Research
Working Papers
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.
Under Revision for the Journal of Money, Credit and Banking
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 sector establishments, I document that establishments which rely more intensively on contract labour provide
greater insurance, in terms of lower wage pass-through of productivity shocks, to (’full-time’) workers they hire directly. I also find that capital-intensive
establishments provide more insurance to full-time workers. A model of wage contracting under limited commitment with different worker types and tasks can explain these findings: establishments employ contract labour to carry out less skill-intensive tasks, while full-time workers carry out more skill-intensive tasks that require the use of capital, making them less substitutable with contract labour. This weakens the establishment’s outside option, leading to the provision of greater insurance to full-time workers.
Research in progress
Support prices, input subsidies and misallocation in Indian agriculture (with Anand Chopra and Pubali Chakraborty)
Abstract: We study the implications of agricultural price support programs (which offer a minimum price to producers of supported crops) and input (electricity and fertilizer) price subsidies for occupational choices and quantify the resulting misallocation of talent across the agricultural and non-agricultural sectors. These programs can distort cropping choices, sorting across sectors, and contribute to low agricultural productivity. As agriculture comprises a large share of employment in many developing economies, low agricultural productivity can help explain the income differences between rich and poor economies. Our analysis employs a dynamic model with agent heterogeneity by productivity and asset holdings to focus on specific distortions, viz., a minimum price that producers of certain crops can avail of or input price subsidies, in the context of India.
Downward nominal wage rigidity and regional labour mobility (Draft available upon request)
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.
Pecuniary externalities and inefficient renegotiation
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.