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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
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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

A Reconsideration of the Theory of Non-Linear Scale Effects: The Sources of Varying Returns to, and Economies of, Scale

Author: 
Peer reviewed: 
Yes, item is peer reviewed.
Date created: 
2017-09
Abstract: 

The main thrust of this paper is a critical assessment of the theory and evidence concerning the sources of scale effects. It is argued that the analysis of static scale effects is important because scale effects are embedding in our world and new technologies associated with an evolving economy often allow their exploitation when they cannot be exploited in less technically advanced and smaller economies. So, although static equilibrium theory is not a good vehicle for studying economic growth, showing how scale effects operate when output varies with given technology helps us to understand the scale effects that occur when output rises as a result of economic growth, even though that is typically driven by technological change. The set of production functions that are consistent with Viner’s treatment of long run cost curves are distinguished from the single production function that is found in virtually all modern microeconomic textbooks. It is argued that the inconsistencies and ambiguities relating to the use of such a single production function to cover all possible scales of a firm’s operations are such that it is an imperfect tool for analysing the scale effects that firms actually face. The relation between scale effects and the size of the firm are discussed. It is shown that under certain commonly occurring circumstances the ability to replicate production facilities is consistent with short ranges of diseconomies of scale and an indefinite range of increasing returns. Next comes a detailed analysis of the sources of positive scale effects and a critical assessment of the treatment of these in a large sample of the existing literature. It is argued that the nature of our world, with its 3-dimensions, its physical laws and the many random elements in its behaviour, is such that when the scale of anything changes, we should always expect to encounter non-linear scale effects. Most authors list a series of examples of sources that are assumed to give rise to scale effects but seldom attempt to show in any detail how these are supposed to work. When we do this, some alleged sources are found not to give rise to scale effects at all, while others have effects that differ from what has been assumed. Furthermore, there is seldom agreement among authors whether a particular source is a cause of varying returns to scale or economies of scale. Most authors argue that indivisibilities are an important source of scale effects, although these are seldom well defined, nor are the precise ways in which these are supposed to work typically analysed. When we do this, we identify two basic types of indivisibilities, ex post and ex ante, plus several variations of each of these main types. We then argue that the discussion of indivisibilities has been confused by use of different implicit definitions of the term and also that only one of these types of indivisibility can be a source of scale effects. Constant returns production functions are found to be inconsistent with much that is known about actual production techniques, even when firms expand by duplicating identical plants. Unless ruled out by definition, diseconomies of scale are found to be a real possibility in many circumstances. When these occur in some parts of complex capital goods or plants, they limit the extent to which economies in other parts can be exploited by increasing the scale of the whole operation. Finally, brief consideration is given to the literature concerning the factors that limit the exploitation of the scale effects that are ubiquitous in the real world and to the consequences of their exploitation.

Document type: 
Book chapter
File(s): 

General Purpose Technologies in Theory, Applications and Controversy: A Review

Peer reviewed: 
Yes, item is peer reviewed.
Date created: 
2017-07-17
Abstract: 

Distinguishing characteristics of General Purpose Technologies (GPTs) are identified and definitions discussed. Our definition includes multipurpose and single-purpose technologies, defining them according to their micro-technological characteristics, not their macro-economic effects. Identifying technologies as GPTs requires recognizing their evolutionary nature, and accepting possible uncertainties concerning marginal cases. Many of the existing ‘tests’ of whether particular technologies are GPTs are based on misunderstandings either of what GPT theory predicts or what such tests can establish. The development of formal GPT theories is outlined, showing that only the early theories predicted the inevitability of GPT-induced showdown and surges. More recent GPT theories, designed to model the characteristics of GPTs, do not imply the necessity of specific macro effects. We show that GPTs can rejuvenate the growth process without causing slowdowns or surges. We conclude that existing criticisms of GPT theory can be resolved and that the concept remains useful for economic theory.

Document type: 
Article
File(s): 

Generality Versus Context Specificity: First, Second and Third Best in Theory and Policy

Author: 
Peer reviewed: 
Yes, item is peer reviewed.
Date created: 
2016-09-06
Abstract: 

Second-best theory established that a policy's effect on community welfare (or any other objective function) varies with its specific context. In contrast, Ng argues that fulfilling first-best conditions piecemeal is optimal whenever the policy maker's information is insufficient to determine the direction of the change in the variable under consideration that will raise welfare, irrespective of the conditions in that market. We argue: (1) that Ng's own assumptions imply not that first-best conditions should be established under these circumstances, but that the status quo should be maintained; (2) that when Ng's key assumption is altered to be empirically relevant, all policy decisions become fully context-specific; (3) that Woo's argument for accepting Ng's conclusions in spite of point (2) is incorrect. The conclusion discusses valid uses of piecemeal welfare theory in spite of second best.

Document type: 
Article
File(s): 

Economic Policy with and Without Maximizing Rules

Author: 
Peer reviewed: 
Yes, item is peer reviewed.
Date created: 
2017-01-11
Abstract: 

This paper contrasts the static neoclassical and the evolutionary views of the economy and economic policy. It responds to Ng's comments on Lipsey's original criticism of third-best theory. Under a relevant definition of informational poverty and Ng's other assumptions, the expected value of any policy-created divergence from the status quo is negative: If there is not enough known to determine what to do, nothing should be done, rather than establishing first-best conditions as Ng's analysis has it. It is argued that Ng's analysis of his two other information states adds little to what common sense suggests. To address Ng's argument that policies using context-specific objective functions lack the required welfare basis, the paper studies how economic policy is actually pursued absent guides provided by welfare economics. Policies that follow from evolutionary economic theory imply that what are seen as 'distortions' in welfare economics are actually desirable forces that drive economic growth.

Document type: 
Article
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