Constrained Agents Research Articles

Asset purchase bailouts and endogenous implicit guarantees

This paper provides a theory of endogenous implicit guarantees on risky assets, in which a government’s bailouts take the form of asset purchases to alleviate asymmetric information on private liquidity needs. As a result of asymmetric information, direct transfers to agents are imperfect so that, when more constrained agents are also more exposed to a given asset, asset purchases by the government are optimal. When anticipated, this form of bailouts leads to an endogenous implicit guarantee premium so that otherwise risky assets can be traded as if there are risk-free. This possibility of implicit guarantee is amplified by other financial frictions such as risk-shifting. Finally, I show how this form of bailouts can shed light on the buildup of the euro area's sovereign debt crisis.

Cascades in capacity constrained agents.

Many sorts of contagious phenomenon, such as music, do not exist in isolation but as part of a competitive marketplace. In these settings there are often superstars with out-sized popularity along with a large number of flops with little popularity. It could be the case that superstars are more popular because they are higher quality but I suggest that capacity constraints may be a structural factor that influences these disparities. In this agent-based model, there are multiple potentially cascading states that the agent can potentially occupy. The agents have a certain capacity of states that they can occupy at once. For example, suppose someone has a workout playlist that lasts 1 hour. As they discover new music to add to the playlist, they have to remove songs currently in the playlist to keep the playlist 1 hour. Thus, in this setting, the states indirectly trade off with each other by virtue of the capacity constraint. The key question is whether the indirect trade offs imposed by the capacity constraint are enough to induce disparities in popularity, even when the states are otherwise identical. I find that increasing the number of states in excess of capacity increases the disparities between popular and unpopular states. This suggests that capacity constraints may be a structural factor in explaining market concentration and superstar phenomenon.

Inflation and Welfare in a Competitive Search Equilibrium with Asymmetric Information

AbstractWe study an economy characterized by competitive search and asymmetric information. Money is essential. Buyers decide their cash holdings after observing the contracts posted by firms and experience match‐specific preference shocks which remain unknown to sellers. Firms are allowed to post general contracts. In the baseline model with indivisible goods, we show that, when the number of potential buyers is fixed, inflation decreases markups. This, in turn, increases aggregate output and ex ante welfare. When goods are divisible the negative effect of inflation on markups holds for unconstrained agents but is ambiguous for constrained agents. Still, optimal monetary policy implies a positive nominal rate. When there is buyers' free entry, asymmetric information causes a congestion effect that can be corrected by monetary policy.

Rational use of cognitive resources in human planning.

Making good decisions requires thinking ahead, but the huge number of actions and outcomes one could consider makes exhaustive planning infeasible for computationally constrained agents, such as humans. How people are nevertheless able to solve novel problems when their actions have long-reaching consequences is thus a long-standing question in cognitive science. To address this question, we propose a model of resource-constrained planning that allows us to derive optimal planning strategies. We find that previously proposed heuristics such as best-first search are near optimal under some circumstances but not others. In a mouse-tracking paradigm, we show that people adapt their planning strategies accordingly, planning in a manner that is broadly consistent with the optimal model but not with any single heuristic model. We also find systematic deviations from the optimal model that might result from additional cognitive constraints that are yet to be uncovered.

Risk premia, asset price bubbles, and monetary policy

We develop a dynamic general equilibrium asset pricing model with heterogeneous beliefs to study the effects of monetary policy on prices, risk premia, asset price bubbles, and financial stability. We propose a new framework for monetary policy with respect to bubbles. Because bubble risk premia arise from an interaction between disagreements among investors and dynamic trading constraints, under a non-accommodative monetary policy, liquidity adjusted risk and bubble risk premia increase. What matters for policy is the trading constrained fraction/mass of agents that disagree about fundamentals (i.e. optimists/pessimists). Accommodative policy can lead to a larger fraction of trading constrained agents that disagree, larger bubbles, and increased systemic risk. An implication of our results is that accommodative monetary policy in response to the Covid-19 crisis does not increase systemic risk due to asset price bubbles, as long as the policy keeps inflation under control.

Asset Liquidity and Fiscal Consolidation Programs

We argue that the relationship between wealth inequality and fiscal multipliers depends crucially on the type of fiscal experiment used, and on the measure of wealth distribution. We calibrate an overlapping generations model with incomplete markets for different European economies and use Household Finance and Consumption Survey (HFCS) data to compare fiscal multipliers when models are calibrated to match the distribution of gross vs. net wealth. We find a negative relationship between fiscal multipliers and wealth inequality when considering fiscal consolidation programs, in contrast to fiscal expansion experiments which are standard in the literature. The underlying mechanism relies on the relationship between the distribution of wealth and the share of credit‑ constrained agents. We examine the role of household balance sheet compositions regarding asset liquidity and find that when calibrating the model to match liquid wealth, the relationship between wealth inequality and fiscal multipliers is much stronger.

Equilibrium with computationally constrained agents

This paper studies aggregate equilibrium models where firms cannot compute future prices with perfect accuracy. Instead, firms use approximations to infer prices. In equilibrium, we find that the precision with which firms can compute prices is endogenous and depends on the level of aggregate supply. At the same time, firms’ individual supplies, and thus aggregate supply, depend on the precision with which future prices are computed. This interplay between supply and firms’ individual ability to infer prices induces multiple equilibria, with inefficiently low output, in economies that otherwise have a unique, efficient, rational expectations equilibrium. Moreover, exogenous parameter changes, which would increase output were there no computational frictions, can diminish the precision of agents’ price forecasts, and reduce output. Our model also accommodates the intuition that large interventions, such as unprecedented quantitative easing, can put agents into “uncharted territory.”

Housing Wealth Effects: The Long View

AbstractWe provide new time-varying estimates of the housing wealth effect back to the 1980s. We use three identification strategies: ordinary least squares with a rich set of controls, the Saiz housing supply elasticity instrument, and a new instrument that exploits systematic differences in city-level exposure to regional house price cycles. All three identification strategies indicate that housing wealth elasticities were if anything slightly smaller in the 2000s than in earlier time periods. This implies that the important role housing played in the boom and bust of the 2000s was due to larger price movements rather than an increase in the sensitivity of consumption to house prices. Full-sample estimates based on our new instrument are smaller than recent estimates, though they remain economically important. We find no significant evidence of a boom–bust asymmetry in the housing wealth elasticity. We show that these empirical results are consistent with the behaviour of the housing wealth elasticity in a standard life-cycle model with borrowing constraints, uninsurable income risk, illiquid housing, and long-term mortgages. In our model, the housing wealth elasticity is relatively insensitive to changes in the distribution of loan-to-value (LTV) for two reasons: first, low-leverage homeowners account for a substantial and stable part of the aggregate housing wealth elasticity; second, a rightward shift in the LTV distribution increases not only the number of highly sensitive constrained agents but also the number of underwater agents whose consumption is insensitive to house prices.

Public Debt Expansions and the Dynamics of the Household Borrowing Constraint

Contrary to a well-established view, public debt expansions may tighten the household borrowing constraint over time. Within an incomplete-markets model featuring an endogenous borrowing limit, we show that plausible debt-financed fiscal policies generate such tightening through an increase in the interest rate. The tightening makes constrained agents deleverage and reinforces the precautionary saving motive of the unconstrained. This appetite for assets affects factor prices and this, in some cases, amplifies the households' reactions to the policies. For example, the tightening can substantially magnify the government spending multiplier by strengthening the typical negative wealth effect on labor supply induced by the fiscal stimulus. Moreover, the tightening affects political support for the policies mainly through price effects.

The Nonlinear Effects of Fiscal Policy

We argue that the fiscal multiplier of government purchases is increasing in the shock, in contrast to what is assumed in most of the literature: the fiscal multiplier is largest for large positive government spending shocks and smallest for large contractions in government spending. We empirically document this fact by analyzing two independent datasets and using two different empirical approaches. We find that a neoclassical, life-cycle, incomplete markets model calibrated to match key features of the US economy, including the distribution of wealth, can well explain this empirical finding. The mechanism works through the relationship between fiscal shocks, the distribution of wealth and the aggregate labor supply elasticity: liquidity constrained agents have less elastic labor supply responses to changes in future income. An increase (decrease) in government spending today acts as a negative (positive) shock to future income, as future wages will be lower (higher). A large increase (decrease) in government spending today will induce saving (borrowing) and move a larger fraction of the agents in the economy away from (towards) the borrowing limit. Analysis of micro-data confirms the mechanism.

Public debt expansions and the dynamics of the household borrowing constraint

Contrary to a well-established view, public debt expansions may tighten the household borrowing constraint over time. Within an incomplete-markets model featuring an endogenous borrowing limit, we show that plausible debt-financed fiscal policies generate such tightening through an increase in the interest rate. The tightening makes constrained agents deleverage and reinforces the precautionary saving motive of the unconstrained. This appetite for assets impacts factor prices which, in some cases, amplify the households' reactions to the policies. For example, the tightening can substantially magnify the government spending multiplier through strengthening the typical negative wealth effect on labor supply induced by the fiscal stimulus. Moreover, the tightening affects the political support to the policies mainly through price effects.

Entrepreneurial Risk, Collateral Constraints and Macroeconomic Fluctuations

We present a calibrated general equilibrium model in which collateral constraints substantially amplify and propagate aggregate shocks through their impact on asset prices and capital allocation. Compared to previous studies, this result is more robust and comes with more realistic interest rate dynamics. Agents productivities as workers and entrepreneurs evolve stochastically, creating a mismatch between wealth and skills. Negative shocks to aggregate productivity cause the capital allocation to deteriorate as constrained agents' wealth falls and their number rises. We capture these non-linear dynamics of the wealth distribution and show that amplification is sizable and asymmetric, making recessions sharper than booms.

Risk Premia, Asset Price Bubbles, and Monetary Policy

We develop a dynamic general equilibrium asset pricing model with heterogeneous beliefs to study the effects of monetary policy on prices, risk premia, asset price bubbles, and financial stability. Bubble risk premia arise from an interaction between disagreements among investors and dynamic trading constraints. Under a non-accommodative monetary policy, liquidity adjusted risk and bubble risk premia increase. We propose a new framework for monetary policy with respect to bubbles. What matters for policy is the trading constrained fraction/mass of agents that disagree about fundamentals (i.e. optimists/pessimists). Accommodative policy can lead to a larger fraction of trading constrained agents that disagree, larger bubbles, and increased systemic risk. An implication of our results is that accommodative monetary policy in response to the ongoing Covid-19 crisis does not increase systemic risk due to asset price bubbles, as long as the policy keeps inflation under control.

Reflecting on Work Values with Young Unemployed Adults in Finland

In this article, we explore the internal conversations about the work values of young unemployed adults in Finland. We draw on the theoretical concept of internal conversation by Margaret Archer in order to shift the focus from the individual work values to the interplay between subjective concerns and structural circumstances. The data consist of six group interviews conducted among 29 young unemployed adults. We argue that the internal conversations on work values of young unemployed adults constitute five significant concerns: self-realization and opportunity to contribute to society; sufficient income to live independently; social expectations; challenges of finding employment; and unsustainability of the employment system. These diverse concerns demonstrate that young unemployed adults are constrained agents in a changing context of global environment, Nordic labor market, and activation policies. The results contribute to the explanations for unemployment by emphasizing both the structural factors and reflective agency of young unemployed adults

The New Keynesian cross

The New Keynesian (NK) cross is a graphical and analytical apparatus for heterogeneous-agent (HANK) models expressing key aggregate demand objects—MPC and multipliers—as functions of heterogeneity parameters. It affords analytical insights into monetary, fiscal, and forward guidance multipliers, and replicates the aggregate implications of quantitative HANK. The key parameter—the constrained agents’ income elasticity to aggregate income—depends on fiscal redistribution: when it is larger (smaller) than one, the effects of policies and shocks are amplified (dampened). With uninsurable idiosyncratic uncertainty, this translates intertemporally—through compounding (discounting) in the aggregate Euler equation—into further amplification (dampening) of future shocks.

Market Selection With Differential Financial Constraints

We analyze financial markets in which agents face differential constraints on the set of assets in which they can trade. In particular, the assets available to each agent span a partition of the state space that can be strictly coarser than the partition spanned by the assets available in the market. We first show that the existence of differential constraints has an impact on prices and allocations as compared to a complete financial market with unconstrained agents. We consider the implications for survival, taking the work of Blume and Easley (2006) as a starting point. We show that whenever agents have identical correct beliefs and equal discount factors, and their partitions are nested, all agents survive. When agents have heterogeneous beliefs, differential constraints may allow agents with wrong beliefs to survive. Provided constraints are relevant (in a sense we define more precisely), the condition for an agent to survive is that his survival index is at least as large as that of the agents with finer partitions. We also study the impact of deregulation (an increase in the set of assets available to some agents). Unless the agent can adopt beliefs that are closer to the truth on the newly refined partition than those of less constrained agents, increasing his opportunities for trade might harm his chances for survival.

Asset Purchase Bailouts and Endogenous Implicit Guarantees

This paper provides a theory of endogenous implicit guarantees and how this leads to the existence of systemic assets, i.e. assets that are too important to default. In the presence of imperfectly observable private liquidity needs, direct transfers to agents are imperfect so that, when more constrained agents are also more exposed to a given asset, asset purchases are optimal. When anticipated, this form of bailouts leads to an endogenous implicit guarantee premium. This possibility of implicit guarantee is amplified by other financial frictions such as risk-shifting. Finally, we show how this form of bailouts can shed light on the buildup of the euro area sovereign debt crisis.

Chinese–African encounters in high‐tech sectors: Comparative investigation of Chinese workplace regimes in Ethiopia

AbstractStudies on China–Africa co‐operation have revealed increasing diversification of China's on‐the‐ground practices in Africa. However, engaged research has yet to examine the situated experiences of Chinese and African individuals whose activities shape and are shaped by Chinese multinationals, especially those in the growing yet underexplored high‐tech sectors. To address this gap, this article investigates the workplace regimes of two Chinese companies in Ethiopia. Using a mixed‐method approach, it articulates the contradictory nature of Chinese investment and its diverse manifestations in work relations between Chinese expatriates and local Ethiopians. Our findings suggest that Chinese and Ethiopian employees are proactive yet constrained agents in exploiting work opportunities for their own economic interests and professional development.

Complete 3-D dynamic coverage in energy-constrained multi-UAV sensor networks

This paper considers dynamic coverage control of multiple power-constrained agents subject to 3D rigid body kinematics. The agents are deployed to patrol a domain until the entire space has reached a satisfactory level of coverage. This is achieved through the gathering of information by a forward-facing sensor footprint, modelled as an anisotropic spherical sector. Coverage and collision avoidance guarantees are met by a hybrid controller consisting of four operating modes: local coverage, global coverage, waypoint scan and subdomain transfer. Energy-aware methods are encoded into the global coverage state to shift the bulk of spatial redistribution onto less constrained agents. Additionally, a novel domain partitioning strategy is used that directs individual agents to explore within concentric hemispherical shells around a centralized charging station. This results in flight paths that are guaranteed to terminate at the charging station in the limit that agent batteries expire. The efficacy of this algorithm is presented through experimental trials with three agents in an indoor environment. Simulations are provided for ten agents.

Asset Purchase Bailouts and Implicit Guarantees

This paper shows that bailouts of private agents can optimally take the form of asset purchases, even if this also means paying off external asset holders, in the presence of borrowing constraints and asymmetric information on liquidity needs. The combination of these two ingredients make direct compensation through loans and/or net transfers imperfect. Thus, when more constrained agents are also more exposed to the asset, the compensation through asset purchases becomes desirable. Anticipating these purchases, private agents engage in a collective bet on the defaulting asset, leading to an equilibrium implicit guarantee, where even an intrinsically worthless asset can be traded at a positive price.