Abstract: This paper describes the inefficiencies associated with mortgage defaults in a standard equilibrium housing model. I calibrate the model to the U.S. housing market and evaluate these inefficiencies in a simulated downturn that captures the peak foreclosure spike and house price decline in the Great Recession. I find that the deadweight cost inefficiency associated with realized lender losses from foreclosure dominates pecuniary externalities, which are insignificant. Debt renegotiation mitigates lender losses following default but might be inefficiently low when transaction costs are incurred prior to the renegotiation process.
Abstract: I study the constrained inefficiency of sale choices of an asset in a heterogeneous agent model with search frictions. These frictions are modeled using a broker-intermediated directed search framework. Pecuniary externalities arise due to imperfect risk-sharing between agents and induce inefficiently high sales if asset sellers are more constrained as a group than buyers. Under the same condition, a novel finding is that private sellers also list prices which are lower than the constrained efficient list price.
Abstract: Using a panel of Indian manufacturing establishments, I document that establishments with greater exposure to contract labour, particularly after 2001, have a lower pass-through of idiosyncratic firm productivity shocks to the wages of workers they hire directly (’permanent’ workers). I also find that establishments based in states with less stringent labour regulations have a greater wage-productivity pass-through for permanent workers. A model with firms facing idiosyncratic productivity shocks that can either hire contract labour or permanent workers subject to search and matching frictions can explain this finding. As contract labour becomes easier to hire, establishments post relatively more vacancies for contract workers, which worsens the outside option of permanent workers, resulting in lower pass-through of idiosyncratic productivity shocks to permanent workers’ wages.
Abstract: We study the implications of agricultural subsidies for the agricultural productivity gap, defined as the ratio of labour productivity in non-agriculture to that in agriculture, and consumer welfare. We develop a dynamic general equilibrium model with individuals heterogeneous in productivity, landholdings, and assets in the presence of mobility costs, financial frictions and incomplete asset markets. We allow for endogenous sorting between sectors: agriculture and non-agriculture, and between the production of crops: staple and cash. The benchmark economy features two tax-financed subsidy programs: input price subsidies that reduce the cost of intermediate inputs for all farmers, and a minimum support price program for the procurement of staples. The model is calibrated to match a mix of macro data and quasi-experimental evidence pertaining to the Indian economy. Our counterfactual results highlight that removing either program reduces agricultural productivity and increases the agricultural productivity gap. However, abolishing either policy boosts welfare primarily by reducing the tax burden, which disproportionately benefits the asset-poor households. Thus, we identify a tension between promoting productivity and improving welfare in the context of agricultural policy intervention.
Abstract: We document a novel empirical finding: regions in the United States that were more exposed to automation prior to the Great Recession witnessed faster employment recoveries following that recession. This finding can be understood using a simple model of firm heterogeneity with capital accumulation. Comparing economies with different degrees of automation intensity, we find that less automation intensive economies recover slower relative to more automation intensive economies following a transitory negative TFP shock, as they have a relatively lower level of automation capital and tend to reduce automation capital investment more following the shock. Consequently, they benefit to a lesser degree from the complementarity between automation capital and labour, resulting in a slower recovery of employment.
Abstract: This paper studies regional labour mobility in an economy where monetary policy is constrained and adverse rural labour demand shocks lead to binding downward nominal wage rigidity. It shows the constrained inefficiency of individual regional labour mobility choices due to an aggregate demand externality, thereby reaffirming and extending prior insights from Farhi and Werning (2014). The output multiplier of a policy encouraging labour mobility following adverse shocks is related to fiscal multipliers associated with regional transfer policies, with the former being significant when demand linkages are stronger and home bias for regional goods is weaker.
Abstract: I introduce default and renegotiation in a standard three-period model of fire sales and pecuniary externalities. In the absence of the default option, indebted agents typically fire-sell their assets in bad states of the world in the intermediate period. The introduction of the default option and the possibility of renegotiation could potentially mitigate fire sales and introduce state-contingency. I show that pecuniary externalities due to market incompleteness might lead to inefficiencies in the decision to renegotiate debt.