Working Papers
Revitalize or Relocate: Optimal Place-based Transfers for Local Recessions (Job Market Paper) October 2024
Cities go through recessions. How does the national government respond to these downturns? And how should it? I provide evidence that commuting zones in the US are subject to idiosyncratic shocks and that population and wages respond only slowly in the aftermath. The US government picks up the slack by transferring money to the affected region through various taxes and public assistance programs. I then present a two-period model of local recessions where I characterize the optimal fiscal policy to achieve macroeconomic stability. Transfers have both a stimulus effect—boosting local demand through home-biased consumption—and a migration effect—encouraging residents to stay, exacerbating the recession. A dynamic New Keynesian economic geography model calibrated to US commuting zones suggests that transfers should be much more generous immediately after a shock, followed by possible taxes in the medium run. The China trade shock, on the other hand, calls for more aggressive transfers targeted towards both the directly impacted and nearby regions.
Strategic (Dis)Integration (with John Sturm Becko) October 2024
Suppose a country anticipates that it may use trade as a point of leverage in future geopolitical conflicts. How should it develop domestic industries and international trading relationships today in order to strengthen its hand tomorrow? Domestically, we show that the country abstains from peacetime capital subsidies if it can credibly threaten trade taxes as geopolitical punishments during conflict, but not otherwise. Internationally, peacetime trade policy promotes the accumulation of foreign capital that makes foreign prices more sensitive to trade during conflict, but not necessarily capital that increases foreign gains from trade. We apply these insights to quantify the US’s optimal policies for building geopolitical power vis-à-vis China. The optimal policy promotes US-China trade on both the import and export margins, especially in consumption goods.
The Granular Origins of Agglomeration (with Shin Kikuchi) October 2024
A few large firms dominate many local labor markets. How does that granularity affect the geography of economic activity? And what does it mean for the efficiency of firm entry? To answer these questions, we propose a new economic geography model featuring granular firms subject to idiosyncratic shocks. We show that average wages increase in the size of the local labor market due to that granularity, and provide a sufficient statistic for the contribution of our mechanism. We further prove that too few firms enter in equilibrium. Using Japanese administrative data on manufacturing, we provide evidence consistent with our mechanism and quantify it. Our mechanism implies that markets with around 2 firms per sector have an elasticity of wages to population of 0.05 and firms capture only 85% of their contribution to production in profits. In large markets like Tokyo, the elasticity is around 0.001, and firm entry is approximately efficient. Enacting optimal place-based industrial policy would increase the number of firms in modest-sized cities by more than 30% and actually decrease the number of firms and people in Tokyo.
The Stable Transformation Path (with Francisco J. Buera, Joseph Kaboski, and Martí Mestieri) Online Appendix October 2024
Many growth models lack balanced growth paths (BGPs). Instead, the sectoral, productivity, and capital dynamics change drastically as the economy develops. We define the Stable Transformation Path (STraP), a generalization of the BGP to non-stationary models, for a wide class of models and prove its existence and uniqueness. We use the STraP to evaluate the implications of benchmark models of structural transformation. Secular structural change can account for a quarter of growth in miracle economies, but it fails to explain the growth experience in the early industrial period.
Works in Progress
Optimal Carbon Taxation with Concerns for Redistribution (with Arnaud Costinot, Joseph Shapiro, and Iván Werning)
We provide a general formula for optimal carbon taxes in a second-best world where governments may have concerns for redistribution, but only have access to nonlinear income taxes. Our formula requires adding to standard estimates of the social cost of carbon an extra term that takes into account its potentially adverse consequences for inequality. Our adjustment only depends on a few sufficient statistics: marginal income tax rates, elasticities of labor supply, and elasticities of relative wages with respect to changes in carbon emissions across quantiles of the income distribution. Combining a model of the US economy with detailed administrative data, we provide estimates of these statistics and explore their implications for carbon taxation.
Optimal Industrial Mix with Granular Shocks (with Shin Kikuchi)
When firms are subject to granular and industry-wide shocks, regions overspecialize, leaving workers overexposed. Using German employer-employee matched data, we study the optimal industrial policy incorporating heterogeneity in occupation, industry, and region.