Research

How does mortgage affordability shape city growth and fertility choices? We study the revolutions in mortgage financing that took place in the U.S. between 1933 and 1940, which created a national mortgage market facilitating mortgage capital to move from the financial centers to the rest of the country. By digitizing city-level census data and a new sample of loan-level data, we show that differences in mortgage rates across cities went from nearly 300 basis points to just over 100 in only six years. This national mortgage market allowed initially capital-scarce places to grow more than capital-abundant ones. In the decades following the housing policies, cities that had higher mortgage rates before the shock saw higher growth in rates of homeownership, population, housing construction, and house prices. Young households in these cities witnessed higher birth rates even before the post-World War II baby boom.

We document a Kuznets curve for construction productivity in 20th-century America. Homes built per construction worker remained stagnant between 1900 and 1940, boomed after World War II, and then plummeted after 1970. The productivity boom from 1940 to 1970 shows that nothing makes technological progress inherently impossible in construction. What stopped it? We present a model in which local land-use controls limit the size of building projects. This constraint reduces the equilibrium size of construction companies, reducing both scale economies and incentives to invest in innovation. Our model shows that, in a competitive industry, such inefficient reductions in firm size and technology investment are a distinctive consequence of restrictive project regulation, while classic regulatory barriers to entry increase firm size. The model is consistent with an extensive series of key facts about the nature of the construction sector. The post-1970 productivity decline coincides with increases in our best proxies for land-use regulation. The size of development projects is small today and has declined over time. The size of construction firms is also quite small, especially relative to other goods-producing firms, and smaller builders are less productive. Areas with stricter land use regulation have particularly small and unproductive construction establishments. Patenting activity in construction stagnated and diverged from other sectors. A back-of-the-envelope calculation indicates that, if half of the observed link between establishment size and productivity is causal, America’s residential construction firms would be approximately 60 percent more productive if their size distribution matched that of manufacturing.

Governments often try to foster regional convergence by transferring resources to poorer regions. Despite being large and repeated over time, such transfers seldom generate growth. I offer an explanation that hinges on local political economy constraints by developing a spatial-equilibrium model in which local voters choose how to spend the transfers to their region. Local voting may upend the effect of the regional transfer and may end up making the recipient region poorer, even if voters are perfectly sophisticated and anticipate the general equilibrium consequences of their choices. Low skilled political majorities in poorer regions might prefer subsidizing declining sectors rather than investing in innovative projects that mostly benefit high skilled workers, thus making poorer regions even more intensive in unskilled industries. I test the predictions of the model using data from the EU Cohesion Policy. I find that EU transfers are less likely to be invested towards technological development and innovation in regions with many low skilled workers, and that this then leads to fewer jobs created per euro. Consistent with the theory, both of these facts occur only when local governments manage the funds, but not when these are managed by centrally appointed authorities, who do not cater to local voters.

Why, in the face of scandals and misbehaviors, partisan supporters don’t seem to change their minds about their favored candidates? We study individuals’ online engagement with negative news on candidates in the 2016 US Presidential Election. Compared to independents, partisan users avoid commenting bad news on their favorite candidate, but seek them on its opponent, a political “ostrich effect”. When they do comment on bad news about their candidate, they try to rationalize them, display a more negative sentiment, and are more likely to cite scandals of the opponent. This behavior is consistent with the predictions of a model of online interactions where paying attention to non-consonant news is emotionally or psychologically costly, while paying attention to consonant ones is pleasing. Because users enjoy receiving positive feedback on their views, social media amplify intrinsic biases that drive ideological segregation.

We study the end of the US Federal Reserve’s geographic system of reserve requirements in 1972, which eliminated geographic differences in the reserves that banks were required to hold against deposits. At the end of this regime, larger cities, which were designated Reserve Cities (RCs) under the geographic regime, experienced a 2 to 4.5 percentage point larger decrease in reserve requirements relative to smaller cities. We exploit the fact that some medium-sized cities were categorized as RCs only because they hosted a branch of their regional Fed Bank, even though they were much smaller than the average RC. We compare banks in these medium-sized RCs to banks in similarly sized non-RCs and find that both lending and deposits increased as reserve requirements declined. This increase was driven by banks subject to the Fed’s reserve requirements (member banks), while non-member banks showed no change. We find no effects of this monetary expansion on employment or wages. We aim to explain this apparent monetary neutrality by showing that changes in the money supply are only impactful when they affect interest rates. In our setting, these rates were likely unaffected by our local shocks and were largely pinned down by aggregates beyond the limits of our medium-sized cities.