Why do firms choose high debt when they anticipate high valuations, and underperform subsequently? We propose a theory of financing cycles where the importance of creditors' control rights over cash flows (“pledgeability”) varies with industry liquidity. The market allows firms take on more...

This paper investigates the determinants of inequality in human capital with an emphasis on the role of the credit constraints. We develop and estimate a model in which individuals face uninsured human capital risks and invest in education, acquire work experience, accumulate assets and smooth...

Insurance affects the variability of consumption over time, which is not captured in standard expected utility of wealth models. We develop a consumption-utility model that shows how liquidity constraints and borrowing costs impact the value of insurance. Liquidity constraints generate high...

This paper demonstrates theoretically that a financial shock can have very persistent effects on international trade. Motivation is taken from the aftermath of the dramatic trade collapse in 2008-9, which despite a substantial recovery, has left a persistently slower growth rate in trade. We...

This paper examines the consumption response to monthly paycheck receipt. Since the amount and arrival date of paychecks are known in advance, the receipt of a paycheck does not coincide with the receipt of new information. Under the basic rational expectations Life-Cycle/Permanent Income...

This paper examines the relationship between household income shocks and child labor. In particular, we investigate the extent to which transitory income shocks lead to increases in child labor and whether household access to credit mitigates the effects of these shocks. Using panel data from a...

This paper examines the properties of exams and markets as alternative allocation devices under borrowing constraints. Exams dominate markets in terms of matching efficiency. Whether aggregate consumption is greater under exams than under markets depends on the power of the exam technology; for...

When government expenditures exceed current tax revenues, the resulting deficit must be financed either by issuing bonds, which imply obligations to levy future taxes, or by creating high-powered money. The choice between money and bonds is often thought to be of great moment for both real and...

Recent empirical studies have found that consumption is more sensitive to current income than the life-cycle, permanent income hypothesis would predict.The present paper studies a model in which the fraction of consumers exhibiting excess sensitivity is endogenously determined. The presence of...

This paper explores how different types of financial regulation could combat many of the phenomena that were observed in the financial crisis of 2007 to 2009. The primary contribution is the introduction of a model that includes both a banking system and a "shadow banking system" that each help...