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 establishments, I document that establishments which rely more intensively on contract labour, particularly after 2001, provide greater wage insurance to (’full-time’) workers they hire directly, i.e. have a lower pass-through of productivity shocks to full-time workers’ wages. A model in which establishments facing idiosyncratic productivity shocks can either hire contract labour on short-term contracts or hire full-time workers in a market with search and matching frictions can explain this finding: as contract labour becomes easier to hire, the outside option of an establishment hiring full-time workers improves, while the outside option of full-time workers worsens, resulting in lower pass-through of productivity shocks to full-time workers’ wages.
Research in progress
Abstract: We study the implications of agricultural price support programs, which offer a minimum price to farmers of certain crops, and farm input price subsidies for consumer welfare and the misallocation of talent across sectors. We develop a dynamic general equilibrium model with heterogeneous agents and endogenous occupational sorting between two sectors: agriculture and non-agriculture, and two crops: staples and cash crops. The government procures staple crops at predetermined prices and distributes them as free rations. The model is calibrated to the Indian economy. Our results suggest that in the absence of the minimum support price policy, labor reallocates from the staple crop sector to the non-agricultural sector; however, both aggregate output and consumer welfare in the economy are lower due to general equilibrium effects. A reduction of the input price subsidy raises crop prices in equilibrium, keeping employment shares fairly unchanged while lowering aggregate output and consumer welfare.
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.