Pub Date : 2025-10-01DOI: 10.1016/j.red.2025.101306
Rui Li , Noah Williams
Recent years have seen episodes of managers subjecting firms to large losses. We develop a dynamic moral hazard model where a manager may divert funds, and also take actions yielding current payoffs, but increasing risks of losses. We show that pay-for-performance contracts exacerbate the risk management friction, then characterize the optimal risk management contract. We solve two examples. One is explicitly solvable, and the optimal contract can be implemented with simple instruments including “clawback” of promised bonuses. The second example shows that it may be optimal for the owner to forgo risk management, allowing the manager to take excess risk.
{"title":"Optimal contracts with hidden risk","authors":"Rui Li , Noah Williams","doi":"10.1016/j.red.2025.101306","DOIUrl":"10.1016/j.red.2025.101306","url":null,"abstract":"<div><div>Recent years have seen episodes of managers subjecting firms to large losses. We develop a dynamic moral hazard model where a manager may divert funds, and also take actions yielding current payoffs, but increasing risks of losses. We show that pay-for-performance contracts exacerbate the risk management friction, then characterize the optimal risk management contract. We solve two examples. One is explicitly solvable, and the optimal contract can be implemented with simple instruments including “clawback” of promised bonuses. The second example shows that it may be optimal for the owner to forgo risk management, allowing the manager to take excess risk.</div></div>","PeriodicalId":47890,"journal":{"name":"Review of Economic Dynamics","volume":"58 ","pages":"Article 101306"},"PeriodicalIF":2.1,"publicationDate":"2025-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145361005","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-09-17DOI: 10.1016/j.red.2025.101304
Junmin Liao , Xiang Sun , Wei Wang
The standard non-homothetic CES preference imposes parametric constraints on the relationship between price and income elasticities. This paper shows these parametric constraints are empirically implausible for certain sectors. We address this issue by introducing an extended parametric restriction that removes these constraints. We fully characterize the extended non-homothetic CES preference and show that it retains all the desirable properties of the standard non-homothetic CES preference. Importantly, the extended non-homothetic CES preference is not restricted for conducting empirical and quantitative exercises in macro-development models. It thus offers a flexible workhorse model for macro development and related fields.
{"title":"The extended non-homothetic CES preference","authors":"Junmin Liao , Xiang Sun , Wei Wang","doi":"10.1016/j.red.2025.101304","DOIUrl":"10.1016/j.red.2025.101304","url":null,"abstract":"<div><div>The standard non-homothetic CES preference imposes parametric constraints on the relationship between price and income elasticities. This paper shows these parametric constraints are empirically implausible for certain sectors. We address this issue by introducing an extended parametric restriction that removes these constraints. We fully characterize the extended non-homothetic CES preference and show that it retains all the desirable properties of the standard non-homothetic CES preference. Importantly, the extended non-homothetic CES preference is not restricted for conducting empirical and quantitative exercises in macro-development models. It thus offers a flexible workhorse model for macro development and related fields.</div></div>","PeriodicalId":47890,"journal":{"name":"Review of Economic Dynamics","volume":"58 ","pages":"Article 101304"},"PeriodicalIF":2.1,"publicationDate":"2025-09-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145117891","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-09-17DOI: 10.1016/j.red.2025.101305
Srinivasan Murali
This paper studies the decline in labor market turnover over recent decades, in particular, job finding, separation, and job changing rates. I analyze the role of an increase in specialization of jobs in accounting for this decline, where specialization is defined as the impact of mismatch on match productivity. Combining individual-level data from NLSY79 and NLSY97 with data on skills from ASVAB and O*NET, I empirically estimate job specialization and show that the specialization has increased over time. To quantify the impact of this increasing specialization on labor market turnover, I build an equilibrium search and matching model with two-sided ex ante heterogeneity, on-the-job search, and endogenous separations. The calibrated model shows that higher job specialization leads to a decline in all the measures of labor market turnover. As specialization increases, firms and workers become more selective in forming matches. Thus, well-matched firms and workers choose to remain in their matches longer, while bad matches get destroyed faster. Since higher specialization leads to an increase in the proportion of good matches in the economy, it results in a decline in the labor market turnover.
{"title":"Job specialization and labor market turnover","authors":"Srinivasan Murali","doi":"10.1016/j.red.2025.101305","DOIUrl":"10.1016/j.red.2025.101305","url":null,"abstract":"<div><div>This paper studies the decline in labor market turnover over recent decades, in particular, job finding, separation, and job changing rates. I analyze the role of an increase in specialization of jobs in accounting for this decline, where specialization is defined as the impact of mismatch on match productivity. Combining individual-level data from NLSY79 and NLSY97 with data on skills from ASVAB and O*NET, I empirically estimate job specialization and show that the specialization has increased over time. To quantify the impact of this increasing specialization on labor market turnover, I build an equilibrium search and matching model with two-sided ex ante heterogeneity, on-the-job search, and endogenous separations. The calibrated model shows that higher job specialization leads to a decline in all the measures of labor market turnover. As specialization increases, firms and workers become more selective in forming matches. Thus, well-matched firms and workers choose to remain in their matches longer, while bad matches get destroyed faster. Since higher specialization leads to an increase in the proportion of good matches in the economy, it results in a decline in the labor market turnover.</div></div>","PeriodicalId":47890,"journal":{"name":"Review of Economic Dynamics","volume":"58 ","pages":"Article 101305"},"PeriodicalIF":2.1,"publicationDate":"2025-09-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145117978","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-09-09DOI: 10.1016/j.red.2025.101302
Alejandro Bernales , Hriday Karnani , Paula Margaretic
Informational economic transmission is crucial even after accounting for countries' fundamental real and financial connections. Informational connections emerge from anomalous interdependence in agents' beliefs about countries' economic activity. We propose measuring this interdependence through the correlation (between countries) of analysts' one-year forecast errors about countries' economic performance. Our measure is based on a learning model in which informational transmission occurs when agents incorrectly assess the quality of new information regarding common factors that affect multiple countries simultaneously, due to learning frictions. Informational interdependence remains substantial under various validity analyses and robustness checks, and after addressing endogeneity concerns in several dimensions. Additionally, we demonstrate considerable higher-order spillovers of economic shocks.
{"title":"Informational economic transmission between countries","authors":"Alejandro Bernales , Hriday Karnani , Paula Margaretic","doi":"10.1016/j.red.2025.101302","DOIUrl":"10.1016/j.red.2025.101302","url":null,"abstract":"<div><div>Informational economic transmission is crucial even after accounting for countries' fundamental real and financial connections. Informational connections emerge from anomalous interdependence in agents' beliefs about countries' economic activity. We propose measuring this interdependence through the correlation (between countries) of analysts' one-year forecast errors about countries' economic performance. Our measure is based on a learning model in which informational transmission occurs when agents incorrectly assess the quality of new information regarding common factors that affect multiple countries simultaneously, due to learning frictions. Informational interdependence remains substantial under various validity analyses and robustness checks, and after addressing endogeneity concerns in several dimensions. Additionally, we demonstrate considerable higher-order spillovers of economic shocks.</div></div>","PeriodicalId":47890,"journal":{"name":"Review of Economic Dynamics","volume":"58 ","pages":"Article 101302"},"PeriodicalIF":2.1,"publicationDate":"2025-09-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145060079","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-07-31DOI: 10.1016/j.red.2025.101301
Shisham Adhikari , Athanasios Geromichalos , Ateş Gürsoy , Ioannis Kospentaris
The first step in a worker's career is often particularly hard. Many firms seeking workers require experience in a related field, so a vicious circle is created, whereby an entry level job is required in order to get an entry level job. Consequently, entrant workers have lower job-finding rates and longer unemployment durations than the unemployed who have looked for a job in the past. To study the welfare implications of these observations, we consider a version of the DMP model where firms who match with entrant workers have to incur training costs. As a result, firms are biased against entrant workers, who, in turn, stay unemployed for a prolonged period of time, exposing themselves to a persistent skill loss shock. We use a calibrated version of the model to quantitatively assess the effectiveness of four government interventions whose common goal is to reduce bias against entrant workers. We find that the most effective intervention takes the form of a subsidy that induces firms to rank entrants higher than experienced workers and that this policy brings the economy very close to the constrained efficient outcome.
{"title":"How much work experience do you need to get your first job?","authors":"Shisham Adhikari , Athanasios Geromichalos , Ateş Gürsoy , Ioannis Kospentaris","doi":"10.1016/j.red.2025.101301","DOIUrl":"10.1016/j.red.2025.101301","url":null,"abstract":"<div><div>The first step in a worker's career is often particularly hard. Many firms seeking workers require experience in a related field, so a vicious circle is created, whereby an entry level job is required in order to get an entry level job. Consequently, entrant workers have lower job-finding rates and longer unemployment durations than the unemployed who have looked for a job in the past. To study the welfare implications of these observations, we consider a version of the DMP model where firms who match with entrant workers have to incur training costs. As a result, firms are biased against entrant workers, who, in turn, stay unemployed for a prolonged period of time, exposing themselves to a persistent skill loss shock. We use a calibrated version of the model to quantitatively assess the effectiveness of four government interventions whose common goal is to reduce bias against entrant workers. We find that the most effective intervention takes the form of a subsidy that induces firms to rank entrants higher than experienced workers and that this policy brings the economy very close to the constrained efficient outcome.</div></div>","PeriodicalId":47890,"journal":{"name":"Review of Economic Dynamics","volume":"58 ","pages":"Article 101301"},"PeriodicalIF":2.1,"publicationDate":"2025-07-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"144779695","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-07-24DOI: 10.1016/j.red.2025.101299
Matthias Beulmann, Holger Strulik
It is generally believed that population growth is associated with higher CO2 emissions. Empirically, however, the fertility rate is negatively associated with CO2 emissions while education and individual human capital are positively associated. In this paper, we set up an R&D-based model of economic growth and pollution with endogenous fertility and education that explains these stylized facts and reconciles them with the common wisdom. By refining the theory of directed technical change we explain why (i) lower birth rates within and across countries are associated with more human capital and therefore with higher income and more CO2 emissions in the 19th and 20th century and (ii) that directed technical change is a necessary but not sufficient condition for low fertility to ultimately have a positive impact on emissions, as a smaller but better educated workforce is able to transition to green growth earlier.
{"title":"The fertility transition and directed technical change towards green growth","authors":"Matthias Beulmann, Holger Strulik","doi":"10.1016/j.red.2025.101299","DOIUrl":"10.1016/j.red.2025.101299","url":null,"abstract":"<div><div>It is generally believed that population growth is associated with higher CO<sub>2</sub> emissions. Empirically, however, the fertility rate is negatively associated with CO<sub>2</sub> emissions while education and individual human capital are positively associated. In this paper, we set up an R&D-based model of economic growth and pollution with endogenous fertility and education that explains these stylized facts and reconciles them with the common wisdom. By refining the theory of directed technical change we explain why (i) lower birth rates within and across countries are associated with more human capital and therefore with higher income and more CO<sub>2</sub> emissions in the 19th and 20th century and (ii) that directed technical change is a necessary but not sufficient condition for low fertility to ultimately have a positive impact on emissions, as a smaller but better educated workforce is able to transition to green growth earlier.</div></div>","PeriodicalId":47890,"journal":{"name":"Review of Economic Dynamics","volume":"58 ","pages":"Article 101299"},"PeriodicalIF":2.3,"publicationDate":"2025-07-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"144714337","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-07-23DOI: 10.1016/j.red.2025.101300
Sigurd M. Galaasen , Herman Kruse
We explore the importance and nature of elderly couples' labor market interlinkages, and how such linkages shape the response to welfare reforms. To this end, we develop a life-cycle model featuring dual-earner households with heterogeneous age gaps, non-separable leisure preferences, and endogenous retirement. To inform key preference parameters, our calibration exploits quasi-experimental evidence of spousal retirement spillovers from a pension reform in Norway. We show that the experimental evidence is highly informative about the degree of non-separability of leisure and that a substantial level of complementarity is required to match the data. Using our calibrated model, we find that the commonly observed tendency of couples to retire together, despite considerable age-gap heterogeneity, can be entirely explained by leisure complementarities. Moreover, comparing to a model with leisure separability reveals that one-third of the long-run labor supply effect of the pension reform is attributed to complementarity. This illustrates the importance of accounting for interdependent decisions when evaluating policy reforms.
{"title":"Spousal spillovers in the labor market: A structural assessment","authors":"Sigurd M. Galaasen , Herman Kruse","doi":"10.1016/j.red.2025.101300","DOIUrl":"10.1016/j.red.2025.101300","url":null,"abstract":"<div><div>We explore the importance and nature of elderly couples' labor market interlinkages, and how such linkages shape the response to welfare reforms. To this end, we develop a life-cycle model featuring dual-earner households with heterogeneous age gaps, non-separable leisure preferences, and endogenous retirement. To inform key preference parameters, our calibration exploits quasi-experimental evidence of spousal retirement spillovers from a pension reform in Norway. We show that the experimental evidence is highly informative about the degree of non-separability of leisure and that a substantial level of complementarity is required to match the data. Using our calibrated model, we find that the commonly observed tendency of couples to retire together, despite considerable age-gap heterogeneity, can be entirely explained by leisure complementarities. Moreover, comparing to a model with leisure separability reveals that one-third of the long-run labor supply effect of the pension reform is attributed to complementarity. This illustrates the importance of accounting for interdependent decisions when evaluating policy reforms.</div></div>","PeriodicalId":47890,"journal":{"name":"Review of Economic Dynamics","volume":"58 ","pages":"Article 101300"},"PeriodicalIF":2.1,"publicationDate":"2025-07-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"144772478","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-06-10DOI: 10.1016/j.red.2025.101298
Bettina Brüggemann, Zachary L. Mahone
This paper confronts a model of entrepreneurship and wealth inequality with empirical patterns on rates of return across the wealth distribution. We find the quantitative model implies rates of return largely consistent with the data. Rates of return to business wealth are high, heterogeneous, negatively correlated with net worth, and persistent. Both dispersion in marginal products of capital and leverage are important for explaining the patterns in rates of return along the wealth distribution. Heterogeneous abilities explain a large portion of cross-sectional dispersion and drive persistence in individual returns.
{"title":"Entrepreneurial rates of return and wealth inequality","authors":"Bettina Brüggemann, Zachary L. Mahone","doi":"10.1016/j.red.2025.101298","DOIUrl":"10.1016/j.red.2025.101298","url":null,"abstract":"<div><div>This paper confronts a model of entrepreneurship and wealth inequality with empirical patterns on rates of return across the wealth distribution. We find the quantitative model implies rates of return largely consistent with the data. Rates of return to business wealth are high, heterogeneous, negatively correlated with net worth, and persistent. Both dispersion in marginal products of capital and leverage are important for explaining the patterns in rates of return along the wealth distribution. Heterogeneous abilities explain a large portion of cross-sectional dispersion and drive persistence in individual returns.</div></div>","PeriodicalId":47890,"journal":{"name":"Review of Economic Dynamics","volume":"58 ","pages":"Article 101298"},"PeriodicalIF":2.3,"publicationDate":"2025-06-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"144263876","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-06-02DOI: 10.1016/j.red.2025.101291
B. Ravikumar, G. Vandenbroucke
We study a model where a single good can be produced using a diminishing-returns technology (Malthus) and a constant-returns technology (Solow). We map the former to agriculture and show that the share of agricultural employment declines at a constant rate during the economic transition and that recent observations on the share are sufficient to estimate the onset of transition. Our model implies that (i) output growth is higher and increasing after the onset of transition, (ii) during the transition, it is a first-order autoregressive process, and (iii) the rate of decline in the share of agricultural employment is a sufficient statistic for the autoregressive coefficient. Our quantitative results are consistent with these implications for developed economies over more than a century despite the changes in the sectoral composition of output and for today's developing economies in various stages of development and structural transformation.
{"title":"On the transition to sustained growth: The importance of recent agricultural employment","authors":"B. Ravikumar, G. Vandenbroucke","doi":"10.1016/j.red.2025.101291","DOIUrl":"10.1016/j.red.2025.101291","url":null,"abstract":"<div><div>We study a model where a single good can be produced using a diminishing-returns technology (Malthus) and a constant-returns technology (Solow). We map the former to agriculture and show that the share of agricultural employment declines at a constant rate during the economic transition and that recent observations on the share are sufficient to estimate the onset of transition. Our model implies that (i) output growth is higher and increasing after the onset of transition, (ii) during the transition, it is a first-order autoregressive process, and (iii) the rate of decline in the share of agricultural employment is a sufficient statistic for the autoregressive coefficient. Our quantitative results are consistent with these implications for developed economies over more than a century despite the changes in the sectoral composition of output and for today's developing economies in various stages of development and structural transformation.</div></div>","PeriodicalId":47890,"journal":{"name":"Review of Economic Dynamics","volume":"58 ","pages":"Article 101291"},"PeriodicalIF":2.3,"publicationDate":"2025-06-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"144223458","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-05-02DOI: 10.1016/j.red.2025.101289
Andrew Yizhou Liu
This paper examines strategic complementarity in labor demand among industry-leading firms in U.S. local labor markets. Using online vacancy postings and a shift-share instrumental variable approach, I find that a 10% increase in other firms' vacancy postings reduces a firm's own postings by 5% to 8%. I identify wage adjustments and matching frictions as key channels underlying this complementarity. The findings highlight how strategic interactions among large firms shape labor market dynamics.
{"title":"Strategic complementarity in labor demand: Evidence from US industry leading firms","authors":"Andrew Yizhou Liu","doi":"10.1016/j.red.2025.101289","DOIUrl":"10.1016/j.red.2025.101289","url":null,"abstract":"<div><div>This paper examines strategic complementarity in labor demand among industry-leading firms in U.S. local labor markets. Using online vacancy postings and a shift-share instrumental variable approach, I find that a 10% increase in other firms' vacancy postings reduces a firm's own postings by 5% to 8%. I identify wage adjustments and matching frictions as key channels underlying this complementarity. The findings highlight how strategic interactions among large firms shape labor market dynamics.</div></div>","PeriodicalId":47890,"journal":{"name":"Review of Economic Dynamics","volume":"57 ","pages":"Article 101289"},"PeriodicalIF":2.3,"publicationDate":"2025-05-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"143904304","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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