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.

Within the context of the Brexit referendum, we show that changes in the perception of social norms impact behavior. The referendum revealed new information about views over immigrants at country level. This new information caused a shift in the social norm which made xenophobic expressions more acceptable. At the margin, some of these expressions involve hate crime. We argue that the post-referendum behavioral change increased in the level of surprise at the referendum result, and that observed geographical variations of the effect depend on underlying local views on immigrants. Survey data corroborate these uncovered facts and support our theoretical mechanism.

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.