Gadi Barlevy

The Cost of Business Cycles under Endogenous Growth

In his famous monograph, Lucas (1987) put forth an argument that the welfare gains from reducing the volatility of aggregate consumption are negligible. Subsequent work that revisited Lucas calculation continued to find only small benefits from reducing the volatility of consumption, further reinforcing the perception that business cycles dont matter. This paper argues instead that fluctuations can affect welfare by affecting the growth rate of consumption. I present an argument for why fluctuations can reduce growth starting from a given initial consumption, which could imply substantial welfare effects as Lucas (1987) already observed in his calculation. Empirical evidence and calibration exercises suggest that the welfare effects are likely to be substantial, about two orders of magnitude greater than Lucas original estimates.

Pay for Percentile

We propose an incentive pay scheme for educators that links educator compensation to the ranks of their students within appropriately defined comparison sets, and we show that under certain conditions our scheme induces teachers to allocate socially optimal levels of effort to all students. Because this scheme employs only ordinal information, our scheme allows education authorities to employ completely new assessments at each testing date without ever having to equate various assessment forms. This approach removes incentives for teachers to teach to a particular assessment form and eliminates opportunities to influence reward pay by corrupting the equating process or the scales used to report assessment results. Our system links compensation to the outcomes of properly seeded contests rather than cardinal measures of achievement growth. Thus, education authorities can employ our incentive scheme for educators while employing a separate system for measuring growth in student achievement that involves no stakes for educators. This approach does not create direct incentives for educators to take actions that contaminate the measurement of student progress.

Why Are the Wages of Job Changers So Procyclical

Evidence on wage cyclicality shows job changers have more procyclical wages than job stayers. Previous work argued this arises because workers gain greater access to jobs in sectors such as manufacturing that offer high wages. This article argues that workers who switch jobs in booms enter temporary jobs with unemployment risk and are merely compensated for subsequent losses. I demonstrate that the two explanations can be distinguished using the relationship between unemployment insurance and wage cyclicality among job changers. The evidence supports the compensation hypothesis; that is, that job changers might not experience real gains from higher‐paying jobs in booms.

Mortgage choices and housing speculation

Borrowers in cities where house prices boomed in the 2000s relied heavily on backloaded interest-only (IO) mortgages that require borrowers only to pay interest initially. We develop a theory that encompasses common explanations for IO use and show that while they can largely account for the regional variation in IOs, they cannot fully explain the concentration of IOs in booming cities. We propose a new explanation. In our model, uncertain price appreciation and no-recourse lending can lead to speculation financed with backloaded mortgages. We find evidence that IO borrowers behaved in ways consistent with such speculation.

A Leverage Based Model of Speculative Bubbles

This paper develops an equilibrium model of speculative bubbles that can be used to explore the role of various policies in either giving rise to or eliminating the possibility of asset bubbles, e.g. restricting the use of certain types of loan contracts, imposing down- payment restrictions, and changing inter-bank rates. As in previous work by Allen and Gorton (1993) and Allen and Gale (2000), a bubble arises in the model because traders are assumed to purchase assets with borrowed funds. My model adds to this literature by allowing creditors and traders to enter into a more general class of contracts, as well as by allowing speculators to trade strategically.

On the Timing of Innovation in Stochastic Schumpeterian Growth Models

Recent work has revived the Schumpeterian hypothesis that recessions facilitate innovation and growth. But a major source of productivity growth, research and development, is actually procyclical. This paper argues that while it is optimal to concentrate growth-enhancing activities in downturns, dynamic spillovers inherent to the R&D process lead private agents to concentrate too much of their R&D activity in booms, precisely when its social cost is highest. Thus, while previous literature has argued recessions promote growth and intertemporal substitution is a desirable consequence of fluctuations, in the case of R&D recessions discourage growth and intertemporal substitution proves to be a social liability.

Estimating Models of On-the-Job Search Using Record Statistics

This paper proposes a methodology for estimating job search models that does not require either functional form assumptions or ruling out the presence of unobserved variation in worker ability. In particular, building on existing results from record-value theory, a branch of statistics that deals with the timing and magnitude of extreme values in sequences of random variables, I show how we can use wage data to identify the distribution from which workers search. Applying this insight to wage data in the NLSY dataset, I show that the data supports the hypothesis that the wage offer distribution is Pareto, but not that it is lognormal.

Characterizations in a random record model with a non-identically distributed initial record

We consider a sequence of random length M of independent absolutely continuous observations Xi, 1 = i = M, where M is geometric, X1 has cdf G, and Xi, i = 2, have cdf F. Let N be the number of upper records and Rn, n = 1, be the nth record value. We show that N is free of F if and only if G(x) = G0(F (x)) for some cdf G0 and that if E (|X2|) is finite so is E |Rn|) for n = 2 whenever N = n or N = n. We prove that the distribution of N along with appropriately chosen subsequences of E(Rn) characterize F and G, and along with subsequences of E Rn - Rn-1) characterize F and G up to a common location shift. We discuss some applications to the identification of the wage offer distribution in job search models.

Properties of the Vacancy Statistic in the Discrete Circle Covering Problem

Holst [10] introduced a discrete spacings model that is related to the Bose-Einstein distribution and obtained the distribution of the number of vacant positions in an associated circle covering problem. We correct his expression for its probability mass function, obtain the first two moments, and describe their limiting properties. We then examine the properties of the vacancy statistic when the number of covering arcs in the associated circle covering problem is random. We also discuss applications of our results to a study of contagion in networks.

A Leverage-Based Model of Speculative Bubbles (Revised)

This paper examines whether theoretical models of bubbles based on the notion that the price of an asset can deviate from its fundamental value are useful for understanding phenomena that are often described as bubbles, and which are distinguished by other features such as large and rapid booms and busts in asset prices together with high turnover in asset ownership. In particular, I focus on riskshifting models similar to those developed in Allen and Gorton (1993) and Allen and Gale (2000). I show that such models could explain these phenomena, and discuss under what conditions booms and speculative trading would emerge. In addition, I show that these models imply that speculative bubbles can be associated with low rather than high premia on loans, in accordance with observations on credit conditions during episodes in which asset prices boomed and crashed.