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Interests: Asset Pricing, Household Finance, Housing Economics


Working Papers

The Contribution of High-Skilled Immigrants to Innovation in the United States with Shai Bernstein, Rebecca Diamond, and Beatriz Pousada
Draft: July 2019

Charles River Associates Award for the Best Paper on Corporate Finance, WFA

Abstract:  We characterize the contribution of immigrants to US innovation, both through their direct productivity as well as through their indirect spillover effects on their native collaborators. To do so, we link patent records to a database cotaining the first five digits of 160 million of Social Security Numbers (SSN). By combining this part of the SSN together with year of birth, we identify whether individuals are immigrants based on the age at which their Social Security Number is assigned. We find that over the course of their careers, immigrants are more productive than natives, as measured by number of patents, patent citations, and the economic value of these patents. Immigrant inventors are more likely to rely on foreign technologies, to collaborate with foreign inventors, and to be cited in foreign markets, thus contributing to the importation and diffusion of ideas across borders. Using an identification strategy that exploits premature inventor deaths, we find that immigrants collaborators create especially strong positive externalities on the innovation production of natives, while natives create especially large positive externalities on immigrant innovation production, suggesting that combining these different knowledge pools into inventor teams is important for innovation. A simple decomposition suggests that despite immigrants only making up 16% of inventors, they are responsible for 30% of aggregate US innovation since 1976, with their indirect spillover effects accounting for more than twice their direct productivity contribution.

Take-Up, Drop-Out, and Spending in ACA Marketplaces with Rebecca Diamond, Michael Dickstein, and Petra Persson
Draft: May 2018

Abstract:  The Affordable Care Act (ACA) established health insurance marketplaces where consumers can buy individual coverage. Leveraging novel credit card and bank account micro-data, we identify new enrollees in the California marketplace and measure their health spending and premium payments. Following enrollment, we observe dramatic spikes in individuals' health care consumption. We also document widespread attrition, with more than half of all new enrollees dropping coverage before the end of the plan year. Enrollees who drop out re-time health spending to the months of insurance coverage. This drop-out behavior generates a new type of adverse selection: insurers face high costs relative to the premiums collected when they enroll strategic consumers. We show that the pattern of attrition undermines market stability and can drive insurers to exit, even absent differences in enrollees' underlying health risks. Further, using data on plan price increases, we show that insurers largely shift the costs of attrition to non-drop-out enrollees, whose inertia generates low price sensitivity. Our results suggest that campaigns to improve use of social insurance may be more efficient when they jointly target take-up and attrition.

How Do Foreclosures Exacerbate Housing Downturns? with Adam Guren
Draft: August 2019
Revision requested, Review of Economic Studies

Abstract:  We present a dynamic search model in which foreclosures exacerbate housing busts and delay the housing market’s recovery. By eroding lender equity, destroying the credit of potential buyers, and making buyers more selective, foreclosures freeze the market for non-foreclosures and reduce price and sales volume. Because negative equity is necessary for default, foreclosures can cause price-default spirals that amplify an initial shock. To quantitatively assess these channels, the model is calibrated to the recent bust. The amplification is significant: ruined credit and choosey buyers account for 22.5 percent of the total decline in non-distressed prices and lender losses account for an additional 30 percent. We use our model to evaluate foreclosure mitigation policies and find that payment reduction is quite effective, but creating a single seller of foreclosures that holds them off the market until demand picks up is the most effective policy. Policies that slow down the pace of foreclosures can be counterproductive.

Stochastic Volatility and Asset Pricing Puzzles
Draft: January 2018
Revision requested, Journal of Finance

Abstract:  This paper builds a real-options, term structure model of the firm to shed new light on the value premium, financial distress, momentum, and credit spread puzzles. The model incorporates stochastic volatility in the firm productivity process and a negative market price of volatility risk. Since the equity of growth firms and financially distressed firms have embedded options, such securities hedge against volatility risk in the market and thus command lower volatility risk premia than the equities of value or financially healthy firms. Abnormal risk-adjusted momentum profits are concentrated among low credit-rating firms for similar reasons. Conversely, since increases in volatility generally reduce the value of debt, corporate debt will tend to command large volatility risk premia, allowing the model to generate higher credit spreads than existing structural models. The paper illustrates that allowing for endogenous default by equityholders is necessary for the model to account for the credit spreads of both investment grade and junk debt. The model is extended to include rare disasters and multiple time scales in volatility dynamics to better account for the expected default frequencies and credit spreads of short maturity debt. Finally, the paper uses a methodology based on asymptotic expansions to solve the model.

Mortgage Design in an Equilibrium Model of the Housing Market with Adam Guren and Arvind Krishnamurthy
Draft: June 2019
Revision requested, Journal of Finance

Abstract:  How can mortgages be redesigned to reduce housing market volatility, consumption volatility, and default? How does mortgage design interact with monetary policy? We answer these questions using a quantitative equilibrium life cycle model with aggregate shocks, long-term mortgages, and an equilibrium housing market, focusing on designs that index payments to monetary policy. Designs that raise mortgage payments in booms and lower them in recessions do better than designs with fixed mortgage payments. The welfare benefits are quantitatively substantial: ARMs improve household welfare relative to FRMs by the equivalent of 0.83 percent of annual consumption under a monetary regime in which the central bank lowers real interest rates in a bust. Among designs that reduce payments in a bust, we show that those that front-load the payment reductions and concentrate them in recessions outperform designs that spread payment reductions over the life of the mortgage. Front-loading alleviates household liquidity constraints in states where they are most binding, reducing default and stimulating housing demand by new homeowners. To isolate this channel, we compare an FRM with a built-in option to be converted to an ARM with an FRM with an option to be refinanced at the prevailing FRM rate. Under these two contracts, the present value of a lender’s loan falls by roughly an equal amount, as these contracts primarily differ in the timing of expected repayments. The FRM that can be converted to an ARM, which front loads payment reductions, improves household welfare by four times as much.

Who Creates New Firms when Local Opportunities Arise? with Shai Bernstein, Emanuele Colonnelli, and Davide Malacrino
Draft: September 2018
Revision requested, Journal of Financial Economics

Abstract:  New firm formation is a critical driver of job creation, and an important contributor to the responsiveness of the economy to aggregate shocks. In this paper we examine the characteristics of the individuals who become entrepreneurs when local opportunities arise due to an increase in local demand. We identify local demand shocks by linking fluctuations in global commodity prices to municipality level agricultural endowments in Brazil. We find that firm creation response is almost entirely driven by young individuals with generalist and managerial skills. In contrast, we find no such response within the same municipalities among skilled, yet older individuals. Those individuals who respond to local demand shocks are younger and more skilled than the average entrepreneur in the population. Entrepreneurial response of young individuals is larger in municipalities with better access to finance, more skilled human capital, and with overall younger demographics. These results highlight how the characteristics of the local population can have a significant impact on the entrepreneurial responsiveness of the economy.


Published Papers

Do Household Wealth Shocks Affect Productivity? Evidence from Innovative Workers During the Great Recession with Shai Bernstein and Rick Townsend. Journal of Finance, forthcoming.

The Effects of Rent Control Expansion on Tenants, Landlords, and Inequality: Evidence From San Francisco with Rebecca Diamond and Franklin Qian. American Economic Review, forthcoming.

Who Wants Affordable Housing in their Backyard? An Equilibrium Analysis of Low Income Property Development with Rebecca Diamond. Journal of Political Economy, 127:3: 1063-1117. 2019.

Who Pays for Rent Control? Heterogeneous Landlord Response to San Francisco's Rent Control Expansion with Rebecca Diamond and Franklin Qian. AEA Papers & Proceedings, 109: 377–380. 2019.

Markets with Untraceable Goods of Unknown Quality: Beyond the Small-Country Case with Stephen W. Salant and Jason Winfree. Journal of International Economics, 100: 112-119, 2016.

Regulating an Experience Good Produced in the Formal Sector of a Developing Country when Consumers Cannot Identify Producers,
with Stephen W. Salant and Jason Winfree. Review of Development Economics, 16(4): 512-526, 2012

Information Invariant Equilibria of Extensive Games,
with Tilman Borgers. B.E. Journal of Theoretical Economics, 7(1): 2007.

Work in Progress

Who Benefits from Rent Control? The Equilibrium Consequences of San Francisco's Rent Control Expansion with Rebecca Diamond and Franklin Qian. Subsumes the structural model from our original paper.