Search Results
Working Paper
Financial Contracting with Enforcement Externalities
We study the negative feedback loop between the aggregate default rate and the efficacy of enforcement in a model of debt-financed entrepreneurial activity. The novel feature of our model is that enforcement capacity is accumulated ex ante and thus subject to depletion ex post. We characterize the effect of shocks that deplete enforcement resources on the aggregate default rate and credit supply. In the model default decisions by entrepreneurs are strategic complements, leading to multiple equilibria. We propose a global game selection to overcome equilibrium indeterminacy and show how shocks ...
Working Paper
The Conundrum of Zero APR: An Analytical Framework
We document the prevalence of promotional pricing of credit card debt in the U.S. and develop an analytic framework to study how interest rates on multiperiod credit line contracts should be set when debt is unsecured and defaultable. We show that according to the basic theory of unsecured credit — suitably extended to allow for promotions — interest rates should price in the expected default risk on a period-by-period basis. The inspection of our model’s mechanism implies that time-consistent consumption behavior is crucial for this result; accordingly, modeling time-inconsistent ...
Working Paper
Long-Run Trade Elasticity and the Trade-Comovement Puzzle
We show that the trade-comovement puzzle - theory's failure to account for the positive relation between trade and business cycle synchronization - is intimately related to its counterfactual implication that short- and long-run trade elasticities are equal. Based on this insight, we show that modeling the disconnect between the low short- and the high long-run trade elasticity in consistency with the data is promising in resolving the puzzle. In a broader context, our findings are relevant for analyzing business cycle transmission in a large class of models and caution against the use of ...
Working Paper
Financial contracting with enforcement externalities
Contract enforceability in financial markets often depends on the aggregate actions of agents. For example, high default rates in credit markets can delay legal enforcement or reduce the value of collateral, incentivizing even more defaults and potentially affecting credit supply. We develop a theory of credit provision in which enforceability of individual contracts is linked to aggregate behavior. The central element behind this link is enforcement capacity, which is endogenously determined by investments in enforcement infrastructure. Our paper sheds new light on the emergence of credit ...
Working Paper
The Future of Labor: Automation and the Labor Share in the Second Machine Age
We study the effect of modern automation on firm-level labor shares using a 2018 survey of 1,618 manufacturing firms in China. We exploit geographic and industry variation built into the design of subsidies for automation paid under a vast government industrialization program, “Made In China 2025,” to construct an instrument for automation investment. We use a canonical CES framework of automation and develop a novel methodology to structurally estimate the elasticity of substitution between labor and automation capital among automating firms, which for our preferred specification is 3.8. ...
Journal Article
Generative AI: A Turning Point for Labor’s Share?
Thanks to artificial intelligence, labor’s share of national income may no longer hold steady.
Journal Article
Why Credit Cards Played a Surprisingly Big Role in the Great Recession
Lukasz Drozd examines the links between zero-APR credit card offers and the Great Recession’s persistent declines in employment and output.
Working Paper
Understanding Growth Through Automation: The Neoclassical Perspective
We study how advancements in automation technology affect the division of aggregate income between capital and labor in the context of long-run growth. Our analysis focuses on the fundamental trade-off between the labor-displacing effect of automation and its positive productivity effect in an elementary task-based framework featuring a schedule of automation prices across tasks linked to the state of technology. We obtain general conditions for the automation technology and technical change driving automation to be labor-share displacing. We identify a unique task technology that reconciles ...
Working Paper
The Trade-Comovement Puzzle
Standard international transmission mechanism of productivity shocks predicts a weak endogenous linkage between trade and business cycle synchronization: a problem known as the trade-comovement puzzle. We provide the foundational analysis of the puzzle, pointing to three natural candidate resolutions: i) financial market frictions; ii) Greenwood–Hercowitz–Huffman preferences; and iii) dynamic trade elasticity that is low in the short run but high in the long run. We show the effects of each of these candidate resolutions analytically and evaluate them quantitatively. We find that, while ...
Working Paper
Responding to COVID-19: A Note
We consider several epidemiological simulations of the COVID-19 pandemic using the textbook SIR model and discuss the basic implications of these results for crafting an adequate response to the ensuing economic crisis. Our simulations are meant to be illustrative of the findings reported in the epidemiological literature using more sophisticated models (e.g., Ferguson et al. (2020)). The key observation we stress is that moderating the epidemiological response of social distancing according to the models may come at a steep price of extending the duration of the pandemic and hence the time ...