This paper studies two-sided matching markets with non-transferable utility when the number of market participants grows large. We consider a model in which each agent has a random preference ordering over individual potential matching partners, and agents' types are only partially observed by the econometrician. We show that in a large market, the inclusive value is a sufficient statistic for an agent's endogenous choice set with respect to the probability of being matched to a spouse of a given observable type. Furthermore, while the number of pairwise stable matchings for a typical realization of random utilities grows at a fast rate as the number of market participants increases, the inclusive values resulting from any stable matching converge to a unique deterministic limit. We can therefore characterize the limiting distribution of the matching market as the unique solution to a fixed-point condition on the inclusive values. Finally we analyze identification and estimation of payoff parameters from the asymptotic distribution of observable characteristics at the level of pairs resulting from a stable matching.
This paper presents a test of the exogeneity of a single explanatory variable in a multivariate model. It does not require the exogeneity of the other regressors or the existence of instrumental variables. The fundamental maintained assumption is that the model must be continuous in the explanatory variable of interest. This test has power when unobservable confounders are discontinuous with respect to the explanatory variable of interest, and it is particularly suitable for applications in which that variable has bunching points. An application of the test to the problem of estimating the effects of maternal smoking in birth weight shows evidence of remaining endogeneity, even after controlling for the most complete covariate specification in the literature.
We consider a group of strategic agents who must each repeatedly take one of two possible actions. They learn which of the two actions is preferable from initial private signals and by observing the actions of their neighbors in a social network.
Perturbed utility functions—the sum of expected utility and a non-linear perturba-tion function—provide a simple and tractable way to model various sorts of stochastic choice. We provide easily understood conditions that characterize this representation by generalizing the acyclicity condition used in revealed preference theory. We show how to relax Luce’s IIA condition to model cases where the agent finds it harder to discriminate between items in larger menus, and how to extend the perturbation-function approach to model choice overload and nested decisions. We also show that these representations correspond to a form of ambiguity-averse preferences for an agent who is uncertain about her true utility
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We formalize the Keynesian insight that aggregate demand driven by sentiments can generate output fluctuations under rational expectations. When production decisions must be made under imperfect information about demand, optimal decisions based on sentiments can generate stochastic self-fulfilling rational expectations equilibria in standard economies without persistent informational frictions, externalities, nonconvexities, or strategic complementarities in production. The models we consider are deliberately simple, but could serve as benchmarks for more complicated equilibrium models with additional features.
We develop a behavioral axiomatic characterization of Subjective Expected Utility (SEU) under risk aversion. Given is an individual agent’s behavior in the market: assume a finite collection of asset purchases with corresponding prices. We show that such behavior satisfies a “revealed preference axiom” if and only if there exists a SEU model (a subjective probability over states and a concave utility function over money) that accounts for the given asset purchases.
There is a widely held view within the general public that large corporations should act in the interests of a broader group of agents than just their shareholders (the stakeholder view). This paper presents a framework where this idea can be justified. The point of departure is the observation that a large firm typically faces endogenous risks that may have a significant impact on the workers it employs and the consumers it serves. These risks generate externalities on these stakeholders which are not internalized by shareholders. As a result, in the competitive equilibrium, there is under-investment in the prevention of these risks. We suggest that this under-investment problem can be alleviated if firms are instructed to maximize the total welfare of their stakeholders rather than shareholder value alone (stakeholder equilibrium). The stakeholder equilibrium can be implemented by introducing new property rights (employee rights and consumer rights) and instructing managers to maximize the total value of the firm (the value of these rights plus shareholder value). If there is only one firm, the stakeholder equilibrium is Pareto optimal. However, this is not true with more than one firm and/or heterogeneous agents, which illustrates some of the limits of the stakeholder model.
This paper studies regulated health insurance markets known as exchanges, motivated by the increasingly important role they play in both public and private insurance provision. We develop a framework that combines data on health outcomes and insurance plan choices for a population of insured individuals with a model of a competitive insurance exchange to predict outcomes under different exchange designs. We apply this framework to examine the effects of regulations that govern insurers' ability to use health status information in pricing. We investigate the welfare implications of these regulations with an emphasis on two potential sources of inefficiency: (i) adverse selection and (ii) premium reclassification risk. We find substantial adverse selection leading to full unraveling of our simulated exchange, even when age can be priced. While the welfare cost of adverse selection is substantial when health status cannot be priced, that of reclassification risk is five times larger when insurers can price based on some health status information. We investigate several extensions including (i) contract design regulation, (ii) self‐insurance through saving and borrowing, and (iii) insurer risk adjustment transfers.