Why Do People Stay Poor?

There are two broad views as to why people stay poor. One emphasizes differences in fundamentals, such as ability, talent, or motivation. The other, the poverty traps view, emphasizes differences in opportunities which stem from access to wealth. To test between these two views, we exploit a large-scale, randomized asset transfer and an 11-year panel of 6,000 households who begin in extreme poverty. The setting is rural Bangladesh and the assets are cows. The data supports the poverty traps view—we identify a threshold level of initial assets above which households accumulate assets, take on better occupations (from casual labor in agriculture or domestic services to running small livestock businesses), and grow out of poverty. The reverse happens for those below the threshold. Structural estimation of an occupational choice model reveals that almost all beneficiaries are misallocated in the work they do at baseline and that the gains arising from eliminating misallocation would far exceed the program costs. Our findings imply that large transfers which create better jobs for the poor are an effective means of getting people out of poverty traps and reducing global poverty.

VOLUNTARY Regulation: Evidence from Medicare Payment Reform

Government programs are often offered on an optional basis to market participants. We explore the economics of such voluntary regulation in the context of a Medicare payment reform, in which one medical provider receives a single, predetermined payment for a sequence of related healthcare services, instead of separate service-specific payments. This “bundled payment” program was originally implemented as a five-year randomized trial, with mandatory participation by hospitals assigned to the new payment model; however, after two years, participation was made voluntary for half of these hospitals. Using detailed claim-level data, we document that voluntary participation is more likely for hospitals that can increase revenue without changing behavior (“selection on levels”) and for hospitals that had large changes in behavior when participation was mandatory (“selection on slopes”). To assess outcomes under counterfactual regimes, we estimate a stylized model of responsiveness to and selection into the program. We find that the current voluntary regime generates inefficient transfers to hospitals, and that alternative (feasible) designs could reduce these inefficient transfers and raise welfare. Our analysis highlights key design elements to consider under voluntary regulation.

Identity, Beliefs, and Political Conflict

We present a theory of identity politics that builds on two ideas. First, when policy conflict renders a certain social divide—economic or cultural—salient, a voter identifies with her economic or cultural group. Second, the voter slants her beliefs toward the stereotype of the group she identifies with. We obtain three implications. First, voters’ beliefs are polarized along the distinctive features of salient groups. Second, if the salience of cultural policies increases, cultural conflict rises, redistributive conflict falls, and polarization becomes more correlated across issues. Third, economic shocks hurting conservative voters may trigger a switch to cultural identity, causing these voters to demand less redistribution. We discuss U.S. survey evidence in light of these implications.

Quantifying the High-Frequency Trading “Arms Race”

We use stock exchange message data to quantify the negative aspect of high-frequency trading, known as “latency arbitrage.” The key difference between message data and widely familiar limit order book data is that message data contain attempts to trade or cancel that fail. This allows the researcher to observe both winners and losers in a race, whereas in limit order book data you cannot see the losers, so you cannot directly see the races. We find that latency arbitrage races are very frequent (about one per minute per symbol for FTSE 100 stocks), extremely fast (the modal race lasts 5–10 millionths of a second), and account for a remarkably large portion of overall trading volume (about 20%). Race participation is concentrated, with the top six firms accounting for over 80% of all race wins and losses. The average race is worth just a small amount (about half a price tick), but because of the large volumes the stakes add up. Our main estimates suggest that races constitute roughly one-third of price impact and the effective spread (key microstructure measures of the cost of liquidity), that latency arbitrage imposes a roughly 0.5 basis point tax on trading, that market designs that eliminate latency arbitrage would reduce the market’s cost of liquidity by 17%, and that the total sums at stake are on the order of $5 billion per year in global equity markets alone.

Understanding Tax Policy: How Do People Reason?

I study how people understand, reason, and learn about two major tax policies: income taxation and estate taxation. Using large-scale Social Economics surveys issued to representative U.S. samples and associated experiments, I seek to elicit respondents’ factual knowledge about tax policy and the income or wealth distributions. Most importantly, I study their understanding of the mechanisms of tax policy and the reasoning that underlies their policy views. In decomposing policy views, I find that support for income and estate taxes is most strongly correlated with social preferences, i.e., the perceived benefits of redistribution and concerns around the fairness of inequality and taxation, as well as with broader views of the government. Efficiency concerns play a more minor role. These correlational patterns are confirmed by the experimental approach, which shows people instructional videos that explain the workings and consequences of one of the aspects of tax policy (the “Redistribution” and the “Efficiency” treatments) or that bring the two together and focus on the trade-off (the “Economist” treatment). The Redistribution and Economist treatments significantly increase support for more progressive income or estate taxes, while the Efficiency treatment has no effect. There are large partisan gaps in both the final policy views and at every step of the reasoning about the underlying mechanisms of taxes. Democrats’ and Republicans’ divergences in tax policy views can ultimately be traced back to different normative criteria (social preferences) and views of the government, rather than to different perceptions of the efficiency implications of taxation.