Competing for Order Flow in OTC Markets

We develop a model of a two‐sided asset market in which trades are intermediated by dealers and are bilateral. Dealers compete to attract order flow by posting the terms at which they execute trades—which can include prices, quantities, and execution speed—and investors direct their orders toward dealers who offer the most attractive terms. We characterize the equilibrium in a general setting, and we illustrate theoretically and numerically how the model can account for several important trading patterns in over‐the‐counter markets, which do not emerge from existing models.     

Abstracts/Résumés

This paper examines whether credit analysts utilize the information contained in the difference between book and taxable income in analyzing a firm’s credit risk. Increased book–tax differences may be informative for credit rating agencies as they may signal decreased earnings quality or changes in the firm’s off–balance sheet financing. Results suggest a significant negative association between positive changes in book–tax differences and ratings changes. This evidence is consistent with large positive changes in book–tax differences signaling decreased earnings quality and/or increased off–balance sheet financing. We also find that large negative changes in book–tax differences result in less favorable rating changes, consistent with these changes signaling decreased earnings quality. In additional analyses, we find that the association between changes in book–tax differences and rating changes is attenuated for high–tax‐planning firms (e.g., where book–tax differences more likely reflect tax planning than decreased earnings quality).     

How Robust Are Popular Models of Nominal Frictions?

We consider alternative combinations of nominal price and wage frictions in dynamic stochastic general equilibrium models fit to U.S. data. Since inflation was unanchored in the 1970s, we divide the data into early, middle, and late samples (1955–68, 1969–79, and 1983–2007, respectively). We find that prices are reoptimized more frequently and exhibit greater indexation to past inflation in the middle sample than in the other two samples, while wages are reoptimized with increasing frequency and display less evidence of indexation over time. Differences in price and wage setting across samples have important implications for the economy's response to key shocks.     

Drained-Weight Labeling for Meat and Poultry: An Economic Analysis of a Regulatory Proposal

In December 1977, the Department of Agriculture proposed controversial new drained-weight labeling regulations for meat and poultry products. Consumer groups for the proposal and producer groups against it made strongly worded, but largely unsupported statements about its impact. This paper attempts to clarify the basic issues. It examines the impact of drained-weight labeling on product price and the effect on producers and consumers, assuming both a static and a dynamic setting.     

A Further Look at the Propagation of Monetary Policy Shocks in HANK

We provide quantitative guidance on whether and to what extent different elements of Heterogeneous Agent New Keynesian (HANK) models amplify or dampen the response of aggregate consumption to a monetary policy shock. We emphasize four findings. First, the introduction of capital adjustment costs does not affect the aggregate response, but does change the transmission mechanism so that a larger share of indirect effects originates from equity prices rather than from labor income. Second, incorporating estimated unequal incidence functions for aggregate labor income fluctuations leads to either amplification or dampening, depending on the data and estimation methods. Third, distribution rules for monopoly profits that allocate a larger share to liquid assets lead to greater amplification. Fourth, assumptions about the fiscal reaction to a monetary policy shock have a stronger effect on the aggregate consumption response than any of the other three elements.     

Do Firms Strategically Internalize Disclosure Spillovers? Evidence from Cash-Financed M&As

We investigate whether managers internalize the spillover effects of their disclosure on the stock price of related firms and strategically alter their disclosure decisions when doing so is beneficial. Using data on firm-initiated disclosures during all-cash acquisitions, we find evidence consistent with acquirers strategically generating news that they expect will depress the target's stock price. Our results suggest the disclosure strategy leads to lower target returns during the negotiation period when the takeover price is being determined and results in a lower target premium. These findings are robust to a battery of specifications and falsification tests. Our results are consistent with expected spillovers influencing the timing and content of firms’ disclosures in M&A transactions.     

The Impact of Union Experience on Job Satisfaction

The relationship between union status and job satisfaction is commonly estimated without recognizing the heterogeneity of non‐union members. Many non‐union workers have experienced union jobs in the past while others have not, suggesting past estimations of the impact of unions on job satisfaction may miss a critical distinction. After separating non‐union members into those workers with and without union experience, this article shows that job satisfaction increases significantly for first‐time union workers, but decreases as workers accumulate experience in the union. Finally, after leaving the union jobs, worker job satisfaction recovers but does so only as the time since unionization grows.     

The Burden of Knowledge and the "Death of the Renaissance Man": Is Innovation Getting Harder?

This paper investigates a possibly fundamental aspect of technological progress. If knowledge accumulates as technology advances, then successive generations of innovators may face an increasing educational burden. Innovators can compensate through lengthening educational phases and narrowing expertise, but these responses come at the cost of reducing individual innovative capacities, with implications for the organization of innovative activity—a greater reliance on teamwork—and negative implications for growth. Building on this "burden of knowledge" mechanism, this paper first presents six facts about innovator behaviour. I show that age at first invention, specialization, and teamwork increase over time in a large micro-data set of inventors. Furthermore, in cross-section, specialization and teamwork appear greater in deeper areas of knowledge, while, surprisingly, age at first invention shows little variation across fields. A model then demonstrates how these facts can emerge in tandem. The theory further develops explicit implications for economic growth, providing an explanation for why productivity growth rates did not accelerate through the 20th century despite an enormous expansion in collective research effort. Upward trends in academic collaboration and lengthening doctorates, which have been noted in other research, can also be explained in this framework. The knowledge burden mechanism suggests that the nature of innovation is changing, with negative implications for long-run economic growth.