David Lindequist

 

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Diversity Taxes (with Saumya Deojain)

(revisions requested at Journal of Public Economic Theory)

The sociological literature suggests that within diverse communities, individuals create externalities on each other when they express their identity through the consumption of market goods. We present a model in which local governments use taxation and individuals adjust their social networks to address these identity expression externalities. Our framework enables us to explore the impact of diversity on social networks and taxation, and how the presence of a tax response to identity expression externalities influences network choice. We find that taxation and network adjustments act as strategic complements or substitutes, depending on individuals' preferences for out-group identity expression. Taxes imposed to regulate identity expression externalities either amplify or dampen the network response to such externalities. We analyze US city data on ethnic diversity, taxation, and segregation as outcomes influenced by identity expression externalities that are addressed through local tax policies and network choices.

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Greener Thy Neighbor? On the Welfare Effects of Protectionist Climate Policy (with Saumya Deojain)

The world is witnessing a surge in green industrial policies, with prominent examples such as the U.S. Inflation Reduction Act (IRA) incorporating significant protectionist elements. While economists have traditionally cautioned against protectionism due to its distortive effects, we argue that in the case of climate policies, these distortions can have strategic value by facilitating coordination between countries on climate action. We present a simple model that blends a standard abatement game with a beggar-thy-neighbor game, leading to multiple potential equilibria. Using techniques from the global games literature, we show that uncertainty surrounding the distortions caused by protectionist policies yields a unique equilibrium. We find that protectionist climate policies improve welfare when expected distortions are low, as they promote coordination on climate change mitigation at relatively modest costs. For high expected distortions, protectionist policies are welfare-neutral, as countries are unlikely to adopt them. For intermediate expected distortions, protectionist policies are most harmful, combining a high probability of coordination failure with substantial costs. Our findings suggest that regulators like the WTO could enhance global welfare by limiting, but not entirely banning, protectionist climate policies, especially in the absence of effective climate agreements.

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The Common Currency Channel of Risk Sharing

I propose a novel channel of international risk sharing: the common currency channel. I theoretically show how the central bank of a currency union can use the common currency to insure member countries against consumption risk from idiosyncratic productivity shocks. A trade-off between risk sharing and moral hazard emerges: a central bank which enables risk sharing induces countries to free ride on each other's production efforts. I study this trade-off and derive rules for a central bank striking the optimal balance between insurance and incentives. Monetary policy determines current account imbalances that are financed through the central bank rather than through the transfer of marketable assets. Optimal policy is contingent on the realization of aggregate production and on the severity of the underlying moral hazard friction. Revisiting European Central Bank policies during the Eurocrisis between 2008 and 2014,  I interpret the buildup of TARGET2 balances as risk sharing through the common currency. I find that the common currency channel accounts for up to 60% of risk sharing among Eurozone countries in the early stages of the Eurocrisis. I conclude that the common currency can be a substitute for risk sharing through fiscal integration.​​​