Research

We study the interest-rate sensitivity of household wealth in a realistic life-cycle model. The model predicts that middle-aged and wealthier households should hold more long-term assets, as observed in the US data. Consequently, optimal portfolio rules imply that falling interest rates increase wealth inequality, while rising rates reduce inequality, consistent with historical experience. However, these long-run shifts in wealth inequality are largely offset by changes in the valuation of human capital and Social Security benefits, mitigating the passthrough of interest-rate fluctuations to expected lifetime consumption.

This paper investigates the informational role of lobbyists in the context of foreign lobbying in the United States. Using Department of Justice data on contacts between foreign governments and US legislators, we show that exogenous shocks to these connections influence foreign aid, tariff legislation, and corporate subsidies to foreign firms. Subsidies to connected foreign firms are associated with lower local employment, challenging the view that lobbyists provide technical expertise for better policymaking. However, subsidies to connected firms increase incumbent legislators' vote shares suggesting that foreign lobbying may still deliver valuable political information. Overall, our findings highlight the nature of the information channel of lobbying and underscore the broad economic significance of foreign lobbying in the US.

Sovereign debt yields have declined dramatically over the last half-century. Standard explanations, including aging populations and increases in asset demand from abroad, encounter difficulties when confronted with the full range of evidence. We propose an explanation based on a decline in inflation and default risk. We show that a model with sovereign default captures the decline in interest rates, the stability of equity valuation ratios, and the reduction in investment and output growth. Calibrations of the model post-Covid suggest that sovereign default risk may have returned.

This paper examines the conventional view that redistribution is central to the democratization process using data from stock markets. Consistent with this view, democratizations have a large, negative impact on asset valuations driven by a rise in redistribution risk. Across 90 countries over 200 years, risk premia are substantially elevated — similar in magnitude to financial crises — prior to and during democratizations. A shift in Catholic church doctrine in support of democracy provides causal evidence that democratizations increase risk premia. Successful democratizations lead to substantial redistribution: the size of the public sector grows, income inequality falls, and the labor share of income rises. An extended version of the canonical redistribution-based model of democratization that includes asset prices can quantitatively explain these effects. Reductions in inequality and increased taxes explain approximately half of the results. The rest comes from greater economic competition and equality in government spending. The model also explains the negligible asset pricing response to autocratizations. Neither an increase in macroeconomic risk nor generic political risk can explain the results.

Recent influential work finds large increases in inequality in the U.S. based on measures of wealth concentration that notably exclude the value of social insurance programs. This paper shows that top wealth shares have not changed much over the last three decades when Social Security is properly accounted for. This is because Social Security wealth increased substantially from $7.2 trillion in 1989 to $40.6 trillion in 2019 and now represents nearly 50% of the wealth of the bottom 90% of the wealth distribution. This finding is robust to potential changes to taxes and benefits in response to system financing concerns.

More than a quarter of working-age households in the United States do not have sufficient savings to cover their expenditures after a month of unemployment. Recent proposals suggest giving workers early access to a small portion of their future Social Security benefits to finance their consumption during the COVID-19 pandemic. We empirically analyze their impact. Relying on data from the Survey of Consumer Finances, we build a measure of households' expected time to cash shortfall based on the incidence of COVID-induced unemployment. We show that access to 1% of future benefits allows 75% of households to maintain their current consumption for three months in case of unemployment. We then compare the efficacy of access to Social Security benefits to already legislated approaches, including early access to retirement accounts, stimulus relief checks, and expanded unemployment insurance.

The authors summarize the recent literature on mutual fund manager skill and performance. They discuss the latest contributions in the field and reinterpret them through the lens of the rational expectations framework. The article has three main conclusions. First, although net alpha is a measure of the abnormal return of an extra dollar invested in a particular fund (i.e., performance), it does not measure mutual fund manager skill. To measure the latter, the product of gross alpha and the size of the fund — value added — is needed. Second, the set of real-time available index funds is the relevant counterfactual to use when assessing the skill and performance of investment managers. Nontradable factors that are constructed with the benefit of hindsight are not a realistic benchmark. Third, the authors can think of no good reason to exclude high-quality mutual fund data either in the cross section or time series when making inferences regarding skill and performance.