Research

Completed working papers

"Hyperbolic Discounting with Random Gratification" (With Liyan Shi). Presentation.

Abstract: We analyze the dynamic problem of decision makers with quasi-hyperbolic discounting and random shocks to temptation. We show that this problem is equivalent to that of a standard consumer-saver who assigns biased weights to future shocks. This equivalence provides a straightforward methodology for characterizing the Markov equilibrium with hyperbolic agents. Through this equivalent problem, we provide conditions for the existence and uniqueness of the equilibrium. If the weights constitute a probability measure, the decision maker can be interpreted as optimistically biased, ensuring a unique equilibrium with continuous decision rules and implying no value for commitment devices. Otherwise, there is intertemporal "conflict'' between present and future selves: if the conflict is limited, uniqueness is guaranteed.

(Update: Sep., 2025)

Download Paper

"Fiscal Unions with Present Biased Governments" (With Jacopo Orlandi).

R&R Review of Economic Studies.

Abstract: This paper studies the relationship between fiscal rules and intergovernmental transfers within a federation. We analyze an environment where present-biased governments must insure against future shocks. The present bias generates a reason for fiscal rules to exist, while risk sharing motives bring out the need for transfers. A central authority designs the optimal combination of state contingent transfers and fiscal rules that maximize the federation's welfare. We show that independently of the present bias, it is optimal to achieve the first-best pattern of aggregate spending. However, how it is implemented depends on the intensity of the bias. When the bias is mild, a mechanism akin to an emergency fund with tight fiscal rules arises, while when the bias is severe, it is optimal to provide loans with contingent payments and to loosen up fiscal rules. Moreover, there is always a degree of bias for which a fiscal union is not optimal.

(Update: April, 2025)

Download Paper

"Optimal Redistribution with Government Debt" (With Kirill Shakhnov). Online appendix.

Abstract: We analyze the tight relationship between government debt and redistribution in Overlapping Generations Economies (OLG). We do so in an heterogeneous agents economy where the government collects capital and progressive labor taxes to pay government spending, debt, and redistribute income. In this environment, the Ramsey planner uses all taxes, even in the long run. We show that rising inequality leads not only to more progressivity, but also to more government debt and capital taxation. The necessary increase in debt to achieve the optimal redistribution policy can be substantial. We explore how limits to government's borrowing choices severely restrict its ability to redistribute income. We calibrate the model to the U.S. in the 2000-10 decade and estimate the optimal response to the observed change in inequality. We find that the optimal level of debt should approximately double.

(Update: Sep., 2025)

Download Paper

"Fiscal Rules and Discretion with Risk of Default" (With Chiara Felli and Liyan Shi).

R&R American Economic Review. Presentation.

Abstract: We study optimal fiscal rules when present-biased governments can default on their debt. Beyond their tendency to overaccumulate debt, they exhibit biases in default incentives. Depending on the severity of the bias and the cost of default, governments may either over-default, inefficiently defaulting at low debt, or under-default, retaining excessively high debt. The latter arises from a “clean-slate externality”: governments fail to internalize the future benefits of offloading debt. Balancing the commitment to not overspend with the flexibility to react to shocks, it is optimal to complement spending rules with default rules that either forbid or force default.

(Update: May, 2025)

Download Paper

"Macro and Financial Implications of Aging" (With Guillermo Ordoñez).

R&R Journal of Political Economy: Macroeconomics.

Abstract: The U.S. economy has recently experienced two salient, seemingly unrelated, phenomena: a large increase in post-retirement life expectancy and a major expansion in securitization. We argue they are intimately related. While aging induces an increase in the demand of saving instruments, it also puts pressure on financial innovations that expand their supply. We quantitatively single out the role of securitization in accommodating demographic transitions. In spite of its potential fragility, we show securitization was critical on increasing credit and output by channeling savings for retirement needs towards productive uses.

(Update: Feb., 2025)

Download Paper

"Unemployment Insurance when the Wealth Distribution Matters" (With Hernan Ruffo and Nicholas Trachter).

R&R European Economic Review.

Abstract: 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.

(Update: Dec., 2024)

Download Paper

"Coordination, efficiency and policy discretion" (With Anderson Schneider)

Abstract: Would citizens coordinate to punish a government when they observe suspicious behavior? This paper shows that such coordination could be impossible in an environment with the following characteristics: 1) the aggregate productivity (fundamental) is stochastic, 2) only the government observes it and, 3) agents privately receive a noisy signal about the fundamental. Item 1) implies that the best policy with commitment is state-contingent, while 2)-3) make information incomplete, hindering coordination among agents. We find that, independently of the signal's accuracy, state-contingent policies cannot be an equilibrium and the best sustainable payoff is uniformly bounded away from the efficient one.

(Update: June, 2016)

Download Paper

"Dynamic bargaining over redistribution in legislatures") (With Alessandro Riboni). Presentation.

Abstract: In modern democracies, public policies are negotiated among elected policymakers. Yet, most macroeconomic models abstract from post-election negotiation. In order to understand the determinants of redistribution, this paper studies legislative bargaining in a growth model where individuals are heterogeneous in their initial capital. Legislators with time-inconsistent preferences negotiate over a linear capital tax. As often the case in actual budget negotiations, we assume that the default option in every legislative session coincides with the previous period's tax. The endogeneity of the status quo forces policymakers to internalize how current decisions affect their bargaining power in future sessions. This channel has far-reaching implications on equilibrium tax levels and on how taxes vary with the institutional environment. On average we obtain capital taxes between 12% and 55%, depending on the distribution of legislators' wealth and on the specifics of the institutions. Finally, we show that political growth cycles arise: decades with low taxes and growing capital are followed by decades with high taxes and decreasing capital (and vice versa).

(Update: Oct., 2013)

Download Paper

Work in progress

"Are governments present biased?" (With Federica Di Nicola, Chiara Felli and Liyan Shi ). Download Presentation.

"Limits to stability." (With Guillermo Ordonez)

Publications

"Sticky Spending, Sequestration, and Government Debt" American Economic Review, vol. 114, no. 11, November 2024 (pp. 3513–50) . (With Alessandro Riboni) . Download.

"The Macroeconomics of Hedging Income Shares" Review of Economics Dynamics. Volume 54, October 2024. (With Adriana Grasso & Juan Passadore) . Download. Online Appendix.

"Optimal COVID-19 Quarantine and Testing Policies" The Economic Journal, vol. 132(647), pages 2534-2562. October 2022. (With Liyan Shi). Download.

"Saving Rates and Savings Ratios" Review of Economics Dynamics, vol. 46, pages 365-381, October 2022 (With Guillermo Ordoñez). Download.

"Do Non-Exporters Lose from Lower Trade Costs?" Review of International Economics. Volume 29, Issue 5, November 2021, Pages 1161-1185. (With Loris Rubini). Download.

"Fiscal Rules as Bargaining Chips." Review of Economic Studies. Volume 88, Issue 5, October 2021, Pages 2439–2478. (with Alessandro Riboni). Download. Download Appendix.

"Cooperatives vs Traditional Banks: The Impact of Interbank Market Exclusion." CEPAL Review. N. 138, Pages 208-22 December 2022. (With Raphael Bergoeing)

"Macro-Prudential Taxation in Good Times." Journal of International Economics. Volume 121 (C), November 2019. (With Jean Flemming and Jean-Paul L'Huillier). Download. Previously circulated as "News and Macroprudential Policy"

"Barriers to Firm Growth in Open Economies." BE Journal of Macroeconomics. De Gruyter, vol. 19 (1), pages 1-36, January 2019. (with Loris Rubini). Download.

"Spending biased legislators: discipline through disagreement." Quarterly Journal of Economics. Volume 130, Issue 2, May 2015. (with Alessandro Riboni) Download. Download presentation.

"The Whole is greater than the sum of its parts: Complementary reforms to address microeconomic distortions." World Bank Economic Review. World Bank Group, vol. 30(2), pages 268-305, July 2016. (With Raphael Bergoeing and Norman Loyza). Online Appendix: intuition

"Heterogeneous labor skills, the median voter and labor taxes." Review of Economics Dynamics. Volume 16, Issue 2, April 2013. (with Anderson Schneider) Download. Data and code Download.

"Costly Financial Intermediation in Neoclassical Growth Theory." Quantitative Economics. Volume 2, Issue 1. March 2011 (with Rajnish Mehra and Edward Prescott) Download. Download appendix.

"Labor Market Distortions, Employment, and Growth: The Recent Chilean Experience." General Equilibrium Models of the Chilean Economy. R. Chumacero and K. Schmidt-Hebbel, eds., Banking and Development Series, Central Bank of Chile, 2004. (with Raphael Bergoeing and Felipe Morande) Download

"Innovaciones en Productividad y Dinámica de Plantas." Revista de Análisis Económico, Volumen 18, Issue 2, pp. 3-32, December 2003. (with Raphael Bergoeing) Download

Other Publications

"Breaking Down the Barriers to Firm growth in Europe " (2012) The Fourth EFIGE Policy Report, August 2012, Bruegel Blueprint 18. (with L. Rubini, K. Desmet and A. Crespo). Download

Google Sites

Report abuse