Research Department
Federal Reserve Bank of Philadelphia
Ten Independence Mall

Philadelphia, PA 19106


Disclaimer: The contents of this page do not necessarily represent the views of the Federal Reserve Bank of Philadelphia or the Federal Reserve System.
"Dispersion in Relative Prices: Evidence and Theory" with Greg Kaplan, Guido Menzio and Nico Trachter
We extend the literature on price dispersion both empirically and theoretically: First, we use a comprehensive dataset on US retail pricing to document that there exists significant dispersion in the overall price level across stores, as well as in the prices of individual goods relative to the store average. While the overall price-level varies by approximately 6% across stores, the prices of individual goods vary by as much as 14% around the store average, making the latter form of ’relative price dispersion’ dominant. This suggests non-trivial scope for households to economize by visiting multiple stores and buying goods where they are cheapest. To rationalize these observations, we propose a novel theory of equilibrium multi-product search. Relative price dispersion arises in the model as a result of spatial price discrimination by stores seeking to take advantage in heterogeneity households’ willingness to shop around for individual goods.
"Unions in a Frictional Labor Market" with Per Krusell
(revision requested)
We analyze a labor market with search and matching frictions where wage setting is controlled by a monopoly union. Frictions render existing matches a form of firm-specific capital which is subject to a hold-up problem in a unionized labor market. We study how this hold-up problem manifests itself in a dynamic infinite horizon model, with fully rational agents. We find that wage solidarity, seemingly an important norm governing union operations, leaves the unionized labor market vulnerable to potentially substantial distortions due to hold-up. Introducing a tenure premium in wages may allow the union to avoid the problem entirely, however, potentially allowing efficient hiring. Under an egalitarian wage policy, the degree of commitment to future wages is important for outcomes: with full commitment to future wages, the union achieves efficient hiring in the long run, but hikes up wages in the short run to appropriate rents from firms. Without commitment, and in a Markov-perfect equilibrium, hiring is well below its efficient level both in the short and the long run, with endogenous real stickiness in the dynamics of wages.
"Can Intangible Capital Explain Cyclical Movements in the Labor Wedge?" with Francois Gourio 
American Economic Review, 104, 5 (May 2014)
Intangible capital is an important factor of production in modern economies that is generally neglected in business cycle analyses. We demonstrate that intangible capital can have a substantial impact on business cycle dynamics, especially if the intangible is complementary with production capacity. We focus on customer capital: the capital embodied in the relationships a firm has with its customers. Introducing customer capital into a standard real business cycle model generates a volatile and countercyclical labor wedge, due to a mismeasured marginal product of labor. We also provide new evidence on cyclical variation in selling effort to discipline the exercise.
"Customer Capital" with Francois Gourio
Review of Economic Studies, 81, 3 (June 2014)
Firms spend substantial resources on marketing and selling. Interpreting this as evidence of frictions in product markets, which require firms to spend resources on customer acquisition, this paper develops a search theoretic model of firm dynamics in frictional product markets. Introducing search frictions generates long-term customer relationships, rendering the customer base a state variable for firms, which is sluggish to adjust. This affects: the level and volatility of firm investment, profits, value, sales and markups, the timing of firm responses to shocks, and the relationship between investment and Tobin’s q. We document support for these predictions in firm-level data from Compustat, using cross-industry variation in selling expenses to quantify differences in the degree of friction across markets.
"Aggregate and Idiosyncratic Risk in a Frictional Labor Market"
Supplements: Online appendix, Mathematica-file on eigenvalue theorem
American Economic Review, 101, 6 (October 2011)
In this paper I develop a tractable extension of a Mortensen-Pissarides style matching model that allows for risk averse workers with limited ability to smooth consumption. I show that this leads to a form of equilibrium wage rigidity. This rigidity arises because the inability of workers to smooth their consumption across unemployment and employment spells changes how unemployed workers value wage offers, and hence also the offers that employers find profitable to make.
"Labor Market Dynamics under Long-Term Wage Contracting"
Supplements: Appendix A, B, C
Journal of Monetary Economics, 56, 2 (March 2009)
Recent research seeking to explain the strong cyclicality of US unemployment emphasizes the role of wage rigidity. This paper proposes a micro-founded model of wage rigidity – an equilibrium business cycle model of job search, where risk neutral firms post optimal long-term contracts to attract risk averse workers. Equilibrium contracts feature wage smoothing, limited by the inability of parties to commit to contracts. The model is consistent with aggregate wage data if neither worker nor firm can commit, producing too rigid wages otherwise. Wage rigidity does not lead to a substantial increase in the cyclical volatility of unemployment.
"On the Implications of a Balanced Budget Rule - An Adaptive Learning Perspective"
Licentiate Thesis, University of Helsinki, 2002 (email me for paper)