Knowledge that Transforms

Experimental evidence suggests that individuals are more risk averse when they perceive risk gradually.We address these …ndings by studying a decision maker (DM) who has recursive preferences over compound lotteries and who cares about the way uncertainty is resolved over time.DM has preferences for one-shot resolution of uncertainty (PORU) if he always prefers any compound lottery to be resolved in a single stage.We establish an equivalence between dynamic PORU and static preferences that are identi…ed with the behavior observed in Allais-type experiments.The implications of this equivalence on preferences over information systems are examined.We de…ne the gradual resolution premium and demonstrate its magnifying e¤ect when combined with the usual risk premium.In an intertemporal context, PORU captures "loss aversion with narrow framing".

We investigate the role of search frictions in markets with price competition and how it leads to sorting of heterogeneous agents. There are two aspects of value creation: the match value when two agents actually trade and the probability of trading governed by the search technology. We show that positive assortative matching obtains when complementarities in the former outweigh complementarities in the latter. This happens if and only if the match-value function is root-supermodular, that is, its nth root is supermodular, where n reflects the elasticity of substitution of the search technology. This condition is weaker than the condition required for positive assortative matching in markets with random search.

We examine the labor market effects of incomplete information about the workers' own job-finding process. Search outcomes convey valuable information, and learning from search generates endogenous heterogeneity in workers' beliefs about their job-finding probability. We characterize this process and analyze its interactions with job creation and wage determination. Our theory sheds new light on how unemployment can affect workers' labor market outcomes and wage determination, providing a rational explanation for discouragement as the consequence of negative search outcomes. In particular, longer unemployment durations are likely to be followed by lower reemployment wages because a worker's beliefs about his job-finding process deteriorate with unemployment duration. Moreover, our analysis provides a set of useful results on dynamic programming with optimal learning.

This paper combines dynamic social choice and strategic experimentation to study the following question: How does a society, a committee, or, more generally, a group of individuals with potentially heterogeneous preferences, experiment with new opportunities? Each voter recognizes that, during experimentation, other voters also learn about their preferences. As a result, pivotal voters today are biased against experimentation because it reduces their likelihood of remaining pivotal. This phenomenon reduces equilibrium experimentation below the socially efficient level, and may even result in a negative option value of experimentation. However, one can restore efficiency by designing a voting rule that depends deterministically on time. Another main result is that even when payoffs of a reform are independently distributed across the population, good news about any individual's payoff increases other individuals' incentives to experiment with that reform, due to a positive voting externality.

Unlike the prediction of a frictionless open economy model, long-term average savings and investment rates are highly correlated across countries—a puzzle first identified by Feldstein and Horioka (1980). We quantitatively investigate the impact of two types of financial frictions on this correlation. One is limited enforcement, where contracts are enforced by the threat of default penalties. The other is limited spanning, where the only asset available is noncontingent bonds. We find that the calibrated model with both frictions produces a savings–investment correlation and a volume of capital flows close to the data. To solve the puzzle, the limited enforcement friction needs low default penalties under which capital flows are much lower than those in the data, and the limited spanning friction needs to exogenously restrict capital flows to the observed level. When combined, the two frictions interact to endogenously restrict capital flows and thereby solve the Feldstein–Horioka puzzle.

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This paper provides a directed search model designed to explain the residual part of wage variation left over after the impact of education and other observable worker characteristics have been removed. Workers have private information about their characteristics at the time they apply for jobs. Firms value these characteristics differently and can observe them once workers apply. They hire the worker they most prefer. However, the characteristics are not contractible, so firms cannot condition their wages on them. This paper shows how to extend arguments from directed search to handle this, allowing for arbitrary distributions of worker and firm types. The model is used to provide a functional relationship that ties together the wage distribution and the wage–duration function. This relationship provides a testable implication of the model. This relationship suggests a common property of wage distributions that guarantees that workers who leave unemployment at the highest wages also have the shortest unemployment duration. This is in strict contrast to the usual (and somewhat implausible) directed search story in which high wages are always accompanied by higher probability of unemployment.

This paper introduces a novel bootstrap procedure to perform inference in a wide class of partially identified econometric models. We consider econometric models defined by finitely many weak moment inequalities,2 which encompass many applications of economic interest. The objective of our inferential procedure is to cover the identified set with a prespecified probability.3 We compare our bootstrap procedure, a competing asymptotic approximation, and subsampling procedures in terms of the rate at which they achieve the desired coverage level, also known as the error in the coverage probability. Under certain conditions, we show that our bootstrap procedure and the asymptotic approximation have the same order of error in the coverage probability, which is smaller than that obtained by using subsampling. This implies that inference based on our bootstrap and asymptotic approximation should eventually be more precise than inference based on subsampling. A Monte Carlo study confirms this finding in a small sample simulation.

This paper develops methods for evaluating marginal policy changes. We characterize how the effects of marginal policy changes depend on the direction of the policy change, and show that marginal policy effects are fundamentally easier to identify and to estimate than conventional treatment parameters. We develop the connection between marginal policy effects and the average effect of treatment for persons on the margin of indifference between participation in treatment and nonparticipation, and use this connection to analyze both parameters. We apply our analysis to estimate the effect of marginal changes in tuition on the return to going to college.

This paper develops a framework to assess how fear of miscoordination affects the sustainability of cooperation. Building on theoretical insights from Carlsson and van Damme (1993), it explores the effect of small amounts of private information on a class of dynamic cooperation games with exit. Lack of common knowledge leads players to second guess each other's behavior and makes coordination difficult. This restricts the range of equilibria and highlights the role of miscoordination payoffs in determining whether cooperation is sustainable or not. The paper characterizes the range of perfect Bayesian equilibria as the players' information becomes arbitrarily precise. Unlike in one-shot two-by-two games, the global games information structure does not yield equilibrium uniqueness.