C.V. Starr Research by Topic – page 2

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Energy Economics | Markets and the Welfare | Financial Crises and Macro-Finance Policy | Institutions and Economic Performance | Wealth distribution, Inequality and Redistributive Policies | Banking Systems, Risk and Financial Markets | Polarization and Conflict | Health and Healthcare | Education and Education Policy | Monetary Policy and Prices | Modern Fiscal Policy | The Economics of Development | Labor Force Dynamics and Household Economics | Unemployment and the Labor Market | Experimental Methods, Game theory, and the Economics of Social Psychology | Housing and the Financial Crisis | International Capital Flows, International Prices, and Trade | Stock Markets and Asset Pricing | Economics of Fluctuations and Dynamics | Migration | Misallocation

Monetary Policy and Prices

'A framework for the analysis of self-confirming policies,' Sargent, T. (with P. Battigalli, S. Cerreia-Vioglio, F. Maccheroni, M. Marinacci), 2017.

This paper provides a general framework for the analysis of self-confirming policies. We first study self-conÖrming equilibria in recurrent decision problems with incomplete information about the true stochastic model. Next we illustrate the theory with a characterization of stationary monetary policies in a linear-quadratic setting.

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'An Empirical Study of Trade Dynamics in the Fed Funds Market,' Lagos, R. (with G. Afonso), 2014.

We use minute-by-minute daily transaction-level payments data to document the cross-sectional and time-series behavior of the estimated prices and quantities negotiated by commercial banks in the fed funds market. We study the frequency and volume of trade, the size distribution of loans, the distribution of bilateral fed funds rates, and the intraday dynamics of the reserve balances held by commercial banks. We find evidence of the importance of the liquidity provision achieved by commercial banks that act as de facto intermediaries of fed funds.

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'Monetary Exchange in Over-the-Counter Markets: A Theory of Speculative Bubbles, the Fed Model, and Self-fulfilling Liquidity Crises,' Lagos, R. (with S. Zhang), 2015.

We develop a model of monetary exchange in over-the-counter markets to study the effects of monetary policy on asset prices and standard measures of financial liquidity, such as bid-ask spreads, trade volume, and the incentives of dealers to supply immediacy, both by participating in the market-making activity and by holding asset inventories on their own account. The theory predicts that asset prices carry a speculative premium that reflects the asset’s marketability and depends on monetary policy as well as the microstructure of the market where it is traded. These liquidity considerations imply a positive correlation between the real yield on stocks and the nominal yield on Treasury bonds—an empirical observation long regarded anomalous. The theory also exhibits rational expectations equilibria with recurring belief driven events that resemble liquidity crises, i.e., times of sharp persistent declines in asset prices, trade volume, and dealer participation in market-making activity, accompanied by large increases in spreads and abnormally long trading delays.

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'Turnover Liquidity and the Transmission of Monetary Policy,' Lagos, R. (with S. Zhang), 2018.

We provide empirical evidence of a novel liquidity-based transmission mechanism through which monetary policy influences asset markets, develop a model of this mechanism, and assess the ability of the quantitative theory to match the evidence.

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'Can heterogeneity in price stickiness account for the persistence and volatility of good-level real exchange rates?,' Midrigan, V. (with P. Kehoe), 2007.

The classic explanation for the persistence and volatility of real exchange rates is that they are the result of nominal shocks in an economy with sticky goods prices. A key implication of this explanation is that if goods have differing degrees of price stickiness then relatively more sticky goods tend to have relatively more persistent and volatile good-level real exchange rates. Using panel data, we find only modest support for these key implications. The predictions of the theory for persistence have some modest support: in the data, the stickier is the price of a good the more persistent is its real exchange rate, but the theory predicts much more variation in persistence than is in the data. The predictions of the theory for volatility fare less well: in the data, the stickier is the price of a good the smaller is its conditional variance while in the theory the opposite holds. We show that allowing for pricing complementarities leads to a modest improvement in the theory’s predictions for persistence but little improvement in the theory’s predictions for conditional variances.

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'Pricing in multiple currencies in domestic markets,' Perez, D. (with A. Drenik), 2018.

We document that a significant fraction of prices in domestic markets of emerging economies are set in dollars. More expensive goods are more likely to be priced in dollars. This fact is generalized across countries and holds within goods categories. More tradeable goods are also more likely to be set in dollars. We develop a search model of currency choice of prices to study how inflation and demand characteristics affect price dollarization. Sellers may set prices in dollars to avoid a rapid erosion of the real value of prices at the expense of experiencing a lower willingness to pay by certain buyers.

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'Currency Choice in Contracts,' Perez, D. (with A. Drenik, and R. Kirpalani), 2018.

We study the general equilibrium of an economy with credit chains in which agents choose the currency in which to denominate contracts, and the government
chooses the inflation rate. Denominating contracts in local currency helps mitigate fundamental risk, while denominating in a foreign currency minimizes risks due to the government’s choice of monetary policy. In the aggregate, the equilibrium currency denomination calls for a coordination of currencies in bilateral contracts within a chain to avoid costly default due to currency mismatch. This implies that the incentives to denominate contracts in a foreign currency might persist even after government risk has been significantly reduced. Our model can help explain the observed hysteresis of dollarization that occurred in several Latin American countries. We show that the socially optimal allocation would call for even more dollarization than is privately optimal in order to constrain the government’s choices ex-post. We also study
the role of the credit network structure in determining whether the equilibrium currency choices matter and if so whether they are unique or not.

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'The Currency Composition of Sovereign Debt,' Perez, D. (with P. Ottonello), 2018.

We study the currency composition of sovereign external debt in emerging economies through the lens of a quantitative model in which the government lacks commitment regarding debt and monetary policy. High levels of debt in local currency give rise to incentives to dilute debt repayment through currency depreciation. Governments tilt the currencycomposition of debt towards foreign currency to avoid inflationary costs and real exchange rate distortions, at the expense of foregoing the hedging properties of local currency debt. Our model is used to shed light on the recent dynamics of the currency composition of debt and on its cyclical behavior.

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'Price Setting Under Uncertainty About Inflation,' Perez, D. (with A. Drenik), 2018.

We use the manipulation of inflation statistics that occurred in Argentina starting in 2007 to test the relevance of informational frictions in price setting. We estimate that the manipulation of statistics had associated a higher degree of price dispersion. This effect is analyzed in the context of a quantitative general equilibrium model in which firms use information about the inflation rate to set prices. Consistent with empirical evidence, we find that monetary policy becomes more effective with less precise information about inflation. Not reporting accurate measures of the CPI entails significant welfare losses, especially in economies with volatile monetary policy.

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'How federal reserve discussions respond to increased transparency,' Rotemberg, M. (with M. Egesdal and M. Gill), 2016.

We analyze how the behavior of the Federal Open Market Committee changed after the statutory enforcement of transparency laws in 1993. To do this, we develop techniques to describe how language use changes over time. For a set of widely used vector space metrics, we demonstrate how to decompose aggregate changes into each individual dimension’s contribution (such as a particular word’s influence). Our approach can be generalized to account for associations between document dimensions (such as word definitions or meanings). Using various documents released by the Federal Reserve from 1976–2007, covering both years in which the FOMC knew its deliberations would eventually be made public, and years in which it believed no records were kept, we find that FOMC deliberations became more similar to the always-public press releases in the transparency regime. FOMC members shifted their comments towards popular economic subjects, such as “inflation” and “growth,” and away from personal opinions, like “think.” In this setting, the observed changes are not purely substitution across words with the same meaning, as the results are robust to accounting for semantic relations.

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'Inequality, Business Cycles and Fiscal-Monetary Policy,' Sargent, T. (with A. Bhandari, D. Evans and M. Golosov), 2018.

We study optimal monetary and scal policy in a model with heterogeneous agents, incomplete markets, and nominal rigidities. We develop numerical techniques to approximate Ramsey plans and apply them to a calibrated economy to compute optimal responses of nominal interest rates and labor tax rates to aggregate shocks. Responses dier qualitatively from those in a representative
agent economy and are an order of magnitude larger. Taylor rules poorly approximate the Ramsey optimal nominal interest rate. Conventional price stabilization motives are swamped by an across person insurance motive that arises from heterogeneity and incomplete markets.

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'Commodity and Token Monies,' Sargent, T., 2017.

A government defines a dollar as a list of quantities of one or more precious metals. If issued in limited amounts, token money is a perfect substitute for precious metal money. Atemporal equilibrium conditions determine how quantities of precious metal and token monies affect an equilibrium price level. Under some circumstances, a government can peg the relative price of two precious metals, confirming Fisher’s (1911) response to a classic criticism of bimetallism. Monometallism dominates bimetallism according to a natural welfare criterion.

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Modern Fiscal Policy

'US Federal Debt 1776 - 1960: Quantities and Prices,' Sargent, T. (with G. Hall and J. Payne), 2018.

This document describes Pandas DataFrames and the spreadsheets underlying them that contain prices, quantities, and descriptions of bonds and notes issued by the United States Federal government from 1776 to 1960. It contains directions to a public github repository at which DataFrames and other files can be downloaded..

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'Managing expectations and fiscal policy,' Sargent, T. (with L.P. Hansen and A.G. Karantounias), 2009.

This paper studies an optimal fiscal policy problem of Lucas and Stokey (1983) but in a situation in which the representative agent’s distrust of the probability model for government expenditures puts model uncertainty premia into history-contingent prices. This gives rise to a motive for expectation management that is absent within rational expectations and a novel incentive for the planner to smooth the shadow value of the agent’s subjective beliefs in order to manipulate the equilibrium price of government debt. Unlike the Lucas and Stokey (1983) model, the optimal allocation, tax rate, and debt all become history dependent despite complete markets and Markov government expenditures.

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'Inequality, Business Cycles and Fiscal-Monetary Policy,' Sargent, T. (with A. Bhandari, D. Evans and M. Golosov), 2018.

We study optimal monetary and fiscal policy in a model with heterogeneous agents, incomplete markets, and nominal rigidities. We develop numerical techniques to approximate Ramsey plans and apply them to a calibrated economy to compute optimal responses of nominal interest rates and labor tax rates to aggregate shocks. Responses dier qualitatively from those in a representative
agent economy and are an order of magnitude larger. Taylor rules poorly approximate the Ramsey optimal nominal interest rate. Conventional price stabilization motives are swamped by an across person insurance motive that arises from heterogeneity and incomplete markets.

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'Honoring public debts,' Sargent, T., 2017.

'Complications for the United States from International Credits: 1913-1940,' Sargent, T. (with G. Hall), 2018.

World War I complicated US monetary, debt management, and tax policies. To finance the war, the US Treasury borrowed $23 billion from its US citizens and lent $12 billion to 20 foreign nations. What began as foreign loans by the early 1930s had become gifts. For the first time in US history, the Treasury managed a large, permanent peacetime debt.

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'Public Debt in economies with Heterogeneous Agents,' Sargent, T. (with A. Bhandari, D. Evans and M. Golosov), 2017.

We study public debt in competitive equilibria in which a government chooses transfers and taxes optimally and in addition decides how thoroughly to enforce debt contracts. If the government enforces perfectly, asset inequality is determined in an optimum competitive equilibrium but the level of government debt is not. Welfare increases if private debt contracts are not enforced. Borrowing frictions let the government gather monopoly rents that come from issuing public debt without facing competing private borrowers. Regardless of whether the government chooses to enforce private debt contracts, the level of initial government debt does not affect an optimal allocation.

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'Fiscal Policy and Debt Management with Incomplete Markets,' Sargent, T. (with A. Bhandari, D. Evans and M. Golosov), 2017.

A Ramsey planner chooses a distorting tax on labor and manages a portfolio of securities in an economy with incomplete markets. We develop a method that uses second order approximations of Ramsey policies to obtain formulas for conditional and unconditional moments of government debt and taxes that include means and variances of the invariant distribution as well as speeds of mean reversion. Asymptotically the planner’s portfolio minimizes a measure of fiscal risk. Analytic expressions that approximate moments of the invariant distribution apply to data on a primary government deficit, aggregate consumption, and returns on traded securities. For U.S. data, we find that the optimal target debt level is negative but close to zero, that the invariant distribution of debt is very dispersed, and that mean reversion is slow.

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'A History of U.S. Debt Limits,' Sargent, T. (with G. Hall), 2015.

Congress first imposed an aggregate debt limit in 1939 when it delegated decisions about designing US debt instruments to the Treasury. Before World War I, Congress designed each bond and specified a maximum amount of each bond that the Treasury could issue. It usually specified purposes for which proceeds could be spent. We construct and interpret a Federal debt limit before 1939..

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The Economics of Development

'The Surprising Instability of Export Specializations,' Easterly, W. (with R. Daruich, and A. Reshef ), 2016.

We study the instability of hyper-specialization of exports. We have two main findings. (1) Specializations are surprisingly unstable: Export ranks are not persistent, and new top products and destinations replace old ones. Measurement error is unlikely to be the main or only determinant of this pattern. (2) Source-country factors are not the main explanation of this instability: Only 20% of the variation in export growth can be explained by variation in comparative advantage (source-by-product factors), while another 20% of the variation in export growth can be explained by variation in bilateral (source-by-destination) factors. The high share of product, destination, and product-by-destination factors, diminishes the emphasis on the nations where the exports originate. The high share of idiosyncratic variance (residual at the source-product-destination level of variation) of about 30%, also indicates the difficulty to predict export success using source country characteristics. These findings suggest that export performance depends, to a greater extent than previously appreciated, on forces that are outside the realm of national export promotion and industrial policies.

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'Shrinking dictators: how much economic growth can we attribute to national leaders?,' Easterly, W. (with S. Pennings ), 2017.

National leaders – especially autocratic ones – are often given credit for high average rates of economic growth while they are in office (and draw criticism for poor growth rates). Drawing on the literature assessing the performance of schoolteachers and a simple variance components model, we develop a new methodology to produce optimal (least squares) estimates of each leader’s contribution to economic growth (controlling for commodity prices, regional business cycles, and country effects). While we do sometimes find sizable growth contributions of celebrated “benevolent autocrats”, we also find that (i) they are regularly outranked by other less celebrated leaders and (ii) the ranking and contributions of leaders is often not robust across growth datasets. Moreover, we find that even in world where leaders do affect growth, the average growth rate during a leader’s tenure is mostly uninformative about that leader’s actual growth contribution. Depending on the dataset and methodology, we find that that measured least squares leader contributions and unobserved leader effects can vary just as much in democracies as autocracies

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'A Long History of a Short Block: Four Centuries of Development Surprises on a Single Stretch of a New York City Street,' Easterly, W. (with L. Freschi, and S. Pennings ), 2016.

Development economists usually (and understandably) evaluate effectiveness of intentional efforts to achieve economic development. There are few opportunities empirically to appreciate the unintended and surprising part of development outcomes portrayed by theories of creative destruction and other theories of spontaneous general equilibrium outcomes not intended by anyone. This paper does a development case study at an extreme micro level (one city block in New York City), but over a long period of time (four centuries). We find that (i) development involves many changes in production as comparative advantage evolves and (ii) most of these changes were unexpected (“surprises”). The block’s history illustrates how difficult it is for overly prescriptive planners to anticipate changes in comparative advantage and how such planning could instead stifle creative destruction.

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'How much long-run economic growth happens at the country level?,' Easterly, W. (with D. Anzoategui, and S. Pennings ), 2016.

Policy and academic discussions of economic growth usually focus on country-level outcomes and determinants. But how much of the variation in long-run growth really happens at the country level? To answer this question, we collect data on growth at the national level (from standard sources), or at the provincial level (from Gennaioli et al. (2014)), and decompose it into variation due to province, country-level or supra-national factors. Using national growth rates, we find that 2/3 of long run growth is due to country effects and the remaining 1/3 is explained by supra-national factors. In our dataset of provincial growth rates, 1/2 of long run growth is national, 1/5 is provincial and the rest is supra-national. Moreover, year dummies show significant variation, suggesting important non-national effects coming from global cycles or global secular shifts in growth. Consistent with a growing literature, our results suggest that many of the deep determinants of growth (for example institutions, geography or culture) may vary at sub-national or supra-national levels, and the importance of the nation-state for economic growth has been overstated

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Labor Force Dynamics and Household Economics

'Free to Leave? A Welfare Analysis of Divorce Regimes,' Fernandez, R. (with J.C. Wong), 2016.

During the 1970s the US underwent an important change in its divorce laws, switching from mutual consent to a unilateral divorce regime. Who benefited and who lost from this change? To answer this question we develop a dynamic life-cycle model in which agents make consumption, saving, labor force participation (LFP), and marriage and divorce decisions subject to several shocks and given a particular divorce regime. We calibrate the model using statistics relevant to the life-cycle of the 1940 cohort. Conditioning solely on gender, our ex ante welfare analysis .finds that women would fare better under mutual consent whereas men would prefer a unilateral system. Once we condition not only on gender but also on initial productivity, we find that men in the top three quintiles of the initial productivity distribution are made better off. by a unilateral system as are the top two quintiles of women; the rest prefer mutual consent. We also find that although the change in divorce regime had only a small effect on the LFP of married women in the 1940 cohort, these effects would be considerably larger for a cohort who lived its entire life under a unilateral divorce system.

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'The Disappearing Gender Gap: The Impact of Divorce, Wages, and Preferences on Education Choices and Women’s Work,' Fernandez, R. (with J.C. Wong), 2011.

Women born in 1935 went to college significantly less than their male counterparts and married women’s labor force participation (LFP) averaged 40% between the ages of thirty and forty. The cohort born twenty years later behaved very differently. The education gender gap was eliminated and married women’s LFP averaged 70% over the same ages. In order to evaluate the quantitative contributions of the many significant changes in the economic environment, family structure, and social norms that occurred over this period, this paper develops a dynamic life-cycle model calibrated to data relevant to the 1935 cohort. We find that the higher probability of divorce and the changes in wage structure faced by the 1955 cohort are each able to explain, in isolation, a large proportion (about 60%) of the observed changes in female LFP. After combining all economic and family structure changes, we find that a simple change in preferences towards work can account for the remaining change in LFP. To eliminate the education gender gap requires, on the other hand, for the psychic cost of obtaining higher education to change asymmetrically for women versus men

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'Personality Traits, Intra-household Allocation and the Gender Wage Gap,' Flinn, C. (with E. Petra, and W. Zhang), 2017.

A model of how personality traits affect household time and resource allocation decisions and wages is developed and estimated. In the model, households choose between two modes of behavior: cooperative or noncooperative. Spouses receive wage offers and allocate time to supplying labor market hours and to producing a public good. Personality traits, measured by the so-called Big Five traits, can affect household bargaining weights and wage offers. Model parameters are estimated by Simulated Method of Moments using the Household Income and Labor Dynamics in Australia (HILDA) data. Personality traits are found to be important determinants of household bargaining weights and of wage offers and to have substantial implications for understanding the sources of gender wage disparities.

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'Family Law Effects on Divorce, Fertility, and Child Investment,' Flinn, C. (with M. Brown, and J. Mullins), 2015.

In order to assess the child welfare impact of policies governing divorced parenting, such as child support orders, child custody and placement regulations, and marital dissolution standards, one must consider their influence not only on the divorce rate but also on spouses’ fertility choices and child investments. We develop a model of marriage, fertility and parenting, with the main goal being the investigation of how policies toward divorce influence outcomes for husbands, wives and children. Estimates of preferences and the technology of child development are disciplined by data on parental time inputs, and simulations based on the model explore the effects of changes in custody allocations and child support standards on outcomes for intact and divided families. Simulations indicate that, while a small decrease in the divorce rate may be induced by a significant child support hike, the major effect of child support levels for both intact and divided households is on the distribution of welfare between parents. Simulated divorce, fertility, test scores and parental welfare all increase with a move toward shared physical placement. Finally, the simulations indicate that children’s interests are not necessarily best served by minimizing divorced parenting.

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'Unemployment fluctuations, match quality, and the wage cyclicality of new hires,' Gertler, M. (with C. Huckfeldt and A. Trigari), 2016.

Macroeconomic models often incorporate some form of wage stickiness to help account for employment fluctuations. However, a recent literature calls in to question this approach, citing evidence of new hire wage cyclicality from panel data studies as evidence for contractual wage flexibility for new hires, which is the relevant margin for employment volatility. We analyze data from the SIPP and find that the wages for new hires coming from unemployment are no more cyclical than those of existing workers, suggesting wages are sticky at the relevant margin. The new hire wage cyclicality found in earlier studies instead appears to reflect cyclical average wage gains of workers making job-to-job transitions, which we interpret as evidence of procyclical match quality for new hires from employment. We then develop a quantitative general equilibrium model with sticky wages via staggered contracting, on-the-job search, and variable match quality, and show that it can account for both the panel data evidence and aggregate labor market regularities. An additional implication of the model is that a sullying effect of recessions emerges, along the lines originally suggested by Barlevy (2002).

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'Robust Decisions for Incomplete Models of Strategic Interaction,' Menzel, K. (with T. Salz), 2013.

We propose Monte Carlo Markov Chain (MCMC) methods for estimation and inference in game-theoretic models with a particular focus on settings in which only a small number of observations for a given type of game is available. In particular we do not assume that it is possible to concentrate out or estimate consistently an equilibrium selection mechanism linking a parametric distribution of unobserved payoffs to observable choices. The algorithm developed in this paper can in particular be used to analyze structural models of social interactions with multiple equilibria using data augmentation techniques. This study adapts the multiple prior framework from Gilboa and Schmeidler (1989) to compute Gamma-posterior expected loss (GPEL) optimal decisions that are robust with respect to assumptions on equilibrium selection, and gives conditions under which it is possible to solve the GPEL problem using one single Markov chain. The practical usefulness of the generic MCMC algorithm is illustrated with an application to revealed preference analysis of two-sided marriage markets with non-transferable utilities.

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'Genes, Education, and Labor Market Outcomes: Evidence from the Health and Retirement Study,' Thom, K. (with N.W. Papageorge), 2016.

Recent advances have led to the discovery of specific genetic variants that predict educational attainment. We study how these variants, summarized as a genetic score variable, are associated with human capital accumulation and labor market outcomes in the Health and Retirement Study (HRS). We demonstrate that the same genetic score that predicts education is also associated with higher wages, but only among individuals with a college education. Moreover, the genetic gradient in wages has grown in more recent birth cohorts, consistent with interactions between technological change and labor market ability. We also show that individuals who grew up in economically disadvantaged households are less likely to go to college when compared to individuals with the same genetic score, but from higher-SES households. Our findings provide support for the idea that childhood SES is an important moderator of the economic returns to genetic endowments. Moreover, the finding that childhood poverty limits the educational attainment of high-ability individuals suggests the existence of unrealized human potential.

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'Genetic Ability, Wealth, and Financial Decision-Making,' Thom, K. (with D. Bath, and N.W. Papageorge), 2017.

Recent advances in behavioral genetics have enabled the discovery of genetic scores linked to a variety of economic outcomes, including education. We build on this progress to demonstrate that the same genetic variants that predict educational attainment independently predict household wealth in the Health and Retirement Study (HRS). This relationship is partly explained by higher earnings, but a substantial portion of this association cannot be explained mechanically by income flows or bequests. This leads us to explore the role of beliefs, financial literacy and portfolio decisions in explaining this genetic gradient in wealth. We show that individuals with lower genetic scores are more prone to reporting “extreme beliefs” (e.g., reporting that there is a 100% chance of a stock market decline in the near future) and they invest their savings accordingly (e.g., avoiding the stock market). Our findings suggest that genetic factors that promote human capital accumulation contribute to wealth disparities not only through education and higher earnings, but also through their impact on the ability to process information and make good financial decisions. The association between genetic ability and wealth is substantially lower among households receiving a defined benefit pension. Policies that transfer greater responsibility to individuals to manage their wealth might therefore exacerbate the consequences of labor market inequality.

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Unemployment and the Labor Market

'Turbulence and Unemployment in Matching Models,' Sargent, T., Ljungqvist L., (with I. Baley), 2018.

Ljungqvist and Sargent (1998, 2008) show that worse skill transition probabilities for workers who suffer involuntary layoffs (i.e., increases in turbulence) generate higher unemployment in a welfare state. den Haan, Haefke and Ramey (2005) challenge this finding by showing that if higher turbulence means that voluntary quits are also exposed to even a tiny risk of skill loss, then higher turbulence leads to lower unemployment within their matching model. We show (1) that there is no such brittleness of the positive turbulence unemployment relationship in the matching model of Ljungqvist and Sargent (2007) even
if we add such “quit turbulence”, and (2) that if den Haan et al. had calibrated their productivity distribution to fit observed unemployment patterns that they miss, then they
too would have found a positive turbulence-unemployment relationship in their model. Thus, we trace den Haan et al.’s finding to their assuming a narrower productivity distribution than Ljungqvist and Sargent had. Because den Haan et al. assume a distribution with such narrow support that it implies small returns to reallocating labor, even a small mobility cost shuts down voluntary separations. But that means that the imposition of a small layoff cost in tranquil times has counterfactually large unemployment suppression effects. When the parameterization is adjusted to fit historical observations on unemployment and layoff costs, a positive relationship between turbulence and unemployment reemerges.

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'A Distributional Framework for Matched Employer Employee Data,' Manresa, E. (with S. Bonhomme, and T. Lamadon), 2017.

We propose a framework to identify and estimate earnings distributions and workercomposition on matched panel data, allowing for two-sided worker-firm unobserved heterogeneity. We introduce two models: a static model that allows for nonlinear interactions between workers and firms, and a dynamic model that allows in addition for Markovian earnings dynamics and endogenous mobility. We establish identification in short panels, and develop tractable two-step estimators where firms are classified into heterogeneous classes in a first step. Applying our method to Swedish administrative data, we find that log-earnings are approximately additive in worker and firm heterogeneity, with a strong association between workers and firms, and a small relative contribution of firm hetero-geneity to earnings dispersion. In addition, we document that wages have a direct effect on mobility, and that, beyond their dependence on the current firm, earnings after a job move also depend on the past firm.

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'Discretizing Unobserved Heterogeneity,' Manresa, E. (with S. Bonhomme, and T. Lamadon), 2017.

We study panel data estimators based on a discretization of unobserved heterogeneitywhen individual heterogeneity is not necessarily discrete in the population. We focus on two-step grouped-fixed effects estimators, where individuals are classified into groups in a first step using kmeans clustering, and the model is estimated in a second step allowing for group-specific heterogeneity. We analyze the asymptotic properties of these discrete estimators as the number of groups grows with the sample size, and we show that bias reduction techniques can improve their performance. In addition to reducing the number of parameters, grouped fixed-effects methods provide effective regularization.For instance, when allowing for the presence of time-varying unobserved heterogeneity we show they enjoy fast rates of convergence depending on the underlying dimension of heterogeneity. Finally, we document the finite sample properties of two-step grouped fixed-effects estimators in two applications: a structural dynamic discrete choice model of migration, and a model of wages with worker and firm heterogeneity.

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'A Note on the Estimation of Job Amenities and Labor Productivity,' Galichon, A. (with A. Dupuy), 2017.

This note introduces a maximum likelihood estimator of the value of job amenities and labor productivity in a single matching market based on the observation of equilibrium matches and wages. The estimation procedure simultaneously fits both the matching patterns and the wage curve. Our estimator is suited for applications to a wide range of assignment problems.

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'High Wage Workers Work for High Wage Firms,' Borovičková, K. (with R. Shimer), 2018.

We develop a new approach to measuring the correlation between the types of matched workers and firms. Our approach accurately measures the correlation in data sets with many workers and firms, but a small number of independent observations for each. Using administrative data from Austria, we find that the correlation between worker and firm types lies between 0.4 and 0.6. We use artificial data sets with correlated worker and firm types to show that our estimator is accurate. In contrast, the Abowd, Kramarz, Margolis (1999) fixed effects estimator suggests no correlation between types in our data set. We show both theoretically and empirically that this reflects an incidental parameter problem.

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'Risk Premia and Unemployment Fluctuations,' Borovičková, K. and Borovičková, J., 2018.

We study the role of fluctuations in discount rates for the joint dynamics of expected returns in the stock market and employment dynamics. We construct a non-parametric bound on the predictability and time-variation in conditional volatility of the firm’s profit flow that must be met to rationalize the observed business-cycle fluctuations in vacancy-filling rates. A stochastic discount factor consistent with conditional moments of the risk-free rate and expected returns on risky assets alleviates the need for an excessively volatile model of the expected profit flow.

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'The Proportional Hazard Model: Estimation and Testing using Price Change and Labor Market Data,' Borovičková, K. (with F. Alvarez and R. Shimer), 2016.

We use labor market data and data on price changes to examine the role of structural duration dependence and heterogeneity in shaping the aggregate hazard rates. In line with an extensive literature we examine this question through the lens of a mixed proportional hazard model. While we think that this model is a convenient representation of the data, we recognize that its structure can be too restrictive. We focus on environments where we observe two observations per individual as this not only allows us to estimate the model non-parametrically, but also test whether the true data-generating process is likely to have a structure imposed by a mixed proportional hazard model. We reject that this is the case both for the price change data and labor market data. We then turn to data simulated from reasonable structural models, none of which can be represented as a mixed proportional hazard model, to examine implications of estimating a misspecified mixed proportional hazard model. We use a “CalvoPlus” model for price changes, while for the labor market data, we assume that individual durations follow an inverse Gaussian distribution. We find that, in fact, the mixed proportional hazard model is a good approximation of the CalvoPlus model and therefore the estimated baseline hazard rate is very similar to the true structural hazard rate. This is not the case for the inverse Gaussian model for the labor market, where the mixed proportional hazard model cannot be viewed as a good approximation. As a consequence, fitting a mixed proportional hazard model to these data vastly understate the importance of heterogeneity in the economy.

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'Job Flows, Worker Flows and Labor Market Policies,' Borovičková, K., 2016.

I study an equilibrium model of the labor market with firm- and worker-level shocks and evaluate the impact of labor market policies in this framework. Firms hire and shed workers in response to firm-specific productivity shocks. Workers and firms learn about the quality of their employment match and separate when they realize they are mismatched. Match quality and productivity shocks must interact in order to explain the hazard rates of separation in the cross section of firm growth rates and workers’ tenures. The model is estimated using a large panel dataset of individual labor market histories in Austria. I find that accounting for worker flows generated by learning and direct job to job transitions, and job flows driven by firm-specific productivity shocks plays a crucial role for the evaluation of the impact of labor market policies on the unemployment rate, duration and average productivity.

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'Decomposing Duration Dependence in a Stopping Time Model,' Borovičková, K. (with F. Alvarez and R. Shimer), 2016.

We develop a simple dynamic model of a worker’s transitions between employment and non-employment. Our model implies that a worker finds a job at an optimal stopping time, when a Brownian motion with drift hits a barrier. The model has structural duration dependence in the job finding rate, in the sense that the hazard rate of finding a job changes during a non-employment spell for a given worker. In addition, we allow for arbitrary parameter heterogeneity across workers, so dynamic selection also affects the average job finding rate at different durations. We show that our model has testable implications if we observe at least two completed non-employment spells for each worker. Moreover, we can nonparametrically identify the distribution of a subset of our model’s parameters using data on the duration of repeated non-employment spells. We use a large panel of social security data for Austrian workers to test and estimate the model. Our model is not rejected by the data, while a mixed proportional hazard model with arbitrary heterogeneity and an arbitrary baseline hazard rate is rejected using the same data set. Our parameter estimates indicate that dynamic selection is important for the decline in the job finding rate at short durations, while structural duration dependence drives most of the decline in the job finding rate at long durations.

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'A Nonparametric Variance Decomposition Using Panel Data,' Borovičková, K. (with F. Alvarez and R. Shimer), 2014.

We consider a population of individuals who draw a random variable from an individual-specific distribution that is fixed over time. We propose an unbiased within-between variance decomposition using a short panel of two observations for each individual. We illustrate the usefulness of our decomposition with two applications: decomposing heterogeneity versus structural duration dependence in unemployment, nonemployment, and employment durations; and calculating the importance of frictional wage dispersion for labor market outcomes.

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'Unemployment fluctuations, match quality, and the wage cyclicality of new hires,' Gertler, M. (with C. Huckfeldt and A. Trigari), 2016.

Macroeconomic models often incorporate some form of wage stickiness to help account for employment fluctuations. However, a recent literature calls in to question this approach, citing evidence of new hire wage cyclicality from panel data studies as evidence for contractual wage flexibility for new hires, which is the relevant margin for employment volatility. We analyze data from the SIPP and find that the wages for new hires coming from unemployment are no more cyclical than those of existing workers, suggesting wages are sticky at the relevant margin. The new hire wage cyclicality found in earlier studies instead appears to reflect cyclical average wage gains of workers making job-to-job transitions, which we interpret as evidence of procyclical match quality for new hires from employment. We then develop a quantitative general equilibrium model with sticky wages via staggered contracting, on-the-job search, and variable match quality, and show that it can account for both the panel data evidence and aggregate labor market regularities. An additional implication of the model is that a sullying effect of recessions emerges, along the lines originally suggested by Barlevy (2002).

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'Discount Rates, Learning by Doing, and Employment Fluctuations,' Midrigan, V. (with P. Kehoe and E. Pastorino), 2015.

We revisit the Shimer (2005) puzzle in a search and matching model with on-the-job human capital accumulation in which households exhibit preference for consumption smoothing. We parameterize the model so that it accords with the micro-evidence on returns to tenure and experience as well as individual life-cycle earning profiles. We find that employment fluctuations in response to productivity shocks are greatly amplified in this environment.

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'Debt Constraints and Employment,' Midrigan, V. (with P. Kehoe and E. Pastorino), 2016.

During the Great Recession, regions of the United States that experienced the largest declines in household debt also experienced the largest drops in consumption, employment, and wages. Employment declines were larger in the nontradable sector and for firms that were facing the worst credit conditions. Motivated by these findings, we develop a search and matching model with credit frictions that affect both consumers and firms. In the model, tighter debt constraints raise the cost of investing in new job vacancies and thus reduce worker job finding rates and employment. Two key features of our model, on-the-job human capital accumulation and consumer-side credit frictions, are critical to generating sizable drops in employment. On-the-job human capital accumulation makes the flows of benefits from posting vacancies long-lived and so greatly amplifies the sensitivity of such investments to credit frictions. Consumerside credit frictions further magnify these effects by leading wages to fall only modestly. We show that the model reproduces well the salient cross-regional features of the U.S. data during the Great Recession.

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'The Fundamental Surplus,' Sargent, T., and L. Ljungqvist, 2017.

To generate big responses of unemployment to productivity changes, researchers have reconfigured matching models in various ways: by elevating the utility of leisure, by making wages sticky, by assuming alternating-offer wage bargaining, by introducing costly acquisition of credit, by assuming fixed matching costs, or by positing government mandated unemployment compensation and layoff costs. All of these redesigned matching models increase responses of unemployment to movements in productivity by diminishing the fundamental surplus fraction, an upper bound on the fraction of a job’s output that the invisible hand can allocate to vacancy creation. Business cycles and welfare state dynamics of an entire class of reconfigured matching models all operate through this common channel.

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'What Nonconvexities Really Say about Labor Supply Elasticities,' Sargent, T., and L. Ljungqvist, 2014.

Rogerson and Wallenius (2013) draw an incorrect inference about a labor supply elasticity at an intensive margin from premises about an option to work part time that retiring workers decline. We explain how their false inference rests on overgeneralizing outcomes from a particular example and how Rogerson and Wallenius haven’t identified an economic force beyond the two — indivisible labor and time separable preferences — that drive a high labor supply elasticity at an interior solution at an extensive margin.

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'Firms' Choices of Wage-Setting Protocols in the Presence of Minimum Wages,' Flinn, C. (with J. Mabli and J. Mullins), 2017.

We study the formation of wages in a frictional search market where firms can choose either to bargain with workers or post non-negotiable wage offers. Workers can secure wage increases for themselves by engaging in on-the-job search and either moving to firms that offer higher wages or, when possible, leveraging an outside offer into a higher wage at the current firm. We characterize the optimal wage posting strategy of non-negotiating firms and how this decision is influenced by the presence of renegotiating firms. We quantitatively examine the model’s unique implications for efficiency, wage dispersion, and worker welfare by estimating it using data on the wages and employment spells of low-skill workers in the United States. In the estimated steady state of the model, we find that more than 10% of job acceptance decisions made while on the job are socially sub-optimal. We also find that, relative to a benchmark case without renegotiation, the presence of even a small number of these firms increases the wage dispersion attributable to search frictions, deflates wages, and reduces worker welfare. Moving to a general equilibrium setting, we use the estimated model to study the impact of a minimum wage increase on firm bargaining strategies and worker outcomes. Our key finding is that binding minimum wages lead to an increase in the equilibrium fraction of renegotiating firms which, relative to a counterfactual in which this fraction is fixed, significantly dampens the reduction in wage dispersion and gains in worker welfare that can typically be achieved with moderate minimum wage increases. Indeed, the presence of endogenous bargaining strategies reverses the sign of the average welfare effect of a $15 minimum wage from positive to negative.

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Experimental Methods, Game theory and the Economics of Social Psychology

'Backward Discounting,' Ray, D., 2018 (with N. Vellodi, and R. Wang).

. We study a model in which lifetime individual utility is derived from both present and past consumption streams. Each of these streams is discounted, the former forward in the usual way, the latter backward. We presume that an individual at date t
evaluates consumption programs according to some weighted average of her own felicity (as perceived at date t) and that of “future selves” at dates greater than t. This simple formulation allows agents to partially anticipate future regret in current decisions, and generates a set of novel testable implications in line with empirical evidence. The model is used to capture the notion of parental influence and investigate its impact on equilibrium savings. The paper also examines other applications of “backward discounting.”.

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'Maximality in the Farsighted Stable Set,' Ray, D., 2018 (with N. Vohra).

. The stable set of von Neumann and Morgenstern imposes credibility on coalitional deviations. Their credibility notion can be extended to cover farsighted coalitional deviations, as proposed by Harsanyi (1974), and more recently reformulated by Ray and Vohra (2015). However, the resulting farsighted stable set suffers from a conceptual drawback: while coalitional deviations improve on existing outcomes, coalitions might do even better by moving elsewhere. Or other coalitions might intervene to impose their favored moves. We show that every farsighted stable set satisfying some reasonable, and easily verifiable, properties is unaffected by the imposition of this stringent maximality requirement. These properties are satisfied by many, but not all, known farsighted stable sets.

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'Strategic Network Formation with Many Agents,' Menzel, K., 2017.

. We consider a random utility model of strategic network formation, where we derive a tractable approximation to the distribution of network links using many-player asymptotics. Our framework assumes that agents have heterogeneous tastes over links, and allows for anonymous and non-anonymous interaction effects among links. The observed network is assumed to be pairwise stable, and we impose no restrictions regarding selection among multiple stable outcomes. Our main results concern convergence of the link frequency distribution from finite pairwise stable networks to the (many-player) limiting distribution. The set of possible limiting distributions is shown to have a fairly simple form and is characterized through aggregate equilibrium conditions, which may permit multiple solutions. We
analyze identification of link preferences and propose a method for estimation of preference parameters. We also derive an analytical expression for agents’ welfare (expected surplus)
from the structure of the network.

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'Attention Managment,' Mathevet, L. (with E. Lipnowski, and D. Wei), 2018.

A well-intentioned principal discloses information to a rationally inattentive agent. Processing information is costly to the agent, but the principal does not internalize this cost. Whatever information the principal makes available to the agent (her disclosure policy), the agent may choose to pay attention to strictly less information. We first find that, in binary-state environments, due to the one-dimensionality of information, it is always optimal for the principal to fully reveal the state. We then study a general model with quadratic payoffs in which we can explicitly characterize the information policies to which the agent willingly pays full attention. In a leading example with three states, optimal disclosure involves distortion at intermediate costs of attention. As the cost increases, optimal information abruptly changes from downplaying the state to exaggerating the state.

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'On information Design in Games,' Mathevet, L. (with E. Perego, and I. Taneva), 2017.

Information disclosure in games influences behavior by affecting the players’ beliefs about the state, as well as their higher-order beliefs. We first characterize the extent to which a designer can manipulate players’ beliefs by disclosing information. Building on this, our next results show that all optimal solutions to information design problems are comprised of an optimal private and of an optimal public component, where the latter comes from concavification. This representation subsumes the single-agent result of Kamenica and Gentzkow (2011). In an environment where the Revelation Principle fails, and hence direct manipulation of players’ beliefs is indispensable, we use our results to compute the optimal solution. In a second example, we illustrate how the private–public decomposition leads to a particularly simple and intuitive resolution of the problem.

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'Simplifying Bayesian Persuasion,' Mathevet, L. (with E. Lipnowski), 2017.

In Bayesian Persuasion (Kamenica and Gentzkow (2011)), the sender’s optimal value is characterized by a concave envelope. Since concavification of a general function is notoriously difficult, we propose a method to reduce the problem, using the underlying economic structure of the indirect expected utility. The key observation is that one can find, using the receiver’s preferences alone, a small set of posterior beliefs on which some optimal information policy must be supported. This simplifies, sometimes dramatically,
the search for optimal information.

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'Rational Inattention and Psychometrics,' Caplin, A. (with D. Csaba, J Leahy), 2018.

We incorporate rational inattention (RI) theory and psychometric methods into an interdisciplinary approach to learning behavior and choice. Our “Weber curve”, which summarizes data from a novel incentivized experiment, allows costs of attention and consumer welfare to be recovered. The recovery result exploits a precise parallel between RI theory and the theory of competitive supply. This yields an elementary microeconomic toolbox for understanding attention costs. We also develop revealed preference methods that allow us to make rich inference about costs from limited psychometric data.

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'Present-Bias, Procrastination and Deadlines in a Field Experiment,' Bisin, A. (with K. Hyndman), 2018.

We study procrastination in the context of a field experiment involving students who must exert costly effort to complete certain tasks by a fixed deadline. Descriptively, we document a strong demand for commitment, in the form of self-imposed deadlines, which appear to be associated with students’ self-reported psychological characteristics and cost of time. We structurally estimate students’ present-bias and cost of time by fitting the experimental data to a stylized stopping time choice model. We find that present-bias is relatively widespread but that having multiple repeated tasks appears to activate effective internal self-control mechanisms. Finally, we also document an important form of partial naivete on the part of students in anticipating their ability to self-control when setting deadlines.

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'A Theory of Experiments,' Chassang, S. (with A. Banerjee, S. Montero, and E. Snowberg), 2018.

We try to better understand why, and when experimenters randomize. Formulating experiment-design as a decision problem lets us gauge the pros and cons of other experimental practices, such as rerandomization.

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'An Experimental Study of Imperfect Public Monitoring: Efficiency versus Renegotiation-Proofness,' Fréchette, G.R. and E. Stacchetti (with M. Embrey), 2013.

We study experimentally behavior in a repeated partnership game
with public imperfect monitoring, and focus on whether subjects are affected by renegotiation concerns. The signal in our design is rather simple: it indicates only a success or a failure in each period. In some treatments, the equilibrium with the highest payoffs is renegotiation-proof, while in others it is not. Results indicate subjects’ play is affected by the inclusion of a choice that permits some cooperation with more forgiving punishments, but that they do not play the renegotiation-proof equilibrium. However, when the renegotiation hypothesis predicts forgiving (short) punishments, subjects using cooperative strategies are indeed more likely to be forgiving. The experiment also reveals the use of strategies that have not been documented before, highlighting the importance of exploring different monitoring structures. Finally, our design includes communication, which we observe to be used to reduce strategic uncertainty.

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'Strategy Choice In The Infinitely Repeated Prisoners’ Dilemma,' Fréchette, G.R. (with P. Dal Bó), 2017.

We use a novel experimental design to identify subjects’ strategies in an infinitely repeated prisoners’ dilemma experiment with perfect monitoring. We ask subjects to design strategies that will play in their place, that is, we elicit strategies. We find that three simple strategies represent the majority of the chosen strategies: Always Defect, Tit-For-Tat, and Grim. We use the elicited strategies to test our ability to recover strategies using statistical methods based on observed cooperate-defect choices and find that we can do so fairly well under certain conditions. Overall, our results show that it is possible to learn about the strategies used by the subjects to support cooperation from their round by round cooperation decisions.

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'Predictive Repeated Game Theory: Measures and Experiments,' Mathevet, L. (with J. Romero), 2014.

One of the fundamental results in repeated games is the Folk theorem, which predicts a plethora of equilibrium outcomes. Many have argued that this extreme number of equilibria is a virtue, as it can explain a variety of different behaviors. However, this result leaves us with almost no predictive power. This paper provides measures for evaluating the predictive power of a theory given experimental data. After running experiments with human subjects in the experimental laboratory, we use these measures to compare a variety of different theories including Mathevet (2014)’s axiomatic approach, and Ioannou and Romero (2014)’s learning model.

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'The People's Perspective on Libertarian-Paternalistic Policies,' Rubinstein, A. (with A. Arad), 2017.

Online experiment is carried out in three countries to examine the non-material welfare implications of libertarian-paternalistic (soft) government interventions. We investigate people’s attitudes towards such interventions and their choices in several hypothetical scenarios of government involvement. We identify a significant proportion of people who (1) think negatively of soft government interventions, (2) forgo the encouraged action presumably in protest against such government interventions even though they would have chosen it otherwise, or (3) prefer the government to only provide information to the public in order to influence their choices rather than an intervention with a more effective choice architecture. In two of the countries, a majority of non-objectors to the soft intervention don’t object to harder interventions either, such as the imposition of taxes. The above findings illuminate the potential welfare loss of a non-negligible portion of the population caused by soft government interventions.

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'Trust Me: Communication and Competition in Psychological Games,' Schotter, A. (with M. Agranov, U. Dasgupta), 2018.

In this paper we study a communication game with and without competition between senders and embed it in the framework of a psychological game where players experience a wide range of emotions such as guilt, lying, and disappointment aversion. We theoretically characterize the set of equilibria that can be sustained in the game with competition and the game without it and test these predictions in a controlled laboratory experiment. Here we induce material payoffs as well as psychological payoffs. Theoretically, an introduction of the psychological payoffs into a communication game is unequivocally beneficial since without them the no-trade equilibrium is the only equilibrium possible. Moreover, the effect of competition on market outcomes in such a communication game is theoretically ambiguous as it depends on which equilibrium subjects choose to play. Empirically, we find that competition is welfare decreasing for both buyers and sellers. This result is driven by an increase in the amount of lying that competing sellers engage in order to attract business from the buyers, who fail to recognize such an effect and tend to believe these messages more than they should.

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'Social Learning and The Winner’s Curse,' Schotter, A. (with A. McClellan), 2018.

This paper adds to the existing experimental (and theoretical) common value auction literature in two ways. First we introduce social learning into an auction and demonstrate that such learning can be dysfunctional, i.e., lead to a greater incidence of the winners curse. Second, on a methodological level, we introduce some methods not previously used in the laboratory. More precisely, we elicit the entire bid function of bidders each
period during the auction rather than eliciting a single bid associated with one particular value (or signal). We demonstrate that the winners curse is not uniform over the domain of the bid function – – it is less pronounced for high as opposed to low signals (values).

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'Learning and Mechanism Design: An Experimental Test of School Matching Mechanisms with Intergenerational Advice,' Schotter, A. (with T. Ding), 2018.

While the mechanisms that economists design are typically in the form of static one-shot games, in the real world mechanisms are used repeatedly by generations of agents who engage in the mechanism for a short period of time and then pass on advice to their successors. Hence, behavior evolves via social learning and may diverge dramatically from that envisioned by the designer. We demonstrate that this is true of school matching mechanisms, even those, like the Gale-Shapley deferred acceptance mechanism in which truth-telling is a dominant strategy. Put differently, our results indicate that experience with an incentive compatible mechanism may not foster truthful revelation if that experience is achieved via social learning.

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'Complementary Institutions and Economic Development,' Schotter, A. (with A. Kloosterman), 2016.

This paper considers the problem of why societies develop differently, a question most recently articulated by Acemoglu and Robinson (2012). We follow North (1990) in defining institutions as the “rules of the game in society.” The question then becomes why do some societies develop functional institutions while others do not? To investigate this question, we develop and examine a specific type of dynamic game (which we call an Institutional Game). Our point is that complementarities among the choices that all societies make as they develop can help to answer this question.

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'Matching and Chatting: An Experimental Study of the Impact of Network Communication on School-Matching Mechanisms,' Schotter, A. (with T. Ding), 2016.

While, in theory, the school matching problem is a static non-cooperative one shot game, in reality the “matching game” is played by parents who choose their strategies after consulting or chatting with other parents in their social networks. In this paper we compare the performance of the Boston and the Gale-Shapley mechanisms in the presence of chatting through social networks. Our results indicate that allowing subjects to chat has an important impact on the likelihood that subjects change their strategies and also on the welfare and stability of the outcomes determined by the mechanism.

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'The Impact of Monitoring in Infinitely Repeated Games: Perfect, Public, and Private,' Fréchette, G.R. (with M. Aoyagi and V. Bhaskar), 2017.

This paper uses a laboratory experiment to study the effect of the monitoring structure on the play of the infinitely repeated prisoner’s dilemma. Keeping the strategic form of the stage game fixed, we examine the behavior of subjects when information about past actions is perfect (perfect monitoring), noisy but public (public monitoring), and noisy and private (private monitoring). We find that the subjects sustain cooperation in every treatment, but that their strategies differ across the three treatments. Specifically, the strategies under imperfect monitoring are both more complex and more lenient than those under perfect monitoring. The results show how the changes in strategies across monitoring structures mitigate the effect of noise in monitoring on efficiency.

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'Dynamic Linear Economies with Social Interactions,' Bisin, A. (with O. Ozgur), 2012.

Social interactions arguably provide a rationale for several important socio-economic phenomena, from smoking and other risky behavior in teens to peer effects in school performance. We study social interactions in dynamic economies. For these economies, we provide existence (Markov Perfect Equilibrium in pure strategies), ergodicity, and welfare results. We characterize several equilibrium properties of policy functions, spatial correlations, and social multiplier effects. Most importantly, we study formally the issue of the identification of social interactions, emphasizing the restrictions imposed by dynamic equilibrium conditions with respect to economies populated by myopic agents and economies in which spatial correlation is induced by selection. In this respect we find that identification can be obtained but only in non-stationary economies.

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'On Blame and Reciprocity: An Experimental Study,' Schotter, A. (with B. Celen and M. Blanco), 2016.

The theory of reciprocity is predicated on the assumption that people are willing to reward kind acts and to punish unkind ones. This assumption raises the question as to how to define “kindness.” In this paper we offer a novel definition of kindness based on a notion of blame. This notion states that in judging whether player i is kind or unkind to player j, player j has to put himself in the position of player I and ask if he would act in a manner that is worse than i does. If player j would act in a worse manner than player i acted, then we say that player j does not blame player i. If, however, player j would be nicer than player i was, then we say that player j blames player i. We consider this notion a natural, intuitive and empirically functional way to explain the motives of people engaged in reciprocal behavior. After developing the conceptual framework, we test this concept by using data from two laboratory experiments and find significant support for the theory.

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'Is Response Time Predictive of Choice? An Experimental Study of Threshold Strategies,' Schotter, A. and I. Treviño, 2014.

This paper investigates the usefulness of non-choice data, namely response times, as a predictor of threshold behavior in a simple global game experiment. Our results indicate that the signal associated to the highest or second highest response time at the beginning of the experiment are both unbiased estimates of the threshold employed by subjects at the end of the experiment. This predictive ability is lost when we move to the third or higher response times. Moreover, the response time predictions are better predictors of observed behavior than the equilibrium predictions of the game. They are also robust, in the sense that they characterize behavior in an “out-of-treatment” exercise where we use the strategy method to elicit thresholds. This paper is the first to point out the predictive power of response times in a strategic situation

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'Attention in Games: An Experimental Study,' Schotter, A. and A. Avoyan, 2018.

A common assumption in game theory is that players concentrate on one game at a time.
However, in everyday life, we play many games and make many decisions at the same time
and have to decide how best to divide our limited attention across these settings. In this paper
we ask how players solve this attention-allocation problem. We find that the attention of
players is attracted to particular features of the games they play and how much attention a
subject gives to a particular game depends on the other game that he or she is simultaneously
attending to.

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'Bringing “Suspense and Surprise” to Data,' Schotter, A. and A. McClellan (with J.B. Kessler), 2015.

In “Suspense and Surprise”, Ely, Frankel and Kamenica (2015, henceforth EFK) derive suspense-optimal information policies for entertainment when agents derive utility from suspense and surprise. One difficulty with bringing EFK to data, however, is that their measure of suspense requires information about agents’ beliefs about their future beliefs, which is non-trivial to observe or elicit. Using the EFK model, we develop a measure of how far entertainment is from the optimal suspense path that relies only on contemporaneous beliefs. We therefore show that EFK is easier to use empirically than expected. We bring this insight to data with an experiment in which we compare beliefs of subjects watching NFL football games to those watching highly popular scripted television dramas. Following EFK, we hypothesize that popular scripted television shows should have a closer-to-optimal suspense path than football games since writers can more finely control viewers’ beliefs than can sports contests. Surprisingly, we find that the NFL games more closely match the optimal suspense structure without sacrificing on surprise. We discuss the implication of this finding for the model in EFK.

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'Mood and Economic Decision Making: Experimental Evidence,' Schotter, A. and A. McClellan (with J.B. Kessler), 2015.

In this paper we investigate the impact of short-term fluctuations in happiness (i.e. a positive mood) on decision-making. The emotional fluctuations we analyze are orthogonal to the fundamentals of the decision maker’s wellbeing and standard theory suggests they should have no effect. We perform an experiment in a sports bar on the Upper East Side of Manhattan while subjects watch an NFL football game. During numerous commercial breaks, we monitor subjects’ happiness and ask them to perform a set of standard experimental tasks involving charitable giving, risk taking, trust, and willingness to pay. We find that the events of the game not only affect the mood of our subjects but that these changes in mood lead to predictable changes in decisions. Our experiment introduces a new method for inducing a dynamic mood sequence and provides a model that can explain why changes in short-term emotions influence economic decisions.

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