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Costs of Financing U.S. Federal Debt Under a Gold Standard: 1791-1933
Abstract From a new data set, we infer time series of term structures of yields on U.S. federal bonds during the gold standard era from 1791–1933 and use our estimates to reassess historical narratives about how the United States expanded its fiscal capacity. We show that U.S. debt carried a default risk premium until the end of the nineteenth century, when it started being priced as an alternative safe asset to U.K. debt. During the Civil War, investors expected the United States to return to a gold standard so the federal government was able to borrow without facing denomination risk. After the introduction of the National Banking System, the slope of the yield curve switched from down to up and the premium on U.S. debt with maturity less than one year disappeared.
The Global Race for Talent: Brain Drain, Knowledge Transfer, and Growth
Abstract How does inventors’ migration affect international talent allocation, knowledge diffusion, and productivity growth? To answer this question, I build a novel two-country innovation-led endogenous growth model, where heterogeneous inventors produce innovations, learn from others, and make dynamic migration and return decisions. Migrants interact with individuals at origin and destination, diffusing knowledge within and across countries. To quantify this framework, I construct a micro-level data set of migrant inventors on the U.S.-EU corridor from patent data and document that (i) gross migration is asymmetric, with brain drain (net emigration) from the EU to the United States; (ii) migrants increase their patenting by 33% a year after migration; (iii) migrants continue working with inventors at origin after moving, although less frequently; (iv) migrants’ productivity gains spill over to their collaborators at origin, who increase patenting by 16% a year when a co-inventor emigrates. I calibrate the model to match the empirical results and study the effect of innovation and migration policy. A tax cut for foreigners and return migrants in the EU that eliminates the brain drain increases EU innovation but lowers U.S. innovation and knowledge spillovers. The former effect dominates in the first 25 years, increasing EU productivity growth by 3%, but the latter dominates in the long run, lowering growth by 3%. On the migration policy side, doubling the size of the U.S. H1B visa program increases U.S. and EU growth by 4% in the long run, because it sorts inventors to where they produce more innovations and knowledge spillovers.
Do Financial Concerns Make Workers Less Productive?
Abstract Workers who are worried about their personal finances may find it hard to focus at work. If so, reducing financial concerns could increase productivity. We test this hypothesis in a sample of low-income Indian piece-rate manufacturing workers. We stagger when wages are paid out: some workers are paid earlier and receive a cash infusion while others remain liquidity constrained. The cash infusion leads workers to reduce their financial concerns by immediately paying off debts and buying household essentials. Subsequently, they become more productive at work: their output increases by 7% (0.11 std. dev.), and they make fewer costly, unintentional mistakes. Workers with more cash on hand thus not only work faster but also more attentively, suggesting improved cognition. These effects are concentrated among more financially constrained workers. We argue that mechanisms such as gift exchange or nutrition cannot account for our results. Instead, our findings suggest that financial strain, at least partly through psychological channels, has the potential to reduce earnings exactly when money is most needed.
A Cognitive View of Policing
Abstract What causes adverse policing outcomes, such as excessive uses of force and unnecessary arrests? Prevailing explanations focus on problematic officers or deficient regulations and oversight. We introduce an overlooked perspective. We suggest that the cognitive demands inherent in policing can undermine officer decision making. Unless officers are prepared for these demands, they may jump to conclusions too quickly without fully considering alternative ways of seeing a situation. This can lead to adverse policing outcomes. To test this perspective, we created a new training that teaches officers to consider different ways of interpreting the situations they encounter. We evaluated this training using a randomized controlled trial with 2,070 officers from the Chicago Police Department. In a series of lab assessments, we find that treated officers were significantly more likely to consider a wider range of evidence and develop more explanations for subjects’ actions. Critically, we also find that training affected officer performance in the field, leading to reductions in uses of force, discretionary arrests, and arrests of Black civilians. Meanwhile, officer activity levels remained unchanged, and trained officers were less likely to be injured on duty. Our results highlight the value of considering the cognitive aspects of policing and demonstrate the power of using behaviorally informed approaches to improve officer decision making and policing outcomes.
A Welfare Analysis of Tax Audits Across the Income Distribution
Abstract We estimate the returns to IRS audits of taxpayers across the income distribution. We find an additional $1 spent auditing taxpayers above the 90th income percentile yields more than $12 in revenue, while audits of below-median income taxpayers yield $5. We construct our estimates by drawing from comprehensive internal accounting information and audit-level enforcement logs. We begin by estimating the average initial return to all audits of U.S. taxpayers filing in tax years 2010–2014. On average, $1 in audit spending initially raises $2.17 in revenue. Audits of high-income taxpayers are more costly, but the additional revenue raised more than offsets the costs. Audits of the 99–99.9th percentile have a 3.2:1 initial return; audits of the top 0.1% return 6.3:1. We then exploit the 40% audit reduction between tax years 2010 and 2014 to examine the returns to marginal audits. We find they exceed the returns to average audits. Revenues remain relatively unchanged, but marginal costs fall below average costs due to economies of scale. Next, we use randomly selected audits to examine the effect of an initial audit on future revenue. This individual deterrence effect produces at least three times more revenue than the initial audit. Deterrence effects are relatively consistent across the income distribution. This results in the 12:1 return above the 90th percentile. We conclude by estimating the welfare consequences of audits using the MVPF framework and comparing audits to other revenue-raising policies. We find that audits raise revenue at lower welfare cost.
War Reparations, Structural Change, and Intergenerational Mobility
Abstract From 1944 to 1952, largely agrarian Finland had to export, on average, 4% of its yearly GDP in industrial products to the Soviet Union as war reparations. To meet the reparation demands, the Finnish state needed to provide extensive temporary support to Soviet-assigned industries with insufficient production capacity. This article documents the long-term effects of this extensive and temporary industrial policy on industrial and local development and on individual outcomes. Using newly digitized data sets, I show in a difference-in-differences setup that the short-term nonmarket production persistently and significantly increased the employment and production of the manufacturing industries exposed to the policy. These industries plausibly benefited from large initial investments and exposure to export markets associated with the war reparations. The episode further led to local development and structural change, as the more exposed regions became persistently more industrialized. I substantiate these within-Finland results with triple-difference setups using comparable Norwegian data. I use Finnish administrative data to study the long-term individual effects of the episode. Tracking individuals over 30 years, I show that the initial state investments and the persistent change in the local industrial structure increased long-term incomes, led to more educational attainment, and promoted the upward mobility of children and young adults in the more exposed regions before the war reparations period. The observed effects are driven by the more advanced heavy industry, which received the majority of state assistance.
Reserves Were Not So Ample After All
Abstract We show that the likelihood of a liquidity crunch in wholesale U.S. dollar funding markets depends on levels of reserve balances at the financial institutions that are the most active intermediaries of these markets. Heightened risk of an imminent liquidity crunch is signaled by significant delays in intraday payments to these large financial institutions over the prior two weeks. Our study contributes to the broader dialogue surrounding the Federal Reserve’s ongoing quantitative tightening.
LinkedOut? A Field Experiment on Discrimination in Job Network Formation
Abstract We assess the impact of discrimination on Black individuals’ job networks across the United States using a two-stage field experiment with 400+ fictitious LinkedIn profiles. In the first stage, we vary race via AI-generated images only and find that Black profiles’ connection requests are 13% less likely to be accepted. Based on users’ CVs, we find widespread discrimination across social groups. In the second stage, we exogenously endow Black and white profiles with the same networks and ask connected users for career advice. We find no evidence of direct discrimination in information provision. However, when taking into account differences in the composition and size of networks, Black profiles receive substantially fewer replies. Our findings suggest that gatekeeping is a key driver of Black–white disparities.
Trust at Scale: The Economic Limits of Cryptocurrencies and Blockchains
Abstract Satoshi Nakamoto (2008) invented a new kind of economic system that does not need the support of government or rule of law. Trust and security instead arise from a combination of cryptography and economic incentives, all in a completely anonymous and decentralized system. This article shows that Nakamoto’s novel form of trust, while undeniably ingenious, is deeply economically limited. The core argument is three equations. A zero-profit condition on the quantity of honest blockchain “trust support” (work, stake, etc.) and an incentive-compatibility condition on the system’s security against majority attack (the Achilles heel of all forms of permissionless consensus) together imply an equilibrium constraint, which says that the “flow” cost of blockchain trust has to be large at all times relative to the benefits of attacking the system. This is extremely expensive relative to traditional forms of trust and scales linearly with the value of attack. In scenarios that represent Nakamoto trust becoming a more significant part of the global financial system, the cost of trust would exceed global GDP. Nakamoto trust would become more attractive if an attacker lost the stock value of their capital in addition to paying the flow cost of attack, but this requires either collapse of the system (hardly reassuring) or external support from rule of law. The key difference between Nakamoto trust and traditional trust grounded in rule of law and complementary sources, such as reputations, relationships, and collateral, is economies of scale: society or a firm pays a fixed cost to enjoy trust over a large quantity of economic activity at low or zero marginal cost.
Overinference from Weak Signals and Underinference from Strong Signals
Abstract When people receive new information, sometimes they revise their beliefs too much, and sometimes too little. We show that a key driver of whether people overinfer or underinfer is the strength of the information. Based on a model in which people know which direction to update in, but not exactly how much to update, we hypothesize that people will overinfer from weak signals and underinfer from strong signals. We then test this hypothesis across four different environments: abstract experiments, a naturalistic experiment, sports betting markets, and financial markets. In each environment, our consistent and robust finding is overinference from weak signals and underinference from strong signals. Our framework and findings can help harmonize apparently contradictory results from the experimental and empirical literatures.
The Long-Run Impacts of Public Industrial Investment on Local Development and Economic Mobility: Evidence from World War II
Abstract This article studies the long-run effects of government-led construction of manufacturing plants on the regions where they were built and on individuals from those regions. Specifically, we examine publicly financed plants built in dispersed locations outside of major urban centers for security reasons during the U.S. industrial mobilization for World War II. Wartime plant construction had large and persistent effects on local development, characterized by an expansion of relatively high-wage manufacturing employment throughout the postwar era. These benefits were shared by incumbent residents; we find men born before World War II in counties where plants were built earned $1,200 (in 2020 dollars) or 2.5% more per year in adulthood relative to those born in counterfactual comparison regions, with larger benefits accruing to children of lower-income parents. The balance of evidence suggests that these individuals benefited primarily from the local expansion of higher-wage jobs to which they had access as adults, rather than because of developmental effects from exposure to better environments during childhood.
Mandatory Notice of Layoff, Job Search, and Efficiency
Abstract In all OECD countries, mandatory notice (MN) policies require firms to inform workers in advance of a layoff. In our theoretical framework, MN helps workers avoid unemployment and find better jobs by encouraging them to search for a new job while still employed, thereby increasing future production. The magnitude of this production gain depends on the relative effectiveness of search while employed versus unemployed. But on-the-job search and diminished work incentives reduce current production. If future gains outweigh current production losses, longer advance notice improves production efficiency. If not, Coasian bargaining predicts that firms offer a larger severance instead of longer notice. With bargaining, the sole efficiency loss of MN is due to delayed separations of unproductive job matches. We test these predictions using novel Swedish administrative data on layoff notifications. Workers eligible for extended MN receive longer notice and larger severance, resulting in less exposure to nonemployment spells and higher-paying jobs. These favorable labor market outcomes are solely due to longer notice; in contrast, larger severance delays job finding and has no impact on wages. We also show that advance notice replaces job search while unemployed with more effective search while employed. On the production side, we document a productivity drop among notified workers and estimate a production loss due to delayed separations. Using our estimates of production gains and losses to evaluate the overall production efficiency, we conclude that the gains of MN seem to outweigh the losses.
Measuring and Mitigating Racial Disparities in Tax Audits
Abstract Tax authorities around the world rely on audits to detect underreported tax liabilities and to verify that taxpayers qualify for the benefits they claim. We study differences in Internal Revenue Service audit rates between Black and non-Black taxpayers. Because neither we nor the IRS observe taxpayer race, we propose and use a novel partial identification strategy to estimate these differences. Despite race-blind audit selection, we find that Black taxpayers are audited at 2.9 to 4.7 times the rate of non-Black taxpayers. An important driver of the disparity is differing audit rates by race among taxpayers claiming the Earned Income Tax Credit (EITC). Using counterfactual audit selection models to explore why the disparity arises, we find that maximizing the detection of underreported taxes would not lead to Black EITC claimants being audited at higher rates. Rather, the audit disparity among EITC claimants stems largely from a policy decision to prioritize detecting overclaims of refundable credits over other forms of noncompliance. Modifying the audit selection algorithm to target total underreported taxes while holding fixed the number of audited EITC claimants would reduce the share of audited taxpayers who are Black and would lead to more audits focused on accurate reporting of business income and deductions, fewer audits focused on the eligibility of claimed dependents, higher per audit costs, and more detected noncompliance.
Present Bias Amplifies the Household Balance-Sheet Channels of Macroeconomic Policy
Abstract We study the effect of monetary and fiscal policy in a heterogeneous-agent model where households have present-biased time preferences and naive beliefs. The model features a liquid asset and illiquid home equity, which households can use as collateral for borrowing. Because present bias substantially increases households’ marginal propensity to consume (MPC), present bias increases the effect of fiscal policy. Present bias also amplifies the effect of monetary policy, but at the same time, slows down the speed of monetary transmission. Interest rate cuts incentivize households to conduct cash-out refinances, which become targeted liquidity injections to high-MPC households. Present bias also introduces a motive for households to procrastinate refinancing their mortgages, which slows down the speed with which this monetary channel operates.