How should financial institutions be regulated? How do these decisions affect individuals?
Professor Eduardo Dávila's body of research focuses on “normative” questions, or what economists call welfare assessments: How are people better or worse off as a result of an economic or policy change?
Spanning a wide range of topics within macroeconomics and finance—including monetary policy, trading, household finance, insurance, and optimal taxation—his work looks at the policy environment to see what is desirable or optimal given that setting.
In 2023, he published in several of the top economics journals—including American Economic Review, Journal of Political Economy, and The Review of Economic Studies—and earned a highly competitive five-year grant from the U.S. National Science Foundation’s Faculty Early Career Development (CAREER) Program. The award will advance his work in evaluating potential macro-financial policies through the lens of how they might affect individuals. In the Q&A below, Professor Dávila discusses the origins of his research interests, and how he is applying research to policy.
What motivated you to start working on normative questions?
I started my PhD in economics in 2008, right in the heart of the global financial crisis— September 2008 was the month the US government took over Fannie Mae and Freddie Mac, and Lehman Brothers filed for bankruptcy—and I had always been interested in financial markets. I was also interested in welfare questions, and when I looked around at the big questions in finance that people were working on then, most of them were not normative, and not centered around questions of welfare. It felt like most of the field of finance was just not ready to provide answers to normative questions: How should you regulate institutions? How should you regulate trading? What are the welfare implications of these decisions?
Especially at the time of my PhD, everyone wanted to answer these questions, and talk about optimal policies, but there was a lack of research about how macro-financial policy should actually operate. Traditionally, the field looked more at questions around uncertainty, time, financial contracting, and the like, but I was more interested in bringing tools from public economics and adapting them to the context of macro-finance. My goal has been to combine insights from welfare economics and public finance, and apply them to macro-financial policy, so that we’re better able to understand how major decisions affect people’s experience of the economy.
You’ve worked on a lot of different policy issues—do you see your research as having a broad goal?
The heart of what I’m trying to do as a researcher is to lay the foundations for the optimal design of policy in a way that incorporates all the welfare implications of what a policy is actually doing and how it affects people.
I like to use the term ‘welfare primacy,’ meaning that my research starts from the perspective that all of economics is really about the welfare of people—with welfare meaning whether things are good or bad for individuals. In other words, when you think about a policy, who is better off, and who is worse off? Optimal policy should aim to make as many people better off as possible, and to the highest degree. My work takes a rigorous look at these types of questions, and does so with a mix of theory and measurement. In order to make welfare assessments—to convey whether people are better or worse off when a policy takes place—you need a theoretical framework. It’s impossible to do welfare analysis without this. So a lot of the work is really about building this framework, and then doing rigorous measurement, in a way that’s useful to policymakers.
While a lot of the work in macro-finance is not focused on normative questions, Yale’s Department of Economics has established a strong tradition, with people like James Tobin, Robert Shiller, and John Geanokoplos, of research that takes issues like general equilibrium and welfare economics seriously. I’m thrilled to be in a place that carries on this tradition.