WORKING PAPERS
'Capital Deaccumulation and the Large Persistent Effects of Financial Crises.' (slides) (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. I suggest that the large initial fall in investment during a banking crisis may be a major cause of the persistent slump in output subsequently, due to its adverse effect on the stock of equipment and intangible capital. To evaluate this channel, I present a model 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. (slides) (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. In our setting, optimal tax rates can be closely approximated by simple closed-form functions of pre-tax prices and parameters. Under plausible parameter values, we find that it is optimal to tax both consumption and wealth at relatively high positive rates and optimal to tax capital income at a negative rate. This is because capital income taxes are more inefficient than both consumption and wealth taxes in terms of their effect on aggregate total factor productivity, in addition to their well-known effect of reducing aggregate capital accumulation.
'The Clarity Incentive for Issue Engagement in Campaigns', with Chitralekha Basu. (slides) (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 parties’ campaign strategies exhibit these patterns because parties face two competing incentives. The first is an incentive to emphasize popular issues positions in order to increase the salience of such issues to voters. The second, which we term the clarity incentive, is an incentive to emphasize already salient issues in order to clarify the party’s position on such issues, thereby increasing its appeal to sympathetic but risk-averse 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
'Bank Deregulation: Who Gains and Who Loses?', with Corina Boar, Kjetil Storesletten and Yicheng Wang.
'The Persistent Effects of the Financial Crisis on Employment and Productivity', with Kemal Ozhan and Piercarlo Zanchettin.
'Optimal Taxation of Risk-Taking', with Romans Pancs.
'Capital Deaccumulation and the Large Persistent Effects of Financial Crises.' (slides) (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. I suggest that the large initial fall in investment during a banking crisis may be a major cause of the persistent slump in output subsequently, due to its adverse effect on the stock of equipment and intangible capital. To evaluate this channel, I present a model 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. (slides) (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. In our setting, optimal tax rates can be closely approximated by simple closed-form functions of pre-tax prices and parameters. Under plausible parameter values, we find that it is optimal to tax both consumption and wealth at relatively high positive rates and optimal to tax capital income at a negative rate. This is because capital income taxes are more inefficient than both consumption and wealth taxes in terms of their effect on aggregate total factor productivity, in addition to their well-known effect of reducing aggregate capital accumulation.
'The Clarity Incentive for Issue Engagement in Campaigns', with Chitralekha Basu. (slides) (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 parties’ campaign strategies exhibit these patterns because parties face two competing incentives. The first is an incentive to emphasize popular issues positions in order to increase the salience of such issues to voters. The second, which we term the clarity incentive, is an incentive to emphasize already salient issues in order to clarify the party’s position on such issues, thereby increasing its appeal to sympathetic but risk-averse 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
'Bank Deregulation: Who Gains and Who Loses?', with Corina Boar, Kjetil Storesletten and Yicheng Wang.
'The Persistent Effects of the Financial Crisis on Employment and Productivity', with Kemal Ozhan and Piercarlo Zanchettin.
'Optimal Taxation of Risk-Taking', with Romans Pancs.
