Work in progress

WARNING: Section under construction.

"Corrigendum: Long-Term Contracting With Time-Inconsistent Agents," with D. Gottlieb, P. Siconolfi and X. Zhang, forthcoming in Econometrica.

"Regulating Credit Markets With Time-Inconsistent Agents," with D. Gottlieb, P. Siconolfi and X. Zhang (coming soon).

"Naive stochastic present bias and credit," with P. Siconolfi (revised version coming soon).

The first note shows that, in models with consumption sets unbounded above, perception-perfect equilibrium is restricted to low levels of lifetime income. It characterizes the exact range where existence occurs, and shows that inefficiencies due to naive present bias vanish as the contracting length grows arbitrarily large.

In the second paper, we introduce lower and upper bounds to the consumer's consumption set. This is motivated by existing regulations, which on one hand limit the amount of maximum fees a lender can impose, and on the other hand restrict lenders' volume of credit due to prudential concerns. The upper bound restriction can also be motivated by the  observation that consumers are often satiated at unaffordable but finite consumption levels. When this is the case, we show that inefficiencies due to naivete may not asymptotically vanish. This is true for consumers with income levels sufficiently high but still insufficient to make the credit limit affordable. We characterize the optimal (equilibrium) contract and show that increasing the credit limit or decreasing maximum fees may hurt consumers. In the process, we identify 'imaginary satiation' as the driving force for borrowing behavior and welfare.

The third paper is a general model of borrowing under quasi-hyperbolic (beta-delta) preferences and false beliefs. Following well-known 'state/trait' duality in IIVP theories, or epigenetic theories of genes expression, or simply allowing for measurement errors in dual-self theories of procrastination, we allow for the procrastination parameter beta to be stochastic. Within this framework, we show that the prudence-to-risk aversion ratio determines borrowing behavior and welfare. With a high-enough ratio, naive consumers oversave. With low ratios, they may overborrow or oversave depending on how optimistic they are. When their beliefs are sufficiently close to the truth, naive consumers overborrow no matter their lifetime income. When their beliefs are far from the truth, and they are close to fully naive beliefs, they may end up oversaving if their income is low. Long-run inefficiencies arise irrespective of income levels or of whether or not utility is bounded. We also define pessimism, give conditions leading to pessimistic beliefs, and show that pessimists always behave as sophisticated time-inconsistent consumers.

Recently I have gone back to working on optimal fiscal policy. The current version is here:

"Do taxspots matter?," with M. Tvede.

It is understood that a general principle of optimal taxation is to smooth out consumption in the face of government spending fluctuations, aiming at tax certainty. In fact, tax uncertainty is pervasive, in and outside the circle of OECD countries, as shown by an IMF/OECD 2017 survey report. Generally, tax uncertainty has many sources (from random audits, tax laws interpretations, tax procedures to legislative uncertainty, as the political process produces changing tax environments), and is considered to negatively affect investments and welfare. However, evidence of the negative welfare effects of tax uncertainty is ambiguous (see, e.g., Bizer and Judd (1989), or references in the IMF/OECD report).

In this paper, we study if and when fiscal policy should introduce uncertainty in the economy -a phenomenon we dub 'taxspots'. Our focus implicitly is on legislative uncertainty, which affects all taxpayers at the same time. We find that capital taxes should be uncertain when prudence is large enough relative to the economy's risk aversion -a condition that requires, but is stronger than, 'nonconvexities' in the Ramsey problem. In economies with hand-to-mouth workers, taxspot uncertainty is persistent when a redistribution towards workers is desirable. Taxspots are not necessarily substitutes for positive average capital taxes, though 'front loading' taxspot policies Pareto improve on positive taxspot-free capital taxes. When workers are imprudent, average tax decreases with taxspots, other things equal.

Our taxspots are reminiscent of, but not equal to, 'sunspots', as fiscal policy is made to depend on 'higher-order beliefs' or 'sentiments' as defined in, e.g., Angeletos and La'O (2020); beliefs which otherwise would have no relevance in equilibrium.

The work on optimal fiscal policy is somewhat related to my previous work on taxes when markets are incomplete, and to my more recent excursions on the topic of bubbles. There the focus was on explaining credit volume collapses (such as occurring during the 2008 financial crisis). With G. Bloise (JET 2019) we show that credit collapse is not a necessary consequence of a recrudescence in agency problems ('manipulation of ARM mortgages') or of the arrival of bad news. Instead, the effect on credit volumes actually depends on how much the economy needs to escape autarky. Thus, when there are some minimal gains from trade at autarky, deterioration of agency problems or the arrival of bad news are not sufficient to create credit market crashes. Our result extends similar conclusions obtained by Fahri and Tirole (2012) in the context of an OLG economy. Our theory of bubble formation does not require abrupt changes in the equilibrium or other discontinuities for bubbles to arise. Our result also shows how studies of liquidity-constrained markets via approximation using no-trade equilibrium (see, e.g., Werning, 2015) can be misleading. [Strangely, you will not find reference to our JET paper in the sequel, appeared on TE, by Bloise, Polemarchakis and Vailakis (2021)...]