Pub Date : 2025-12-17DOI: 10.1016/j.jedc.2025.105242
Anastasiia Parakhoniak , Olga Balakina , Claes Bäckman
What are the aggregate and distributional consequences of the relationship between an individual’s social network and financial decisions? Motivated by several well-documented facts about the influence of social connections on financial decisions, we build and calibrate a model of stock market participation with a social network that emphasizes the interplay between connectivity and network structure. Since connections to informed agents influence peers through utility and learning, there is a pivotal role for homophily. An increase in the average number of connections raises the average participation rate, mostly due to richer agents. Higher homophily benefits richer agents by creating clusters where information spreads more efficiently. We also show that peer effects in participation costs is crucial for matching stock market participation among poorer agents. Finally, we provide empirical evidence consistent with the importance of connectivity and sorting.
{"title":"Beyond connectivity: Stock market participation in a network","authors":"Anastasiia Parakhoniak , Olga Balakina , Claes Bäckman","doi":"10.1016/j.jedc.2025.105242","DOIUrl":"10.1016/j.jedc.2025.105242","url":null,"abstract":"<div><div>What are the aggregate and distributional consequences of the relationship between an individual’s social network and financial decisions? Motivated by several well-documented facts about the influence of social connections on financial decisions, we build and calibrate a model of stock market participation with a social network that emphasizes the interplay between connectivity and network structure. Since connections to informed agents influence peers through utility and learning, there is a pivotal role for homophily. An increase in the average number of connections raises the average participation rate, mostly due to richer agents. Higher homophily benefits richer agents by creating clusters where information spreads more efficiently. We also show that peer effects in participation costs is crucial for matching stock market participation among poorer agents. Finally, we provide empirical evidence consistent with the importance of connectivity and sorting.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"183 ","pages":"Article 105242"},"PeriodicalIF":2.3,"publicationDate":"2025-12-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145841932","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 : 2025-12-11DOI: 10.1016/j.jedc.2025.105243
Cheng Chen , Takahiro Hattori
Declining population growth and firm-level input distortions are important real-world phenomena. In this paper, we develop a firm dynamics model to study how firing costs induce input distortions through the lens of growth of working-age population. We find that the negative impact of firing costs on aggregate productivity and output is amplified when the growth rate of working-age population declines. This is because slower growth of labor supply leads to fewer entering firms and more incumbents, which are more affected by firing costs. Using Japanese establishment-level data, we calibrate the model and conduct counterfactual analyses, showing that a decline in population growth has a quantitatively significant impact on firm entry and firm-level input distortions. Finally, we provide evidence using Japanese establishment-level census data to support the model’s key predictions.
{"title":"Population growth, employment protection, and firm-level distortions","authors":"Cheng Chen , Takahiro Hattori","doi":"10.1016/j.jedc.2025.105243","DOIUrl":"10.1016/j.jedc.2025.105243","url":null,"abstract":"<div><div>Declining population growth and firm-level input distortions are important real-world phenomena. In this paper, we develop a firm dynamics model to study how firing costs induce input distortions through the lens of growth of working-age population. We find that the negative impact of firing costs on aggregate productivity and output is amplified when the growth rate of working-age population declines. This is because slower growth of labor supply leads to fewer entering firms and more incumbents, which are more affected by firing costs. Using Japanese establishment-level data, we calibrate the model and conduct counterfactual analyses, showing that a decline in population growth has a quantitatively significant impact on firm entry and firm-level input distortions. Finally, we provide evidence using Japanese establishment-level census data to support the model’s key predictions.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"183 ","pages":"Article 105243"},"PeriodicalIF":2.3,"publicationDate":"2025-12-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145799430","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 : 2025-12-09DOI: 10.1016/j.jedc.2025.105239
Ying Liu , Xi Wang
We develop a structural credit risk model by incorporating three features of Credit Risk Mitigation Warrant (CRMW): specific protection, targeted guidance, and actual implementation. The model quantifies CRMW’s effect on credit spreads under systematic and idiosyncratic shocks. Results show that CRMW: (1) reduces credit spreads by raising default boundaries, with stronger effects under idiosyncratic shocks; (2) exhibits pro-cyclical feature that amplifies spread volatility; (3) is outperformed by fiscal bailouts under systematic risk, while its signaling effect mitigates adverse selection. This paper provides valuable insights into CRMW’s credit risk management mechanisms and effects.
{"title":"Has CRMW lowered the cost of corporate debt? A structural credit risk model","authors":"Ying Liu , Xi Wang","doi":"10.1016/j.jedc.2025.105239","DOIUrl":"10.1016/j.jedc.2025.105239","url":null,"abstract":"<div><div>We develop a structural credit risk model by incorporating three features of Credit Risk Mitigation Warrant (CRMW): specific protection, targeted guidance, and actual implementation. The model quantifies CRMW’s effect on credit spreads under systematic and idiosyncratic shocks. Results show that CRMW: (1) reduces credit spreads by raising default boundaries, with stronger effects under idiosyncratic shocks; (2) exhibits pro-cyclical feature that amplifies spread volatility; (3) is outperformed by fiscal bailouts under systematic risk, while its signaling effect mitigates adverse selection. This paper provides valuable insights into CRMW’s credit risk management mechanisms and effects.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"183 ","pages":"Article 105239"},"PeriodicalIF":2.3,"publicationDate":"2025-12-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145760586","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 : 2025-12-07DOI: 10.1016/j.jedc.2025.105241
Elisa Grugni , Ivan Savin , Jeroen van den Bergh
Climate policies are typically designed at the regional level. This generates differences in implicit carbon prices across countries that can alter the structure of trade patterns and undermine the effectiveness of environmental regulations through carbon leakage. The paper examines the macroeconomic consequences of asymmetric climate policies, focusing on how they affect the international structure of production. The purpose is twofold: assessing the impact of uncoordinated climate policies on the outsourcing of production and studying the effectiveness of a border carbon adjustment mechanism aimed at safeguarding countries’ competitiveness. To this end, we develop and simulate a theoretical agent-based model in which supply chains are endogenously determined by downstream firms’ sourcing strategies; such firms select a supplier of intermediate goods, whose production generates emissions and is subjected to environmental regulations. Focusing on bottom-up interactions among heterogeneous and boundedly rational agents, this approach provides novel insights into how environmental policies rewire firm linkages within global production networks, and how this reshaping affects overall carbon emissions.
{"title":"Carbon leakage in production networks under asymmetric climate policies","authors":"Elisa Grugni , Ivan Savin , Jeroen van den Bergh","doi":"10.1016/j.jedc.2025.105241","DOIUrl":"10.1016/j.jedc.2025.105241","url":null,"abstract":"<div><div>Climate policies are typically designed at the regional level. This generates differences in implicit carbon prices across countries that can alter the structure of trade patterns and undermine the effectiveness of environmental regulations through carbon leakage. The paper examines the macroeconomic consequences of asymmetric climate policies, focusing on how they affect the international structure of production. The purpose is twofold: assessing the impact of uncoordinated climate policies on the outsourcing of production and studying the effectiveness of a border carbon adjustment mechanism aimed at safeguarding countries’ competitiveness. To this end, we develop and simulate a theoretical agent-based model in which supply chains are endogenously determined by downstream firms’ sourcing strategies; such firms select a supplier of intermediate goods, whose production generates emissions and is subjected to environmental regulations. Focusing on bottom-up interactions among heterogeneous and boundedly rational agents, this approach provides novel insights into how environmental policies rewire firm linkages within global production networks, and how this reshaping affects overall carbon emissions.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"183 ","pages":"Article 105241"},"PeriodicalIF":2.3,"publicationDate":"2025-12-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145841931","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 : 2025-12-07DOI: 10.1016/j.jedc.2025.105240
Jingyuan Li , Qian Lin , Weidong Tian
We develop a dynamic utility model within a continuous-time framework to incorporate ambiguity overprecision regarding both the correlation and drift of price dynamics. We extend key results from optimal capital requirements theory in this framework. By employing an explicit approach, we determine the optimal liability-to-surplus ratio for a major insurer, shedding light on the profound impact of ambiguity overprecision. Our analysis reveals that accounting for ambiguity overprecision leads to an optimal liability-to-surplus ratio exceeding the benchmark established in the absence of such overprecision.
{"title":"Ambiguity overprecision and optimal capital requirements in continuous time","authors":"Jingyuan Li , Qian Lin , Weidong Tian","doi":"10.1016/j.jedc.2025.105240","DOIUrl":"10.1016/j.jedc.2025.105240","url":null,"abstract":"<div><div>We develop a dynamic utility model within a continuous-time framework to incorporate ambiguity overprecision regarding both the correlation and drift of price dynamics. We extend key results from optimal capital requirements theory in this framework. By employing an explicit approach, we determine the optimal liability-to-surplus ratio for a major insurer, shedding light on the profound impact of ambiguity overprecision. Our analysis reveals that accounting for ambiguity overprecision leads to an optimal liability-to-surplus ratio exceeding the benchmark established in the absence of such overprecision.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"183 ","pages":"Article 105240"},"PeriodicalIF":2.3,"publicationDate":"2025-12-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145799273","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 : 2025-12-03DOI: 10.1016/j.jedc.2025.105229
Arka Prava Bandyopadhyay , Lilia Maliar
We use model-free reinforcement learning (RL) to explore how a mortgage servicer can optimize her actions toward a borrower. Unlike conventional heuristic approaches, our methodology eliminates reliance on subjective and qualitative judgments from industry and legal experts. We are the first to incorporate post-securitization soft information and the borrower’s responsiveness to the servicer to estimate an RL-based policy rule. When maximizing her reward, the servicer dynamically learns the type of borrower, allowing it to anticipate and mitigate adversarial behavior. This, in turn, fosters greater borrower cooperation and improves overall outcomes.
{"title":"Reinforcement learning for household finance: Designing policy via responsiveness","authors":"Arka Prava Bandyopadhyay , Lilia Maliar","doi":"10.1016/j.jedc.2025.105229","DOIUrl":"10.1016/j.jedc.2025.105229","url":null,"abstract":"<div><div>We use model-free reinforcement learning (RL) to explore how a mortgage servicer can optimize her actions toward a borrower. Unlike conventional heuristic approaches, our methodology eliminates reliance on subjective and qualitative judgments from industry and legal experts. We are the first to incorporate post-securitization soft information and the borrower’s responsiveness to the servicer to estimate an RL-based policy rule. When maximizing her reward, the servicer dynamically learns the type of borrower, allowing it to anticipate and mitigate adversarial behavior. This, in turn, fosters greater borrower cooperation and improves overall outcomes.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"182 ","pages":"Article 105229"},"PeriodicalIF":2.3,"publicationDate":"2025-12-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145748441","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 : 2025-12-02DOI: 10.1016/j.jedc.2025.105227
Stéphane Adjemian , Michel Juillard
The Extended Path (EP) method solves DSGE models under certainty equivalence, capturing nonlinearities and occasionally binding constraints but ignoring the role of uncertainty. We propose the Stochastic Extended Path (SEP), which restores this channel by computing conditional expectations with quadrature and unscented transforms. To avoid the exponential explosion of a full tree of future shocks, we introduce a sparse tree representation that scales linearly with the horizon. We further develop a hybrid SEP, combining SEP with perturbation corrections to capture long-run effects of volatility at low cost. Accuracy is benchmarked in an asset pricing model with a closed-form solution, where hybrid SEP outperforms perturbation methods. We then illustrate the approach in an RBC model with a lower bound on investment.
{"title":"Stochastic extended path","authors":"Stéphane Adjemian , Michel Juillard","doi":"10.1016/j.jedc.2025.105227","DOIUrl":"10.1016/j.jedc.2025.105227","url":null,"abstract":"<div><div>The Extended Path (EP) method solves DSGE models under certainty equivalence, capturing nonlinearities and occasionally binding constraints but ignoring the role of uncertainty. We propose the Stochastic Extended Path (SEP), which restores this channel by computing conditional expectations with quadrature and unscented transforms. To avoid the exponential explosion of a full tree of future shocks, we introduce a sparse tree representation that scales linearly with the horizon. We further develop a hybrid SEP, combining SEP with perturbation corrections to capture long-run effects of volatility at low cost. Accuracy is benchmarked in an asset pricing model with a closed-form solution, where hybrid SEP outperforms perturbation methods. We then illustrate the approach in an RBC model with a lower bound on investment.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"182 ","pages":"Article 105227"},"PeriodicalIF":2.3,"publicationDate":"2025-12-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145748440","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 : 2025-12-01DOI: 10.1016/j.jedc.2025.105206
King King Li , Tao Zhu
This paper theoretically and experimentally investigates matching friction as a cause of monetary nonneutrality. We design a price-posting game in which mismatching (i.e., a player not being matched with a trading partner) is costly and can only be eliminated if players coordinate on one equilibrium from a specific subset of multiple equilibria. In the lab, subjects coordinate by certain pricing and visiting rules, and their actions appear to be consistent with such an equilibrium. A nominal shock disturbs the established coordination patterns and, in particular, causes sellers to adjust their pricing rules. The adjustment is persistent and differs at a disaggregate level in a way that the resulting nonneutrality gets along with the quantity theory (i.e., the aggregate price level is proportional to the aggregate nominal stock).
{"title":"Matching friction, coordination, and monetary nonneutrality","authors":"King King Li , Tao Zhu","doi":"10.1016/j.jedc.2025.105206","DOIUrl":"10.1016/j.jedc.2025.105206","url":null,"abstract":"<div><div>This paper theoretically and experimentally investigates matching friction as a cause of monetary nonneutrality. We design a price-posting game in which mismatching (i.e., a player not being matched with a trading partner) is costly and can only be eliminated if players coordinate on one equilibrium from a specific subset of multiple equilibria. In the lab, subjects coordinate by certain pricing and visiting rules, and their actions appear to be consistent with such an equilibrium. A nominal shock disturbs the established coordination patterns and, in particular, causes sellers to adjust their pricing rules. The adjustment is persistent and differs at a disaggregate level in a way that the resulting nonneutrality gets along with the quantity theory (i.e., the aggregate price level is proportional to the aggregate nominal stock).</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"181 ","pages":"Article 105206"},"PeriodicalIF":2.3,"publicationDate":"2025-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145615741","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 : 2025-12-01DOI: 10.1016/j.jedc.2025.105202
Miguel Casares , Paul Gomme , Hashmat Khan
What are the socially optimal restrictions on private activity during a pandemic? How do these differ from private decisions? We address these questions by modeling the interactions between epidemiology and the macroeconomy. Unlike the private planner, the social planner accounts for two externalities: the increase in the cost of severe illness associated with more infected individuals, reflecting the capacity constraints of the health care system; and the socioeconomic transmission of the virus from asymptomatic to susceptible individuals. Owing to these externalities, the social planner imposes stricter constraints on socioeconomic activities. Applied to the COVID-19 pandemic, socially optimal restrictions reduce the welfare costs by roughly one percent of GDP.
{"title":"Private versus social responses to a pandemic","authors":"Miguel Casares , Paul Gomme , Hashmat Khan","doi":"10.1016/j.jedc.2025.105202","DOIUrl":"10.1016/j.jedc.2025.105202","url":null,"abstract":"<div><div>What are the socially optimal restrictions on private activity during a pandemic? How do these differ from private decisions? We address these questions by modeling the interactions between epidemiology and the macroeconomy. Unlike the private planner, the social planner accounts for two externalities: the increase in the cost of severe illness associated with more infected individuals, reflecting the capacity constraints of the health care system; and the socioeconomic transmission of the virus from asymptomatic to susceptible individuals. Owing to these externalities, the social planner imposes stricter constraints on socioeconomic activities. Applied to the COVID-19 pandemic, socially optimal restrictions reduce the welfare costs by roughly one percent of GDP.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"181 ","pages":"Article 105202"},"PeriodicalIF":2.3,"publicationDate":"2025-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145615742","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 : 2025-12-01DOI: 10.1016/j.jedc.2025.105217
Katharina Drechsler , Sebastian Müller , Heinz-Theo Wagner
To explore whether the rise of digital innovation across firms might point to the existence of a new risk compensation in asset pricing, we construct a text-based measure of the socio-technical phenomenon of digitalization, called digital orientation, by using the MD&A section of annual firm reports from 1996 to 2020. We find that firms with a high digital orientation (digital leaders) are systematically different along several key characteristics like valuation, sales growth, and profitability, forming a peer group of digitally leading firms across traditional industry boundaries. A digital orientation strategy, which is long (short) stocks with high (low) digital orientation, earns an equally weighted (value-weighted) monthly six-factor alpha of 0.41 % (0.28 %) per month, both statistically significant at 5 %. These results are robust to various sensitivity checks, including alternative constructions of the digital orientation measure, controls for industry membership, changes to the sample dataset, and the use of an alternative dictionary. Additionally, the results remain comparable if we construct an alternative investment strategy based on the portfolio holdings of funds with a digital innovation focus.
{"title":"The “digital” premium: Why does digitalization drive stock returns?","authors":"Katharina Drechsler , Sebastian Müller , Heinz-Theo Wagner","doi":"10.1016/j.jedc.2025.105217","DOIUrl":"10.1016/j.jedc.2025.105217","url":null,"abstract":"<div><div>To explore whether the rise of digital innovation across firms might point to the existence of a new risk compensation in asset pricing, we construct a text-based measure of the socio-technical phenomenon of digitalization, called digital orientation, by using the MD&A section of annual firm reports from 1996 to 2020. We find that firms with a high digital orientation (digital leaders) are systematically different along several key characteristics like valuation, sales growth, and profitability, forming a peer group of digitally leading firms across traditional industry boundaries. A digital orientation strategy, which is long (short) stocks with high (low) digital orientation, earns an equally weighted (value-weighted) monthly six-factor alpha of 0.41 % (0.28 %) per month, both statistically significant at 5 %. These results are robust to various sensitivity checks, including alternative constructions of the digital orientation measure, controls for industry membership, changes to the sample dataset, and the use of an alternative dictionary. Additionally, the results remain comparable if we construct an alternative investment strategy based on the portfolio holdings of funds with a digital innovation focus.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"181 ","pages":"Article 105217"},"PeriodicalIF":2.3,"publicationDate":"2025-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145615740","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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