Knowledge that Transforms

Are the highest sample realizations selected from a larger presample more or less informative than the same amount of random data? Developing multivariate accuracy for interval dominance ordered preferences, we show that sample selection always benefits (or always harms) a decision maker if the reverse hazard rate of the data distribution is log‐supermodular (or log‐submodular), as in location experiments with normal noise. We find nonpathological conditions under which the information contained in the winning bids of a symmetric auction decreases in the number of bidders. Exploiting extreme value theory, we quantify the limit amount of information revealed when the presample size (number of bidders) goes to infinity. In a model of equilibrium persuasion with costly information, we derive implications for the optimal design of selected experiments when selection is made by an examinee, a biased researcher, or contending sides with the peremptory challenge right to eliminate a number of jurors.

We characterize the set of extreme points of monotonic functions that are either majorized by a given function f or themselves majorize f and show that these extreme points play a crucial role in many economic design problems. Our main results show that each extreme point is uniquely characterized by a countable collection of intervals. Outside these intervals the extreme point equals the original function f and inside the function is constant. Further consistency conditions need to be satisfied pinning down the value of an extreme point in each interval where it is constant. We apply these insights to a varied set of economic problems: equivalence and optimality of mechanisms for auctions and (matching) contests, Bayesian persuasion, optimal delegation, and decision making under uncertainty.

This paper reconciles the asymptotic disagreement between Bayesian and frequentist inference in set‐identified models by adopting a multiple‐prior (robust) Bayesian approach. We propose new tools for Bayesian inference in set‐identified models and show that they have a well‐defined posterior interpretation in finite samples and are asymptotically valid from the frequentist perspective. The main idea is to construct a prior class that removes the source of the disagreement: the need to specify an unrevisable prior for the structural parameter given the reduced‐form parameter. The corresponding class of posteriors can be summarized by reporting the ‘posterior lower and upper probabilities’ of a given event and/or the ‘set of posterior means’ and the associated ‘robust credible region’. We show that the set of posterior means is a consistent estimator of the true identified set and the robust credible region has the correct frequentist asymptotic coverage for the true identified set if it is convex. Otherwise, the method provides posterior inference about the convex hull of the identified set. For impulse‐response analysis in set‐identified Structural Vector Autoregressions, the new tools can be used to overcome or quantify the sensitivity of standard Bayesian inference to the choice of an unrevisable prior.

We propose a positive model of empirical science in which an analyst makes a report to an audience after observing some data. Agents in the audience may differ in their beliefs or objectives, and may therefore update or act differently following a given report. We contrast the proposed model with a classical model of statistics in which the report directly determines the payoff. We identify settings in which the predictions of the proposed model differ from those of the classical model, and seem to better match practice.

We develop a tractable general equilibrium framework in which firms are large and have market power with respect to both products and labor, and in which a firm's decisions are affected by its ownership structure. We characterize the Cournot–Walras equilibrium of an economy where each firm maximizes a share‐weighted average of shareholder utilities—rendering the equilibrium independent of price normalization. In a one‐sector economy, if returns to scale are non‐increasing, then an increase in “effective” market concentration (which accounts for common ownership) leads to declines in employment, real wages, and the labor share. Yet when there are multiple sectors, due to an intersectoral pecuniary externality, an increase in common ownership could stimulate the economy when the elasticity of labor supply is high relative to the elasticity of substitution in product markets. We characterize for which ownership structures the monopolistically competitive limit or an oligopolistic one is attained as the number of sectors in the economy increases. When firms have heterogeneous constant returns to scale technologies, we find that an increase in common ownership leads to markets that are more concentrated.

What incentives do governments have to negotiate trade agreements that constrain their domestic regulatory policies? We study a model in which firms design products to appeal to local consumer tastes, but their fixed costs increase with the difference between versions of their product destined for different markets. In this setting, firms' profit‐maximizing choices of product attributes are globally optimal in the absence of consumption externalities, but national governments have unilateral incentives to invoke regulatory protectionism to induce firm delocation. An efficient trade agreement requires commitments not to engage in such opportunistic behavior. A rule requiring mutual recognition of standards can be used to achieve efficiency, but one that requires only national treatment falls short. When product attributes confer local consumption externalities, an efficient trade agreement must coordinate the fine details of countries' regulatory policies.

This paper develops inference methods for the iterated overidentified Generalized Method of Moments (GMM) estimator. We provide conditions for the existence of the iterated estimator and an asymptotic distribution theory, which allows for mild misspecification. Moment misspecification causes bias in conventional GMM variance estimators, which can lead to severely oversized hypothesis tests. We show how to consistently estimate the correct asymptotic variance matrix. Our simulation results show that our methods are properly sized under both correct specification and mild to moderate misspecification. We illustrate the method with an application to the model of Acemoglu, Johnson, Robinson, and Yared (2008).

This paper shows that the products and prices offered in markets are correlated with local income‐specific tastes. To quantify the welfare impact of this variation, I calculate local price indexes micro‐founded by a model of non‐homothetic demand over thousands of grocery products. These indexes reveal large differences in how wealthy and poor households perceive the choice sets available in wealthy and poor cities. Relative to low‐income households, high‐income households enjoy 40 percent higher utility per dollar expenditure in wealthy cities, relative to poor cities. Similar patterns are observed across stores in different neighborhoods. Most of this variation is explained by differences in the product assortment offered, rather than the relative prices charged, by chains that operate in different markets.

This paper presents a continuous‐time model of sovereign debt. In it, a relatively impatient sovereign government's hidden type switches back and forth between a commitment type, which cannot default, and an opportunistic type, which can, and where we assume outside lenders have particular beliefs regarding how a commitment type should borrow for any given level of debt and bond price. In any Markov equilibrium, the opportunistic type mimics the commitment type when borrowing, revealing its type only by defaulting on its debt at random times. The equilibrium features a “graduation date”: a finite amount of time since the last default, after which time reputation reaches its highest level and is unaffected by not defaulting. Before such date, not defaulting always increases the country's reputation. For countries that have recently defaulted, bond prices and the total amount of debt are increasing functions of the amount of time since the country's last default. For countries that have not recently defaulted (i.e., those that have graduated), bond prices are constant.

This paper studies asset pricing and labor market dynamics when idiosyncratic risk to human capital is not fully insurable. Firms use long‐term contracts to provide insurance to workers, but neither side can fully commit; furthermore, owing to costly and unobservable retention effort, worker‐firm relationships have endogenous durations. Uninsured tail risk in labor earnings arises as a part of an optimal risk‐sharing scheme. In equilibrium, exposure to the tail risk generates higher aggregate risk premia and higher return volatility. Consistent with data, firm‐level labor share predicts both future returns and pass‐throughs of firm‐level shocks to labor compensation.