FAS Theses and Dissertations

This thesis studies the role of currency in shaping capital flows to and investment in emerging and developing economies.

Chapter 1 proposes a novel trade-off for emerging-market sovereign borrowing. Borrowing in local currency insulates sovereigns from default but increases the severity of bond fire sales in bad times, as local-currency bonds are endogenously held by intermediaries vulnerable to fire sales. We present two facts about intermediary sorting and causal evidence of local-currency fire sales. We rationalize the facts in a model where foreign households demand money-like claims denominated in their own currency from intermediaries, and study the optimal currency composition of sovereign debt.

Chapter 2 studies the macroeconomic implications of widespread dollar lending in a small open economy. Using microdata from Peru, we document widespread dollar exposure across the firm size, leverage, and sectoral distribution. We develop a model to characterize currency depreciations given this heterogeneity. Aggregate outcomes following a depreciation depend on the joint distribution of firms’ exposures and their marginal propensities to invest out of liquidity, which are particularly high for some firms. Estimating the model on the universe of firms, we find that depreciations are significantly more contractionary than predicted by representative-firm models.

Chapter 3 introduces a theory wherein dollarization arises as a risk transfer between domestic firms and households, who hedge against inflation and income risks from local currency depreciations. We use cross-country and household-level data from Uruguay to test the predictions of the model. We evaluate the effectiveness of capital controls in this setting, and find that they can have perverse effects.

This thesis has three essays which are empirical studies at the intersection of finance and macroeconomics. The topics include low interest rates and financial markets, debt contracts and corporate borrowing constraints, and expectations in finance and macro. The essays hope to provide empirical evidence, using diverse approaches, to better understand the connections as well as differences between classic theories and economic activities in practice.

My dissertation consists of three essays in consumer and small business finance. The last US housing boom and the development of mortgage securitization are commonly believed to fuel the credit expansion before the financial crisis. The first two chapters contribute to these discussions by investigating the bank-lending channel through which housing shocks and mortgage securitization affect credit access of consumers and small businesses. In addition, home equity debt is also believed to play an important role over the last boom-and-bust cycle; and my third chapter investigates how the 2005 US bankruptcy reform affect consumers’ home equity borrowing behaviors. In the first chapter I show that the last US housing boom reduced renter credit access. In particular, banks reduced non-mortgage credit supply when they expanded mortgage lending to homeowners. As a consequence, renters living in locations where banks had more geographic exposure to the housing boom ended up borrowing less but defaulting more. This research suggests that policies affecting house prices and mortgage financing have broader implications for less well-off households that do not own a home. The second chapter explores the causal effect of mortgage securitization on small business lending. It is commonly believed that mortgage securitization frees up bank liquidity and increases the supply of illiquid loans. However, based on an instrumental variable approach I find that increasing the easiness of mortgage securitization reduces bank lending to small businesses, especially to the small-size and low-income borrowers. A possible explanation is that securitization increases bank risk-taking on retained mortgages, which may reduce bank incentive to issue small business loans. The last chapter examines the effect of bankruptcy protection on home equity borrowing and consumption smoothing. Based on a natural experiment of the 2005 US bankruptcy reform, I use a difference-in-difference method to show that consumers increased home equity borrowing when debtor protection at bankruptcy reduced. The house price sensitivity of consumption and entrepreneurship were also increased. My results suggest that reducing bankruptcy protection could lead to a stronger amplification effect of housing collateral over the business cycle.

Macroeconomic and institutional shocks are important drivers of firms' activities. In chapter one, I examine the role of patent litigation in affecting companies’ innovation. Studying a landmark Supreme Court decision, I show that an improvement in patent enforcement positively affects the innovation activity of corporations. In chapter two, I study the role of private equity in period of large financial turmoil. In the context of the 2008 crisis in United Kingdom, I show that private equity backed companies experienced a lower decline in investment than a control group of similar companies that were not related to private equity. This effect is explained by the ability of private equity to relax the financing constraints of the portfolio companies when access to credit markets is limited. In chapter three, I explore the role of sovereign securities held by banks in the propagation of a financial shock to the economy. Using detailed loan level data matching firms and banks in Italy, the paper finds that the shock to banks' sovereign portfolio caused by the Greek bailout (2010) was passed on to firms through a contraction in credit. The effects of this shock were particularly disruptive for smaller companies.

The chapters in this dissertation study entrepreneurship activity and capital market behavior. In Chapter 1, I ask whether the opportunity cost of marriage affects female entrepreneurship. I use World War II casualties as exogenous shocks to local marriage markets across the US and test whether women in high-casualty regions were more active in starting new businesses than women in low-casualty regions. In Chapter 2, I examine hedge funds' strategic behaviors at investment conferences. I evaluate performances of their stock pitches through event studies and analyze the behaviors and motives of various types of investors. In Chapter 3, my coauthors and I compare two asset pricing tests, the Fama-MacBeth cross-section test versus the Jensen's alpha time-series test. We study their relevance to a risk-averse investor facing transaction costs as well as their statistical power of detecting anomalies in capital markets.

This thesis presents two essays studying the role of banks in financial markets and one which studies statistical inference in matching markets. The first chapter presents a new theory of the role of banks, providing an explanation for the role of publicly available securities on bank balance sheets. The model provides a unified framework for studying asset prices, portfolio choices, capital structure, and macroeconomic policies such as quantitative easing. Relative to existing models of banking, the paper emphasizes the demand for deposits rather than the expertise of bankers in making loans. The second chapter expands on the research agenda presented in the first by studying why traders might demand bank deposits. It formalizes the idea that deposits function as a form of money, because they are safe assets that avoid adverse selection problems in trade. The model presents a fundamental tension between banks creating large quantities of money-like assets and being vulnerable to financial panics. The third chapter studies identification and estimation in two sided matching markets where the desirability of matching with an agent can be summarized by a latent index. The paper first studies identification, showing that a many-to-one matching market allows for the estimation of parameters that cannot be estimated in a one-to-one matching market. It then studies the limiting distribution of a class of estimators and develops novel methods for proving such limit theorems.

The first essay studies consumption-based asset pricing models in which consumers make mistakes. I build a model in which a portfolio manager selects portfolio weights on behalf of a potentially non-optimizing consumer. In the case of power utility, risk premia depend on exposure to long-horizon consumption and expected return shocks, not single-period consumption as in the standard model. My results apply to a wide range of environments and generalize beyond power utility. In the general case, long-horizon risks matter when consumers do not react to shocks optimally. I provide empirical evidence that expected return shocks are negatively priced in the cross section of stock returns, as the model predicts, and can account for 1.3 percentage points of the equity premium.

The second essay, coauthored with Weiling Liu, proposes a novel measure of intermediary risk constraints called the interdealer broker (IDB) index, which captures the portion of total trade volume conducted between dealers using an IDB. Theoretically, when aggregate risk constraints tighten, dealers will use IDBs more in order to redistribute idiosyncratic risk. Empirically, we test our measure in the U.S. Treasury market, where we find that the IDB index has a 0.72 correlation with interest rate risk, as proxied by Value-at-Risk. Furthermore, a one standard deviation increase in the IDB index forecasts a 1.8 percentage point higher annual excess return on a five-year bond. This return predictability holds across different fixed income classes, over varying maturities, as well as out-of-sample.

The third essay studies the optimal risk taking of a endowment manager who invests on behalf of an endowment with limited flexibility to adjust its spending. I model this limited flexibility in reduced-form by assuming the endowment follows a spending policy which only gradually adjusts to changes in wealth, in line with Yale and many other universities. In my benchmark case, I find that endowments should optimally reduce their risky asset holdings by 4 to 7 percentage points if following a rule similar to Yale's. I additionally develop a new methodology to approximately solve portfolio choice problems when spending policies are not necessarily optimal.

This dissertation consists of three independent essays on the understanding of investor behavior and financial markets. Chapter 1 (co-authored with Zhong Xu and Chuanwei Zou), “Trading Relationships in the Chinese Repo Market,” studies relationship formation in the Chinese repo market and its impact on the terms of trade. We find that relationships play an important role. In particular, banks with stronger pre-existing ties are more likely to trade with each other again. They also trade at lower rates, require smaller haircuts and have looser standards on collateral. Our results suggest that relationships reduce both search frictions and counter-party credit risk in the Chinese repo market. Chapter 2, “Retail Investors’ Ownership Breadth and Stock Returns,” analyzes the ownership breadth of different groups of retail investors and their predictive powers for future returns. We document that there exists heterogeneity among retail investors in the changes of their ownership breadth. While the change in ownership breadth of large retail investors and institutional investors predicts positive returns, the change in ownership breadth of small and medium investors predicts returns negatively. The results are consistent with a model in which rational traders have an information advantage over noise traders. Chapter 3, “Price-based Momentum and Earnings-based Momentum,” compares momentum strategies based on firms’ stock prices with momentum strategies based on their earnings surprises in order to test whether firms’ past performance contains any additional information on predicting future returns controlling for past earnings surprises. In contrast to earlier studies, we find that both firms’ past idiosyncratic returns and earnings surprises can predict future returns and earnings surprises after controlling for each other. Our findings indicate that price-based momentum and earnings-based momentum are two distinct phenomena that represent the market’s under-reaction to different pieces of information.

This dissertation consists of three essays: Chapters 1 and 2 focus on the impact of cognitive and institutional constraints on stock market efficiency while Chapter 3 examines whether shocks to the real interest rate are a priced state variable.

Chapter 1 is titled "Commodity Inattention": attention is a scarce resource for investors that must be divided among many sources of information. The commodities market is an important source of information affecting firms that operate in the economy. Investors do not fully appreciate this relationship allowing for predictability in equity returns using commodity returns. A strategy that exploits this predictability has an alpha of 1.5% per month and no meaningful factor exposure. This effect is stronger in smaller firms, firms that tend to be ignored by their owners, firms owned by investors who ignore commodity information, firms with nuanced commodity exposure and during times of high informational burden for investors.

Chapter 2 is titled "Market Crash Risk and Slow Moving Capital": index option skew (risk reversal) is a variable commonly looked at by investors to assess market conditions. In the cross-section, value stocks and junk bonds do poorly when the price of risk reversals increases. However, investors are slow to fully incorporate this information into prices leading to significant predictability in value vs. growth stocks as well as junk vs. investment grade bonds. This predictability is economically significant and poses a challenge to strictly rational models of information processing by investors.

Chapter 3 is titled "Is Real Interest Rate Risk Priced? Theory and Empirical Evidence": we propose a model in which real interest rates respond to both expected consumption growth and time preferences. Exposures to future consumption growth and time preference interest rate shocks are both priced, however, the two types of interest rate risk have different prices. The premia for time preference risk are arbitrarily large when EIS is close to 1. Empirically, we find little evidence that interest rate risk is priced in the cross-section of stocks and bonds.

The first chapter provides empirical evidence of a financial channel through which a friction in the labor market impacts corporate investment in innovation. I document that employment protection amplifies operating leverage and reduces the ability of financially constrained firms to perform R&D projects. Using the adoption of wrongful-discharge protections by state courts across the U.S. as a source of exogenous variation in the cost of adjusting labor downwards, I show that it increases operating leverage of firms in these states. Among financially constrained firms, these court decisions reduce R&D investment, and amplify the procyclicality of R&D investment. Capital expenditures, however, are not affected regardless of the level of financial constraints. Last, I show that high R&D firms hoard cash and issue more equities in response to the court decisions. I provide a corporate investment model with costly external finance and liquidity constraints that predicts these patterns. The second chapter explores the implications for asset prices of shocks that raise the intensity of innovation for new product development. Innovation increases productivity by expanding product variety, but requires time and resources to be implemented and become available for production. Therefore, higher intensity of innovation is associated with larger investment and higher marginal value of consumption. Firms the values of which are more sensitive to the intensity of innovation, the growth firms, command lower risk premiums. Based on this observation, I build a calibrated general equilibrium model with time-varying intensity of innovation that can potentially explain the equity premium and the cross-sectional distribution of equity returns. I also provide empirical evidence of comovement between innovation intensity and the value spread. The third chapter proposes an alternative method to decompose market unexpected returns into cash-flow and discount-rate news by incorporating information from the cross-section of asset returns. I find that the resulting market news series are relatively stable to the choice of VAR variables that are used to generate the expected market return series. Furthermore, when I estimate the market cash-flow and discount-rate betas using the updated market news series, it shows a pattern across the characteristic-sorted portfolios consistent with the one initially documented by Campbell and Vuolteenaho (2004), regardless of the sample period. The cross-sectional goodness of fit of the ICAPM improves when it is tested using the market news beta estimates constructed based on the updated market news series. The out-of-sample construction of the market news series that incorporates the cross-sectional asset return information demonstrates that the market cash-flow news is much less volatile than previously estimated directly using the VAR models.

My dissertation is composed of three papers in financial economics. In the first essay, “Credit Migration and Covered Interest Rate Parity,” I document economically large and persistent discrepancies in the pricing of credit risk between corporate bonds denominated in different currencies. This violation of the Law-of-One-Price (LOOP) in credit risk is closely aligned with violations of covered interest rate parity in the time series and the cross-section of currencies. I explain this phenomenon with a model of market segmentation. Post-crisis regulations and intermediary frictions have severely impaired arbitrage in the exchange rate and credit markets each on their own, but capital flows, either currency-hedged investment or debt issuance, bundle together the two LOOP violations. Limits of arbitrage spill over from one market to another. The second essay, joint with Robin Greenwood and Sam Hanson, studies theoretically how do large supply shocks in one financial market affect asset prices in other markets. We develop a model in which capital moves quickly within an asset class, but slowly between asset classes. While most investors specialize in a single asset class, a handful of generalists can gradually re-allocate capital across markets. Upon arrival of a supply shock, prices of risk in the impacted asset class become disconnected from those in others. Over the long-run, capital flows between markets and prices of risk become more closely aligned. While prices in the impacted market initially overreact to shocks, under plausible conditions, prices in related asset classes underreact. Our model suggests that the short-run price impact of a supply shock on different markets may not accurately reveal the long-run impact, which is often of greater interest to policymakers. The final essay, joint with Robert Barro, develops a new options-pricing formula that applies to far-out-of-the money put options on the overall stock market when disaster risk is the dominant force, the size distribution of disasters follows a power law, and the economy has a representative agent with Epstein-Zin utility. In the applicable region, the elasticity of the put-options price with respect to maturity is close to one. The elasticity with respect to exercise price is greater than one, roughly constant, and depends on the difference between the power-law tail parameter and the coefficient of relative risk aversion, γ. The options-pricing formula conforms to data from 1983 to 2015 on far-out-of-the-money put options on the U.S. S&P 500 and analogous indices for other countries. The analysis uses two types of data—indicative prices on OTC contracts offered by a large financial firm and market data provided by OptionMetrics, Bloomberg, and Berkeley Options Data Base. The options-pricing formula involves a multiplicative term that is proportional to the disaster probability, p. If γ and the size distribution of disasters are fixed, time variations in p can be inferred from time fixed effects. The estimated disaster probability peaks particularly during the recent financial crisis of 2008-09 and the stock-market crash of October 1987.

The first chapter studies how dealers affect the liquidity of the corporate bonds market. Using corporate bond transaction data with dealer identifiers, I find that a large component of the bid-ask spread is dealer-dependent. Customers incur different trading costs depending on which dealer handles their transactions. The dealer-specific component of trading costs is related to several characteristics of dealers, including their connectedness, credit risk, and portfolio risk. These findings are consistent with an inventory risk model of the bid-ask spread, whereby shocks to a dealer’s inventory cost affects the equilibrium bid-ask spread. The second chapter, joint with Ali Ozdagli, studies how interest rates influence the investment behavior of insurance companies. Life insurance companies, the largest institutional holders of corporate bonds, tilt their portfolios towards higher-yield bonds when interest rates decline. This tilt seems to be primarily driven by an increase in duration rather than credit risk and insurers do not seem to increase the credit risk of their bonds as interest rates decline. Moreover, the duration gap between their assets and liabilities deviates from zero for extended periods of time both in negative and positive directions. We propose a new model of duration-matching under adjustment costs that conforms with these patterns and test other implications of this model. The third chapter, joint with Luis Viceira, documents that the short-run correlations of returns across countries have increased substantially from 1986 to 2016, both for equities and bonds. We identify increased correlations of discount rate shocks, a transitory component of returns, as the main driver of the upward shift in stock return correlations. We conclude that the increase in short-run correlations does not imply decreased long-horizon benefit for diversification in global equities market. In addition, we investigate the optimal intertemporal global portfolio choice problem for long horizon investors in the presence of permanent shocks and transitory shocks to asset values.

This dissertation is composed of three essays in financial economics, which share a common focus on the determinants of managerial and corporate decision-making. The first essay studies the growing role of politics in consumer markets by measuring consumer demand for political tilt and examining its implications for firm behavior. The second essay studies how benchmarking incentives shape crowded risk-taking in the context of mutual fund managers investing in cryptocurrencies. The third essay studies pharmaceutical firms facing losses of exclusivity, and examines the role of managerial reference points in responses to large and predictable revenue declines.

This dissertation contains three essays on how differences among financial intermediaries affect the provision of financial services. The first essay, "Bank Consolidation and Financial Inclusion," focuses on deposit-taking and identifies the adverse effects of bank consolidation on lower-income depositors through the higher deposit account fees larger banks charge. In the second essay, "Large Banks and Small Firm Lending," Victoria Ivashina, Ryan D. Taliaferro and I examine the large and persistent shift in the composition of lenders to small businesses following the housing market crash in 2007. In the third essay, "Risk, Lending, and Organizational Form," I focus on mortgage lending and investigate how differences in organizational form drive both risk-taking during the real estate boom and subsequent performance after the real estate market crash.

My dissertation focuses on topics in household finance and bank regulation. In chapter 1, I estimate the household consumption response to a predictable, quasi-permanent income shock. Credit card spending rises well before the positive shock occurs and then plateaus, suggesting that households are forward-looking and have enough liquidity to increase spending. This type of household behavior is found to be remarkably similar to the simulation of a modified buffer-stock model. The main conclusion is that households appear to be quite sophisticated in their consumption behavior, which has various policy implications. In chapter 2 (joint with Divya Kirti), we present a model that describes how different types of bank regulation can affect the likelihood of fire sales in a crisis. There are three main results. First, the design of capital requirements affects whether fire sales can occur in the recapitalization process. Second, the interaction between capital and liquidity requirements causes banks to become larger and can also make fire sales more likely. Third, mandatory equity issuance can be a useful policy for limiting fire sales, but only if binding. Collectively, our findings suggest that bank regulation may have a strong effect on the likelihood of fire sales. In addition, time-varying risk weights may more effective than time-varying capital requirements in preventing fire sales. In chapter 3 (joint with Todd Keister), we investigate whether policy makers should be permitted to bail out financial institutions during a financial crisis. We develop a model that incorporates two competing views about the causes of these crises: self-fulfilling shifts in investors’ expectations and deteriorating economic fundamentals. We show that – in both cases – the desirability of allowing intervention depends on a tradeoff between incentives and insurance. If policy makers can correct incentive distortions through regulation, then allowing intervention is always optimal. If regulation is imperfect and the risk-sharing benefit from intervention is absent, it is optimal to prohibit intervention. Our results show that it is possible to provide meaningful policy analysis without taking a stand on the contentious issue of whether financial crises are driven by expectations or fundamentals.

This dissertation studies how market structure and regulation shape firm behavior, and how those responses affect welfare, in energy and health care markets. The first chapter, co-authored with Coly Elhai, studies how market incentives and infrastructure constraints influence oil and gas producers' methane emissions. We develop a model in which producers make drilling and emissions decisions and face transmission costs that depend on pipeline utilization. Leveraging novel emissions data from the Permian Basin, we find that emissions respond to high-frequency price variation. With our estimated model, we show that a $1,500/metric ton methane tax reduces emissions by up to 7 percent, but effects are attenuated by pipeline congestion and optimistic flaring efficacy assumptions. Expanding gas pipeline infrastructure yields net emission reductions and generates social returns substantially exceeding construction costs.

The second chapter, also co-authored with Coly Elhai, evaluates New Mexico's 2021 gas waste rules for the oil and gas industry, which tightened limits on routine flaring and imposed penalties for noncompliance. A simple conceptual framework highlights three margins of response: venting and flaring, drilling, and reporting. The reporting margin arises because compliance is based on self-reported gas waste. Because many producers operate in both New Mexico and Texas, the policy may spill across state lines: firm-wide abatement may reduce gas waste outside New Mexico, while displaced drilling may shift elsewhere, muting the policy's aggregate effect. Using a cross-border difference-in-differences design in the Permian Basin, we compare outcomes in New Mexico and Texas before and after the policy change. Standard cross-border comparisons may be biased because spillovers partially treat the Texas comparison group. We address this problem with an operator-level decomposition that identifies direct effects in New Mexico and spillovers onto exposed firms' Texas assets. Among operators initially above the regulatory threshold, the policy lowered venting-and-flaring intensity by 3.9 percentage points in New Mexico and by 1.6 percentage points on the Texas assets of exposed firms, corresponding to declines of 92 percent and 32 percent, respectively. Accounting for these spillovers, overall gas waste fell by 54 percent in New Mexico and 14 percent in Texas. We find no evidence that the policy changed drilling activity or induced underreporting of gas waste.

The third chapter studies how health insurer consolidation affects both negotiated hospital prices and consumer premiums. I examine the acquisition of one large national insurer by another using matched difference-in-differences designs that compare the merging insurers with rival insurers before and after the merger. At hospitals with pre-merger overlap between the two firms, the merger increased the merged insurer's negotiated discounts relative to billed charges by at least 6 percent in the Medicare Advantage market and 8 percent in the commercial market, with larger effects where the merger generated larger increases in insurer concentration. These gains were not passed through to consumers: in counties with pre-merger overlap, the merger increased Medicare Advantage premiums by 51 percent on average.

This dissertation studies the relationship between information technology and productivity in three domains. Chapter 1 examines a mobile software application that allows recipients of the Supplemental Nutrition Assistance Program (SNAP) to check their benefit balance. Recipients spend a large majority of benefits before halfway through a benefit deposit cycle. Using an event study, I show that the introduction of the application on average has small but significant impacts - around 5% - on the ability of recipients to extend the time frame over which they spend benefits within a cycle. These effects are higher for recipients who are new to SNAP, who are highest in the distribution of SNAP benefits, and who have the largest tendency pre-adoption to spend down quickly. The results are consistent with the impact of salience on consumer choice and offer evidence that such software tools may be a cost effective means to support policy goals. Chapter 2 examines the impact of machine learning on public sector productivity in practice. Partnering with Yelp and the City of Boston, we run an experiment to compare an inspector-curated list of restaurants to inspect (i.e. business-as-usual) to a pair of algorithm-created lists based on empirical predictions of which restaurants are most likely to have health code violations. Our goal is to understand the gains from - and barriers to - implementing predictive algorithms to improve the city’s ongoing inspection operations. We present four main findings. First, even simple algorithms greatly outperform business-as-usual; the city can identify 50% more violations using the same number of inspections. Second, one key barrier to implementing an algorithm in managerial contexts is compliance. In our sample, inspectors were only half as likely to comply with a directive to inspect a restaurant based on the algorithm relative to restaurants based on their own judgment. Third, beyond efficiency differences, the algorithm also has equity implications. For example, relative to the inspector-created list, algorithms were more likely to target ethnic restaurants and major chains. Fourth, based on these results, Boston has proceeded with implementing a modified version of the algorithm into their ongoing inspection process. Chapter 3 studies the theoretical impact of machine learning applied to the selection of public sector workers. Economists have become increasingly interested in studying the nature of production functions in social policy applications with the goal of improving productivity. Traditionally models have assumed workers are homogenous inputs. However, in practice, substantial variability in productivity means the marginal productivity of labor depends substantially on which new workers are hired--which requires not an estimate of a causal effect, but rather a prediction. We demonstrate that there can be large social welfare gains from using machine learning tools to predict worker productivity using data from two important applications - police hiring and teacher tenure decisions.

In my first chapter, I consider the long-term effects of World War II on women. WWII drew women into the workforce in unprecedented numbers and, often, into atypical occupations. After the war, they returned home where they became the mothers of the baby boom generation. Their daughters changed the female labor force by pursuing higher education and careers. My research analyzes whether cultural change during World War II helped to produce this break with the past. I use data on war manufacturing infrastructure and armed forces mobilization rates to predict whether the daughters were affected by the war's impact on their mothers. I also construct a measure of predicted war plants using pre-war infrastructure to remove the possibility of an endogenous decision to locate plants where women were particularly amenable to employment. My analysis shows that these war-related variables increased baby boomer women's education, although not their labor force participation. The primary impact was on their attainment of a college degree. The Quiet Revolution in women's employment, careers and education was therefore impacted greatly by their mothers' experiences before their daughters were born.

My second chapter also considers intergenerational impacts on women's careers, though in a more contemporary context. This chapter considers the effect of a stay-at-home mother on her daughter's career choice, specifically her tendency to choose her father's career. I provide some descriptive statistics of women who choose to be homemakers and those who have chosen their parents' occupations. I hypothesize that a woman with a stay-at-home mom is more likely to choose her father's career, given that she lacks a female occupational role model in the home. I find no conclusive evidence of this, even when I only examine women in competitive careers. However, I do find statistically significant effects of the community in which she grows up. Women who grew up in communities where women were employed in competitive careers are less likely to choose their father's careers. Communities with men who are employed in competitive careers are more likely to produce women who inherit their father's occupation. Such a decision proves highly advantageous, since women in their father's careers earn more, while women in their mother's careers earn less.

My final chapter focuses on the rural South and analyzes trends in segregation due to private schools. Though in less extreme conditions than during the 1960's, school children are still segregated by race. Throughout the United States, this primarily occurs because of residential segregation. But there exists a unique pattern and opportunity in the heart of the South, its rural communities. Segregation in the rural South occurs largely through the presence of private schools. This is fascinating in that different races can live relatively near each other but never go to school together. White students' enrollment in private schools is highly dependent on the black proportion of the student population. Thus, black students in public schools in largely black areas have even fewer white peers. Segregation due to private schools is highest within the Cotton Belt, a region historically known for racism. The evidence is also consistent with a detrimental effect of private schools on public school funding. I find that rural Southern school districts with high levels of private school segregation also have low levels of school resources per student, even after controlling for what the median voter could afford. Using votes for segregationist presidential candidate Strom Thurmond as an instrument for segregation due to private schools only strengthens the results. Moreover, the recent increases in white enrollment at private schools may be slowly increasing racial separation due to private schools.

This dissertation combines insights from market design and behavioral economics in designing conventional and unconventional marketplaces. The first design recognizes that market participants make mistakes in their interactions with market rules. Even in many matching markets which were designed such that revealing one’s true preferences is a simple and optimal strategy, participants’ limited understanding of the matching algorithm can lead them to select an inferior strategy against their own best interests. I propose a redesign of a widely used algorithm to take potential strategic mistakes into account, and make them less costly for the participants and for efficiency of the market. Experimental results show participant decisions under the new design is more aligned with their own interests compared to that of the baseline. The second design focuses on people’s altruistic motivations when they provide goods and services to others in need for free. By conceptualizing this non-traditional economic setting as a market with altruistic supply, we can see the need to clear market demand and supply just like in any market. The lack of a market price, because suppliers are not motivated by monetary compensations, adds to the challenge since a typical market relies on adjustments of the market price to coordinate supplier actions. We propose an alternative mechanism to provide information and coordination for altruistic suppliers, so that individual suppliers make efficient decisions and aggregate supply responds to the demand of those in need. In laboratory experimental markets, our design dramatically shifts supply to follow more closely to demand. This design is then applied to blood donation, a prominent example of a market with altruistic supply. Since pricing a blood donation is viewed as repugnant, volunteer blood donors in developed countries are mostly motivated by altruism rather than monetary incentives. In a field experiment with blood donors, the results show that short-term donation rates are higher, and more responsive to blood shortage appeals among treatment donors compared to that of control donors. These designs and their applications demonstrate how existing market designs might change and how new markets are conceptualized when we take into account more broadly of participant motivations and behaviors. Recognizing intrinsic altruistic motivations of blood donors allow us to view the voluntary blood donation system as a market, and make the ‘market’ more efficient by coordinating donor actions. In other markets economists helped design, participants might behave contrary to their own best interests and sometimes in a way we don’t understand. Explicitly recognizing the potential for ‘mistakes’ enables us to reduce the costs of those who do make mistakes, and improve market outcomes by correcting misallocations due to participant mistakes. These designs are also examples of taking constraints in a market seriously. Repugnance limits the use of incentives in the market for blood and therefore we treat it as a market with altruistic supply. Participants’ ability to understand a market clearing algorithm and to response appropriately to incentives in the algorithm may limit the complexity of a market and calls for the need to account for mistakes in the design.

This dissertation presents three essays addressing the role of informational frictions in monetary policy. In particular, motivated by the observation that central banks around the world are often concerned about their reputation for knowledgeability, I study why this might be the case and how this affects how central banks set monetary policy. In the first essay, “Perceptions of Competence: Monetary Policy and the Reputational Accelerator,” I characterize the role that perceptions of a central bank’s knowledgeability play in affecting monetary policy’s ability to stabilize aggregate outcomes. In the second essay, “Monetary Policy Reversal Aversion,” I analyze the monetary policy distortions that might arise when central banks care about their reputation for knowledgeability. The third and last essay, “Perceptions of Central Bank Knowledgeability and the Signaling Channel: An Empirical Analysis,” empirically tests for the novel mechanisms outlined in the first essay, providing evidence that perceptions of central bank knowledgeability can affect the transmission of monetary policy. Together, these essays shed light on the unanswered questions of how the public’s uncertainty of the central bank’s ability to read and understand the economy affects aggregate economic outcomes and the way central banks set monetary policy, and why central banks might care about their reputation for knowledgeability in the first place.