Working Papers


with Abhay Aneja

Incarceration directly affects a meaningful share of the U.S. adult population, and affects the society at large through its effects on future criminal activity. We document a financial channel pivotal to our understanding of the criminal cycle. We show that incarceration significantly reduces access to credit that in turn leads to substantial increases in recidivism, creating a perverse feedback loop. To show this, we examine: (i) the causal effects of incarceration on access to credit, (ii) how incarceration-induced information asymmetries distort efficient credit allocation, and (iii) the causal impact of lack of access to credit on recidivism. Exploiting random assignment of criminal cases to courtrooms, we document significant post-release reductions in credit and in credit scores. Testing for adverse or advantageous selection in loans given to ex-convicts, we find no evidence that ex-convicts are stigmatized by lenders. We find, instead, that labor market distortions in the form of suppressed wages for ex-convicts spillover into credit markets because lenders, who use income to screen applicants, are unable to form reliable estimates of default risk. This informational distortion through the income channel is worsened by the ex-convicts' inability to service their debt while incarcerated, which further drives credit flows to ex-convicts below the full-information benchmark. Finally, using a regression discontinuity design, we show this loss of access feeds back into higher recidivism rates, thus amplifying the effects of incarceration on recidivism. In this regard, we show that the crime-reduction goal of incarceration is undermined by the financial distortions that imprisonment creates. More generally, our findings highlight how policy goals can be undermined by unintended and self-induced market information asymmetries and incompleteness.


How Corporate Debt Perpetuates Labor Market Disparities:  
The Link Between Capital Structure, Unemployment, and Wages

with Abhay Aneja

This paper studies corporate debt as a transmission mechanism for unemployment risk in labor markets. While high firm-specific financial leverage increases a worker's likelihood of  becoming  unemployed i.e., unemployment  risk, high aggregate corporate leverage affects the value of outside jobs and hence decreases the worker's outside option.  We show that financial leverage can increase or decrease wages depending on how labor market conditions affect the trade-off between compensation for unemployment risk and a weaker outside option. The resulting effect is that leverage dampens fluctuations in wages and amplifies fluctuations in unemployment. When increases in the cost of labor are a result of employment regulations, firms issue more debt, mitigate the regulatory costs, and weaken the regulation's intended objectives by increasing unemployment risk. Consistently with this, we present evidence that firms increased corporate debt following the passage of anti-discrimination regulation during the Civil Rights Movement and that this increase in corporate debt disproportionately exposed minority workers to higher levels of unemployment risk that persist today.

Awards: Becker-Friedman Institute Macro Financial Modeling Fellowship
Presentations:  Bretton Woods Macro Financial Modeling Summer Session

The Labor Market Effects of Minority Political Power: Evidence from the Voting Rights Act of 1965

with Abhay Aneja

A central objective of democratic societies is to provide racial and ethnic minorities opportunities for economic advancement that are equal to their majority counterparts. In this paper, we test whether political incorporation contributes to such equality by examining whether minority voting rights are linked to individual economic gains in the form of labor market progress. We use the passage of the 1965 Voting Rights Act to examine whether the re-enfranchisement of black Americans in the American South contributed to their improved economic status over the second half of the twentieth century. We exploit discontinuities at state borders to show that counties where political rights were protected by the federal government experienced larger reductions in the black-white wage gap between 1950 and 1980. In addition to showing that the VRA improved blacks Americans’ wages, we also provide evidence of a mechanism that has been less-often discussed in research examining racial disparities in the labor market: public sector employment. Finally, we also show that the wage gains of black Americans occur almost immediately after passage of the VRA. As such, our results suggest that wage gains are likely not caused (at least exclusively) by differential changes in human capital accumulation as schools attended by black children improved.

Presentations: American Law and Economics Association Annual Meeting, All California Economic History Meeting