Knowledge that Transforms

Abstract This article investigates whether offers of commitment contracts, in the form of self-imposed choice-set restrictions and penalties with no financial upside, are well-targeted tools for addressing self-control problems. In an experiment on gym attendance (N=1,248), we examine take-up of commitment contracts and also introduce a separate elicitation task to identify actual and perceived time inconsistency. There is high take-up of commitment contracts for greater gym attendance, resulting in significant increases in exercise. However, this take-up is influenced both by noisy valuation and incorrect beliefs about one’s time inconsistency. Approximately half of the people who take up commitment contracts for higher gym attendance also take up commitment contracts for lower gym attendance. There is little association between commitment contract take-up and reduced-form and structural estimates of actual or perceived time inconsistency. A novel information treatment providing an exogenous shock to awareness of time inconsistency reduces demand for commitment contracts. Structural estimates of a model of quasi-hyperbolic discounting and gym attendance imply that offering our commitment contracts lowers consumer surplus and is less socially efficient than utilizing linear exercise subsidies that achieve the same average change in behaviour.

Abstract We study auction design for bidders equipped with non-expected utility preferences that exhibit constant risk aversion (CRA). The CRA class is large and includes loss-averse, disappointment-averse, mean-dispersion, and Yaari’s dual preferences as well as coherent and convex risk measures. Any preference in this class displays first-order risk aversion, contrasting the standard expected utility case which displays second-order risk aversion. The optimal mechanism offers “ full-insurance” in the sense that each agent’s utility is independent of other agents’ reports. The seller excludes less types than under risk neutrality and awards the object randomly to intermediate types. Subjecting intermediate types to a risky allocation while compensating them when losing allows the seller to collect larger payments from higher types. Relatively high types are willing to pay more, and their allocation is efficient.

Abstract We use a revealed-preference approach to estimate investor expectations of stock market returns. Using data on demand for index funds that follow the S&P 500, we develop and estimate a model of investor choice to flexibly recover the time-varying distribution of expected future returns across investors. Our analysis is facilitated by the prevalence of leveraged funds that track the same underlying asset: by choosing between higher and lower leverage, investors trade off higher return against less risk. Our estimates indicate that investor expectations are heterogeneous, extrapolative, and persistent. Following a downturn, investors become more pessimistic on average, but there is also an increase in disagreement among participating investors due to the presence of contrarian investors.

Abstract We show that the folk theorem holds generically for the repeated two-player game with private monitoring if the support of each player’s signal distribution is sufficiently large. Neither cheap talk communication nor public randomization is necessary.

Abstract How does the arrival of a new minority group affect the social acceptance and outcomes of existing minorities? We study this question in the context of the First Great Migration. Between 1915 and 1930, 1.5 million African Americans moved from the U.S. South to Northern urban centres, which were home to millions of European immigrants arrived in previous decades. We formalize and empirically test the hypothesis that the inflows of Black Americans changed perceptions of outgroup distance among native-born whites, reducing the barriers to the social integration of European immigrants. Predicting Black in-migration with a version of the shift-share instrument, we find that immigrants living in areas that received more Black migrants experienced higher assimilation along a range of outcomes, such as naturalization rates and intermarriages with native-born spouses. Evidence from the historical press and patterns of heterogeneity across immigrant nationalities provide additional support to the role of shifting perceptions of the white majority.

Abstract Using a broad panel of advanced economies, we document that increases in GDP per capita are associated with a systematic shift in the composition of value added to sectors that are intensive in high-skill labour, a process we label as skill-biased structural change. It follows that further development in these economies leads to an increase in the relative demand for skilled labour. We develop a quantitative two-sector model of this process as a laboratory to assess the sources of the rise of the skill premium in the U.S. and a set of ten other advanced economies, over the period 1977 to 2005. For the U.S., we find that the sector-specific skill neutral component of technical change accounts for 18–24% of the overall increase of the skill premium due to technical change, and that the mechanism through which this component of technical change affects the skill premium is via skill-biased structural change.

Abstract Government procurement contracts rarely have many bids, often only one. Motivated by the institutional features of federal procurement, this article develops a principal-agent model where a buyer seeks sellers at a cost and negotiates contract terms with them. The model is identified and estimated with data on IT and telecommunications contracts. We find the benefits of drawing additional sellers are significantly reduced because the procurement agency can extract informational rents from sellers. Another factor explaining the small number of bids is that sellers are relatively homogeneous, conditional on observed project attributes. Administrative hurdles and corruption appear to play very limited roles.

Abstract We recast the Aiyagari–Bewley–Huggett model of income and wealth distribution in continuous time. This workhorse model—as well as heterogeneous agent models more generally—then boils down to a system of partial differential equations, a fact we take advantage of to make two types of contributions. First, a number of new theoretical results: (1) an analytic characterization of the consumption and saving behaviour of the poor, particularly their marginal propensities to consume; (2) a closed-form solution for the wealth distribution in a special case with two income types; (3) a proof that there is a unique stationary equilibrium if the intertemporal elasticity of substitution is weakly greater than one. Second, we develop a simple, efficient and portable algorithm for numerically solving for equilibria in a wide class of heterogeneous agent models, including—but not limited to—the Aiyagari–Bewley–Huggett model.

Abstract This article investigates how incentives and behavioural policy interventions affect individuals’ allocation of scarce cognitive resources. Based on experimental evidence, we demonstrate that incentives systematically influence individuals’ allocation of cognitive resources, and their propensity to actively engage with a decision or to stay passive. Policies that steer individuals’ attention to a specific decision lead to more active decision-making and better choices in the targeted choice domain, but induce negative cognitive spillovers on the quality of choices in other domains. In our setting, these two countervailing effects offset each other, such that the overall payoff consequences of the interventions are essentially zero. We further document that cognitive spillovers are especially pronounced for complex choices and for subgroups of the population with a smaller stock of cognitive resources. We discuss implications for the design and evaluation of behavioural policy interventions.

Abstract We develop a model of fragile self-esteem—self-esteem that is vulnerable to objectively unjustified swings—and study its implications for choices that depend on, or are aimed at enhancing or protecting, one’s self-view. In our framework, a person’s self-esteem is determined by sampling his memories of ego-relevant outcomes in a fashion that in turn depends on how he feels about himself, potentially creating multiple fragile “self-esteem personal equilibria.” Self-esteem is especially likely to be fragile, as well as unrealistic in either the positive or the negative direction, if being successful is important to the agent. A person with a low self-view might exert less effort when success is more important. An individual with a high self-view, in contrast, might distort his choices to prevent a collapse in self-esteem, with the distortion being greater if his true ability is lower. We discuss the implications of our results for mental well-being, education, job search, workaholism, and aggression.