Knowledge that Transforms

We introduce a simple model of the “percolation ” of information of common interest through a large market, as agents encounter each other over time and reveal information to each other, some of which they may have received earlier from other agents. We are particularly interested in the evolution over time of the cross-sectional distribution in the population of the posterior probability assignments of the various agents. We provide a market example based on privately held auctions, and show how the rate of convergence of the cross-sectional distribution of information is determined by the frequency of auctions and by the number of agents bidding at each auction. Our results contribute to the literature on information transmission in markets. Hayek (1945) argues that markets allow information that is dispersed in a population to be revealed through prices. Grossman’s (1981) notion of a rational-expectations equilibrium formalizes this idea in a centralized market. A number of important markets, however, are decentralized. These include over-the-counter markets and private-auction markets. Wolinsky (1990) and Blouin and Serrano (2002) study information transmission in decentralized markets. 2 In contrast to these two papers, equilibrium behavior in our market example leads to full revelation of information

In this paper, I investigate the scope of a model with exogenous habit formation - or `catching up with the Joneses`, see Abel (1990) - to generate the observed equity premium as well as other key macroeconomic facts. Along the way, I derive restrictions for four out of eight parameters for a rather general preference specification of habit formation by imposing consistency with long-run growth, the leisure share, the aggregate Frisch elasticity of labor supply, the observed risk-free rate, and the observed Sharpe ratio. I show that a DSGE model with (exogenous and lagged) habits in both leisure and consumption, but not necessarily with additional persistence, is well capable of matching the observed asset market facts as well as macro facts, provided one allows for moderate real wage stickiness and provided one allows for sufficient curvature on preferences, as dictated by the asset market observations. Without wage stickiness, delivery on both the asset pricing implications as well as the macroeconomic implications seems to be much harder.

The call for "more transparency " is voiced nowadays by politicians and pundits alike, as a solution to almost any failure of the political system. Proponents of transparency emphasize its bene…ts such as enhanced accounability, enhanced predictability, and the provision of expert information to the economy. Both political scientists and economists noted however that, in the presence of career or reputation concerns, transparency may yield ine ¢ cient decisions as decision makers will not necessarily state their private views in public, thereby distorting the process of information aggregation. In this paper I consider the optimality of transparency of committees. 1 I build on a model of committees composed of experts who have career concerns, provided in Levy (forthcoming). When the decision making procedure in a committee is transparent, outsiders can observe the individual votes of the experts, whereas when it is secretive, only its …nal decision is known to outsiders. As I emphasize in Levy (forthcoming), whether committees should be transparent or secretive cannot be analyzed

A repeated moral hazard setting in which the Principal privately observes the Agent's output is studied. The optimal contract for a finite horizon is characterized, and shown to require burning of resources. These are only burnt after the worst possible realization sequence and the amount is independent of both the length of the horizon and the discount factor. For the infinite horizon. it is shown that there is no loss from restricting the analysis to contracts in which the Agent receives a constant efficiency wage and no feedback until he is fired. Furthermore, optimal contracts cannot be replicated by short-term contracts. A family of fixed interval review contracts is characterized. Longer review intervals are preferable but harder to implement. Comparative statics on the review length are carried out. Finally, these contracts are shown approximate first best if players are very patient.

A number of major social policy interventions have been introduced recently in the United States. The new Temporary Assistance for Needy Families (TANF) program, introduced in 1996, was advertised changing the welfare system as we know it. The new Medicare prescription drug benefit, introduced in 2006, was the largest expansion of Medicare in its history. Developing countries are also fertile ground for innovative new policies. Mexico introduced a program in 1997 (Progresa) that provided subsidies to poor rural households contingent upon the school attendance of their children. The distinction between ex post and ex ante policy evaluation is important. Ex post policy evaluation occurs upon or after the policy has been implemented. It is ubiquitous in the social sciences. Such studies make use of existing policy variation. Examples include the study of minimum wage effects on labor market outcomes, the study of the impact of welfare benefits on labor market and demographic outcomes, and the study of how divorce laws affect marital stability. The development of methodological approaches to ex post program evaluation using nonexperimental methods is an active area of research (Petra Todd 2006). There is little methodological or applied research explicitly concerned with ex ante policy evaluation using nonexperimental methods, which is perhaps surprising given its potential value. Interventions that require ex ante evaluation are those that are outside the historical experience. These include a large change in the parameters of existing programs such doubling the (real) minimum wage, adding new features to an existing program such the Medicare drug benefit program, or introducing a completely new program such Progresa. The nonexperimental approach to ex ante policy evaluation must be an extrapolation from existing policy or policy-relevant variation.' Because of that, and unlike ex post evaluation, ex ante valuation must rely on parametric and/or behavioral assumptions (theory).

The search for talent is of particular interest to economists; in fact, nothing unites academic economists’ interest like speculation about the causes of two key measures of success in their profession: completion of the doctorate and success in publishing. We assess both outcomes by using a rich set of pre-graduate school characteristics to forecast both success in the Ph.D. program and professional achievement. Using information contained in application files to a top 5 economics Ph.D. program in 1989, we predict the determinants of doctoral degree completion and research productivity 17 years later. The results suggest that several variables consistently predict degree completion and long run research productivity: quantitative GRE scores, having a foreign undergraduate degree, and the quality of the individuals who write letters of reference.

We study a one-dimensional Hotelling-Downs model of electoral competition with the following innovation: a fraction of candidates have “character” and are exogenously committed to a campaign platform; this is unobservable to voters. Character is desirable, and a voter's utility is a convex combination of standard policy preferences and her assessment of a candidate's character. This structure induces a signaling game between strategic candidates and voters, since a policy platform affects voters' utilities not only directly, but also indirectly through inferences about a candidate's character. The model generates a number of predictions, starting with a failure of the median voter theorem.

Revealing Preferences Graphically: An Old Method Gets a New Tool Kit by Syngjoo Choi, Raymond Fisman, Douglas M. Gale and Shachar Kariv. Published in volume 97, issue 2, pages 153-158 of American Economic Review, May 2007

How Occupied France Financed Its Own Exploitation in World War II by Filippo Occhino, Kim Oosterlinck and Eugene N. White. Published in volume 97, issue 2, pages 295-299 of American Economic Review, May 2007

The positive correlation between real investment rates and real income levels across countries is driven largely by differences in the price of investment relative to output. The high relative price of investment in poor countries is due to the low price of consumption goods in those countries. Investment prices are no higher in poor countries. Thus, the low real investment rates in poor countries are not driven by high tax or tariff rates on investment. Poor countries, instead, appear to be plagued by low efficiency in producing investment goods and in producing consumer goods to trade for them.