Working Papers

The Risk-Premium Channel of Uncertainty: Implications for Unemployment and Inflation, with H. Lee and P. Rendahl (revised version: August 2022)
Revised & Resubmitted
- Review of Economic Dynamics

Abstract. This paper studies the role of macroeconomic uncertainty in a search-and-matching framework with risk-averse households. Heightened uncertainty about future productivity reduces current economic activity even in the absence of nominal rigidities. A risk-premium mechanism accounts for this result. As future asset prices become more volatile and covary more positively with aggregate consumption, the risk premium rises in the present. The associated downward pressure on current asset values lowers firm entry, making it harder for workers to find jobs and reducing supply. With nominal rigidities the recession is exacerbated, as a more uncertain future reinforces households’ precautionary behavior, which causes demand to contract. Counterfactual analyses using a calibrated model imply that unemployment would rise by less than half as much absent the risk-premium channel. The presence of this mechanism implies that uncertainty shocks are less deflationary than regular demand shocks, nor can they be fully neutralized by monetary policy.


Publications

Volatile Hiring: Uncertainty in Search and Matching Models, with W. Den Haan and P. Rendahl
Journal of Monetary Economics, Vol. 123 pp. 1-18 (2021)

Abstract. In search-and-matching models, the nonlinear nature of search frictions increases average unemployment rates during periods with higher volatility. These frictions are not, however, by themselves sufficient to raise unemployment following an increase in perceived uncertainty; though they may do so in conjunction with the common assumption of wages being determined by Nash bargaining. Importantly, option-value considerations play no role in the standard model with free entry. In contrast, when the mass of entrepreneurs is finite and there is heterogeneity in firm-specific productivity, a rise in perceived uncertainty robustly increases the option value of waiting and reduces job creation.


Workers, Capitalists, and the Government: Fiscal Policy and Income (Re)Distribution, with C. Cantore
Journal of Monetary Economics, Vol. 119 pp. 58-74 (2021)

Abstract. We propose a novel two-agent New Keynesian model to study the interaction of fiscal policy and household heterogeneity in a tractable environment. Workers can save in bonds subject to portfolio adjustment costs; firm ownership is concentrated among capitalists who do not supply labor. The model is consistent with micro data on empirical intertemporal marginal propensities to consume, and it avoids implausible profit income effects on labor supply. Relative to the traditional two-agent model, these features imply, respectively, a lower sensitivity of consumption to the composition of public financing; and smaller fiscal multipliers alongside pronounced redistributive effects.


Work in Progress

Superstar Teams: The Micro Origins and Macro Implications of Coworker Complementarities
Draft coming soon

Abstract. Modern production processes commonly involve teamwork among employees specialized in different job tasks. I develop and quantify a theoretical model of team production and hiring. In the model, firms assign tasks to heterogeneous workers, whom they hire in a frictional labor market. In addition to efficiency gains, the division of labor generates coworker complementarities: One employee's marginal product is increasing in other team members' productivity. These complementarities are stronger when tasks are more complex. This has implications for productivity, as quality mismatch among coworkers lowers team output, and for inequality. Complementarities lead firms to form teams of similarly talented workers -- in equilibrium, employers with ``superstar teams'' pull away from the rest in terms of productivity and pay. I validate the model's key mechanisms using administrative micro data. Paralleling a rise in task complexity, a theory-informed measure of coworker complementarities has almost doubled since 1990. A structural estimation exercise suggests that this rise has exacerbated productivity losses due to coworker mismatch, and that it can account for a significant fraction of the increase in the between-establishment share of wage inequality in Germany.

Coordination is Key: Task Assignment and Firm Productivity

Human Capital at Work: Skill Composition, Productivity, and Wages, with C. Criscuolo and P. Gal
OECD Policy Paper

Discussions

"Household Portfolio Choices and Nonlinear Income Risk," by J. Galvez