Maya Eden

Work in progress

Complexity and the Demand for Safe Assets (joint with Nir Avni, Department of Mathematics, Harvard University)

The subprime mortgage crisis was amplified by the complexity of securitized products. When losses from loans began to realize, many assets were difficult to price because of their complexity, causing them to be essentially untradeable. This is puzzling given that the purpose of securitization is to create safe assets. In this paper, we propose that the collapse in the value of securitized products can be explained by an inherent discontinuity in the level of complexity of financial assets. We employ tools from Statistical Mechanics to argue that the complexity induced by the process of securitization exhibits a phase transition, in which complexity increases discontinuously at some critical level of securitization. In our model, if the demand for safe assets is sufficiently high, the system is drawn to an unstable equilibrium in which agents do not know whether the level of complexity is above or below the critical threshold. The state of complexity can be inferred if the economy is hit by a sectoral shock (such as a shock to housing prices) that calls for the reevaluation of assets. If complexity is revealed to be above the critical level, securitized products become illiquid, resulting in a widespread financial crisis in which banks are both unwilling to lend to each other and unwilling to issue new loans to the productive sector.

A Balls-and-Bins Model of the City Size Wage Premium (joint with Matthew J. Notowidigdo, Chicago Booth)

The correlation between city size and wages is typically interpreted as arising from a combination of worker sorting, firm selection, and city-wide agglomeration economies. In this paper, we propose an alternative explanation, which is that part of this correlation is a mechanical consequence of a highly skewed income distribution. We are motivated by the following statistical principle: if families (“balls”) are randomly assigned to cities (“bins”) of varying size, and the income distribution of families is highly skewed, then with a high probability we will observe a positive correlation between income per capita and city size. Empirically, we interpret “families” broadly as groups of individuals with similar incomes that tend to collocate, such as employees of the same industry or members of the same immigrant group. The correlation implied by the balls-and-bins model depends on the size of these groups. For example, the balls-and-bins model with groups of size 10,000 generates a correlation between city size and wages that can fully account for the lower bound of the existing estimates in the literature. In ongoing work, we are empirically estimating group sizes based on observable characteristics in order to estimate the practical relevance of this mechanism.

The Week

The seven day labor-leisure cycle has set the rhythm of economic activity for over a thousand years. However, the division of time into chunks of labor and chunks of leisure is at odds with the standard dynamic model of labor supply that implies that the optimal consumption of leisure is smooth. I add three ingredients to the standard continuous time model: first, any point in time must be spent either on labor or on leisure (and cannot be divided between these two activities). Second, the utility derived from leisure takes the form of increasing a stock of pleasant memories, which depreciates during time spent on work. Third, there is a cost associated with switching between labor and leisure. In this model, a “week” that divides time into a cycle of labor and leisure emerges as an optimal plan. All three modifications are necessary for this result. If either labor or leisure requires widespread coordination, the model has multiple equilibria. It is therefore theoretically possible that the seven day week is a consequence of a coordination failure. In calibrating the optimal labor-leisure cycle, a key parameter is the switching cost between labor and leisure. This parameter depends both on the physical switching costs between the workplace and the “leisure” location, and on the psychological switching costs between work and leisure activities.