Economics, Department of

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Peer reviewed: 
Yes, item is peer reviewed.
Date created: 
2018-11-07
Abstract: 

A survey of instruction delivery and reinforcement methods in recent laboratory experiments reveals a wide and inconsistently reported variety of practices and limited research evaluating their effectiveness. Thus, we experimentally compare how methods of delivering and reinforcing experiment instructions impact subjects’ comprehension and retention of payoff-relevant information. We report a one-shot individual decision task in which non-money-maximizing behavior can be unambiguously identified and find that such behavior is prevalent in our baseline treatment which uses plain, but relatively standard experimental instructions. We find combinations of reinforcement methods that can eliminate half of non-money-maximizing behavior, and we find that we can induce a similar reduction via enhancements to the content of instructions. Residual non-money-maximizing behavior suggests that this may be an important source of noise in experimental studies.

Document type: 
Article
File(s): 

Why a Pandemic Recession Boosts Asset Prices

Peer reviewed: 
Yes, item is peer reviewed.
Date created: 
2021-02-03
Abstract: 

Economic recessions are traditionally associated with asset price declines, and recoveries with asset price booms. Standard asset pricing models make sense of this: during a recession, dividends are low and the marginal value of income is high, causing low asset prices. Here, I develop a simple model which shows that this is not true during a recession caused by consumption restrictions, such as those seen during the 2020 pandemic: the restrictions drive the marginal value of income down, and thereby drive asset prices up, to an extent that tends to overwhelm the effect of low dividends. This result holds even if investors misperceive the economic forces at work.

Document type: 
Article

A Social Network Model of COVID-19

Peer reviewed: 
Yes, item is peer reviewed.
Date created: 
2020-10-29
Abstract: 

I construct a dynamic social-network model of the COVID-19 epidemic which embeds the SIR epidemiological model onto a graph of person-to-person interactions. The standard SIR framework assumes uniform mixing of infectious persons in the population. This abstracts from important elements of realism and locality: (i) people are more likely to interact with members of their social networks and (ii) health and economic policies can affect differentially the rate of viral transmission via a person’s social network vs. the population as a whole. The proposed network-augmented (NSIR) model allows the evaluation, via simulations, of (i) health and economic policies and outcomes for all or subset of the population: lockdown/distancing, herd immunity, testing, contact tracing; (ii) behavioral responses and/or imposing or lifting policies at specific times or conditional on observed states. I find that viral transmission over a network-connected population can proceed slower and reach lower peak than transmission via uniform mixing. Network connections introduce uncertainty and path dependence in the epidemic dynamics, with a significant role for bridge links and superspreaders. Testing and contact tracing are more effective in the network model. If lifted early, distancing policies mostly shift the infection peak into the future, with associated economic costs. Delayed or intermittent interventions or endogenous behavioral responses generate a multi-peaked infection curve, a form of ‘curve flattening’, but may have costlier economic consequences by prolonging the epidemic duration.

Document type: 
Article
File(s): 

An Open-Economy Model with Money, Endogenous Search and Heterogeneous Firms

Peer reviewed: 
Yes, item is peer reviewed.
Date created: 
2017-07-03
Abstract: 

This paper describes a new monetary open-economy model where firms have market power due to search frictions in the goods market, and endogenous search effort by consumers mitigates this market power. The optimal inflation rate generally depends positively on the cost of search effort, the cost of firm entry, and the cost of trade. Higher inflation always improves a country's terms-of-trade against its trading partners. I also characterize a general class of matching processes which offer a novel approach to modeling firm sales.

Document type: 
Article
File(s): 

Coordination-Free Equilibria in Cheap Talk Games

Author: 
Peer reviewed: 
Yes, item is peer reviewed.
Date created: 
2017-03
Abstract: 

This paper characterizes generic equilibrium play in a multi-sender version of Crawford and Sobel's (1982) cheap talk model, when robustness to a broad class of beliefs about noise in the senders' observation of the state is required. Just like in the one-sender model, information transmission is partial, equilibria have an interval form, and they can be computed through a generalized version of Crawford and Sobel’s forward solution procedure. Fixing the senders' biases, full revelation is not achievable even as the state space becomes large. Intuitive welfare predictions, such as the desirability of consulting senders with small and opposite biases, follow.

Document type: 
Article

Particulate Matter and Labor Supply: The Role of Caregiving and Non-Linearities

Peer reviewed: 
Yes, item is peer reviewed.
Date created: 
2017-02
Abstract: 

This paper examines the effect of air pollution on labor supply in Lima, Peru. We focus on fine particulate matter (PM2.5), an important pollutant for health according to the medical literature, and show that moderate levels of pollution reduce hours worked for working adults. Our research design takes advantage of rich household panel data in labor outcomes to address omitted variables. This research design allows us to investigate whether the response to air pollution is non-linear. We find that the effect of moderate pollution levels on hours worked is concentrated among households with susceptible dependents, i.e., small children and elderly adults; while the highest concentrations affect all households. This suggests that caregiving is likely a mechanism linking air pollution to labor supply at moderate levels. We provide further evidence of this mechanism using data on children morbidity. Finally, we find no evidence of intra-household attenuation behavior. For instance, there is no re-allocation of labor across household members, and earnings decrease with air pollution. 

Document type: 
Article

Risk Taking with Background Risk under Recursive Rank-Dependent Utility

Author: 
Peer reviewed: 
Yes, item is peer reviewed.
Date created: 
2017-03
Abstract: 

This paper examines how background risk affects risk taking under rank-dependent utility. I assume that a decision-maker facing a risk taking decision in the presence of background risk views these risks as composing a compound lottery, and recursively evaluates this compound lottery using rank-dependent utility. I show that adding background risk increases risk aversion whenever the utility-for-wealth function is risk vulnerable (Gollier and Pratt, 1996) in this model. 

Document type: 
Article
File(s): 

A Tractable Model of Indirect Asset Liquidity

Peer reviewed: 
Yes, item is peer reviewed.
Date created: 
2017-01
Abstract: 

Assets have “indirect liquidity” if they cannot be used as media of exchange, but can be traded to obtain a medium of exchange (money) and thereby inherit monetary properties. This essay describes a simple dynamic model of indirect asset liquidity, provides closed form solutions for real and nominal assets, and discusses properties of the solutions. Some of these are standard: assets and money are imperfect substitutes, asset demand curves slope down, and money is not always neutral. Other properties are more surprising: prices are flexible but appear sticky, and an increase in the supply of indirectly liquid assets can decrease welfare. Because of its simplicity, the model can be useful as a building block inside a larger model, and for teaching concepts from monetary theory.

Document type: 
Article
File(s): 

Matching, Marriage, and Children: Differences Across Sexual Orientations

Peer reviewed: 
Yes, item is peer reviewed.
Date created: 
2016-05
Abstract: 

There are many differences in behavior across couples of different sexual orientations—some well known, others not. We propose a model which explains differences in expected matching behavior, marriage rates, non-child-friendly activities, and fertility, based on different costs of procreation and complementarities between marriage and children. The model predicts that the biological traits of same-sex couples, unlike those of heterosexual couples, should not be correlated—holding constant other household production characteristics. In addition, the model predicts that heterosexuals have a higher probability of having children and getting married, and that childless heterosexuals are less likely to engage in behaviors not complementary with children than childless gays and lesbians. Using two nationally representative probability samples that self-identify sexual orientation, these predictions are confirmed.

Document type: 
Article
File(s): 

Smart-Dating in Speed-Dating: How a Simple Search Model Can Explain Matching Decisions

Peer reviewed: 
Yes, item is peer reviewed.
Date created: 
2018-05-05
Abstract: 

How do people in a romantic matching situation choose a potential partner? We study this question in a new model of matching under search frictions, which we estimate using data from an existing speed dating experiment. We find that attraction is mostly in the eye of the beholder and that the attraction between two potential partners has a tendency to be mutual. These results are supported by a direct measure of subjective attraction. We also simulate the estimated model, and it predicts rejection patterns, matching rates, and sorting outcomes that fit the data very well. Our results are consistent with the hypothesis that people in a dating environment act strategically and have at least an implicit understanding of the nature of the frictions and of the strategic equilibrium.

Document type: 
Article