Working Papers 2007

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13-07 - Markets Versus Negotiations: The Predominance of Centralized Markets
 
Zvika Neeman and Nir Vulkan

 

 

Working Paper #13-07
Markets Versus Negotiations: The Predominance of Centralized Markets
 
Zvika Neeman and Nir Vulkan
The paper considers the consequences of competition between two widely used exchange mechanisms, a “decentralized bargaining” market, and a “centralized” market.In every period, members of a large heterogenous group of privately-informed traders who each wish to buy or sell one unit of some homogenous good may opt for trading through one exchange mechanism. Traders may also postpone their trade to a future period. It is shown that trade outside the centralized market completely unravels. In every strong Nash equilibrium, all trade takes place in the centralized market. No trade ever occurs through direct negotiations.

      
Jel Nos.: C78, D40, L10
Keywords: centralized markets, decentralized markets, decentralized bargaining, market microstructure, competition.

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12-07 - Welfare Implications of the Transition to High Household Debt

 
Zvi Hercowitz and Jeffrey R. Campbell
 

Published in: Journal of Monetary Economics, Volume 56, Issue 1, January 2009, Pages 1–16.
 

Working Paper #12-07
Welfare Implications of the Transition to High Household Debt
 
Zvi Hercowitz and Jeffrey R. Campbell
Aggressive deregulation of the mortgage market in the early 1980s triggered innovations that greatly reduced the required home equity of U.S. households. This allowed households to cash-out a large part of accumulated equity, which equaled 71 percent of GDP in 1982. A borrowing surge followed: Household debt increased from 43 to 62 percent of GDP in the 1982-2000 period. What are the welfare implications of such a reform for borrowers and savers? This paper uses a calibrated general equilibrium model of lending from the wealthy to the middle class to evaluate these effects quantitatively.

Published in: Journal of Monetary Economics, Volume 56, Issue 1, January 2009, Pages 1–16.
Jel Nos.: E44, E65
Keywords: Financial Reform, Mortgage Debt, Interest Rates

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11-07 - Patents, Imitation and Licensing In an Asymmetric Dynamic R&D Race

 

Chaim Fershtman1 and Sarit Markovich

 

Published in International Journal of Industrial Organization, Volume 28, Issue 2, 2010, Pages 113-126

 

Working paper #11-07
Patents, Imitation and Licensing In an Asymmetric Dynamic R&D Race
Chaim Fershtman1 and Sarit Markovich

R&D is an inherently dynamic process which typically involves different intermediate stages
that need to be developed before the completion of the final invention. Firms are not
necessarily symmetric in their R&D abilities; some may have an advantage in early stages of
the R&D process while others may have advantages in other stages of the process. This paper
uses a two-firm asymmetric-ability multistage R&D race model to analyze the effect of
patents, imitations and licensing arrangements on the speed of innovation, firm value and
consumers' surplus. By using numerical analyses to study the MPE of the R&D race, the
paper demonstrates the circumstances under which a weak patent protection regime, which
facilitates free imitation of any intermediate technology, may yield a higher consumers'
surplus and total surplus than a regime that awards a patent for the final innovation. The
advantage of imitation may hold even when the length of the patent is optimally calculated or
when we allow for voluntary licensing of intermediate technologies.

Published in: International Journal of Industrial Organization, Volume 28, Issue 2, 2010, 113-126

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10-07 - Doing Good or Doing Well? Image Motivation and Monetary Incentives in Behaving Prosocially

 

Dan Ariely, Anat Bracha, and Stephan Meier

 

Published in: The American Economic Review, Vol. 99, No. 1, March 2009, Pages 544-555.

 

Working paper #10-07
Doing Good or Doing Well? Image Motivation and Monetary Incentives in Behaving Prosocially
Dan Ariely, Anat Bracha, and Stephan Meier

This paper experimentally examines image motivation–the desire to be liked and
well-regarded by others–as a driver in prosocial behavior (doing good), and asks
whether extrinsic monetary incentives (doing well) have a detrimental effect on prosocial
behavior due to crowding out of image motivation.
By definition, image depends on one’s behavior being visible to other people. Using
this unique property we show that image is indeed an important part of the motivation
to behave prosocially. Moreover, we show that extrinsic incentives interact with image
motivation and are therefore less effective in public than in private. Together, these
results imply that image motivation is crowded out by monetary incentives; which in
turn means that monetary incentives are more likely to be counterproductive for public
prosocial activities than for private ones.

Keywords: prosocial behavior, extrinsic incentives, image motivation, experiments
JEL: D64, C90, H41

Published in: The American Economic Review, Vol. 99, No. 1, March 2009, pp. 544-555

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9-07 Choice with Frames 

 

Yuval Salant and Ariel Rubinstein

 

Published in: Review of Economic Studies, Volume 75, Issue 4, 2008, Pages 1287-1296.

 

Working paper #9-07 Choice with Frames
Yuval Salant and Ariel Rubinstein

In order to incorporate recent developments in Bounded Rationality and Be-
havioral Economics into Choice Theory, we introduce the notion of an extended choice problem
(A; f) where A is a set of alternatives and f is a frame. A frame consists of observable informa-
tion that appears to be irrelevant to the rational assessment of the alternatives but nonetheless
may a®ect choice. An extended choice function assigns a chosen element to every extended
choice problem. We identify conditions under which there exists either a transitive or a transi-
tive and complete binary relation over the alternatives such that an alternative x is chosen in
some extended choice problem (A; f) if and only if x is maximal according to the binary relation
in the set A. We then investigate several extended choice models in which behavior cannot be
described as the maximization of a complete and transitive relation, or alternatively the binary
relation provides little information on how the decision maker chooses from extended choice
problems. We comment on the possible welfare interpretations of our results along the paper.

Published in: Review of Economic Studies, Volume 75, Issue 4, 2008, Pages 1287-1296.

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8-07 On the Definition of Objective Probabilities by Empirical Similarity

 

Itzhak Gilboa, Offer Lieberman, and David Schmeidler

 

Published in: Synthese, January 2010, Volume 172, Issue 1, Pages 79-95.

Working paper #8-07 On the Definition of Objective Probabilities by Empirical Similarity
Itzhak Gilboa, Offer Lieberman, and David Schmeidler

We suggest to define objective probabilities by similarity-weighted
empirical frequencies, where more similar cases get a higher weight in
the computation of frequencies. This formula is justified intuitively
and axiomatically, but raises the question, which similarity function
should be used? We propose to estimate the similarity function from
the data, and thus obtain objective probabilities. We compare this
definition to others, and attempt to delineate the scope of situations
in which objective probabilities can be used.

Published in: Synthese, January 2010, Volume 172, Issue 1, Pages 79-95.

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7-07 The effect of Better Information on Income Inequality 

 

Itzhak Zilcha and Bernard Eckwert
 

Published in: Economic Theory, August 2007, Volume 32, Issue 2, pp 287-307

Working paper #7-07 The effect of Better Information on Income Inequality
Itzhak Zilcha and Bernard Eckwert

We consider an OLG economy with endogenous investment in human
capital. Heterogeneity in individual human capital levels in modelled by a
distribution of innate ability across agents. This distribution is common
knowledge but, at young age, no agent knows his/hers ability. The
production of human capital depends on each individual's investment in
education. This investment decision is taken only after observing a signal
which is correlated to his/her true ability, and which is used for updating
beliefs. Thus, a better information system affects the distribution of
human capital in each generation. Assuming separable and identical
preferences for all individuals, we derive the following results in
equilibrium: (a) if the relative measure of risk aversion is less (more) than
1 then more information raises (reduces) income inequality. (b) When a
risk sharing market is available better information results in higher
inequality regardless of the measure risk aversion.

Keywords w: information system, income inequality, risk sharing markets
JEL D80 J24 J30

Published in: Economic Theory, August 2007, Volume 32, Issue 2, pp 287-307

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6-07 - A Similarity-Based Approach to Prediction

 

Itzhak Gilboa, Offer Lieberman, and David Schmeidler
 

Published in: Journal of Econometrics, Volume 162, Issue 1, May 2011, Pages 124–131

Working paper# 6-07 - A Similarity-Based Approach to Prediction
Itzhak Gilboa, Offer Lieberman, and David Schmeidler

Assume we are asked to predict a real-valued variable yt based on certain characteristics xt = (x1t , ..., xmt ), and on a database consisting of (x1i, ..., xmi , yi) for i = 1, ..., n. Analogical reasoning suggests to combine past observations of x and y with the current values of x to generate an assessment of y is similarity-weighted averaging. Specifically, the predicted value of y, ys t , is the weighted average of all previously observed values yi, where the weight of yi, for every i = 1, ..., n, is the similarity between the vector x1t , ..., xmt , associated with yt, and the previously observed vector, x1i , ..., xmi . The “empirical similarity" approach suggests estimation of the similarity function from past data. We discuss this approach as a statistical method of prediction, study its relationship to the statistical literature, and extend it to the estimation of probabilities and of density functions.

Keywords:  Density estimation;  Empirical similarity;  Kernel;  Spatial models

Published in: Journal of Econometrics, Volume 162, Issue 1, May 2011, Pages 124–131

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5-07 Productivity and Taxes as Drivers of FDI

 

Assaf Razin and Efraim Sadka

Working paper #5-07 Productivity and Taxes as Drivers of FDI

Assaf Razin and Efraim Sadka

We develop a framework in which the host country productivity has a positive effect on
the intensive margin (the size of FDI flows), but only an ambiguous effect on the
extensive margin (the likelihood of FDI flows to occur). The source-country productivity
has a negative effect on the extensive margin. An increase in the host-country corporate
tax rate reduces the actual FDI flows the likelihood of such flows to occur. An increase in
the source-country corporate tax rate reduces the likelihood of FDI flows. These
predictions are confronted with Data on FDI flows, drawn from the International Direct
Investment dataset (Source OECD), covering the bilateral FDI flows among 18
OECD countries over the period 1987 to 2003. We find some support for the
main predictions of the model.

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4-07 Investment in Schooling and the Marriage Market

 

Pierre Andre Chiappori, Murat Iyigun and Yoram Weiss

 

Working paper#4-07 Investment in Schooling and the Marriage Market
Pierre Andre Chiappori, Murat Iyigun and Yoram Weiss

We present a model with pre-marital schooling investment, endogenous marital
matching and spousal specialization in homework and market production.
Investment in schooling raises wages and generates two kinds of returns in our
framework: a labor-market return and a marriage-market return because education
can affect the intra-marital share of the surplus one can extract from
marriage. When the returns to education and household roles are gender neutral,
men and women educate in equal proportions and there is pure positive
assortative matching in the marriage market. But if men and women have
different market returns or household roles, then there may be mixing in equilibrium
where some educated individuals marry uneducated spouses and those
who educate less extract a relatively larger share of the marital surplus. The
existence of large and frictionless marriage markets creates competition among
potential spouses, precludes bargaining and generates premarital investments
that are efficient. Given that the gender wage gap narrows with the level of education,
women’s labor-market return from schooling is higher than that of men.
Moreover, women’s household time obligations have declined over time, raising
their marriage-market return from schooling. Combining these two effects, we
explain why women now attain higher schooling levels than men.

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3-07 Technology Adoption, Bubbles and Productivity

David Zvilichovsky

 

Technology Adoption, Bubbles and Productivity
David Zvilichovsky

In this paper we study the impact of uncertain innovation on the concomitant time path of stock
market valuations and technology adoption. We specify the conditions which may produce
valuation and adoption profiles often associated with market ‘bubbles’. The paper evaluates post
bubble production and productivity in a setting which incorporates network externalities. When
externality forces are weak, a ‘bubbly’ profile will most likely entail over-adoption and wasted
resources. However, if a significant innovation is prone to positive network effects it is probable
that the ‘bubbly’ process boosts post bubble growth and productivity. Uncertainty and
externalities may amplify market valuations as well as adoption. We evaluate the probability
that such a ‘bubbly’ process contributes to overall long term productivity under various
scenarios. The paper compares the qualitative results of the model to the Internet bubble and its
aftermath and provides a possible explanation for the path of valuation, adoption and
productivity during the period. We reason that the boom and bust cycle ending in 2000 may have
not been caused by irrational exuberance but rather by expectations for an uncertain technology
change, enhanced by inherent network externalities. We also claim that the magnitude of post
bubble US productivity growth, which is higher than any seen in 40 years, may have actually
been amplified as a result of the preceding boom and bust pattern.

JEL: N1, O14, O30, O40, E32, L1

Keywords: Bubbles, Innovation, Technology Adoption, Network Externalities, Productivity,
Decision under Uncertainty

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2-07 Immigration and the survival of social security: a political economy model

Edith Sand and Assaf Razin

 

Working paper #7-07 Immigration and the survival of social security: a political economy model
Edith Sand and Assaf Razin

In the political debate people express the idea that immigrants are good because they can help pay
for the old. The paper explores this idea in a dynamic political-economy setup. For this purpose we
develop an OLG political economy model of social security and migration. We characterize sub-game
perfect Markov equilibria where immigration policy and pay-as-you-go (PAYG) social security system
are jointly determined through a majority voting process. The main feature of the model is that immigrants
are desirable for the sustainability of the social security system because the political system is able
to manipulate the ratio of old to young and thereby the coalition which supports future high social
security benefits. We demonstrate that the older is the native born population the more likely is that
the immigration policy is liberalized and the social security system survives.

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1-07 Contractual Frictions and Global Sourcing

 

Pol Antràs and Elhanan Helpman

 

 

Working paper #1-07 Contractual Frictions and Global Sourcing
Pol Antràs and Elhanan Helpman

We generalize the Antràs and Helpman (2004) model of the international organization of
production in order to accommodate varying degrees of contractual frictions. In particular, we
allow the degree of contractibility to vary across inputs and countries. A continuum of firms
with heterogeneous productivities decide whether to integrate or outsource the production of
intermediate inputs, and from which country to source them. Final-good producers and their
suppliers make relationship-specific investments which are only partially contractible, both in
an integrated firm and in an arm’s-length relationship. We describe equilibria in which firms
with different productivity levels choose different ownership structures and supplier locations,
and then study the effects of changes in the quality of contractual institutions on the relative
prevalence of these organizational forms. Better contracting institutions in the South raise the
prevalence of offshoring, but may reduce the relative prevalence of FDI or foreign outsourcing.
The impact on the composition of offshoring depends on whether the institutional improvement
affects disproportionately the contractibility of a particular input. A key message of the paper
is that improvements in the contractibility of inputs controlled by final-good producers have
different effects than improvements in the contractibility of inputs controlled by suppliers.

Keywords: contractual frictions, trade, FDI, sourcing.
JEL Classification: D23, F10, L23

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