Working Papers

"Local Government Valuation"
(with Oliver Giesecke and Marcelo Sena)

WFA NASDAQ Award for Best Paper on Asset Pricing 2023

We construct a novel data set on the fiscal position of municipalities in the United States and document a secular decline in their financial health. Our data combines financial data from the Annual Comprehensive Financial Reports (ACFRs) of municipalities along with Census data of their revenue and expenditure cash flows. We find that a large share of municipalities operate with a negative net position---akin to a negative book equity position in the corporate context. We find that most of the decline originates from the accumulation of legacy obligations, i.e., pensions and other post-employment benefits (OPEBs); this is recognized by municipal bond markets through higher credit spreads. While accounting values from the ACFRs are informative, they are based on book valuations which potentially convey limited information about the economic value of assets and liabilities. Thus, we turn to the market valuation of local governments' equity by estimating an SDF that matches the valuation of a wide range of assets in the economy to prices future tax and expenditure claims. Using market prices for tax and expenditure claims, and market valuations of liability positions we find that the market values of equity are highly correlated with the book values. The negative equity position---in terms of book and market values---for some local governments suggests the presence of implicit insurance by the state and federal governments.

Presentations: UEA 11th European Meeting, Brookings Institution 2022 Municipal Finance Conference, UEA 16th North America Meeting, Midwest Finance Association 2023 Annual Meeting, Western Finance Association 2023 Annual Meeting, AREUEA National Conference 2023, Stanford GSB Finance, Virtual Municipal Finance Workshop 2024.

"Income Contingent Loans as an Unemployment Benefit" (submitted)
with Joseph Stiglitz and Jungyoll Yun

Imperfections in risk and capital markets imply that individuals who lose jobs suffer from imperfect smoothing of consumption across states and times. Compared to the first best, there will be too little search. Optimal unemployment programs, which balance the marginal benefit of consumption smoothing vs. the marginal cost of the insurance externality, increase welfare and may even increase GDP. Our analytical results suggest that welfare is higher if the unemployment benefits program includes income-contingent unemployment loans (ICL), where the amount repaid depends on the individual’s future income. Such loans can be financed by a risk premium imposed on the unemployed who avail themselves of the loans, and partially substitute for unemployment insurance (UI) benefits. Optimal unemployment benefits programs (UB) with ICL do a better job of smoothing consumption across states and time, and in particular total benefits when unemployed increase. We analyze how changes in key parameters, such as the degree of risk aversion and the nature of post-employment work, affect the design of the optimal UB program and the magnitude of the incremental benefits from including income-contingent loans.

Coverage: MarketWatch

"Local Governments' Response to Fiscal Shocks: Evidence from Connecticut"
with Oliver Giesecke. Earlier circulated as "Zombie Cities"

Best Student Paper (Honorable Mention) at the 15th North American Meeting of the Urban Economics Association 2021

The deteriorating fiscal position of municipalities across the United States raises the question which adjustment mechanisms municipalities have at their disposal and what their effects are. We utilize quasi-experimental variation in the year of property tax assessments in the state of Connecticut to provide causal evidence of the fiscal adjustment following a large decline in property values after the Great Financial Crisis. We find that local governments adjust tax rates to maintain stable tax revenues; there is no change in public employment levels and limited adjustments of public services. Our micro data on people's location further allows us to causally estimate the migration elasticity to a change in property tax rates. We find evidence of inter-state migration in response to an increase in property tax rates; and no statistically significant response of intra-state migration. Detailed property and location choice data reveal the elasticity of migration with regard to the property tax bill. An increase in the property tax bill by ten percent leads to an average increase in the migration propensity by about 1.5%.

Presentations: Columbia University, Columbia Business School, AREUEA National Conference 2021, UEA North America Meeting 2021, EEA-ESEM 2022.

Hurricanes, Adaptation and Capital Formation

A number of recent papers have investigated the impact of hurricanes on economic growth. However, there is limited understanding of the investment component of local growth after hurricanes. Using hand collected and web-scraped statutory property tax rate data in the U.S., I find that local governments respond to hurricane impact by raising tax rates. I find the hike in tax rates is persistent for 3-4 years after hurricane impact. The response is four times larger for major hurricanes compared to minor hurricanes. However, the increase in tax rates is not expected to be large enough to cause significant out-migration after the average hurricane. I supplement these findings with a novel data set of firm facility-level hurricane impact. I find that firms initially decrease investment in the quarter following hurricane impact and increase it in the final quarters of the second year after impact. Taken together, my paper presents a novel set of stylized facts on government and firm adaptation investment response that can be interpreted in light of recent general equilibrium models with disaster risk.

Presentations: AERE WEA Meeting 2023, Columbia University, Columbia Financial Economics, Midwest Finance Association 2024, AERE MEA Meeting 2024.

"Something Biased This Way Comes: The Effect of Media on Local Elections in the US"
with Dario Romero

We study how the introduction of a biased TV station operator affects electoral results. We use the staggered expansion of Sinclair Broadcasting Group (SBG) -- a large TV station operator known for its conservative slant -- from 2012 to 2017 and causally establish a set of facts. First, we find that SBG acquisition increases the likelihood of a Republican candidate winning the House of Representatives election. Interestingly, and on the other hand, in presidential elections, the Republican party candidate receives fewer votes, due to an increase in voting for third party candidates, after SBG acquisition. Second, when analyzing the winner's ideology in the House election, we document an ideological shift to the right for the winner. Part of this shift is mechanical due to a greater probability of the Republican candidate winning the election. However, we also find that Republican candidates have a greater likelihood of being conservative rather than moderate in SBG acquired places, suggesting an effect on the ideology of candidates winning primaries. We do not find any shifts in ideology for Democratic candidates. We also document other interesting facts, for example, that Republican candidates see an increase in PAC donations in SBG acquired places.

Presentations: 6th Economics of Media Bias Workshop 2023, NYU Abu Dhabi.

"Do Rounding-Off Heuristics Matter? Evidence from Bilateral Bargaining in the U.S. Housing Market"
with Franklin Qian, Ye Zhang, and Tianxiang Zheng
subsumes our earlier draft, The Microstructure of the U.S. Housing Market: Evidence from Millions of Bargaining Interactions

Using confidential offer-level data on the US housing market, this paper examines rounding-off heuristics in the bilateral bargaining process. We demonstrate that home sellers and home buyers follow different rounding-off heuristics. Sellers' list prices cluster more frequently around charm numbers (e.g. 349,999) compared to buyers' offer prices and negotiated final sales prices which have relatively more salient round numbers. These charm list prices dominate round list prices by yielding a higher sales price and a shorter time on the market. Buyer counteroffers are driven by seller list price choices -- buyers are more likely to respond to a round/charm list price with an offer price at the corresponding rounding level with trivial adjustments. However, when sellers use round numbers as initial list prices, buyers are relatively more likely to use offer prices with greater counteroffer adjustments. These empirical findings provide novel insights into bilateral bargaining behavior in the U.S. housing market. We provide plausible mechanisms for our results.

Presentations:  Atlanta Fed 2022, Columbia Experimental Design Workshop 2023,  Yale Junior Finance Conference 2023, Duke Fuqua 2023,  Bauer Houston Brownbag 2023, AREUEA-ASSA Annual Conference 2024,  Stockholm School of Economics Brownbag 2024.

"Repricing Avalanches in the Billion Prices Data"
with Laura Leal, Makoto Nirei and José Scheinkman

Nirei and Scheinkman (2021) proposed an equilibrium model of price adjustments with menu-costs with a finite number of firms and derived a “reproduction number” for repricing and a limit functional form for the distribution of the number of simultaneously price-adjusting firms. We show that the distribution of price-changes in data from the Billion Prices Project is well fitted by this functional form and exhibits a reproduction number that is close to unity, indicating that complementarity in price-changes plays a major role in repricings.

Work in Progress

"Conflicting Clauses in Contracts (2023)"
Show that statements to the effect of A and ~A in the same contract can be optimal in the presence of deep uncertainty.

"Climate Clubs Without Tariffs (2024), with Prajit Dutta"
Show that the standard game theoretic treaty model can be modified to give a stable club of non-trivial large size without tariffs.

"Decision Making under Climate Change Deep Uncertainty (2024)"
Peer-reviewed chapter for Joseph Stiglitz 80th anniversary festschrift discussing the changes in the standard model needed to capture deep uncertainty imposed by climate change.

"Climate Treaties with Abatement Technology Discovery"

"A Micro-Founded Neo-Fisher Effect (2023)"