Eduardo Dávila Publications

This paper develops a welfare accounting decomposition that identifies and quantifies the origins of welfare gains and losses in general economies with heterogeneous individuals and disaggregated production. The decomposition — exclusively based on preferences and technologies — first separates efficiency from redistribution considerations. Efficiency comprises i) exchange efficiency, which captures allocative efficiency gains due to reallocating consumption and factor supply across individuals, and ii) production efficiency, which captures allocative efficiency gains due to adjusting intermediate inputs and factors, as well as technical efficiency gains from primitive changes in technologies, good endowments, and factor endowments. Leveraging the decomposition, we provide a new characterization of efficiency conditions in disaggregated production economies with heterogeneous individuals that carefully accounts for non-interior solutions, extending classic efficiency results in Lange (1942) or Mas-Colell et al. (1995). In competitive economies, prices (and wedges) are directly informative about the welfare-relevant statistics that shape the welfare accounting decomposition, which allows us to characterize a generalized Hulten’s theorem and a new converse Hulten’s theorem. We present several minimal examples and four applications to workhorse models in macroeconomics: i) the Armington model, ii) the Diamond-Mortensen-Pissarides model, iii) the Hsieh-Klenow model, and iv) the New Keynesian model.

This paper shows that it is possible to define an unambiguous notion of the direct effect of a parameter perturbation on the value of an optimization problem’s objective away from an optimum for problems with linearly homogeneous constraints. This notion of the direct effect relies on reformulating the optimization problem using shares as choice variables, and has the interpretation of holding choice variables — when formulated as shares — fixed. This short paper contains one formal “non-envelope” theorem and four applications to i) consumer demand, ii) cost minimization, iii) planning in exchange economies, and iv) planning in production economies.

This paper studies the social value of closing price differentials in financial markets. We show that arbitrage gaps exactly correspond to the marginal social value of executing an arbitrage trade. Moreover, arbitrage gaps and price impact measures are sufficient to compute the total social value from closing an arbitrage gap, which may emerge for different reasons, including nonpecuniary benefits of holding particular assets. Theoretically, we show that, for a given arbitrage gap, the total social value of arbitrage is higher in more liquid markets. We compute the welfare gains from closing arbitrage gaps for covered interest parity violations.

This paper studies the optimal determination of deposit insurance when bank runs are possible. We show that the welfare impact of changes in the level of deposit insurance coverage can be generally expressed in terms of a small number of sufficient statistics, which include the level of losses in specific scenarios and the probability of bank failure. We characterize the wedges that determine the optimal ex ante regulation, which map to asset- and liability-side regulation. We demonstrate how to employ our framework in an application to the most recent change in coverage in the United States, which took place in 2008.

This article studies the optimal design of corporate taxes when firms have private information about future investment opportunities and face financial constraints. A government whose goal is to efficiently raise a given amount of revenue from its corporate sector should attempt to tax unconstrained firms, which value resources inside the firm less than financially constrained firms. We show that a corporate payout tax (a tax on dividends and share repurchases) can both separate constrained and unconstrained firms and raise revenue and is therefore optimal. Our quantitative analysis implies that a revenue-neutral switch from profit taxation to payout taxation would increase the overall value of existing firms and new entrants by 7%⁠. This switch could be implemented in the current US tax system by making retained earnings fully deductible.

This paper studies leverage regulation when equity investors and/or creditors have distorted beliefs relative to a planner. We characterize how the optimal regulation responds to arbitrary changes in investors'/creditors' beliefs, relating our results to practical scenarios. We show that the optimal regulation depends on the type and magnitude of such changes. Optimism by investors calls for looser leverage regulation, while optimism by creditors, or jointly by both investors/creditors, calls for tighter leverage regulation. Our results apply to environments with (i) planners with imperfect knowledge of investors'/creditors' beliefs, (ii) monetary policy, (iii) bailouts and pecuniary externalities, and (iv) endogenous beliefs.

This paper characterizes the optimal transaction tax in an equilibrium model of financial markets. If investors hold heterogeneous beliefs unrelated to their fundamental trading motives and the planner calculates welfare using any single belief, a positive tax is optimal, regardless of the magnitude of fundamental trading. Under some conditions, the optimal tax is independent of the planner's belief. The optimal tax can be implemented by adjusting its value until total volume equals fundamental volume. Knowledge of (i) the share of nonfundamental trading volume and (ii) the semielasticity of trading volume to tax changes is sufficient to quantify the optimal tax.