others, they also increase their markups. Our calibrated model suggests that a fall in trade costs which increases the trade-to-GDP ratio of the US manufacturing sector from 12% (its level in the 1970s) to 24% (its current level) increases productivity growth by 0.12 percentage points and the aggregate markup by 1.70 percentage points. Without the feedback effect of innovation on the productivity distribution, markups would actually have fallen.

This paper studies electoral competition over redistributive taxes between a safe incumbent and a risky opponent. As in prospect theory, economically disappointed voters become risk lovers, and hence are intrinsically attracted by the more risky candidate. We show that, after a large adverse economic shock, the equilibrium can display policy divergence: the more risky candidate proposes lower taxes and is supported by a coalition of very rich and very disappointed voters, while the safe candidate proposes higher taxes. This can explain why new populist parties are often supported by economically dissatisfied voters and yet they run on economic policy platforms of low redistribution. We show that survey data on the German SOEP are consistent with our theoretical predictions on voters' behavior.

We present a theory of war onset and war duration in which power is multidimensional and can evolve through conflict. The resources players can secure without fighting are determined by their political power, while the ability of appropriating resources with violence is due to their military power. When deciding whether to wage a war, players evaluate the consequences on the current allocation of resources as well as on the future distribution of military and political power. We deliver three main results: a key driver of war is the mismatch between military and political power; dynamic incentives may amplify static incentives, leading forward-looking players to be more belligerent; and a war is more likely to last for longer if political power is initially more unbalanced than military power and the politically under-represented player is militarily advantaged. Our results are robust to allowing the peaceful allocation of resources to be a function of both political and military power. Finally, we provide empirical correlations on inter-state wars that are consistent with the theory.

We use decision theory to confront uncertainty that is sufficiently broad to incorporate 'models as approximations'.We presume the existence of a featured collection of what we call 'structured models' that have explicit substantive motivations. The decision maker confronts uncertainty through the lens of these models, but also views these models as simplifications, and hence, as misspecified. We extend min-max analysis under model ambiguity to incorporate the uncertainty induced by acknowledging that the models used in decision-making are simplified approximations. Formally, we provide an axiomatic rationale for a decision criterion that incorporates model misspecification concerns.

We use a recently developed right-tail variation of the Augmented Dickey-Fuller unit root test to identify and date-stamp periods of mildly explosive behavior in the weekly time series of eight U.S. fixed income yield spreads between September 2002 and April 2018. We find statistically significant evidence of mildly explosive dynamics in six of these spreads, two of which are short/medium-term mortgagerelated spreads. We show that the time intervals characterized by instability that we estimate from these yield spreads capture known episodes of financial and economic distress in the U.S. economy. Mild explosiveness migrates from short-term funding markets to medium- and long-term markets during the Great Financial Crisis of 2007-09. Furthermore, we statistically validate the conjecture that the initial panic of 2007 migrated from segments of the ABX market to other U.S. fixed income markets in the early phases of the financial crisis.