Research Interest
Heterogeneous-Agent Models, Expectation Formation, Wealth Inequality, Macro-Public Finance
Working papers
“Belief Heterogeneity and Heuristics as Drivers of Wealth Inequality ” JMP
Abstract: Using microdata, we document heterogeneity in overreaction in household-finance expectations. Low-income households overreact more strongly to recent household-finance experience when forming expectations about future finances, while high-income households look closer to a no-overreaction benchmark. Motivated by this evidence, we incorporate heterogeneity in overreaction into an incomplete markets with both idiosyncratic and aggregate risks. The calibrated model implies a negative relationship between the extent of overreaction and wealth. Overreacting households become too pessimistic after bad experiences triggered by recession and too optimistic after good experiences triggered by expansion, which shifts saving incentives in a state-dependent way. Because our business cycle calibration features persistent expansions and rare severe recessions, optimistic under-saving episodes dominate on average and overreactors accumulate less wealth. The wealth-overreaction relationship weakens in recessions, when fewer households are in good states. In a policy experiment, a flat wealth tax reduces wealth concentration in both the benchmark and a rational version of the model. However, the reduction is larger under overreaction because the policy affects beliefs through its impact on household finances and partly corrects optimistic beliefs.
“Herding and Contrarianism with Overreaction”
Abstract: 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
"Redistribution without Rational Expectations”, with Patrick Macnamara and Raffaele Rossi