Department of Economics
University of Wisconsin-Madison
Madison, WI 53706
Institutional Affiliation: University of Wisconsin-Madison
NBER Working Papers and Publications
|May 2020||The Hammer and the Scalpel: On the Economics of Indiscriminate versus Targeted Isolation Policies during Pandemics|
with Varadarajan V. Chari, Christopher Phelan: w27232
We develop a simple dynamic economic model of epidemic transmission designed to be consistent with widely used SIR biological models of the transmission of epidemics, while incorporating economic benefits and costs as well. Our main finding is that targeted testing and isolation policies deliver large welfare gains relative to optimal policies when these tools are not used. Specifically, we find that when testing and isolation are not used, optimal policy delivers a welfare gain equivalent to a 0.6% permanent increase in consumption relative to no intervention. The welfare gain arises because under the optimal policy, the planner engineers a sharp recession that reduces aggregate output by about 40% for about 3 months. This sharp contraction in economic activity reduces the rate of transmi...
|November 2019||Rules without Commitment: Reputation and Incentives|
with Alessandro Dovis: w26451
This paper studies the optimal design of rules in a dynamic model when there is a time inconsistency problem and uncertainty about whether the policy maker can commit to follow the rule ex post. The policy maker can either be a commitment type, which can always commit to follow rules, or an optimizing type, which sequentially decides whether to follow rules or not. This type is unobservable to private agents, who learn about it through the actions of the policy maker. Higher beliefs that the policy maker is the commitment type (the policy maker's reputation) help promote good behavior by private agents. We show that in a large class of economies, preserving uncertainty about the policy maker's type is preferable from an ex-ante perspective. If the initial reputation is not too high, the op...
|October 2017||Fiscal Rules, Bailouts, and Reputation in Federal Governments|
with Alessandro Dovis: w23942
Expectations of transfers by central governments incentivize overborrowing by local governments. In this paper, we ask if fiscal rules can reduce overborrowing if central governments cannot commit. We study a model in which the central government’s type is unknown and show that fiscal rules increase overborrowing if the central government’s reputation is low. In contrast, fiscal rules are effective in lowering debt if the central government’s reputation is high. Even when the central government’s reputation is low, binding fiscal rules will arise in the equilibrium of a signaling game.
Published: Alessandro Dovis & Rishabh Kirpalani, 2020. "Fiscal Rules, Bailouts, and Reputation in Federal Governments," American Economic Review, vol 110(3), pages 860-888.