Research

Firms can discipline workers through the threat of termination, but the value of continued employment depends on job opportunities in the external labor market. We study how bankers’ outside options affect risky lending. Using granular employment histories and predetermined coworker links, we construct a time-varying bank-level measure of outside options from hiring at connected financial institutions. A standard-deviation improvement in outside options raises non-investment-grade lending growth by 1.6 to 3.0 percentage points and shifts loans toward borrowers with greater ex-ante and realized risk without detectable compensating loan spreads. Measures of bank and systemic risk also increase. Among individually matched bankers, outside options increase borrower risk and weaken the separation penalty following poor loan performance. The risk response is concentrated among younger bankers, who are more mobile. Financial advisors exhibit a similar pattern of increased misconduct followed by weaker employment penalties under improved outside options. The evidence indicates that workplace discipline is dependent on external labor market conditions, transmitting labor market fluctuations into credit risk.

Keywords: Financial Stability, Risk, Labor Markets, Outside Options

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Many important decisions are made jointly by groups. While groups can draw on and discuss diverse perspectives, they may also suffer from counterproductive dynamics, such as herding and gridlock. To investigate this tension, we study three features that distinguish joint from individual decision-making: composition, communication, and collaborative aggregation. Simple comparisons between joint and individual decisions cannot distinguish their effects. To separate them, we design an experiment in which subjects construct portfolios to maximize returns and minimize volatility, first individually and then in one of three decision modes; each mode differs from adjacent modes by a single feature. We find that composition drives the benefits of joint decision-making: simply pooling two individuals’ independent submissions reduces portfolio concentration and volatility. Communication attenuates these gains by inducing partners to converge on similar portfolios and to prioritize maximizing returns over managing risk. Collaborative aggregation improves decision quality relative to fixed aggregation rules only among partners with differing beliefs. Disentangling these features reveals an offsetting cost of communication that limits the ability of groups to make full use of members’ inputs.

The value-added tax (VAT) is commonly regarded to be non-distortionary due to its de jure trade neutrality. We analyze the effects of the VAT on trade in final goods in the European Union (EU) from 1988 to 2019, and we find that the VAT is de facto non-neutral. Using a gravity approach, we show that a one percentage point VAT increase implies a 5.45% reduction of foreign imports relative to internal trade. While institutional quality, EU accession, and preferential Common Market access cannot explain the over-proportionate reduction in imports, we provide evidence that foreign firm exit drives non-neutrality.

JEL Classification: F10, F14, H24

Keywords: Value-added taxation, trade neutrality, discrimination, border adjustment

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