A Theory of Wage Rigidity and Unemployment Fluctuations with On-the-Job Search (Job Market Paper)
Abstract: I develop a new theory of wage rigidity and unemployment fluctuations. The starting point of my analysis is a generalized version of Burdett and Mortensen's (1998) job-ladder model featuring risk-neutral firms, risk-averse workers, and aggregate risk. Because of on-the-job search, my model generates wage rigidity both for incumbent workers, through standard insurance motives, and for new hires, through novel strategic complementarities in wage setting between firms. In contrast to the conventional wisdom in the macro literature, the introduction of on-the-job search implies that: (i) the wage rigidity of incumbent workers, rather than new hires, is the critical determinant of unemployment fluctuations; (ii) fairness considerations in wage setting dampens, rather than amplifies, unemployment fluctuations; and (iii) new hire wages are too flexible, rather than too rigid, in the decentralized equilibrium. Quantitatively, the wage rigidity of incumbent workers caused by the insurance motive alone accounts for about one fifth of the unemployment fluctuations observed in the data.
Women, Wealth Effects, and Slow Recoveries (Revise and resubmit, AEJ Macro)
(with Emi Nakamura and Jón Steinsson)
Abstract: Business cycle recoveries have slowed in recent decades. This slowdown comes entirely from female employment: as women’s employment rates converged towards men’s over the course of the past half-century, the growth rate of female employment slowed. But does the slowdown in the growth of female employment rates translate into a slowdown for overall employment rates? The degree to which women “crowd out” men in the labor market is a sufficient statistic for this question. We estimate the extent of crowding out across states, and find that it is small. We then develop a general equilibrium model of the female convergence process featuring home production and show that our cross- sectional crowding out estimate provides a powerful diagnostic statistic for aggregate crowding out. Our model implies that at least 70% of the slowdown in recent business cycle recoveries can be explained by female convergence.
Globalization and the Ladder of Development: Pushed to the Top or Held at the Bottom?
(with David Atkin and Arnaud Costinot)
Abstract: We study the relationship between international trade and development in a model where countries differ in their capability, goods differ in their complexity, and capability growth is a function of a country's pattern of specialization. Theoretically, we show that it is possible for international trade to increase capability growth in all countries and, in turn, to push all countries up the development ladder. This occurs when specialization in the more complex sectors, which face less foreign competition in all countries, also tends to create positive dynamic spillovers. Empirically, we propose to estimate these dynamic spillovers using the entry of countries into the World Trade Organization as an instrumental variable for other countries' patterns of specialization. Our results suggest that sectors facing less foreign competition tend to create negative spillovers. Through the lens of our model, this implies dynamic welfare losses from trade that are pervasive and particularly large among a few developing countries.
Asset Quality Cycles
Journal of Monetary Economics, vol. 95, pp. 97-108, May 2018 [working paper version]
Abstract: Systemic risk builds up during booms in an economy featuring asymmetric information in asset markets, where investors’ hidden effort choices endogenously determine asset quality distribution. Higher asset prices during booms induce more investors to sell their assets, which lowers their incentive to improve quality. This quality deterioration in turn makes the economy vulnerable to future exogenous shocks because market breakdowns become more likely. Private agents do not internalize that their effort choices worsen future adverse selection problems, and thus the planner may improve welfare by taxing trade and thereby lowering asset prices.
Research in Progress
Preacutionary Savings Traps
Abstract: Risk-taking and risk-sharing are complements when markets are incomplete due to limited commitment frictions, and risky investment is illiquid. Greater risk-taking lowers the outside options of reneging the contract, which improves risk-sharing. In turn, better risk-sharing encourages more risk-taking. Following an increase in aggregate risk, investment goes down, and market incompleteness endogenously rises. The feedbacks can be strong enough that a temporary shock brings the economy into a permanent slump with high idiosyncratic risks and high precautionary savings. Subsidizing risky investment not only improves welfare but also may reduce risk.
Home-Market Effects in Asset Production
Abstract: Capital tends to flow from fast-growing countries to slow-growing countries, contrary to the prediction of neoclassical models. I propose a parsimonious theory in which slower growth causes capital inflow. The theory builds on the idea that financial development is demand driven. In the model, a relatively larger demand for store of value in slow-growing countries stimulates financial innovation. The endogenous response of financial development can be strong enough to attract capital inflow. This contrasts with the existing theories in which slow-growing countries happen to have relatively well-developed financial markets.