Wintersemester 24/25

When explaining the declining labor income share in advanced economies, the macro literature finds that the elasticity of substitution between capital and labor is greater than one. However, the vast majority of micro-level estimates shows that capital and labor are complements (elasticity less than one). Using firm- and establishment-level data from Korea, we divide capital into equipment and software, as they may interact with labor in different ways. Our estimation shows that equipment and labor are complements (elasticity 0.6), consistent with other micro-level estimates, but software and labor are substitutes (1.6), a novel finding that helps reconcile the macro vs. micro-literature elasticity discord. As the quality of software improves, labor shares fall within firms because of factor substitution and endogenously rising markups. In addition, production reallocates toward firms that use software more intensively, as they become effectively more productive.

To study the role of uncertainty and learning in selection into entrepreneurship at various life stages, we develop a quantitative model of occupational choice under incomplete information and discipline the learning process using novel subjective business forecasts data from U.S. entrepreneurs. Our model rationalizes key observed entrepreneurial life cycle outcomes, including entry and exit dynamics. Informational uncertainty prevents high-potential individuals from discovering their entrepreneurial talents and creating ”gazelles” at young ages, leading to significant output and productivity losses. Quantitative experiments show that policies prioritizing the young by offering insurance for experimentation unveil high-productivity entrepreneurs and improve occupational sorting at earlier life stages, ultimately increasing aggregate entrepreneur share, output, and welfare.

This paper analyzes the pass-through of inflation expectations into the prices and wages set by firms. We conduct a survey of firms using a tailored questionnaire, incorporating randomized information treatments to generate exogenous variation in inflation expectations. Our findings show that changes in inflation expectations influence both wages and prices, though the pass-through is incomplete. Moreover, we find that short-term inflation expectations have higher pass-through coefficients than long-term expectations, particularly for prices. The pass-through is conditional on firms' underlying price-setting behavior. To validate our results, we use a hypothetical vignette that does not rely on information treatments and find similar pass-through coefficients.

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In 2004, 75 million people across 10 countries joined the European Union (EU). Over the subsequent 15 years, their GDP per capita has almost doubled. Using a synthetic control method, I show that half of this increase is attributed to the EU accession. By joining the EU, the GDP per capita of the new members would have been 8,433~USD or 32\% higher in 2019. These findings are robust to various tests and specifications: a leave-one-out test, an in-country placebo, an in-time placebo, and alternative donor pools. A simple growth accounting decomposition shows that the contribution of the Solow residual to growth of the new member countries is three times larger. The data shows convergence in investment, consumption, government spending, export/import shares, employment rate, FDI, and regulations indices. The TFP of the new member states has been growing at a higher rate since 2004. These results raise the question of why accession to the EU had such a large impact on TFP

When agents’ information is imperfect and dispersed, existing measures of macroeconomic uncertainty based on the forecast error variance have two distinct drivers: the variance of the economic shock and the variance of the information dispersion. The former driver increases uncertainty and reduces agents’ disagreement (agreed uncertainty). The latter increases both uncertainty and disagreement (disagreed uncertainty). We use these implications to identify empirically the effects of agreed and disagreed uncertainty shocks, based on a novel measure of consumer disagreement derived from survey expectations. Disagreed uncertainty has no discernible economic effects and is benign for economic activity, but agreed uncertainty exerts significant depressing effects on a broad spectrum of macroeconomic indicators.

This paper studies how college admissions preferences for low income students affect intergenerational earnings mobility. We develop a quantitative model of college choice with quality differentiated colleges. We find that admissions preferences substantially increase low income enrollment in top quality colleges and intergenerational earnings mobility. The associated losses of aggregate earnings are very small.

The exposure of firms and financial institutions to aggregate shocks is a key driver behind financial crises. This paper studies how idiosyncratic uninsurable labor income risk faced by lender households influences the concentration of aggregate risk on borrower entrepreneurs' balance sheets. I propose a tractable model of households' idiosyncratic labor risk and embed it into a workhorse business cycle framework with informational asymmetries in entrepreneurial financing and privately optimal contracting. The presence of idiosyncratic labor income risk affects aggregate fluctuations and risk concentration through two explicit channels: i) endogenous increases in the share of human wealth in households’ total wealth increase realized idiosyncratic consumption risk, given labor income risk; and ii) cyclicality in the idiosyncratic labor income risk itself leads to cyclicality in realized consumption risk.

We study the role of financial frictions in determining the allocation of investment and innovation. Empirically, we find that established firms are investment-intensive when they have low net worth but become innovation-intensive as they accumulate net worth. To interpret these findings, we develop an endogenous growth model with heterogeneous firms and financial frictions. In our model, firms are investment-intensive when they have low net worth because their returns to capital are high. Quantitatively, the aggregate losses due to lower innovation are large, even though the allocation of capital to existing ideas is comparatively efficient. If innovation has positive spillovers, a planner would lower investment among constrained firms to finance more innovation. An innovation subsidy does not generate the correct distribution of investment and innovation to exactly decentralize this outcome.

This paper investigates the financial stability consequences of banks' interest rate risk exposure and uninsured deposit funding share. We develop a model incorporating insured and uninsured deposits, interest rate-sensitive securities, and credit-risky loans to understand how banks respond to interest rate risk and the potential for deposit runs. The model delivers the concentration of uninsured deposits in larger banks and examines how banks' portfolio- and funding choices impact financial stability. When banks anticipate volatile bond returns, they seek exposure to this interest rate risk. We study the effects of recent Federal Reserve rate hikes on banks and analyze micro-prudential policy tools to enhance the banking sector's resilience. Higher liquidity requirements are effective at curbing run risk of large banks, but cause misallocation in the lending market. Size-dependent capital requirements are equally effective at mitigating run risk, with minimal unintended consequences.