Knowledge that Transforms

We study the formation of a ruling coalition in non-democratic societies where institutions do not enable political commitments. Each individual is endowed with a level of political power. The ruling coalition consists of a subset of the individuals in the society and decides the distribution of resources. A ruling coalition needs to contain enough powerful members to win against any alternative coalition that may challenge it, and it needs to be self-enforcing, in the sense that none of its subcoalitions should be able to secede and become the new ruling coalition. We present both an axiomatic approach that captures these notions and determines a (generically) unique ruling coalition and the analysis of a dynamic game of coalition formation that encompasses these ideas. We establish that the subgame-perfect equilibria of the coalition formation game coincide with the set of ruling coalitions resulting from the axiomatic approach. A key insight of our analysis is that a coalition is made self-enforcing by the failure of its winning subcoalitions to be self-enforcing. This is most simply illustrated by the following example: with “majority rule”, two-person coalitions are generically not self-enforcing and consequently, three-person coalitions are self-enforcing (unless one player is disproportionately powerful). We also characterize the structure of ruling coalitions. For example, we determine the conditions under which ruling coalitions are robust to small changes in the distribution of power and when they are fragile. We also show that when the distribution of power across individuals is relatively equal and there is majoritarian voting, only certain sizes of coalitions (e.g. with majority rule, coalitions of size 1, 3, 7, 15, etc.) can be the ruling coalition.

This paper shows how record-value theory, a branch of statistics that deals with the timing and magnitude of extreme values in sequences of random variables, can be used to nonparametrically identify the offer distribution of wages workers face.Using NLSY wage data, I show that the data supports the hypothesis that the wage offer distribution is Pareto but rejects that it is lognormal.In addition, I show that my approach can be used to construct a bound on the return to job-specific human capital.Using the same NLSY data, I find that job-specific human capital plays only a minor role in the wage growth of the workers in my sample.Instead, wage growth among the young workers in my sample appears to be driven primarily by the accumulation of general human capital as well as on-the-job search.

A community's culture is defined by the preferences and equilibrium behaviours of its members. Contacts among communities alter individual cultures through two interrelated mechanisms: behavioural adaptations driven by pay-offs to coordination, and preference changes shaped by socialization and self-persuasion. This paper explores the workings of these mechanisms through a model of cultural integration in which preferences and behaviours vary continuously. It identifies a broad set of conditions under which cross-cultural contacts promote cultural hybridization. The analysis suggests that policies to support social integration serve to homogenize preferences across communities, thereby undermining a key objective of multiculturalism. Yielding fresh insights into strategies pursued to influence cultural trends, it also shows that communities benefit from having other communities adjust their behaviours.

This paper analyses theoretically and empirically the relationship between military conflicts and trade. We show that the conventional wisdom that trade promotes peace is only partially true even in a model where trade is economically beneficial, military conflicts reduce trade, and leaders are rational. When war can occur because of the presence of asymmetric information, the probability of escalation is lower for countries that trade more bilaterally because of the opportunity cost associated with the loss of trade gains. However, countries more open to global trade have a higher probability of war because multilateral trade openness decreases bilateral dependence to any given country and the cost of a bilateral conflict. We test our predictions on a large data set of military conflicts on the 1950–2000 period. Using different strategies to solve the endogeneity issues, including instrumental variables, we find robust evidence for the contrasting effects of bilateral and multilateral trade openness. For proximate countries, we find that trade has had a surprisingly large effect on their probability of military conflict.

This paper shows that standard international business cycle models can be reconciled with the empirical evidence on the lack of consumption risk sharing. First, we show analytically that with incomplete asset markets productivity disturbances can have large un-insurable effects on wealth, depending on the value of the trade elasticity and shock persistence. Second, we investigate these findings quantitatively in a model calibrated to the U.S. economy. With the low trade elasticity estimated via a method of moments procedure, the consumption risk of productivity shocks is magnified by high terms of trade and real exchange rate (RER) volatility. Strong wealth effects in response to shocks raise the demand for domestic goods above supply, crowding out external demand and appreciating the terms of trade and the RER. Building upon the literature on incomplete markets, we then show that similar results are obtained when productivity shocks are nearly permanent, provided the trade elasticity is set equal to the high values consistent with micro-estimates. Under both approaches the model accounts for the low and negative correlation between the RER and relative (domestic to foreign) consumption in the data the Backus Smith puzzle.

We analyse the design of decision rules by a principal who faces an informed but biased agent and who is unable to commit to contingent transfers. The contracting problem reduces to a delegation problem in which the principal commits to a set of decisions from which the agent chooses his preferred one. We characterize the optimal delegation set and perform comparative statics on the principal's willingness to delegate and the agent's discretion. We also provide conditions for interval delegation to be optimal and show that they are satisfied when the agent's preferences are sufficiently aligned. Finally, we apply our results to the regulation of a privately informed monopolist and to the design of legislatives rules.

We introduce peer effects in the costs of human capital acquisition into a model of statistical discrimination in labour markets. This creates a link between the level of segregation in social networks and racial disparities in job assignment and wages. We show that this relationship is characterized by discontinuities: there is a threshold level of segregation below which negative stereotypes become unsustainable, and steady-state skill levels can change dramatically. This change can work in either direction: skill levels may either rise or fall in both groups. Which of these outcomes arises depends on the population share of the disadvantaged group and on the distribution of the costs of human capital investments. We also examine the effects of affirmative action policies in the presence of peer effects and provide conditions under which such policies eliminate negative stereotypes.

Using data on one-shot games, we investigate whether players' actions can be viewed as responses to underlying expectations about their opponent's behaviour. In our laboratory experiments, subjects play a set of 14 two-person 3×3 games and state beliefs about which actions they expect their opponents to play. The data sets from the two tasks are largely inconsistent. Rather, we find evidence that the subjects perceive the games differently when they (i) choose actions and (ii) state beliefs—their stated beliefs reveal deeper strategic thinking than their actions. On average, they fail to best respond to their own stated beliefs in almost half of the games. The inconsistency is confirmed by estimates of a unified statistical model that jointly uses the actions and the belief statements. There, we can control for decision noise and formulate a statistical test that rejects consistency. Effects of the belief elicitation procedure on subsequent actions are mostly insignificant.