Knowledge that Transforms

In this article, we examine the effect of “choice fatigue” on decision making. We exploit a natural experiment in which voters face the same contest at different ballot positions due to differences in the number of local issues on their ballot. Facing more decisions before a given contest significantly increases the tendency to abstain or rely on decision shortcuts, such as voting for the status quo or the first-listed candidate. We estimate that, without choice fatigue, abstentions would decrease by 8%, and 6% of the propositions in our data set would have passed rather than failed.

This article theoretically and empirically analyses behaviour in penny auctions, a relatively new auction mechanism. As in the US dollars or war-of-attrition, players in penny auctions commit higher non-refundable costs as the auction continues and only win if all other players stop bidding. I first show that, in any equilibria that does not end immediately, players bid probabilistically such that the expected profit from every bid is zero. Then, using two large data sets covering 166, 000 auctions, I calculate that average profit margins actually exceed 50%. To explain this deviation, I incorporate a sunk-cost fallacy into the theoretical model to generate a set of predictions about hazard rates and player behaviour, which I confirm empirically. While players do (slowly) learn to correct this bias and there are few obvious barriers to competition, activity in the market is rising and concentration remains relatively high.

Should policy makers be prevented from bailing out investors in the event of a crisis? I study this question in a model of financial intermediation with limited commitment. When a crisis occurs, the policy maker will respond with fiscal transfers that partially cover intermediaries' losses. The anticipation of this bailout distorts ex ante incentives, leading intermediaries to become excessively illiquid and increasing financial fragility. Prohibiting bailouts is not necessarily desirable, however: while it induces intermediaries to become more liquid, it may nevertheless lower welfare and leave the economy more susceptible to a crisis. A policy of taxing short-term liabilities, in contrast, can both improve the allocation of resources and promote financial stability.

Previous research has established that the predictions of game theory are quite sensitive to the assumptions made about the players’ beliefs. We evaluate the severity of this robustness problem by characterizing conditions on the primitives of the model—the players’ beliefs and higher-order beliefs about the payoff-relevant parameters—for the behaviour of a given Harsanyi type to be approximated by the behaviour of (a sequence of) perturbed types. This amounts to providing belief-based characterizations of the strategic topologies of Dekel et al. (2006). We apply our characterizations to a variety of questions concerning robustness to perturbations of higher-order beliefs, including genericity of types that are consistent with a common prior, and we investigate the connections between our notions of robustness and the notion of common p-belief of Monderer and Samet (1989).

Poor heath, large acute and long-term care medical expenses and spousal death are significant drivers of impoverishment among retirees. We document these facts and build a rich overlapping generations model that reproduces them. We use the model to assess the incentive and welfare effects of U.S. Social Security and means-tested social insurance programs, such as Medicaid and food stamp programs, for the aged. We find that U.S. means-tested social insurance programs for retirees provide significant welfare benefits for all newborn. Moreover, when means-tested social insurance benefits are of the scale in the U.S., all newborn prefer that Social Security be removed. Finally, we find that the current scale of means-tested social insurance in the U.S. is about right in the following sense. If we condition on the current Social Security program, the benefits of increasing means-tested social insurance are small or negative.

This article presents a framework for analysing global identification in log linearized Dynamic Stochastic General Equilibrium (DSGE) models that encompasses both determinacy and indeterminacy. First, it considers a frequency domain expression for the Kullback–Leibler distance between two DSGE models and shows that global identification fails if and only if the minimized distance equals 0. This result has three features: (1) it can be applied across DSGE models with different structures; (2) it permits checking whether a subset of frequencies can deliver identification; (3) it delivers parameter values that yield observational equivalence if there is identification failure. Next, the article proposes a measure for the empirical closeness between two DSGE models for a further understanding of the strength of identification. The measure gauges the feasibility of distinguishing one model from another based on a finite number of observations generated by the two models. It is shown to represent the highest possible power under Gaussianity when considering local alternatives. The above theory is illustrated using two small-scale and one medium-scale DSGE models. The results document that certain parameters can be identified under indeterminacy but not determinacy, that different monetary policy rules can be (nearly) observationally equivalent, and that identification properties can differ substantially between small and medium-scale models. For implementation, two procedures are developed and made available, both of which can be used to obtain and thus to cross validate the findings reported in the empirical applications. Although the article focuses on DSGE models, the results are also applicable to other vector linear processes with well-defined spectra, such as the (factor-augmented) vector autoregression.

We study effort and risk-taking behaviour in an economy with a continuum of principal–agent pairs where each agent exerts costly hidden effort. Principals write contracts based on both absolute and relative performance evaluations (APE and RPE, respectively) to make individually optimal risk–return trade-offs but do not take into account their impact on endogenously determined aggregate variables. This results in contractual externalities when these aggregate variables are used as benchmarks in contracts. Contractual externalities have welfare changing effects when principals put too much weight on APE or RPE due to information frictions. Relative to the second best, if the expected productivity is high, risk-averse principals over-incentivize their own agents, triggering a rat race in effort exertion, resulting in over-investment in effort and excessive exposure to industry risks. The opposite occurs when the expected productivity is low, inducing pro-cyclical investment and risk-taking behaviours.

This article studies an economy with both centralized and decentralized monetary exchanges under search frictions. A degenerate asset distribution is featured under a broad class of preferences including, for example, constant return to scale, constant elasticity of substitution, CARA and others from a range of macroeconomic literatures. Some novel applications impossible under quasi-linear preferences, for example endogenous growth, are illustrated under this class of preferences. This article finds that the welfare cost and growth loss of inflation can be much higher in these applications than previous estimates.

Voters commonly face a choice between competent candidates and those with policy preferences similar to their own. This article explores how electoral rules, such as district magnitude, mediate this trade-off and affect the composition of representative bodies and the quality of policy outcomes. We show formally that anticipation of bargaining over policy causes voters in elections with multiple singlemember districts to prefer candidates with polarized policy positions over more competent candidates. Results from a unique field experiment in Afghanistan are consistent with these predictions. Specifically, representatives selected by elections with a single multi-member district are better educated and exhibit less extreme policy preferences.