Knowledge that Transforms

We develop a parsimonious model to study the equilibrium and socially optimal decisions of banks to enter, trade in, and possibly exit, an OTC market. Although we endow all banks with the same trading technology, banks' optimal entry and trading decisions endogenously lead to a realistic market structure composed of dealers and customers with distinct trading patterns. We decompose banks' entry incentives into incentives to hedge risk and incentives to make intermediation profits. We show that dealer banks enter more than is socially optimal. In the face of large negative shocks, they may also exit more than is socially optimal when markets are not perfectly resilient.

This paper analyzes South Africa's Free Basic Water Policy, under which households receive a free water allowance equal to the World Health Organization's recommended minimum of 6 kiloliters per month. I structurally estimate residential water demand, evaluate the welfare eects of free water, and provide optimal price schedules derived from a social planner's problem. I use a unique dataset of monthly metered billing data for 60,000 households for 2002-2008 from a particularly disadvantaged suburb of Pretoria. The dataset contains rich price variation across 18 dierent nonlinear tarischedules, and includes a policy experiment which removed the free allowance. I …nd that without government subsidy, the mean monthly consumption would decrease from 12.6 to 5.6 kiloliters, which is below the clean water consumption recommended by the WHO. However, it is possible to reallocate the current subsidy to form an optimal tari¤ without a free allowance, which would increase welfare while leaving the water provider's revenue unchanged. This optimal tariwould also reduce the number of households consuming below the WHO-recommended level.

We develop a strategic theory of counterfeiting as a multi-market large game. Bad guys choose whether to counterfeit, and what quality to produce. Opposing them is a continuum of good guys who select a costly verification effort. In equilibrium, counterfeiters produce better quality at higher notes, but verifiers try sufficiently harder that verification still improves. We develop a graphical framework for deducing comparative statics. Passed and counterfeiting rates vanish for low and high notes. Our predictions are consistent with time series and cross-sectional patterns in a unique data set assembled largely from the Secret Service.

This paper characterizes an equilibrium payoff subset for Markovian games with private information as discounting vanishes. Monitoring might be imperfect, transitions depend on actions, types correlated or not, values private or interdependent. It focuses on equilibria in which players report their information truthfully. This characterization generalizes those for repeated games, and reduces to a collection of one-shot Bayesian games with transfers. With independent private values, the restriction to truthful equilibria is shown to be without loss, except for individual rationality; in the case of correlated types, results from static mechanism design can be applied, resulting in a folk theorem.

This paper develops a quantitative model of internal city structure that features agglomeration and dispersion forces and an arbitrary number of heterogeneous city blocks. The model remains tractable and amenable to empirical analysis because of stochastic shocks to commuting decisions, which yield a gravity equation for commuting flows. To structurally estimate agglomeration and dispersion forces, we use data on thousands of city blocks in Berlin for 1936, 1986 and 2006 and exogenous variation from the city’s division and reunification. We estimate substantial and highly localized production and residential externalities. We show that the model with the estimated agglomeration parameters can account both qualitatively and quantitatively for the observed changes in city structure. We show how our quantitative framework can be used to undertake counterfactuals for changes in the organization of economic activity within cities in response for example to changes in the transport network.

We study the identification through instruments of a nonseparable function that relates a continuous outcome to a continuous endogenous variable. Using group and dynamical systems theories, we show that full identification can be achieved under strong exogeneity of the instrument and a dual monotonicity condition, even if the instrument is discrete. When identified, the model is also testable. Our results therefore highlight the identifying power of strong exogeneity when combined with monotonicity restrictions.

This paper axiomatizes an intertemporal version of the maxmin expected-utility model. It employs two axioms specific to a dynamic setting. The first requires that smoothing consumption across states of the world is more beneficial to the individual than smoothing consumption across time. Such behavior is viewed as the intertemporal manifestation of ambiguity aversion. The second axiom extends Koopmans' notion of stationarity from deterministic to stochastic environments.

THIS SUPPLEMENT CONTAINS proofs of the theoretical results stated in Cavaliere, In addition, extended details and discussions (also covering models with intercept) are given for the Monte Carlo results reported in Section 4 of

ORDER TO PROVE PROPOSITION 1, we first present and prove the following lemmas.

Recent research suggests that adopting imprecise accounting standards elevates audit firm litigation exposure and could undermine auditor objectivity if audit firms respond by herding to industry norms. This paper reports the results of two experiments that demonstrate how audit firms can effectively mitigate the elevated litigation exposure without herding to industry norms by staffing engagements with recognized technical experts, using judgment frameworks and automated decision aids, and providing persuasive evidence of adherence to auditing standards. We find that judgment frameworks are particularly well‐suited for defending judgments under imprecise standards, and represent a cost‐effective alternative to using technical experts. However, our results also indicate that judgment frameworks may provide a safe harbor for relatively low‐quality judgments when those frameworks are used under precise standards. We discuss implications for audit firms, courts, and regulators that currently conduct or evaluate audits within and across jurisdictions where the precision of accounting standards varies considerably.