Thesis advisor: Rosen Valchev / I study how economic conditions and strategic incentives affect belief formation of rational agents with a limited information processing capacity. I study the impact of cognitive and information frictions on individual risk taking, investment and portfolio choice, and their implications on aggregate macroeconomic fluctuations. In my first chapter "Rational Overoptimism and Moral hazard in Credit Booms" I develop a framework in which over optimism in credit booms originates from rational decisions of managers. Because of moral hazard, managers pay too little attention to the aggregate conditions that generate risk, leading them to over borrow and over invest during booms. Periods of low risk premia predict higher default rates, higher probability of crises and systematic negative banks excess returns, in line with existing evidence. I document a negative relation between the convexity of CEO's compensation and their information on a larger sample of firms, which is consistent with my theory. My model implies that compensation regulation can play an important role in macro prudential policy. In my second chapter "Biased Surveys" Rosen Valchev and I improve on the standard tests for the FIRE hypothesis by allowing for both public and private information, and find new interesting results. First, we propose a new empirical strategy that can accommodate this richer information structure, and find that the true degree of information rigidity is about a third higher than previously estimated. Second, we find that individual forecasts over-react to private information but under-react to public information. We show that this is consistent with a theory of strategic diversification incentives in forecast reporting, where forecasters are rational but report a biased measure of their true expectations. This has two effects. First, it generates what looks like behavioral “over-reaction” in expectations, and second biases the information rigidity estimate further downward. Overall, our results caution against the use of survey of forecasts as a direct measure of expectations, and suggest that the true underlying beliefs are rational, but suffer from a much larger degree of imperfect information than previously thought. This has particularly profound implications for monetary policy, where inflation expectations play a key role. I explore further how economic incentives shape beliefs in my third chapter "International Trade and Portfolio Diversification". I show that information choice can explain the puzzling positive relation between bilateral investment and trade across countries. I present a model of endogenous information with both investment in assets and income from trade. While standard model of risk-hedging would require agents to invest in non-trading countries to diversify income risk, I show that limited information capacity and preferences for early resolution of uncertainty reverse this result. The intuition is that investors collect more information on trading partners to reduce income uncertainty, and therefore perceive their equity as less risky. I find that allowing for information choice reduces the role of risk hedging on portfolio decisions. I test my model’s implied relation between trade and attention in the data and find robust empirical support. / Thesis (PhD) — Boston College, 2022. / Submitted to: Boston College. Graduate School of Arts and Sciences. / Discipline: Economics.

Le résumé en français n'a pas été communiqué par l'auteur. / In the past couple of decades, digitization has affected the strategy of economic players and the structure of markets across the board by lowering the cost of storing, sharing and analyzing data. This has given rise to a new field of economics, the economics of digitization, which touches upon the fields of industrial organization, market design, information economics, and labor economics. For industrial economists, these new questions and challenges coupled with new types of data, have led to vigorous research on the topics of reputation, search, rankings, matching, and online auctions. Following this line of research, the first two of the chapters in my thesis are on the topics information frictions and reputation systems in online service markets, and the third chapter proposes a novel methodology for modeling transaction prices motivated by competition on online distribution channels.

This dissertation presents three chapters addressing issues pertaining to monetary policy, information, and central bank communication. The first chapter studies optimal monetary policy in an environment where policy actions provide a signal of economic fundamentals to imperfectly informed agents. I derive the optimal discretionary policy in closed form and show that, in contrast to the perfect information case, the signaling channel leads the policymaker to be tougher on inflation. The strength of the signaling effect of policy depends on relative uncertainty levels. As the signaling effect strengthens, the optimal policy under discretion approaches that under commitment to a forward-looking linear rule, thereby decreasing the stabilization bias. This contributes to the central bank finding it optimal to withhold its additional information from private agents. Under a general linear policy rule, inflation and output forecasts can respond positively to a positive interest rate surprise when the signaling channel is strong. This positive response is the opposite of what standard perfect information New Keynesian models predict and it matches empirical patterns found by previous studies. Chapter 2 provides new empirical evidence supporting the predictions of the model presented in Chapter 1. More specifically, I find that the responses of inflation forecasts to interest rate surprises is especially positive when there is greater uncertainty regarding the previous forecast. Finally, Chapter 3 examines whether communications by the Federal Open Market Committee might have the ability to influence financial market responses to macroeconomic news. In particular, I am able to relate labor-related word use in FOMC statements and meeting minutes to the amount by which interest rates' response to labor-related news exceeds their response to other news. / Economics

More than a billion people lack access to modern electricity and instead rely on kerosene and other dirty lighting sources, grid expansion is not expected to keep pace with population growth, and both contribute to climate change. Moreover, pneumonia is the leading cause of death for under-fives in the world and kerosene smoke is a significant risk factor. For-profit distribution of low-cost solar LEDs has been touted as an answer, but adoption remains low, especially by the poorest. This study estimates demand curves for both the initial price of low-cost solar LEDs as well as the subsequent user fee for repeated purchases, while also estimating the impact of shortrun subsidies, or a free trial period, on long-run demand. We find uptake is highly sensitive to price with most households purchasing at zero price and none at full cost. Furthermore, using unique objective big data on long-term usage we show that households that received lights for free use their lights as much as those that paid a positive price, disproving the notion, in this context, that consumers will not use goods they received for free. Finally, we find short-term subsidies for user fees actually increases long-term demand in the context of repeated purchases.

Thesis advisor: Susanto Basu / Thesis advisor: Peter Ireland / This dissertation consists of three independent chapters analyzing the role that information and credit frictions play in goods and financial markets. Within these chapters, I develop dynamic stochastic general equilibrium (DSGE) models to study the implications of these frictions on the macroeconomy, both at the national and international level. In the first chapter, I provide a novel explanation for the observed large and persistent fluctuations in real exchange rates using a model with noisy, dispersed information among price-setting firms. Chapter two studies how entrepreneurs' attitudes towards risk affect business cycles in a framework with agency frictions between borrowers and lenders. Finally, chapter three introduces a liquidity channel in a business cycle model with agency frictions to rationalize the highly volatile behavior of default recovery rates observed in the data. Real exchange rates have been extremely volatile and persistent since the end of the Bretton Woods system. For many developed economies, real exchange rates are as volatile as nominal exchange rates, and their fluctuations exhibit a half-life in the range of three to five years. Traditional sticky-price models struggle to jointly account for these features under plausible nominal rigidities (Chari, Kehoe, and McGrattan, 2002). Is it possible to reconcile, in a single framework, the enormous short-term volatility of the real exchange rate with its extremely long half-life? The first chapter of this dissertation addresses this question within a framework in which information is noisy and heterogeneous among price-setting firms. In this context, the continuing uncertainty that firms face about the state of the economy and about the beliefs of their competitors, slows down the price adjustment in response to nominal shocks, generating large and long-lived real exchange rate movements. I estimate the model using real output and output deflator data from the US and the Euro Area and show, as an out-of-sample test, that the model successfully explains the observed volatility and persistence of the Euro/Dollar real exchange rate. In a Bayesian model comparison, I show that the data strongly favor the dispersed information model relative to a sticky-price model à la Calvo. The model also accounts for the persistent effects of monetary shocks on the real exchange rate that I document using a structural vector autoregression. The second chapter, joint with Mikhail Dmitriev, studies how entrepreneurs' attitudes towards risk affect business cycles in a model with agency frictions. Entrepreneurs are inevitably exposed to non-diversified risk, which likely affects their willingness to borrow and to invest in risky projects. Nevertheless, the financial friction literature has paid little attention to how entrepreneurs' desire to take on this risk affects their investment choices in a general-equilibrium setting. Indeed, business cycle models with credit market frictions that feature idiosyncratic risk assume, for tractability, that entrepreneurs are risk neutral (Bernanke, Gertler, and Gilchrist, 1999, BGG). In this chapter, we generalize the BGG framework to the case of entrepreneurs with constant-relative-risk-aversion preferences. In doing so, we overcome the aggregation challenges of this setup and maintain an analytically tractable, log-linear framework. Our main result is that higher risk aversion stabilizes business cycle fluctuations in response to financial shocks, such as wealth redistribution or risk shocks, without significantly affecting the dynamic responses to technology and monetary shocks. Our findings suggest that, within this class of models, the ability of financial shocks to account for a large portion of short-run output fluctuations found in previous work (e.g., Christiano, Motto, and Rostagno (2014)) crucially hinges on borrowers' risk neutrality. The third chapter, joint with Mikhail Dmitriev, examines the implications of the cyclical properties of default recovery rates for aggregate fluctuations. We document that recovery rates after default in the United States are highly volatile and strongly pro-cyclical. These facts are hard to reconcile with the existing financial friction literature. Indeed, models with limited enforceability à la Kiyotaki and Moore (1997) do not feature defaults and recovery rates in equilibrium, while agency costs models following Bernanke, Gertler, and Gilchrist (1999) underestimate the volatility of recovery rates by one order of magnitude. In this chapter, we extend the standard agency costs model allowing liquidation costs for creditors to depend on the tightness of the market for physical capital. Creditors do not have expertise in selling entrepreneurial assets, but when buyers are plentiful, this disadvantage is minimal. Instead when sellers are abundant, the disadvantage of being an outsider is higher. Following a negative shock, entrepreneurs sell capital and liquidation costs for creditors increase, driving down recovery rates. With higher liquidation costs, creditors cut lending and cause entrepreneurs to sell even more capital. This liquidity channel works independently from standard balance sheet effects, and amplifies the impact of financial shocks on output by up to 50 percent. / Thesis (PhD) — Boston College, 2016. / Submitted to: Boston College. Graduate School of Arts and Sciences. / Discipline: Economics.

In many procurement auctions, entrants determine whether to participate in auctions accounting for their roles of intermediaries who search for the best (or the cheapest) input suppliers. We build on a procurement auction model with entry, combining with intermediary search for suppliers. The novel feature is that costs of bidders are endogenously determined by suppliers who strategically charge input prices. We show the existence of an equilibrium with price dispersion for inputs, generating cost heterogeneity among bidders. Interestingly, the procurement cost may rise as the number of potential bidders increases. (author's abstract) / Series: Department of Economics Working Paper Series