Research

Rising Income Inequality and the Impact of r-g in the United States with Antonio Abatemarco and Elena Lagomarsino   ⚖️
Review of Income and Wealth 71(1), 2025

This paper proposes a novel non-parametric strategy to test ‘Piketty's third law,' postulating that a positive gap between the rate of return on capital (r) and the economy's growth rate (g) is associated with increased income inequality. The strategy is based on a decomposition of inequality changes over time that allows investigating the existence of a distributive effect of the r-g gap and its relative importance with respect to other drivers of income inequality changes over time. Applying this strategy to data from the Panel Study of Income Dynamics on the last 50 years, we find support for the existence of Piketty's law in the evolution of income inequality in the United States. Whereas factors other than Piketty's income dynamics predominantly drive overall inequality, the r-g gap accounts for approximately 10% of the trend in income inequality in the medium- and long-term.

Clean Innovation, Heterogenous Financing Costs, and the Optimal Climate Policy Mix with Emanuele Campiglio and Anthony Wiskich  🌲🚀🏦
Journal of Environmental Economics and Management 128, 2024  

Access to finance is a major barrier to clean innovation. We incorporate a financial sector in a directed technological change model, where research firms working on different technologies raise funding from financial intermediaries at potentially different costs. We show that, in addition to a rising carbon tax and a generous but short-lived clean research subsidy, optimal climate policies include a clean finance subsidy directly aimed at reducing the financing cost differential across technologies. The presence of an endogenous "financing experience effect" induces stronger mitigation efforts in the short-term to accelerate the convergence of heterogeneous financing costs.  This is achieved primarily through a carbon price premium of 39% in 2025, relative to a case with no financing costs. 

A Tale of Two Cities: Communication, Innovation, and Divergence  with Stefano Magrini   ⚖️🚀
Economic Inquiry 62(1), 2024 

We present a two-area endogenous growth model where abstract knowledge flows at no cost across space but tacit knowledge arises from the interaction between researchers and hence is hampered by distance. Digital communication reduces this “cost of distance” for flows of tacit knowledge and reinforces productive specialization, leading to an increase in the system-wide growth rate but at the cost of more inequality within and across areas. These results are consistent with the rise in the concentration of innovative activities, income inequality, and skills and income divergence across US urban areas. 

Wealth Inequality and the Exploration of Novel Technologies  ⚖️🚀🏦
B.E. Journal of Macroeconomics 23(2), 2023  

I investigate whether wealth inequality hinders the discovery of novel technologies in a competitive screening model. Agents can engage in experimentation, which may lead to the discovery of superior technologies, while wasting time with inferior ones. Talented agents are better at weeding out inferior actions, but talent is unobservable by lenders. When agents are poor, this causes an adverse selection problem and experimentation is also pursued by untalented agents. As economies become wealthier, this misallocation problem weakens. Higher inequality worsens the misallocation problem when the economy is rich, but can increase efficiency in poor economies. 

Risk Aversion and the Size of Desired Debt with Elena Lagomarsino   ⚖️🏦
Italian Economic Journal 9(1), 2023  

We investigate the determinants of the level of desired total, secured, and unsecured debt for a panel of Italian households over the period 1989 - 2016, accounting for both left censoring and sample selection. In particular, we focus on the role of households' attitudes towards risks, using both their observed behaviour in the financial market and the responses to a hypothetical lottery choice question. We find risk aversion to be a significant determinant of the desired amount of unsecured and total debt. Relatively more risk adverse households desire more debt, suggesting that Italian households may rely on consumer credit to insure themselves against temporary shocks.  

The Carbon Bubble: Climate Policy in a Fire-Sale Model of Deleveraging with David Comerford 🌲🏦
Scandinavian Journal of Economics 125(3), 2023   

Credible implementation of climate change policy requires large fossil fuel asset write-offs. We discuss the implications of this issue, named the Carbon Bubble, for macroeconomic policy and for climate policy itself. We embed the Carbon Bubble in a macroeconomic model exhibiting a financial accelerator: if investors are leveraged, the Carbon Bubble precipitates a fire-sale as investors rush for the exits, and generate a large and persistent fall in output and investment. We investigate policies which can accompany the writing-off of these assets, like debt transfers, investment subsidies, government guarantees. We find a role for policy in mitigating the Carbon Bubble.  

No Gain in Pain: Psychological Well-Being, Participation, and Wages in the BHPS with Elena Lagomarsino   ⚖️
European Journal of Health Economics 21(9), 2020  

Accounting for endogeneity, unobserved heterogeneity, and sample selection in an unified framework, we investigate the effect of psychological well-being on wages and labour market participation using a panel from the British Household Panel Survey. We find the effect of psychological well-being on labour market outcomes to differ across gender. In particular, psychological distress significantly reduces participation across genders, but, conditional on participation, has a significant negative effect on hourly wages only in the female sample. 

Energy Shocks and the Climate Transition with David Comerford    🌲🏦 

We present a two-sector growth model in which a representative agent invests in fossil fuel-based energy and renewable energy. These  differ in capital intensity and project duration: fossil fuel investments require lower upfront investment and have shorter duration, whereas renewables are more capital-intensive with longer-lived assets. We show that a negative economic shock (such as an energy supply shock or recession) raises the marginal utility of consumption, leading the agent to cut total investment and to skew the remaining investment toward fossil fuel projects with quicker returns. This mechanism delays the clean energy transition, even if renewable energy is cost-effective on a levelised cost basis, implying a role for policies to sustain clean investment during recessions. We discuss how this mechanism can be amplified by higher interest rates, perceived risk, and financial frictions, and we relate our findings to recent empirical episodes (e.g. the 2022-23 energy crisis and post-2008 recession). 

Inequality and Mobility under Social Competition with Francesco Trevisan ⚖️

We provide a micro-founded dynamic framework to analyse the effects of inequality on social competition, mobility, and welfare. We consider an infinitely repeated Tullock contest in which players with concave utility allocate resources between consumption and costly effort, and the prizes from the current competition determine the players' endowments in the subsequent period. We characterize the unique pure-strategy Markov Perfect Equilibrium, proving that the highly endowed player exerts more effort and has a higher probability of winning. Social competition is maximized at an intermediate level of inequality, whereas utilitarian social welfare is maximized under full equality. Assuming non-increasing absolute risk aversion preferences, we find that greater inequality monotonically reduces social mobility (a pattern consistent with the Great Gatsby curve) and lowers the welfare of the lowly endowed player. By contrast, the welfare of the highly endowed player is non-monotonic when the discount factor is sufficiently high. Thus, being richer in a more unequal society does not necessarily imply higher individual welfare. For example, under logarithmic utility and a discount factor of 2/3, an individual must control over 88% of total resources to strictly prefer inequality over full equality.

Inequality of Opportunity, Inequality of Effort, and Innovation  ⚖️🚀🏦 

Is inequality good or bad for innovation? I study an endogenous growth model with heterogeneous agents; due to credit frictions, inequalities in wealth lead to misallocation of talent. A more unequal reward scheme incentivises innovation in any given period, but it leads to a more unequal  distribution of opportunities that may exacerbate the misallocation of talent in the next period.  Empirically, I show that the flow of patents in a US state is negatively correlated with inequality of opportunity, but positively with inequality of effort; and that the elimination of state death taxes, as a proxy for an increase in the financial incentives towards risky activities, had a positive short-term but a negative long-term effect on the growth rate of patents. 

Too Different to Get Along: Inequality and Global Public Goods with Margherita Bellanca   🌲⚖️ 

We study how inequality affects the feasibility of an international agreement on the provision of an environmental public good in a two-country two-level political economy model. At the international level, two negotiators try to agree on the respective country's provision of the public good under different international equity rules, knowing that this agreement will need to be accepted by the median voter in each country. At the national level, agents' preferences for the public good depend on their relative income position, which implies that negotiators must also take into account the level of inequality within their country. We show that the feasibility of the agreement and the distribution of the gains from cooperation depends on the equity rule imposed, on the levels of within-country inequality, and on the level of cross-country inequality. 

Asymmetric Information and Market Power with Francisco Queirós  ⚖️🏦 

The last decades have been marked by a decline in real interest rates and an increase in product market power. By embedding an adverse selection framework in a model with variable markups in the product markets, we argue that these two changes actually reinforce each other through the interactions between financial intermediation, interest rates, and market power. Our economy exhibits two equilibria: one where market power is high, and factor shares are low; and one where market power is low, and factor shares are high. 

Climate Policies, Green Innovation, and Divergence with Stefano Magrini 🌲⚖️🚀 

The Geography of Green Innovators in the United States with Margherita Gerolimetto and Stefano Magrini 🌲🚀