Igor Livshits - Academia.edu (original) (raw)
Papers by Igor Livshits
Journal of Economic Surveys, 2015
This paper proves an analogue of Pratt's theorem for two measures of risk aversion for mean-... more This paper proves an analogue of Pratt's theorem for two measures of risk aversion for mean-variance preferences. A direct link is established between these measures and standard measures of risk aversion. Implications for problems of choice under uncertainty such as portfolio choice problems are derived. This paper establishes the equivalence of two measures of risk aversion for a general class of mean-variance preferences. It further derives implications for decision making under uncertainty, and establishes portfolio characterization of risk aversion for mean- variance preferences, which allows for comparison of agents' attitudes toward risk based on the choices they make under uncertainty. The motivation for studying mean-variance preferences is twofold: 1) they are widely used in finance; and 2) Epstein (1985) has shown that in the class of Machina's (1982) non-expected utility preferences only mean-variance preferences satisfy appropriate decreasing-absolute- ri...
Economics Letters, 2002
This paper provides a simple counterexample to existence of pure strategy (stationary) Markov per... more This paper provides a simple counterexample to existence of pure strategy (stationary) Markov perfect equilibrium for a class of infinite-horizon games with complete information, finitely many actions, and finitely many ordered states. For the given example, the proof of non-existence is provided.
The Review of Economic Studies, 2016
Financial innovations are a common explanation for the rise in credit card debt and bankruptcies.... more Financial innovations are a common explanation for the rise in credit card debt and bankruptcies. To evaluate this story, we develop a simple model that incorporates two key frictions: asymmetric information about borrowers' risk of default and a fixed cost of developing each contract lenders offer. Innovations that ameliorate asymmetric information or reduce this fixed cost have large extensive margin effects via the entry of new lending contracts targeted at riskier borrowers. This results in more defaults and borrowing, and increased dispersion of interest rates. Using the Survey of Consumer Finances and Federal Reserve Board interest rate data, we find evidence supporting these predictions. Specifically, the dispersion of credit card interest rates nearly tripled while the "new" cardholders of the late 1980s and 1990s had riskier observable characteristics than existing cardholders. Our calculation suggest these new cardholders accounted for over 25% of the rise in bank credit card debt and delinquencies between 1989 and 1998.
... Superstores or Mom and Pops? Technology Adoption and Productivity Differences in Retail Trade... more ... Superstores or Mom and Pops? Technology Adoption and Productivity Differences in Retail Trade David Lagakos Federal Reserve Bank of Minneapolis and Arizona State University ABSTRACT ...
There has been considerable public debate on the relative merits of alternative consumer bankrupt... more There has been considerable public debate on the relative merits of alternative consumer bankruptcy rules. The option to discharge one's debt provides partial insurance against bad luck, but by driving up interest rates makes lifecycle smoothing more difficult. We construct a quantitative model of consumer bankruptcy to address this trade-off. We argue that such a model should have three key feature: a life-cycle component, idiosyncratic earnings uncertainty and expense uncertainty (exogenous negative shocks to household balance sheets). We further show that transitory and persistent earnings shocks have very different implications for evaluating bankruptcy rules -while persistent shocks make bankruptcy option desirable, transitory shocks have the opposite implication. Our findings suggest that the current US bankruptcy system may be desirable for reasonable parameter values.
SSRN Electronic Journal, 2000
We propose a parsimonious model with adverse selection where delinquency, renegotiation, and bank... more We propose a parsimonious model with adverse selection where delinquency, renegotiation, and bankruptcy all occur in equilibrium as a result of a simple screening mechanism. A borrower has private information about her cost of bankruptcy, and a lender may use random contracts to screen different types of borrowers. In equilibrium, some borrowers choose not to repay, and thus become delinquent. The lender renegotiates with some delinquent borrowers. In the absence of renegotiation, delinquency leads to bankruptcy. We apply the model to analyze effects of a government intervention in debt restructuring. We show that a mortgage modification program aimed at limiting foreclosures that fails to take into account private debt restructuring may have the opposite effect from the one intended.
Personal bankruptcies in the United States have increased dramatically, rising from 1.4 per thous... more Personal bankruptcies in the United States have increased dramatically, rising from 1.4 per thousand working age population in 1970 to 8.5 in 2002. We use a heterogeneous agent life-cycle model with competitive financial intermediaries who can observe households' earnings, age and current asset holdings to evaluate several commonly offered explanations. We find that increased uncertainty (income shocks, expense uncertainty) cannot quantitatively account for the rise in bankruptcies. Instead, stories related to a change in the credit market environment are more plausible. In particular, we find that a combination of a decrease in the transactions cost of lending and a decline in the cost of bankruptcy does a good job in accounting for the rise in consumer bankruptcy. We also argue that the abolition of usury laws and other legal changes are unimportant.
This paper studies the choice between general and speciflc human capital. A trade-ofi arises beca... more This paper studies the choice between general and speciflc human capital. A trade-ofi arises because general human capital, while less productive, can easily be reallocated across flrms. Accordingly, the fraction of individuals with speciflc human capital depends on the amount of uncertainty in the economy. Our model implies that while economies with more speciflc human capital tend to be more
2004 Meeting Papers, 2004
This paper presents a theoretical framework in which either long-term or short-term labor contrac... more This paper presents a theoretical framework in which either long-term or short-term labor contracts arise endogenously. The fundamental trade-off is between firm specific and general human capital. While firm-specific human capital is more productive than general human capital, it cannot be reallocated in response to firm specific shocks. Firm-specific human capital is thus more attractive in environments where firms face less uncertainly about the quality of their projects. When firm-specific human capital is optimal and workers do not have access to perfect financial markets, long-term labor contracts are necessary to decentralize the first-best allocation. Within this framework, we show that `volatility,'' which has no aggregate consequences in economies with general human capital, has large and persistent negative effects in economies with long-term contracts. Volatility is modelled by an aggregate state which determines the accuracy of firms' signals about the quality of their projects. This model therefore sheds light on the sources of the recent stagnation of the Japanese economy. It also provides a rationale for Japan having adopted long-term labor contracts in the 1950's: since imitation is less uncertain than innovation, economies catching up to the frontier are well served by implementing long-term labor contracts
Are monopoly rights (a la Prescott (1999, 2000)) essential for barriers to technology adoption? S... more Are monopoly rights (a la Prescott (1999, 2000)) essential for barriers to technology adoption? Surprisingly, we find the answer is "sometimes"! Using a political economy model, we find that when governments are not too "bad", monopoly rights are necessary for barriers. For "bad" governments, eliminating monopoly rights leads to more extreme barriers to technology adoption and larger deviations in TFP from the frontier. This counter-intuitive result is driven by two forces. First, allowing the entry of unskilled workers into protected industries limits the distortion in relative prices. More importantly, the entry of young workers into protected industries perpetuates the industry lobby and leads to multiple periods of protection. In contrast, with monopoly rights, young workers do not work in protected industries.
Financial innovations are a common explanation of the rise in consumer credit and bankruptcies. T... more Financial innovations are a common explanation of the rise in consumer credit and bankruptcies. To evaluate this story, we develop a simple model that incorporates two key frictions: asymmetric information about borrowers risk of default and a fixed cost to create each contract offered by lenders. Innovations which reduce the fixed cost or ameliorate asymmetric information have large extensive margin
Several recent defaults on sovereign debt were accompanied by major bank- ing crises in the defau... more Several recent defaults on sovereign debt were accompanied by major bank- ing crises in the defaulting countries. We argue that the banking crises, trig- gered by the defaults, were due to inadequate prudential regulations, which did not recognize the riskiness of the government debt. We use a simple model of prudential regulation to illustrate this point. We further show that
Are monopoly rights (a la Prescott (1999, 2000)) essential for barriers to technology adoption? S... more Are monopoly rights (a la Prescott (1999, 2000)) essential for barriers to technology adoption? Surprisingly, we find the answer is "sometimes"! Using a political economy model, we find that when governments are not too "bad", monopoly rights are necessary for barriers. For "bad" governments, eliminating monopoly rights leads to more extreme barriers to technology adoption and larger deviations in TFP from the frontier. This counter-intuitive result is driven by two forces. First, allowing the entry of unskilled workers into protected industries limits the distortion in relative prices. More importantly, the entry of young workers into protected industries perpetuates the industry lobby and leads to multiple periods of protection. In contrast, with monopoly rights, young workers do not work in protected industries.
A key feature of recent work on barriers to technology adoption is the assumption that monopoly r... more A key feature of recent work on barriers to technology adoption is the assumption that monopoly rights of insiders are limited by the ability of industry outsiders to enter. This paper endogenizes the decision of a government to provide barriers to technology adoption alone or in combination with barriers to entry of outsiders. Using a political economy model, we find that a government provides barriers to both technology adoption and outsider entry. If governments are not too "corrupt", restricting their ability to provide barriers to entry may eliminate barriers to adoption. However, for sufficiently "corrupt" governments, prohibiting barriers to entry leads to more extreme barriers to technology adoption.
We show how labour market restrictions, such as firing costs, and bail-outs may arise as useful i... more We show how labour market restrictions, such as firing costs, and bail-outs may arise as useful institutions to support investment in specific human capital.
Journal of Economic Surveys, 2015
This paper proves an analogue of Pratt's theorem for two measures of risk aversion for mean-... more This paper proves an analogue of Pratt's theorem for two measures of risk aversion for mean-variance preferences. A direct link is established between these measures and standard measures of risk aversion. Implications for problems of choice under uncertainty such as portfolio choice problems are derived. This paper establishes the equivalence of two measures of risk aversion for a general class of mean-variance preferences. It further derives implications for decision making under uncertainty, and establishes portfolio characterization of risk aversion for mean- variance preferences, which allows for comparison of agents' attitudes toward risk based on the choices they make under uncertainty. The motivation for studying mean-variance preferences is twofold: 1) they are widely used in finance; and 2) Epstein (1985) has shown that in the class of Machina's (1982) non-expected utility preferences only mean-variance preferences satisfy appropriate decreasing-absolute- ri...
Economics Letters, 2002
This paper provides a simple counterexample to existence of pure strategy (stationary) Markov per... more This paper provides a simple counterexample to existence of pure strategy (stationary) Markov perfect equilibrium for a class of infinite-horizon games with complete information, finitely many actions, and finitely many ordered states. For the given example, the proof of non-existence is provided.
The Review of Economic Studies, 2016
Financial innovations are a common explanation for the rise in credit card debt and bankruptcies.... more Financial innovations are a common explanation for the rise in credit card debt and bankruptcies. To evaluate this story, we develop a simple model that incorporates two key frictions: asymmetric information about borrowers' risk of default and a fixed cost of developing each contract lenders offer. Innovations that ameliorate asymmetric information or reduce this fixed cost have large extensive margin effects via the entry of new lending contracts targeted at riskier borrowers. This results in more defaults and borrowing, and increased dispersion of interest rates. Using the Survey of Consumer Finances and Federal Reserve Board interest rate data, we find evidence supporting these predictions. Specifically, the dispersion of credit card interest rates nearly tripled while the "new" cardholders of the late 1980s and 1990s had riskier observable characteristics than existing cardholders. Our calculation suggest these new cardholders accounted for over 25% of the rise in bank credit card debt and delinquencies between 1989 and 1998.
... Superstores or Mom and Pops? Technology Adoption and Productivity Differences in Retail Trade... more ... Superstores or Mom and Pops? Technology Adoption and Productivity Differences in Retail Trade David Lagakos Federal Reserve Bank of Minneapolis and Arizona State University ABSTRACT ...
There has been considerable public debate on the relative merits of alternative consumer bankrupt... more There has been considerable public debate on the relative merits of alternative consumer bankruptcy rules. The option to discharge one's debt provides partial insurance against bad luck, but by driving up interest rates makes lifecycle smoothing more difficult. We construct a quantitative model of consumer bankruptcy to address this trade-off. We argue that such a model should have three key feature: a life-cycle component, idiosyncratic earnings uncertainty and expense uncertainty (exogenous negative shocks to household balance sheets). We further show that transitory and persistent earnings shocks have very different implications for evaluating bankruptcy rules -while persistent shocks make bankruptcy option desirable, transitory shocks have the opposite implication. Our findings suggest that the current US bankruptcy system may be desirable for reasonable parameter values.
SSRN Electronic Journal, 2000
We propose a parsimonious model with adverse selection where delinquency, renegotiation, and bank... more We propose a parsimonious model with adverse selection where delinquency, renegotiation, and bankruptcy all occur in equilibrium as a result of a simple screening mechanism. A borrower has private information about her cost of bankruptcy, and a lender may use random contracts to screen different types of borrowers. In equilibrium, some borrowers choose not to repay, and thus become delinquent. The lender renegotiates with some delinquent borrowers. In the absence of renegotiation, delinquency leads to bankruptcy. We apply the model to analyze effects of a government intervention in debt restructuring. We show that a mortgage modification program aimed at limiting foreclosures that fails to take into account private debt restructuring may have the opposite effect from the one intended.
Personal bankruptcies in the United States have increased dramatically, rising from 1.4 per thous... more Personal bankruptcies in the United States have increased dramatically, rising from 1.4 per thousand working age population in 1970 to 8.5 in 2002. We use a heterogeneous agent life-cycle model with competitive financial intermediaries who can observe households' earnings, age and current asset holdings to evaluate several commonly offered explanations. We find that increased uncertainty (income shocks, expense uncertainty) cannot quantitatively account for the rise in bankruptcies. Instead, stories related to a change in the credit market environment are more plausible. In particular, we find that a combination of a decrease in the transactions cost of lending and a decline in the cost of bankruptcy does a good job in accounting for the rise in consumer bankruptcy. We also argue that the abolition of usury laws and other legal changes are unimportant.
This paper studies the choice between general and speciflc human capital. A trade-ofi arises beca... more This paper studies the choice between general and speciflc human capital. A trade-ofi arises because general human capital, while less productive, can easily be reallocated across flrms. Accordingly, the fraction of individuals with speciflc human capital depends on the amount of uncertainty in the economy. Our model implies that while economies with more speciflc human capital tend to be more
2004 Meeting Papers, 2004
This paper presents a theoretical framework in which either long-term or short-term labor contrac... more This paper presents a theoretical framework in which either long-term or short-term labor contracts arise endogenously. The fundamental trade-off is between firm specific and general human capital. While firm-specific human capital is more productive than general human capital, it cannot be reallocated in response to firm specific shocks. Firm-specific human capital is thus more attractive in environments where firms face less uncertainly about the quality of their projects. When firm-specific human capital is optimal and workers do not have access to perfect financial markets, long-term labor contracts are necessary to decentralize the first-best allocation. Within this framework, we show that `volatility,'' which has no aggregate consequences in economies with general human capital, has large and persistent negative effects in economies with long-term contracts. Volatility is modelled by an aggregate state which determines the accuracy of firms' signals about the quality of their projects. This model therefore sheds light on the sources of the recent stagnation of the Japanese economy. It also provides a rationale for Japan having adopted long-term labor contracts in the 1950's: since imitation is less uncertain than innovation, economies catching up to the frontier are well served by implementing long-term labor contracts
Are monopoly rights (a la Prescott (1999, 2000)) essential for barriers to technology adoption? S... more Are monopoly rights (a la Prescott (1999, 2000)) essential for barriers to technology adoption? Surprisingly, we find the answer is "sometimes"! Using a political economy model, we find that when governments are not too "bad", monopoly rights are necessary for barriers. For "bad" governments, eliminating monopoly rights leads to more extreme barriers to technology adoption and larger deviations in TFP from the frontier. This counter-intuitive result is driven by two forces. First, allowing the entry of unskilled workers into protected industries limits the distortion in relative prices. More importantly, the entry of young workers into protected industries perpetuates the industry lobby and leads to multiple periods of protection. In contrast, with monopoly rights, young workers do not work in protected industries.
Financial innovations are a common explanation of the rise in consumer credit and bankruptcies. T... more Financial innovations are a common explanation of the rise in consumer credit and bankruptcies. To evaluate this story, we develop a simple model that incorporates two key frictions: asymmetric information about borrowers risk of default and a fixed cost to create each contract offered by lenders. Innovations which reduce the fixed cost or ameliorate asymmetric information have large extensive margin
Several recent defaults on sovereign debt were accompanied by major bank- ing crises in the defau... more Several recent defaults on sovereign debt were accompanied by major bank- ing crises in the defaulting countries. We argue that the banking crises, trig- gered by the defaults, were due to inadequate prudential regulations, which did not recognize the riskiness of the government debt. We use a simple model of prudential regulation to illustrate this point. We further show that
Are monopoly rights (a la Prescott (1999, 2000)) essential for barriers to technology adoption? S... more Are monopoly rights (a la Prescott (1999, 2000)) essential for barriers to technology adoption? Surprisingly, we find the answer is "sometimes"! Using a political economy model, we find that when governments are not too "bad", monopoly rights are necessary for barriers. For "bad" governments, eliminating monopoly rights leads to more extreme barriers to technology adoption and larger deviations in TFP from the frontier. This counter-intuitive result is driven by two forces. First, allowing the entry of unskilled workers into protected industries limits the distortion in relative prices. More importantly, the entry of young workers into protected industries perpetuates the industry lobby and leads to multiple periods of protection. In contrast, with monopoly rights, young workers do not work in protected industries.
A key feature of recent work on barriers to technology adoption is the assumption that monopoly r... more A key feature of recent work on barriers to technology adoption is the assumption that monopoly rights of insiders are limited by the ability of industry outsiders to enter. This paper endogenizes the decision of a government to provide barriers to technology adoption alone or in combination with barriers to entry of outsiders. Using a political economy model, we find that a government provides barriers to both technology adoption and outsider entry. If governments are not too "corrupt", restricting their ability to provide barriers to entry may eliminate barriers to adoption. However, for sufficiently "corrupt" governments, prohibiting barriers to entry leads to more extreme barriers to technology adoption.
We show how labour market restrictions, such as firing costs, and bail-outs may arise as useful i... more We show how labour market restrictions, such as firing costs, and bail-outs may arise as useful institutions to support investment in specific human capital.