Knowledge that Transforms

We study repeated games with frequent actions and frequent imperfect public signals, where the signals are aggregates of many discrete events, such as sales or tasks. The high-frequency limit of the equilibrium set depends both on the probability law governing the discrete events and on how many events are aggregated into a single signal. When the underlying events have a binomial distribution, the limit equilibria correspond to the equilibria of the associated continuous-time game with diffusion signals, but other event processes that aggregate to a diffusion limit can have a different set of limit equilibria. Thus the continuous-time game need not be a good approximation of the high-frequency limit when the underlying events have three or more possible values.

This paper provides new insight into the relationship between inflation and the setting of individual prices by examining a large data set of Mexican consumer prices covering episodes of both low and high inflation. When the annual rate of inflation is low (below 10%–15%), the frequency of price changes comoves weakly with inflation because movements in the frequency of price decreases and increases partly offset each other. In contrast, the average magnitude of price changes correlates strongly with inflation because it is sensitive to movements in the relative shares of price increases and decreases. When inflation rises beyond 10%–15%, few price decreases are observed and both the frequency and average magnitude are important determinants of inflation. I show that a menu-cost model with idiosyncratic technology shocks predicts the average frequency and magnitude of price changes well over a range of inflation similar to that experienced by Mexico.

We exploit random assignment of gender quotas for leadership positions on Indian village councils to show that prior exposure to a female leader is associated with electoral gains for women. After ten years of quotas, women are more likely to stand for, and win, elected positions in councils required to have a female chief councilor in the previous two elections. We provide experimental and survey evidence on one channel of influence—changes in voter attitudes. Prior exposure to a female chief councilor improves perceptions of female leader effectiveness and weakens stereotypes about gender roles in the public and domestic spheres.

Are cities as politically polarized as states and countries? “No” is the answer from our regression discontinuity design analysis, which shows that whether the mayor is a Democrat or a Republican does not affect the size of city government, the allocation of local public spending, or crime rates. However, there is a substantial incumbent effect for mayors. We investigate three mechanisms that could account for the striking lack of partisan impact at the local level, and find the most support for Tiebout competition among localities within metropolitan areas.

This paper investigates the dynamics of individual portfolios in a unique data set containing the disaggregated wealth of all households in Sweden. Between 1999 and 2002, we observe little aggregate rebalancing in the financial portfolio of participants. These patterns conceal strong household-level evidence of active rebalancing, which on average offsets about one-half of idiosyncratic passive variations in the risky asset share. Wealthy, educated investors with better diversified portfolios tend to rebalance more actively. We find some evidence that households rebalance toward a greater risky share as they become richer. We also study the decisions to trade individual assets. Households are more likely to fully sell directly held stocks if those stocks have performed well, and more likely to exit direct stockholding if their stock portfolios have performed well; but these relationships are much weaker for mutual funds, a pattern that is consistent with previous research on the disposition effect among direct stockholders and performance sensitivity among mutual fund investors. When households continue to hold individual assets, however, they rebalance both stocks and mutual funds to offset about one-sixth of the passive variations in individual asset shares. Households rebalance primarily by adjusting purchases of risky assets if their risky portfolios have performed poorly, and by adjusting both fund purchases and full sales of stocks if their risky portfolios have performed well. Finally, the tendency for households to fully sell winning stocks is weaker for wealthy investors with diversified portfolios of individual stocks.

We test whether textbook consumers are forward-looking, using a large new data set on textbooks sold in college bookstores during the ten semesters from 1997 to 2001. The data strongly support the hypothesis that students are forward-looking with low short-run discount rates and that they behave as if they have rational expectations of publishers' revision behavior. Data from a second new data set on the market prices of used books at Amazon Marketplace also support the hypothesis of rational, forward-looking behavior. Simulation results indicate that students are sufficiently forward-looking that publishers cannot consistently raise revenue by accelerating current revision cycles.

Using nationally representative data on consumption, we show that Blacks and Hispanics devote larger shares of their expenditure bundles to visible goods (clothing, jewelry, and cars) than do comparable Whites. These differences exist among virtually all subpopulations, are relatively constant over time, and are economically large. Although racial differences in utility preference parameters might account for a portion of these consumption differences, we emphasize instead a model of status seeking in which conspicuous consumption is used as a costly indicator of a household's economic position. Using merged data on race- and state-level income, we demonstrate that a key prediction of the status-signaling model—that visible consumption should be declining in reference group income—is strongly borne out in the data for each racial group. Moreover, we show that accounting for differences in reference group income characteristics explains most of the racial difference in visible consumption.