UNPROCESSED (anon cache)

(Paper written with Raquel Fonseca, Arie Kapteyn and Titus Galama)

We estimate a stochastic life-cycle model of endogenous health spending, asset accumulation and retirement to investigate the causes behind the increase in health spending and longevity in the U.S. over the period 1965-2005. We estimate that technological change and the increase in the generosity of health insurance on their own may explain independently 36% of the rise in health spending (insurance 6% and technology 30%), while income explains only 4% and mortality 0.5%. By simultaneously occurring over this period, these changes may have led to complementarity effects which we find to explain an additional 57% increase in health spending. The estimates suggest that elasticity of health spending with respect to changes in both income and insurance is larger with co-occurring improvements in technology. We estimate that technological change, taking the form of increased health care productivity at an annual rate of 1.3%, explains almost all of the rise in life expectancy at age 25 over this period, while changes in insurance and income together explain less than 10%. The bulk of the increase in welfare witnessed over the period stems from technological change. We estimate that households in 2005 would be willing to sacrifice up to 75% of their annual consumption to continue living with 2005 rather than 1965 technology.

This paper examines the implications of changing the expectations assumption that is embedded in nearly all current macroeconomic models. The paper substitutes measured or “real” expectations for rational expectations in an array of standard macroeconomic relationships, as well as in a DSGE model. The author finds that the use of survey measures of expectations—for near-term inflation, long-term inflation, unemployment, and short-term interest rates—improves performance along a variety of dimensions. Survey expectations exhibit strong correlations to key macroeconomic variables. Those correlations may be given a structural interpretation in a DSGE context. Including survey expectations helps to identify key slope parameters in standard relationships, and eliminates the need for having lagged dependent variables in structural models that is often motivated by indexation for prices and habit formation for consumption. Including survey expectations also obviates the need for autocorrelated structural shocks in the key equations. In a head-to-head empirical test, the weight placed on the DSGE model’s rational expectations is essentially zero and the weight on survey expectations is one. The paper also discusses the modeling complications that arise once the rational expectations assumption is abandoned, and proposes methods for endogenizing survey expectations in a general equilibrium macro model.

(Paper written with Shawn Rohlin and Amanda Ross)

Previous studies have struggled to demonstrate that higher taxes deter business activity. We revisit this issue by estimating the effect of cross-border differences in state tax conditions on the tendency for new establishments to favor one side of a state border over the other. Identification is enhanced by several features of the research design. We focus only on companies that locate within easy commuting distance of state borders; we difference activity across adjacent segments of state borders and over time, and we control for multiple sources of tax revenue. Of special importance given the border design, we highlight the impact of previously overlooked state reciprocal agreements that require workers to pay income tax to their state of residence as opposed to their state of employment.
Results indicate that reciprocal agreements have a pronounced effect on companies situated close to a state border. In locations where reciprocal agreements are in force, higher personal income taxes lure companies from across the border, while corporate income taxes and sales taxes have the opposite effect. Where reciprocal agreements are not in place, the results are largely reversed. These patterns are amplified in heavily developed locations, and differ in systematic and anticipated ways by industry and corporate/non-corporate status of the establishment. Overall, the results support the view that entrepreneurs are drawn towards tax sheltered locations, ceteris paribus.

(Paper written with Stéphane Auray and Frédéric Jouneau-Sion)

In this paper, we propose a theoretical framework to investigate the impact of conflicts and wars on key macroeconomic aggregates and welfare. Using a panel data with 9 countries from 1870 onwards, we first show that the consumption-to-output ratio is minimal during WWII for participants. While this can be explained by an increase in public spending in the USA, this can not be the case in other countries that participated in WWII, as they experience a large fall in output during wartime. To account for this, we build a variation of a Real  Business Cycle model first proposed by Hercowitz and Sampson [1991]. We extend the initial model to account for specific shocks that destroy private and public capital stocks – as conflicts do – by assuming an (exogenously) time-varying depreciation rate of the stock of capital. In addition, the model imbeds generalized TFP shocks capturing standard technological factors as well as the potential effects of war on the labor force. The model is estimated and used (i ) to assess the importance of depreciation shocks during war episodes, and (ii ) to quantify the welfare effects of conflicts. We show that depreciation shocks are crucial to account for the macroeconomic dynamics of countries that have experienced large war-related destructions, and that the welfare losses from fluctuations can be quite large when considering data samples that include major war episodes.

(Paper written with Ferdinand Rauch)

Despite turbulent histories, some locations have been home to towns for centuries, while others nearby never have. But is this because fixed locational fundamentals pin down the location of towns even after major urban disruptions, or because of path dependence? We examine the collapse of the Roman Empire in Northwestern Europe, which ended Roman town life in Britain, but not in France. We find that since early Medieval times, British towns were - and still are today - less likely than French towns to locate on Roman town sites. We also find that the Medieval British urban network, much more so than its French counterpart, reconfigured around coasts and navigable rivers. These finding suggests that path dependence is important in determining urban locations.

(Paper written with Steffen Huck and Georg Weizsäcker)

In many economic contexts, an elusive variable of interest is the agent’s belief about relevant events, e.g. about other agents’ behavior. A growing number of surveys and experiments ask participants to state beliefs explicitly but little is known about the causal relation between beliefs and other behavioral variables.
This paper discusses the possibility of creating exogenous instrumental variables for belief statements, by informing the agent about exogenous manipulations of the relevant events. We conduct trust game experiments where the amount sent back by the second player (trustee) is exogenously varied. The procedure allows detecting causal links from beliefs to actions under plausible assumptions. The IV-estimated effect is significant, confirming the causal role of beliefs. It is only slightly and insignificantly smaller than in estimations without instrumentation, consistent with a mild effect of social norms or other omitted variables.

(Paper written with Richard Blundell and Antoine Bozio)

This paper provides a new analysis of the key stylised facts underlying the evolution of labour supply at the extensive and intensive margins in the last 40 years in three countries: the United States, the United Kingdom and France. We propose a definition of the extensive and intensive margins robust to the choice of the reference period and we develop a statistical decomposition that provides bounds on changes at these margins. We show that both margins matter in explaining changes in total hours. We highlight similarities in the evolution of the extensive margin for prime-aged individuals in the three countries, while divergence dominates the extensive margin at younger and older ages. At the intensive margin, divergence dominates: hours of work for American workers have remained steady throughout the period while French workers have markedly reduced their hours. The UK stands apart, with British women working fewer hours than French women but with British men working longer hours than their French counterparts. Given the large differences by age and gender that we document, it is unlikely that a single explanation will suffice to account for the macroeconomic evolutions in the three countries.

Remedies for Sick Insurance

(written with Carlos E. Noton and Pau Olivella)
NBER working paper 17938
March 2012

Abstract
This expository paper describes the factors that contribute to failure of health insurance markets, and the regulatory mechanisms that have been and can be used to combat these failures. Standardized contracts and creditable coverage mandates are discussed, along with premium support, enrollment mandates, guaranteed issue, and risk adjustment, as remedies for selection-related market damage.
An overall conclusion of the paper is that the design and management of creditable coverage mandates are likely to be key determinants of the performance of the health insurance exchanges that are a core provision of the PPACA of 2010. Enrollment mandates, premium subsidies, and risk adjustment can improve the stability and relative efficiency of the exchanges, but with carefully designed creditable coverage mandates are not necessarily critical for their operation.

Plan Selection in Medicare Part D: Evidence from Administrative Data

(written with Florian Heiss, Adam Leive and Joachim Winter)
NBER working paper 18166
June 2012

Abstract
We study the Medicare Part D prescription drug insurance program as a bellwether for designs of private, non-mandatory health insurance markets, focusing on the ability of consumers to evaluate and optimize their choices of plans. Our analysis of administrative data on medical claims in Medicare Part D suggests that less than 10 percent of individuals enroll in plans that are ex post optimal with respect to total cost (premiums and co-payments). Relative to the benchmark of a static decision rule, similar to the Plan Finder provided by the Medicare administration, that conditions next year’s plan choice only on the drugs consumed in the current year, enrollees lost on average about $300 per year. These numbers are hard to reconcile with decision costs alone; it appears that unless a sizeable fraction of consumers value plan features other than cost, they are not optimizing effectively.

Plus d'information sur Daniel L. Mc Fadden

(Paper written with Gustaf Bruze and Yoram Weiss)

We formulate and estimate a dynamic model of marriage, divorce, and remarriage using 27 years of panel data for the entire Danish cohort born in 1960. The marital surplus is identified from the probability of divorce, and the surplus shares of husbands and wives from their willingness to enter marriage. Education and marriage order are complements in generating gains from marriage. Educated men and women receive a larger share of the marital gains but this effect is mitigated when their proportion rises. Education stabilizes marriage and second marriages are less stable. As the cohort ages, uneducated men are the most likely to be single.

(Paper written with Joshua Graff Zivin and Solomon M.Hsiang)

We provide the first estimates of the potential impact of climate change on human capital, focusing on the impacts from both short-run weather and long-run climate. Exploiting the longitudinal structure of the NLSY79 and random fluctuations in weather across interviews to estimate well-identified models of the effect of temperature, we find that short-run changes in temperature lead to statistically significant decreases in cognitive performance on math (but not reading) beyond 26C (78.8F). Turning to the long-run effect of climate, we estimate cross-sectional models and exploit the richness of the NLSY79 to control for numerous background factors, including the mother's and grandparents' human capital. We do not find a statistically significant relationship between climate and human capital, suggesting that adaptation plays a significant role over longer time periods. When we directly examine the effect of air conditioning as a form of adaptation, we find that, consistent with short-run results, climate is significantly related to math (but not reading) human capital. The adoption of air conditioning effectively offsets the penalty from 4.5C (8.1F) additional degree days above 21C, though we present some suggestive evidence on the limits of air conditioning as a protective measure in very warm climates.

(Paper written with Amir Jina)

Do natural disasters have a causal effect on economic development? Reconstructing every country’s physical exposure to the universe of tropical cyclones during 1950-2008, we exploit year-to-year variation in cyclone strikes to identify the effect of disasters on long-run growth. The data reject long-standing hypotheses that disasters stimulate growth via “creative destruction” or that short-run losses disappear following migrations or transfers of wealth. Instead, we find robust evidence that national incomes decline, relative to their pre-disaster trend, and do not recover within twenty years. This result is globally valid, holding for countries of all types, and is supported by non-income variables as well as global patterns of climate-based adaptation. National income loss arises from a small but persistent suppression of annual growth rates spread across the fifteen years following disaster, generating large and significant cumulative effects: a 90th percentile event reduces per capita incomes by 7.4% two decades later, effectively undoing 3.7 years of average development. The gradual nature of these losses render them inconspicuous to a casual observer, however simulations indicate that they have dramatic influence over the long-run development of countries that are endowed with regular or continuous exposure to disaster. Globally, we estimate that long-run growth in modern World GDP has been slowed 1.3% per year due to more than 6,000 cyclones since 1950 – and that under conservative discounting assumptions the present discounted cost of “business as usual” climate change is roughly $9.7 trillion larger than previously thought.

(Paper written with Laurent Gobillon and Peter Rupert)

In France, Africans face a higher unemployment rate than natives, differing by as much as 5 to 10 percentage points. Using commute time data we find that they also face longer commute times to work. In this paper we investigate the impact of spatial mismatch, and, in particular, the degree of discrimination in the housing market, on the unemployment rate of ethnic groups. Based on Rupert and Wasmer (2012), we calibrate a model of commute time, relocation decisions, and frictional labor and housing markets, to quantify the role of housing market  discrimination for different groups of the labor force. Our results are that, in France, the lower quality of housing offers to Africans significantly affect their unemployment rate, and explains between 22 and 42% of the unemployment gap of 6 percentage points between Africans and natives, that is 1.5 to 2.5 percentage points. However, labor factors remain the main explanation to the high unemployment rate of Africans. In the US, spatial factors explain between 11 to 18% of the unemployment gap of 8.9 percentage points between White and Black workers, that is 1 to 1.6 percentage points.

(Paper written with Bettina Klaus)

In college admissions and student placements at public schools, the admission decision can be thought of as assigning indivisible objects with capacity constraints to a set of students such that each student receives at most one object and monetary compensations are not allowed. In these important market design problems, the agent-proposing deferred-acceptance (DA-)mechanism with responsive strict priorities performs well and economists have successfully implemented DA-mechanisms or slight variants thereof. We show that almost all real-life mechanisms used in such environments|including the large classes of priority mechanisms and linear programming mechanisms|satisfy a set of simple and intuitive properties. Once we add strategy-proofness to these properties, DA-mechanisms are the only ones surviving. In market design problems that are based on weak priorities (like school choice), generally multiple tie-breaking (MTB) procedures are used and then a mechanism is implemented with the obtained strict priorities. By adding stability with respect to the weak priorities, we establish the rst normative foundation for MTB-DA-mechanisms that are used in NYC.

Prudential Policy For Peggers (by Stephanie Schmitt-Grohe and Martin Uribe)

Abstract
This paper shows that in a small open economy with downward nominal wage rigidity pegging the nominal exchange rate creates a pecuniary externality. The externality causes unemployment, overborrowing, and depressed consumption. Ramsey optimal capital controls are shown to be prudential in the sense that they tax capital inflows in good times and subsidize external borrowing in bad times. Under plausible calibrations, this type of macro prudential policy is shown to lower the average unemployment rate by 10 percentage points, to reduce average external debt by 10 to 50 percent, and to increase welfare by 2 to 5 percent of consumption per period.

Paper

Slides

Related Papers

The Case for Temporary Inflation In the Eurozone, Stephanie Schmitt-Grohe, and Martin Uribe, August 2012.

Pegs and Pain, Stephanie Schmitt-Grohe, and Martin Uribe, November 2011.

Managing Currency Pegs, Stephanie Schmitt-Grohe, and Martin Uribe, January 2012.

Pegs, Downward Wage Rigidity, and Unemployment: The Role of Financial Structure, Stephanie Schmitt-Grohe, and Martin Uribe, November 2011.

(Paper written with David Cutler, Ariel Stern, and David Wennberg)

Supplier-induced demand has been used by non-economists to characterize a wide range of sins related to the provision of health care services. Economists have adopted a more narrow definition: a principal-agent problem in which physicians face a trade-off between patient benefits and their own income. We expand this model of physician behavior to one that allows for organizational factors (such as peer pressure or willingness to accommodate referring physicians), and professional beliefs about the efficacy of specific treatments.  We test the model using two unique national surveys from 2005; one of 516 U.S. cardiologists and the other a survey of 2,515 Medicare enrollees asked about preferences for end-of-life care.  Our results do not support a large role for patient demand or direct financial considerations in explaining regional differences in utilization.  While organizational factors influence physician behavior, the best explanation for large observed variations in treatment patterns is physician beliefs about their own productivity.   That many cardiologists' beliefs are more aggressive than professional guidelines suggests the presence of considerable waste in U.S. health care.

(Paper written with Timothy Besley and Thiemo Fetzer)

This paper estimates the effect of Somali piracy attacks on shipping costs using data on shipping contracts in the dry bulk market. We look at shipping routes whose shortest path exposes them to piracy and nd that the increase in attacks in 2008 lead to around a 8 to 12 percent increase in costs. From this we calculate the welfare loss imposed by piracy. We estimate that generating round 120 USD million of revenue for Somali pirates led to a welfare loss of anywhere between 0.9 and 3.3 USD billion. Therefore, piracy is an expensive way of making transfers.

An important motivation for intergovernmental transfers seems to be the provision of insurance against cost shocks in the public sector. Transfers are often designed to enable lower-level governments to provide an "adequate" level of some category of public expenditure, even in jurisdictions in which provision is costly. Here a transfer system of this nature is compared to uniform provision by a central government, when local cost conditions vary randomly, when the realization of these cost conditions is observed only by local decision makers. This is a very standard principal-agent problem, and the solution to this problem is compared to the outcome under uniform provision by the central government.

(Paper written with Julien Martin)

In this paper, we merge French firm-level customs data with the list of members of the Comité Colbert, the French association grouping luxury brands. We define as luxury exporters all French firms exporting luxury products at a price at least equal to the minimum price observed for this product among Colbert firms exports. We show that the share of high-end producers exports in French exports increased sharply from 2000 to 2009, even though luxury exports suffered relatively more during the crisis. While the geographic distribution of non-luxury exports has been stable over the past 10 years, important geographic reshuffling is observed for high-end products exports, in favor of fast-growing regions. At the micro-level, luxury exporters are shown to be much more sensitive to GDP per capita and less sensitive to distance, both for the intensive and the extensive margin of their exports. Altogether, these results suggest that specializing in high-end products makes the economy more sensitive to the economic situation, but also better equipped to reap the gains from business opportunities when fast-growing countries are far away.

(Paper written with Tarek-Taher Jaber López, Aurora García-Gallego, Georgina Michailidou and Pandelis Perakakis)

We experimentally test a model of corruption where firms compete for obtaining the license for a project, and a town planner decides on the firm to obtain the license. Each firm has to split its resources between quality and a bribe. Quality entails a social externality that endogenously depends on the quality of the winner's project, positively affecting all players. The bribe is unfair (increases inequality), ineffcient (it costs more to the sender than contributes to the receiver's utility) and antisocial. We report results from three studies. In the first study, the basic model is implemented showing that subjects exhibit a preference for quality and aversion to bribes. In the second study two new features are introduced: A citizen who is a passive receiver of the consequences of the potentially corrupt transaction and an option available to losers to investigate the deal between the planner and the winner of the licence. If the investigation reveals no bribe, the accusing firm loses all its profit, otherwise the accused firm and planner lose their profits. Despite the few times that the option is actually used bribes fall dramatically and efficiency increases, especially when a citizen is also present. Ethical behavior is associated with altruistic preferences and higher degrees of risk aversion. In the third study, we report results from a skin conductance control of subjects acting in the baseline and the whistle-blowing treatments. First, we show that firm-subjects acting in the absence of a whistle-blowing threat feel a higher emotional arousal when acting ethically than when sending bribes to the planners. The contrary is true in the whistle-blowing treatment. The anticipation of the loser's decision to blow the whistle also causes a higher arousal to those who have won a licence after bribing than those who did without bribing the planner. Planners show no arousal in either the decision or the anticipation moments of their and others' actions, confirming that passive bribery has no observable physiological impact.

(Paper written with Franz Dietrich)

Rational choice theory analyzes how an agent can rationally act, given his or her preferences, but says little about where those preferences come from. Preferences are usually assumed to be .xed and exogenously given. Building on related work on reasons and rational choice (Dietrich and List forthcoming), we describe a framework for conceptualizing preference formation and preference change. In our model, an agent.s preferences are based on certain .motivationally salient.properties of the alternatives over which the preferences are held. Preferences may change as new properties of the alternatives become salient or previously salient properties cease to be salient. Our approach captures endogenous preferences in various contexts and helps to illuminate the distinction between formal and substantive concepts of rationality, as well as the role of perception in rational choice.

Changes in exchange rates are not random. Two economically motivated factors account for 20% to 90% of the daily, monthly, quarterly, and annual exchange rate movements in developed countries and in emerging and developing countries with floating exchange rates.
These two factors - a carry and a dollar factor - are risk factors: the former accounts forthe cross-section of interest rate-sorted currency returns, while the latter accounts for a novel cross-section of dollar-beta sorted currency returns. The different shares of systematic risk across currencies are related to financial and macroeconomic measures of world integration.
These results have direct implications for asset managers, present a new set of precisely measured currency characteristics, and offer new insights into international macroeconomics and finance models.

Website address of the paper :
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1930516

Financial deregulation can help rationalize the negative correlation between house prices and current account balance observed in the United States and in several other countries that have experienced the highest degree of turmoil during the recent financial crisis. Lower collateral requirements facilitate access to external funding and increase the demand for consumption and housing. As a consequence, house prices increase and the current account turns negative because households borrow on net from the rest of the world. At the same time, however, the world real interest rate counterfactually raises. Expansionary monetary policy shocks in the United States, amplified by exchange rate pegs to the dollar in emerging economies, keep the world real interest rate low but play virtually no role for house prices and the current account.

(Paper written with Jeffrey R. Brown, Erzo F.P. Luttmer and Olivia S. Mitchell)

This paper provides evidence consistent with the hypothesis that individuals have poorly defined preferences when it comes to the complex decision of whether to annuitize, and that this - rather than a taste for lump sums - mayhelp explain observed low levels of annuity purchases. We test this using Social Security benefits as our choice setting,in an experimental module as part of the RAND American Life Panel. Although average annuity valuations under some elicitation methods are quite close to actuarial values, these averages mask substantial heterogeneity in responses, including substantial numbers who provide responses that are objectively irrational under reasonable parameter assumptions. Moreover, consumers tend to value annuities less when given the opportunity to buy more, andthey value them more highly when given the opportunity to sell these income streamsin exchange for lump sums. Financially literate consumers are better able to offer responses that are consistent across alternative ways of eliciting preferences for annuitization. We also show thatit is still difficult to explain much of the observed cross-sectional variation in annuity demand, even for the more financially literate population. These and other results raise doubts about whether consumers can make utility-maximizing choices when confronted with the decision about whether to buy an annuity in the real-world context. Accordingly, observers should be cautioususing observed behavior about annuity purchases to draw conclusions about the welfare consequences of annuitization.

(Paper written with Victor Couture and Matthew Turner)

We investigate the determinants of driving speed in large US cities. We first estimate city level supply functions for speed in an econometric framework where both the supply and demand for driving are explicit. These estimations allow us to calculate a city level index of driving speed and to rank cities by driving speed. Our investigation of the determinants of speed provide the foundations for welfare analysis. Our results suggest that large gains in speed may be possible if slow cities can emulate fast cities and that the deadweight losses from congestion are large.

Paper : http://www.nber.org/confer//2012/SI2012/URB/Couture_Duranton_Turner.pdf

(Paper written with Alessandra Cassar and Giovanna D’Adda)

We designed an experiment to identify the causal effects of institutional quality on norms of societal cooperation and to study the interaction of institutions and culture in sustaining economic exchange. The experiment consists of four parts: First, an initial trust game followed by 10 rounds of a market game in which agents can trade honestly, cheat or opt out of trading, in the absence of any contract enforcement systems. Subjects are then randomly allocated to one of two institutional treatments: either a partial enforcement system where only those who buy protection receive justice; or an impartial enforcement system, which administers fair settlements. Finally, subjects play another trust game, identical to the first. We obtain data from 346 subjects from Northern and Southern Italy and Kosovo. Our main result is that an impartial legal enforcement system has a positive causal effect on trust and trustworthiness, suggesting that moral norms of cooperative behavior can result as a by-product of impartial institutions. Cultural origin, initial trust and trustworthiness influence opportunistic behavior in markets, but only in the absence of impartial institutions, suggesting that trust can also act as a substitute for formal enforcement in the absence of the latter.

(Paper written with Emmanuel Farhi and Oleg Itskhoki)

We show that even when the exchange rate cannot be devalued, a small set of conventional fiscal instruments can robustly replicate the real allocations attained under a nominal exchange rate devaluation in a standard New Keynesian open economy environment. We perform the analysis under alternative pricing assumptions producer or local currency pricing, along with nominal wage stickiness; under alternative asset market structures, and for anticipated and unanticipated devaluations. There are two types of fiscal policies equivalent to an exchange rate devaluation one, a uniform increase in import tariff and export subsidy, and two, a value-added tax increase and a uniform payroll tax reduction. When the devaluations are anticipated, these policies need to be supplemented with a consumption tax reduction and an income tax increase. These policies have zero impact on fiscal revenues. In certain cases equivalence requires, in addition, a partial default on foreign bond holders. We discuss the issues of implementation of these policies, in particular, under the circumstances of a currency union.

Good rankings are bad - Why reliable rankings can hurt consumers

(Paper written with Laurent Bouton)

Ranking have become increasingly popular on markets for study programs, restaurants, wines, cars, etc. This paper analyses the welfare implication of such rankings. Consumers have to make a choice between two goods of unknown quality with exogenous presence or absence of an informative ranking. We show that existence of the ranking might make all consumers worse off. The existence of a ranking changes the demand structure of consumers. With rigid prices and rationing, the change can be detrimental to consumers due to its effect on rationing. Furthermore, this change in demand can also be detrimental due to consumption externalities. Finally, with perfectly flexible prices the ranking might increase the market power of firms and hence lead to losses for all consumers.

What is the effect of imported technology on firm productivity? We study this question using Hungarian firm-level trade and balance sheet data. Our preliminary results indicate that (i) The share of imported capital is strongly positively related to productivity, both across firms, and over time; (ii) Imports from R&D abundant countries matter more for productivity than imports from low-R&D countries; (iii) Imported capital and imported material inputs are complementary, which strengthens the productivity effect. Our results indicate that capital imports are an important channel of technology transfer.

(Paper written with Justin M. Rao and Hannah Trachtman)

What triggers giving? We explore this in a randomized natural field experiment during the Salvation Army's annual campaign. Solicitors were at one or both of two main entrances to a supermarket, making the solicitation either easy or difficult to avoid. Additionally, solicitors were either silent, or asked "please give" to passersby. We observed over 17,000 passings over four days, and found dramatic avoidance of the solicitors, but only during a direct ask. Furthermore, asking increased donations 75%. Across all conditions, seeking the solicitor was exceedingly rare. The results do not support static views of altruism, and instead highlight the importance of social cues and psychological features of the giver-receiver interaction. We argue that avoidance could evidence a lack of altruism or self-control strategy to deal with empathic reflexes to give.

(Paper written with Nadine Ketel, Edwin Leuven and Bas van der Klaauw)

In the Netherlands, excess demand to study medicine is rationed through a (weighted) lottery. We use this source of random variation to enter the medical profession, to estimate the rent that this supply restriction generates for lottery winners. According to our estimates at least 25% of a physician's salary consists of a rent. Outside the medical professions people would have earned 25% less. The size of this rent does not vary with the ability of an applicant.

(Paper written with Felix Bierbrauer and Craig Brett)
Tax competition between two governments who choose nonlinear income tax schedules to maximize the average utility of their residents when skills are unobservable and labor is perfectly mobile is examined. We show that there are no Nash equilibria in which there is a skill type that pays positive taxes to one country and whose utility is larger than the average utility in the other country or in which the lowest skilled are subsidized. We also show that it is possible for the most highly skilled to receive a net transfer funded by taxes on lower skilled individuals in equilibrium. These findings confirm the race-to-the-bottom thesis in this setting.

(Paper written with Patricia Apps, Jan Kabátek and Ray Rees)
This paper introduces a static structural model of hours of market labor supply, time spent on child care and other domestic work, and bought in child care for married or cohabiting mothers with pre-school age children. The father's behavior is taken as given. The main goal is to analyze the sensitivity of hours of market work, parental child care, other household production and formal child care to the wage rate, the price of child care, taxes, benefits and child care subsidies. To account for the non-convex nature of the budget sets and, possibly, the household technology, a discrete choice model is used. The model is estimated using the HILDA dataset, a rich household survey of the Australian population, which contains detailed information on time use, child care demands and the corresponding prices. Simulations based on the estimates show that the time allocations of women with pre-school children are highly sensitive to changes in wages and the costs of child care. A policy simulation suggests that labor force participation and hours of paid work would increase substantially in a fiscal system based solely on individual rather than joint taxation.

(Paper written with Hélène Rey and Nicolas Govillot)
We update and improve the Gourinchas and Rey (2007a) daftaset of the historical evolution of US external assets and liabilities at market value since 1952 to include the recent crisis period. We find strong evidence of a sizeable excess return of gross assets over gross liabilities. The center country of the International Monetary System enjoys an "exorbitant privilege" that significantly weakens its external constraint. In exchange for this "exorbitant privilege" we document that the US provides insurance to the rest of the world, especially in times of global stress. This "exorbitant duty" is the other side of the coin. During the 2007-2009 global financial crisis, payments from the US to the rest of the world amounted to 19 percent of US GDP. We present a stylized model that accounts for these facts.

(Paper written with Arvind Krishnamurthy)

We evaluate the effect of the Federal Reserve’s purchase of long-term Treasuries and other long-term bonds ("QE1" in 2008-2009 and "QE2" in 2010-2011) on interest rates. Using an event-study methodology we reach two main conclusions. First, it is inappropriate to focus only on Treasury rates as a policy target because QE works through several channels that affect particular assets differently. We find evidence for a signaling channel, a unique demand for long-term safe assets, and an inflation channel for both QE1 and QE2, and an MBS pre-payment channel and a corporate bond default risk channel for QE1. Second, effects on particular assets depend critically on which assets are purchased.  The event-study suggests that (a) mortgage-backed securities purchases in QE1 were crucial for lowering mortgage-backed security yields as well as corporate credit risk and thus corporate yields for QE1, and (b) Treasuries-only purchases in QE2 had a disproportionate effect on Treasuries and Agencies relative to mortgage-backed securities and corporates, with yields on the latter falling primarily through the market’s anticipation of lower future federal funds rates.

(Paper written with Adam Reiff)

A recent pricing literature has concluded that menu cost models provide valid micro-foundations for time-dependent models under small business cycle shocks. The models' similarity necessarily breaks down for large shocks, however, when the fraction of price changes starts increasing in menu cost models. We show that in this case menu cost models predict (i) an unexpectedly high price flexibility and (ii) significant asymmetry between the real effects of positive and negative monetary shocks under positive trend inflation rates, contrary to time-dependent models. We demonstrate in a structural model that these predictions are consistent with observed price responses to large value-added tax shocks in Hungary. The evidence facilitates comparison of different menu cost models and raises doubts on alternative pricing models with information or search frictions as sole reasons for price rigidity.

(Paper written with Manuel Oechslin)

We explore the productivity impact of international trade in a monopolistically competitive economy with endogenous mark-ups due to credit market frictions. We show that reducing trade barriers in such an environment (i) may - but not necessarily must - have a negative impact on productivity and output; (ii) is bound to increase the polarization of the income distribution. The reason is that the pro-competitive effects of trade reduce mark-ups and hence the borrowing capacity of less a­ffuent entrepreneurs. As a result, smaller firms may no longer be able to make the investments required to operate the high-productivity technology. Our findings are consistent with evidence from developing countries which (i) does not suggest a clear-cut impact of trade on economic performance; (ii) hints at an inequality-enhancing effect of globalization.

(Paper written with Jae Song)

This paper estimates the effect of Disability Insurance receipt on labor supply. Exploiting the effectively random assignment of judges to disability insurance cases, we use instrumental variables to address the fact that those allowed benefits are a selected sample. We find that benefit receipt reduces labor force participation by 26 percentage points three years after a disability determination decision, although the reduction is smaller for those over age 55, college graduates, and those with mental illness. Over 60% of those denied benefits by an Administrative Law Judge are subsequently allowed benefits within 10 years, showing that most applicants apply, re-apply, and appeal until they get benefits. OLS estimates are similar to instrumental variables estimates. The participation elasticity with respect to the after-tax wage is 1.5.

(Paper written with Klaus Nehring and Marcus Pivato)

Judgement aggregation is a model of social choice where the space of social alternatives is the set of consistent evaluations (‘views’) on a family of logically interconnected propositions, or yes/no-issues. Unfortunately, simply complying with the majority opinion in each issue often yields a logically inconsistent collection of judgements. Thus, we consider the Condorcet set: the set of logically consistent views which agree with the majority in as many issues as possible. Any element of this set can be obtained through a process of diachronic judgement aggregation, where the evaluations of the individual issues are decided through a sequence of majority votes unfolding over time, with earlier decisions possibly imposing logical constraints on later decisions. Thus, for a fixed profile of votes, the ultimate social choice can depend on the order in which the issues are decided; this is called path dependence. We investigate the size and structure of the Condorcet set - and hence the scope and severity of path-dependence - for several important classes of judgement aggregation problems.

(Paper written with David E. Wildasin)

This paper develops a theory of taxation and public investment in an intertemporal setting with stochastically-fluctuating revenues. With full access to capital markets, the time paths of taxes and investment are smooth. With constraints on government borrowing, however, public investment fluctuates in response to (adverse or favorable) revenue shocks, despite some precautionary savings behavior.  The theory is tested empirically using a 25-year panel of data on more than 1,000 US municipalities located in states that restrict municipal borrowing to varying degrees. The empirical results are supportive. While public investment is found to be significantly affected by current revenue shocks, public consumption is not. Moreover, investment spending of municipalities located in states that impose heavier restrictions on municipal borrowing tends to be more sensitive to revenue shocks.

We examine factors that may contribute to ‘overconfidence’ in relative ability on an intelligence test. We test experimentally for evidence of self-esteem concerns and instrumental strategic concerns. Errors in Bayesian updating are rare when the information does not involve own relative ability, but far more common when it does, suggesting self-esteem issues. There is also strong evidence that males state higher levels of confidence in relative ability when this precedes a tournament; as entry is predicted by relative confidence, this can be an effective deterrent. Inflating confidence can be part of an equilibrium strategy, providing a rationale for strategic overconfidence.

(Paper written with Julian di Giovanni & Francesc Ortega)

This paper evaluates the welfare impact of observed levels of migration and remittances in both origins and destinations, using a quantitative multi-sector model of the global economy calibrated to aggregate and firm-level data on 60 developed and developing countries. Our framework accounts jointly for origin and destination characteristics, as well as the inherently multi-country nature of both migration and other forms of integration, such as international trade and remittance flows. In the presence of firm heterogeneity and imperfect competition larger countries enjoy a greater number of varieties and thus higher welfare, all else equal. Because of this effect, natives in countries that received a lot of migration - such as Canada or Australia - are better off. The remaining natives in countries with large emigration flows - such as Jamaica or El Salvador - are also better off due to migration, but for a different reason: remittances. The quantitative results show that the welfare impact of observed levels of migration is substantial, at about 5 to 10% for the main receiving countries and about 10% for the main sending countries.

(Joint with Mohammed Abdellaoui, Aurélien Baillon, & Laetitia Placido)

Since Keynes (1921) & Knight (1921) we know that uncertainties in economics usually come with no objective statistical probabilities. If then still probabilities are used to model such uncertainties, they have to be subjective (de Finetti 1931; Savage 1954). However, Ellsberg (1961) showed that in most cases no subjective probabilities can be assigned (ambiguity). We need new models for beliefs and decisions. Only at the end of the 1980s, people succeeded in developing such models (Gilboa & Schmeidler), at first theoretical and normatively motivated. They assumed expected utility for known probabilities and focused on ambiguity aversion.

We investigate ambiguity descriptively. Ambiguity is measured extensively in experimental and behavioral economics nowadays, with predictors investigated in regressions. One number is commonly taken to capture ambiguity, being an index of ambiguity aversion. This index mostly is the alpha from the alpha maxmin model for multiple priors. The ambiguity aversion index is then treated similarly as the index of risk aversion.

We propose generalizations:

1. Ambiguity should depend on the source of uncertainty (=events generated by a common mechanism and with a uniform degree of ambiguity).  Tractability is to be maintained though.

2. There is so much ambiguity seeking that it should be incorporated into models.

3. We need nonexpected utility also for known probabilities.

We introduce a theoretical model of sources that can give exact predictions and ambiguity premiums.  We demonstrate its tractability in an experiment where we get tractable graphs of source functions that fully capture ambiguity.  Surprisingly, we can revive subjective probabilities in agreement with Ellsberg’s paradoxes and ambiguity.

Finally, I report on a recent survey over N=1,935 households, investigating the impact of ambiguity on household portfolio choices.  In particular, we investigate the nonparticipation paradox of households investing less in stocks than any rational theory can explain.

(Paper written with Raphaël Soubeyran)

This paper contributes to the heated debate on the link between climate and civil war.  We exploit a large dataset of a drought index commonly used in hydrology, the Palmer Drought Severity Index (PDSI). The PDSI is based on a hydrological model and is a cumulative measure that takes account of past climatic variables. Our analysis takes account of country fixed effects, removal of the most influential observations, use of alternative sample periods and changes to the battle-death threshold. Overall, results show a robust link between drought and civil war in Sub-Saharan African states after independence.

(Paper written with Ciro Avitabile and Irma Clots-Figueras)

Citizenship rights are associated with better economic opportunities for immigrants. This paper studies how in a country with a large fraction of temporary migrants the fertility decisions of foreign citizens respond to a change in the rules that regulate child legal status at birth. The introduction of birthright citizenship in Germany, following the reform of the German nationality law in 2000, represented a positive shock in the returns to the investment in child human capital. Consistent with the Becker "quality-quantity" model of fertility, we find that birthright citizenship determined a reduction in immigrants' fertility and an improvement in health outcomes among children affected by the reform.

The endowment effect has been widely documented. Recent models of reference-dependent preferences indicate that expectations play a prominent role in the presence of the phenomenon. A subset of such expectations-based models predicts an endowment effect for risk when reference points change from certain to stochastic. In two purposefully simple risk preference experiments, eliminating often-discussed confounds, I demonstrate both between and within-subjects an endowment effect for risky gambles. While subjects are virtually risk neutral when choosing between fixed gambles and changing certain amounts, a high degree of risk aversion is displayed when choosing between fixed amounts and changing gambles. These results provide needed separation between expectations based reference-dependent models, allow for evaluation of recent theoretical extensions, and may help to close a long-standing debate in decision science on inconsistency between probability and certainty equivalent methodology for utility elicitation.

(Paper written with Kurt Brekke and Odd Rune Straume)

In many markets, such as education, health care and public utilities, firms are often profit-constrained either due to regulation or because they have non-profit status. At the same time such firms may have altruistic concerns towards consumers. In this paper we study semi-altruistic firms' incentives for quality provision and cost efficiency when facing constraints on the distribution of profits. Using a spatial competition framework, we derive the equilibrium outcomes under both quality competition with regulated prices and quality-price competition. Profit constraints always lead to lower cost-efficiency, whereas the effects on quality and price are ambiguous. If altruism is high (low), profit-constrained firms offer higher (lower) quality and lower (higher) prices than firms that are not profit-constrained. Compared with the first-best outcome, the cost-efficiency of profit-constrained firms is too low, while quality might be over- or underprovided. Profit constraints may improve welfare and be a complement or substitute to a higher regulated price, depending on the degree of altruism.

In explaining the uneven distribution of economic activity, a key empirical challenge is separating agglomeration and dispersion forces from natural advantages and amenities. This paper uses the division and reunification of Berlin as a natural experiment to provide new evidence on the strength of agglomeration and dispersion forces. We develop a quantitative model of city structure that allows for variation in natural advantages, amenities and transport infrastructure. We use disaggregated data on land rents, workplace employment and residence employment to determine the model’s parameters and show that it can account both qualitatively and quantitatively for the observed changes in city structure.

Recent empirical work finds surprisingly little evidence for adverse selection in insurance markets. This has been attributed to the importance of heterogeneity in preferences. Extending the sufficient statistics approach by Einav, Finkelstein and Cullen (2010), we show how welfare conclusions and policy recommendations change substantially when choices are also driven by heterogeneity in perceptions. Since the uninsured are overly optimistic, the value of universal mandates is unambiguously higher. Information policies may be detrimental as they make the market more adversely selected. We also analyze the identification of the heterogeneity in risk preferences and perceptions and propose a new choice-based approach using price variation.

(Paper written with Rodrigo Velez)
We consider the problem of fairly allocating a bundle of privately appropriable and infinitely divisible goods among a group of agents with "classical" preferences. We propose to measure an agent’s "sacrifice" at an allocation by the size of the set of feasible bundles that the agent prefers to her consumption. As a solution, we select the allocations at which sacrifices are equal across agents and this common sacrifice is minimal. We then turn to the manipulability of this solution. In the tradition of Hurwicz (1972, Decision and Organization, U. Minnesota Press), we identify, under some mild assumptions on preferences, the equilibrium allocations of the manipulation game associated with this solution when all commodities are normal: (i) for each preference profile, each equal-division constrained Walrasian allocation is an equilibrium allocation; (ii) conversely, each equilibrium allocation is equal-division constrained Walrasian. (iii) Furthermore, we show that if normality of goods is dropped, then equilibrium allocations may not be equal-division Constrained Walrasian.

When it comes to international economic sanctions, the most frequent goal is regime hange and democratization. Up to now, however, such sanctions have usually failed to achieve their stated goal. Paradoxically, in some cases (e.g., Haiti, Iraq), they even made the targeted regimes resort to policies which severely amplified the direct negative economic consequences. This paper offers a political-economy model which provides an intuitive explanation for these observations. In the model, to avoid sanctions-induced challenges, autocratic regimes lower the supply of government services in order to reduce private-sector productivity and hence the resources of potential challengers. This defense strategy only stops working if the sanctions reach a critical intensity. Yet, the critical level might be so high that even if the regime were ousted and democracy established imposing sanctions would not be in the interest of the general population.

The paper studies how high leverage and crises can arise as a result of changes in the income distribution. Empirically, the periods 1920-1929 and 1983-2007 both exhibited a large increase in the income share of the rich, a large increase in leverage for the remainder, and an eventual financial and real crisis. The paper presents a theoretical model where these features arise endogenously as a result of a shift in bargaining powers over incomes. A financial crisis can reduce leverage if it is very large and not accompanied by a real contraction. But restoration of the lower income group’s bargaining power is more effective.

Empirical research shows that - rather than improving incentives - exerting more control can reduce performance by crowding out intrinsic motivation. The present paper shows that such motivational crowding-out can be explained in a model with intention-based reciprocity. It demonstrates that if individuals differ in their propensity for reciprocity concerns while preferences are private information, then the very act of being controlled can be considered to be unfriendly. Imposing control can then induce low effort from individuals who - absent control - voluntary exert high effort. This new intention-based argument stands in stark contrast to existing theoretical wisdom on motivational crowd-out that is exclusively based on signaling motives.

This seminar will examine the role of empirical evidence in tax reform loosely organised under five headings: (a) Key margins of adjustment to tax reform, (b) Measurement of effective tax rates, (c) The importance of information, complexity and salience, (d) Evidence on the size of responses, (e) Implications from optimal tax theory for tax design. It will focus on the taxation of earnings and consumption http://www.ifs.org.uk/mirrleesReview

In search and bargaining models, the effect of higher wages on employment is determined by the elasticity of the job creation curve. In this paper, we use U.S. data over the 1970-2007 period to explore whether labor market outcomes abide by the restrictions implied by such models and to evaluate the elasticity of the job creation curve. The main difference between a job creation curve and a standard demand curve is that the former represents a relationship between wages and employment \emph{rates}, while the latter represents a relationship between wages and employment levels. Although this distinction is quite simple, it has substantive implications for the identification of the effect of higher wages on employment. The main findings of the paper are that U.S. labor market outcomes observed at the city-industry level appear to conform well to the restrictions implied by search and bargaining theory and that, using 10-year differences, we estimate the elasticity of the job creation curve with respect to wages to be -0.3.

We interpret this relatively low elasticity as reflecting a low propensity for individuals to become more entrepreneurial and create more jobs when labor costs are lowered and variable profits are raised.

I construct a dynamic general equilibrium model where a recession is initiated by losses suffered by financial institutions, and exacerbated by their inability to extend credit to the real economy. The event that triggers the recession is similar to a redistribution shock: a small sector of the economy -- borrowers who use their home as collateral -- defaults on their loans (that is, they pay back less than contractually agreed). When banks hold little equity in excess of regulatory requirements, their portfolio losses require them to react immediately, either by recapitalizing or by deleveraging. By deleveraging, banks transform the initial redistribution shock into a credit crunch, and amplify and propagate the financial shock to the real economy. In my benchmark experiment aimed at replicating key features of the Great Recession, credit losses (that is, a redistribution shock) of about 5 percent of GDP lead to a 3 percent drop in output, whereas they would have little effect on economic activity in a model where banks are just a veil.

(Paper written with Michele Piccione)

Investors have limited ability to forecast financial outcomes. They use models of financial markets that do not include all relevant statistical correlations. This paper models traders who use incomplete but statistically correct theories of financial markets while failing to appreciate that they sometimes trade against others who have more complete theories. The more such incomplete-yet-statistically-correct theories present in the market, the higher are asset prices; prices always exceed fundamentals under any theory. When fundamentals are persistent, a greater number of theories results in a narrower range of asset prices. Prices do not depend upon fundamentals alone. Investors with more complete theories sometimes under-perform those with strictly less complete theories.

[Paper written with K. Jin (LSE) and S. Guibaud (LSE)]
 
A striking pattern in the data is that variations in the current account are mostly driven by private savings, rather than investment. Three other pronounced trends are--(1) the steady decline in world interest rates (2) the rise of persistent global imbalances and (3) a divergence in savings rates across countries--- coinciding with a period of rapid growth in emerging markets. In this paper, we develop a framework in which households in two large open-economies feature different degrees of credit constraints, and we show that all of the above facts can be reconciled when faster TFP growth occurs in emerging markets characterized by tighter liquidity constraints. Unlike the predictions of the standard model, savings rate diverges across countries in response to a fall in the interest rate, and savings rather than investment drive cross-sectional variations in the current account. On the flip side, faster TFP growth in less-constrained economies leads to higher world interest rates and a convergence in savings rate.

(Paper written with Ha Hwang)

We explore the problem facing a sophisticated social planner who is aware that incentives designed to alter the economic costs and benefits of the targeted behaviors may also affect the citizen's references. We address the case where explicit incentives such as subsidies, taxes, and fines crowd out altruistic references that internalize the effects of ones' actions on others or diminish ethical or intrinsic motivation to contribute to the public good. Evidence from behavioral experiments indicates that crowding may take two forms: categorical (the effect on social preferences depends only on the presence or absence of the incentive) or marginal (the effect depends on the extent of the incentive). We also distinguish among the causes of crowding out, which may arise because of the framing and information effects of incentives that make preferences state dependent or due to durable learning effects of incentives on cultural transmission that make preferences endogenous.

We characterize optimal incentives for the sophisticated planner and show that crowding out of either the marginal and categorical nature and caused by either state-dependent or endogenous preferences may call for greater use of incentives rather than the opposite, as is commonly assumed.  Results are readily extended to the (less common) case of crowding in.

(Paper written with Eric Helland)

Every year thousands of firms are engaged in research joint ventures (RJV), where all knowledge gained through R&D is shared among members. Most of the empirical literature assumes members are non-cooperative in the product market. But many RJV members are rivals leaving open the possibility that firms may form RJVs to facilitate collusion. We examine this by exploiting variation in RJV formation generated by a policy change that affects the collusive benefits but not the research synergies associated with a RJV. We use data on RJVs formed between 1986 and 2001 together with firm-level information from Compustat to estimate a RJV participation equation. After correcting for the endogeneity of R&D and controlling for RJV characteristics and firm attributes, we find the decision to join is impacted by the policy change. We also find the magnitude is significant: the policy change resulted in an average drop in the probability of joining a RJV of 34% among telecommunications firms, 33% among computer and semiconductor manufacturers, and 27% among petroleum refining firms. Our results are consistent with research joint ventures serving a collusive function.

(Paper writen with Andrea Leiter and Michael Pfaffermayr)

This paper develops a structural empirical general equilibrium model with path dependence of the role of fixed costs of bilateral market entry for the aggregate extensive margin of bilateral trade. This leads to path dependence of that margin. We embed the theoretical model into a dynamic stochastic model of bilateral selection into import markets and apply it to a data-set of aggregate bilateral exports among 171 countries over the period 1992-2004. In particular, we disentangle the role of changes in trade costs, in labor endowments, and in total factor productivity for trade, bilateral market entry, numbers of firms active, and welfare.

This paper studies the impact of an increase in local leader accountability within an authoritarian regime by examining the effect of the introduction of village level elections in rural China. We collect a unique nationwide survey on the history of electoral reforms in 217 rural Chinese villages (1980-2005) and exploit variation in the timing of the introduction of elections to establish the causal effect of an increase in leadership accountability. We document that the elections were imperfectly implemented, but still decreased the enforcement of unpopular upper government policies and increased appropriate public goods provision at the village level. The findings provide strong evidence of the benefits of increased political accountability.

(Paper written with Arnold Chassagnon and François Le Grand)

We consider a formal approach to comparative risk aversion and applies it to intertemporal choice models. This allows us to ask whether standard classes of utility functions, such as those inspired by Kihlstrom and Mirman, Selden, Epstein and Zin and Quiggin are well-ordered in terms of risk aversion. Moreover, opting for this model-free approach allows us to establish new general results on the impact of risk aversion on savings behaviors. In particular, we show that risk aversion enhances precautionary savings, clarifying the link that exists between the notions of prudence and risk aversion.

The majority of economic decisions involve consequences that are both risky and delayed. While the bulk of previous research has focused on measuring atemporal risk preferences, a robust body of evidence has emerged showing that risk tolerance is delay dependent, usually increasing with the delay to the resolution of uncertainty. On the other hand, people's preference for a smaller immediate reward over a larger delayed one weakens drastically when both rewards are made risky. Therefore, risk and delay seem to interact in a complex way, documented by a number of other puzzling findings. In this paper we argue that future events are uncertain by their very nature and, consequently, delayed consequences involve an additional layer of uncertainty not accounted for by objectively given probabilities. We show that future uncertainty conjointly with people's proneness to nonlinear probability weighting generates a unifying framework for explaining increasing risk tolerance, hyperbolic discounting as well as a large number of observed interaction effects between time and risk. Moreover, based on an experiment with monetary incentives, we demonstrate that people's atemporal risk preferences are indeed a significant determinant of their time discounting behavior: Greater departures from linear probability weighting predict a stronger decline in impatience on the level of individual behavior.

(Paper written with Xianwen Shi)

A committee decides by unanimity whether to accept the current alternative, or to continue costly search. Each alternative is described by a vector of distinct attributes, and each committee member can privately assess the quality of one attribute (her "speciality"). Preferences are heterogeneous and interdependent: each specialist values all attributes, but puts a higher weight on her speciality (partisanship). We study how acceptance standards, members' welfare and expected search duration vary with the amount of conflict within the committee. We also compare decisions made by committees consisting of specialized experts to decisions made by committees of generalists who can each assess all information available. The acceptance cutoff decreases (increases) in the degree of conflict when information is public (private). In both cases welfare decreases in the level of conflict. Finally, we identify situations where specialized committee decisions yield Pareto improvements over specialized, one-person decisions even if search takes longer. The technical analysis uses tools from (stochastic) majorization and reliability.

(Paper written with Frédéric Docquier)

We explore the complementarities between high-skill emigration and poverty in developing countries. We build a model endogenizing human-capital accumulation, high-skill migration and productivity. Two countries sharing the same characteristics may end up either in a “low poverty/low brain drain” path or in a “high poverty/high brain drain” path. After identifying country-specific parameters, we find that, for a majority of countries, the observed equilibrium has higher income than the other possible one. In 22 developing countries (including 20 small states with less than 2 million inhabitants), poverty and high brain drain are worsened by a coordination failure. For 25 other countries, a radical worsening of economic performances is feasible.
These results are fairly robust to identification assumptions and the inclusion of a brain-gain mechanism.

(Paper written with Nobuhiro Kiyotaki and Albert Queralto)

We develop a macroeconomic model with an intermediation sector that allow banks the option to issue outside equity as well as short term debt. This makes bank risk exposure an endogenous choice. The goal is to have a model that can not only capture a crisis when financial institutions are highly vulnerable to risk, but can also account for why these institutions adopt such a risky portfolio structure in the first place. We use the model to assess quantitatively how perceptions of fundamental risk and of government credit policy in a crisis ex post affect the vulnerability of the financial system ex ante. We also study the quantitative effects of macroprudential policies designed to offset the incentives for risk-taking.

(Paper written with Talia Bar)

This paper derives an optimal mechanism for a principal (a …financing government agency or an executive of a company) to choose up to m projects from a selection of n R&D projects when resources are limited. R&D projects are risky and the principal is not fully informed of each projects prospects. Project managers hold private information about the quality of their project. They compete for resources as they would benefi…t if their own project is …financed. In the optimal mechanism, the principal does not always award funding to the highest probability of success project. There is a region of high quality projects where the allocation of funds does not depend on reported qualities. Managers have limited liability constraints, hence to provide incentives for truth-telling project managers that were not fi…nanced may need to be compensated.

(Paper written with Luojia Hu)

This paper studies the impact of pre‐natal sex selection on the well‐being of girls who are born by analyzing changes in children’s nutritional status and mortality over the years since the diffusion of sex‐selective abortion in India. We use the ratio of male to female births in the year and state in which a child was born as a proxy for parental access to prenatal sex‐selection. Using repeated cross‐sections from a large‐scale and rich survey data, we show that high sex ratios at birth reflect the practice of sex‐selective abortion. We then exploit the large regional and time variations in the use of sex‐selective abortion to analyze whether changes in girls’ outcomes relative to boys within states and over time are associated with changes in sex‐ratios at birth. We find that an increase in the practice of sex‐selective abortion appears to be associated with a reduction in the relative prevalence of malnutrition among surviving girls. The negative association is stronger for rural households and at higher birth parities. We find no evidence that sex‐selective abortion lead to a selection of girls into families of higher SES, however we do find some evidence on a larger reduction in family size for girls relative to boys. We also find some suggestive evidence of better treatment of girls as measured by breastfeeding duration. On the other hand, sex‐selective abortion does not appear to be associated with a reduction in the excess of girls’ mortality.

(Paper written with Michael Woodford)
This paper considers a general class of nonlinear rational-expectations models in which policymakers seek to maximize an objective function that may be household expected utility. We show how to derive a target criterion that is: (i) consistent with the model’s structural equations, (ii) strong enough to imply a unique equilibrium, and (iii) optimal, in the sense that a commitment to adjust the policy instrument at all dates so as to satisfy the target criterion maximizes the objective function. The proposed optimal target criterion is a linear equation that must be satisfied by the projected paths of certain economically relevant “target variables”. It takes the same form at all times and generally involves only a small number of target variables, regardless of the size and complexity of the model. While the projected path of the economy requires information about the current state, the target criterion itself can be stated without reference to a complete description of the state of the world. We illustrate the application of the method to a nonlinear DSGE model with staggered price-setting, in which the objective of policy is to maximize household expected utility.

Paper written with Nicholas Christakis, James Fowler & Karthik Kalyanaraman

We develop and analyze a tractable empirical model for strategic network formation that can be estimated with data from a single network at a single point in time. We model the network formation as a sequential process where in each period a single randomly selected pair of agents has the opportunity to form a link. Conditional on such an opportunity, a link will be formed if both agents view the link as beneficial to them. They base their decision on their own characateristics, the characteristics of the potential partner, and on features of the current state of the network, such as whether the the two potential partners already have friends in common. A key assumption is that agents do not take into account possible future changes to the network. This assumption avoids complications with the presence of multiple equilibria, and also greatly simplifies the computational burden of anlyzing these models. We use Bayesian markov-chain-monte-carlo methods to obtain draws from the posterior distribution of interest. We apply our methods to a social network of 669 high school students, with, on average, 4.6 friends. We then use the model to evaluate the effect of an alternative assignment to classes on the topology of the network.

Benjamin Franklin recommended a systematic subjective evaluation of all key variables for selecting between multiple alternatives. We extend this approach, which we call the index method. We propose the use of prior knowledge (i.e., primarily empirical evidence, but also expert domain knowledge) to prepare a list of predictor variables. Then, for each variable, assign a value such as 1 if the variable has a positive influence on the outcome variable; otherwise, assign a value of 0. Sum up the value scores. The alternative with the highest overall score is preferred. The index method can also be used in conjunction with regression analysis to generate quantitative forecasts. This method is appropriate when many variables are important and where much prior knowledge exists. I describe findings from our validation research on election forecasting. The index method provides excellent forecast accuracy, as I will show. Most important, however, it aids decision-making such as in deciding which candidate a party shouId nominate and what issues a candidate should emphasize in a campaign. I also describe areas for potential application, such as employee selection, determining which advertisement is most effective, deciding which new product will be most profitable, and which countries will experience the most rapid economic growth.

(Joint paper with Nicolas Houy)
This paper analyzes the assignment of durable objects to successive generations of agents who live for two periods. The optimal assignment rule is stationary, favors old agents and is determined by a selectivity function which satisfies an iterative functional differential equation. More patient social planners are more selective, as are social planners facing distributions of types with higher probabilities for higher types.
The paper also characterizes optimal assignment rules when monetary transfers are allowed and agents face a recovery cost, when agents' types are private information and when agents can invest to improve their types.

This study investigates the following questions: Is it harder to distinguish and remember people if they are of another race? And do memory limitations have discriminatory implications? To answer these questions, I conduct an experiment in a laboratory environment. Participants are presented with a set of potential candidates of different races - East Asian and Caucasian White - and each candidate is associated with a monetary value. Incentives are provided to recall candidates with higher values. I find that people are much better able to recall candidates with higher values if they are of the same race. Candidates of the other race are more likely to be confused with each other. This leads to positive and negative discrimination at the same time: those at bottom of the value distribution benefit while those at the top lose out. These results suggest that cognitive biases could play a role in the nature of cross-racial relations, in particular for phenomena relying on repeated interactions and individual recognition, such as the formation and maintenance of social ties or the establishment of trust relationships.

(Paper joint with Alessia Campolmi)
The macro literature has extensively studied the interaction between labor market frictions and the aggregate economy. However, little to no attention has been devoted to the choice of workers to participate in the labor market. The question we address in this paper is to what extent the participation margin plays a role for: business cycle dynamics; transmission mechanism of monetary policy; monetary policy design.

Information provided by an agent affects prices at which equity transactions take place. The agent may breach his duty either by spending too little effort at investigating relevant matters or by manipulating the obtained information unduly. As a consequence of such breach of duty, market participants may suffer from losses. Legal systems provide a rather disparate array of remedies without providing a coherent theory that would support the design of these remedies. The present paper propagates a general principle according to which courts may award expectation damages and it identifies sufficient conditions under which such damages would generate incentives for the agent to investigate with due care and to disclose the information duly.

Controlling for country fixed effects, there is a positive and statistically significant relationship between the degree of housing market regulation (HMR) and the strictness of employment protection legislation (EPL) in OECD countries. We provide a model in which HMR increases foreclosure costs in case of mortgage default, while EPL raises the administrative cost of dismissal. Owing to banks' lending behavior, individuals' demand for job protection increases with the cost of foreclosure. We use the model to discuss social housing and family insurance, the case for mortgage unemployment insurance, regulations on the use of fixed-term contracts, the impact of min down-payment policies, feed-back effects from HMR to EPL, and the failure of a 2006 French reform of the labor contracts.

ABSTRACT

Machina (2009) introduced two examples that falsify Choquet expected utility, presently one of the most popular models of ambiguity. This article shows that Machina’s examples do not only falsify the model mentioned, but also four other popular models for ambiguity of the literature, namely maxmin expected utility, variational preferences, α-maxmin and the smooth model of ambiguity aversion.
Thus, Machina’s examples pose a challenge to most of the present field of ambiguity.Finally, the paper discusses how an alternative representation of ambiguity-averse preferences manages to accommodate the Machina paradoxes and what drives theresults.

This paper analyzes quantitatively the extent to which there is overborrowing in a business cycle model for emerging market economies and discusses alternative policy regimes often advocated as second best policy responses to imperfect access to capital markets. We find that overborrowing can occur only under special circumstances. The main policy implication of the analysis is that there is no clear cut rationale to prefer ex ante or ex-post policies to minimize the likelihood or the severity of financial crises. Both type of policies have costs and benefits. It follows that policy should focus on trying to achieve first best outcomes by removing the underlying sources of financial friction.

Since its start, the Real Business Cycle literature has always faced the question of the propagation of  technological shocks. To obtain realistic business cycle fluctuations, it is indeed  necessary either to assume large (and sometimes negative) technological shocks, or  to find sources of amplifications generating large swings in hours and output. In this paper, we build a model with three imperfect markets (credit, labor and good  market) and derive its steady-state and its dynamics.  We are primarily concerned about knowing whether different market imperfections raise or reduce business cycle fluctuations in response to technological shocks,  and attempt to answer the question about which market is the main source of persistence and amplification of shocks.

We show that quasi-hyperbolic discounting not only affects savings but also the demand for long-term care insurance. In general, the demand of quasi-hyperbolic discounting individuals differs from demand of exponential discounters. Furthermore, quasi-hyberbolic discounters' insurance demand is time-inconsistent. In the presence of a binding liquidity constraint in old age, they tend to buy less insurance than initially planned. Viewed from old age, individuals may regret having bought too little insurance coverage.

We study a model where a principal bargains bilaterally with N agents under two contracting modes: binding and non-binding contracts or agreements. We find that the unique pairwise stable payoffs coincide respectively with the nucleolus and the Shapley value of related coalitional games. Next we study the distributive effects of contracts and we find that the principal (agents) likes (dislike) non-binding contracts when agents are substitutes---and vice-versa if agents are complements. Finally we study the bargaining effects of pairwise mergers and we argue that contracts can be an important element to identify conditions where the "bargaining paradox" and "waterbed effects" are to be expected.