Knowledge that Transforms

This article proposes a strategic framework to account for fertility choices in polygamous households. It uses unique data on fertility histories of a representative sample of co-wives in Senegal to estimate a duration model of birth intervals with individual baseline hazards. Exploiting entries and exits of co-wives as well as gender of births, empirical tests show that children are strategic complements. One wife raises her fertility in response to an increase by the other wife, because children are the best claim to resources controlled by the husband. This result is the first quantitative evidence that the competition between co-wives drives fertility upwards. It suggests that polygamy undermines the fertility transition in Sub-Saharan Africa by incentivizing women to want many children. This article is also one of the few attempts to open the black box of non-nuclear families, placing strategic interactions at the heart of household decision-making.

Abstract This article studies how credit markets respond to policy constraints on household leverage. Exploiting a sharp policy-induced discontinuity in the cost of originating certain high-leverage mortgages, we study how the Dodd–Frank “Ability-to-Repay” rule affected the price and availability of credit in the U.S. mortgage market. Our estimates show that the policy had only moderate effects on prices, increasing interest rates on affected loans by 10–15 basis points. The effect on quantities, however, was significantly larger; we estimate that the policy eliminated 15% of the affected market completely and reduced leverage for another 20% of remaining borrowers. This reduction in quantities is much greater than would be implied by plausible demand elasticities and indicates that lenders responded to the policy not only by raising prices but also by exiting the regulated portion of the market. Heterogeneity in the quantity response across lenders suggests that agency costs may have been one particularly important market friction contributing to the large overall effect as the fall in lending was substantially larger among lenders relying on third-parties to originate loans. Finally, while the policy succeeded in reducing leverage, our estimates suggest this effect would have only slightly reduced aggregate default rates during the housing crisis.

We develop a model explaining how criminal organizations strategically use pre-electoral violence as a way of influencing electoral results and politicians' behaviour. We then characterize the incentives to use such violence under different levels of electoral competition and different electoral rules. Our theory is consistent with the empirical evidence within Sicily and across Italian regions. Specifically, the presence of organized crime is associated with abnormal spikes in violence against politicians before elections-particularly when the electoral outcome is more uncertain-which in turn reduces voting for parties opposed by criminal organizations. Using a very large data set of parliamentary debates, we also show that violence by the Sicilian Mafia reduces anti-Mafia efforts by members of parliament appointed in Sicily, particularly from the parties that traditionally oppose the Mafia.

We document that the spread of the Mafia in Sicily at the end of the 19th century was in part caused by the rise of socialist Peasant Fasci organizations. In an environment with weak state presence, this socialist threat triggered landowners, estate managers, and local politicians to turn to the Mafia to resist and combat peasant demands. We show that the location of the Peasant Fasci is significantly affected by a severe drought in 1893, and using information on rainfall, we estimate the impact of the Peasant Fasci on the location of the Mafia in 1900. We provide extensive evidence that rainfall before and after this critical period has no effect on the spread of the Mafia or various economic and political outcomes. In the second part of the article, we use this source of variation in the strength of the Mafia in 1900 to estimate its medium-term and long-term effects. We find significant and quantitatively large negative impacts of the Mafia on literacy and various public goods in the 1910s and 20s. We also show a sizable impact of the Mafia on political competition, which could be one of the channels via which it affected local economic outcomes. We document negative effects of the Mafia on longer-term outcomes (in the 1960s, 70s, and 80s) as well, but these are in general weaker and often only marginally significant. One exception is its persistent and strong impact on political competition.

We conduct an empirical analysis of consumer preferences and search costs on an Internet platform. Using data from a major French platform (PriceMinister), we show descriptive evidence of substantial price dispersion among adverts for the same product, of consumers often not choosing the cheapest advert and sometimes choosing an advert dominated in price and non-price characteristics by another available advert. We consider a sequential search model where consumers sample adverts in an endogenous order based on their preferences and search costs. We show that the optimal search-and-purchase strategy can be characterized by a set of inequalities which can feasibly be tested on transaction and advert data. This allows us to estimate, for each transaction, a set of preference and search cost parameter values, thus allowing for flexible consumer heterogeneity in preferences and search costs. The estimated model can then describe a wide range of consumer search and purchase behaviours. We find that the model can explain almost all transactions in the data and requires non-zero preferences and search costs for at least 50% and 22% (respectively) of observations. We also find evidence of heterogeneous and sometimes substantial search costs.

Abstract How should carbon be taxed as a part of fiscal policy? The literature on optimal carbon pricing often abstracts from other taxes. However, when governments raise revenues with distortionary taxes, carbon levies have fiscal impacts. While they raise revenues directly, they may shrink the bases of other taxes (e.g. by decreasing employment). This article theoretically characterizes and then quantifies optimal carbon taxes in a dynamic general equilibrium climate–economy model with distortionary fiscal policy. First, this article establishes a novel theoretical relationship between the optimal taxation of carbon and of capital income. This link arises because carbon emissions destroy natural capital: they accumulate in the atmosphere and decrease future output. Consequently, this article shows how the standard logic against capital income taxes extends to distortions on environmental capital investments. Second, this article characterizes optimal climate policy in sub-optimal fiscal settings where income taxes are constrained to remain at their observed levels. Third, this article presents a detailed calibration that builds on the seminal DICE approach but adds features essential for a setting with distortionary taxes, such as a differentiation between climate change production impacts (e.g. on agriculture) and direct utility impacts (e.g. on biodiversity existence value). The central quantitative finding is that optimal carbon tax schedules are 8–24% lower when there are distortionary taxes, compared to the setting with lump-sum taxes considered in the literature.

Abstract Individuals are constantly processing external information and translating it into actions. This draws on limited resources of attention and requires economizing on attention devoted to signals related to economic behaviour. A natural measure of such costs is based on Shannon’s “channel capacity”. Modelling economic agents as constrained by Shannon capacity as they process freely available information turns out to imply that discretely distributed actions, and thus actions that persist across repetitions of the same decision problem, are very likely to emerge in settings that without information costs would imply continuously distributed behaviour. We show how these results apply to the behaviour of an investor choosing portfolio allocations, as well as to some mathematically simpler “tracking” problems that illustrate the mechanism. Trying to use costs of adjustment to explain “stickiness” of actions when interpreting the behaviour in our economic examples would lead to mistaken conclusions.

We experimentally investigate the time-inconsistent taste for immediate gratification and future-preference misprediction. Across 7 weeks, 100 participants choose the number of unpleasant transcription tasks given various wages to complete immediately and at different future dates. Participants preferred 10–12% fewer tasks in the present compared to any future date, leading to an estimated $β $ of 0.83. Comparing predictions with actual immediate-work choices provides evidence against substantial sophistication, with estimates implying that participants understand no more than 24% of their present bias. Finally, we find evidence of “projection bias”: participants wished to complete 4–12% fewer tasks when decisions were elicited right after completing tasks rather than before.

We provide a general theoretical characterization of how firms' technology choice on a technology frontier determines the long-run elasticity of substitution between capital and labour. We show that the shape of the frontier determines factor shares and the elasticity of substitution between capital and labour. If there are adjustment costs to technology choice, the short-and long-run elasticities differ, with the long-run always higher. If the technology frontier is log-linear, the production function becomes Cobb-Douglas in the long run but, consistent with empirical evidence, short-run dynamics are characterized by gross complementarity. The approach is easily implementable and yields a powerful way to introduce CES-type production functions in macroeconomic models. We provide an illustration within an estimated dynamic general equilibrium model and show that the use of our production technology provides a good match for the short-and medium-run behaviour of the U.S. labour share.

Abstract We study platform markets in which the information about users’ preferences is dispersed. First, we show how the dispersion of information introduces idiosyncratic uncertainty about participation decisions and how the latter shapes the elasticity of the demands and the equilibrium prices. We then study the effects on profits, consumer surplus, and welfare of platform design, blogs, forums, conferences, advertising campaigns, post-launch disclosures, and other information management policies affecting the agents’ ability to predict participation decisions on the other side of the market.