Ongoing Projects

Balance-Sheet Diversification in General Equilibrium: Identification and Network Effects

NBER Working paper 23572, July 2017, ungated pdf.

The paper uses disaggregated data on asset holdings and liabilities to estimate a general equilibrium model where each institution determines the diversification and size of the asset and liability sides of its balance-sheet. The model endogenously generates two types of financial networks: (i) a network of institutions when two institutions share common asset or liability holdings or when an institution holds an asset that is the liability of another. In both cases demand/supply decisions by one institution affect the value of other institutions’ holdings/liabilities, (ii) a network of financial instruments implied by the distribution of assets and liabilities within and across institutions. A change in the price of one asset induces change in demand/supply for all other assets, thus generating price comovement. The general equilibrium analysis predicts the propagation of real, financial and regulatory shocks as well as the change in the network caused by the shock.

Income Inequality and Growth

Invited submission of a chapter for the Handbook of Finance and Development, edited by Thorsten Beck.

Joint with Norman Loyza (World Bank) and Romain Rancière (USC).

Financial depth is the fuel of economic growth. Yet, the same fuel, when excessive and triggered by a shock of flame, can engender an economic crisis. For decades, the economics literature studied these two effects separately, building independently massive cases in favor of and against financial deepening. Only since the mid-2000s, the economics literature recognized that the positive and negative aspects of finance should be considered jointly. This innovation has prompted an exploration of the trade-offs involved in various aspects of financial development, such as depth, inclusion, composition, and variety. Likewise, it has induced a new type of policy debate regarding monetary and financial affairs, a debate that takes into account the trade-offs intrinsic in financial development (see, for instance, World Bank (2013)). And from this debate, a diversity of policy reforms have been implemented across the world, from financial macroprudential policies to monetary policy frameworks that monitor credit and asset price growth.

Working Papers

City Equilibrium with Borrowing Constraints: Structural Estimation and General Equilibrium Effects

Revise and Resubmit at the International Economic Review

joint with Romain Ranciere (University of Southern California)

Structural models of location choice use observed demand to estimate household preferences. However, household demand may be partly determined by borrowing constraints, limiting households’ choice set. Credit availability differs across locations, households, and years. We put forward a model of neighborhood choice where mortgage approval rates determine households’ choice set. Using household-level data, geocoded transactions, and mortgage applications for the San Francisco Bay area, we find that including borrowing constraints leads to higher estimated preferences for better performing schools and majority-white neighborhoods. General equilibrium estimates of the relaxation of lending standards provide two out-of-sample predictions: between 2000 and 2006, (i) a compression of the price distribution and (ii) a decline in black exposure to Whites. Both predictions are supported by empirical observation.

The Higher Moments of Future Return on Equity

Revise and Resubmit at the Accounting Review (resubmitted)

joint with Steven Monahan (INSEAD), Woo Jin Chang (INSEAD), and Florin Vasvari (London Business School).

We use quantile regressions to evaluate the higher moments of future earnings. First, we evaluate the in-sample relations between current firm-level attributes and the moments of lead return on equity, ROE. We show that: (1) as current ROE increases lead ROE tends to increase, become more disperse, and more leptokurtic—i.e., fat-tailed; (2) loss firms tend to have lower, more disperse, and more left-skewed lead ROE; (3) as accruals increase lead ROE tends to decrease and become more disperse; and, (4) firms with higher leverage and/or lower payout ratios tend to have greater dispersion in lead ROE. Second, we show that the in-sample relations generate reliable out-of-sample predictions of the standard deviation, skewness, and kurtosis of lead ROE. Moreover, when compared to predictions obtained via alternative approaches, our out-of-sample predictions always contain incremental information content and are typically more reliable. Finally, we evaluate the relation between higher moments and market-based variables. These analyses demonstrate that equity prices are increasing in the variance and skewness of lead ROE but decreasing in the kurtosis of lead ROE. Credit spreads are increasing in the variance and kurtosis of lead return on assets, ROA, and decreasing in the skewness of lead ROA.

Job Displacement and Crime: Evidence from Danish Microdata (and presentation)

joint with Patrick Bennett (Norwegian School of Economics)

This paper matches a comprehensive Danish employer-employee data set with individual crime information (timing of offenses, charges, convictions, and prison terms by crime type) to estimate the impact of job displacement on an individual’s propensity to commit crime. We focus on displaced individuals, i.e. high-tenure workers with strong attachment to their firm, who lose employment during a mass-layoff event. Pre-displacement data suggests no evidence of endogenous selection of workers for displacement during mass layoffs: displaced workers’ propensity to commit crime exhibits no significantly increasing trend prior to displacement; and the crime rate of workers who will be displaced is not significantly higher than the crime rate of workers who will not be displaced. In contrast, displaced workers’ probability to commit crime increases by 0.52 percentage points in the year of job separation. The effects are driven by increases in the propensity to commit property crime, which increases by 0.38 percentage points, or about 26% of the population-wide average. The substantial post-displacement earnings losses, coupled with the effects on property crime, are consistent with Becker’s (1968) economic theory of crime. Marital dissolution is more likely post-displacement, and we find small intra-family externalities of adult displacement on younger family members’ crime. The impact of displacement on crime is stronger in municipalities with higher capital and labor income inequalities.


Credit Standards and Segregation

Review of Economics and Statistics, December 2016, Vol. 98, No. 5, Pages: 880-896.

joint with Romain Ranciere (University of Southern California).

This paper explores the effects of changes in lending standards on racial segregation within metropolitan areas. Such changes affect neighborhood choices as well as aggregate prices and quantities in the housing market. Using the credit boom of 2000-2006 as a large-scale experiment, we put forward an IV strategy that predicts the relaxation of credit standards as the result of a credit supply shock predominantly affecting liquidity-constrained banks. The relaxed lending standards led to significant outflows of Whites from black and from racially mixed neighborhoods: without such credit supply shock, black households would have had between 2.3 and 5.1 percentage points more white neighbors in 2010.

Brokers and the Dynamics of Segregation

Journal of Economic Theory, May 2015.

The paper presents a dynamic model of neighborhood segregation where fee motivated real estate bro- kers match sellers optimally either to minority or to white buyers. In an initially all-white neighborhood, real estate brokers thus either keep the neighborhood in a steady-state white equilibrium or trigger racial transition by matching sellers to minority buyers, a process called blockbusting. Racial transition leads to a higher rate of property turnover in the neighborhood once the fraction of minorities has reached a tipping point—but racial transition also leads to lower prices, and this is the trade-off faced by a broker. The model shows that with multiple brokers, blockbusting profit per broker is lower as brokers free ride on each other’s groundbreaking efforts. The model predicts that racial transition will happen in the neighborhood when (i) the number of brokers is limited, (ii) racial preferences lie in an intermediate range, (iii) the arrival rate of offers is intermediate. Otherwise, real estate brokers steer white households toward white buyers.

Estimating Perceptions of Discrimination: Experimental Economics in Schools

Journal of Public Economics, Volume 105, September 2013, Pages 116–130, joint with Lionel Page

We put forward a new experimental economics design with monetary incentives to estimate students’ per- ceptions of grading discrimination. We use this design in a large field experiment which involved 1200 British students in grade 8 classrooms across 29 schools. In this design, students are given an endowment that they can invest on a task where payoff depends on performance. The task is a written verbal test which is graded nonanonymously by their teacher, in a random half of the classrooms, and graded anonymously by an external examiner in the other random half of the classrooms. We find significant evidence that students’ choices reflect perceptions of biases in teachers’ grading practices. Our results suggest systematic gender effects: students invest more with male teachers. Moreover, if we use the choices made with an external examiner as a benchmark, this result seems to come from two effects which complement each other: when comparing students’ choices with their teacher to those made with an external examiner, we find that male students invest less with female teachers while female students invest more with male teachers.

Using Compulsory Mobility to Identify School Quality and Peer Effects

Oxford Bulletin of Economics and Statistics, forthcoming, joint with Stephen Machin and Francis Kramarz

Education production functions that feature school and student fixed effects are identified using students’ school mobility. However, student mobility is driven by factors like parents’ labour market shocks and divorce. Movers experience large achievement drops, are more often minority and free meal students, and sort endogenously into peer groups and school types. We exploit an English institutional feature whereby some students must change schools between grades 2 and 3. We find no evidence of endogenous sorting of such compulsory movers across peer groups or school types. Non-compulsory movers bias school quality estimates downward by as much as 20% of a SD.

Assessed by a Teacher Like Me: Race and Teacher Assessments

Education Finance and Policy, Summer 2014.

Do teachers assess same-race students more favorably? This paper uses nationally representative data on teacher assessments of student ability that can be compared with test scores to determine whether teachers give better as- sessments to same-race students. The data set follows students from kindergarten to grade 5, a period dur- ing which racial gaps in test scores increase rapidly. Teacher assessments comprise up to twenty items mea- suring specific skills. Using a unique within-student and within-teacher identification and while controlling for subject-specific test scores, I find that teachers do assess same-race students more favorably. Effects ap- pear in kindergarten and persist thereafter. Robustness checks suggest that: student behavior does not explain this effect; same-race effects are evident in teacher as- sessments of most of the skills; grading “on the curve” should be associated with lower assessments; and mea- surement error in assessments or test scores does not significantly affect the estimates.


Empirical research on this webpage uses data from ICPSR, and geocoding services from Texas A&M Geoservices.