Knowledge that Transforms

Abstract This paper introduces the random discounted expected utility (R-DEU) model, which we have developed as a means to deal with heterogeneous risk and time preferences. The R-DEU model provides an explicit linkage between preference and choice heterogeneity. We prove it has solid comparative statics, discuss its identification, and demonstrate its computational convenience. Finally, we use two distinct experimental datasets to illustrate the advantages of the R-DEU model over common alternatives for estimating heterogeneity in preferences across individuals.

Abstract Rational respondents to economic surveys may report as a point forecast any measure of the central tendency of their predictive distribution, e.g. the mean, median, or mode. We propose tests of forecast rationality when the measure used by the respondent is unknown. We overcome an identification problem that arises when the centrality measures are in a local neighborhood of each other, as is the case for approximately symmetric distributions. We apply our tests to income forecasts from the FRBNY's Survey of Consumer Expectations. We find these forecasts are rationalizable as mode forecasts, but not as mean or median forecasts.

Abstract We study the wellbeing returns from volunteering in England's National Health Service (NHS) Volunteer Responders, set up in response to Covid-19. Using linked survey and administrative data, we exploit the oversubscription of volunteers and the random allocation of tasks via an app to establish causality. Volunteers show stronger wellbeing and feelings of belongingness and connectedness to their local area. Welfare analyses suggest that the benefits of the programme substantially exceeded its costs. We are the first to study the welfare effects of a nationwide volunteering programme. Our findings show that pro-social behaviour improves personal wellbeing as well as social welfare.

Abstract India is home to a comprehensive affirmative action program that reserves a fraction of positions at governmental institutions for various disadvantaged groups. While there is a Supreme Court-endorsed mechanism to implement these reservation policies when all positions are identical, courts have refrained from endorsing explicit mechanisms when positions are heterogeneous. This lacuna has resulted in widespread adoption of unconstitutional mechanisms, countless lawsuits, and inconsistent court rulings. By formulating mandates from the landmark Supreme Court judgment Saurav Yadav vs The State of U.P. (2020) as technical axioms, we show that the 2SMH-DA mechanism is uniquely suited to overcome these challenges.

Abstract Using micro data for the UK and Germany, we provide novel evidence on the cyclical properties of reservation wages and estimate that wages and reservation wages are characterised by moderate and very similar degrees of cyclicality. Several job search models that quantitatively match the cyclicality of wages tend to overpredict the cyclicality in reservation wages. We show that this puzzle can be addressed when reservation wages display backward-looking reference dependence. Model calibrations that allow for reference dependence match the empirically observed cyclicality of wages and reservation wages for plausible value of all other model parameters.

Abstract We propose a new measure of underlying inflation that informs, in real time, about asymmetric risks on the outlook of inflationary pressures. The asymmetries are generated through nonlinearities induced by economic activity. The new indicator is based on a multivariate regime-switching framework jointly estimated on disaggregated sub-components of the euro area HICP and has several additional advantages. First, it is able to swiftly infer abrupt changes in underlying inflation. Second, it helps to timely track turning points in underlying inflation. Third, the proposed indicator also has a satisfactory performance with respect to various criteria relevant for inflation monitoring.

Abstract We evaluate the nationwide impact of the Washington State Attorney General's 2018-20 enforcement campaign against no-poach clauses in franchising contracts, which prohibited worker movement across locations within a chain. Implementing a staggered difference-in-differences research design using Burning Glass Technologies job vacancies and Glassdoor salary reports from numerous industries, we estimate a 6% increase in posted annual earnings from the job vacancy data and a 4% increase in worker-reported earnings.

Abstract How substantial are the economic benefits from democratic regime change? We argue that democratisation is often not a discrete event but a two-stage process: autocracies enter into ‘episodes’ of political liberalisation which eventually culminate in regime change or not. To account for this chronology and the implicit counterfactual groups, we introduce a repeated-treatment difference-in-difference implementation capturing non-parallel trends and selection into treatment. We find that modelling regime change in two stages rather than a single event yields stronger long-run growth effects. Among democratizers, experiencing repeated episodes without regime change reduces growth in democracy whereas length of episode does not.

Abstract We extend BLP's aggregate discrete-choice model of product differentiation to create more flexibility in the price functional form. We apply a Box-Cox specification, which relaxes the typical unit demand assumption and creates flexibility on demand curvature. The model provides a unifying framework for mixed logit and mixed CES models, while remaining computationally tractable. We provide an illustrative application to the ready-to-eat cereals market. This shows that the cross-sectional relation between price elasticities and average prices per product is more in line with descriptive elasticity patterns, and that substitution between product pairs may be affected to some extent.

Abstract Economists have long suspected that firm-to-firm relationships might lower the responsiveness of prices to shocks due to the use of fixed-price contracts. Using transaction-level U.S. import data, I show that the pass-through of exchange rate shocks in fact rises as a relationship ages. Based on novel stylized facts about a relationship's life cycle, I develop a model of relationship dynamics in which a buyerseller pair accumulates relationship capital to lower production costs under limited commitment. The structurally estimated model generates countercyclical mark-ups and countercyclical pass-through of shocks through variation in the economy's rate of relationship creation, which falls in recessions.