Knowledge that Transforms

This paper considers random coefficients binary choice models. The main goal is to estimate the density of the random coefficients nonparametrically. This is an ill-posed inverse problem characterized by an integral transform. A new density estimator for the random coefficients is developed, utilizing Fourier–Laplace series on spheres. This approach offers a clear insight on the identification problem. More importantly, it leads to a closed form estimator formula that yields a simple plug-in procedure requiring no numerical optimization. The new estimator, therefore, is easy to implement in empirical applications, while being flexible about the treatment of unobserved heterogeneity. Extensions including treatments of nonrandom coefficients and models with endogeneity are discussed.

We develop a network-flow approach for characterizing interim-allocation rules that can be implemented by ex post allocations. Our method can be used to characterize feasible interim allocations in general multi-unit auctions where agents face capacity constraints, both ceilings and floors. Applications include a variety of settings of practical interest, ranging from individual and group-specific capacity constraints, set-aside sale, partnership dissolution, and government license reallocation.

We investigate the role of deeply-rooted pre-colonial ethnic institutions in shaping comparative regional development within African countries. We combine information on the spatial distribution of ethnicities before colonization with regional variation in contemporary economic performance, as proxied by satellite images of light density at night. We document a strong association between pre-colonial ethnic political centralization and regional development. This pattern is not driven by differences in local geographic features or by other observable ethnic-specific cultural and economic variables. The strong positive association between pre-colonial political complexity and contemporary development obtains also within pairs of adjacent ethnic homelands with different legacies of pre-colonial political institutions.

The aim of this paper is to develop revealed preference tests for Cournot equilibrium. The tests are akin to the widely used revealed preference tests for consumption, but have to take into account the presence of strategic interaction in a game-theoretic setting. The tests take the form of linear programs, the solutions to which also allow us to recover cost information on the firms. To check that these nonparametric tests are sufficiently discriminating to reject real data, we apply them to the market for crude oil.

Dynamic models of ambiguity aversion are increasingly popular in applied work. This paper shows that there is a strong interdependence in such models between the ambiguity attitude and the preference for the timing of the resolution of uncertainty, as defined by the classic work of Kreps and Porteus (1978). The modeling choices made in the domain of ambiguity aversion influence the set of modeling choices available in the domain of timing attitudes. The main result is that the only model of ambiguity aversion that exhibits indifference to timing is the maxmin expected utility of Gilboa and Schmeidler (1989). This paper examines the structure of the timing nonindifference implied by the other commonly used models of ambiguity aversion. This paper also characterizes the indifference to long-run risk, a notion introduced by Duffie and Epstein (1992). The interdependence of ambiguity and timing that this paper identifies is of interest both conceptually and practically—especially for economists using these models in applications.

We study repeated Bayesian games with communication and observable actions in which the players' privately known payoffs evolve according to an irreducible Markov chain whose transitions are independent across players. Our main result implies that, generically, any Pareto-efficient payoff vector above a stationary minmax value can be approximated arbitrarily closely in a perfect Bayesian equilibrium as the discount factor goes to 1. As an intermediate step, we construct an approximately efficient dynamic mechanism for long finite horizons without assuming transferable utility.

This paper proposes a new approach to equilibrium selection in repeated games with transfers, supposing that in each period the players bargain over how to play. Although the bargaining phase is cheap talk (following a generalized alternating-offer protocol), sharp predictions arise from three axioms. Two axioms allow the players to meaningfully discuss whether to deviate from their plan; the third embodies a “theory of disagreement”—that play under disagreement should not vary with the manner in which bargaining broke down. Equilibria that satisfy these axioms exist for all discount factors and are simple to construct; all equilibria generate the same welfare. Optimal play under agreement generally requires suboptimal play under disagreement. Whether patient players attain efficiency depends on both the stage game and the bargaining protocol. The theory extends naturally to games with imperfect public monitoring and heterogeneous discount factors, and yields new insights into classic relational contracting questions.

Few microfinance-funded businesses grow beyond subsistence entrepreneurship. This paper considers one possible explanation: that the structure of existing microfinance contracts may discourage risky but high-expected-return investments. To explore this possibility, I develop a theory that unifies models of investment choice, informal risk-sharing, and formal financial contracts. I then test the predictions of this theory using a series of experiments with clients of a large microfinance institution in India. The experiments confirm the theoretical predictions that joint liability creates two potential inefficiencies. First, borrowers free-ride on their partners, making risky investments without compensating partners for this risk. Second, the addition of peer-monitoring overcompensates, leading to sharp reductions in risk-taking and profitability. Equity-like financing, in which partners share both the benefits and risks of more profitable projects, overcomes both of these inefficiencies and merits further testing in the field.

This paper presents a theoretical and empirical analysis of the role of life expectancy for optimal schooling and lifetime labor supply. The results of a simple prototype Ben-Porath model with age-specific survival rates show that an increase in lifetime labor supply is not a necessary, or a sufficient, condition for greater life expectancy to increase optimal schooling. The observed increase in survival rates during working ages that follows from the “rectangularization” of the survival function is crucial for schooling and labor supply. The empirical results suggest that the relative benefits of schooling have been increasing across cohorts of U.S. men born between 1840 and 1930. A simple quantitative analysis shows that a realistic shift in the survival function can lead to an increase in schooling and a reduction in lifetime labor hours.