Knowledge that Transforms

I present a sticky-wage model of exchange rate pass-through with heterogeneous producers and endogenous markups. The model shows that low levels of exchange rate pass-through to firm- and aggregate-level import prices coexist with large movements in trade flows. After an exchange rate shock, aggregate import prices are subject to a composition bias due to changes in the extensive margin of trade (the number of goods traded between countries). At the firm level, each producer adjusts its markups depending on its own productivity and the change in the competitive environment generated by the exchange rate movement. Firm-level price responses are asymmetric—different for appreciations and depreciations—and adjustments in the intensive margin of trade (firm-level exports) are substantial. In general equilibrium, the model shows that firm reallocations increase the persistence of exogenous shocks.

I examine a model of a uniform price auction of a perfectly divisible good with private information in which the bidders submit discrete bidpoints rather than continuous downward sloping demand functions. I characterize necessary conditions for equilibrium bidding. The characterization reveals a close relationship between bidding in multiunit auctions and oligopolistic behaviour. I demonstrate that a recently proposed indirect approach to the revenue comparisons of discriminatory and uniform price auctions is not valid if bid functions have steps. In particular, bidders may bid above their marginal valuation in a uniform price auction. In order to demonstrate that discrete bidding can have important consequences for empirical analysis I use my model to examine a data set consisting of individual bids in uniform price treasury auctions of the Czech government. I propose an alternative method for evaluating the performance of the employed mechanism. My results suggest that the uniform price auction performs well, both in terms of efficiency of the allocation and in terms of revenue maximization. I estimate that the employed mechanism failed to extract at most 3 basis points in terms of the annual yield of T-bills worth of expected surplus while implementing an allocation resulting in almost all the efficient surplus. Failing to account for discreteness of bids would in my application result in overestimating the unextracted revenue by more than 50%.

We study a market model in which competing firms use costly marketing devices to influence the set of alternatives that boundedly rational consumers perceive as relevant. Consumers in our model apply well-defined preferences to a “consideration set”, which is a subset of the feasible set and subject to manipulation by firms. We examine the implications of this behavioral model on otherwise competitive markets. In our model, the market equilibrium outcome is not competitive, yet firms earn competitive payoff because the strategic use of costly marketing devices wears off the collusive impact of consumers’ bounded rationality. Equilibrium behavior satisfies an “effective marketing property”: if a consumer considers a firm only because of a marketing device it employs, he ends up buying from that firm.

This paper analyses the interaction between internal agency problems within firms and external search frictions when workers have private information. We show that the allocation of resources is determined by a modified Hosios Rule. We then analyze the effect of changes in the macro economic variables on the wage contract and the unemployment rate. We find that private information may increase the responsiveness of the unemployment rate to changes in productivity. The incentive power of the wage contracts is positively related to high productivity, low unemployment benefits and high search frictions.

We estimate the effect of shifts in monetary policy using the term structure of interest rates. In our no-arbitrage model, the short rate follows a version of the Taylor's (1993, “Discretion Versus Policy Rules in Practice”, Carnegie-Rochester Conference Series on Public Policy, 39, 195–214) rule where the coefficients on the output gap and inflation vary over time. The monetary policy loading on the output gap has averaged around 0·4 and has not changed very much over time. The overall response of the yield curve to output gap components is relatively small. In contrast, the inflation loading has changed substantially over the last 50 years and ranges from close to zero in 2003 to a high of 2·4 in 1983. Long-term bonds are sensitive to inflation policy shifts with increases in inflation loadings leading to higher short rates and widening yield spreads.

This paper investigates the comparative statics of “more ambiguity aversion” as defined by <cross-ref type="bib" refid="bib26">Klibanoff, Marinacci and Mukerji (2005</cross-ref>, “A Smooth Model of Decision Making under Ambiguity”, Econometrica , 73 (6), 1849–1892). The analysis uses the static two-asset portfolio problem with one safe asset and one uncertain one. While it is intuitive that more ambiguity aversion would reduce demand for the uncertain asset, this is not necessarily the case. We derive sufficient conditions for a reduction in the demand for the uncertain asset and for an increase in the equity premium. An example that meets the sufficient conditions is when the set of plausible distributions for returns on the uncertain asset can be ranked according to their monotone likelihood ratio. It is also shown how ambiguity aversion distorts the price kernel in the alternative portfolio problem with complete markets for contingent claims.

We derive a closed-form solution for Tobin's Q in a stochastic dynamic framework. We show analytically that investment is positively related to Tobin's Q and cash flow, even in the absence of adjustment costs or financing frictions. Both Q and investment move in the same direction as expected revenue growth, so changes in expected revenue growth induce Q and investment to comove positively. Similarly, shocks to current cash flow, arising from shocks to the user cost of capital in our model, cause investment and cash flow per unit of capital to comove positively. Furthermore, we show that this alternative mechanism for the relationship among investment, Q, and cash flow delivers larger cash flow effects for smaller- and faster-growing firms, as observed in the data. Moreover, the empirically small sensitivity of investment to Tobin's Q does not imply implausibly large adjustment costs in our model (since there are no adjustment costs). Calibrating the model generates values of Q similar to those in the data; investment is more sensitive to cash flow than it is to Q, and both responses are of empirically plausible magnitudes.

In view of the non-identification of the first-price auction model with risk-averse bidders, this paper proposes some parametric identifying restrictions and a semiparametric estimator for the risk aversion parameter(s) and the latent distribution of private values. Specifically, we exploit heterogeneity across auctioned objects to establish semiparametric identification under a conditional quantile restriction of the bidders' private value distribution and a parameterization of the bidders' utility function. We develop a multistep semiparametric method and we show that our semiparametric estimator of the utility function parameter(s) converges at the optimal rate, which is slower than the parametric one but independent of the dimension of the exogenous variables thereby avoiding the curse of dimensionality. We then consider various extensions including a binding reserve price, affiliation among private values, and asymmetric bidders. The method is illustrated on U.S. Forest Service timber sales, and bidders' risk neutrality is rejected.

The consumption literature uses adult equivalence scales to measure individual-level inequality. This practice imposes the assumption that there is no within-household inequality. In this paper, we show that ignoring consumption inequality within households produces misleading estimates of inequality along two dimensions. To illustrate this point, we use a collective model of household behaviour to estimate consumption inequality in the U.K. from 1968 to 2001. First, the use of adult equivalence scales underestimates the initial level of cross-sectional consumption inequality by 50%, as large differences in the earnings of husbands and wives translate into large differences in consumption allocations within households. Second, we estimate the rise in between-household inequality has been accompanied by an offsetting reduction in within-household inequality. Our findings also indicate that increases in marital sorting on wages and hours worked can simultaneously explain two-thirds of the decline in within-household inequality and between a quarter and one-half of the rise in between-household inequality for one and two adult households.

The Pareto-like tail of the size distribution of firms can arise from random growth of productivity or stochastic accumulation of capital. If the shocks that give rise to firm growth are perfectly correlated within a firm, then the growth rates of small and large firms are equally volatile, contrary to what is found in the data. If firm growth is the result of many independent shocks within a firm, it can take hundreds of years for a few large firms to emerge. This paper describes an economy with both types of shocks that can account for the thick-tailed firm size distribution, high entry and exit rates, and the relatively young age of large firms. The economy is one in which aggregate growth is driven by the creation of new products by both new and incumbent firms. Some new firms have better ideas than others and choose to implement those ideas at a more rapid pace. Eventually, such firms slow down when the quality of their ideas reverts to the mean. As in the data, average growth rates in a cross section of firms will appear to be independent of firm size, for all but the smallest firms.