'Capital Deaccumulation and the Large Persistent Effects of Financial Crises.' (pdf)
In a panel of OECD and emerging economies, I find that banking crises are characterized by larger initial drops in investment than other large recessions and are followed by particularly persistent drops in output. Furthermore, the larger the drop in investment during the crisis, the more persistent the decrease in output subsequently. I present a model to account for these patterns, in which a financial shock temporarily increases the costs of external finance for investing entrepreneurs, leading to a drop in investment and a persistent slump in output and employment. Critical to the model is the distinction between different types of capital with different depreciation rates. Intangible capital and equipment have high depreciation rates, leading these stocks to drop substantially when investment falls during a financial shock. This can cause output and employment to remain low for close to a decade, through the contribution of equipment and intangibles to production and labor demand. I show that the consequences of such a financial shock correspond to several features of the US Great Recession (2008-2014), especially the large drop in equipment and intangible capital. In the model, TFP and government spending shocks do not lead to such large declines in investment or persistent output decreases, so the model is also consistent with the more transitory output drops seen after non-financial recessions, where such shocks may have been more important.
'Entrepreneurship, Agency Frictions and Redistributive Capital Taxation', with Corina Boar. (pdf)
Motivated by the observation that among OECD countries redistribution is negatively correlated with entrepreneurial activity, we examine the implications of entrepreneurial financial frictions for optimal linear capital taxation, in a setting where the government is concerned with redistribution. By including financial frictions, we emphasize the effect of a new channel affecting the equity-efficiency trade-off of redistribution: taxes affect the allocative efficiency of capital and, ultimately, total factor productivity. We find that high tax rates are optimal, provided that they are applied to wealth, rather than risky capital. Under plausible parameter values, we find that the optimal tax on risky capital is lower than that on wealth, and roughly in line with current U.S. levels. This suggests welfare gains from taxing only wealth at a higher rate.
'The Clarity Incentive for Issue Engagement in Campaigns', with Chitralekha Basu. (pdf)
Although parties focus disproportionately on favorable issues in their election campaigns, it is also the case that parties spend much of the 'short campaign' addressing the same issues - and especially salient issues. If able to influence the importance of issues for voters through their emphasis, it is puzzling that parties spend any time on unfavorable issue positions. We suggest that while parties prefer to emphasize popular issue positions, they also face an additional incentive to emphasize issues that are salient to voters: clarifying their positions on these issues for sympathetic voters. Leveraging the surprise general election victory of the British Conservative party in 2015---which brought about a hitherto unexpected referendum on EU membership---we show that, consistent with this hypothesis, voter uncertainty is especially costly for parties on salient issues. We formalize this argument using a model of party strategy with endogenous issue salience.
WORKS IN PROGRESS
'Distributional Consequences of Financial Development', with Corina Boar and Yicheng Wang.
'Price Norms, Higher-Order Beliefs and Macroeconomic Fluctuations.'