Recent Publications
A Comment on: State Capacity, Reciprocity, and the Social Contract, by Timothy Besley,
Econometrica, Vol. 88, No. 4 (July, 2020), 1345–1349.
Besley’s paper studies the role of civic culture in expanding fiscal capacity. I read this paper through the eyes of models of institutions and culture in economic development. First of all, I will argue that the results of the paper hold qualitatively in different models displaying complementarity between civic culture and public good provision. I will then illustrate how an analysis of the institutional design of the polity of the state in the context of the model produces a rich set of novel implications with regards to institutional change and to the institutional correlates of civic capital, state capacity and public goods provision. I will then show that relaxing the assumption that elites have commitment also produces interesting implications for the study o culture and institutions. Finally, I will briefly speculate on the dynamics of civic culture if inter-generational cultural transmission is characterized by some form of imperfect altruism on the parts of the parents.
Review of The Deficit Myth, by S. Kelton, Perseus Books, 2020,
Journal of Economic Literature, forthcoming 2020.
The book aims at explaining the Modern Monetary Theory (MMT). It should be seen as a rhetorical exercise. Indeed it is the core of MMT that appears as merely a rhetorical exercise. As such it is interesting but not a theory in any meaningful sense I can make of the word. The T in MMT is more like a collection of interrelated statements floating in fluid arguments. It is very hard for the reader to capture all the moving parts in a coherent structure, which would allow for some sort of confutation. I will try, rather, to expose what seems to me the logic behind the rhetoric of the floating statements.
Wealth Distribution and Social Mobility: A Quantitative Analysis of U.S Data,
with Jess Benhabib (NYU) and Mi Luo (Emory Un.), American Economic Review, 2019, 109(5), 1623–1647
We quantitatively identify the factors that drive wealth dynamics in the United States and are consistent with its skewed cross-sectional distribution and with social mobility. We concentrate on three critical factors: (i) skewed earnings, (ii) differential saving rates across wealth levels, and (iii) stochastic idiosyncratic returns to wealth. All of these are fundamental for matching both distribution and mobility.
The stochastic process for returns which best fits the cross-sectional distribution of wealth and social mobility in the United States shares several statistical properties with those of the returns to wealth uncovered by Fagereng et al. (2017) from tax records in Norway.
Skewed Wealth Distributions: Theory and Empirics
with Jess Benhabib (NYU), Journal of Economic Literature, 2018, 56(4), 1261–1291.
Invariably, across a cross-section of countries and time periods, wealth distributions are skewed to the right displaying thick upper tails, that is, large and slowly declining top wealth shares. In this survey, we categorize the theoretical studies on the distribution of wealth in terms of the underlying economic mechanisms generating skewness and thick tails. Further, we show how these mechanisms can be micro-founded by the consumption–savings decisions of rational agents in specific economic and demographic environments. Finally we map the large empirical work on the wealth distribution to its theoretical underpinnings.
Main Publications
Government Policy with Time Inconsistent Voters,
with Alessandro Lizzeri and Leeat Yariv, American Economic Review, 105(6), 1711–37, 2015.
Behavioral economics presents a “paternalistic” rationale for benevolent government intervention. This paper presents a model of public debt where voters have self-control problems and attempt to commit using illiquid assets. In equilibrium, government accumulates debt to respond to individuals’ desire to undo their commitments, which leads individuals to rebalance their portfolio, in turn feeding into a demand for further debt accumulation. As a consequence, (i) large (and distortionary) government debt accumulation occurs, and (ii) banning illiquid assets could improve individuals’ welfare. These results offer a new rationale for balanced budget rules in constitutions to restrain governments’ responses to voters’ self-control problems.
Read Paper — Online Appendix — AER Research Highlights
Counterparty risk externality: Centralized versus Over-The-Counter Markets,
with Viral Acharya, Journal of Economic Theory, 49, 153-82, 2014.
We study financial markets where agents share risks, but have incentives to default and their financial positions might not be transparent, that is, might not be mutually observable. We show that a lack of position transparency results in a counterparty risk externality, that manifests itself in the form of excess “leverage,” in that parties take on short positions that lead to levels of default risk that are higher than Pareto efficient ones. This externality is absent when trading is organized via a centralized clearing mechanism that provides transparency of trade positions. Collateral requirements and especially subordination of nontransparent positions in bankruptcy can ameliorate the counterparty risk externality in market settings such as over-the-counter (OTC) markets which feature a lack of position transparency.
The Distribution of Wealth and Fiscal Policy in Economies with Finitely Lived Agents,
with Jess Benhabib and Shenghao Zhu, Econometrica, 79(1), 122-57, 2011; re-printed in J.B. Davies (Ed.)The Economics of Wealth Distribution, Edward Elgar Publishing (two volume set), London, 2013.
We study the dynamics of the distribution of wealth in an overlapping generation economy with finitely lived agents and intergenerational transmission of wealth. Financial markets are incomplete, exposing agents to both labor and capital income risk. We show that the stationary wealth distribution is a Pareto distribution in the right tail and that it is capital income risk, rather than labor income, that drives the properties of the right tail of the wealth distribution. We also study analytically the dependence of the distribution of wealth—of wealth inequality in particular—on various fiscal policy instruments like capital income taxes and estate taxes, and on different degrees of social mobility. We show that capital income and estate taxes can significantly reduce wealth inequality, as do institutions favoring social mobility. Finally, we calibrate the economy to match the Lorenz curve of the wealth distribution of the U.S. economy.
Present-Bias, Quasi-Hyperbolic Discounting, and Fixed Costs,
with Jess Benhabib and Andy Schotter, Games and Economic Behavior, 69(2), 205-223, 2010.
A vast literature in experimental psychology has studied time preferences by eliciting preferences over various alternative rewards obtained at different times, that is, over reward–time pairs.1 Representations of such time preferences include a specification of discounting. This literature has documented various behavioral regularities with regards to discounting. The most important of such regularities is called “reversal of preferences.” It occurs, for example, when a subject prefers $10 now rather than $12 in a day, but he/she prefers $12 in a year plus a day rather than $10 in a year. Reversals of preferences are not consistent with exponential discounting. Psychologists (e.g., Herrnstein, 1961; de Villiers and Herrnstein, 1976; Ainslie and Herrnstein, 1981; see also Ainslie, 1992, 2001) and also behavioral economists (e.g., Elster, 1979; Laibson, 1997; Loewenstein and Prelec, 1992; O’Donoghue and Rabin, 1999) have noted that reversals of preferences are instead consistent with a rate of time preference which declines with time. Various specifications of discounting with this property, notably hyperbolic discounting and quasi-hyperbolic discounting have been suggested..
Efficient Competitive Equilibria with Adverse Selection,
with Piero Gottardi, Journal of Political Economy, 114(3), 2006.
Do Walrasian markets function orderly in the presence of adverse selection? In particular, is their outcome efficient when exclusive contracts are enforceable? This paper addresses these questions in the context of a Rothschild-Stiglitz insurance economy. We identify an externality associated with the presence of adverse selection as a special form of consumption externality. Consequently, we show that competitive equilibria always exist but are not typically incentive efficient. However, as markets for pollution rights can internalize environmental externalities, markets for consumption rights can be designed to internalize the consumption externality due to adverse selection. With such markets competitive equilibria exist and incentive-constrained versions of the first and second welfare theorems hold.
Markets as Beneficial Constraints on the Government,
with Adriano Rampini, Journal of Public Economics, 90, 601-629, 2006.
We study the role of anonymous markets in which trades cannot be monitored by the government. We adopt a Mirrlees approach to analyze economies in which agents have private information and a benevolent government controls optimal redistributive tax policy. While unrestricted access to anonymous markets reduces the set of policy instruments available to the government, it also limits the scope of inefficient redistributive policies when the government lacks commitment. Indeed, the restrictions that anonymous markets impose on the optimal fiscal policy, especially on capital taxation and the history-dependence of income taxation, can have positive welfare effects in this case
An Empirical Analysis of Religious Homogamy and Socialization in the U.S,
with Giorgio Topa and Thierry Verdier, Journal of Political Economy, 112(3), 615-64, 2004.
This paper presents an empirical analysis of a choice-theoretic model of cultural transmission. In particular, we use data from the General Social Survey to estimate the structural parameters of a model of marriage and child socialization along religious lines in the United States. The observed intermarriage and socialization rates are consistent with Protestants, Catholics, and Jews having a strong preference for children who identify with their own religious beliefs and making costly decisions to influence their children’s religious beliefs. Our estimates imply dynamics of the shares of religious traits in the population that are in sharp contrast with the predictions obtained by linear extrapolations from current intermarriage rates.
The Economics of Cultural Transmission and the Evolution of Preferences,
with Thierry Verdier, Journal of Economic Theory, 97(2), 298-319, 2001.
This paper studies the population dynamics of preference traits in a model of intergenerational cultural transmission. Parents socialize and transmit their preferences to their offspring, motivated by a form of paternalistic altruism (“imperfect empathy”). In such a setting we study the long run stationary state pattern of preferences in the population, according to various socialization mechanisms and institutions, and identify sufficient conditions for the global stability of an heterogenous stationary distribution of the preference traits. We show that cultural transmission mechanisms have very different implications than evolutionary selection mechanisms with respect to the dynamics of the distribution of the traits in the population, and we study mechanisms which interact evolutionary selection and cultural transmission.
Beyond the Melting Pot: Cultural Transmission, Marriage, and the Evolution of Ethnic and Religious Traits,
with Thierry Verdier, Quarterly Journal of Economics, CXV(3), 955-988, 2000.
This paper presents an economic analysis of the intergenerational transmission of ethnic and religious traits through family socialization and marital segregation decisions. Frequency of intra-group marriage (homogamy), as well as socialization rates of religious and ethnic groups, depend on the group’s share of the population: minority groups search more intensely for homogamous mates, and spend more resources to socialize their offspring. This pattern generally induces a dynamics of the distribution of ethnic and religious traits which converges to a culturally heterogeneous stationary population. Existing empirical evidence bearing directly and indirectly on the implications of the model is discussed.
General Equilibrium with Endogenously Incomplete Financial Markets,
Journal of Economic Theory, 82(1), 19-45, 1996.
The present paper studies a class of general equilibrium economies with
imperfectly competitive financial intermediaries and price-taking consumers. Intermediaries optimally choose the securities they issue and the bid-ask spread they charge. Financial intermediation is costly, and hence markets are endogenously
incomplete. An appropriate equilibrium concept is developed, and existence is proved. Competitive equilibria for this class of economies display full indexation of securities payoffs and monetary neutrality even if intermediaries are restricted to
issue “nominal” securities and financial markets turn out to be incomplete. This is in sharp contrast with the indeterminacy and non-neutrality results established in
the literature for incomplete markets economies with exogenously given “nominal” securities.