Research

RESEARCH STATEMENT(in Spanish)

RECENT PAPERS

 Aging across developing countries is expected to pose an important fiscal burden on governments with public pension schemes, which may be amplified by having large informal sectors. This document proposes a dynamic general equilibrium model with overlapping generations, where individuals across different age cohorts can be self-employed or work for an aggregate formal firm, and a government finances pensions through payroll taxes and debt. We calibrate the model to replicate relevant moments for the Colombian economy and find that aging would almost duplicate public debt, crowding out investment and reducing output by 2pp. Reducing the replacement rate, increasing the reference income, or increasing the payroll tax for formal employees would ameliorate the negative effects of aging without hurting formality. 


Labor informality, common in Latin American economies, is both a cause of low productivity and vulnerability, and a buffer that mitigates the effects of negative shocks in job destruction. In the current circumstances, labor informality is also associated with a higher risk of contagion. This fact reduces the willingness of households to get involved in informal activities and, therefore, reduces the labor supply and the speed of recovery. To understand and quantify these mechanisms, we propose an SIR model featuring a dual labor market, where households imperfectly substitute consumption from the informal and formal sector, and calibrate it to Colombian and Peruvian data. Considering a higher risk of contagion from the informal sector doubles the size of the recession and slows recovery, whereas having less rigidities in markets allows for a faster recovery. Targeting transfers and using selective lockdowns have a similar epidemiological effect as its non-targeted counterparts, but at a lower economic cost. Moreover, lockdowns are useful to slow contagion in the first months, but approach the non-constrained response before the peak of contagions, suggesting the inconvenience of long lockdowns.


Adverse shocks are common in developing countries. Since markets are incomplete, households must significantly distort their decisions to cope with these shocks. These distortions not only affect current utility but can also increase the vulnerability to future shocks, which in turn could trap households in a low-income equilibrium. This paper uses Colombian longitudinal data to estimate the persistence of adverse shocks, which is found to be between 9 and 11 percentage points, and find that such persistence is explained by decreases in consumption after a realized adverse shock. We also show that, while households in the lowest and highest quintiles use assets to smooth consumption, households in the middle of the wealth distribution decrease consumption significantly after a shock. We then propose a model and calibrate it with these estimates to rationalize the observed behavior behavior, and find that a poverty trap exists for the first two quintiles.


This paper models an entrepreneur's choice between investing in a safe activity or experimenting with a new risky one, and how much to invest in the ``entrepreneurial capital'' that would permit more effective use of the arriving information on the latter- how much to learn how to learn. Optimal investment in entrepreneurial capital depends on the cost, the distance from the entrepreneurial frontier, and non-monotonically on the expected return on the risky activity and can lead to three learning regimes, two of which can generate a development trap where firms and countries are unable to assess the potential of newly arriving technologies and hence grow more slowly. The first arises purely because it is too expensive to learn to learn, the second because the returns to the new activity are so high that they obviate the need to distinguish between activities and hence invest in entrepreneurial capital.   We draw on historical evidence to show how the model offers insights into three understudied features of the industrialization process in the western hemisphere at the beginning of the 20th century: the disproportionate influence of immigrant/foreign entrepreneurs in driving industrialization in Latin America; the emergence of selective exceptions to this pattern, as well as episodes of entrepreneurial retrogression; and the  differing effects of similar economic structures across countries that suggest the possibility of a learning-displacing resource curse. The model is able to simulate the respective decline and boom in the Chilean and US copper industries at the turn of the century, arising either from initially high relative returns or low initial endowments of entrepreneurial capital in the latter.


This paper explores the role of effort and human capital as mechanisms to alleviate the idiosyncratic risk faced by individuals in the presence of incomplete markets. I construct a DSGE model where effort and human capital determine the probability of being employed the next period. While effort is a flow variable that has to be exerted every period, human capital is a stock variable chosen when the agent is born. I first show how effort and assets are inverse related, and then characterize the investment in education as a function of its cost. In the stationary equilibrium individuals diversify between market and non- market mechanisms to reduce risk. As a result, in the long run, the median individual will hold a negative credit balance, which better approximates the real wealth distribution when compared with previous studies. The results shed light on the potential implication of combining policies of unemployment insurance and subsidies to education to improve the wealth distribution.


 Successful innovators have become billionaires by generating breakthrough technologies that are later widely adopted in the society. This paper proposes a model to explain why this is (constrained) efficient. I consider an environment where a population of agents must choose   between pursuing a risky project or a safe project. Before taking the decision, each agent can acquire information about the risky project by exerting unobservable effort. Then an aggregate statistic of the acquired information in the economy becomes public and each agent picks a project. In equilibrium a free-riding problem arises and the amount of agents acquiring information decreases compared to the efficient allocation. I then study the optimal contract designed by a social planner who wants to maximize social welfare but does not observe individual efforts. The optimal contract divides the population between nonexperimenters and a few experimenters that exert high effort, thus substituting the extensive margin of information by its intensive margin. It also splits the total returns of the risky project among experimenters when the unknown project yields significantly greater returns than the safe project. Therefore, it explains why paying so much to successful innovators is optimal.


Tax avoidance is highly prevalent in countries where the perception of corruption is higher. On the other hand, a lower tax revenue decreases the benefits from corruption. The purpose of this paper is to understand this effect of reputation on corruption mediated by tax collection, both theoretically and empirically. We first propose a model to understand the strategic interaction between a government that must finance public expenditure but can also steal part of the collected money, and citizens who may avoid taxes since the expenditure level is not observable to them. We then test its predictions using Colombian municipal data and find that increases in corruption cases as a measure of reputation lead to lower tax collection, yet to less corruption measured as a higher spending efficiency in education in the following period. 


We present a theoretical argument to identify the conditions under which a firm prefers to invest in biased innovations rather than neutral innovations. We prove that incentives to invest in biased innovations positively depend on i) total factor productivity and ii) the scarcity of a factor. 


WORK IN PROGRESS


I study dynamic stochastic models where current actions are constrained by a current state and determine the distribution over future states. The purpose of this paper is to provide a general learning process that allows agents to take the optimal decision when these endogenous transitions are unknown. The paper generalizes previous results by not imposing parametric restrictions on the unknown transition functions. Therefore, this approach is robust to this type of belief misspecification. I consider the cases where the possible set of actions is discrete as in bandit problems, or take a convex and compact set of values as is usual in most of the dynamic literature. Convergence to the rational expectations actions is obtained in the latter case provided some plausible conditions are satisfied.


This paper analyzes the strategic interaction between drugs dealers and the government's deterrence choices. We resume Hopenhayn's (1992) entry/exit set up but we model individuals' incentives to enter into drugs' market, to produce and to remain active. Drugs dealers activities determine their profits but also depend on their probability of being arrested, a variable chosen by the government. As visible and experimented drugs cartels may generate a higher political cost, authorities concentrate their resources on fighting them. However, this myopic strategy generates a never-ending cycle where drug lords are arrested but are replaced by newcomers. We then solve for the optimal deterrence policy and propose policy recommendations that would allow governments to increase the efficiency of funds spent in "drugs war".


Countries with high levels of income inequality and poverty, where the biggest share of world crime resides, strive to fight this issue with stale and expensive policing tactics. This paper explores the efficiency of implementing hidden policemen around cities as a costless strategy to battle crime. We model the interaction between a enforcer and a criminal in a sequential game with asymmetric information where the enforcer has the possibility of hiding policemen to deceive the criminal, and the latter has to decide whether to commit a crime or abstain from it. We find an equilibrium where hiding policeman prevents crime and is more efficient than equilibria where this strategy is not followed.


PUBLICATIONS: (ORCID)

 

CHAPTERS IN BOOKS


OTHER PUBLICATIONS