Paolo Martellini

I am an Assistant Professor of Economics at the University of Wisconsin-Madison.

In 2020-2021, I was a Junior Scholar at the Federal Reserve Bank of Minneapolis. 

I received my PhD in Economics from the University of Pennsylvania.

My research focuses on Macro, Labor, and Urban Economics.

You can download my CV here.

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Journal of Political Economy (Lead Article)

Abstract: For a search-theoretic model of the labor market, we seek conditions for the existence of a Balanced Growth Path (BGP), an equilibrium in which unemployment, vacancy, and workers' transition rates remain constant in the face of improvements in the production and search technologies. A BGP exists iff firm-worker matches are inspection goods, and the idiosyncratic component of productivity of a match is drawn from a Pareto distribution. Declining search frictions contribute to the growth of the economy with an intensity that depends on the tail coefficient of the Pareto distribution. A corollary of the theory is that market size does not affect unemployment, vacancy and workers' transition rates even with non-constant returns to scale in search. We develop a strategy to measure the rate of decline of search frictions, the returns to scale in search, and their contribution to growth.

The Economic Journal

Abstract: We revisit the hypothesis that labor market fluctuations are driven by shocks to the discount rate. Using a model in which the UE and the EU rates are endogenous, we show that an increase in the discount rate leads to a decline in both the UE and the EU rates. In the data, though, the UE and EU rates move against each other at business cycle frequency. Using a lifecycle model with human capital accumulation on the job, we show that an increase in the discount rate does indeed lead to a decline in the aggregate UE rate and to an increase in the aggregate EU rate. However, the decline in the UE rate is larger for younger workers than for older workers and the EU rate increases only for younger workers. In the data, fluctuations in the UE and EU rates at the business cycle frequency are nearly identical across age groups.

American Economic Review: Insights

Abstract: Declining search frictions generate productivity growth by allowing workers to locate more quickly jobs for which they are well-suited. The return of declining search frictions on productivity varies across different types of workers. For workers who are jacks of all trades—in the sense that their productivity is nearly independent from the distance between their skills and the requirements of their job—declining search frictions lead to minimal productivity growth. For workers who are masters of one trade—in the sense that their productivity is very sensitive to the gap between their individual skills and the requirements of their job–declining search frictions lead to fast productivity growth. As predicted by this view, we find that workers in routine occupations have low wage dispersion and growth, while workers in non-routine occupations have high wage dispersion and growth.

Journal of Political Economy

Abstract: We measure college graduate quality — the average human capital of a college’s graduates — using the average earnings of its graduates adjusted to a common labor market. Our implementation uses the database of the website Glassdoor, which has the necessary information on earnings and education for non-migrants and migrants who graduate from roughly 3,300 colleges in 66 countries. Graduates of colleges in the richest countries have 50 percent more human capital than graduates of colleges in the poorest countries. Migration reinforces these differences. Poorer countries not only lose a higher share of their skilled workers, but their emigrants are highly positively selected on human capital. Finally, we show that these stocks and flows matter for growth and development by showing that college graduate quality predicts the share of a college’s students that become inventors, engage in entrepreneurship, and become top executives, both within and across countries.

Working Papers

Abstract: I propose a dynamic spatial equilibrium model that accounts for the heterogeneous labor market experience of workers across US cities. Productivity differentials between large and small cities emerge as an equilibrium outcome due to spatial sorting, increasing returns to scale in job search, and knowledge diffusion through local peer effects. The model delivers testable predictions with respect to selection into and returns to migration, which are supported by the data. I use this framework to quantify the aggregate implications of relaxing zoning regulation in large cities. I show how the resulting relocation of workers affects the size and composition of cities, the return from local interactions, and the spatial distribution of productivity. Failing to account for the impact of housing policy on local productivity would lead to overstating the magnitude of equilibrium income gains by a factor of 3.

Abstract: We approach the design of anti-discriminatory labor market regulation as a delegation problem. A private firm (the agent) is repeatedly faced with the opportunity of hiring one among several applicants to fill its vacancies. The firm is biased against applicants from some demographic group, and it is neutral towards applicants from some other group. Applicants di§er not only with respect to their demographic characteristics, but also with respect to the idiosyncratic quality of their match with firm. A benevolent and unbiased labor market authority (the principal) enacts a hiring regulation (a direct-revelation mechanism without transfers) in order to reduce the impact of the firm's bias on its hiring behavior. The hiring regulation is constrained by the fact that the quality of the match between any particular applicant and the firm is privately observed by the firm. We characterize the optimal mechanism.

Abstract: This paper investigates the role of school assignment to neighborhoods and the provision of school transportation on the disparities in educational access across children. We build and estimate a spatial equilibrium model of residential sorting and school choice, which replicates cross-sectional moments of a large school district and the response of neighborhood and school choice to quasi-experimental variation in peer school composition and school bus transportation. We find that removing transportation is equivalent to extending commuting distance by two and half times. Disutility over commuting distance is similar across families, while the skill composition of school peers is valued disproportionately more by higher income families. We use the estimated model to assess the welfare implications of a policy that includes high achieving schools in the choice set of disadvantaged neighborhoods. We find negative welfare effects in the aggregate, and only small gains for economically disadvantaged families. The majority of the gain from access to better peers is offset by higher house prices and longer commutes. Incumbent families respond by relocating to different neighborhoods and increasing attendance at private schools, particularly as the policy is implemented on a larger scale. Notably, the high income households at the outskirts of the city are unaffected by the policy, given the role of distance as a natural barrier to school desegregation.

Abstract: In this paper, we develop a new theory of firm dynamics and capital reallocation and use it to study the taxation of private business income, wealth, and capital transfers. Central to the analysis is the idea that certain productive assets—say, customer-bases and trade names—are specific to a business and thus not available in rental markets. Owners grow their businesses by investing in these assets themselves or by purchasing a group of assets that constitute an existing business. Given the specificity of the assets, the reallocation of capital through business transfers takes time and, as a result, theory predicts a dispersion in marginal products, with capital gradually being transferred from owners with low marginal products to those with high marginal products. Despite the gradual reallocation, the allocations we analyze are efficient. Introducing business taxation has implications for business entry, investment, and capital transfers. We find taxes on business income are the least distortive and achieve the highest welfare when compared to taxes on wealth and capital transfers.

Work in Progress

Competition, Commitment, and Optimal Information Disclosure (with Alessandro Dovis)