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Working Paper
A tractable circular city model with an application to the effects of development constraints on land rents
Superseded by working paper 13-37.> A tractable production-externality-based circular city model in which both firms and workers choose location as well as intensity of land use is presented. The equilibrium structure of the city has either (i) no commuting ("mixed-use" form) or (ii) a central business district (CBD) of positive radius and a surrounding residential ring. Regardless of which form prevails, the intra-city variation in all endogenous variables displays the negative exponential form: x(r) = x(0)exr (where r is the distance from the city center and x depends only on preference ...
Working Paper
Foreclosures and house price dynamics: a quantitative analysis of the mortgage crisis and the foreclosure prevention policy
This paper is superseded by WP 15-15 <p>The authors construct a quantitative equilibrium model of the housing market in which an unanticipated increase in the supply of housing triggers default mortgages via its effect on house prices. The decline in house prices creates an incentive to increase the consumption of housing space, but leverage makes it costly for homeowners to sell their homes and buy bigger ones (they must absorb large capital losses). Instead, leveraged households find it advantageous to default and rent housing space. Since renters demand less housing space than homeowners, ...
Working Paper
Incumbency Disadvantage in U.S. National Politics: The Role of Policy Inertia and Prospective Voting
We document that postwar U.S. national elections show a strong pattern of incumbency disadvantage": If the presidency has been held by a party for some time, that party tends to lose seats in Congress. We develop a model of partisan politics with policy inertia and prospective voting to explain this finding. Positive and normative implications of the model are explored.
Working Paper
The Changing Polarization of Party Ideologies: The Role of Sorting
U.S. congressional roll-call voting records show that as polarization of the two parties along the economic dimension changes, polarization along the social/cultural dimension tends to change in the opposite direction. A model of party competition within a two-dimensional ideology space is developed in which party platforms are determined by voters who compose the party. It is shown that if distribution of voter preferences is radially symmetric, polarization of party ideologies along the two dimensions are inversely related, as observed. The model gives a remarkably good quantitative account ...
Working Paper
The Firm Size-Leverage Relationship and Its Implications for Entry and Business Concentration
Larger firms (by sales or employment) have higher leverage. This pattern is explained using a model in which firms produce multiple varieties, acquire new varieties from their inventors, and borrow against the future cash flow of the firm with the option to default. A variety can die with a constant probability, implying that firms with more varieties (bigger firms) have a lower variance of sales growth and, in equilibrium, higher leverage. In this setup, a drop in the risk-free rate increases the value of an acquisition more for bigger firms because of their higher leverage: They can (and ...
Working Paper
Continuous Markov equilibria with quasi-geometric discounting
We prove that the standard quasi-geometric discounting model used in dynamic consumer theory and political economics does not possess continuous Markov perfect equilibria (MPE) if there is a strictly positive lower bound on wealth. We also show that, at points of discontinuity, the decision maker strictly prefers lotteries over the next period's assets. We then extend the standard model to have lotteries and establish the existence of an MPE with continuous decision rules. The models with and without lotteries are numerically compared, and it is shown that the model with lotteries behaves ...
Working Paper
Debt dilution and seniority in a model of defaultable sovereign debt
An important ineffciency in sovereign debt markets is debt dilution, wherein sovereigns ignore the adverse impact of new debt on the value of existing debt and, consequently, borrow too much and default too frequently. A widely proposed remedy is the inclusion of seniority clause in sovereign debt contracts: Creditors who lent first have priority in any restructuring proceedings. We incorporate seniority in a quantitatively realistic model of sovereign debt and find that seniority is quite effective in mitigating the dilution problem. We also show theoretically that seniority cannot be fully ...
Working Paper
Do supply restrictions raise the value of urban land? The (neglected) role of production externalities
Restriction on the supply of new urban land is commonly thought to raise the value of existing urban land. Our paper questions this view. We develop a tractable production-externality-based circular city model in which firms and workers choose locations and intensity of land use. Consistent with evidence, the model implies exponentially decaying density and price gradients. For plausible parameter values, an increase in the demand for urban land can lead to a smaller increase in urban rents in cities that cannot expand physically because they are less able to exploit the positive external ...
Working Paper
Specific capital and vintage effects on the dynamics of unemployment and vacancies
In a reasonably calibrated Mortensen and Pissarides matching model, shocks to average labor productivity can account for only a small portion of the fluctuations in unemployment and vacancies (Shimer (2005a)). In this paper, the author argues that if vintage specific shocks rather than aggregate productivity shocks are the driving force of fluctuations, the model does a better job of accounting for the data. She adds heterogeneity in jobs (matches) with respect to the time the job is created in the form of different embodied technology levels. The author also introduces specific capital that, ...
Working Paper
Maturity, indebtedness, and default risk
We present a novel and tractable model of long-term sovereign debt. We make two sets of contributions. First, on the substantive side, using Argentina as a test case we show that unlike one-period debt models, our model of long-term sovereign debt is capable of accounting for the average spread, the average default frequency, and the average debt-to-output ratio of Argentina over the 1991-2001 period without any deterioration in the model's ability to account for Argentina's cyclical facts. Using our calibrated model we determine what Argentina's debt, default frequency and welfare would have ...