Research

Working Papers:


How should industrial policies be directed to reduce distortions and foster economic development? We study this question in a multi-sector model with technology adoption, where the production of goods and modern technologies features rich network structures. We provide simple formulas for the sectoral policy multipliers, and provide insights regarding the power of alternative policy instruments. We devise a simple procedure to estimate the model parameters and the distribution of technologies across sectors, which we apply to Indian data. We find that technology adoption greatly amplifies the multipliers’ magnitudes, and it changes the ranking of priority sectors for industrial policy. Further, we find that adoption subsidies are the most cost-effective instrument for promoting economic development.


We study the spatial expansion of banks in response to banking deregulation in the 1980’s and 1990’s. During this period large banks expanded rapidly, mostly by adding new branches in new locations, while many small banks exited. We document that large banks sorted into the densest markets, but that sorting weakened over time as large banks expanded to more marginal markets in search of locations with a relative abundance of retail deposits. This allowed large banks to reduce their dependence on expensive wholesale funding. To rationalize these patterns we propose a spatial equilibrium theory of multi-branch banks that sort into heterogeneous locations. Our theory yields two forms of sorting. First, span-of-control sorting incentivizes top firms to select the largest markets and smaller banks the more marginal ones. Second, mismatch sorting incentivizes banks to locate in more marginal locations, where deposits to loans are relatively high, to better align their deposits and loans. Together these two forms of sorting account well for the sorting patterns we document.


R&R at American Economic Review

Why don’t poor countries adopt more productive technologies? Is this all because of distortions? Is there a role for policies that coordinate technology adoption? To answer these questions, we develop a quantitative model with heterogeneous firms and idiosyncratic distortions, in which the gains from technology adoption are larger when more firms adopt. When this complementarity is strong enough, multiple equilibria and hence coordination failures are possible. More important, even without equilibrium multiplicity, the model elements responsible for the complementarity amplify the effect of distortions substantially. In what we call the Big Push region, the impact of distortions is four times as large as in models without such complementarity. The Big Push region exists for a broad, empirically-relevant range of parameter values, whereas multiplicity is confined to a smaller segment of the parameter space.

 

This paper analyzes the welfare effects of unemployment insurance in a life-cycle model, focusing on partial vs. general equilibrium effects. We study an OLG economy with learning-by-doing human capital accumulation. Agents can be employed or unemployed. While unemployed agents costly search for new jobs. We calibrate the model to the U.S. economy, and find that replacement ratio and potential duration are close to the current one. But, in contrast with the previous literature, we find that the optimal policies under general and partial equilibrium are almost the same. Through a series of exercises we conclude that the life-cycle model provides two key components, crucial for welfare evaluation: it emphasizes workers’ insurance needs by accurately reproducing the left tail of the wealth distribution, and generates a realistic response of precautionary savings to transfers.



We study trading in over-the-counter (OTC) markets where agents heterogeneous valuations for assets are private information. We develop a novel quantitative model in which assets are issued through a primary market and then traded in a secondary OTC market. We use data on the US municipal bond market to calibrate the model. We find that the effects of private information are large, reducing asset supply by 20%, trade volume by 80%, and aggregate welfare by 4.5%. Using the model, we identify two channels through which the information friction harms the economy. First, there is misallocation induced by the information friction, as some efficient trades, which should occur, do not. Second, the total stock of assets is inefficiently low because resale value and liquidity go down due to the information friction. We investigate how much a simple tax/subsidy scheme that spurs issuance of new assets can help mitigate the cost associated with private information and find that it lowers the welfare cost from 4.5% to 2.4%.


Work in Progress:


We construct a dataset of the employment size distribution of establishments in India encompassing a broad cross-section of sectors. We combine readily available data from the 2005 Economic Census, which excludes the majority of agriculture firms, with information from 2003 National Sample Survey Office's Land and Livestock Holdings Survey, whose data is representative of the agricultural firms, i.e., the majority of the employment and firms in India. The combine dataset features a missing middle, i.e., a hollowing in the employment size distribution of establishments in the intermediate size classes. We show that a similar fact naturally arise when studying the size distribution of more narrowly defined sectors within the Economic Census. This finding is in sharp contrast to the recent evidence presented by Hsieh and Olken (2014), which is solely based on aggregate data from the Economic Census. We discuss alternative theories that can be used to interpret this fact.


Published and Accepted Papers:


The Journal of Political Economy, Number 1, Volume 132,  January 2024

We study the number, size, and location of a firm’s plants. The firm’s decision balances the benefit of delivering goods and services to customers using multiple plants with the cost of setting up and managing these plants, and the potential for cannibalization that arises as their number increases. Modeling the decisions of heterogeneous firms in an economy with a vast number of widely distinct locations is complex because it involves a large combinatorial problem. Using insights from discrete geometry, we study a tractable limit case of this problem in which these forces operate at a local level. Our analysis delivers predictions on sorting across space for industries with many plants per firm. Compared with less productive firms, productive firms place more plants in dense high-rent locations and place fewer plants in markets with low density and low rents. Controlling for the number of plants, productive firms also operate larger plants than those operated by less productive firms. We present evidence consistent with these and several other predictions using U.S. establishment-level data.

The Review of Economic Studies, Vol. 89, October 2022

We build a theory of financial intermediation based on the premise that some investors are better able to figure out the trade motives of their counterparties in bilateral meetings—screening experts. We solve for the equilibrium market structure, and study how information asymmetries stemming from heterogeneity in screening expertise shape up the core-periphery trade structure. In particular, the core of the market is populated by screening experts: they have the largest share of trade volume, they are actively engaged in middleman activity, and trade with the most counterparties. Using transaction-level micro-data and information disclosure requirements, we provide extensive evidence consistent only with our theory of financial intermediation.


Media coverage: Bloomberg; Brookings; Marginal revolution; Promarket; Vox; Cato Institute (commentary); askblog; The Grumpy Economist; Cato Institute (Research Briefs); Milken Institute Review                                                           

2020 NBER Macroeconomics Annual, Volume 35

Using U.S. NETS data, we present evidence that the positive trend observed in national productmarket concentration between 1990 and 2014 becomes a negative trend when we focus on measures of local concentration. We document diverging trends for several geographic definitions of local markets. SIC 8 industries with diverging trends are pervasive across sectors. In these industries, top firms have contributed to the amplification of both trends. When a top firm opens a plant, local concentration declines and remains lower for at least 7 years. Our findings, therefore, reconcile the increasing national role of large firms with falling local concentration, and a likely more competitive local environment. 


Review of Economic Dynamics (2019), Vol. 33 (special issue in Fragmented Financial Markets)

We model asset issuance in over-the-counter markets. Investors buy newly issued assets in a primary market and trade existing assets in a secondary market, where trade in both markets is over-the-counter (OTC). We show that the level of asset issuance and its efficiency depend on how investors split the surplus in secondary market trade. If buyers get most of the surplus, then sellers do not have incentives to participate in the primary market in order to intermediate assets and the economy has a low level of assets. On the other hand, if sellers get most of the surplus, buyers have strong incentives to participate in the primary market and the economy has a high level of assets. The decentralized equilibrium is inefficient for any splitting rule. The result follows from a double-sided hold-up problem in which it is impossible for all investors to take into account the full social value of an asset when trading. We propose a tax/subsidy scheme and show how it restores efficiency. We also extend the model in several dimensions and study the robustness of the inefficiency result. Finally, we explore the effects of the inefficiency using numerical examples. We study how bargaining power and trading speed in the secondary market affect the efficiency result, and we notice some interesting implications for policy interventions aimed to restore efficiency to OTC markets.


American Economic Journal: Microeconomics (2019), Vol. 11, No. 3

Relative price dispersion is defined as persistent differences in the price that retailers set for the same good relative to the price they set for their other goods. Using a large-scale dataset on prices in the US retail market, we document that relative price dispersion accounts for about 30% of the variance of prices for the same good, in the same market, during the same week. Using a search-theoretic model of the retail market, we show that relative price dispersion can be rationalized as the equilibrium consequence of a pricing strategy used by sellers to discriminate between high-valuation buyers who need to make all of their purchases in one store, and low-valuation buyers who are able to purchase different items in different stores.


International Economic Review (2019), Vol. 60, No. 2           

Individuals experience frequent occupational switches during their lifetime. Over 40% of high school graduates transition between white and blue collar occupations more than once between the ages of 18 and 28. Moreover, initial worker characteristics are predictive of future patterns of occupational switching, including the timing and number of switches. We construct a quantitative model of occupational choices with worker learning and occupation specific productivity shocks to match life cycle patterns of occupational transitions and quantify the value of occupational mobility and learning. For the average 18 year old worker, the value of being able to switch occupations is about 67 months of the maximum wage they could earn in the model (if they knew their type) and the value of a worker learning their type is about 32 months of this maximum wage.


International Economic Review (2019), Vol. 60, No. 1

Using rich U.S. data on consumer shopping behavior and good prices, we document that customer turnover is sensitive to price variation. Motivated by this finding, we study an economy where the customer base of a firm is persistent because of search frictions preventing customers from freely relocating across suppliers of consumption goods, and firms set prices under customer retention concerns. The key feature of our model is that the elasticity of the customer base to price -the extensive margin elasticity of demand- depends on the customers’ endogenous opportunity cost of search, and interacts with heterogeneity in firm productivity. More productive firms enjoy less customer attrition and lower elasticity of demand. As firms compete for customers, the price pass-through of productivity shocks is incomplete, with the most productive firms passing-through more. Moreover, an increase in the utility of consumption relatively to the cost of search results in higher customers search intensity and, therefore, lower prices, amplifying the effects of demand shocks on consumption.


Review of Economic Dynamics (2018), pp. 205-220

We develop a search-theoretic model of the product market that generates price dispersion across and within stores. Buyers differ with respect to their ability to shop around, both at different stores and at different times. The fact that some buyers can shop from only one seller while others can shop from multiple sellers causes price dispersion across stores. The fact that the buyers who can shop from multiple sellers are more likely to be able to shop at multiple times causes price dispersion within stores. Specifically, it causes sellers to post different prices for the same good at different times in order to discriminate between different types of buyers.


Journal of Economic Theory (2015), pp. 188-215

The paper studies equilibrium pricing in a product market for an indivisible good where buyers search for sellers. Buyers search sequentially for sellers but do not meet every seller with the same probability. Specifically, a fraction of the buyers' meetings lead to one particular large seller, while the remaining meetings lead to one of a continuum of small sellers. In this environment, the small sellers would like to set a price that makes the buyers indifferent between purchasing the good and searching for another seller. The large seller would like to price the small sellers out of the market by posting a price that is low enough to induce buyers not to purchase from the small sellers. These incentives give rise to a game of cat-and-mouse, whose only equilibrium involves mixed strategies for both the large and the small sellers. The fact that the small sellers play mixed strategies implies that there is price dispersion. The fact that the large seller plays mixed strategies implies that prices and allocations vary over time. We show that the fraction of the gains from trade accruing to the buyers is positive and nonmonotonic in the degree of market power of the large seller. As long as the large seller has some positive but incomplete market power, the fraction of the gains from trade accruing to the buyers depends in a natural way on the extent of search frictions.


Journal of Economic Theory (2015), pp. 339-368

We study the optimal anticipated policy in a pure-currency economy with flexible prices and a non-degenerate distribution of money holdings. The economy features a business cycle and lump-sum monetary injections have distributional effects that depend on the state of the cycle. We parsimoniously characterize the dynamics of the economy and study the optimal regulation of the money supply as a function of the state under commitment. The optimal policy prescribes monetary expansions in recessions, when insurance is most needed by the cash-poor unproductive agents. Conversely, the optimal policy prescribes monetary contractions during booms, so that the inflationary effect of the occasional expansions is undone.


Quantitative Economics 6(1) (2015), pp. 223-256 

A stepping stone arises in risky environments with learning and transferable human capital. An example is the role played by academic two-year colleges in postsecondary education: Students, as they learn about the uncertain educational outcomes, can drop out or transfer up to harder and more rewarding schools, carrying a fraction of the accumulated human capital. A theory of education is built and contrasted empirically to find that i) option value explains a large part of returns to enrollment, ii) enrollment in academic two-year colleges is driven by the option to transfer up, and iii) the value of the stepping stone is small.


Journal of Economic Theory 147 (2012), pp. 2332-2356

A prominent feature of the [9] model of commodity money is the multiplicity of dynamic equilibria. We show that the frequency of search is strongly related to the extent of multiplicity. Holding fixed the average number of meetings in a given unit of time, we vary the frequency of search by altering the interval between search opportunities. To isolate the role of frequency of search in generating multiplicity, we focus on symmetric dynamic equilibria in a symmetric environment, a class for which we can sharply characterize several features of the set of equilibria. For any finite frequency of search this class retains much of the multiplicity, but when agents search continuously there is a unique dynamic equilibrium. For each frequency we are able to characterize the entire set of equilibrium payoffs, strategies played, and dynamic paths of the state variables consistent with equilibrium. Indexed by any of these features, the set of equilibria converges uniformly to the equilibrium of the continuous search limit. We conclude that when search is frequent, the unique limiting equilibrium is a good approximation to any of the more exotic equilibria.


Old Working Papers: