Abstract We study the dynamics of income and wealth inequality using a heterogeneous-agent model that combines endogenous portfolio choice, a granular representation of the tax-and-transfer system, and a reduced-form mechanism linking markups to top incomes through entrepreneurial risk. Driven by changes in taxation, markups, and asset prices, the model accounts for the observed trends in income and wealth inequality in France since 1984, up to the top 1% income and wealth shares. We combine counterfactual simulations with a simple accounting decomposition of wealth accumulation to assess the contributions of these driving forces to inequality dynamics and to identify the channels through which they operate. We identify rising markups as the primary driver of income inequality, while all three forces – taxation, markups, and asset prices – contribute significantly to wealth inequality. Our findings highlight both the mechanical impact of differential asset price movements and the central role of endogenous saving responses in shaping wealth inequality over time.

Abstract Using a large-scale real effort experiment, we explore whether and how different peer assignment mechanisms affect worker performance and stress. Letting individuals choose whom to compare to increases productivity to the same extent as a targeted exogenous matching policy designed to maximize motivational spillovers. These effects are significantly larger than those obtained through random assignment and their magnitude is comparable to the impact of an increase in pay of about 10 percent. A downside of targeted peer assignment is that, unlike endogenous peer selection, it leads to a large increase in stress. The key advantage of letting workers choose whom to compare to is that it allows those workers who want to be motivated to compare to a motivating peer while also permitting those for whom social comparisons have little benefits or are too stressful to avoid them. Finally, we show that social comparisons yield stronger motivational effects than comparable non-social goals.

Abstract German history over the past 125 years has been turbulent. Marked by two world wars, revolutions and major regime changes, as well as a hyperinflation and three currency reforms, expropriations and territorial divisions, it comprises extreme shocks to study the role of historical events, taxation, asset price changes, portfolio heterogeneity in affecting the wealth distribution in the long run. Combining tax and archival data, household surveys, historical national accounts, and rich lists, we document that the top 1% wealth share has fallen by half, from close to 50% in 1895 to 26% today. Nearly all of this decline was the result of changes that occurred between 1914 and 1952. Using a novel decomposition framework, we show that collapsing equity prices after World War I and in the Great Depression as well as taxation in the aftermath of World War II stand out as great equalizers in 20th century German history. After unification in 1990, two trends have left their mark on the German wealth distribution. Households at the top made substantial capital gains from rising business wealth while the middle-class had large capital gains in the housing market. The wealth share of the bottom 50% has halved since 1990. Our findings speak to the importance of historical shocks to the valuation of existing wealth and taxation in driving the evolution of the wealth distribution over the long run. In addition, our data revisions reveal that Germany’s current wealth-income ratio is about 120 percentage points higher than previously thought.

Abstract This paper tests whether inequality shapes the redistributive impact of democratization by examining changes to the governance of councils providing poor relief—rudimentary social insurance—in nineteenth-century Britain. An 1894 reform removed institutional features—a graduated franchise, property qualifications, the absence of a secret ballot, and the participation of unelected magistrates—that allowed landowners to control spending on poor relief after the 1832 Great Reform Act. The empirical analysis uses a new annual dataset of poor law spending from 1884–1905 to test whether higher pre-reform inequality amplified the effect of democratic reform on redistribution. The results support the Meltzer–Richard hypothesis: higher local income inequality led to higher poor relief spending after 1894. Areas where landed elites held political power saw smaller increases in expenditure, indicating that de facto elite influence muted the effect of democratization. These findings provide empirical support for models of democratization that focus on demands for redistribution.

Abstract We study the innovation effects of the Agreement on the Free Movement of Persons, signed by Switzerland and the European Union in 1999. We exploit a quasi-experimental setting created by Switzerland’s implementation of the treaty, which initially eased entry restrictions only for commuters from neighboring countries, thereby inducing a large inflow of “cross-border inventors” in regions close to the border. We find that the treaty increased patenting in such regions relative to comparable ones farther away from the border. We find no evidence indicating the displacement of native inventors or a reduction in the patenting activity of Switzerland’s neighboring countries. We also find that incumbent inventors in regions next to the border increased their productivity, thanks to patents in collaboration with cross-border inventors. We provide evidence suggesting that cross-border inventors contributed to Swiss patenting by enabling R&D laboratories to enlarge, albeit without increasing the productivity of local peers outside direct collaborations.

Abstract How coordination can be achieved in isolated, one-shot interactions without communication and in the absence of focal points is a long-standing question in game theory. We show that a cost—benefit approach to reasoning in strategic settings delivers sharp theoretical predictions that address this central question. In particular, our model predicts that, for a large class of individual reasoning processes, coordination in some canonical games is more likely to arise when players perceive heterogeneity in their cognitive abilities, rather than homogeneity. In addition, and perhaps contrary to common perception, it is not necessarily the case that being of higher cognitive sophistication is beneficial to the agent. We show that subjects’ behavior in a laboratory experiment is consistent with the predictions of our model, and present evidence against alternative coordination mechanisms.

Abstract How coordination can be achieved in isolated, one-shot interactions without communication and in the absence of focal points is a long-standing question in game theory. We show that a cost–benefit approach to reasoning in strategic settings delivers sharp theoretical predictions that address this central question. In particular, our model predicts that, for a large class of individual reasoning processes, coordination in some canonical games is more likely to arise when players perceive heterogeneity in their cognitive abilities, rather than homogeneity. In addition, and perhaps contrary to common perception, it is not necessarily the case that being of higher cognitive sophistication is beneficial to the agent. We show that subjects’ behavior in a laboratory experiment is consistent with the predictions of our model, and present evidence against alternative coordination mechanisms.

Abstract We study the effect of entry on the price distribution in the German retail gasoline market. Exploiting several hundred entries over five years in an event study design, we find that entry causes a persistent first-order stochastic shift in the price distribution for at least three years after entry. Prices at the top of the distribution change moderately or not at all, but prices at the left tail decrease by up to 13% (9%) of stations’ gross margins after entry within a 1 km (2 km) radius. The value of information (VOI) increases by 29% (15%) in 1 km (2 km) markets, suggesting larger savings for consumers with easy access to information.

Abstract While individuals hold, exchange, and update opinions over multiple issues, these opinions are often correlated, and a unidimensional spectrum is enough to summarize them. But when should one expect opinions to be unidimensional? And how important is the underlying structure of communication? Our experimental results validate the crisp predictions by DeMarzo, Vayanos, and Zwiebel (2003) when individuals update their opinions on a fixed network, always trusting the same neighbors, and confirm the importance of the communication structure in predicting whether individuals hold relatively moderate or extreme opinions. We also provide a theoretical result, simulation results, and experimental evidence suggesting that unidimensionality may arise even when individuals’ networks vary over time.

Abstract With the monetary policy lower bound a re-emerging concern in some locations, we present new insights on the impact of negative policy rates. We develop a new theoretical model to match the empirical evidence on their effects. The model features a heterogeneous, oligopolistic banking sector where loan pricing is determined in part by the availability of deposit funding and in part by wholesale funding. The use of non-deposit funding ensures that the bank lending channel of negative rates remains active. We explore the impact of the policy on different types of banks: High-deposit banks may experience a fall in interest margins and profitability, which can result in reduced lending. But this is more than compensated for by greater lending from low-deposit banks. We embed this banking sector in an open-economy macroeconomic model, featuring exchange-rate and capital market transmission channels, which continue to work as normal when rates are negative. These non-bank channels, combined with general equilibrium effects and an active bank lending channel, mean that the transmission of negative rates is only somewhat weaker than the transmission of conventional policy.