Long-Term Finance and Investment with Frictional Asset Markets
 
A well-functioning long-term financial market allows firms to invest at long horizons which benefits aggregate productivity and the real economy. This paper develops a theory of the maturity structure of corporate debt and studies its implications for the macroeconomy. The novel ingredient is an explicit model of the secondary market for corporate bonds that exhibits over-the-counter trading frictions characteristic of real-world markets which give rise to two key mechanisms. First, the presence of an OTC secondary market implies that the interest rate increases with maturity. Second, economies with more frictional asset markets exhibit a steeper yield curve that induces firms to borrow and invest at shorter horizons. A quantitative version of the model calibrated to match cross-country moments suggests that reductions in trading frictionsa new channel of financial developmentcan promote economic development. A policy intervention consisting of government-backed financial intermediaries who deal in the secondary market can improve liquidity, reduce long-term financial costs, and lead to investment in longer-term projects generating substantial welfare gains.
 

 
The Tail that Wags the Economy: Belief-Driven Business Cycles and Persistent Stagnation
With Laura Veldkamp and Venky VenkateswaranJanuary 2017 paperRevise and resubmitted at Journal of Political Economy

The Great Recession was a deep downturn with long-lasting effects on credit markets, labor markets and output. While narratives about what caused the recession abound, the persistence of GDP below its pre-crisis trend is puzzling. We propose a simple persistence mechanism that can be easily quantified and combined with existing models, even complex ones. Our solution rests on the premise that no one knows the true distribution of shocks to the economy. If agents use observed macro data to estimate this distribution non-parametrically, then transitory events, especially extreme events, generate persistent changes in beliefs and thus in macro outcomes. We apply our tool to an existing model, designed to explain the onset of the great recession, and find that adding belief updating endogenously generates the persistence of the downward shift in US output, colloquially known as “secular stagnation.”
 
 
Investment and Bilateral Insurance
With Emilio Espino and Juan Sanchez, September 2017 paper, Revise and resubmitted at Journal of Economic Theory
 
Private information may limit insurance possibilities when two agents get together to pool idiosyncratic risk. However, if there is capital accumulation, bilateral insurance possibilities may improve because misreporting distorts investment. We show that if one of the Pareto weights is sufficiently large, that agent does not have incentives to misreport. This implies that, under some conditions, the full information allocation is incentive compatible when agents have equal Pareto weights. In the long run, either one of the agents goes to immiseration or both agents' lifetime utilities are approximately equal. The second case is only possible with capital accumulation. 
 
Explaining Income Inequality and Social Mobility: The Role of Fertility and Family Transfers
 
Poor families have more children and transfer less resources to them. This suggests that family decisions about fertility and transfers increase income inequality and dampen intergenerational mobility. To evaluate the quantitative importance of this mechanism, we extend the standard heterogeneous-agent life-cycle model with earnings risk and credit constraints to allow for endogenous fertility, family transfers, and education. The model, estimated to the US in the 2000s, implies that a counterfactual flat income-fertility profile would—through the equalization of initial conditions—reduce intergenerational persistence and income inequality by about 10%. The impact of a counterfactual constant transfer per child is twice as large.
 
 
Retail Prices: New Evidence From Argentina
 
We create a new database of retail prices in Argentina with over 10 million observations per day. Our main novel finding is that, different from Kaplan, Menzio, Rudanko, and Trachter (2016), chains, rather than stores, explain most of the price variation in our data. We show this in three ways: (a) Even though chains have on average 158 stores, there are on average less than 2.5 unique prices per product by chain; (b) Among products that change prices in one store, the probability that other stores of the same chain also change the price of the same product in the same day is 2.4 times the probability for other stores of any chain; and (c) A formal variance decomposition shows that only 28% of the price dispersion (for the same product, day, and city) is explained by stores setting different prices within a chain. This finding is relevant for retail-pricing theories since there are significantly fewer chains than stores, which matters for the degree of competition in the market. This paper also studies the heterogeneity in price changes and price dispersion across product categories.