Knowledge that Transforms

We build a model of competitive pooling, which incorporates adverse selection and signaling into general equilibrium. Pools are characterized by their quantity limits on contributions. Households signal their reliability by choosing which pool to join. In equilibrium, pools with lower quantity limits sell for a higher price, even though each household's deliveries are the same at all pools. The Rothschild-Stiglitz model of insurance is included as a special case. We show that by recasting their hybrid oligopolistic-competitive story in our perfectly competitive framework, their separating equilibrium always exists (even when they say it does not) and is unique.

Abstract: Departures from self-interest in economic experiments have recently inspired models of “social preferences”. We design a range of simple experimental games that test these theories more directly than existing experiments. Our experiments show that subjects are more concerned with increasing social welfare—sacrificing to increase the payoffs for all recipients, especially low-payoff recipients—than with reducing differences in payoffs (as supposed in recent models). Subjects are also motivated by reciprocity: They withdraw willingness to sacrifice to achieve a fair outcome when others are

Ongoing questions on the historical mean and standard deviation of the return on equities and bonds and on the equilibrium demand for these securities are addressed in the context of a stationary, overlapping-generations economy in which consumers are subject to a borrowing constraint. The key feature captured by the OLG economy is that the bulk of the future income of the young consumers is derived from their wages forthcoming in their middle age, while the bulk of the future income of the middle-aged consumers is derived from their savings in equity and bonds. The young would like to borrow and invest in equity but the borrowing constraint prevents them from doing so. The middle-aged choose to hold a diversified portfolio that includes positive holdings of bonds and this explains the demand for bonds. Without the borrowing constraint, the young borrow and invest in equity, thereby decreasing the mean equity premium and increasing the rate of interest.

This paper presents an interpretation of rising regionalism in world trade as a coordination failure, based on (i) sector-specific sunk costs in production, and (ii) "friction" in trade negotiation. Given these elements, if a regional trade bloc is expected to form, private agents will make investments that will make bloc member countries more specialized toward each other, but bloc and nonbloc countries mutually less specialized. This diminishes the ex post demand for multilateral free trade. Thus, the expected supply of regionalism generates its own demand, creating a Pareto-inferior equilibrium.

We analyze the value placed by rational agents on self-confidence, and the strategies employed in its pursuit. Confidence in one's abilities generally enhances motivation, making it a valuable asset for individuals with imperfect willpower. This demand for self-serving beliefs (which can also arise from hedonic or signaling motives) must be weighed against the risks of overconfidence. On the supply side, we develop a model of self-deception through endogenous memory that reconciles the motivated and rational features of human cognition. The resulting intrapersonal game of strategic communication typically leads to multiple equilibria. While “positive thinking” can improve welfare, it can also be self-defeating (and nonetheless pursued).

We analyze yield spreads on sovereign bonds issued by emerging markets, using modern data from the 1990s and newly collected historical data on bonds traded in London during 1870–1913, a previous era of global capital market integration. We show that spreads today comove across emerging markets to a significantly higher degree than they did in the historical sample. Moreover, sharp changes in spreads in the 1990s tend to be mostly related to global events, whereas they were primarily related to country-specific events in 1870–1913. Although we find that fundamentals comove somewhat more strongly today than they did in the past, we conjecture that today's investors pay less attention to country-specific events than their predecessors did.

This paper studies the structure of the employment relationship in organizations. It investigates the trade-off firms face between making commitments to their workforce as a whole (multilateral relational contracts), and making more limited commitments to individuals or smaller groups of employees (bilateral relational contracts). Multilateral contracts bind the firm more strongly to implicit commitments, improving motivation, but are difficult to adjust in response to changes in the environment. Bilateral contracts make workforce changes easier to implement. The framework helps to explain the use of relative performance evaluation, why firms rely on temporary employees, and the adoption of two-tier workforces.

This paper characterizes the dynamic effects of shocks in government spending and taxes on U. S. activity in the postwar period. It does so by using a mixed structural VAR/event study approach. Identification is achieved by using institutional information about the tax and transfer systems to identify the automatic response of taxes and spending to activity, and, by implication, to infer fiscal shocks. The results consistently show positive government spending shocks as having a positive effect on output, and positive tax shocks as having a negative effect. One result has a distinctly nonstandard flavor: both increases in taxes and increases in government spending have a strong negative effect on investment spending.

Among countries colonized by European powers during the past 500 years, those that were relatively rich in 1500 are now relatively poor. We document this reversal using data on urbanization patterns and population density, which, we argue, proxy for economic prosperity. This reversal weighs against a view that links economic development to geographic factors. Instead, we argue that the reversal reflects changes in the institutions resulting from European colonialism. The European intervention appears to have created an “institutional reversal” among these societies, meaning that Europeans were more likely to introduce institutions encouraging investment in regions that were previously poor. This institutional reversal accounts for the reversal in relative incomes. We provide further support for this view by documenting that the reversal in relative incomes took place during the late eighteenth and early nineteenth centuries, and resulted from societies with good institutions taking advantage of the opportunity to industrialize.

Are product market and entry regulation key sources of low employment growth in many European countries? We investigate this question in the context of the French retail trade industry. Since 1974, approval by regional zoning boards has been required for the creation or extension of any large retain store in France. We exploit a unique database that provides time- and region-specific variation in boards' approval decisions. We show that stronger deterrence of entry by the boards increased retailer concentration and slowed down employment growth in France.