Published and Forthcoming Papers

Careers in Firms: the Role of Learning about Ability and Human Capital Acquisition,  June 2024, Journal of Political Economy

Job and wage mobility can arise from firms and workers learning about workers' ability and workers acquiring human capital with experience. The relative importance of these two mechanisms is still debated, though. Using administrative data from one firm Baker, Gibbs, and Holmström (1994a,b), I estimate a structural model that integrates them. I find the direct effect of beliefs about ability on wages, which existing work has focused on, to be small. However, by improving the sorting of workers to the firm's jobs, learning about ability is indirectly a crucial determinant of wage growth and dispersion. [PDF][online_appendix][additional_online_details][Fed press]

Is a Fiscal Union Optimal for a Monetary Union? (with R. Berriel, E. Gonzalez-Aguado, and P.J. Kehoe), January 2024, Journal of Monetary Economics 

When is a fiscal union appropriate for a monetary union? In a monetary union without fiscal externalities, when local fiscal authorities have an informational advantage over a central fiscal authority in terms of their knowledge of countries' preferences for government spending, a decentralized fiscal regime dominates a centralized one. Our novel result is that in the presence of fiscal externalities across countries, however, a decentralized fiscal regime is optimal for small monetary unions, whereas a centralized fiscal regime is optimal for large ones. These results shed new light on the debate on fiscal integration within the EU and its enlargement. [PDF][online_appendix][replication_package]

Asset Prices and Unemployment Fluctuations (with P.J. Kehoe,  P. Lopez, and V. Midrigan), May 2023, Review of Economic Studies

Recent critiques have demonstrated that existing attempts to account for the unemployment volatility puzzle of search models are inconsistent with the procylicality of the opportunity cost of employment, the cyclicality of wages, and the volatility of risk-free rates. We propose a model that is immune to these critiques and solves this puzzle by allowing for preferences that generate time-varying risk over the cycle, and so account for observed asset pricing fluctuations, and for human capital accumulation on the job, consistent with existing estimates of returns to labor market experience. Our model reproduces the observed fluctuations in unemployment because hiring a worker is a risky investment with long-duration surplus flows. Intuitively, since the price of risk in our model sharply increases in recessions as observed in the data, the benefit from creating new matches greatly drops, leading to a large decline in job vacancies and an increase in unemployment of the same magnitude as in the data. [PDF][online_appendix][MarginalRevolution]

Cash Transfers and Nonlinear Prices (with O. Attanasio), November 2022, Microeconomic Insights

When consumers differ in their intensity of preference for a good, a seller has an incentive to sell lower quantities of a good at higher unit prices to induce consumers who like the good relatively more to purchase more of it. This type of price discrimination through volume discounts is usually interpreted to imply that nonlinear pricing leads to undesirably low levels of consumption among the poor. Using a rich model of price discrimination, which accounts for many distinguishing features of markets in developing countries and that we estimate with data from the celebrated Mexican cash transfer program Progresa, we find instead that many poor households consume much more than they would under linear pricing. We also find that the presence of price discrimination has crucial implications for the impact of cash transfer programs: in the context of Progresa, the unit prices of small quantities of common staples purchased by poorer households increased, whereas the unit prices of large quantities of the same goods purchased by richer households decreased. We conclude by discussing the instances in which price discrimination is likely to arise and its implications for welfare. [paper] 

Challenges and Opportunities from the Pandemic in Europe:  the Case of Italy (with A. Fogli), August 2021, SIEPR Policy Brief

In this brief, we examine how the pandemic unfolded in one of the major EU countries, Italy, whose experience in many dimensions has mirrored the U.S.’s one. We consider the specific health and economic emergencies that Italy has faced, contrast the experiences of two major cities in the U.S. and Italy, N.Y.C. and Milan, based on a novel network model of contagions and economic activity, and review the fiscal measures adopted in Italy in response to the pandemic. We conclude by assessing the opportunities that EU stimulus plans offer to Italy as well as the policy challenges ahead. [brief][appendix]

Do Income Transfers Work In Developing Countries?, March 2021, in Defining Ideas, Hoover Institution

Cash transfer programs have become increasingly popular in developing countries over the past twenty years as they have largely succeeded in alleviating poverty both in the short run, by transferring resources to families, and in the long run, by encouraging parents to invest in the health and education of children. This is especially true when transfers are conditional on specific eligibility requirements. So-called CCTs, or conditional cash transfer programs, target eligible families so long as they satisfy certain requirements.  From the start, however, these programs have raised concerns that a substantial portion of the transfers, especially in isolated rural communities, could be appropriated by shopkeepers through price increases. Here we review existing work, examine the extent to which this concern is warranted, and provide suggestions for the evaluation and design of cash transfer policies. 

On the Importance of Household vs. Firm Credit Frictions in the Great Recession (with P.J. Kehoe,  P. Lopez, and V. Midrigan),  August 2020, Review of Economic Dynamics

Although a tightening of credit is commonly thought to have been a key determinant of the Great Recession, to date it is unclear whether a worsening of credit conditions faced by households or by firms was most responsible for the downturn. Many existing studies have suggested that the household-side credit channel is quantitatively the most important one. Others contend that the firm-side channel played a key role. We propose a model in which both channels are present and are formalized as arising from a tightening of debt constraints faced by either households or firms. Our quantitative analysis indicates that the household-side credit channel is indeed the more salient one. We then evaluate the relative benefits of a fixed-sized transfer to households or firms that improves their access to credit. We find that the beneficial effects of such a transfer on employment are substantially larger when the transfer targets households rather than firms. We interpret our results as highlighting the importance of accounting for alternative transmission channels of financial shocks when evaluating government interventions during recessions. [PDF][Fed press]

Nonlinear Pricing in Village Economies (with O. Attanasio), January 2020, Econometrica

This paper examines the prices of basic staples in rural Mexico. We document that nonlinear pricing in the form of quantity discounts is common, that quantity discounts are sizable for typical staples, and that the well-known conditional cash transfer program Progresa has significantly increased quantity discounts, although the program, as documented in previous studies, has not affected on average unit prices. To account for these patterns, we propose a model of price discrimination that nests those of Maskin and Riley (1984) and Jullien (2000), in which consumers differ in their tastes and, because of subsistence constraints, in their ability to pay for a good. We characterize nonlinear pricing in this model and analyze the effect of nonlinear pricing on market participation as well as the impact of a market-wide transfer, analogous to the Progresa one, when consumers are differentially constrained. We show that the model is structurally identified from data on prices and quantities from a single market under common assumptions. We estimate the model using data from municipalities and localities in Mexico on three commonly consumed commodities. Interestingly, we find that nonlinear pricing is beneficial to a large number of households, including those consuming small quantities, relative to linear pricing mostly because of the higher degree of market participation that nonlinear pricing induces. We also show that the Progresa transfer has affected the slopes of the price schedules of the three commodities we study, which have become steeper as consistent with our model leading to an increase in the intensity of price discrimination. Finally, we show that a reduced form of our model, in which the size of quantity discounts depends on the hazard rate of the distribution of quantities purchased in a village, accounts for the shift in price schedules induced by the program. [PDF][supp_appendix][Fed press][Yale EGC]

Debt Constraints and Employment (with P.J. Kehoe and V. Midrigan), August 2019, Journal of Political Economy

During the Great Recession, the regions of the United States that experienced the largest declines in household debt also had the largest drops in consumption, employment, and wages. Employment declines were larger in the nontradable sector. Motivated by these findings, we develop a search and matching model with credit frictions. In the model, tighter debt constraints raise the cost of investing in new job vacancies and thus reduce worker job-finding rates and employment. The key new feature of our model, on-the-job human capital accumulation, is critical to generating sizable drops in employment. On-the-job human capital accumulation increases the duration of the flows of benefits from posting vacancies and, in our quantitative model, amplifies the employment drop from a credit tightening tenfold relative to the standard Diamond-Mortensen-Pissarides model. We show that our model reproduces well the salient cross-regional features of the U.S. economy during the Great Recession. [PDF][supp_appendix]

Evolution of Modern Business Cycle Models: Accounting for the Great Recession (with P.J. Kehoe and V. Midrigan), Summer 2018, Journal of Economic Perspectives

In this paper we review the recent literature on business cycles, discuss the extent to which existing models can account for the past recession, examine the features of the past recession that have informed promising new theories, and consider some of the challenges as well as open questions that the ongoing debate has raised. [PDF] 

On the Importance of Easing Consumer Credit Frictions (with P.J. Kehoe and V. Midrigan), December 2017, Economic Policy Paper, Federal Reserve Bank of Minneapolis

The vast bulk of the government financial interventions during the Great Recession was directed at helping banks weather the financial crisis. The design of these programs was heavily influenced by the view that helping banks preserve their means of providing finance to firms was the most important ingredient in ensuring a quick recovery from the crisis. We argue that the cross-state patterns of employment, output and debt in the United States suggest that financial frictions that led to a tightening of credit for consumers were more important in accounting for the recession than those that led to a tightening of credit for firms. Our analysis implies that policies designed to ease consumer credit conditions would have been more effective at ensuring a rapid recovery than the policies actually adopted that focused on easing firm credit conditions. [PDF]

Fiscal Unions Redux (with P.J. Kehoe), February 2017, Economic Theory

Before the advent of sophisticated international financial markets, a widely accepted belief was that within a monetary union, a union-wide authority orchestrating fiscal transfers between countries is necessary to provide adequate insurance against country-specific economic fluctuations. A natural question is then: Do sophisticated international financial markets obviate the need for such an active union-wide authority? We argue that they do. Specifically, we show that in a benchmark economy with no international financial markets, an activist union-wide authority is necessary to achieve desirable outcomes. With sophisticated international financial markets, however, such an authority is unnecessary if its only goal is to provide cross-country insurance. Since restricting the set of policy instruments available to member countries does not create a fiscal externality across them, this result holds in a wide variety of settings. Finally, we establish that an activist union-wide authority concerned just with providing insurance to member countries is optimal only when individual countries are either unable or unwilling to pursue desirable policies. [PDF]

Learning-by-Employing: The Value of Commitment Under Uncertainty (with B. Camargo), July 2016, Journal of Labor Economics

We analyze commitment to employment in an environment in which an infinitely lived firm faces a sequence of finitely lived workers who differ in their ability. A worker's ability is initially unknown, and a worker's effort affects how informative about ability his performance is. We show that equilibria display commitment to employment only when effort has a delayed impact on output. In this case, insurance against early termination encourages workers to exert effort, thus allowing the firm to better identify workers' ability. Our results help explain the use of probationary appointments in environments in which workers' ability is uncertain. [PDF][Fed Staff Report]

Debt Constraints and the Labor Wedge (with P.J. Kehoe and V. Midrigan), May 2016, American Economic Review (Papers and Proceedings)

Changes in household debt and employment across regions of the U.S. during the Great Recession are highly correlated: regions where the decrease in household debt was most pronounced were also regions where the decline in employment was most severe. We show that the drop in employment in the regions that have experienced the largest decrease in household debt is mostly accounted for by changes in the labor wedge (deviations from a static consumption-leisure choice) as opposed to changes in real wages. We argue that such a pattern is consistent with fluctuations in debt constraints in a standard Bewley-Aiyagari model. [PDF]

Job Matching Within and Across Firms, May 2015, International Economic Review

This paper proposes a matching model of the labor market in the presence of uncertainty and learning about ability that provides a simple unified framework for analyzing the dynamics of jobs and wages within firms and in the labor market. The model allows for different degrees of generality of ability as well as speeds of learning across jobs and firms. Equilibrium assignments and wages are consistent with a broad range of empirical findings on careers, suggest a novel interpretation for well-documented patterns, and help explain features of careers usually thought difficult to reconcile with the presence of uncertainty and learning. [PDF][supp_appendix]

Working Papers 

The Macroeconomic Dynamics of Labor Market Policies (with E. Hurst, P.J. Kehoe,  and T. Winberry),  Journal of Political Economy  (2nd round)

We develop a dynamic macroeconomic framework with worker heterogeneity, putty-clay adjustment frictions, and firm monopsony power to study the distributional impact of labor market policies over time. Our framework reconciles the well-known tension between low short-run and high long-run elasticities of substitution across inputs of production, especially among workers with different skills within a same education group. We use this framework to evaluate the effects of redistributive policies such as the minimum wage and the Earned Income Tax Credit.  We argue that since these policies generate slow transition dynamics that can differ greatly in the short and long run, a serious assessment of their overall impact must take account of the entire time path of the responses they induce. [PDF][slides][Bloomberg][Washington Post][BFI Insight]

On the Role of Performance Incentives, Learning about Ability, and Human Capital for Wages (with B. Camargo and F. Lange)

Although performance pay is a key source of wage dispersion, little is known about why it typically accounts for only a small portion of pay or how it shapes wages over the life cycle. As we document, standard models of performance incentives fail to explain its declining importance later in the life cycle. We fill this gap and resolve this puzzle by proposing a new framework that integrates well-known models of dynamic moral hazard, uncertainty about worker productivity, and human capital acquisition, and proving it is identified based on its equilibrium characterization. Once we parameterize  the model using well-known firm-level data, we find that performance pay is central to life-cycle wages. Strikingly, its level and life-cycle profile are not driven by the canonical risk-incentive tradeoff of moral-hazard models. Instead, they reflect workers’ desire to insure against the productivity risk arising from uncertainty about their  productivity and to acquire human capital. [PDF][NBERwp][slides] 

Revisiting the Employment Effect of the Americans with Disabilities Act (with J. Lise and L. Pistaferri) 

In this paper, we revisit the evidence on the employment effects of the Americans with Disabilities Act (ADA) of 1990. The existing literature has assessed the impact of the policy by comparing the labor market outcomes of individuals who report limitations to their ability to work (work limitations) and the labor market outcomes of individuals who do not. Since the ADA applies to all disabled individuals, not just those with work limitations, we rely on rich health and limitation information from the Survey of Income and Program Participation to distinguish between individuals with work limitations and individuals with other types of limitations that do not necessarily limit their ability to work (functional limitations). Consistently with the literature, over a longer sample period than used in previous work, we find that the ADA has had a negative effect on the employment and wages of individuals with work limitations. However, we also find that the policy has had a substantial and significant positive effect on the employment of individuals with physical or mental limitations that are not work-impacting, even when severe, with virtually no effect on their wages. To interpret this evidence, we develop a search and matching model of the labor market in which a worker's productivity and value of non-market time varies with a worker's disability status and firms face different costs to accommodate, employ, and separate from different types of workers with disabilities. We then use the model to evaluate the heterogeneous impacts of the policy on the employment and wages of work disabled and non-work disabled workers, to examine the relative importance of the different components of the policy for these outcomes, and to compare alternative designs of it. [slides]

On the Identification of Models of Uncertainty, Learning, and Human Capital Acquisition and the Determinants of Sorting (with A. de Paula,  C. Gualdani, and S. Salgado)

We examine the empirical content of dynamic matching models of the labor market with ex ante heterogeneous firms and workers in the presence of symmetric uncertainty and learning about worker ability and workers' human capital acquisition. We allow ability and acquired human capital to be general across firms to varying degrees. We establish conditions under which the primitives of these models are semiparametrically identified  based only on data on workers' jobs and wages. Through the lens of this class of models, we investigate the ability of existing empirical measures of the assortativeness of the matching between firms and workers to detect the actual degree of sorting in the labor market. We propose a new measure of matching assortativeness that accounts for the evolving  uncertainty about workers' ability and  workers' accumulating human capital. [PDF][slides]

Dynamic Competition in the Era of Big Data (with P.J. Kehoe and B. Larsen) 

The advent of rich and highly–detailed information on individual web–browsing and purchase histories—an instance of so–called Big Data—has begun to make feasible sophisticated forms of personalized pricing, heretofore considered too informationally demanding to implement. We argue these pricing strategies are especially relevant in markets for differentiated experience goods. Taking the view that this ability to price discriminate both intertemporally and interpersonally will become increasingly relevant in the future, here we investigate its implications on the dynamics of prices and on efficiency in such markets. In particular, we derive a simple characterization of the equilibrium pricing rule that shows how prices contain a variety–specific dynamic component that depends on the relative informativeness of competing varieties about consumers’ tastes. Over time, this pricing rule leads to discontinuous price changes that take the form of fluctuating price discounts for a given consumer. We provide evidence on the gains associated with these sophisticated forms of price discrimination using data on individual consumers’ purchases of Apple and Samsung products over time. We estimate primitives in the setting in which firms use the uniform pricing rule we observe in the data and then simulate the counterfactual world with first-degree price discrimination. We find that a significant fraction of consumers are better off under price discrimination relative to uniform pricing, as price discrimination intensifies competition for each individual consumer. Consumers worse off under price discrimination are those who are a good match for only Apple or Samsung. Firm profits from these consumers are correspondingly higher under price discrimination. [PDF][slides (short)][Bloomberg]

Tax the Rich? A Theory of Income and Wealth Inequality (with V.V. Chari, P.J. Kehoe, P. Lopez, and S. Salgado)

Recently, it has been argued that a progressive wealth tax may have large beneficial effects on the distribution of welfare in society and effectively no adverse effects on real economic activity. This paper evaluates the merits of this view, both conceptually and empirically, within a dynamic general equilibrium model in which empirically plausible income and wealth distributions arise from the agency problem between managers, executives, and entrepreneurs, on the one hand, and capital markets, on the other hand. In this framework, wealth taxes distort the effort that managers, executives, and entrepreneurs expend to create firms’ value, which capital markets reward them for, by tilting their choice of projects towards less risky but also less productive ventures. Our preliminary simulations show that even a simple version of the model accounts well for the distribution of income and wealth in the United States, including the higher degree of concentration of the distribution of wealth than that of income. The model also implies a substantial aggregate output loss from wealth taxes similar to those implemented in European countries such as Norway, which lead to a reduction in inequality that would be achieved at a much lower cost by a modest increase in the degree of progressivity of income taxation. [slides][video]

Fiscal Federalism and Monetary Unions (with R. Berriel, E. Gonzalez-Aguado, and P.J. Kehoe)

We apply ideas from fiscal federalism to reassess how fiscal authority should be delegated within a monetary union. In a real-economy model with no fiscal externalities, in which local fiscal authorities have an informational advantage about the preferences of their citizens for public spending relative to a fiscal union, a natural generalization of the classic decentralization result by Oates (1999) applies. Namely, a decentralized fiscal regime dominates a fiscal union, and the degree of dominance increases as the information of the fiscal union worsens in quality. In the presence of direct fiscal externalities across countries, however, a decentralized regime is optimal for small federations of countries, whereas a centralized regime is optimal for large ones. We then consider a monetary-economy model, in which governments finance their expenditures with nominal debt and inflation has a negative impact on aggregate productivity. If the monetary authority can commit to its inflation policy, then a version of Oates (1999)’s decentralization result holds. By contrast, when the monetary authority lacks commitment power, the resulting time-inconsistency problem generates an indirect endogenous fiscal externality. In this case, when a country-level fiscal authority chooses a higher level of nominal debt, it induces the monetary authority to inflate more to reduce the level of distortionary taxes needed to finance the higher debt. Because country-level fiscal authorities do not take into account the costs of the induced inflation that their fiscal policies induce in other countries, a negative fiscal externality arises. This externality naturally becomes more severe as the number of countries in the monetary union increases. Hence, as in the real-economy model, a decentralized fiscal regime is optimal for small monetary unions, whereas a fiscal union is optimal for sufficiently large ones. Our key result is that as the size of a monetary union increases, it becomes relatively more desirable to centralize fiscal authority. We conclude by discussing the implications of our results for the debate on the integration of fiscal policy within the EU and its enlargement. [PDF][slides]

On the Dynamic Effects of Monetary Policy with Heterogeneous Agents (with P.J. Kehoe, V. Midrigan, P. Lopez, and S. Salgado) 

The key missing ingredient necessary to evaluate the ability of heterogeneous agent New Keynesian models, or HANK models, to reproduce the differential responses of hand-to-mouth (HtoM) and non-hand-to-mouth (NHtoM) consumers to unanticipated monetary shocks are identified responses to such shocks using heterogeneous agent vector autoregressions or HAVARs. Our goal is to provide such evidence. We use micro-data to construct consumption, income, and hours worked for HtoM and NHtoM consumers and find that after a monetary shock, the consumption, income, and hours worked of HtoM consumers all respond in a hump-shaped fashion about three times as much as those of NHtoM consumers. Thus, we find no evidence that, relative to NHtoM consumers, the consumption of HtoM consumers responds disproportionately more than their income. Once we control for compositional effects due to differences in education, age, and gender across the two groups of consumers, we find scant differences in the response of consumption of HtoM and NHtoM consumers. [slides]

Household Economies of Scale and Consumption (with O. Attanasio, V. Di Maro, and A. Mahajan)

We revisit the importance of economies of scale in consumption by examining the relationship between per-capita expenditure on food and household size. In an influential paper,  Deaton and Paxson (1998) estimate this relationship to be negative in a number of countries, including developing ones, in contrast to the implications of the demand model they propose, which accounts for economies of scale at the household level and the consumption of both private goods (food) and public goods (housing). Intuitively, when household size increases for given expenditure per capita,  the price of the public good, namely, housing, decreases, which induces a positive income effect and a negative substitution effect on the demand for the private good, namely, food. If the income elasticity of the demand for food is large enough, then the substitution effect is small and so its per-capita consumption increases. When the unit price of food is constant in the quantity demanded of food, the same positive relationship holds between household size and per-capita expenditure on food. By contrast, we show that when food is priced nonlinearly via volume discounts—as is pervasive in developing countries—demand models that allow for economies of scale at the household level in general give rise to an ambiguous or negative relationship between household size and per-capita expenditure on food, as observed in the data. Once we account for the nonlinear pricing of food, we validate Deaton and Paxson (1998)'s conjecture that per-capita consumption of food increases, although per-capita expenditure decreases, with household size. [new paper soon]

Work in Progress

Prices, Consumption, and Welfare Under Cash and In-Kind Transfers (with O. Attanasio and S. Gautam)

A large literature has examined the impact of cash and in-kind transfers on consumption in developing countries. In evaluating these programs, however, existing work has largely ignored the potential price effects of transfers, which could undermine their positive impact on consumption especially when sellers have market power and exercise it through sophisticated forms of price discrimination among consumers. In this paper, we complement the existing literature by assessing the impact of cash and in-kind transfers on the distribution of consumption, prices, and welfare within an equilibrium model of price discrimination through nonlinear pricing that accounts for households' heterogeneous preferences for consumption, budget constraints, and consumption opportunities. We show that the effect of either type of transfers on equilibrium prices can be characterized as a function of the slope and curvature of consumers' marginal utility and the hazard rate of the distribution of consumers' marginal willingness to pay. Empirically, we document a large degree of price discrimination in all the Mexican villages we study and find very different price effects of cash and in-kind transfers. In particular, whereas cash transfers tend to lower unit prices and decrease the degree of price discrimination, in-kind transfers have an opposite effect that reduces some of their benefits, as consistent with our model. We then estimate the impact of the two types of transfers on the distribution of consumption, prices, and consumer's utility. We conclude by examining the optimal design of transfers in the presence of the price responses we measure. [new slides soon]

The Value of Managers  (with A. Bartel,  W. Halverson, J. Jedras, K. Shaw, and A. Wurdinger)

We use data from a very large Canadian bank with more than 80,000 employees, following managers over time and their direct reports (workers), and compare how different divisions of the bank are run.  We isolate a trade-off underlying the value of managers in providing workers with incentives for performance. In the Wealth Management (WM) division, workers are strongly remunerated for performance, and they have very few managers supervising them, whereas in the Risk Management (RM) or Personal Banking (PB) divisions, they receive little or no pay-for-performance and many managers supervise them.  Using machine-learning analysis of the text of job postings for managers, we show that in the WM division, workers are empowered, and in RM division, they are regulated. The reason why workers in the WM group are empowered is that they have the potential to generate large gains for themselves and the bank. On the contrary, workers in the RM group face a substantial risk of losses that they cannot be reasonably held liable for. We interpret these findings on the difference in job design, pay structure, and authority delegation across divisions through the lens of a dynamic moral-hazard model in which firms rely on both explicit and implicit incentives for performance but large downside output risk and workers' limited liability, which are important features of a division like RM, tend to mute both types of incentives, making managerial supervision an appealing incentive device. [slides]

Lessons from Optimal Fiscal and Monetary Policy (with V.V. Chari, P.  Kehoe, and J. Nicolini)

In this paper, we examine the optimality of contingent fiscal policy rules that are analogous to popular monetary policy rules, and we argue that desirable fiscal policy rules, especially in the form of debt management policies, have been successfully applied by several countries over long horizons. [slides]

On the The Puzzle of the Labor Wedge: a New Business Cycle Accounting Framework (with P.J. Kehoe and C. Malgieri)

The so-called labor wedge, defined as a deviation from the first-order condition for static labor supply in the growth model, plays a much larger role in explaining output fluctuations in the United States than in Europe. This is puzzling given the generally higher flexibility of U.S. labor markets compared with European ones. We propose an alternative accounting framework in which labor markets are frictional and matches between firms and workers are governed by long-term contracts. This framework aims to reconcile the observed discrepancy between the contribution of the labor wedge in explaining recessions and the strength of labor market frictions across countries. We show that a frictionless model would misinterpret credit shocks as productivity shocks, particularly in European economies during the Great Recession. 

Labor Market Regulations, Employment, and Wage Dynamics (with Z. Huo, L. Pacelli, and M. Tartari)

The goal of this paper is to explore the empirical importance of institutional constraints on pay and employment common in European countries for labor market outcomes. We propose a simple dynamic equilibrium model of the labor market in which we explicitly incorporate the constraints implied by the Italian national collective labor agreements (Contratto Collettivo Nazionale del Lavoro (CCNL) or National Collective Employment Contract) and analyze worker and firm behavior subject to these restrictions. We consider the following provisions of national contracts: (1) wage floors for each of the positions in the institutional job ladder, (2) dismissal/firing restrictions, (3) demotion restrictions, and (4) automatic promotions. The introduction of these constraints renders the dynamics of the model nontrivial. Specifically, wage floors entail both nominal and real rigidities and have potentially negative and positive impact on aggregate employment. We estimated the model using a unique dataset, the Work Histories Italian Panel (WHIP), containing pay and between-firm as well as within-firm career information for a large sample of Italian workers employed at some point over the period 1994-2004, in which information on the time-varying and job level-specific wage floors and related provisions, as contained in the relevant national contracts, is matched to WHIP for each observation. We use the estimated model to assess the impact of the constraints described on the dynamics of individual and aggregate wages and employment in Italy between 1994 and 2004. [slides]

A Characterization of Dependent Armed Bandit Problems with Applications (with P.J. Kehoe) 

We study a problem in which a decision maker repeatedly chooses among alternatives with uncertain rewards and learns about their worth by experiencing them. We allow the rewards from different alternatives to be statistically dependent, so the decision maker's problem is an instance of a multi-armed bandit with dependent arms. We provide a complete characterization of an optimal policy for a class of bandit problems that display complementarity between the unobserved state and the decision maker's action. We prove that the optimal policy is monotone in beliefs and takes a simple partition form. Our result also allows us to characterize equilibrium allocations in a market where decision makers strategically experiment even when information externalities generate inefficiencies. Finally, we show how our analysis can be applied to economic models of R&D, job assignment and matching in the labor market, and choice of product variety for experience goods to generate predictions consistent with the data. 

Representative Discussions

Supply, Demand, Institutions, and Firms: A Theory of Labor Market Sorting and the Wage Distribution (2022)  by  D. Haanwinckel [slides] 

Debt, Human Capital Accumulation, and the Allocation of Talent (2020)  by  T. Alon, N. Cox, and A. Wong [slides]

Household Leverage and the Recession (2018)  by  C. Jones, V. Midrigan,  and T.  Philippon [slides]