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We introduce and quantify a new channel through which the housing market affects household spending: the home purchase channel. Households spend on average $8,000 more on home-related durables and home improvements in the 2 years following a home purchase. Expenditures on nondurables and durables unrelated to the home remain unchanged or decrease modestly. The home purchase channel played a substantial role in the Great Recession, accounting for one-third of the decline in spending on home-related durables and home improvements from 2005 to 2010. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online

We analyze the effect of local-level labor market concentration on wages. Using Census data over the period 1977–2009, we find that: (1) local-level employer concentration exhibits substantial cross-sectional and time-series variation and increases over time; (2) consistent with labor market monopsony power, there is a negative relation between local-level employer concentration and wages that is more pronounced at high levels of concentration and increases over time; (3) the negative relation between labor market concentration and wages is stronger when unionization rates are low; (4) the link between productivity growth and wage growth is stronger when labor markets are less concentrated; and (5) exposure to greater import competition from China (the “China Shock”) is associated with more concentrated labor markets. These five results emphasize the role of local-level labor market monopsonies in influencing firm wage-setting behavior and can potentially explain some of the stagnation of wages in the United States over the past several decades.

We provide new evidence that a disruption in credit supply played a quantitatively significant role in the unprecedented contraction of employment during the Great Depression using a novel, hand-collected dataset of large industrial firms. Our identification strategy exploits preexisting variation in the need to raise external funds at a time when public bond markets essentially froze. Local bank failures inhibited firms’ ability to substitute public debt for private debt, which exacerbated financial constraints. We estimate a large and negative causal effect of financing frictions on firm employment. We find that the lack of access to credit likely accounted for a substantial fraction of the aggregate decline in employment of large firms between 1928 and 1933.

Corporate bond markets proved remarkably resilient against a sharp contraction caused by the 2020 Covid-19 pandemic. We document three important findings: (1) bond issuance increased immediately when the contraction hit, whereas, in contrast, syndicated loan issuance was low;(2) Federal Reserve interventions increased bond issuance, while loan issuance also increased, but to a lesser degree;and (3) bond issuance was concentrated in the investment-grade segment for large and profitable issuers. We compare these results to previous crises and recessions and document similar patterns. We conclude that the U.S. bond market is an important and resilient source of funding for corporations.

Investment in intangible capital such as R&D has increased dramatically since the 1990s. However, productivity growth remains sluggish in recent years. One potential reason is that a significant share of the increase in intangible investment is geared toward consumer products such as pharmaceutical drugs with limited spillovers to productivity. We document that a significant share of R&D spending in the United States is done by pharmaceutical firms and geared to developing drugs for older patients. Increased life expectancy and quality of life for the elderly increases welfare but may not be reflected in estimates of total factor productivity.

Highlights • Civic capital is associated with higher social distancing compliance during COVID-19. • This holds across US counties, a survey of US individuals, and European regions. • The effect is in addition to any impact of political ideology, age, or education. • In high civic capital areas social distancing persisted after the mandate was lifted., Using mobile phone and survey data, we show that during the early phases of COVID-19, voluntary social distancing was greater in areas with higher civic capital and amongst individuals exhibiting a higher sense of civic duty. This effect is robust to including controls for political ideology, income, age, education, and other local-level characteristics. This result is present for U.S. individuals and U.S. counties as well as European regions. Moreover, we show that after U.S. states began re-opening, high civic capital counties maintained a more sustained level of social distancing, while low civic capital counties did not. Finally, we show that U.S. individuals report a higher tendency to use protective face masks in high civic capital counties. Our evidence points to the importance of considering the level of civic capital in designing public policies not only in response to pandemics, but also more generally.

As countries around the world grapple with Covid-19, their economies are grinding to a halt. For the first time since the Great Depression both advanced economies and developing economies are in recession. Governments and central banks have responded to the pandemic and the economic crisis using both fiscal and monetary tools on a scale that the world has not witnessed before. This paper analyzes the determinants of fiscal and monetary policies during the Covid-19 crisis. We find that high-income countries announced larger fiscal policies than lower-income countries. We also find that a country’s credit rating is the most important determinant of its fiscal spending during the pandemic. High-income countries entered the crisis with historically low interest rates and as a result were more likely to use nonconventional monetary policy tools. These findings raise the concern that countries with poor credit histories – those with lower credit ratings and, in particular, lower-income countries – will not be able to deploy fiscal policy tools effectively during economic crises.

Credit spreads for secured debt issuances are lower than for unsecured debt issuances, especially when a firm’s credit quality deteriorates, the economy slows, or average credit spreads widen. Yet healthy firms tend to be reluctant to issue secured debt when other forms of financing are available, as we demonstrate with an analysis of security issuance over time and in particular around the COVID-19 pandemic shock in the United States in early 2020. We find that for firms that are rated below-investment grade and that have few alternative sources of financing in difficult times, the likelihood of secured debt issuance is positively correlated with the premium associated with secured debt. It is uncorrelated for firms that are investment grade. This pattern of issue behavior is consistent with firms seeing unencumbered collateral as a form of insurance, to be used only in extremis.

The success of non-pharmaceutical interventions to contain pandemics often depends greatly upon voluntary compliance with government guidelines. What explains variation in voluntary compliance? Using mobile phone and survey data, we show that during the early phases of COVID-19, voluntary social distancing was higher when individuals exhibit a higher sense of civic duty. This is true for U.S. individuals, U.S. counties, and European regions. We also show that after U.S. states began re-opening, social distancing remained more prevalent in high civic capital counties. Our evidence points to the importance of civic capital in designing public policy responses to pandemics.

We document a steady decline in the share of secured debt issued (as a fraction of total debt) in the United States over the twentieth century, with some pickup in this century. Superimposed on this secular trend, the share of secured debt issued is countercyclical. The secular decline in secured debt issuance seems to result from creditors acquiring greater confidence over time that the priority of their debt claims will be respected even if they do not obtain security up front. Borrowers also do not seem to want to lose financial and operational flexibility by giving security up front. Instead, security is given on a contingent basis – when a firm approaches distress. Similar arguments explain why debt is more likely to be secured in the down phase of a cycle than in the up phase, thus accounting for the cyclicality of secured debt share. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Lenders are unwilling to accept lower credit spreads for secured debt relative to unsecured debt when a firm is healthy. However, they accept significantly lower credit spreads for secured debt when a firm’s credit quality deteriorates, the economy slows, or average credit spreads widen. This contingent valuation of collateral or security, coupled with the borrower perceiving a loss of operational and financial flexibility when issuing secured debt, may explain why firms issue secured debt on a contingent basis; they issue more when their credit quality deteriorates, the economy slows, and average credit spreads widen.

This paper identifies a new channel through which bankrupt firms impose negative externalities on non-bankrupt peers. The bankruptcy and liquidation of a retail chain weakens the economies of agglomeration in any given local area, reducing the attractiveness of retail centers for remaining stores leading to contagion of financial distress. We find that companies with greater geographic exposure to bankrupt retailers are more likely to close stores in affected areas. We further show that the effect of these externalities on non-bankrupt peers is higher when the affected stores are smaller and are operated by firms with poor financial health.

This paper provides the first systematic analysis of the link between countries’ economic, political, and social conditions and the global phenomenon of ISIS foreign fighters. We find that poor eco...

Credit market freezes in which debt issuance declines dramatically and market liquidity evaporates are typically observed during financial crises. In the financial crisis of 2008–2009, the structur...

Illiquidity in short-term credit markets during the financial crisis might have severely curtailed the supply of nonbank consumer credit. Using a new data set linking every car sold in the United States to the credit supplier involved in each transaction, we find that the collapse of the asset-backed commercial paper market reduced the financing capacity of such nonbank lenders as captive leasing companies in the automobile industry. As a result, car sales in counties that traditionally depended on nonbank lenders declined sharply. Although other lenders increased their supply of credit, the net aggregate effect of illiquidity on car sales is large and negative. We conclude that the decline in auto sales during the financial crisis was caused in part by a credit supply shock driven by the illiquidity of the most important providers of consumer finance in the auto loan market. These results also imply that interventions aimed at arresting illiquidity in short-term credit markets might have helped contain the real effects of the crisis.

We analyze the empirical determinants of liquidity in debt markets in light of predictions stemming from debt-based information theories. We conduct a battery of tests confirming predictions of asymmetric information models of bond liquidity, including those that predict a``hockey-stick" relation between bond liquidity and underlying fundamental value. When debt is deep in the money, it becomes informationally insensitive and more liquid. In contrast, when firm value deteriorates towards the left tail, the value of debt becomes informationally sensitive and less liquid. We alleviate endogeneity concerns using exogenous variation in firm value that is plausibly not driven by bond liquidity. Our results shed new empirical light on the determination of liquidity in debt markets.

There is mounting evidence of the influence of personal characteristics of CEOs on corporate outcomes. In this paper we analyze the relation between military service of CEOs and managerial decisions, financial policies, and corporate outcomes. Exploiting exogenous variation in the propensity to serve in the military, we show that military service is associated with conservative corporate policies and ethical behavior. Military CEOs pursue lower corporate investment, are less likely to be involved in corporate fraudulent activity, and perform better during industry downturns. Taken together, our results show that military service has significant explanatory power for managerial decisions and firm outcomes.

This paper examines whether house demolitions are an effective counterterrorism tactic against suicide terrorism. We link original longitudinal micro-level data on houses demolished by the Israeli Defense Forces with data on the universe of suicide attacks against Israeli targets. By exploiting spatial and time variation in house demolitions and suicide terror attacks during the second Palestinian uprising, we show that punitive house demolitions (those targeting Palestinian suicide terrorists and terror operatives) cause an immediate, significant decrease in the number of suicide attacks. The effect dissipates over time and by geographic distance. In contrast, we observe that precautionary house demolitions (demolitions justified by the location of the house but not related to the identity or any action of the house's owner) cause a significant increase in the number of suicide terror attacks. The results are consistent with the view that selective violence is an effective tool to combat terrorist groups, whereas indiscriminate violence backfires.

We introduce and quantify a new channel through which the housing market affects household spending: the home purchase channel. Using an event-study design with data from the Consumer Expenditure Survey, we show that households spend on average $3,700 more in the months before and the first year following a home purchase. This spending is concentrated in the home-related durables and home improvements sectors, which are complementary to the purchase of the house. Expenditures on nondurables and durables unrelated to the home remain unchanged or decrease modestly. We estimate that the home purchase channel played a substantial role in the Great Recession, accounting for one-third of the decline in home-related durables spending and a fifth of the decline in home maintenance and investment spending from 2005 to 2010, together totaling $14.3 billion annually.

While credit rating agencies are of central importance to credit markets, it is still unclear how credit ratings decisions are being made. Are credit rating quantitatively hard-wired? Or, do ratings represent a more holistic approach to the evaluation of creditworthiness? I evaluate the quantitative content of rating decisions made by S&P Global Ratings Inc. and assess its development over time. I find that S&P rating decisions moved from being quantitative to being qualitative and then being highly quantitative again in the last few years. I also find that rating standards became more lenient during the global financial crisis suggesting that it is possible that ratings were artificially held up to avoid even further downgrades. My results suggest that, in general, S&P rating decisions are highly quantitative and can be predicted with a high degree of accuracy using firm characteristics. In fact, my analysis suggests that credit rating decisions can be replaced by an algorithm that uses just ten financial variables.

This paper evaluates and discusses methodologies for evaluating credit ratings of Investment Holding Companies. I analyze Standard & Poor’s and Moody’s rating approaches, evaluate their soundness based on theoretical grounding and empirical evidence, and suggest improvements.

Credit market freezes in which debt issuance declines dramatically and market liquidity evaporates are typically observed during financial crises. In the financial crisis of 2008-09, the structured credit market froze, issuance of corporate bonds declined, and secondary credit markets became highly illiquid. In this paper we analyze liquidity in bond markets during financial crises and compare two main theories of liquidity in markets: (1) asymmetric information and adverse selection, and (2) heterogenous beliefs. Analyzing the 1873 financial crisis as well as the 2008-09 crisis, we find that when bond value deteriorates, bond illiquidity increases, consistent with an adverse selection model of the information sensitivity of debt contracts. While we show that the adverse-selection model of debt liquidity explains a large portion of the rise in illiquidity, we find little support for the hypothesis that opinion dispersion explains illiquidity in financial crises.

This paper provides the first systematic analysis of the link between economic, political, and social conditions and the global phenomenon of ISIS foreign fighters. We find that poor economic conditions do not drive participation in ISIS. In contrast, the number of ISIS foreign fighters is positively correlated with a country's GDP per capita and Human Development Index (HDI). In fact, many foreign fighters originate from countries with high levels of economic development, low income inequality, and highly developed political institutions. Other factors that explain the number of ISIS foreign fighters are the size of a country's Muslim population and its ethnic homogeneity. Although we cannot directly determine why people join ISIS, our results suggest that the flow of foreign fighters to ISIS is driven not by economic or political conditions but rather by ideology and the difficulty of assimilation into homogeneous Western countries.

Do bankrupt firms impose negative externalities on their nonbankrupt competitors? We propose and analyze a collateral channel in which a firm’s bankruptcy reduces the collateral value of other industry participants, thereby increasing their cost of debt financing. We identify the collateral channel using novel data of secured debt tranches issued by U.S. airlines that include detailed descriptions of the underlying collateral pools. Our estimates suggest that industry bankruptcies have a sizeable impact on the cost of debt financing of other industry participants. We discuss how the collateral channel may lead to contagion effects that amplify the business cycle during industry downturns. DO BANKRUPT FIRMS affect their solvent nonbankrupt competitors? Although a large body of research studies the consequences of bankruptcy reorganizations and liquidations for those firms that actually file for court protection (e.g., Asquith, Gertner, and Scharfstein (1994), Hotchkiss (1995), and Str¨ omberg (2000)), little is known about the externalities that bankrupt firms impose on other firms operating in the same industry. Any such externalities would be of particular concern, as they may give rise to self-reinforcing feedback loops that amplify the business cycle during industry downturns. Indeed, the potential for contagion effects was of particular concern during the financial panic of 2007 to 2009, where insolvent bank liquidations and asset sell offs imposed “fire-sale” externalities on the economy at large (see, e.g., Kashyap, Rajan, and Stein (2008)). In this paper, we identify one channel through which bankrupt firms impose negative externalities on nonbankrupt competitors, namely, through their impact on collateral values. We use the term “collateral channel” to describe this effect. According to the collateral channel, one firm’s bankruptcy reduces the

We provide novel evidence linking the level of creditor protection provided by law to the degree of usage of technologically older, vintage capital in the airline industry. Using a panel of aircraft-level data around the world, we find that better creditor rights are associated with both aircraft of a younger vintage and newer technology, as well as firms with larger aircraft fleets. We propose that by mitigating financial shortfalls, enhanced legal protection of creditors facilitates the ability of firms to make large capital investments, adapt advanced technologies, and foster productivity.

Financial regulation was as hotly debated a political issue in the 19th century as it is today. We study the political economy of state usury laws in 19th century America. Exploiting the wide variation in regulation, enforcement, and economic conditions across states and time, we find that usury laws when binding reduce credit and economic activity, especially for smaller firms. We examine the motives of regulation and find that usury laws coincide with other economic and political policies favoring wealthy political incumbents, particularly when they have more voting power. The evidence suggests financial regulation is driven by private interests capturing rents from others rather than public interests protecting the underserved. WE EXAMINE THE MOTIVES and consequences of financial regulation to better understand the implications of regulation for financial development and economic growth. While the current global financial crisis has reinvigorated the debate on financial regulation’s effects and motives, there is a long history of financial regulation and development we can examine to shed light on these issues. Specifically, we study the political economy of financial regulation and its consequences through the lens of usury laws in 19th century America. Usury laws are arguably the oldest form of financial regulation—mentioned in both the Bible and the Koran and dating back to ancient Rome—having long been

Collateralized Loan Obligations (CLOs) were one of the largest and fastest growing segments of the structured finance market, fueling the 2003-2007 boom in syndicated loans and leveraged buyouts. The credit crisis brought CLO issuance to a halt, and as a result the leveraged loan market dried up. Similar to other structured finance products, investors in CLOs rely heavily on credit rating provided by the rating agencies, yet little is known about CLO rating practices. This paper attempts to fill that gap. Using novel hand-collected data on 3,912 tranches of Collateralized Loan Obligations (CLO) we document the rating practices of CLOs and analyze their existing structures.

We examine how collateral affects the cost of debt capital. Theories based on borrower moral hazard and limited pledgeable income predict that collateral increases the availability of credit and reduces its price. Testing these theories is complicated by the very selection problem which they imply: creditors will demand collateral precisely from those borrowers who are riskier. This selection problem leads to a positive relation in the data between the presence of collateral and the loan yield. Analyzing the extensive margin of collateral use, therefore, masks the hypothesized negative impact that collateral exhibits on debt yields. In this paper, we alleviate this problem by focusing on a particular industry and examining its intensive, rather than extensive, margin of collateral use. Using a novel data set of secured debt issued by U.S. airlines, we construct industry-specific measures of collateral redeployability. We show that debt tranches that are secured by more redeployable collateral exhibit lower credit spreads, higher credit ratings, and higher loan-to-value ratios -- an effect which our estimates show to be economically sizeable. Our results suggest that the ability to pledge collateral, and in particular redeployable collateral, lowers the cost of external financing and increases debt capacity.

How do liquidation values affect financial contract renegotiation? While the "incomplete-contracting" theory of financial contracting predicts that liquidation values determine the allocation of bargaining power between creditors and debtors, there is little empirical evidence on financial contract renegotiations and the role asset values play in such bargaining. This paper attempts to fill this gap. We develop an incomplete-contracting model of financial contract renegotiation and estimate it using data on the airline industry in the United States. We find that airlines successfully renegotiate their lease obligations downward when their financial position is sufficiently poor and when the liquidation value of their fieet is low. Our results show that strategic renegotiation is common in the airline industry. Moreover, the results emphasize the importance of the incomplete contracting perspective to real-world financial contract renegotiation.

I investigate the effect of assets’ liquidation values on capital structure by exploiting the diversity of track gauges in nineteenth-century American railroads. The abundance of track gauges limited the redeployability of rolling stock and tracks to potential users with similar track gauge. Moreover, potential demand for both rolling stock and tracks was further diminished when many railroads went under equity receiverships. I find that the potential demand for a railroad’s rolling stock and tracks were significant determinants of debt maturity and the amount of debt that was issued by railroads. The results are consistent with liquidation values models of financial contracting and capital structure. (JEL G32, G33, L92, N21, N71) An extensive theoretical literature analyzes financial decisions from an “incomplete contracting” perspective. The driving force in this approach is the right to foreclose on the debtor’s assets in the case of default, and the theory predicts that optimal debt structure depends on how costly it is for creditors to liquidate assets. Despite the abundant theory, there is relatively little empirical evidence on the relation between liquidation value and debt structure. Testing the theory requires detailed information about the assets, their liquidation values, and the capital structure of the firm. Unfortunately, liquidation values are typically not observed by the econometrician, and crude accounting proxies such as fixed-asset ratio are far from being accurate. I provide empirical evidence on the link between liquidation values and debt maturity using a unique data set of nineteenth-century American railroads and exploiting variation in track gauges—the width of the tracks—to measure asset salability.

This paper studies the relation between the human capital of suicide bombers and the outcomes of their suicide attacks. We argue that human capital is an important factor in the production of terrorism and that if terrorists behave rationally, we should observe that more able suicide bombers are assigned to more important targets. To validate the theoretical predictions and estimate the returns to human capital in suicide bombing, we use a unique dataset detailing the biographies of Palestinian suicide bombers, the targets they attack, and the number of people that they kill and injure. Our empirical analysis suggests that older and more educated suicide bombers are being assigned by their terror organization to more important targets. We find that more educated and older suicide bombers are less likely to fail in their mission and are more likely to cause increased casualties when they attack.

We examine the impact of asset liquidation value on debt contracting using a unique set of commercial property non-recourse loan contracts. We employ commercial zoning regulation to capture the flexibility of a property's permitted uses as a measure of an asset's redeployability or value in its next best use. Within a census tract, more redeployable assets receive larger loans with longer maturities and durations, lower interest rates, and fewer creditors, controlling for the current value of the property, its type, and neighborhood. These results are consistent with incomplete contracting and transaction cost theories of liquidation value and financial structure.

This paper identifies a new channel through which bankrupt firms undergoing liquidation impose negative externalities on their nonbankrupt peers. The liquidation of a retail chain weakens the economies of agglomeration in any given local area, reducing the attractiveness of retail centers for remaining stores and leading to contagion of financial distress. We find that firms with greater geographic exposure to bankrupt retailers are more likely to close stores in affected areas. We further show that the effect of these externalities on nonbankrupt peers is higher when affected stores are smaller and are operated by firms in financial distress.Received December 16, 2015; editorial decision June 28, 2018 by Editor Philip Strahan.

This paper shows that illiquidity in short-term credit markets during the financial crisis may have sharply curtailed the supply of non-bank consumer credit. Using a new data set linking every car sold in the United States to the credit supplier involved in each transaction, we show that the collapse of the asset-backed commercial paper market decimated the financing capacity of captive leasing companies in the automobile industry. As a result, car sales in counties that traditionally depended on captive-leasing companies declined sharply. Although other lenders increased their supply of credit, the net aggregate effect of illiquidity on car sales is large and negative. We conclude that the decline in auto sales during the financial crisis was caused in part by a credit supply shock driven by the illiquidity of the most important providers of consumer finance in the auto loan market: the captive leasing arms of auto manufacturing companies. These results also imply that interventions aimed at arresting illiquidity in credit markets and supporting the automobile industry might have helped to contain the real effects of the crisis.

Yes, it did. We use exogenous variation in banks’ incentives to conform to the standards of the Community Reinvestment Act (CRA) around regulatory exam dates to trace out the effect of the CRA on lending activity. Our empirical strategy compares lending behavior of banks undergoing CRA exams within a given census tract in a given month to the behavior of banks operating in the same census tract-month that do not face these exams. We find that adherence to the act led to riskier lending by banks: in the six quarters surrounding the CRA exams lending is elevated on average by about 5 percent every quarter and loans in these quarters default by about 15 percent more often. These patterns are accentuated in CRA-eligible census tracts and are concentrated among large banks. The effects are strongest during the time period when the market for private securitization was booming.

The U.S. Federal Reserve used the Term Auction Facility (TAF) to provide term funding to eligible depository institutions from December 2007 to March 2010. According to the Fed, the purpose of TAF was to inject term funds through a broader range of counterparties and against a broader range of collateral than open market operations. The overall goal of the TAF was to ensure that liquidity provisions could be disseminated efficiently even when the unsecured interbank markets were under stress. In this paper I use the TAF micro-level loan data and find that about 60 percent of TAF loans went to foreign banks that pledged asset-backed securities as collateral for these loans. The data and analysis illustrate the major role that foreign - in particular, European - banks currently play in the U.S. financial system and the resultant currency mismatch in their balance sheets. The data suggest that foreign banks had to borrow from the Federal Reserve Bank to meet their dollar-denominated liabilities.