Research

When is a fiscal union appropriate for a monetary union? In a monetary union without fiscal externalities, when local fiscal authorities have an informational advantage over a central fiscal authority in terms of their knowledge of countries' preferences for government spending, a decentralized fiscal regime dominates a centralized one. Our novel result is that in the presence of fiscal externalities across countries, however, a decentralized fiscal regime is optimal for small monetary unions, whereas a centralized fiscal regime is optimal for large ones. These results shed new light on the debate on fiscal integration within the EU and its enlargement.

This paper investigates how risk should be shared between workers who require incentives and retirees who do not. We analyze the impact of incentives on workers' ability to bear risk and examine how the timing of incentives through entitlements should vary depending on the state of the economy. Our findings suggest that perfect risk sharing is optimal when the utility from consumption is logarithmic or when aggregate productivity growth is independent and identically distributed. Our numerical analysis suggests that the deviation from perfect risk sharing is small. We relate the quantitative findings to the failure of a consumption-based stochastic discount factor (SDF) to price economic growth, which is reminiscent of the equity premium puzzle. Once we augment our model with shocks that generate volatile enough SDFs, numerical deviations from perfect risk sharing are substantial.

We study the optimal timing of investment in a dynamic moral hazard setting. The principal hires an agent to develop a project, whose progression is uncertain, influenced by random events, and unobservable actions taken by the agent. The principal has two margins to dynamically incentivize the agent: adjusting compensation upon project completion and changing the required threshold for completion. Our novel result is that the principal never uses the latter instrument: it sets a constant threshold, invariant to both the project's progression and the agent's promised compensation. This threshold is the same as in the observable effort case, implying that the presence of moral hazard does not distort the investment margin, only the expected time to complete the project. Instead, the principal provides incentives by adjusting the agents' expected compensation based on the project's timeline and progress. Quantitatively, compensation declines as time passes, but remains conditionally uncorrelated with the fluctuations in the project's progression. These two features of the optimal contract -- constant completion requirements and decaying compensation -- match contracts observed in practice, e.g. in procurement settings. Finally, we argue that the contracts observed in practice approximate the optimal one, rationalizing their usage and prevalence in settings with optimal investment under moral hazard.

We apply ideas from fiscal federalism to derive new results on how fiscal authority should be delegated within a monetary union. We consider a monetary-economy model, in which governments finance their expenditures with nominal debt and inflation has a negative effect on productivity. If the monetary authority has commitment, then a version of Oates's (1999) decentralization result holds. By contrast, when the monetary authority lacks commitment, the resulting time-inconsistency problem generates an indirect endogenous fiscal externality. In this case, when a country-level fiscal authority chooses a higher level of nominal debt, it induces the monetary authority to inflate more. Since the country-level fiscal authority does not take into account this adverse indirect effect of its actions on inflation, a negative fiscal externality arises, which becomes more severe as the number of countries in the monetary union increases. Hence, a decentralized regime is optimal for small monetary unions, whereas a fiscal union is optimal for sufficiently large ones. Our key new result is that as the size of a monetary union increases, it becomes relatively more desirable to centralize fiscal authority.

We study the stability of social networks under conditions of imperfect monitoring, where agents cannot fully observe others' decisions to create or sever links within the network. Our analysis begins with the case where agents can only monitor their direct neighbors. To account for this limitation, we propose the novel concept of Peer-Monitored Stability, which expands the set of stable networks beyond the traditional framework of Pairwise Stability. We prove that for two widely studied payoff structures, distance-based and degree-based, any Pareto-efficient network is Peer-Monitored Stable. Extending our framework, we consider scenarios in which agents can monitor indirect connections within a defined radius of distance. We introduce a measure of network stability based on the minimal level of monitoring required to stabilize the network. This measure provides a full ranking of the stability of social networks. Finally, we apply our measure to mixed externalities models and derive non-trivial upper bounds for the stability of Pareto-efficient networks within the class of degree-distance-based payoffs.