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Journal Article
News shocks and business cycles
This article considers the question, raised by Beaudry and Portier in their recent articles, of whether "news shocks" can lead to expansions and contractions that look like business cycle movements. News shocks are to be thought of solely as affecting expectations (regarding future events) and thus do not influence current resource restrictions at all. So the question is, for example, whether news about lower future productivity could lead our key aggregate variables?consumption, investment, and employment?to co-move down now. Beaudry and Portier make the point that standard neoclassical ...
Working Paper
Vintage capital as an origin of inequalities
Working Paper
Frictional wage dispersion in search models: a quantitative assessment
Standard search and matching models of equilibrium unemployment, once properly calibrated, can generate only a small amount of frictional wage dispersion, i.e., wage differentials among ex-ante similar workers induced purely by search frictions. We derive this result for a specific measure of wage dispersion|the ratio between the average wage and the lowest (reservation) wage paid. We show that in a large class of search and matching models this statistic (the mean-min ratio") can be obtained in closed form as a function of observable variables (i.e., interest rate, value of leisure, and ...
Report
On the size of U.S. government: political economy in the neoclassical growth model
We study a dynamic version of Meltzer and Richard's median-voter analysis of the size of government. Taxes are proportional to total income, and they are used for government consumption, which is exogenous, and for lump-sum transfers, whose size is chosen by electoral vote. Votes take place sequentially over time, and each agent votes for the policy that maximizes his equilibrium utility. We calibrate the model and its income and wealth distribution to match postwar U.S. data. This allows a quantitative assessment of the equilibrium costs of redistribution, which involves distortions to the ...
Working Paper
Asset Trading and Valuation with Uncertain Exposure
This paper considers an asset market where investors have private information not only about asset payoffs, but also about their own exposure to an aggregate risk factor. In equilibrium, rational investors disagree about asset payoffs: Those with higher exposure to the risk factor are (endogenously) more optimistic about claims on the risk factor. Thus, information asymmetry limits risk sharing and trading volumes. Moreover, uncertainty about exposure amplifies the effect of aggregate exposure on asset prices, and can thereby help explain the excess volatility of prices and the predictability ...
Working Paper
Unions in a frictional labor market
Revised May 2016. We analyze a labor market with search and matching frictions in which wage setting is controlled by a monopoly union. Frictions render existing matches a form of firm-specific capital that is subject to a hold-up problem in a unionized labor market. We study how this hold-up problem manifests itself in a dynamic infinite horizon model with fully rational agents. We find that wage solidarity, seemingly an important norm governing union operations, leaves the unionized labor market vulnerable to potentially substantial distortions because of hold-up. Introducing a tenure ...
Working Paper
Technology-policy interaction in frictional labor markets
Does capital-embodied technological change play an important role in shaping labor market outcomes? To address this question, we develop a model with vintage capital and search-matching frictions where irreversible investment in new vintages of capital creates heterogeneity in productivity among firms, matched as well as vacant. We demonstrate that capital-embodied technological change reduces labor demand and raises equilibrium unemployment and unemployment durations. In addition, the presence of labor market regulation?we analyze unemployment benefits, payroll and income taxes, and firing ...
Conference Paper
Vintage capital as an origin of inequalities
Does capital-embodied technological change play an important role in shaping labor market inequalities? This paper addresses the question in a model with vintage capital and search / matching frictions where costly capital investment leads to large heterogeneity in productivity among vacancies in equilibrium. The paper first demonstrates analytically how both technology growth and institutional variables affect equilibrium wage inequality, income shares and unemployment. Next, it applies the model to a quantitative evaluation of capital as an origin of wage inequality: at the current rate of ...