Aggregate Implications of Micro Asset Market Segmentation

This paper develops a consumption-based asset pricing model to explain and quantify the aggregate implications of a frictional financial system, comprised of many financial markets partially integrated with one another. Each of our micro financial market's is inhabited by traders who are specialized in that markets type of asset. We specify exogenously the level of segmentation that ultimately determines how much idiosyncratic risk traders bear in their micro market and derive aggregate asset pricing implications. We pick segmentation parameters to match facts about systematic and idiosyncratic return volatility. We find that if the same level of segmentation prevails in every market, traders bear 30% of their idiosyncratic risk. With otherwise standard parameters, this benchmark model delivers an unconditional equity premium of 2.4% annual. We further disaggregate the model by allowing the level of segmentation to differ across markets. This version of the model delivers the same aggregate asset pricing implications but with only one-third the amount of segmentation: on average traders bear 10% of their idiosyncratic risk.Asset pricing; market segmentation; idiosyncratic risk

An Integral Equation Representation for Overlapping Generations in Continuous Time

This paper develops a method for solving for the dynamic general equilibrium of a deterministic continuous time overlapping generations model with a finite-horizon life-cycle. The model has isoelastic preferences and allows for general assumptions about individual endowments and demographics. Solving for an equilibrium reduces to solving a nonlinear integral equation. In the special case of log utility, the integral equation is linear and global approximations to a solution are easily computed with linear algebra

Information Manipulation, Coordination and Regime Change

This paper studies endogenous information manipulation in games where a population can overthrow a regime if individuals coordinate. The benchmark game has a unique equilibrium and in this equilibrium propaganda is effective if signals are sufficiently precise. Despite playing against perfectly rational individuals, a regime is able to manipulate information in a way that exploits heterogeneity in individual beliefs so that at equilibrium its chances of surviving are higher than they otherwise would be. This result is robust to alternative payoffs where the regime cares only for survival and to a number of alternative information structures, including situations where individuals have access to high-quality private information that is entirely uncontaminated by the regime.This paper studies endogenous information manipulation in games where a population can overthrow a regime if individuals coordinate. The benchmark game has a unique equilibrium and in this equilibrium propaganda is effective if signals are sufficiently precise. Despite playing against perfectly rational individuals, a regime is able to manipulate information in a way that exploits heterogeneity in individual beliefs so that at equilibrium its chances of surviving are higher than they otherwise would be. This result is robust to alternative payoffs where the regime cares only for survival and to a number of alternative information structures, including situations where individuals have access to high-quality private information that is entirely uncontaminated by the regime

On the Sluggish Response of Prices to Money in an Inventory-Theoretic Model of Money Demand

We exposit the link between money, velocity and prices in an inventory-theoretic model of the demand for money and explore the extent to which such a model can account for the short-run volatility of velocity, the negative correlation of velocity and the ratio of money to consumption, and the resulting stickiness' of the aggregate price level relative to a benchmark model with constant velocity. We find that an inventory-theoretic model of the demand for money is a natural framework for understanding these aspects of the dynamics of money, velocity and prices in the short run.

Information Manipulation, Coordination, and Regime Change

This paper presents a model of information and political regime change. If enough citizens act against a regime, it is overthrown. Citizens are imperfectly informed about how hard this will be and the regime can, at a cost, engage in propaganda so that at face-value it seems hard. This coordination game with endogenous information manipulation has a unique equilibrium and the paper gives a complete analytic characterization of its comparative statics. If the quantity of information available to citizens is suciently high, then the regime has a better chance of surviving. However, an increase in the reliability of information can reduce the regime's chances. These two effects are always in tension: a regime benefits from an increase in information quantity if and only if an increase in information reliability reduces its chances. The model allows for two kinds of information revolutions. In the first, associated with radio and mass newspapers under the totalitarian regimes of the early twentieth century, an increase in information quantity coincides with a shift towards media institutions more accommodative of the regime and, in this sense, a decrease in information reliability. In this case, both effects help the regime. In the second kind, associated with diffuse technologies like modern social media, an increase in information quantity coincides with a shift towards sources of information less accommodative of the regime and an increase in information reliability. This makes the quantity and reliability effects work against each other. The model predicts that a given percentage increase in information reliability has exactly twice as large an effect on the regime's chances as the same percentage increase in information quantity, so, overall, an information revolution that leads to roughly equal-sized percentage increases in both these characteristics will reduce a regime's chances of surviving.global games; hidden actions; signal-jamming; propaganda; bias; media

Income Dispersion and Counter-Cyclical Markups

We construct a model of counter-cyclical markups based on cyclical variation in the dispersion of income across agents. The model is neoclassical in most respects, with monopolistically competitive firms facing a distribution of buyers that changes through time. Income dispersion is high during recessions, which reduces the price elasticity of demand and increases markups applied by firms. Using recent estimates of counter-cyclical income dispersion, we calibrate the model and show that it generates realistic markups as well as other salient features of business cycles

Income Dispersion and Counter-Cyclical Markups

Recent advances in measuring cyclical changes in the income distribution raise new questions: How might these distributional changes affect the business cycle itself? We show how counter-cyclical income dispersion can generate counter-cyclical markups in the goods market, without any preference shocks or price-setting frictions. In recessions, heterogeneous labor productivity shocks raise income dispersion, lower the price elasticity of demand, and increase imperfectly competitive firms' optimal markups. The calibrated model explains not only many cyclical features of markups, but also cyclical, long-run and cross-state patterns of standard business cycle aggregates.

Information Revolutions and the Overthrow of Autocratic Regimes

This paper presents a model of information quality and political regime change. If enough citizens act against a regime, it is overthrown. Citizens are imperfectly informed about how hard this will be and the regime can, at a cost, engage in propaganda so that at face-value it seems hard. The citizens are rational and evaluate their information knowing the regime's incentives. The model makes three predictions. First, even rational citizens may not correctly infer the amount of manipulation. Second, as the intrinsic quality of information available becomes sufficiently high, the regime is more likely to survive. Third, the regime benefits from ambiguity about the amount of manipulation, and consequently, as it becomes cheaper to manipulate, the regime is also more likely to survive. Key results of the benchmark static model extend to a simple dynamic setting where there are waves of unrest