Knowledge that Transforms

Identifying the optimal set of individuals to first receive information (“seeds”) in a social network to maximize expected diffusion is a widely studied question in many settings. Several studies propose network-centrality-based heuristics to select seeds likely to increase diffusion. Here, we show that, for the classic independent cascade model of diffusion, either seeding a few more individuals at random can prompt a larger diffusion than optimal seeding or optimal seeding itself results in limited spread. These findings hold across a broad range of random networks and are supported by simulations on real-world networks.

Should central banks’ inflation targets remain set in stone? We study a dynamic mechanism design problem between a government and a central bank. The central bank has persistent private information about structural shocks. Firms learn the state from the central bank’s reports and form inflation expectations. A dynamic inflation target implements the full-information commitment allocation. The central bank is delegated the authority to adjust the target’s level and flexibility one period in advance. A declining natural interest rate and a flattening Phillips curve imply opposite optimal target adjustments. Our results speak to practical policy questions of inflation target design.

We study reputation dynamics within the household in a setting where women regularly receive transfers from their husbands for household purchases. We propose a signaling model in which wives try to maintain a good reputation in the eyes of their husbands to receive high transfers. This leads them to (i) avoid risky purchases (goods with unknown returns) and (ii) knowingly overuse low-return goods to hide bad purchase decisions—we call this the intrahousehold sunk cost effect. We present supportive evidence for the model from a series of experiments with married couples in rural Malawi.

Are application hassles, or “ordeals,” an effective way to limit public program enrollment? We provide new evidence by studying (removal of) an auto-enrollment policy for health insurance, adding an extra step to enroll. This minor ordeal has a major impact, reducing enrollment by 33 percent and differentially excluding young, healthy, and economically disadvantaged people. Using a simple model, we show adverse selection—a classic feature of insurance markets—undermines ordeals’ standard rationale of excluding low-value individuals since they are also low-cost and may not be inefficient. Our analysis illustrates why ordeals targeting is unlikely to work well in selection markets.

We explore the implications of ownership concentration for the recently concluded incentive auction that repurposed spectrum from broadcast TV to mobile broadband usage in the United States. We document significant multilicense ownership of TV stations. We show that in the reverse auction, in which TV stations bid to relinquish their licenses, multilicense owners have an incentive to withhold some TV stations to drive up prices for their remaining TV stations. Using a large-scale valuation and simulation exercise, we find that this strategic supply reduction increases payouts to TV stations by between 13.5 percent and 42.4 percent. (D44, D47, H82, L13, L82, L88)

The Supplemental Security Income program uses a birth weight cutoff at 1,200 grams to determine eligibility. Using birth certificates linked to administrative records, we find low-income families of infants born just below the cutoff receive higher monthly cash benefits (equal to 27 percent of family income) at ages 0–2 with smaller benefits continuing through age 10. Yet we detect no improvements in health care use and mortality in infancy, nor in health and human capital outcomes as observed through young adulthood for these infants. We also find no improvements for their older siblings.

The Medicare hospice program is intended to provide palliative care to terminal patients, but patients with long stays in hospice are highly profitable, motivating concerns about overuse among the Alzheimer's and Dementia (ADRD) population in the rapidly growing for-profit sector. We provide the first causal estimates of the effect of for-profit hospice on patient spending using the entry of for-profit hospices over 20 years. We find hospice has saved money for Medicare by offsetting other expensive care among ADRD patients. As a result, policies limiting hospice use including revenue caps and antifraud lawsuits are distortionary and deter potentially cost-saving admissions.

This paper develops a framework to extend the strategic form analysis of cursed equilibrium (CE) developed by Eyster and Rabin (2005) to multistage games. The approach uses behavioral strategies rather than normal form mixed strategies and imposes sequential rationality. We define and characterize properties of cursed sequential equilibrium (CSE) and apply it to four canonical economic applications: signaling games, reputation building, durable goods monopoly, and the dirty faces game. These applications illustrate various implications of CSE, show how and why it differs from sequential equilibrium and CE, and provide evidence from laboratory experiments that support the empirical relevance of CSE.

We empirically characterize how China is internationalizing its bond market by staggering the entry of different types of foreign investors into its domestic market and propose a dynamic reputation model to explain this strategy. Our framework rationalizes China’s strategy as trying to build credibility as a safe issuer while reducing the cost of capital flight. We use our framework to shed light on China’s response to episodes of capital outflows.

This paper studies the effect of nonlinear pricing on markups and misallocation. In a general equilibrium model in which firms are allowed to set a quantity-dependent pricing schedule, markup heterogeneity is not a sign of misallocation. Instead, we point to a new source of misallocation: high-taste consumers are allocated too much of each good, low-taste consumers too little. Using micro data from the retail sector, we show that nonlinear pricing is prevalent and quantify the model. Welfare losses from misallocation across consumers are substantially larger than those from misallocation across firms under linear pricing.