Knowledge that Transforms

Many time series exhibit “long memory”: Their autocorrelation function decays slowly with lag. This behavior has traditionally been modeled via unit roots or fractional Brownian motion and explained via aggregation of heterogeneous processes, nonlinearity, learning dynamics, regime switching, or structural breaks. This paper identifies a different and complementary mechanism for long‐memory generation by showing that it can naturally arise when a large number of simple linear homogeneous economic subsystems with short memory are interconnected to form a network such that the outputs of the subsystems are fed into the inputs of others. This networking picture yields a type of aggregation that is not merely additive, resulting in a collective behavior that is richer than that of individual subsystems. Interestingly, the long‐memory behavior is found to be almost entirely determined by the geometry of the network, while being relatively insensitive to the specific behavior of individual agents.

Recent evidence suggests that investors are inattentive to their portfolios and hire expensive portfolio managers. This paper develops a life‐cycle portfolio‐choice model in which the investor experiences loss‐averse utility over news and can ignore his portfolio. In such a model, the investor prefers to ignore and not rebalance his portfolio most of the time because he dislikes bad news more than he likes good news such that expected news causes a first‐order decrease in utility. Consequently, the investor has a first‐order willingness to pay a portfolio manager who rebalances actively on his behalf. Moreover, the investor can diversify over time and his consumption aligns with predictions of mental accounting. I structurally estimate the preference parameters by matching stock shares and stock‐market non‐participation over the life cycle. My parameter estimates are in line with the literature, generate reasonable intervals of inattention, and simultaneously explain consumption and wealth accumulation over the life cycle. Here, it matters that news utility preserves first‐order risk aversion even in the presence of stochastic labor income, which also causes stock shares to rise in wealth.

This paper develops and implements a nonparametric test of random utility models. The motivating application is to test the null hypothesis that a sample of cross‐sectional demand distributions was generated by a population of rational consumers. We test a necessary and sufficient condition for this that does not restrict unobserved heterogeneity or the number of goods. We also propose and implement a control function approach to account for endogenous expenditure. An econometric result of independent interest is a test for linear inequality constraints when these are represented as the vertices of a polyhedral cone rather than its faces. An empirical application to the U.K. Household Expenditure Survey illustrates computational feasibility of the method in demand problems with five goods.

We investigate the welfare effects of vertical integration of regional sports networks (RSNs) with programming distributors in U.S. multichannel television markets. Vertical integration can enhance efficiency by reducing double marginalization and increasing carriage of channels, but can also harm welfare due to foreclosure and incentives to raise rivals' costs. We estimate a structural model of viewership, subscription, distributor pricing, and affiliate fee bargaining using a rich data set on the U.S. cable and satellite television industry (2000?2010). We use these estimates to analyze the impact of simulated vertical mergers and divestitures of RSNs on competition and welfare, and examine the efficacy of regulatory policies introduced by the U.S. Federal Communications Commission to address competition concerns in this industry.

To study intertemporal decisions under risk, we develop a new recursive model of non‐expected‐utility preferences. The main axiom of our analysis is called mixture aversion, as it captures a dislike of probabilistic mixtures of lotteries. Our representation for mixture‐averse preferences can be interpreted as if an individual optimally selects her risk attitude from some feasible set. We describe some useful parametric examples of our representation and provide comparative statics that tightly link decreases in risk aversion to larger sets of feasible risk attitudes. We then present several applications of the model. In an insurance problem, mixture‐averse preferences can produce a marginal willingness to pay for insurance coverage that increases in the level of existing coverage. In investment decisions, our model can generate endogenous heterogeneity in equilibrium stock market participation, even when consumers have identical preferences. Finally, we demonstrate that our model can address the Rabin paradox even in the presence of reasonable levels of background risk.

We propose a theory of intertemporal choice that is robust to specific assumptions on the discount rate. One class of models requires that one utility stream be chosen over another if and only if its discounted value is higher for all discount factors in a set. Another model focuses on an average discount factor. Yet another model is pessimistic, and evaluates a flow by the lowest available discounted value.

This zip file contains the replication files for the manuscript. It also contains an online appendix. The supplementary material contains 7 appendices with additional results and some omitted proofs. Appendix C introduces some notation. Appendix D includes a brief review of differential geometry. Appendix E gathers the proofs of the key mathematical results in Appendix A. Appendix F provides sufficient conditions for the u-Donsker properties in Section 4. Appendix G extends the theoretical analysis to include discrete covariates. Appendices H and I report the results of 3 numerical simulations and an empirical application to the effect of race on mortgage denials, respectively.

We document that consumption growth rates are far from i.i.d. and have a highly persistent component. First, we estimate univariate and multivariate models of cash‐flow (consumption, output, dividends) growth that feature measurement errors, time‐varying volatilities, and mixed‐frequency observations. Monthly consumption data are important for identifying the stochastic volatility process; yet the data are contaminated, which makes the inclusion of measurement errors essential for identifying the predictable component. Second, we develop a novel state‐space model for cash flows and asset prices that imposes the pricing restrictions of a representative‐agent endowment economy with recursive preferences. To estimate this model, we use a particle MCMC approach that exploits the conditional linear structure of the approximate equilibrium. Once asset return data are included in the estimation, we find even stronger evidence for the persistent component and are able to identify three volatility processes: the one for the predictable cash‐flow component is crucial for asset pricing, whereas the other two are important for tracking the data. Our model generates asset prices that are largely consistent with the data in terms of sample moments and predictability features. The state‐space approach allows us to track over time the evolution of the predictable component, the volatility processes, the decomposition of the equity premium into risk factors, and the variance decomposition of asset prices.

We study commodity taxation and characterize the Laffer curve, a trade-off between tax rates and revenue, in noncompetitive markets. Pricing in these markets leads to incomplete tax pass-through and agents re-optimize their purchase and pricing decisions in response to any tax change. We use detailed data from Pennsylvania, a state that monopolizes retail sales of alcoholic beverages, to estimate a model of demand for horizontally differentiated products that ties consumers' demographic characteristics to heterogeneous preferences for spirits. We find that under the state's current tax policy, spirits are overpriced. Distillers respond to decreases in the tax rate by increasing wholesale prices, which limits the state's revenue gain to only 13% of the incremental tax revenue predicted under the common assumption of perfect competition. The strategic response of noncompetitive firms to changes in taxation therefore flattens the Laffer curve significantly.

Peer Reviewed