My dissertation studies the interaction between business cycles in the time series and inequality in cross-section, of which racial inequality is one of the most salient dimensions. The first chapter of my dissertation explores how heterogeneous behaviors over business cycles affect wealth inequality. Wealth is distributed more unevenly than income, and one contributing factor might be that richer households earn higher portfolio returns. I uncover one channel that causes portfolio returns to be increasing in wealth: Poorer households consistently buy risky assets in booms—when expected returns are low—and sell after a bust—when expected returns are high. Although time-varying expected returns are a robust empirical fact, theories are ambiguous on whether poorer or richer households engage in such cyclical trading patterns. I estimate the trading patterns for households across wealth levels, in the US housing market for 1988-2013. I interact housing ownership patterns from deeds records with household-level wealth, which I infer from merging owners' surnames with their name-based income in the 1940 full Census. The estimated dispersion in expected returns from this “buy-high-sell-low” channel is large: The interquartile-range difference is 60 basis points per year. The channel predicts that geographies with historically higher volatility will feature more wealth inequality than income inequality: I verify this implication in the data. These results suggest that a government policy intended to boost poorer households' wealth via homeownership can backfire if it ignores the status of house prices. The second chapter of my dissertation finds that racial prejudice, and hence racial discrimination, is countercyclical and may partially account for the higher incidence of business cycles on racial minorities. It starts with the question: Does deteriorating economic condition cause racial prejudice to rise? Despite psychological/sociological microfoundations and multiple economic implications of the inferiority of racial prejudice, empirical evidence has been inconclusive. This paper constructs better-powered measures of local areas' racial prejudice using Google searches for racial slur and "KKK," white-on-black non-pecuniary crime, survey responses and corporal punishment at school. Across these measures, racial prejudice correlates negatively with the local economic condition. Using predictors of local economic condition in the 2000s, I show that the relationship is causal: lower income causes higher racial prejudice in the area. Within the context of this dissertation, the third chapter of my dissertation studies the role of racial prejudice and discrimination in determining racial economic inequality, using a natural experiment that shifts local areas' racial bias against black Americans. Following the Obama presidency, pundits and researchers have asked how having a black leader affects white Americans’ attitude toward black Americans. Given theoretical ambiguity, I test for causal impact of a black leader on racial attitudes using local elections of black politicians at the municipal level. Using Race Implicit Attitude Test (IAT) scores as a measure of racial prejudice and close election regression discontinuity design for causal inference, I find that electoral victory of a black leader leads to a rise in racial prejudice among white Americans against black Americans. Following a close electoral victory, the IAT score rises by about 0.03, or 7% of the average black-white difference. Simultaneously, using the same discontinuity design, black politicians’ electoral victory causes lower employment and higher mortgage denial for black Americans relative to white Americans. By ruling out other channels by which electoral victory could adversely affect black Americans’ relative economic outcome, I argue that the rise in prejudice caused black-white economic inequality to widen.




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