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Project acronym APMPAL-HET
Project Asset Prices and Macro Policy when Agents Learn and are Heterogeneous
Researcher (PI) Albert MARCET TORRENS
Host Institution (HI) FUNDACIÓ MARKETS, ORGANIZATIONS AND VOTES IN ECONOMICS
Summary Based on the APMPAL (ERC) project we continue to develop the frameworks of internal rationality (IR) and optimal signal extraction (OSE). Under IR investors/consumers behave rationally given their subjective beliefs about prices, these beliefs are compatible with data. Under OSE the government has partial information, it knows how policy influences observed variables and signal extraction. We develop further the foundations of IR and OSE with an emphasis on heterogeneous agents. We study sovereign bond crisis and heterogeneity of beliefs in asset pricing models under IR, using survey data on expectations. Under IR the assets' stochastic discount factor depends on the agents' decision function and beliefs; this modifies some key asset pricing results. We extend OSE to models with state variables, forward-looking constraints and heterogeneity. Under IR agents' prior beliefs determine the effects of a policy reform. If the government does not observe prior beliefs it has partial information, thus OSE should be used to analyse policy reforms under IR. If IR heterogeneous workers forecast their productivity either from their own wage or their neighbours' in a network, low current wages discourage search and human capital accumulation, leading to low productivity. This can explain low development of a country or social exclusion of a group. Worker subsidies redistribute wealth and can increase productivity if they "teach" agents to exit a low-wage state. We build DSGE models under IR for prediction and policy analysis. We develop time-series tools for predicting macro and asset market variables, using information available to the analyst, and we introduce non-linearities and survey expectations using insights from models under IR. We study how IR and OSE change the view on macro policy issues such as tax smoothing, debt management, Taylor rule, level of inflation, fiscal/monetary policy coordination, factor taxation or redistribution.
Based on the APMPAL (ERC) project we continue to develop the frameworks of internal rationality (IR) and optimal signal extraction (OSE). Under IR investors/consumers behave rationally given their subjective beliefs about prices, these beliefs are compatible with data. Under OSE the government has partial information, it knows how policy influences observed variables and signal extraction. We develop further the foundations of IR and OSE with an emphasis on heterogeneous agents. We study sovereign bond crisis and heterogeneity of beliefs in asset pricing models under IR, using survey data on expectations. Under IR the assets' stochastic discount factor depends on the agents' decision function and beliefs; this modifies some key asset pricing results. We extend OSE to models with state variables, forward-looking constraints and heterogeneity. Under IR agents' prior beliefs determine the effects of a policy reform. If the government does not observe prior beliefs it has partial information, thus OSE should be used to analyse policy reforms under IR. If IR heterogeneous workers forecast their productivity either from their own wage or their neighbours' in a network, low current wages discourage search and human capital accumulation, leading to low productivity. This can explain low development of a country or social exclusion of a group. Worker subsidies redistribute wealth and can increase productivity if they "teach" agents to exit a low-wage state. We build DSGE models under IR for prediction and policy analysis. We develop time-series tools for predicting macro and asset market variables, using information available to the analyst, and we introduce non-linearities and survey expectations using insights from models under IR. We study how IR and OSE change the view on macro policy issues such as tax smoothing, debt management, Taylor rule, level of inflation, fiscal/monetary policy coordination, factor taxation or redistribution.
Project acronym BacRafts
Project Architecture of bacterial lipid rafts; inhibition of virulence and antibiotic resistance using raft-disassembling small molecules
Researcher (PI) Daniel López Serrano
Host Institution (HI) AGENCIA ESTATAL CONSEJO SUPERIOR DEINVESTIGACIONES CIENTIFICAS
Summary Membranes of eukaryotic cells organize signal transduction proteins into microdomains or lipid rafts whose integrity is essential for numerous cellular processes. Lipid rafts has been considered a fundamental step to define the cellular complexity of eukaryotes, assuming that bacteria do not require such a sophisticated organization of their signaling networks. However, I have discovered that bacteria organize many signaling pathways in membrane microdomains similar to the eukaryotic lipid rafts. Perturbation of bacterial lipid rafts leads to a potent and simultaneous impairment of all raft-harbored signaling pathways. Consequently, the disassembly of lipid rafts in pathogens like Staphylococcus aureus generates a simultaneous inhibition of numerous infection-related processes that can be further explored to control bacterial infections. This unexpected sophistication in membrane organization is unprecedented in bacteria and hence, this proposal will explore the molecular basis of the assembly of bacterial lipid rafts and their role in the infection-related processes. These questions will be addressed in three main goals: First, I will elucidate the molecular components and the mechanism of assembly of bacterial lipid rafts using S. aureus as model organism. Second, I will dissect the molecular basis that links the functionality of the infection-related processes to the integrity of bacterial lipid rafts. Third, my collection of anti-raft small molecules that are able to disrupt lipid rafts will be tested as antimicrobial agents to prevent hospital-acquired infections, abrogate pre-existing infections and develop bacteria-free materials that can be used in clinical settings. I will use a number of molecular approaches in combination with cutting-edge techniques in flow cytometry, cell-imaging and transcriptomics to clarify the architecture and functionality of lipid rafts and demonstrate the feasibility of targeting lipid a new strategy for anti-microbial therapy.
Membranes of eukaryotic cells organize signal transduction proteins into microdomains or lipid rafts whose integrity is essential for numerous cellular processes. Lipid rafts has been considered a fundamental step to define the cellular complexity of eukaryotes, assuming that bacteria do not require such a sophisticated organization of their signaling networks. However, I have discovered that bacteria organize many signaling pathways in membrane microdomains similar to the eukaryotic lipid rafts. Perturbation of bacterial lipid rafts leads to a potent and simultaneous impairment of all raft-harbored signaling pathways. Consequently, the disassembly of lipid rafts in pathogens like Staphylococcus aureus generates a simultaneous inhibition of numerous infection-related processes that can be further explored to control bacterial infections. This unexpected sophistication in membrane organization is unprecedented in bacteria and hence, this proposal will explore the molecular basis of the assembly of bacterial lipid rafts and their role in the infection-related processes. These questions will be addressed in three main goals: First, I will elucidate the molecular components and the mechanism of assembly of bacterial lipid rafts using S. aureus as model organism. Second, I will dissect the molecular basis that links the functionality of the infection-related processes to the integrity of bacterial lipid rafts. Third, my collection of anti-raft small molecules that are able to disrupt lipid rafts will be tested as antimicrobial agents to prevent hospital-acquired infections, abrogate pre-existing infections and develop bacteria-free materials that can be used in clinical settings. I will use a number of molecular approaches in combination with cutting-edge techniques in flow cytometry, cell-imaging and transcriptomics to clarify the architecture and functionality of lipid rafts and demonstrate the feasibility of targeting lipid a new strategy for anti-microbial therapy.
Project acronym BUBPOL
Project Monetary Policy and Asset Price Bubbles
Researcher (PI) Jordi Galí Garreta
Host Institution (HI) Centre de Recerca en Economia Internacional (CREI)
Summary "The proposed research project seeks to further our understanding on two important questions for the design of monetary policy: (a) What are the effects of monetary policy interventions on asset price bubbles? (b) How should monetary policy be conducted in the presence of asset price bubbles? The first part of the project will focus on the development of a theoretical framework that can be used to analyze rigorously the implications of alternative monetary policy rules in the presence of asset price bubbles, and to characterize the optimal monetary policy. In particular, I plan to use such a framework to assess the merits of a "leaning against the wind" strategy, which calls for a systematic rise in interest rates in response to the development of a bubble. The second part of the project will seek to produce evidence, both empirical and experimental, regarding the effects of monetary policy on asset price bubbles. The empirical evidence will seek to identify and estimate the sign and response of asset price bubbles to interest rate changes, exploiting the potential differences in the joint behavior of interest rates and asset prices during "bubbly" episodes, in comparison to "normal" times. In addition, I plan to conduct some lab experiments in order to shed some light on the link between monetary policy and bubbles. Participants will trade two assets, a one-period riskless asset and a long-lived stock, in an environment consistent with the existence of asset price bubbles in equilibrium. Monetary policy interventions will take the form of changes in the short-term interest rate, engineered by the experimenter. The experiments will allow us to evaluate some of the predictions of the theoretical models regarding the impact of monetary policy on the dynamics of bubbles, as well as the effectiveness of "leaning against the wind" policies."
"The proposed research project seeks to further our understanding on two important questions for the design of monetary policy: (a) What are the effects of monetary policy interventions on asset price bubbles? (b) How should monetary policy be conducted in the presence of asset price bubbles? The first part of the project will focus on the development of a theoretical framework that can be used to analyze rigorously the implications of alternative monetary policy rules in the presence of asset price bubbles, and to characterize the optimal monetary policy. In particular, I plan to use such a framework to assess the merits of a "leaning against the wind" strategy, which calls for a systematic rise in interest rates in response to the development of a bubble. The second part of the project will seek to produce evidence, both empirical and experimental, regarding the effects of monetary policy on asset price bubbles. The empirical evidence will seek to identify and estimate the sign and response of asset price bubbles to interest rate changes, exploiting the potential differences in the joint behavior of interest rates and asset prices during "bubbly" episodes, in comparison to "normal" times. In addition, I plan to conduct some lab experiments in order to shed some light on the link between monetary policy and bubbles. Participants will trade two assets, a one-period riskless asset and a long-lived stock, in an environment consistent with the existence of asset price bubbles in equilibrium. Monetary policy interventions will take the form of changes in the short-term interest rate, engineered by the experimenter. The experiments will allow us to evaluate some of the predictions of the theoretical models regarding the impact of monetary policy on the dynamics of bubbles, as well as the effectiveness of "leaning against the wind" policies."
Project acronym CITIZINGLOBAL
Project Citizens, Institutions and Globalization
Researcher (PI) Giacomo Antonio Maria PONZETTO
Summary Globalization has brought the world economy unprecedented prosperity, but it poses governance challenges. It needs governments to provide the infrastructure for global economic integration and to refrain from destructive protectionism; yet it can engender popular discontent and a crisis of democracy. My proposal will study when trade- and productivity-enhancing policies enjoy democratic support; why voters may support instead inefficient surplus-reducing policies; and how political structure reacts to globalization. Part A studies the puzzling popularity of protectionism and how lobbies can raise it by manipulating information. It will study empirically if greater transparency causes lower trade barriers. It will introduce salience theory to political economics and argue that voters overweight concentrated losses and disregard diffuse benefits. It will show that lobbies can raise protection by channeling information to insiders and advertising the plight of displaced workers. Part B studies inefficient infrastructure policy and the ensuing spatial misallocation of economic activity. It will show that voters' unequal knowledge lets local residents capture national policy. They disregard nationwide positive externalities, so investment in major cities is insufficient, but also nationwide taxes, so spending in low-density areas is excessive. It will argue that the fundamental attribution error causes voter opposition to growth-enhancing policies and efficient incentive schemes like congestion pricing. Part C studies how the size of countries and international unions adapts to expanding trade opportunities. It will focus on three forces: cultural diversity, economies of scale and scope in government, and trade-reducing border effects. It will show they explain increasing country size in the 19th century; the rise and fall of colonial empires; and the recent emergence of regional and global economic unions, accompanied by a peaceful increase in the number of countries.
Globalization has brought the world economy unprecedented prosperity, but it poses governance challenges. It needs governments to provide the infrastructure for global economic integration and to refrain from destructive protectionism; yet it can engender popular discontent and a crisis of democracy. My proposal will study when trade- and productivity-enhancing policies enjoy democratic support; why voters may support instead inefficient surplus-reducing policies; and how political structure reacts to globalization. Part A studies the puzzling popularity of protectionism and how lobbies can raise it by manipulating information. It will study empirically if greater transparency causes lower trade barriers. It will introduce salience theory to political economics and argue that voters overweight concentrated losses and disregard diffuse benefits. It will show that lobbies can raise protection by channeling information to insiders and advertising the plight of displaced workers. Part B studies inefficient infrastructure policy and the ensuing spatial misallocation of economic activity. It will show that voters' unequal knowledge lets local residents capture national policy. They disregard nationwide positive externalities, so investment in major cities is insufficient, but also nationwide taxes, so spending in low-density areas is excessive. It will argue that the fundamental attribution error causes voter opposition to growth-enhancing policies and efficient incentive schemes like congestion pricing. Part C studies how the size of countries and international unions adapts to expanding trade opportunities. It will focus on three forces: cultural diversity, economies of scale and scope in government, and trade-reducing border effects. It will show they explain increasing country size in the 19th century; the rise and fall of colonial empires; and the recent emergence of regional and global economic unions, accompanied by a peaceful increase in the number of countries.
Project acronym Danger ATP
Project Regulation of inflammatory response by extracellular ATP and P2X7 receptor signalling: through and beyond the inflammasome
Researcher (PI) Pablo Pelegrin Vivancos
Host Institution (HI) FUNDACION PARA LA FORMACION E INVESTIGACION SANITARIAS DE LA REGION DE MURCIA
Call Details Consolidator Grant (CoG), LS6, ERC-2013-CoG
Summary Inflammatory diseases affect over 80 million people worldwide and accompany many diseases of industrialized countries, being the majority of them infection-free conditions. There are few efficient anti-inflammatory drugs to treat chronic inflammation and thus, there is an urgent need to validate novel targets. We now know that innate immunity is the main coordinator and driver of inflammation. Recently, we and others have shown that the activation of purinergic P2X7 receptors (P2X7R) in immune cells is a novel and increasingly validated pathway to initiate inflammation through the activation of the NLRP3 inflammasome and the release of IL-1β and IL-18 cytokines. However, how NLRP3 sense P2X7R activation is not fully understood. Furthermore, extracellular ATP, the physiological P2X7R agonist, is a crucial danger signal released by injured cells, and one of the most important mediators of infection-free inflammation. We have also identified novel signalling roles for P2X7R independent on the NLRP3 inflammasome, including the release of proteases or inflammatory lipids. Therefore, P2X7R has generated increasing interest as a therapeutic target in inflammatory diseases, being drug like P2X7R antagonist in clinical trials to treat inflammatory diseases. However, it is often questioned the functionality of P2X7R in vivo, where it is thought that extracellular ATP levels are below the threshold to activate P2X7R. The overall significance of this proposal relays to elucidate how extracellular ATP controls host-defence in vivo, ultimately depicting P2X7R signalling through and beyond inflammasome activation. We foresee that our results will generate a leading innovative knowledge about in vivo extracellular ATP signalling during the host response to infection and sterile danger.
Inflammatory diseases affect over 80 million people worldwide and accompany many diseases of industrialized countries, being the majority of them infection-free conditions. There are few efficient anti-inflammatory drugs to treat chronic inflammation and thus, there is an urgent need to validate novel targets. We now know that innate immunity is the main coordinator and driver of inflammation. Recently, we and others have shown that the activation of purinergic P2X7 receptors (P2X7R) in immune cells is a novel and increasingly validated pathway to initiate inflammation through the activation of the NLRP3 inflammasome and the release of IL-1β and IL-18 cytokines. However, how NLRP3 sense P2X7R activation is not fully understood. Furthermore, extracellular ATP, the physiological P2X7R agonist, is a crucial danger signal released by injured cells, and one of the most important mediators of infection-free inflammation. We have also identified novel signalling roles for P2X7R independent on the NLRP3 inflammasome, including the release of proteases or inflammatory lipids. Therefore, P2X7R has generated increasing interest as a therapeutic target in inflammatory diseases, being drug like P2X7R antagonist in clinical trials to treat inflammatory diseases. However, it is often questioned the functionality of P2X7R in vivo, where it is thought that extracellular ATP levels are below the threshold to activate P2X7R. The overall significance of this proposal relays to elucidate how extracellular ATP controls host-defence in vivo, ultimately depicting P2X7R signalling through and beyond inflammasome activation. We foresee that our results will generate a leading innovative knowledge about in vivo extracellular ATP signalling during the host response to infection and sterile danger.
Project acronym EDST
Project Economic Development and Structural Transformation
Researcher (PI) Maria Paula BUSTOS
Host Institution (HI) FUNDACION CENTRO DE ESTUDIOS MONETARIOS Y FINANCIEROS
Summary The early development literature documented that the growth path of most advanced economies was accompanied by a process of structural transformation. As economies develop, the share of agriculture in employment falls and workers migrate to cities to find employment in the industrial and service sectors [Clark (1940), Kuznets (1957)]. In the first industrialized countries, technical improvements in agriculture favoured the development of industry and services by releasing labour, increasing demand and raising profits to finance other activities. However, several scholars noted that the positive effects of agricultural productivity on economic development are no longer operative in open economies. In addition, there is a large theoretical literature highlighting how market failures can retard structural transformation in developing countries. In particular, financial frictions might constrain the reallocation of capital and thus retard the process of labour reallocation. In this project, we propose to contribute to our understanding of structural transformation by providing direct empirical evidence on the effects of exogenous shocks to local agricultural and manufacturing productivity on the reallocation of capital and labour across sectors, firms and space in Brazil. For this purpose, we construct the first data set that permits to jointly observe labour and credit flows across sectors and space. To exploit the spatial dimension of the capital allocation problem, we design a new empirical which exploits the geographical structure of bank branch networks. Similarly, we propose to study the spatial dimension of the labour allocation problem by exploiting differences in migration costs across regions due to transportation and social networks.
The early development literature documented that the growth path of most advanced economies was accompanied by a process of structural transformation. As economies develop, the share of agriculture in employment falls and workers migrate to cities to find employment in the industrial and service sectors [Clark (1940), Kuznets (1957)]. In the first industrialized countries, technical improvements in agriculture favoured the development of industry and services by releasing labour, increasing demand and raising profits to finance other activities. However, several scholars noted that the positive effects of agricultural productivity on economic development are no longer operative in open economies. In addition, there is a large theoretical literature highlighting how market failures can retard structural transformation in developing countries. In particular, financial frictions might constrain the reallocation of capital and thus retard the process of labour reallocation. In this project, we propose to contribute to our understanding of structural transformation by providing direct empirical evidence on the effects of exogenous shocks to local agricultural and manufacturing productivity on the reallocation of capital and labour across sectors, firms and space in Brazil. For this purpose, we construct the first data set that permits to jointly observe labour and credit flows across sectors and space. To exploit the spatial dimension of the capital allocation problem, we design a new empirical which exploits the geographical structure of bank branch networks. Similarly, we propose to study the spatial dimension of the labour allocation problem by exploiting differences in migration costs across regions due to transportation and social networks.
Project acronym ELECTRIC CHALLENGES
Project Current Tools and Policy Challenges in Electricity Markets
Researcher (PI) Natalia FABRA PORTELA
Host Institution (HI) UNIVERSIDAD CARLOS III DE MADRID
Summary The fight against climate change is among Europe's top policy priorities. In this research agenda, I propose to push out the frontier in the area of Energy and Environmental Economics by carrying out policy-relevant research on a pressing issue: how to design optimal regulatory and market-based solutions to achieve a least cost transition towards a low-carbon economy. The European experience provides unique natural experiments with which to test some of the most contentious issues that arise in the context of electricity markets, including the potential to change households' demand patterns through dynamic pricing, the scope of renewables to mitigate market power and depress wholesale market prices, and the design and performance of the auctions for renewable support. While there is a body of policy work on these issues, it generally does not meet the required research standards. In this research, I will rely on cutting-edge theoretical, empirical, and simulation tools to disentangle these topics, while providing key economic insights that are relevant beyond electricity markets. On the theory front, I propose to develop new models that incorporate the intermittency of renewables to characterize optimal bidding as a key, broadly omitted ingredient in previous analysis. In turn, these models will provide a rigorous structure for the empirical and simulation analysis, which will rely both on traditional econometrics for casual inference as well as on state-of-the-art machine learning methods to construct counterfactual scenarios for policy analysis. While my focus is on energy and environmental issues, my research will also provide methodological contributions for other areas - particularly those related to policy design and policy evaluation. The conclusions of this research should prove valuable for academics, as well as to policy makers to assess the impact of environmental and energy policies and redefine them where necessary.
The fight against climate change is among Europe's top policy priorities. In this research agenda, I propose to push out the frontier in the area of Energy and Environmental Economics by carrying out policy-relevant research on a pressing issue: how to design optimal regulatory and market-based solutions to achieve a least cost transition towards a low-carbon economy. The European experience provides unique natural experiments with which to test some of the most contentious issues that arise in the context of electricity markets, including the potential to change households' demand patterns through dynamic pricing, the scope of renewables to mitigate market power and depress wholesale market prices, and the design and performance of the auctions for renewable support. While there is a body of policy work on these issues, it generally does not meet the required research standards. In this research, I will rely on cutting-edge theoretical, empirical, and simulation tools to disentangle these topics, while providing key economic insights that are relevant beyond electricity markets. On the theory front, I propose to develop new models that incorporate the intermittency of renewables to characterize optimal bidding as a key, broadly omitted ingredient in previous analysis. In turn, these models will provide a rigorous structure for the empirical and simulation analysis, which will rely both on traditional econometrics for casual inference as well as on state-of-the-art machine learning methods to construct counterfactual scenarios for policy analysis. While my focus is on energy and environmental issues, my research will also provide methodological contributions for other areas - particularly those related to policy design and policy evaluation. The conclusions of this research should prove valuable for academics, as well as to policy makers to assess the impact of environmental and energy policies and redefine them where necessary.
Project acronym Forecasting
Project New Methods and Applications for Forecast Evaluation
Researcher (PI) Barbara Rossi
Host Institution (HI) UNIVERSIDAD POMPEU FABRA
Summary Forecasting is a fundamental tool in Economics, Statistics, Business and other sciences. Judging whether forecasts are good and robust is of great importance since forecasts are used everyday to guide policymakers' and practitioners' decisions. The proposal aims at addressing four important issues that researchers encounter in practice. A first issue is how to assess whether forecasts are optimal in the presence of instabilities. Optimality is an important property of models' forecasts: if forecasts are not optimal, then the model can be improved. Existing methods to assess forecast optimality are not robust to the presence of instabilities, which are widespread in the data. How to obtain such robust methods and what they tell us about widely used economic models' forecasts is the first task of this project. A second problem faced by forecasters in practice is to evaluate density forecasts. Density forecasts are important tools for policymakers since they quantify uncertainty around forecasts. However, existing methodologies focus on a null hypothesis that is not necessarily the one of interest to the forecaster. The second task is to develop tests for forecast density evaluation that address forecasters' needs. A third, important question is "Why Do We Use Forecast Tests To Evaluate Models' Performance?". The third task of this project is to understand the relationship between traditional in-sample and forecast evaluation tests, and develop a framework that helps to understand under which circumstances forecast tests are more useful than typical in-sample tests. A final question is how researchers can improve models that do not forecast well. Model misspecification is widespread, still economists are often left wondering exactly which parts of their models are misspecified. The fourth task is to propose an empirical framework for addressing this issue. By estimating time-varying wedges, we assess where misspecification is located, and how important it is.
Forecasting is a fundamental tool in Economics, Statistics, Business and other sciences. Judging whether forecasts are good and robust is of great importance since forecasts are used everyday to guide policymakers' and practitioners' decisions. The proposal aims at addressing four important issues that researchers encounter in practice. A first issue is how to assess whether forecasts are optimal in the presence of instabilities. Optimality is an important property of models' forecasts: if forecasts are not optimal, then the model can be improved. Existing methods to assess forecast optimality are not robust to the presence of instabilities, which are widespread in the data. How to obtain such robust methods and what they tell us about widely used economic models' forecasts is the first task of this project. A second problem faced by forecasters in practice is to evaluate density forecasts. Density forecasts are important tools for policymakers since they quantify uncertainty around forecasts. However, existing methodologies focus on a null hypothesis that is not necessarily the one of interest to the forecaster. The second task is to develop tests for forecast density evaluation that address forecasters' needs. A third, important question is "Why Do We Use Forecast Tests To Evaluate Models' Performance?". The third task of this project is to understand the relationship between traditional in-sample and forecast evaluation tests, and develop a framework that helps to understand under which circumstances forecast tests are more useful than typical in-sample tests. A final question is how researchers can improve models that do not forecast well. Model misspecification is widespread, still economists are often left wondering exactly which parts of their models are misspecified. The fourth task is to propose an empirical framework for addressing this issue. By estimating time-varying wedges, we assess where misspecification is located, and how important it is.
Project acronym GLOBALMACRO
Project Global Production Networks and Macroeconomic Interdependence
Researcher (PI) Julian DI GIOVANNI
Summary Researchers and policymakers alike have highlighted the potential efficiency gains of a global production structure. However, such linkages also raise the possibility of risks. This proposal tackles both empirical and theoretical challenges in incorporating the microeconomic structure of trade and international production networks in the study of the propagation of shocks internationally, and their impact on macroeconomic interdependence. Using newly constructed micro-level datasets, I provide quantitative analysis of the importance of the linkages in multicountry general equilibrium models of trade. First, using firm export and imported-input linkages, I provide a novel model-based estimation strategy to identify the role of country and firm-level shocks, and the implications of these estimates for the transmission of shocks across borders. By using structural trade models to estimate shocks at the firm level and studying the implications for the transmission of shocks across borders, I help bridge the micro-macro nexus in international economics. Second, I take an even more granular focus by studying the role of firm-to-firm production linkages in transmitting shocks across countries. To do so, I exploit a novel matching procedure between a country's administrative dataset and cross-country firm-level data. I further build on these data by adding in domestic bank-firm relationships. This strategy allows for the study of how financial shocks are exported abroad via firms' trade and multinational linkages. Third, I incorporate the insights from the empirical work into a full-scale multicountry general equilibrium model of trade, which allows for firm-level heterogeneity and microeconomic and macroeconomics shocks. I use the model for a quantitative study of the cross-country transmission of the different shocks via trade. This allows me to perform counterfactuals and examine the impact of policies, such as how opening to trade impacts macroeconomic interdependence.
Researchers and policymakers alike have highlighted the potential efficiency gains of a global production structure. However, such linkages also raise the possibility of risks. This proposal tackles both empirical and theoretical challenges in incorporating the microeconomic structure of trade and international production networks in the study of the propagation of shocks internationally, and their impact on macroeconomic interdependence. Using newly constructed micro-level datasets, I provide quantitative analysis of the importance of the linkages in multicountry general equilibrium models of trade. First, using firm export and imported-input linkages, I provide a novel model-based estimation strategy to identify the role of country and firm-level shocks, and the implications of these estimates for the transmission of shocks across borders. By using structural trade models to estimate shocks at the firm level and studying the implications for the transmission of shocks across borders, I help bridge the micro-macro nexus in international economics. Second, I take an even more granular focus by studying the role of firm-to-firm production linkages in transmitting shocks across countries. To do so, I exploit a novel matching procedure between a country's administrative dataset and cross-country firm-level data. I further build on these data by adding in domestic bank-firm relationships. This strategy allows for the study of how financial shocks are exported abroad via firms' trade and multinational linkages. Third, I incorporate the insights from the empirical work into a full-scale multicountry general equilibrium model of trade, which allows for firm-level heterogeneity and microeconomic and macroeconomics shocks. I use the model for a quantitative study of the cross-country transmission of the different shocks via trade. This allows me to perform counterfactuals and examine the impact of policies, such as how opening to trade impacts macroeconomic interdependence.
Project acronym IllegalPharma
Project Competitive Dynamics in the Informal Economy: The case of Illegal Pharmaceutical Drugs
Researcher (PI) LUIS FRANCISCO DIESTRE MARTIN
Host Institution (HI) INSTITUTO DE EMPRESA SL
Summary This project aims to develop a competitive dynamics theory of the informal economy, which is currently lacking in academic research. Specifically, this project will adopt an institutional theory perspective to better understand three fundamental outcomes in the informal economy: market entry (illegal businesses' decision to be active in a specific niche), price competition (price differentials between legal and illegal products), and product quality (quality of products sold in illegal businesses). The main conceptual proposition suggested in this project is that selling products through illegal means may still be perceived as a legitimate activity. Building on this statement, it will be proposed that the degree in which actors perceive the sale of an illegal product as a more or less legitimate activity will influence (1) entrepreneurs' decision to illegally enter such market, (2) consumers' willingness to pay for such illegal product (i.e., price differential versus the legal version of the product) and (3) manufacturers' motivation to keep quality standards for that illegal product. The empirical setting for this study will be the illegal sale of pharmaceutical drugs. The sale of illegal pharmaceuticals accounts for more than 10% of the medicines market and over €30 billion in annual earnings (World Health Organization, 2003). It represents one of the biggest challenges for societies in that, attending to the WHO's Department of Essential Medicines and Health Products, anywhere from 100,000 to a million people die every year due to falsified drugs. Accordingly, this study aims to provide two main contributions: (1) an academic contribution by developing a radically new theory of the competitive dynamics in the informal economy, and (2) a practical contribution by providing a better understanding of the determinants of the informal economy that could help policy makers and regulators in their goal of fighting the trading of illegal medicines.
This project aims to develop a competitive dynamics theory of the informal economy, which is currently lacking in academic research. Specifically, this project will adopt an institutional theory perspective to better understand three fundamental outcomes in the informal economy: market entry (illegal businesses' decision to be active in a specific niche), price competition (price differentials between legal and illegal products), and product quality (quality of products sold in illegal businesses). The main conceptual proposition suggested in this project is that selling products through illegal means may still be perceived as a legitimate activity. Building on this statement, it will be proposed that the degree in which actors perceive the sale of an illegal product as a more or less legitimate activity will influence (1) entrepreneurs' decision to illegally enter such market, (2) consumers' willingness to pay for such illegal product (i.e., price differential versus the legal version of the product) and (3) manufacturers' motivation to keep quality standards for that illegal product. The empirical setting for this study will be the illegal sale of pharmaceutical drugs. The sale of illegal pharmaceuticals accounts for more than 10% of the medicines market and over €30 billion in annual earnings (World Health Organization, 2003). It represents one of the biggest challenges for societies in that, attending to the WHO's Department of Essential Medicines and Health Products, anywhere from 100,000 to a million people die every year due to falsified drugs. Accordingly, this study aims to provide two main contributions: (1) an academic contribution by developing a radically new theory of the competitive dynamics in the informal economy, and (2) a practical contribution by providing a better understanding of the determinants of the informal economy that could help policy makers and regulators in their goal of fighting the trading of illegal medicines.
Project acronym MacroColl
Project The Macroeconomics of Collateral
Researcher (PI) Alberto Miguel Martin
Summary Financial markets constitute the backbone of modern economies, intermediating resources from those who have them (i.e., lenders) to those who can put them to productive use (i.e., borrowers). The defining feature of these markets is that they entail the exchange of goods today for a borrower's promise to deliver goods in the future. These promises are sustained by guarantees, which are akin to the amount of future income that borrowers can credibly pledge to lenders. I refer to this pledgeable income as an economy's stock of collateral. This stock determines the amount and type of promises that can be traded in an economy and, in turn, this set of promises determines the transactions that can be carried out. Intuitively, when this set of promises is large, resources find their most productive uses and efficiency is high. This raises a general question: what are the key determinants of the set of promises that an economy is able to sustain, and why does it vary? In macroeconomic models, it is commonly assumed that all promises are backed by only one kind of collateral, i.e. usually that of private borrowers, and that this collateral is 'fundamental', i.e. it consists of output. Real-world financial markets, however, rely on many types of collateral to guarantee promises. In this proposal, I focus on three such types. First, collateral may be 'bubbly', i.e. promises can be backed by nothing else but the income that the sale of new promises is expected to bring in the future. Second, collateral need not be private, as government promises are sustained by pledging public income. Third, collateral need not be homogenous, as it may differ in quality or type across entrepreneurs, and this quality may not be perfectly observed by all. I address the following broad questions. How do economies produce these different types of collateral? How do they interact with one another? Is there a role for policy in maintaining the efficient level and composition of collateral?
Financial markets constitute the backbone of modern economies, intermediating resources from those who have them (i.e., lenders) to those who can put them to productive use (i.e., borrowers). The defining feature of these markets is that they entail the exchange of goods today for a borrower's promise to deliver goods in the future. These promises are sustained by guarantees, which are akin to the amount of future income that borrowers can credibly pledge to lenders. I refer to this pledgeable income as an economy's stock of collateral. This stock determines the amount and type of promises that can be traded in an economy and, in turn, this set of promises determines the transactions that can be carried out. Intuitively, when this set of promises is large, resources find their most productive uses and efficiency is high. This raises a general question: what are the key determinants of the set of promises that an economy is able to sustain, and why does it vary? In macroeconomic models, it is commonly assumed that all promises are backed by only one kind of collateral, i.e. usually that of private borrowers, and that this collateral is 'fundamental', i.e. it consists of output. Real-world financial markets, however, rely on many types of collateral to guarantee promises. In this proposal, I focus on three such types. First, collateral may be 'bubbly', i.e. promises can be backed by nothing else but the income that the sale of new promises is expected to bring in the future. Second, collateral need not be private, as government promises are sustained by pledging public income. Third, collateral need not be homogenous, as it may differ in quality or type across entrepreneurs, and this quality may not be perfectly observed by all. I address the following broad questions. How do economies produce these different types of collateral? How do they interact with one another? Is there a role for policy in maintaining the efficient level and composition of collateral?
Project acronym MIRAGE
Project Independence and quality of mass Media in the InteRnet AGE
Researcher (PI) Ruben Durante
Summary The Internet was expected to make citizens considerably more informed and better able to hold politicians and powerful interests accountable. Many predicted it would also effectively complement traditional media and improve news reporting. These expectations have not been met. There is no evidence that citizens have become more informed; they have, however, become more ideologically polarized, possibly due to online media overexposing users to like-minded content. At the same time, traditional media are struggling: competition from online platforms has slashed advertising revenues forcing newspapers to close or downsize. These changes risk undermining the quality of reporting and making media more vulnerable to capture by special interests. My project examines how the Internet has transformed the way news is produced and disseminated, both directly and through its influence on traditional media, and its ultimate effect on media independence and content quality. To this end, I tackle four distinct but intertwined questions. First, I examine to what extent Google search results are tailored to users' political views, and whether personalized results increase ideological polarization. Second, I study how lower advertising revenues affect newspapers' organization and content quality by exploiting the staggered introduction of advertising platform Craigslist across the US. Third, I examine how media dependence on advertisers influences news bias by testing the relationship between advertising spending by car manufacturers and coverage of car safety recalls in US newspapers. Finally, I study how the dependence of media on banks affects coverage of financial issues; focusing on Europe's sovereign debt crisis, I test whether newspapers linked to banks with higher exposure to risky debt endorsed different crisis-management measures. My results will shed light on the deep transformations the media industry is undergoing and their implications for the quality of democracy.
The Internet was expected to make citizens considerably more informed and better able to hold politicians and powerful interests accountable. Many predicted it would also effectively complement traditional media and improve news reporting. These expectations have not been met. There is no evidence that citizens have become more informed; they have, however, become more ideologically polarized, possibly due to online media overexposing users to like-minded content. At the same time, traditional media are struggling: competition from online platforms has slashed advertising revenues forcing newspapers to close or downsize. These changes risk undermining the quality of reporting and making media more vulnerable to capture by special interests. My project examines how the Internet has transformed the way news is produced and disseminated, both directly and through its influence on traditional media, and its ultimate effect on media independence and content quality. To this end, I tackle four distinct but intertwined questions. First, I examine to what extent Google search results are tailored to users' political views, and whether personalized results increase ideological polarization. Second, I study how lower advertising revenues affect newspapers' organization and content quality by exploiting the staggered introduction of advertising platform Craigslist across the US. Third, I examine how media dependence on advertisers influences news bias by testing the relationship between advertising spending by car manufacturers and coverage of car safety recalls in US newspapers. Finally, I study how the dependence of media on banks affects coverage of financial issues; focusing on Europe's sovereign debt crisis, I test whether newspapers linked to banks with higher exposure to risky debt endorsed different crisis-management measures. My results will shed light on the deep transformations the media industry is undergoing and their implications for the quality of democracy.
Project acronym MISSINGMIDDLE
Project The Causal Effect of Public Policy and Income on Child Health and Human Capital
Researcher (PI) Maria Libertad González Luna
Summary A recent literature in economics on the "fetal origins hypothesis" has documented that a range of early (prenatal and postnatal) shocks and interventions can have substantial effects on long-term human capital formation (e.g. adult health, wages). However, we still know little about the years in between early infancy and adulthood, referred to as the "missing middle". How do early shocks affect health and human capital formation during childhood? How do the effects of different types of interventions, or shocks at different ages, compare? What are the most cost-effective ways of improving young children's future outcomes? I aim to fill this gap in the literature by taking advantage of a range of natural experiments in a country, Spain, for which high quality administrative data are available for the past 35 years. State of the art econometric techniques, combined with large sample sizes, will allow me to evaluate credibly and precisely the causal effects of a number of different public policies and shocks on child development. I will consider five different "shocks" in early childhood (at different ages), affecting: i) Household material resources (an unconditional mother's allowance); ii) Parental time (subsidized paternity leave); iii) Medical treatments around birth (elective delivery); iv) The availability of family planning services (access to abortion); and v) Aggregate demand shocks to different sectors of the economy. I will evaluate their impact on health and cognitive development at ages 0-15, as measured in hospital and primary health care records, school grades, and standardized test scores, among other data sources. I will also study the potential channels linking treatments to child outcomes, including family size (fertility), parental time use and labor market outcomes, expenditure patterns, etc. My results will help us understand how shocks in early life can have long-term effects on human capital, with direct policy implications.
A recent literature in economics on the "fetal origins hypothesis" has documented that a range of early (prenatal and postnatal) shocks and interventions can have substantial effects on long-term human capital formation (e.g. adult health, wages). However, we still know little about the years in between early infancy and adulthood, referred to as the "missing middle". How do early shocks affect health and human capital formation during childhood? How do the effects of different types of interventions, or shocks at different ages, compare? What are the most cost-effective ways of improving young children's future outcomes? I aim to fill this gap in the literature by taking advantage of a range of natural experiments in a country, Spain, for which high quality administrative data are available for the past 35 years. State of the art econometric techniques, combined with large sample sizes, will allow me to evaluate credibly and precisely the causal effects of a number of different public policies and shocks on child development. I will consider five different "shocks" in early childhood (at different ages), affecting: i) Household material resources (an unconditional mother's allowance); ii) Parental time (subsidized paternity leave); iii) Medical treatments around birth (elective delivery); iv) The availability of family planning services (access to abortion); and v) Aggregate demand shocks to different sectors of the economy. I will evaluate their impact on health and cognitive development at ages 0-15, as measured in hospital and primary health care records, school grades, and standardized test scores, among other data sources. I will also study the potential channels linking treatments to child outcomes, including family size (fertility), parental time use and labor market outcomes, expenditure patterns, etc. My results will help us understand how shocks in early life can have long-term effects on human capital, with direct policy implications.
Project acronym MITOMAD
Project Functional characterisation of mitochondrial metabolic adaptations to innate sensing in dendritic cell subsets
Researcher (PI) David SANCHO MADRID
Host Institution (HI) CENTRO NACIONAL DE INVESTIGACIONESCARDIOVASCULARES CARLOS III (F.S.P.)
Summary Immunometabolism is an emerging research field that promises to generate novel targets for manipulation of functional responses in immune cells. Pioneering studies are beginning to unveil how innate sensing leads to metabolic reprogramming of immune cells. We became interested in the possible metabolic consequences of innate sensing by myeloid cells because of our previous work showing how mouse and human dendritic cell (DC) subsets detect danger signals from microbes and damaged tissues. Our current data show that sensing of live bacteria triggers a profound reorganisation of the mitochondrial electron transport chain (ETC) in macrophages, with a switch in the relative contribution of ETC complexes I and II to mitochondrial respiration that impacts immune response. As we pursue novel strategies to manipulate DC function, and supported by our preliminary data in DCs, we hypothesise that innate sensing induces mitochondrial adaptations in DCs and that targeting mitochondrial metabolism will affect DC function. Our goals are: 1) to characterise how innate sensing of danger signals from microbes or from tissue damage modulate mitochondrial adaptations and metabolic reprogramming in mouse and human DC subsets; 2) to dissect the molecular mechanisms that connect innate sensing and mitochondrial adaptations in DCs, using biased and unbiased cutting-edge proteomics approaches; 3) to address the impact of manipulating mitochondrial biology on mouse and human DC metabolism and function; and 4) to assess the functional in vivo effects of targeting mitochondrial biology in DCs in homeostasis and disease. The characterisation of the molecular mechanisms that link innate sensing and mitochondrial metabolism with DC function will open new avenues for basic research in mitochondrial biology and for the emerging field of immunometabolism. Functional targeting of DC mitochondrial metabolism has great potential for the discovery of new strategies to modulate immunity and tolerance.
Immunometabolism is an emerging research field that promises to generate novel targets for manipulation of functional responses in immune cells. Pioneering studies are beginning to unveil how innate sensing leads to metabolic reprogramming of immune cells. We became interested in the possible metabolic consequences of innate sensing by myeloid cells because of our previous work showing how mouse and human dendritic cell (DC) subsets detect danger signals from microbes and damaged tissues. Our current data show that sensing of live bacteria triggers a profound reorganisation of the mitochondrial electron transport chain (ETC) in macrophages, with a switch in the relative contribution of ETC complexes I and II to mitochondrial respiration that impacts immune response. As we pursue novel strategies to manipulate DC function, and supported by our preliminary data in DCs, we hypothesise that innate sensing induces mitochondrial adaptations in DCs and that targeting mitochondrial metabolism will affect DC function. Our goals are: 1) to characterise how innate sensing of danger signals from microbes or from tissue damage modulate mitochondrial adaptations and metabolic reprogramming in mouse and human DC subsets; 2) to dissect the molecular mechanisms that connect innate sensing and mitochondrial adaptations in DCs, using biased and unbiased cutting-edge proteomics approaches; 3) to address the impact of manipulating mitochondrial biology on mouse and human DC metabolism and function; and 4) to assess the functional in vivo effects of targeting mitochondrial biology in DCs in homeostasis and disease. The characterisation of the molecular mechanisms that link innate sensing and mitochondrial metabolism with DC function will open new avenues for basic research in mitochondrial biology and for the emerging field of immunometabolism. Functional targeting of DC mitochondrial metabolism has great potential for the discovery of new strategies to modulate immunity and tolerance.
Project acronym NOVARIPP
Project Novel properties of antigen receptors and instruments to modulate lymphoid function in physiological and pathological conditions
Researcher (PI) Balbino Alarcon Sanchez
Summary The current paradigm of T cell function in the immune response is that T cells recognize antigen through the T cell antigen receptor (TCR) which transduces signals to the cytoplasm by way of cytosolic priming and effector tyrosine kinases. The TCR acts in a monovalent fashion is crosslinked by its antigen/MHC (pMHC) ligand, causing TCR triggering. However, our more recent data indicate that the TCR is organized in pre-existing oligomers, and therefore it might not require crosslinking, and that the triggered TCR adopts, upon ligand binding, an active conformation that is responsible for recruiting cytoplasmic effector molecules. We have found novel direct effectors of the TCR, including the Ras GTPase TC21 and unveiled that these effectors play an essential role in a variety of TCR signaling functions including tonic signaling and TCR downregulation. Furthermore, we have found that TC21 is required for the acquisition of pMHC by T cells from the APCs and re-express it on their own plasma membrane, becoming themselves APCs for other T cells. In this proposal we wish to explore several of the avenues open by our most recent findings, including the importance of pMHC presentation by T cells. Another objective is to study an interesting property of the conformational change in the TCR: its return to the inactive conformation even when it is still bound to its pMHC ligand (countdown effect). We also propose to use approaches that alter the size of pre-existing TCR oligomers to seek for new ways of modulating T cell activation. The last two objectives refer to study the role of TC21 as a direct effector of the B cell antigen receptor (BCR). We propose to study the involvement of TC21 in the B cell germinal center response and how the deregulation of its expression can influence the transformation of GC B cells into lymphomas. Finally, we propose to generate small molecular weight inhibitors of TC21 as potential drugs for the treatment of lymphomas.
The current paradigm of T cell function in the immune response is that T cells recognize antigen through the T cell antigen receptor (TCR) which transduces signals to the cytoplasm by way of cytosolic priming and effector tyrosine kinases. The TCR acts in a monovalent fashion is crosslinked by its antigen/MHC (pMHC) ligand, causing TCR triggering. However, our more recent data indicate that the TCR is organized in pre-existing oligomers, and therefore it might not require crosslinking, and that the triggered TCR adopts, upon ligand binding, an active conformation that is responsible for recruiting cytoplasmic effector molecules. We have found novel direct effectors of the TCR, including the Ras GTPase TC21 and unveiled that these effectors play an essential role in a variety of TCR signaling functions including tonic signaling and TCR downregulation. Furthermore, we have found that TC21 is required for the acquisition of pMHC by T cells from the APCs and re-express it on their own plasma membrane, becoming themselves APCs for other T cells. In this proposal we wish to explore several of the avenues open by our most recent findings, including the importance of pMHC presentation by T cells. Another objective is to study an interesting property of the conformational change in the TCR: its return to the inactive conformation even when it is still bound to its pMHC ligand (countdown effect). We also propose to use approaches that alter the size of pre-existing TCR oligomers to seek for new ways of modulating T cell activation. The last two objectives refer to study the role of TC21 as a direct effector of the B cell antigen receptor (BCR). We propose to study the involvement of TC21 in the B cell germinal center response and how the deregulation of its expression can influence the transformation of GC B cells into lymphomas. Finally, we propose to generate small molecular weight inhibitors of TC21 as potential drugs for the treatment of lymphomas.
Project acronym OCIAN
Project Ownership, competition, innovation, and antitrust
Researcher (PI) Francesc Xavier Vives Torrents
Host Institution (HI) UNIVERSIDAD DE NAVARRA
Summary The project intends to study the effect of the ownership structure of firms on competition in product markets, innovation, and aggregate outcomes, and derive welfare and policy implications. The rise of institutional investment, with the profound changes occurred in the asset management industry in the last decades, has implied important variations in the ownership structure of firms. Among them, there has been a formidable increase in common ownership of firms in the same industry, which has raised antitrust concerns, mostly in the US but also in the EU. At the same time, a lack of dynamism in terms of entry and exit, investment and innovation, linked to potential secular stagnation of advanced economies, has been perceived, and blamed on the rise of market power. The proposed research will develop mostly theoretical models to study the effects of changes in the investment industry and firms' ownership patterns on product markets and the general equilibrium macroeconomic consequences. The proposal consists of five strands. The first three purport to study the effect of changes of the market structure of the investment industry and ownership structure of firms on: i) market power in product markets; ii) investment and innovation incentives in the presence of technological spillovers among firms; and iii) aggregate output, investment, labour supply and income distribution. The fourth strand aims to develop empirical assessments of the developed theory. The final strand of the proposal will derive the antitrust and regulatory implications of the results. Particular attention will be devoted to the impact of changes in the network of control rights and cash flow rights of firms' owners. The novelty of the approach lies in the integration of the perspectives and tools of industrial organization, corporate finance, and network theory to provide a global view of the relationship between ownership structure, competition and innovation.
The project intends to study the effect of the ownership structure of firms on competition in product markets, innovation, and aggregate outcomes, and derive welfare and policy implications. The rise of institutional investment, with the profound changes occurred in the asset management industry in the last decades, has implied important variations in the ownership structure of firms. Among them, there has been a formidable increase in common ownership of firms in the same industry, which has raised antitrust concerns, mostly in the US but also in the EU. At the same time, a lack of dynamism in terms of entry and exit, investment and innovation, linked to potential secular stagnation of advanced economies, has been perceived, and blamed on the rise of market power. The proposed research will develop mostly theoretical models to study the effects of changes in the investment industry and firms' ownership patterns on product markets and the general equilibrium macroeconomic consequences. The proposal consists of five strands. The first three purport to study the effect of changes of the market structure of the investment industry and ownership structure of firms on: i) market power in product markets; ii) investment and innovation incentives in the presence of technological spillovers among firms; and iii) aggregate output, investment, labour supply and income distribution. The fourth strand aims to develop empirical assessments of the developed theory. The final strand of the proposal will derive the antitrust and regulatory implications of the results. Particular attention will be devoted to the impact of changes in the network of control rights and cash flow rights of firms' owners. The novelty of the approach lies in the integration of the perspectives and tools of industrial organization, corporate finance, and network theory to provide a global view of the relationship between ownership structure, competition and innovation.
Project acronym RISK AND DIVERSITY
Project Labor Market Risk and Skill Diversity: Implications for Efficiency, Policy, and Estimation
Researcher (PI) Jan Eeckhout
Summary Labor market risk and skill diversity are central features of the labor market. Arguably, employment risk is one of the biggest sources of uncertainty most individuals face in their life time. Likewise, exploiting the synergies and complementarities between differentially skilled workers is amongst the greatest challenges to firms' hiring decisions. The objective is to analyze the efficiency properties and as a consequence evaluate the role for policy. In order to establish the implications of the mechanisms that govern risk and diversity, I elaborate on concrete applications and discuss estimation in different labor market settings. In the presence of Labor Market Risk I address the question how asset holdings exacerbate wage inequality. Workers are exposed to the risk of unemployment, and workers with few assets will trade off the lower riskiness of a job against lower wages. Different asset holdings translate into different wages, thus amplifying inequality due to assets with wage inequality. The proposed analysis of unemployment risk can solve for an equilibrium model that incorporates the distribution of assets, while at the same time allowing for heterogeneity in skills. There is no doubt that fully understanding the asset-skill tradeoff is of primary importance for labor market policy. I then study a different angle of labor market risk, namely risk that is due to matching stochastic types, which introduces ex post mismatch. Ex ante, agents match based on the distribution of possible realizations of ex post types. This model is conducive to identification of complementarities between workers and the value of risk sharing. Skill Diversity, or the allocation of differentially skilled workers across firms of different productivity, is a central feature of the labor market. The aim of this research is to embed the optimal worker composition within firms into standard macro environments to study technological change, information aggregation and spatial diversity.
Labor market risk and skill diversity are central features of the labor market. Arguably, employment risk is one of the biggest sources of uncertainty most individuals face in their life time. Likewise, exploiting the synergies and complementarities between differentially skilled workers is amongst the greatest challenges to firms' hiring decisions. The objective is to analyze the efficiency properties and as a consequence evaluate the role for policy. In order to establish the implications of the mechanisms that govern risk and diversity, I elaborate on concrete applications and discuss estimation in different labor market settings. In the presence of Labor Market Risk I address the question how asset holdings exacerbate wage inequality. Workers are exposed to the risk of unemployment, and workers with few assets will trade off the lower riskiness of a job against lower wages. Different asset holdings translate into different wages, thus amplifying inequality due to assets with wage inequality. The proposed analysis of unemployment risk can solve for an equilibrium model that incorporates the distribution of assets, while at the same time allowing for heterogeneity in skills. There is no doubt that fully understanding the asset-skill tradeoff is of primary importance for labor market policy. I then study a different angle of labor market risk, namely risk that is due to matching stochastic types, which introduces ex post mismatch. Ex ante, agents match based on the distribution of possible realizations of ex post types. This model is conducive to identification of complementarities between workers and the value of risk sharing. Skill Diversity, or the allocation of differentially skilled workers across firms of different productivity, is a central feature of the labor market. The aim of this research is to embed the optimal worker composition within firms into standard macro environments to study technological change, information aggregation and spatial diversity.
Project acronym SUEE
Project Strategic Uncertainty in Economic Environments
Researcher (PI) Antonio Penta
Summary This proposal concerns two sets of projects that tackle theoretical challenges raised by the data broker and online advertisement industry. 1-Strategic Uncertainty (SU) in Economic Environments: By assuming that individuals have correct beliefs about others' behavior, the equilibrium approach in economics assumes away SU. But SU is central to many settings. Testament to this is the existence of a data broker industry, in which data on agents' behavior are traded: this information would have no value without SU. Within game theory, non-equilibrium concepts such as rationalizability and models of level-k reasoning have been developed to study SU. But these models have had a limited impact on broader economics. This is partly due to the weakness and limited tractability of these concepts. Part 1 tackles SU in order to favor a better integration within economics. From a behavioral perspective, I propose axiomatic foundations that justify modeling individuals' reasoning as stemming from a cost-benefit analysis, and investigate (theoretically and experimentally) how these ideas shed light on the occurrence of equilibrium coordination under SU, i.e. as the result of purely subjective reasoning. From a classical perspective, I develop uniqueness and monotone comparative statics results for non-equilibrium concepts, to favor a better integration of SU in standard economics. Applications include problems of information disclosure of strategic datasets and identification in models of social interactions. 2-Online Auctions with Digital Marketing Agencies (DMA): I study the role of DMA in the auctions used to sell advertisement space on the web. I analyze how collusive bidding can emerge from bid delegation to a common DMA and how this undermines both revenues and efficiency of the auctions used by key players in the industry such as Facebook, Google and Microsoft-Yahoo!. Implications and extensions include business, policy and economics methodology.
This proposal concerns two sets of projects that tackle theoretical challenges raised by the data broker and online advertisement industry. 1-Strategic Uncertainty (SU) in Economic Environments: By assuming that individuals have correct beliefs about others' behavior, the equilibrium approach in economics assumes away SU. But SU is central to many settings. Testament to this is the existence of a data broker industry, in which data on agents' behavior are traded: this information would have no value without SU. Within game theory, non-equilibrium concepts such as rationalizability and models of level-k reasoning have been developed to study SU. But these models have had a limited impact on broader economics. This is partly due to the weakness and limited tractability of these concepts. Part 1 tackles SU in order to favor a better integration within economics. From a behavioral perspective, I propose axiomatic foundations that justify modeling individuals' reasoning as stemming from a cost-benefit analysis, and investigate (theoretically and experimentally) how these ideas shed light on the occurrence of equilibrium coordination under SU, i.e. as the result of purely subjective reasoning. From a classical perspective, I develop uniqueness and monotone comparative statics results for non-equilibrium concepts, to favor a better integration of SU in standard economics. Applications include problems of information disclosure of strategic datasets and identification in models of social interactions. 2-Online Auctions with Digital Marketing Agencies (DMA): I study the role of DMA in the auctions used to sell advertisement space on the web. I analyze how collusive bidding can emerge from bid delegation to a common DMA and how this undermines both revenues and efficiency of the auctions used by key players in the industry such as Facebook, Google and Microsoft-Yahoo!. Implications and extensions include business, policy and economics methodology.