Research Page of Jinhui Bai

Journal Articles:

[1] Monetary Equilibria in a Cash-in-Advance Economy with Incomplete Financial Markets (with Ingolf Schwarz), Journal of Mathematical Economics, 2006, 42, 422-451.

Working Papers:

[1] Revealed Political Power, (with Roger Lagunoff), draft coming soon.

Are political outcomes biased toward the wealthy? This paper adopts a "revealed preference" approach to this question. We examine a dynamic policy environment in which long run preferences are unobserved to an outsider but are known to be well ordered by individual income each period. Policy data is observable and represented by a Markov policy rule. Political power is summarized by wealth-weighted voting system with weights that can vary across states. The larger is the voting weight on income in any period, the larger in the political bias. Our task is to assess what, if anything, can the outside observer infer about these weights from the policy rule. Our first result shows that without further knowledge, inference is impossible: any Markov policy rule can be rationalized by any system of wealth-weighted voting under a preference profile in the aforementioned class. We then bring in polling data to augment the observer’s information. Two simple polls are analyzed, each comparing the actual policy choice each period to a fixed alternative. The polls are shown to provide bounds on wealth-weights each period and in some cases can provide information about the change in political inequality across time.

[2] On the Faustian Dynamics of Policy and Political Power, (with Roger Lagunoff), last updated June, 2009

This paper examines the Faustian dynamics of policy and power. We posit a general class of dynamic games in which current policies affect the future distribution of political power, resulting in the following "Faustian trade off": if the current ruler chooses his preferred policy, he then sacrifices future political power; yet if he wants to preserve his future power, he must sacrifice his present policy objectives. The trade-off comes from the fact that the current political ruler/pivotal voter cannot un-couple the direct effect of his policy from its indirect effect on future power.

A Policy-endogenous (PE) equilibrium describes this endogenous transfer of power, and the resulting evolution of policy and political power over time. We show that the Faustian trade-off in a PE equilibrium is decomposed into two basic rationales. The political preservation effect induces more tempered policy choices than if one's policy choice did not affect one's political fortunes. However, the reformation effect induces "more aggressive" policies in order to exploit the productivity gains from policies chosen by even more aggressive successors. We distinguish between political systems that give rise to monotone Faustian dynamics --- political power that progressively evolves toward more fiscally liberal types of leaders, and cyclical Faustian dynamics --- political power that oscillates between liberal and conservative types of leaders. In each case, we show that the Faustian trade off moderates the choices of each type of leader.

[3] Stationary Monetary Equilibrium in a Baumol-Tobin Exchange Economy: Theory and Computation (last updated December 27, 2005).

I study a stationary monetary equilibrium in a Baumol-Tobin exchange economy with two assets (money and bonds) and long-lived, heterogeneous consumers who face uninsurable idiosyncratic endowment risk. Each consumer must pay a fixed cost of exchanging bonds for goods or money, but it is costless to trade money for goods. I characterize the theoretical properties and evaluate the model quantitatively by using calibrated parameters. First, increasing the exogenous growth rate of money increases the nominal interest rate and velocity of money, but decreases the real interest rate, in accordance with the Mundell-Tobin effect. The presence of the Mundell-Tobin effect makes clear the contrast with models with complete financial markets, in which I show that the steady-state real interest rate is equal to the common discount rate of consumers. Second, when the exogenous transaction cost is reduced, the nominal and real interest rates fall and the velocity of money increases. Third, I quantify the implementation and welfare consequences of Friedman's rule. For reasonably calibrated model, the deflation rates consistent with Friedman's rule are only slightly smaller than the discount rate of consumers. In addition, Friedman's rule may reduce average welfare because changes in the lump-sum taxation induce redistributions across consumers.