This article presents a political economic analysis of exit from federations. Over time, members’ benefits from being in a federation can fluctuate because of changes in the state of the world. If a member stops benefitting, it may wish to secede i.e. exit the federation. Based on a real options model, we show that state-contingent exit penalties can induce socially efficient exit decisions. In addition to the substantive implications, this represents a methodological contribution to real options theory. Even if ex-ante specified exit penalties cannot be made state-contingent, they may still enhance social welfare by preventing secession wars. This finding runs counter to the dominant view in the literature that exit clauses should be avoided in federations. As a first test of the model, we derive five hypotheses and show that they hold for the breakup of Yugoslavia and all cases known to us of federations with an exit clause.

We demonstrate the importance of intertemporal marginal propensities to consume (iMPCs) in disciplining general equilibrium models with heterogeneous agents and nominal rigidities. In a benchmark case, the dynamic response of output to a change in the path of government spending or taxes is given by an equation involving iMPCs, which we call the intertemporal Keynesian cross. Fiscal multipliers depend only on the interaction between iMPCs and public deficits. We provide empirical estimates of iMPCs and argue that they are inconsistent with representative- agent, two-agent and one-asset heterogeneous-agent models, but can be matched by models with two assets. Quantitatively, models that match empirical iMPCs predict deficit-financed fiscal multipliers that are larger than one, even if monetary policy is active, taxation is distortionary, and investment is crowded out. These models also imply larger amplification of shocks that involve private borrowing, as we illustrate in an application to deleveraging.

Why has economic inequality risen dramatically over the past few decades even in democracies where individuals could vote for more redistribution? We experimentally study how individuals respond to inequality and find that subjects generally take from richer and give to poorer individuals. However, this behavior removes only a fraction of inequality. Moreover, individuals who give to those who are poorer are generally not the same individuals who also take from others who are richer. These results offer an explanation for the absence of policy interventions that could effectively counter rising differences in wealth: Voters are divided on how to react to inequality in ways that make it difficult to build majority coalitions willing to back political redistribution.

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How the kibbutz movement thrived despite its inherent economic contradictions and why it eventually declined

The authors compile large data sets from Norwegian and US historical censuses to study return migration during the Age of Mass Migration (1850–1913). Norwegian immigrants who returned to Norway held lower-paid occupations than did Norwegian immigrants who stayed in the United States, both before and after their first transatlantic migration, suggesting they were negatively selected from the migrant pool. Upon returning to Norway, return migrants held higher-paid occupations relative to Norwegians who never moved, despite hailing from poorer backgrounds. These patterns suggest that despite being negatively selected, return migrants had been able to accumulate savings and could improve their economic circumstances once they returned home.