ERC Starting Grant

In this project, I investigate why agricultural productivity is especially low in developing countries and how this affects the dynamics of structural transformation and development. To provide answers to these questions, I combine novel micro panel data from Sub-Saharan Africa and Southeast Asia with an array of geospatial data on rural areas and quantitative theoretical models for structural analysis.

I focus particularly on rural areas of developing countries that typically host large shares of the population, face increasing agricultural risk from climate change and exhibit elevated poverty incidence. Answering these questions is thus crucial for poverty reduction and helps determining whether, and if yes how, policy makers should pursue policies that encourage movement of the workforce out of agriculture.

My attention focuses on three dimensions that could explain persistent agricultural productivity gaps in developing countries: (i) dynamic farm adjustments and factor misallocation; (ii) labor reallocation and domestic migration; and (iii) the impact of climate change in the presence of barriers to adaptation.

ERC Advanced Grant

In recent years, my research has tried to understand the key drivers and macroeconomic effects of an economy’s stock of collateral, i.e., of its ability to pledge future income to back financial promises. But there is a crucial aspect of the problem that deserves further study. In a world of heterogeneous agents, what matters for the efficiency of financial markets is not just the overall stock of collateral, but also its distribution across firms, sectors and countries. Moreover, this distribution is largely endogenous, as it is determined by equilibrium forces and is bound to change when the economy does.

In this project, I study three major ongoing shifts in the global economy and their implications for the distribution of collateral and the efficiency of financial markets:

First, I focus on the sustained decline in real interest rates that has characterized the global economy over the past few decades. I show how, in a world of heterogeneous agents and financial frictions, falling interest rates may actually reduce the efficiency of financial markets and even lead to lower economic growth. As it turns out, it may even be counterproductive to reduce interest rates in the midst of a financial crisis!

In a second set of projects, I focus on the recent rise of corporate earnings and markups in much of the advanced world. Although there is substantial research on the origin and macroeconomic effects of higher markups, we know little about their effects on the efficiency of financial markets. I explore this relationship and show that the rise of market power may account for the higher level and volatility of asset prices over the past few decades.

The last part of the proposal deals with the role of geopolitics on capital flows. It is motivated by the observation that both large waves of financial globalization, in the late 19th and 20th centuries, took place under the shadow of a single hegemonic power. In a third set of projects, I explore the relationship between the existence of a hegemon and financial globalization, and study how an increase in competition among global powers (e.g. the rise of China) affects the size and composition of international capital flows.

ERC Consolidator Grant

Financial markets constitute the backbone of modern economies, intermediating resources from those who have them (i.e., lenders) to those who can put them to productive use (i.e., borrowers). The defining feature of these markets is that they entail the exchange of goods today for a borrower’s promise to deliver goods in the future. These promises are sustained by guarantees, which are akin to the amount of future income that borrowers can credibly pledge to lenders. I refer to this pledgeable income as an economy’s stock of collateral. This stock determines the amount and type of promises that can be traded in an economy and, in turn, this set of promises determines the transactions that can be carried out. Intuitively, when this set of promises is large, resources find their most productive uses and efficiency is high.

This raises a general question: what are the key determinants of the set of promises that an economy is able to sustain, and why does it vary?

In macroeconomic models, it is commonly assumed that all promises are backed by only one kind of collateral, i.e. usually that of private borrowers, and that this collateral is ‘fundamental’, i.e. it consists of output. Real-world financial markets, however, rely on many types of collateral to guarantee promises. In this proposal, I focus on three such types. First, collateral may be ‘bubbly’, i.e. promises can be backed by nothing else but the income that the sale of new promises is expected to bring in the future. Second, collateral need not be private, as government promises are sustained by pledging public income. Third, collateral need not be homogenous, as it may differ in quality or type across entrepreneurs, and this quality may not be perfectly observed by all. I address the following broad questions. How do economies produce these different types of collateral? How do they interact with one another? Is there a role for policy in maintaining the efficient level and composition of collateral?

ERC Advanced Grant

My research project proposes studying the origin of state capacity, democracy and political dynasties using the colonial conquest of Latin America as a natural experiment.

Much of the recent work on comparative politics and development uses large historical events as fruitful experimentation laboratories. However, the colonial experience looks more similar to a "bundle treatment" than a single treatment. It is difficult to disentangle the role of differences in legal origin from the influences of human capital, etc.

My methodological approach has three advantages:

First, since I only analyse the initial years of colonization, my empirical strategy is based on the fact that the initial conquerors had no knowledge of the land that they intended to conquer.

The second advantage is that, in working with the colonization of Latin America, we only have one colonial power, Spain, which avoids the traditional problems of diversity of legal origins.

The third advantage is that the contracts (“Capitulaciones”), that the conquerors signed with the King before embarking to America, and before even knowing anything about the land that he would conquer, and other documents from the Archivo de Indias, provide very rich details on the rules that governed the early institutions (power to tax and rule, the use of military power, the treatment of indigenous groups, etc.).

The colonization of the Americas and the information contained in the “Capitulaciones” found in the Archivo de Indias provides a unique opportunity to advance the debate on the origin of state capacity, democracy and political dynasties.

ERC Consolidator Grant

I plan to study the effect of history on conflict and economic development with two historical microscopes.

Following the lead of the new institutional economics, part of the literature argues that institutions cause differences in productivity and factor endowments which, in turn, explain economic development. An alternative view assumes that human capital shapes institutional changes and, therefore, institutions are endogenous. In the first part of the project, which is the core of the research proposal, I will try to move one step further in this debate by taking an approach that uses administrative data on the first colonizers of Latin America. The data contain some personal characteristics on each of the settlers from 1492 to 1599 (town of origin in Spain, occupation, education, city of arrival in the Americas, etc). Using within-country analysis, since we have information on the precise destinations of the first “pobladores” (settlers), and the different institutional set-ups during the first years of colonization for different geographical areas in Latin America, I will reexamine the issue of institutions versus human capital in the explanation of economic development and conflict. The institutions in the initial times of colonization were not the same in all the regions of Latin America and, in many cases, represented an evolution of pre-Colombian institutions. The new data allows also the analysis of the interaction between human capital and institutions in the initial times. In addition the migrations and the evolution of institutions during the first century of colonization provide also some guidance for the research on the sources of institutional persistence.

In the second part I plan to go further back in time to understand how very old conflicts influence current conflict. I will construct a dataset with the location of old conflicts using archaeological evidence to analyze the dynamics of conflict by regions in the very long run.

ERC Starting Grant

The research project will use theoretical models and empirical techniques to explore the causes, consequences, and prevention mechanisms of conflicts. The aim is to determine the basic elements that make countries more prone to social conflicts and then identify a set of feasible policies to prevent future episodes of violence. The project considers the causes and the propagation mechanisms of social conflicts of different intensity. The main objective of the project is to the study the institutional designs that may prevent, or mitigate, such social conflicts. Therefore, the analysis of economic institutions (such as property rights, etc.), political institutions and structure (democracy, decentralization, political systems, etc.), and the type of political leaders, that can help to prevent, conflict in potentially conflictive societies. From a methodological perspective, the project proposes to overcome some statistical pitfalls present in most of the previous literature on the determinants of civil wars and conflicts. The use of simple linear regressions, or a probit/logit specification, imposes very strong identification conditions that are likely to be violated. The current consensus, which emerges from those analyses, is that poverty is the single, most important determinant of civil wars. This result could be an artifact of simultaneity problems: the incidence of civil wars and poverty may be driven by the same determinants, some of which are probably missing. We propose to check the robustness of this consensus idea, and the importance of the institutional design, using other econometric procedures (instrumental variables and matching methods) which are subject to weaker identification conditions than the traditional regressions. Finally, we plan to investigate methods to deal with the missing data problem that plague the study of the determinants of civil wars.

ERC Starting Grant

Corporate taxes have large economic effects via their impact on private investment, which is a key driver of short-run fluctuations and long-run growth. Recently, policymakers renewed their interest in corporate taxation as a tool to tackle the massive government debts accumulated during the pandemic, the secular increase in business profits, and the exhaustion of monetary policy. Since it is increasingly clear that corporate taxation will be a key component of fiscal policy in the years to come, the project's objective is to understand the macroeconomic effects of corporate taxation and delineate and quantify the trade-offs associated with different reforms.

The project research agenda will contribute on three main fronts:

1. Methodologically, by studying how corporate tax reforms affect aggregate productivity, firm valuation, and business cycle dynamics using new structural frameworks with rich heterogeneity and empirically-relevant investment frictions.
2. Empirically, by providing systematic evidence on the macroeconomic impact of corporate tax reforms using a combination of theory and cross-country firm-level investment data.
3. With regard to policy, by providing a novel perspective for the design and evaluation of corporate tax reforms with a long-run macroeconomic perspective that considers the interaction with monetary policy.

ERC Consolidator Grant

Internet markets tend to concentrate in the hands of a very few large platforms. These platforms have been accused of abusing their monopoly power vis-a-vis their users (consumers, sellers, advertisers) and maintaining the latter through hostile behavior towards potential competitors. They are said to harm users by ‘self-preferencing’, data harvesting, creating 'monopoly positions' and extracting resulting rents with high fees, all the while avoiding competition by acquiring, copying and otherwise disadvantaging potential competitors. This project addresses these concerns in four parts:

The first part focuses on the dual role of online marketplaces, whereby the platform both runs the marketplace and acts as a seller on it. The project aims to understand how such hybrid marketplaces conduct themselves toward consumers and third party sellers. The model will be used to evaluate recent policy proposals and suggest ways to avoid significant unintended consequences.

Another part studies how platforms steer consumers to sellers. As most platforms let sellers set prices and collect fees on revenues, a platform’s own algorithm and her choice to augment/replace it with a position auction may be consequently driven by revenue maximization. The project plans to show that steering systems may drastically alter pricing, leading to ‘mediated’ competition.

The third part explores the nature of recommendation algorithms, particularly the interplay between consumer search and algorithm effectiveness, in order to demonstrate that algorithms may be self-fulfilling and self-defeating, which determines their effectiveness and significantly alters the resulting allocations and their efficiency.

The final part explains the circumstances in which an incumbent platform may acquire an upstart platform. These depend on the overlap of existing user bases, increasing returns to data and monopoly power over advertisers. Acquisitions may be used in situations of both no and substantial overlap in user bases, with mixed welfare consequences.

ERC Starting Grant

Traditionally, the evaluation of macroeconomic policy has relied on analyzing specific economic models which often do not correspond to the complex and data-rich environments in which real world policy decisions are made.

To this extent, I propose to develop a new framework for evaluating macroeconomic policy decisions — policymetrics — that is inspired by the robust inference literature in econometrics and makes minimal assumptions on the underlying economic model. The methodology detects optimization failures, i.e. instances in which policy decisions do not minimize the (welfare) loss function, and determines the causes and dynamics of such failures, all while fully respecting the limitations imposed by the Lucas critique.

I will apply the framework to evaluate contemporaneous and historical monetary, fiscal and climate policy decisions from different governments and institutions around the world, hereby providing a unique non-model based assessment of modern macroeconomic policy.

ERC Consolidator Grant

The goals of Professor Reguant's ERC project are to better understand the economic impacts of the rapid transformation of electricity markets, and to improve the design of electricity markets going forward. Reguant will develop and implement novel statistical tools and structural models in order to achieve these goals. Her research will focus both on firm strategic responses and investment (supply-side), as well as consumer behavior and welfare and distributional impacts (demand side).

ERC Starting Grant

Financial markets play an essential role in allocating an economy’s resources to their most productive use, fostering investment, employment, innovation, and growth. While there is substantial evidence that financial markets are plagued with information asymmetries and its perils, we do not have a good understanding of what economic conditions may foster such information asymmetries, or how they interact with aggregate investment decisions, liquidity in asset markets, or economic fluctuations. The goal of my proposal is to fill this gap and to contribute to the discussion on how to better design financial and macroprudential regulation.

First, I will develop microeconomic frameworks to uncover the drivers of information asymmetries in markets by studying how agents’ actions, such as choosing to design complex assets or to trade in opaque markets, are affected by economic conditions. I will complement this research with an empirical analysis of the determinants of asset complexity in the data. Second, I will study how information asymmetries, and resulting incentives to invest and trade in markets, fluctuate over the cycle and across economies by embedding the insights from my microeconomic frameworks into dynamic, general equilibrium, macro settings.

ERC Advanced Grant

In the last four decades, there have been a number of significant secular trends around the world. Wage inequality has risen sharply, and most of the wage gains have been appropriated by the top 1%. In addition, labor market dynamism and new startups have declined, the labor share of total output has fallen, low skilled wages have stagnated, and there has been reallocation of production from small to superstar firms. During the same four decades, there has also been a sharp secular increase in market power. Firms set higher prices, profit rates are higher, and scale economies are up.

In this project, I will explore whether these secular trends are related. Specifically, I ask whether the rise of market power has caused these profound macroeconomic changes, in order to uncover economic mechanisms that help understand this fundamental transformation and the implications for efficiency and welfare.

The close link between the macroeconomic consequences and the causes of market power puts this research at the intersection of macro/labor, industrial organization and law & economics. The ultimate objective of the project is to inform the policy debate and determine how to keep market power under control in order to remediate macroeconomic consequences that were, until now, considered independent.

ERC Advanced Grant

Labor market risk and skill diversity are central features of the labor market. Arguably, employment risk is one of the biggest sources of uncertainty most individuals face in their life time. Likewise, exploiting the synergies and complementarities between differentially skilled workers is amongst the greatest challenges to firms' hiring decisions. The objective is to analyze the efficiency properties and as a consequence evaluate the role for policy. In order to establish the implications of the mechanisms that govern risk and diversity, I elaborate on concrete applications and discuss estimation in different labor market settings.

In the presence of Labor Market Risk I address the question how asset holdings exacerbate wage inequality. Workers are exposed to the risk of unemployment, and workers with few assets will trade off the lower riskiness of a job against lower wages. Different asset holdings translate into different wages, thus amplifying inequality due to assets with wage inequality. The proposed analysis of unemployment risk can solve for an equilibrium model that incorporates the distribution of assets, while at the same time allowing for heterogeneity in skills. There is no doubt that fully understanding the asset-skill tradeoff is of primary importance for labor market policy. I then study a different angle of labor market risk, namely risk that is due to matching stochastic types, which introduces ex post mismatch. Ex ante, agents match based on the distribution of possible realizations of ex post types. This model is conducive to identification of complementarities between workers and the value of risk sharing.

Skill Diversity, or the allocation of differentially skilled workers across firms of different productivity, is a central feature of the labor market. The aim of this research is to embed the optimal worker composition within firms into standard macro environments to study technological change, information aggregation and spatial diversity.

Watch a video summary of this project:

ERC Starting Grant

Sorting is prevalent in many economic environments. High skilled workers match with the most productive managers, men marry women with similar education levels, experienced venture capitalists finance more successful start-ups. As a returning European investigator, my objective is to continue and expand my research program developed in the US. Using equilibrium theory, the objective is to provide testable hypotheses for the role of sorting in development and market design. In the process of development, there is occupational sorting in the allocation of workers to managers. Due to increased openness and improved communication, managers now have access to a broader labor market. For example, Apple managers in California design the iPod, and workers in Taiwan produce it. Some preliminary analysis shows that in this environment most of the gains from trade are due to sorting. This has substantial implications for inequality and poverty. The main beneficiaries turn out to be both the lowest and the highest skilled workers. I present new evidence on occupational sorting: richer countries have added 20% managerial jobs while poorer countries have added only 5%. A second strand of this proposal facilitates the testability of two-sided matching markets. I purport to derive general conditions for unique assortative matching. This theoretical finding enables identification of model estimates. Because in the presence of various characteristics of a matched agent the well-known condition of supermodularity is typically violated, this result is important for its general applicability. This result also turns out to be important for market design questions in two-sided markets where uniqueness is a key requirement for incentive compatible mechanisms. In another related market design problem, the focus is on the role of the price mechanism itself as a force towards sorting. Finally, an application of two-sided matching to biomedical research labs is explored.

ERC Advanced Grant

The research proposed here seeks to advance our knowledge on the implications of heterogeneity for monetary policy. Its overall objectives are manifold:

Firstly, to develop a general framework to (re-)assess the role of heterogeneity for aggregate fluctuations, both in macro models and in actual economies.

Secondly, to evaluate the extent to which the current New Keynesian framework, widely used by researchers and central banks for the analysis of aggregate economic fluctuations and their interaction with monetary policy, needs to be modified in order to introduce elements of heterogeneity.

Thirdly, to develop specific tractable alternatives to the currently dominant framework that approximate well the main mechanisms through which heterogeneity affects aggregate fluctuations and the transmission of monetary policy found in richer, but more complex, models.

And, finally, to revisit some central issues of monetary economics through the lens of the newly developed models. Those include the optimal design of monetary policy, the gains from wage flexibility, the effects of helicopter drops, and the stabilizing role of income policies, just to name a few.

I plan to conduct much of the research proposed here in collaboration with my colleague Davide Debortoli (UPF and BSE), an excellent macroeconomist with great knowledge of dynamic macroeconomic theory and, more specifically, of the computational methods used for solving heterogeneous agent models.

ERC Advanced Grant

The proposed research project seeks to further our understanding on two important questions for the design of monetary policy:

(a) What are the effects of monetary policy interventions on asset price bubbles?
(b) How should monetary policy be conducted in the presence of asset price bubbles?

The first part of the project will focus on the development of a theoretical framework that can be used to analyze rigorously the implications of alternative monetary policy rules in the presence of asset price bubbles, and to characterize the optimal monetary policy. In particular, I plan to use such a framework to assess the merits of a “leaning against the wind” strategy, which calls for a systematic rise in interest rates in response to the development of a bubble.

The second part of the project will seek to produce evidence, both empirical and experimental, regarding the effects of monetary policy on asset price bubbles. The empirical evidence will seek to identify and estimate the sign and response of asset price bubbles to interest rate changes, exploiting the potential differences in the joint behavior of interest rates and asset prices during “bubbly” episodes, in comparison to “normal” times. In addition, I plan to conduct some lab experiments in order to shed some light on the link between monetary policy and bubbles. Participants will trade two assets, a one-period riskless asset and a long-lived stock, in an environment consistent with the existence of asset price bubbles in equilibrium. Monetary policy interventions will take the form of changes in the short-term interest rate, engineered by the experimenter. The experiments will allow us to evaluate some of the predictions of the theoretical models regarding the impact of monetary policy on the dynamics of bubbles, as well as the effectiveness of “leaning against the wind” policies.

ERC Advanced Grant

The New Keynesian (NK) model has emerged in recent years as the workhorse for monetary policy analysis. The first part of the proposed project is motivated by two shortcomings of that framework: (i) the lack of an explicit analysis of unemployment and its potential role in the design of policy, (ii) the limited empirical support for the model s wage-setting block. One of the objectives of the proposed project is the assessment of the empirical relevance of the specification of the wage-setting bock found in standard versions of the NK model, with a special focus on their implied wage-unemployment dynamics. As part of my project, I will show how the standard NK model with staggered wage setting implies a relationship between wage inflation and unemployment that fails to capture important features of the data. I also plan to develop and study an extension of the NK model that incorporates in a tractable way real wage rigidities (coexisting with nominal rigidities), with the objective of (i) assessing their relative role in explaining the observed patterns of wages and unemployment, (ii) analyzing their implications for the design of monetary policy. The second part of the project is motivated by the significant changes in the co-movements among some key macro variables that have accompanied the recent period of low macroeconomic volatility (the so-called Great Moderation). One objective of the proposed research is to understand the role that structural change in the labor market may have played as a source of those changes. In particular, I plan to analyze the causes of the vanishing pro-cyclicality of labor productivity and their potential causes, including a more subdued use of labor hoarding by firms, possibly as a result of lower hiring/firing costs. In addition, I plan to study the consequences that such structural changes may have had on wage setting, and their ability to account for the apparent increase in wage flexibility during the recent period.

ERC Starting Grant

During the last two decades, low productivity growth has been a major source of concern in advanced economies. The traditional approach posits that weak productivity growth is the result of distortions on the supply side of the economy, and that growth can be revived only through "structural reforms". In this project I will develop a novel Keynesian growth approach, which instead emphasizes the relationship between demand factors and productivity. Did the Great Recession contribute to the recent productivity growth slowdown? Should productivity enter the monetary policy trade-off? Did the adoption of the euro slow down growth in peripheral countries? Are capital flows from emerging to advanced economies depressing global productivity growth? These are some of the questions that I will tackle.

ERC Starting Grant

In today’s globalized world, labor mobility is at the core of the political debate and a centerpiece for economic policy. The design of migration policies, such as selective, skill-biased, immigration policies, policies to encourage the integration of immigrants, or ones that facilitate geographical mobility to increase labor market opportunities of disadvantaged workers, requires a good understanding of a more fundamental issue: understanding the role of internal migration and immigration in shaping the career paths and human capital accumulation of workers. This project aims at providing a coherent analysis that allows us to understand the interactions between labor mobility and human capital accumulation, and their implications for economic policy design.

The project takes three different lenses to look at this question: labor mobility as a mechanism for individuals to adjust to labor market policies (e.g. job protection legislation), short run shocks (e.g. the Great Recession), or longer run transformations (e.g. skill-biased technical change); the selectivity of the immigration policies (e.g in the United States, H1-B visas versus general immigration visas); and the human capital accumulation of immigrants themselves (and therefore assimilation and integration). The type of questions that the project formulates include: (a) What are the role of temporary and permanent contracts in shaping career paths and geographic mobility of workers? (b) Does the forgone human capital accumulation during a recession produce a lost generation? Is this alleviated by geographical mobility? (c) What is the role of geographical and occupational mobility in spreading or containing the effects of technological progress on wage inequality? (d) To what extent selective immigration policies maximize native workers’ prospects and wellbeing? (e) How can we increase degree of assimilation of immigrants?

ERC Starting Grant

In the recent years in advanced democracies there has been a wave of electoral successes of populist politicians supporting extreme messages. Is populism caused by negative economic shocks? If so, what are the mechanisms? What explains heterogeneity in responses to such shocks? In this project, I will test empirically if personal experiences, information environment, and their interaction with aggregate economic shocks shape people’s political decisions. The project consists of three parts.

First, I will study how personal employment histories, potentially affected by globalization and technological shocks, individual predispositions, and information environment influenced voting for Trump. I will use a unique database of more than 40 million resumes for the period 2010-2016, the largest available repository of resumes of job-seekers in the US, which was not previously used in academic research, and match it with zipcode-level economic and voting variables.

Second, I will study how negative social experiences during the formative years affect subsequent labor market outcomes, antisocial behavior, and the support of populist agenda. I will examine how corporal punishment in schools in UK affected subsequent educational attainment, employment, antisocial behavior, and voting for UKIP and Brexit. I will digitize archival records on regulations and practice of corporal punishment in different educational authorities in the UK during 1970-80s, combining it with contemporary outcomes.

Third, I will examine what makes people actively resist extremist regimes even when it is associated with high personal costs. I will study a historical example of resistance to Nazi regime in Germany during the WWII, which provides unique methodological opportunity to study determinants of resistance to extremism in a high stake environment. I will use a self-collected dataset on treason cases to measure resistance, combining it with data on bombing and exposure to foreign propaganda.

ERC Starting Grant

Every year, the world economy invests massively to improve or develop its transport infrastructure. Some of the largest ever infrastructure projects will be undertaken in the coming decades as, for instance, the multi-trillion dollar Belt and Road Initiative by the Chinese government. By shaping the patterns of international and interregional trade, transport infrastructure plays a major role in determining the distribution of economic activity across space and fostering regional economic development. How should these infrastructure projects be designed to maximize social welfare? In this proposal, I develop and evaluate new methods to study optimal transport networks in general-equilibrium models of international trade, urban economics and economic geography, taking into account the impact of transport infrastructure on trade, migrations and economic growth.

The new ERC project is a continuation of Prof. Marcet's previous ERC-funded project (APMPAL), which also explored agent expectations and their implications for asset pricing, fiscal and monetary policy.

A conventional assumption in dynamic models is that agents form their expectations in a very sophisticated manner. In particular, that they have Rational Expectations (RE). We have developed some tools to relax this assumption while retaining fully optimal behaviour by agents. We assume that agents are Internally Rational, that is, they have a slightly imperfect view of price behavior but they behave rationally given their system of beliefs. This is conceptually a small deviation from RE. The APMPAL developed some modelling tools to apply this idea and studied some empirical and policy implications for asset pricing, fiscal and monetary policy. It also developed tools for the analysis of policy under partial information.

The current project, APMPAL-HET intends to: i) develop further the theory of Internal Rationality and optimal policy under partial information, and to introduce investors and consumers that are heterogeneous in their expectations, ii) build models that are useful for policy analysis and iii) build different tools for prediction of macroeconomic and financial variables.

ERC Advanced Grant

A conventional assumption in dynamic models is that agents form their expectations in a very sophisticated manner. In particular, that they have Rational Expectations (RE). We develop some tools to relax this assumption while retaining fully optimal behaviour by agents. We study implications for asset pricing and macro policy.

We assume that agents have a consistent set of beliefs that is close, but not equal, to RE. Agents are Internally Rational, that is, they behave rationally given their system of beliefs. Thus, it is conceptually a small deviation from RE. It provides microfoundations for models of adaptive learning, since the learning algorithm is determined by agents’ optimal behaviour. In previous work we have shown that this framework can match stock price and housing price fluctuations, and that policy implications are quite different.

In this project we intend to: i) develop further the foundations of internally rational (IR) learning, ii) apply this to explain observed asset price price behavior, such as stock prices, bond prices, inflation, commodity derivatives, and exchange rates, iii) extend the IR framework to the case when agents entertain various models, iv) optimal policy under IR learning and under private information when some hidden shocks are not revealed ex-post. Along the way we will address policy issues such as: effects of creating derivative markets, sovereign spread as a signal of sovereign default risk, tests of fiscal sustainability, fiscal policy when agents learn, monetary policy (more specifically, QE measures and interest rate policy), and the role of credibility in macro policy.

ERC Consolidator Grant

Professor González plans to study the effects of early shocks on health and human capital formation during childhood. She will do so by taking advantage of several natural experiments in a country, Spain, for which high quality administrative data are available for the past 35 years. State of the art econometric techniques, combined with large sample sizes, will allow her to evaluate credibly and precisely the causal effects of a number of different public policies and shocks on child development.

Professor González will consider five different “shocks” in early childhood, affecting: i) Household material resources (an unconditional mother’s allowance); ii) Parental time (subsidized paternity leave); iii) Medical treatments around birth (elective delivery); iv) The availability of family planning services (access to abortion); and v) Aggregate demand shocks to different sectors of the economy.

She will evaluate their impact on health and cognitive development at ages 0-15. She will also study the potential channels linking treatments to child outcomes. Her results will help us understand how shocks in early life can have long-term effects on human capital, with direct policy implications.

Project website

ERC Consolidator Grant

Much research has shown that judgments are the products of imperfect information processing heuristics. Recently, an alternative theoretical perspective has been proposed. It emphasizes that people form judgments by observing information samples about the alternatives. Sampling-based theories can explain numerous judgment patterns such as risk aversion, overconfidence, illusory correlations, the in-group out-group bias, or social influence.

The sampling approach has illustrated how these and other important patterns of human judgments can be parsimoniously explained by assuming a common source of bias. But at least two important questions remain:

1. How do sampling explanations for judgment biases can be integrated with explanations that focus on information-processing biases in order to explain judgment patterns in naturally occurring environments?
2. What are the implications of selective information sampling for collective judgments and the distribution of beliefs and attitudes over social networks?

This project sets out to answer these pressing questions by (1) developing integrative belief formation models that incorporate both sampling-based mechanisms and information processing-based mechanisms; (2) collecting and analyzing experimental and field data to test these integrative models and uncover how the two classes of mechanisms interact; (3) building on these insights to develop models that lead to testable predictions about collective judgments and test these predictions with field and experimental data; (4) running experiments to measure the extent to which social network driven information sampling can contribute to opinion polarization.

The project will carry novel prescriptions to limit judgment biases such as the prevalence of negative stereotypes about socially distant others or the resistance to institutional change. It will also carry prescriptions to limit the emergence of collective illusions, and contain the polarization of opinions across social groups.

ERC Starting Grant

The project examines how the Internet has transformed the way news is produced and disseminated, both directly and through its influence on traditional media, and its ultimate effect on media independence and content quality. The project investigates four distinct but intertwined questions: 1) to what extent search engine results are tailored to users’ political views, and how personalization affects ideological polarization? 2) how do lower advertising revenues affect newspapers’ organization and content quality?; 3) how does the dependence of media on advertisers influences news coverage; and 4) how does the dependence of media on banks affect news coverage of financial issues.

ERC Starting Grant

The project will be conducted in three parts. The first part, joint with Larbi Alaoui (UPF and BSE), aims at understanding the interaction between individuals' incentives, cognitive abilities and strategic behavior. This research combines both theoretical and experimental work, bridging tools and ideas from game theory, computer science, psychology and economics. The second part pursues a classical game theoretic approach to study problems of "strategic uncertainty", that is situations of social interactions in which agents don't necessarily have correct expectations about the environment. The third part, joint with F. Decarolis (EIEF) and M. Goldmanis (Royal Holloway), aims at studying the impact of the diffusion of Digital Marketing Agencies on the auction formats most commoly used to sell online advertisement space. These auctions are used, for instance, by firms such as Google, Microsoft, Facebook, etc., and account for a huge and growing market worldwide.

ERC Starting Grant

This project focuses on the interplay between citizens’ political participation, policy-making institutions and globalization. It aims to study which conditions create democratic support for trade- and productivity-enhancing policies; when and why voters support instead measures that hinder trade and reduce aggregate surplus; and how the architecture of government should and does react to globalization.

In particular, the first part of the project studies the puzzling popularity of protectionism and how lobbies can raise it by manipulating information. It will investigate how greater transparency can cause lower trade barriers. It will also study how voter psychology makes concentrated losses more salient than diffuse benefits.

The second part of the project studies inefficient infrastructure policy and the ensuing spatial misallocation of economic activity. It will show that voters’ unequal knowledge lets local residents capture national policy. They disregard nationwide positive externalities, so investment in major cities is insufficient, but also nationwide taxes, so spending in low-density areas is excessive. Moreover, it will consider how behavioral biases cause voter opposition to growth-enhancing policies and efficient incentive schemes like congestion pricing.

The third part of the project studies how the size of countries and international unions adapts to expanding trade opportunities. It will focus on three forces: cultural diversity, economies of scale and scope in government, and trade-reducing border effects. These can explain increasing country size in the nineteenth century; the rise and fall of colonial empires; and the recent emergence of regional and global economic unions, accompanied by a peaceful increase in the number of countries.

ERC Advanced Grant

Globalization is expanding economic borders rapidly. Barriers to trade are now lower than ever and this has led to the creation of many truly global goods and asset markets. And yet globalization is changing political borders only slowly. The second wave of globalization that started after WWII found the world organized into a set of states or centralized jurisdictions that often go beyond cultural borders but that clearly fall short of economic borders. These centralized jurisdictions still hold most of the political and decision-making power.

This growing mismatch between markets and states lowers the quality of economic policymaking. Since constituencies are located inside the state, governments tend to disregard effects of economic policies that are felt beyond the political border. The result is a worsening in policymaking that could seriously mitigate the gains from globalization and even turn them into losses. The goal of this project is to improve our understanding of how this growing mismatch between economic and political borders affects economic policy and political structure. In particular, it focuses on the inefficiencies this mismatch creates and on how should we (“the citizens of the world”) handle them.

The project is organized around two themes. The first one is the handling of enforcement externalities. One of the key roles of governments is to enforce contracts. When these contracts involve domestic and foreign residents, governments have the temptation to enforce selectively so as to shift income to domestic residents at the expense of foreigners. The second theme is the evolution of political structure. The world is currently organized into states or centralized jurisdictions. This project studies the hypothesis that globalization leads to an alternative political structure based on a set of overlapping jurisdictions.

ERC Advanced Grant

Advanced capitalist economies experience large and persistent movements in asset prices that are difficult to justify with economic fundamentals. The internet bubble of the 1990s and the real state market bubble of the 2000s are two recent examples. The predominant view is that these bubbles are a market failure, and are caused by some form of individual irrationality on the part of market participants. This project is based instead on the view that market participants are individually rational, although this does not preclude sometimes collectively sub-optimal outcomes. Bubbles are thus not a source of market failure by themselves but instead arise as a result of a pre-existing market failure, namely, the existence of pockets of dynamically inefficient investments. Under some conditions, bubbles partly solve this problem, increasing market efficiency and welfare. It is also possible however that bubbles do not solve the underlying problem and, in addition, create negative side-effects. The main objective of this project is to develop this view of asset bubbles, and produce an empirically-relevant macroeconomic framework that allows us to address the following questions: (i) What is the relationship between bubbles and financial market frictions? Special emphasis is given to how the globalization of financial markets and the development of new financial products affect the size and effects of bubbles. (ii) What is the relationship between bubbles, economic growth and unemployment? The theory suggests the presence of virtuous and vicious cycles, as economic growth creates the conditions for bubbles to pop up, while bubbles create incentives for economic growth to happen. (iii) What is the optimal policy to manage bubbles? We need to develop the tools that allow policy makers to sustain those bubbles that have positive effects and burst those that have negative effects.

ERC Starting Grant

The goal of the project is to examine how advances in information technologies affect public policies. In particular, it will empirically investigate the causal effect of social media on political participation. The first part of the project will examine the effect of social media penetration on participation in political protest activities, as well as the mechanisms that drive these effects, using a specific example of protests activities in Russia in 2011-2012. We will exploit idiosyncratic variation in the early penetration of social media across cities to identify causal effect of social media penetration on participation in protest activities. We will also exploit the effects of early penetration on the distribution of users across competing online social networks to examine the role of coordination as a specific mechanism behind the effect. The second part of the project will use content analysis of the messages in social media and detailed information on the network structure and its evolution over time to study (1) the effect of network structure on the diffusion of information and subsequent actions; (2) the effect of offline events on network formation. Exogenous shock in the form of unexpected wave of protest activities will be used to identify the effects of interest. Smaller parts of the project will use survey experiments and cross-country comparison of the content of traditional and social media to provide additional evidence on the mechanisms behind the effects of social media. The project will be mainly empirical, but it will rely heavily on the theoretical advances in the fields of political economy and network analysis.

ERC Consolidator Grant

In 2007 the US and Europe were overwhelmed by a banking crisis, which was followed by a severe economic recession. Historical studies show that financial crises are followed by periods of substantially stronger contraction of aggregate output and employment than non-financial recessions. Those studies also point out that the best predictor of financial crises is an ex-ante strong credit boom which, after the beginning of the crisis, followed by negative overall credit growth. Lastly, financial crises take a long time until recovering the pre-crisis levels.

Why are the effects of credit shocks so strong and persistent over time? Is this effect explained by costly household deleveraging? What is the effect of household debt on consumption, savings and employment? Are there any benefits of debt in crises? Do some effects of the financial crisis work through a reduction in credit supply to firms and projects with high innovative content and productivity (high overall return, but with high credit and liquidity risk for the lenders)? Or are the cleansing effects in financial crises concentrated on the less productive firms? Can macroprudential policies based on strict control of loan-to-value ratios stop the building up of excessive household debt?

We plan to construct several new datasets to study these issues by merging information from different sources. For some issues, like the analysis of the effect of household debt on consumption and employment, we can take advantage of a natural experiment of randomized allocation of debt among individuals derived from the use of lotteries to allocate the rights to buy housing in Spain. In comparison to the existing literature, we can exploit the exogenous variation generated by these lotteries and some other combination of data (including exhaustive credit data) to obtain causal evidence and quantification on the interaction between debt, systemic risk, crises, and the new macroprudential policy.

Project website Twitter @persistdebt

ERC Consolidator Grant

Forecasting is a fundamental tool in Economics, Statistics, Business and other sciences. Judging whether forecasts are good and robust is of great importance since forecasts are used everyday to guide policymakers' and practitioners' decisions. The proposal aims at addressing four important issues that researchers encounter in practice.

A first issue is how to assess whether forecasts are optimal in the presence of instabilities. Optimality is an important property of models’ forecasts: if forecasts are not optimal, then the model can be improved. Existing methods to assess forecast optimality are not robust to the presence of instabilities, which are widespread in the data. How to obtain such robust methods and what they tell us about widely used economic models’ forecasts is the first task of this project.

A second problem faced by forecasters in practice is to evaluate density forecasts. Density forecasts are important tools for policymakers since they quantify uncertainty around forecasts. However, existing methodologies focus on a null hypothesis that is not necessarily the one of interest to the forecaster. The second task is to develop tests for forecast density evaluation that address forecasters’ needs.

A third, important question is “Why Do We Use Forecast Tests To Evaluate Models’ Performance?”. The third task of this project is to understand the relationship between traditional in-sample and forecast evaluation tests, and develop a framework that helps to understand under which circumstances forecast tests are more useful than typical in-sample tests.

A final question is how researchers can improve models that do not forecast well. Model misspecification is widespread, still economists are often left wondering exactly which parts of their models are misspecified. The fourth task is to propose an empirical framework for addressing this issue. By estimating time-varying wedges, we assess where misspecification is located, and how important it is.

ERC Starting Grant

Financial liberalization in emerging markets has not produced the benefits predicted by conventional, neoclassical models. There is consensus that in reality financial frictions must play a larger role than these models anticipated. The objective of this research project is to enhance our understanding of how this happens, emphasizing the interactions between financial integration and the workings of domestic financial markets.

The project is structured around a set of related questions. (i) Can these interactions account for the macroeconomic effects of financial liberalization? (ii) How should emerging markets manage financial integration? Should they rely on financial systems that facilitate segmentation between domestic and international markets, as in the 70s and 80s? (iii) What are the implications for the global imbalances that contributed to the recent crisis? Can emerging markets export their vulnerabilities to advanced countries? (iv) Can these interactions explain the appearance of bubbles? What are their effects on the workings of international and domestic financial markets?
Gross capital flows reflect risk in domestic financial markets and also raise this risk by increasing the incentives to default. This complementarity is highly destabilizing. (v) Does the recent global financial crisis and associated collapse in gross capital flows reflect such forces? Have they been present in previous crises, particularly in emerging markets?

Emerging markets are more financially integrated than during the cold war. But the current situation has an antecedent in the late 19th century. Traditionally, integration is taken as exogenous. I will explore the forces that shape the process of integration. (vi) Is there any relationship between the existence of a hegemonic power, Britain in the late 19th century and the US since the 1980s, and financial integration? (vii) What will be the effect of the ongoing weakening of the hegemonic power of the US?

ERC Starting Grant

The household and family structure in every major industrialized country changed in a fundamental way during the last couple of decades. First, marriage is less important today, as divorce, cohabitation, and single-motherhood are much more common. Second, female labor force participation has increased dramatically. As a result of these changes, today s households are very far from traditional breadwinner husband and housekeeper wife paradigm. These dramatic changes generated significant public interest and a large body of literature that tries to understand causes and consequences of these changes.

This project has two main goals. First, it studies changes in household and family structure. The particular questions that it tries to answer are: 1) What are economic factors behind the rise in premarital sex and its destigmatization? What determines parents incentives to socialize their children and affect their attitudes? 2) What are the causes and consequences of the recent rise in assortative mating and diverging marriage patterns by different educational groups? 3) Why are marriage patterns among blacks so different than whites in the U.S.?

The second aim of this project is to improve our understanding of income risk, the role of social insurance policies and labor market dynamics by building models that explicitly considers two-earner households. In particular, we ask the following set of questions: 1) What is the role of social insurance policies (income maintenance programs or progressive taxation) in an economy populated by two-earner households facing uninsurable idiosyncratic risk? 2) How does marriage and labor market dynamics interact and how important this interaction for our understanding of labor supply and marriage decisions?