Research Interest
Household Heterogeneity, Wealth Inequality, Behavioural Macro and Finance, Optimal Taxation.
Working paper
“Belief Heterogeneity and Heuristics as Drivers of Wealth Inequality ”
Using microdata, we find that low-income households overreact to their current finances when forming expectations about future finances, while high-income households tend to be rational. Motived by this heterogeneity in overreaction, we incorporate it into a DSGE model with incomplete markets and both idiosyncratic and aggregate risks. We show a negative correlation between the extent of overreaction and wealth. An overreacting type becomes too pessimistic after a bad shock and too optimistic after a good shock. In our model, good states are common because the employment rates stays above 90% in both recessions and expansions. On average, this gives overreacting households overly optimistic beliefs, which leads them to save too little. This effect weakens during recessions, since fewer households hold optimistic beliefs then. Our policy exercise suggests that a wealth tax can be more effective with overreaction than in a model with fully rational agents. It corrects for the optimistic belief of poor overreacting households and gives them stronger incentives to save.
“Herding and Contrarianism with Overreaction”
This paper studies overreaction-induced herding and contrarian behaviour in a sequential trading market microstructure framework. Informed traders suffer from the representativeness heuristic and overreact to price movements when forming expectations of future payoffs. Herding and contrarian behaviour can be characterised by a wedge between the informativeness of private signals and public signals extracted from price movements. They occur when the perceived informativeness of the public signal outweighs the informativeness of the private signal. For a heuristic-free rational trader, such a case never occurs.
Work in progress
"Pareto Optimal Reforms”, with Patrick Macnamara and Raffaele Rossi