Equilibrium asset prices and savings of heterogeneous agents in the presence of incomplete markets and portfolio constraints

We study the quantitative properties of a dynamic general equilibrium model in which agents face both idiosyncratic and aggregate income risk, state-dependent borrowing constraints that bind in some but not all periods and markets are incomplete. Optimal individual consumption-savings plans and equilibrium asset prices are computed under various assumptions about income uncertainty. Then we investigate whether our general equilibrium model with incomplete markets replicates two empirical observations: the high correlation between individual consumption and individual income, and the equity premium puzzle. We find that, when the driving processes are calibrated according to the data from wage income in different sectors of the US economy, the results move in the direction of explaining these observations, but the model falls short of explaining the observed correlations quantitatively. If the incomes of agents are assumed independent of each other, the observations can be explained quantitatively.

Competing engines of growth: Innovation and standardization

We study a dynamic general equilibrium model where innovation takes theform of the introduction of new goods whose production requires skilled workers.Innovation is followed by a costly process of standardization, whereby these newgoods are adapted to be produced using unskilled labor. Our framework highlightsa number of novel results. First, standardization is both an engine of growth anda potential barrier to it. As a result, growth is an inverse U-shaped function ofthe standardization rate (and of competition). Second, we characterize the growthand welfare maximizing speed of standardization. We show how optimal protection of intellectual property rights affecting the cost of standardization vary withthe skill-endowment, the elasticity of substitution between goods and other parameters. Third, we show that, depending on how competition between innovatingand standardizing firms is modelled and on parameter values, a new type of multiplicity of equilibria may arise. Finally, we study the implications of our model forthe skill-premium and we illustrate novel reasons for linking North-South trade tointellectual property rights protection.

Corporate finance and the monetary transmission mechanism

This paper analyzes the transmission mechanisms of monetarypolicy in a general equilibrium model of securities marketsand banking with asymmetric information. Banks' optimal asset/liability policy is such that in equilibrium capital adequacy constraints are always binding. Asymmetric information about banks' net worth adds a cost to outside equity capital, which limits the extent to which banks can relax their capital constraint. In this context monetarypolicy does not affect bank lending through changes in bank liquidity. Rather, it has the effect of changing theaggregate composition of financing by firms. The model also produces multiple equilibria, one of which displays all the features of a "credit crunch". Thus, monetary policy can also have large effects when it induces a shift from one equilibrium to the other.

Aggregate consequences of limited contract enforceability

We study a general equilibrium model in which entrepreneurs finance investment with optimal financial contracts. Because of enforceability problems, contracts are constrained efficient. We show that limited enforceability amplifies the impact of technological innovations on aggregate output. More generally, we show that lower enforceability of contracts will be associated with greater aggregate volatility. A key assumption for this result is that defaulting entrepreneurs are not excluded from the market.

Trade, markup heterogeneity and misallocations

We argue that the procompetitive effect of international trade may bring about significant welfare costs that have not been recognized. We formulate a stylized general equilibrium model with a continuum of imperfectly competitive industries to show that, under plausible conditions, a trade-induced increase in competition can actually amplify monopoly distortions. This happens because trade, while lowering the average level of market power, may increase its cross-sectoral dispersion. Using data on US industries, we document a dramatic increase in the dispersion of market power overtime. We also show evidence thattrade might be responsible for it and provide some quantifications of the induced welfare cost. Our results suggest that, to avoid some unpleasant effects of globalization, trade integration should be accompanied by procompetitive reforms (i.e., deregulation) in the nontraded sectors.

The intra-generational redistributive effects of social security

This paper provides a quantitative evaluation of the intra--cohortredistributive elements of the United States social security system in thecontext of a computable general equilibrium model. I determine how thewell--being of individuals that differ across {\sl gender, race} and {\sl education}is affected by government social security policy. I find that females, whitesand non--college graduates stand less to gain (lose) from reductions(increases) in the size of social security than males, non--whites andcollege graduates, respectively. Differences in mortality risk and laborproductivity translate into differences in the magnitudes of capitalaccumulation and labor supply distortions, that are responsible for theobserved welfare difference between types. Results imply that the currentprogram is lifetime progressive across gender and education, yet lifetimeregressive across race.

Entrepreneurial risk, investment and innovation

In this paper I develop a general equilibrium model with risk averse entrepreneurialfirms and with public firms. The model predicts that an increase in uncertainty reducesthe propensity of entrepreneurial firms to innovate, while it does not affect thepropensity of public firms to innovate. Furthermore, it predicts that the negativeeffect of uncertainty on innovation is stronger for the less diversified entrepreneurialfirms, and is stronger in the absence of financing frictions in the economy. In thesecond part of the paper I test these predictions on a dataset of small and mediumItalian manufacturing firms.

Comment to "Weak instruments robust tests in GMM and the New Keynesian Phillips curve" by Frank Kleibergen and Sophocles Mavroeidis

I discuss the identifiability of a structural New Keynesian Phillips curve when it is embedded in a small scale dynamic stochastic general equilibrium model. Identification problems emerge because not all the structural parameters are recoverable from the semi-structural ones and because the objective functions I consider are poorly behaved. The solution and the moment mappings are responsible for the problems.

A positive theory of geographic mobility and social insurance

This paper presents a tractable dynamic general equilibrium model thatcan explain cross-country empirical regularities in geographical mobility,unemployment and labor market institutions. Rational agents vote overunemployment insurance (UI), taking the dynamic distortionary effects ofinsurance on the performance of the labor market into consideration.Agents with higher cost of moving, i.e., more attached to their currentlocation, prefer more generous UI. The key assumption is that an agent'sattachment to a location increases the longer she has resided there. UIreduces the incentive for labor mobility and increases, therefore, thefraction of attached agents and the political support for UI. The mainresult is that this self-reinforcing mechanism can give rise to multiplesteady-states-one 'European' steady-state featuring high unemployment,low geographical mobility and high unemployment insurance, and one'American' steady-state featuring low unemployment, high mobility andlow unemployment insurance.

Metastability and front propagation in the first-order optical Fréedericksz transition

A general dynamical model for the first-order optical Fréedericksz transition incorporating spatial transverse inhomogeneities and hydrodynamic effects is discussed in the framework of a time-dependent Ginzburg-Landau model. The motion of an interface between two coexisting states with different director orientations is considered. A uniformly translating front solution of the dynamical equations for the motion of that interface is described.

A General model of bilateral migration agreements

Unilateral migration policies impose externalities on other countries. In order to try to internalize these externalities, countries sign bilateral migration agreements. One element of these agreements is the emphasis on enforcing migration policies: immigrant-receiving countries agree to allow more immigrants from their emigrant-sending partner if they cooperate in enforcing their migration policy at the border. I present a simple theoretical model that justifies this behavior in a two-country setting with welfare maximizing governments. These governments establish migration quotas that need to be enforced at a cost. I prove that uncoordinated migration policies are inefficient. Both countries can improve welfare by exchanging a more "generous" migration quota for expenditure on enforcement policy. Contrary to what could be expected, this result does not depend on the enforcement technology that both countries employ.

A general continuous auction model with insiders

We analyse in a unified way how the presence of a trader with privilege information makes the market to be efficient when the release time is known. We establish a general relation between the problem of finding an equilibrium and the problem of enlargement of filtrations. We also consider the case where the time of announcement is random. In such a case the market is not fully efficient and there exists equilibrium if the sensitivity of prices with respect to the global demand is time decreasing according with the distribution of the random time.

General preferences for consumption goods in the random matching model of commodity money

This paper generalizes the original random matching model of money byKiyotaki and Wright (1989) (KW) in two aspects: first, the economy ischaracterized by an arbitrary distribution of agents who specialize in producing aparticular consumption good; and second, these agents have preferences suchthat they want to consume any good with some probability. The resultsdepend crucially on the size of the fraction of producers of each goodand the probability with which different agents want to consume eachgood. KW and other related models are shown to be parameterizations ofthis more general one.

Revenue management under general discrete choice model of consumer behavior

Customer choice behavior, such as 'buy-up' and 'buy-down', is an importantphe-nomenon in a wide range of industries. Yet there are few models ormethodologies available to exploit this phenomenon within yield managementsystems. We make some progress on filling this void. Specifically, wedevelop a model of yield management in which the buyers' behavior ismodeled explicitly using a multi-nomial logit model of demand. Thecontrol problem is to decide which subset of fare classes to offer ateach point in time. The set of open fare classes then affects the purchaseprobabilities for each class. We formulate a dynamic program todetermine the optimal control policy and show that it reduces to a dynamicnested allocation policy. Thus, the optimal choice-based policy caneasily be implemented in reservation systems that use nested allocationcontrols. We also develop an estimation procedure for our model based onthe expectation-maximization (EM) method that jointly estimates arrivalrates and choice model parameters when no-purchase outcomes areunobservable. Numerical results show that this combined optimization-estimation approach may significantly improve revenue performancerelative to traditional leg-based models that do not account for choicebehavior.

A Hull and White formula for a general stochastic volatility jump-diffusion model with applications to the study of the short-time behavior of the implied volatility

In this paper, generalizing results in Alòs, León and Vives (2007b), we see that the dependence of jumps in the volatility under a jump-diffusion stochastic volatility model, has no effect on the short-time behaviour of the at-the-money implied volatility skew, although the corresponding Hull and White formula depends on the jumps. Towards this end, we use Malliavin calculus techniques for Lévy processes based on Løkka (2004), Petrou (2006), and Solé, Utzet and Vives (2007).