We introduce a banking sector and heterogeneous agents in the Matsuyama et al. (2016) dynamic over-lapping generations neoclassical model with good and bad projects. The model captures the benefits and costs of an advanced banking system which can facilitate economic development when allocates resources to productive activities but can also hamper progress when invests in projects that do not contribute to capital formation. When the economy achieves higher stages of development it becomes prone to cycles. We show how the disparity of incomes across agents de-pends on changes in both the prices of the factors of production and the reallocation of agents across occupations.

We introduce endogenous fire sales into a simple network model. For any given initial distribution of shocks across the network, we develop a clearing algorithm to solve for the financial equilibrium. We then utilise the results to perform ex ante risk assessment and derive risk premia for every balance sheet item where liabilities are differentiated according to priority rights. We find that risk premia reflect both idiosyncratic risk and risk of contagion (network risk). Moreover, we show that network risk magnifies the gap between the risk premia of equity and debt. We also perform comparative statics, showing that changes to the distribution of shocks and network structure can have substantial effects on the level of systemic losses.

We study partial commitment in leader-follower games. A collection of subsets covering the leader's action space determines her commitment opportunities. We characterize the outcomes resulting from all possible commitment structures of this kind. If the commitment structure is an interval partition, then the leader's payoff is bounded by the payoffs she obtains under the full and no-commitment benchmarks. We apply our results to study new design problems.

This paper investigates self-serving belief distortion about dominant norms of honesty. We consider an environment where the subject can earn a monetary reward by lying. In contrast to the existing literature on motivated beliefs, we do not focus on distortion in one dimension alone, but instead consider beliefs in two dimensions, both of which have been shown to affect individual behavior: empirical (what other people do) and normative (what other people approve of). Our experimental findings are consistent with the predictions of a dual-self model in which conditional norm-followers strategically distort their beliefs to justify self-serving behavior. We argue that the asymmetry between what we infer from empirical as opposed to normative information is a key ingredient of belief distortion in our context: widespread honest behavior is a strong indicator of disapproval of lying (and thus that a norm of honesty is followed), but the opposite does not hold. Taken together, we show why, when, and which norm-relevant beliefs are strategically distorted.