Schooling supply and the structure of production: Evidence from US States 1950-1990

We find that over the period 1950-1990, US states absorbed increases in the supplyof schooling due to tighter compulsory schooling and child labor laws mostly throughwithin-industry increases in the schooling intensity of production. Shifts in the industrycomposition towards more schooling-intensive industries played a less important role.To try and understand this finding theoretically, we consider a free trade model withtwo goods/industries, two skill types, and many regions that produce a fixed rangeof differentiated varieties of the same goods. We find that a calibrated version ofthe model can account for shifts in schooling supply being mostly absorbed throughwithin-industry increases in the schooling intensity of production even if the elasticityof substitution between varieties is substantially higher than estimates in the literature.

Structural unemployment

Structural unemployment is due to mismatch between available jobs and workers.We formalize this concept in a simple model of a segmented labor market with searchfrictions within segments. Worker mobility, job mobility and wage bargaining costsacross segments generate structural unemployment. We estimate the contribution ofthese costs to fluctuations in US unemployment, operationalizing segments as statesor industries. Most structural unemployment is due to wage bargaining costs, whichare large but nevertheless contribute little to unemployment fluctuations. Structuralunemployment is as cyclical as overall unemployment and no more persistent, bothin the current and in previous recessions.

Speculation, risk premia and expectations in the yield curve

An affine asset pricing model in which traders have rational but heterogeneous expectations aboutfuture asset prices is developed. We use the framework to analyze the term structure of interestrates and to perform a novel three-way decomposition of bond yields into (i) average expectationsabout short rates (ii) common risk premia and (iii) a speculative component due to heterogeneousexpectations about the resale value of a bond. The speculative term is orthogonal to public informationin real time and therefore statistically distinct from common risk premia. Empirically wefind that the speculative component is quantitatively important accounting for up to a percentagepoint of yields, even in the low yield environment of the last decade. Furthermore, allowing for aspeculative component in bond yields results in estimates of historical risk premia that are morevolatile than suggested by standard Affine Gaussian term structure models which our frameworknests.

The contribution of schooling in development accounting: Results from a nonparametric upper bound

How much would output increase if underdeveloped economies were toincrease their levels of schooling? We contribute to the development accounting literature by describing a non-parametric upper bound on theincrease in output that can be generated by more schooling. The advantage of our approach is that the upper bound is valid for any number ofschooling levels with arbitrary patterns of substitution/complementarity.Another advantage is that the upper bound is robust to certain forms ofendogenous technology response to changes in schooling. We also quantify the upper bound for all economies with the necessary data, compareour results with the standard development accounting approach, andprovide an update on the results using the standard approach for a largesample of countries.

A model of shadow banking

We present a model of shadow banking in which financial intermediaries originate and trade loans, assemble these loans into diversified portfolios, and then finance these portfolios externally with riskless debt. In this model: i) outside investor wealth drives the demand for riskless debt and indirectly for securitization, ii) intermediary assets and leverage move together as in Adrian and Shin (2010), and iii) intermediaries increase their exposure to systematic risk as they reduce their idiosyncratic risk through diversification, as in Acharya, Schnabl, and Suarez (2010). Under rational expectations, the shadow banking system is stable and improves welfare. When investors and intermediaries neglect tail risks, however, the expansion of risky lending and the concentration of risks in the intermediaries create financial fragility and fluctuations in liquidity over time.

Welfare of naive and sophisticated players in school choice

Two main school choice mechanisms have attracted the attention in the literature: Boston and deferred acceptance (DA). The question arises on the ex-ante welfareimplications when the game is played by participants that vary in terms of their strategicsophistication. Abdulkadiroglu, Che and Yasuda (2011) have shown that the chances ofnaive participants getting into a good school are higher under the Boston mechanism thanunder DA, and some naive participants are actually better off. In this note we show thatthese results can be extended to show that, under the veil of ignorance, i.e. students not yetknowing their utility values, all naive students may prefer to adopt the Boston mechanism.

The effects of employment uncertainty and wealth shocks on the labor supply and claiming behavior of older American workers

Unemployment rates in developed countries have recently reached levels not seenin a generation, and workers of all ages are facing increasing probabilities of losingtheir jobs and considerable losses in accumulated assets. These events likely increasethe reliance that most older workers will have on public social insurance programs,exactly at a time that public finances are suffering from a large drop in contributions.Our paper explicitly accounts for employment uncertainty and unexpectedwealth shocks, something that has been relatively overlooked in the literature, butthat has grown in importance in recent years. Using administrative and householdlevel data we empirically characterize a life-cycle model of retirement and claimingdecisions in terms of the employment, wage, health, and mortality uncertainty facedby individuals. Our benchmark model explains with great accuracy the strikinglyhigh proportion of individuals who claim benefits exactly at the Early RetirementAge, while still explaining the increased claiming hazard at the Normal RetirementAge. We also discuss some policy experiments and their interplay with employmentuncertainty. Additionally, we analyze the effects of negative wealth shocks on thelabor supply and claiming decisions of older Americans. Our results can explainwhy early claiming has remained very high in the last years even as the early retirementpenalties have increased substantially compared with previous periods, andwhy labor force participation has remained quite high for older workers even in themidst of the worse employment crisis in decades.

The political cost of reforms

This paper formalizes in a fully-rational model the popular idea that politiciansperceive an electoral cost in adopting costly reforms with future benefits and reconciles it with the evidence that reformist governments are not punished by voters.To do so, it proposes a model of elections where political ability is ex-ante unknownand investment in reforms is unobservable. On the one hand, elections improve accountability and allow to keep well-performing incumbents. On the other, politiciansmake too little reforms in an attempt to signal high ability and increase their reappointment probability. Although in a rational expectation equilibrium voters cannotbe fooled and hence reelection does not depend on reforms, the strategy of underinvesting in reforms is nonetheless sustained by out-of-equilibrium beliefs. Contrary tothe conventional wisdom, uncertainty makes reforms more politically viable and may,under some conditions, increase social welfare. The model is then used to study howpolitical rewards can be set so as to maximize social welfare and the desirability of imposing a one-term limit to governments. The predictions of this theory are consistentwith a number of empirical regularities on the determinants of reforms and reelection.They are also consistent with a new stylized fact documented in this paper: economicuncertainty is associated to more reforms in a panel of 20 OECD countries.

Do institutions and culture matter for business cycles?

We examine the relationship between institutions, culture and cyclical fluctuations for a sampleof 45 European, Middle Eastern and North African countries. Better governance is associated withshorter and less severe contractions and milder expansions. Certain cultural traits, such as lack ofacceptance of power distance and individualism, are also linked business cycle features. Businesscycle synchronization is tightly related to similarities in the institutional environment. Mediterraneancountries conform to these general tendencies.

Approximate knowledge of rationality and correlated equilibria

We extend Aumann's theorem [Aumann 1987], deriving correlated equilibria as a consequence of common priors and common knowledge of rationality, by explicitly allowing for non-rational behavior. Wereplace the assumption of common knowledge of rationality with a substantially weaker one, joint p-belief of rationality, where agents believe the other agents are rational with probability p or more. We show that behavior in this case constitutes a kind of correlated equilibrium satisfying certain p-belief constraints, and that it varies continuously in the parameters p and, for p sufficiently close to one,with high probability is supported on strategies that survive the iterated elimination of strictly dominated strategies. Finally, we extend the analysis to characterizing rational expectations of interimtypes, to games of incomplete information, as well as to the case of non-common priors.

Notes for a new guide to Keynes (I): Wages, aggregate demand, and employment

I revisit the General Theory's discussion of the role of wages inemployment determination through the lens of the New Keynesianmodel. The analysis points to the key role played by the monetarypolicy rule in shaping the link between wages and employment, andin determining the welfare impact of enhanced wage flexibility. I showthat the latter is not always welfare improving.

Slow recoveries: A structural interpretation

An analysis of the performance of GDP, employment and otherlabor market variables following the troughs in postwar U.S. businesscycles points to much slower recoveries in the three most recentepisodes, but does not reveal any significant change over time in therelation between GDP and employment. This leads us to characterizethe last three episodes as slow recoveries, as opposed to jobless recoveries.We use the estimated New Keynesian model in Galí-Smets-Wouters (2011) to provide a structural interpretation for the slowerrecoveries since the early nineties.

Fiscal policy, pricing frictions and monetary accommodation

We investigate the theoretical conditions for effectiveness of government consumptionexpenditure expansions using US, Euro area and UK data. Fiscal expansions taking placewhen monetary policy is accommodative lead to large output multipliers in normal times.The 2009-2010 packages need not produce significant output multipliers, may havemoderate debt effects, and only generate temporary inflation. Expenditure expansionsaccompanied by deficit/debt consolidations schemes may lead to short run output gains buttheir success depends on how monetary policy and expectations behave. Trade opennessand the cyclicality of the labor wedge explain cross-country differences in the magnitude ofthe multipliers.

Gender gaps in performance: Evidence from young lawyers

This paper documents and studies the gender gap in performance among associatelawyers in the United States. Unlike most high-skilled professions, the legal professionhas widely-used objective methods to measure and reward lawyers' productivity: thenumber of hours billed to clients and the amount of new-client revenue generated. Wefind clear evidence of a gender gap in annual performance with respect to bothmeasures. Male lawyers bill ten-percent more hours and bring in more than double thenew-client revenue. We show that the differential impact across genders in the presenceof young children and the differences in aspirations to become a law-firm partneraccount for a large part of the difference in performance. These performance gaps haveimportant consequences for gender gaps in earnings. While individual and firmcharacteristics explain up to 50 percent of earnings gap, the inclusion of performancemeasures explains most of the remainder.