Knowledge that Transforms

We study a longitudinal sample of over one million French workers from more than five hundred thousand employing firms. We decompose real total annual compensation per worker into components related to observable employee characteristics, personal heterogeneity, firm heterogeneity, and residual variation. Except for the residual, all components may be correlated in an arbitrary fashion. At the level of the individual, we find that person effects, especially those not related to observables like education, are a very important source of wage variation in France. Firm effects, while important, are not as important as person effects. At the level of firms, we find that enterprises that hire high-wage workers are more productive but not more profitable. They are also more capital and high-skilled employee intensive. Enterprises that pay higher wages, controlling for person effects, are more productive and more profitable. They are also more capital intensive but are not more high-skilled labor intensive. We find that person effects explain about 90% of inter-industry wage differentials and about 75% of the firm-size wage effect while firm effects explain relatively little of either differential.

We study a model in which two carriers choose networks to connect cities and compete for customers. We show that if carriers compete aggressively (e.g., Bertrand-like behavior), one carrier operating a single hub-spoke network is an equilibrium outcome. Competing hub-spoke networks are not an equilibrium outcome, although duopoly equilibria in nonhub networks can exist. If carriers do not compete aggressively, an equilibrium with competing hub-spoke networks exists as long as the number of cities is not too small. We provide conditions under which all equilibria consist of hub-spoke networks.

‘If empirically meaningful interpersonal comparisons have to be based on indifference maps, as we have argued, then the Independence of Irrelevant Alternatives must be violated. The information which enables us to assert that individual A prefers x to y more strongly than B prefers y to x must be based on comparisons by A and B of x and y not only to each other but also to other alternatives. Kenneth J. Arrow, ‘Social Choice and Individual Values, p. 112. In a framework of preferences over lotteries, we show that an axiom system consisting of weakened versions of Arrow's axioms has a unique solution. ‘Relative Utilitarianism’ consists of first normalizing individual von Neumann-Morgenstern utilities between 0 and 1 and then summing them.

This paper defines a general equilibrium model with exchange and club formation. Agents trade multiple private goods widely in the market, can belong to several clubs, and care about the characteristics of the other members of their clubs. The space of agents is a continuum, but clubs are finite. It is shown that (i) competitive equilibria exist, and (ii) the core coincides with the set of equilibrium states. The central subtlety is in modeling club memberships and expressing the notion that membership choices are consistent across the population.

This paper develops a regression limit theory for nonstationary panel data with large numbers of cross section (n) and time series (T) observations. The limit theory allows for both sequential limits, wherein T→∞ followed by n→∞, and joint limits where T, n→∞ simultaneously; and the relationship between these multidimensional limits is explored. The panel structures considered allow for no time series cointegration, heterogeneous cointegration, homogeneous cointegration, and near-homogeneous cointegration. The paper explores the existence of long-run average relations between integrated panel vectors when there is no individual time series cointegration and when there is heterogeneous cointegration. These relations are parameterized in terms of the matrix regression coefficient of the long-run average covariance matrix. In the case of homogeneous and near homogeneous cointegrating panels, a panel fully modified regression estimator is developed and studied. The limit theory enables us to test hypotheses about the long run average parameters both within and between subgroups of the full population.

A game is better-reply secure if for every nonequilibrium strategy x* and every payoff vector limit u* resulting from strategies approaching x*, some player i has a strategy yielding a payoff strictly above ui* even if the others deviate slightly from x*. If strategy spaces are compact and convex, payoffs are quasiconcave in the owner's strategy, and the game is better-reply secure, then a pure strategy Nash equilibrium exists. Better-reply security holds in many economic games. It also permits new results on the existence of symmetric and mixed strategy Nash equilibria.

In this paper, we consider the following classical public goods problem. A group of individuals must decide on a level of public good that is produced according to constant returns to scale up to some capacity constraint. In addition to deciding the level of public good, the group must decide how to tax the individuals in the group in order to cover the cost. The distribution of the burden of taxation is important because different individuals have different marginal rates of substitution between the private good (taxes) and the public good, and may have different incomes as well. These individual marginal rates of substitution are private information; that is, each individual knows his or her own marginal rate of substitution, but not those of the other members of the group. Adopting a Bayesian mechanism design framework, we assume that the distribution of marginal rates of substitution is common knowledge.