Knowledge that Transforms

I propose a new solution concept—behavioral equilibrium—to study environments with players who are naive, in the sense that they fail to account for the informational content of other players' actions. I apply the framework to certain adverse selection settings and show that, contrary to the existing literature, the adverse selection problem is exacerbated when naive players fail to account for selection. More generally, the main distinguishing feature of the framework is that, in equilibrium, beliefs about both fundamentals and strategies are jointly restricted. Consequently, whether a behavioral bias may arise or not is determined endogenously in equilibrium.

Since women began entering the workforce in large numbers in the latter half of the twen? tieth century, they have faced important and difficult trade-offs between family and work. One such trade-off involves the timing of fer? tility. Biological constraints such as declining fecundity by age encourage early childbearing. However, researchers have found evidence of a wage premium to delay. Amalia Miller (2007) uses miscarriages as a source of variation in the timing of first birth, and finds an additional year of delay is associated with a 3 percent increase in wage rates and a 10 percent increase in earnings. David Ellwood, Ty Wilde, and Lily Batchelder (2004) show that wage profiles for high-skilled women flatten out at the point of the first birth, resulting in' significantly greater lifetime earn? ing for delayers.1 Understanding the causes of this wage pre? mium is essential to understanding the choices working women face and the decisions they make. This paper examines how much of the delay premium can be explained by differ? ences in human capital among early and late child bearers. Using data from the National Longitudinal Survey of Youth (NLSY), I find a raw return of approximately 3 percent per year of delay for hourly wages in 2003. Using the full NLSY panel and a fixed-effects framework, I show that there is a wage penalty to motherhood that increases with time since the birth, and that these penalties are greatest for high-skilled women. However, this effect is attenuated for women who delay childbirth. Next, I show that there are significant differ? ences in women's observable characteristics by age at first birth. Women who delay are more skilled, more educated, more likely to be in pro? fessional or managerial careers, and have more experience?even conditional on completed fer? tility. I return to estimating the return to delay, adjusting wages for differences in observable characteristics. I find that as much as 90 percent of the return to delay can be explained by differ? ences in observable characteristics. Education, experience, and age at first marriage have the most explanatory power. These results support a human capital theory for the delay premium.

A player i's actions in a game are determined by her beliefs about other players; these depend on the game's real-life context, not only its formal description. Define a game situation as a game together with such beliefs; call the beliefs—and i's resulting expectation—rational if there is common knowledge of rationality and a common prior. In two-person zero-sum games, i's only rational expectation is the game's value. In an arbitrary game G, we characterize i's rational expectations in terms of the correlated equilibria of the doubled game 2G in which each of i's strategies in G appears twice.

This paper compares centralized and decentralized coordination when managers are privately informed and communicate strategically. We consider a multidivisional organization in which decisions must be adapted to local conditions but also coordinated with each other. Information about local conditions is dispersed and held by self-interested division managers who communicate via cheap talk. The only available formal mechanism is the allocation of decision rights. We show that a higher need for coordination improves horizontal communication but worsens vertical communication. As a result, decentralization can dominate centralization even when coordination is extremely important relative to adaptation.

Based on recent neuroscience evidence, we model the brain as a dual-system organization subject to three conflicts: asymmetric information, temporal horizon, and incentive salience. Under the first and second conflicts, we show that the uninformed system imposes a positive link between consumption and labor at every period. Furthermore, decreasing impatience endogenously emerges as a consequence of these two conflicts. Under the first and third conflicts, it becomes optimal to set a consumption cap. Finally, we discuss the behavioral implications of these rules for choice bracketing and expense tracking, and for consumption over the life cycle.

We report evidence that Bitnet adoption facilitated increased research collaboration between US universities. However, not all institutions benefited equally. Using panel data from seven top engineering journals, Bitnet connection records, and institution ranking data, we find that middle-tier universities were the primary beneficiaries; they benefited largely by increasing their collaboration with top-tier schools. Furthermore, we find that the magnitude of this effect is greatest for co-located pairs. Thus, the advent of Bitnet – and likely of subsequent networks – seems to have increased the role of middle-tier universities as producers of new knowledge in the national innovation system.

We show that even incomplete public insurance can crowd out private insurance demand. We estimate that Medicaid could explain the lack of private long-term care insurance for about two-thirds of the wealth distribution, even if no other factors limited the market's size. Yet Medicaid provides incomplete consumption smoothing for most individuals. Medicaid's crowd-out effect stems from the large implicit tax (about 60–75 percent for a median-wealth individual) that Medicaid imposes on private insurance. An implication is that public policies designed to stimulate the private insurance market will have limited efficacy as long as Medicaid's large implicit tax remains.

This paper studies matching in vertical networks, generalizing the theory of matching in two-sided markets. It gives sufficient conditions for the existence of stable networks and presents an algorithm for finding two of them. One is the best stable network for the agents on the “upstream” end of an industry. The other is best for the agents on the “downstream” end. The paper describes several properties of the set of stable networks and discusses applications of the theory to the design of matching markets with more than two types of agents and to the empirical analysis of supply chains. (JEL C78, D85, L14) The woollen coat, for example, which covers the day-labourer, as coarse and rough as it may appear, is the produce of the joint labour of a great multitude of workmen. The shepherd, the sorter of the wool, the wool-comber or carder, the dyer, the scribbler, the spinner, the weaver, the fuller, the dresser, with many others, must all join their different arts in order to complete even this homely production. —Adam Smith (1776)

Efficient regulation of the commons requires information about the regulated firms that is rarely available to regulators (e.g., cost of pollution abatement). This paper proposes a simple mechanism that implements the first-best for any number of firms: a uniform price, sealed-bid auction of an endogenous number of (transferable) licenses with a fraction of the auction revenues given back to firms. Paybacks, which rapidly decrease with the number of firms, are such that truth-telling is a dominant strategy regardless of whether firms behave non-cooperatively or collusively. The mechanism also provides firms with incentives to invest in socially optimal R&D.

African American and White Differences in the Impacts of Monetary Policy on the Duration of Unemployment by William M. Rodgers. Published in volume 98, issue 2, pages 382-86 of American Economic Review, May 2008