Knowledge that Transforms

Here we consider a matching model where agents are heterogeneous and utilities nontransferable. We utilize this framework to study how equilibrium sorting takes place in marriage markets. We impose conditions that guarantee the existence of a steady state equihbrium and then characterize it. Several examples are developed to illustrate the richness of equilibria. The model reveals an interesting sorting externality that can support multiple steady state equilibria, even with constant returns to matching.

Eight alternative methods of eliciting preferences between money and a consumption good are identified: two of these are standard willingness-to-accept and willingness-to-pay measures. These methods differ with respect to the reference point used and the dimension in which responses are expressed. The loss aversion hypothesis of Tversky and Kahneman's theory of reference-dependent preferences predicts systematic differences between the preferences elicited by these methods. These predictions are tested by eliciting individuals' preferences for two private consumption goods; the experimental design is incentive-compatible and controls for income and substitution effects. The theory's predictions are broadly confirmed.

This paper studies the equilibrium determination of the number of countries in different political regimes, and in different economic environments, with more or less economic integration. We focus on the trade-off between the benefits of large jurisdictions and the costs of heterogeneity of large and diverse populations. Our model implies that (i) democratization leads to secessions; (ii) in equilibrium one generally observes an inefficiently large number of countries; (iii) the equilibrium number of countries is increasing in the amount of economic integration.

This paper analyzes the evolution of an economy where growth is driven by increased specialization caused by the geographical expansion of markets. It proves that such Smithian growth exhibits generic threshold behavior. Below a critical density of transport linkages, the economy is split into isolated local markets with limited specialization. Above the critical density, these markets begin to fuse into a large, economywide market causing growth to accelerate. This allows an explicit test of the consensus among historians of Sung dynasty China that the economic revolution during that period was a result of commercialization caused by the creation of a national waterway network.

This paper tries to explain why government bureaucracies are often associated with red tape, corruption, and lack of incentives. The paper identifies two specific ingredients that together can provide an explanation: the fact that governments often act precisely in situations where markets fail and the presence of agency problems within the government. We show that these problems are exacerbated at low levels of development and in bureaucracies dealing with poor people. We also argue that we need to posit the existence of a welfare-oriented constituency within the government in order to explain red tape and corruption.

Under central planning, many firms relied on a single supplier for critical inputs. Transition has led to decentralized bargaining between suppliers and buyers. Under incomplete contracts or asymmetric information, bargaining may inefficiently break down, and if chains of production link many specialized producers, output will decline sharply. Mechanisms that mitigate these problems in the West, such as reputation, can only play a limited role in transition. The empirical evidence suggests that output has fallen farthest for the goods with the most complex production process, and that disorganization has been more important in the former Soviet Union than in Central Europe.

The paper examines the evolutionary foundations of bilateral bargaining behavior. Interaction is assumed to be personal, in the sense that agents may recognize each others' bargaining strategies. In particular, the model allows interaction between “obstinate” agents, whose demands are independent of the opponent, and “sophisticated” agents, who adapt to their opponent's expected play. When the pie's size is certain, evolution favors obstinate agents who insist on getting at least half the pie. The unique outcome is an equal split. In sufficiently noisy environments, sophisticated behavior appears in equilibrium together with greedy obstinate behavior. There is then a positive probability of conflict.

In some experiments rational players who understand the structure of the game could improve their payoff. We hound the size of the observed losses in several such experiments, lb do this, we suppose that observed play resembles an equilibrium because players learn about their opponents' play. Consequently, in an extensive-form game, some actions that are not optimal given the true distribution of opponents' play could be optimal given available information. We find that average losses are small: $0.03 to $0.64 per player with stakes between $2 and $30. In one of the three experiments we examine, this also implies a narrow range of outcome.

We model a consumer's efforts to reduce the discount on future utilities. Our analysis shows how wealth, mortality, addictions, uncertainty, and other variables affect the degree of time preference. In addition to working out many implications of the model, we discuss evidence on consumption, savings, equilibrium, and the dynamics of inequality. We claim that most ofthat evidence is consistent with the predictions of our approach.

We use store-level data to document the exact process of changing prices and to directly measure menu costs at five multistore supermarket chains. We show that changing prices in these establishments is a complex process, requiring dozens of steps and a nontrivial amount of resources. The menu costs average $105,887/year per store, comprising 0.70 percent of revenues, 35.2 percent of net margins, and $0.52/price change. These menu costs may be forming a barrier to price changes. Specifically, (1) a supermarket chain facing higher menu costs (due to item pricing laws that require a separate price tag on each item) changes prices two and one-half times less frequently than the other four chains; (2) within this chain the prices of products exempt from the law are changed over three times more frequently than the products subject to the law. “In principle, fixed costs of changing prices can be observed and measured. In practice, such costs take disparate forms in different firms, and we have no data on their magnitude. So the theory can be tested at best indirectly, at worst not at all” [Alan Blinder 1991, p. 90].