Working Papers 2008

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15-08 - DO FINANCIAL INCENTIVES AFFECT FERTILITY?
 
Alma Cohen, Rajeev Dehejia and Dmitri Romanov
 

Published in: The Review of Economics and Statistics, March 2013, Vol. 95, No. 1, Pages 1-20.
 

Working Paper #15-08
DO FINANCIAL INCENTIVES AFFECT FERTILITY?
 
Alma Cohen, Rajeev Dehejia and Dmitri Romanov
This paper investigates whether financial incentives, and in particular government child subsidies, affect fertility. We take advantage of a comprehensive, non-public, individual-level panel data set that includes fertility histories and detailed individual controls for married Israeli women from 1999-2005, a period with substantial changes in the level of government child subsidies, but no changes in eligibility and coverage. We find a significant positive effect on fertility; the mean level of child subsidies produces a 6.9 percent increase in fertility, and we estimate the benefit elasticity to be in the range of 0.12-0.18 and the price elasticity to be in the range of 0.088-0.13. The positive effect of child subsidies on fertility is absent from the upper part of the income distribution, but it is present across all religious groups. Using a differences-in-differences specification, we find that a large, unanticipated reduction in child subsidies that occurred in 2003 had a substantial negative impact on fertility. Overall, our results are consistent with the view that fertility responds to financial incentives and they indicate that the child subsidy policies used in many countries can have a significant influence on incremental fertility decisions.

Published in: The Review of Economics and Statistics, March 2013, Vol. 95, No. 1, Pages 1-20.
Jel Nos.: D1, H31, I38, J13, K36.
Keywords: Fertility, child subsidies, child allowances.

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14-08 - Finite State Dynamic Games with Asymmetric Information: A Framework for Applied Work
 
Chaim Fershtman and Ariel Pakes
 

Published in: The Quarterly Journal of Economics, 2012, 127 (4): 1611-1661.
 

Working Paper #14-08
Finite State Dynamic Games with Asymmetric Information: A Framework for Applied Work
 
Chaim Fershtman and Ariel Pakes
With applied work in mind, we define an equilibrium notion for dynamic games with assymetric information which does not require a specification for players’ beliefs about their opponents types. This enables us to define equilibrium conditions which, at least in principal, are testable and can be computed using a simple reinforcement learning algorithm. We conclude with an example that endogenizes the maintenance decisions for electricity generators in a dynamic game among electric utilities in which the costs states of the generators are private information.

Published in: The Quarterly Journal of Economics, 2012, 127 (4): 1611-1661.
Jel Nos.: L13, C73, D82

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13-08 - Renegotiation-Proof Mechanism Design
 
Zvika Neeman and Gregory Pavlov
 

Working Paper #13-08
Renegotiation-Proof Mechanism Design
 
Zvika Neeman and Gregory Pavlov
A mechanism is said to be renegotiation-proof if it is robust against renegotiation both before and after it is played. We ask the following three related questions: (1)what kind of environments or mechanism design problems admit renegotiation-proof implementation? (2) what kind of social choice rules are implementable in a way that is renegotiation-proof? and (3) what kind of mechanisms are renegotiation-proof? We provide characterization results for environments, social choice rules, and mechanisms that facilitate renegotiation-proof implementation in complete information settings, and in incomplete information settings with independent private values. For incomplete information settings with correlated interdependent values we provide sufficient conditions for renegotiation-proof implementation. Importantly, our results imply that some common mechanism design problems do not admit the existence of any renegotiation-proof mechanism.

      
Jel Nos.: D02, D70, D82
Keywords: ex-post renegotiation, interim renegotiation, oracle renegotiation proofness.

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12-08 - Optimal Bilateral Trade of Multiple Objects
 
Ran Eilat and Ady Paunzer
 

Published in: Games and Economic Behavior, Volume 71, Issue 2, March 2011, Pages 503–512, 2011
 

Working Paper #12-08
Optimal Bilateral Trade of Multiple Objects
 
Ran Eilat and Ady Paunzer
We consider a private-values buyer-seller problem with multiple objects. Valuations are binary, i.i.d., and such that the problem does not have a trivial solution. We characterize mechanisms that span the Pareto frontier. These have a very simple form: Call the seller ``good`` if he has a low valuation and ``bad`` if he has a high valuation. Call the buyer ``good`` if he has a high valuation and ``bad`` if he has a low valuation. For each object, if both say ``bad`` there is no trade. If both say ``good``, they trade. If agent j says ``bad`` and the other says ``good``, they trade only if the number of good objects in j`s announcement is above a certain threshold (at the threshold itself they trade with probability between 0 and 1). The thresholds depend on the weights given to each agent in the designer`s objective function: as she leans more towards one of the agents, his trading threshold weakly decreases, and the rival`s weakly increases.

Published in: Games and Economic Behavior, Volume 71, Issue 2, March 2011, Pages 503–512, 2011
Jel Nos.: D82; D86
Keywords: Bilateral trade; Multiple objects; Buyer–seller problem; Bargaining; Mechanism design; Private values

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11-08 - Human Capital and Inequality Dynamics:The Role of Education Technology
 
Jean-Marie Viaene and Itzhak Zilcha
 

Published in: Econometrica, Volume 76, Issue 304, pages 760–778, October 2009
 

Working Paper #11-08
Human Capital and Inequality Dynamics:The Role of Education Technology
 
Jean-Marie Viaene and Itzhak Zilcha
The paper offers a unified way to examine several puzzles on in-equality dynamics. It focuses on differences in the education technology and their effects on income distributions. Our overlapping generations economy has the following features: (1) consumers are heterogenous with respect to ability and parental human capital; (2) intergenerational transfers take place via parental direct investment in education and, public education financed by taxes (possibly, with a level determined by majority voting). We explore several variations in the production of human capital, some attributed to .`home-education`.and others related to `public-education`, and indicate how various changes in education technologies affct the intragenerational income inequality along the equilibrium path.

Published in: Econometrica, Volume 76, Issue 304, pages 760–778, October 2009
Jel Nos.: D91; E25; H52
Keywords: Human Capital; Innate Ability; Inequality Dynamics.

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10-08 - The Role of Stigma in the Design of Welfare Programs
 
Tomer Blumkin, Yoram Margalioth and Efraim Sadka
 

Working Paper #10-08
The Role of Stigma in the Design of Welfare Programs
 
Tomer Blumkin, Yoram Margalioth and Efraim Sadka
We consider the notion of welfare stigma ? la Besley and Coate (1992b). This stigma is attributed to welfare claimants by society when they are perceived as undeserving in the sense that they falsely claim to be eligible for welfare benefits. However, due to imperfect information, this stigma may be extended, with some probability, to all welfare claimants. We examine the implications of this kind of stigma for the design of welfare programs.

      
Jel Nos.: H2, D6
Keywords: Welfare, Take Up, Targeting, Inequality, Stigma.

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9-08 - Talent Utilization, a Source of Bias in Measuring TFP
 
Tali Regev and Hosny Zoabi
 

Published in: Talent Utilization and Search for the Appropriate Technology, 2014. Macroeconomic Dynamics, 18, pp: 863-882
 

Working Paper #9-08
Talent Utilization, a Source of Bias in Measuring TFP
 
Tali Regev and Hosny Zoabi
This paper analyzes a model of economic growth that explains di®erences in economic structure across countries. It highlights the interplay between productivity, talents utilization and entrepreneurship incentives. The paper has two main results. First, it argues that when measuring human capital we ignore one dimension, which is alents utilization``. It is suggested then that, in development accounting, human capital is inaccurately measured. Second, it shows that the magnitude of talents utilization increases with the level of development. Thus, the paper suggests that talents utilization ampli¯es differences in productivity and contributes to the explanation of large observed international differences in per capita income.

Published in: Talent Utilization and Search for the Appropriate Technology, 2014. Macroeconomic Dynamics, 18, pp: 863-882
Jel Nos.: L16, O11, O14, O33, O47
Keywords: Total factor productivity, talent utilization, human capital, factor accumulation.

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8-08 - Inside the Black of Box of Ability Peer Effects: Evidence from Variation in Low Achievers in the Classroom
 
Victor Lavy, M. Daniele Paserman and Analia Schlosser
 

Published in: The Economic Journal, Volume 122, Issue 559, pages 208–237, March 2012.
 

Working Paper #8-08
Inside the Black of Box of Ability Peer Effects: Evidence from Variation in Low Achievers in the Classroom
 
Victor Lavy, M. Daniele Paserman and Analia Schlosser
In this paper, we estimate the extent of ability peer effects in the classroom and explore the underlying mechanisms through which these peer effects operate. We identify as low ability students those who are enrolled at least one year behind their birth cohort (“repeaters”). We show that there are marked differences between the academic performance and behavior of repeaters and regular students. The status of repeaters is mostly determined by first grade; therefore, it is unlikely to have been affected by their classroom peers, and our estimates will not suffer from the reflection problem. Using within school variation in the proportion of these low ability students across cohorts of middle and high school students in Israel, we find that the proportion of low achieving peers has a negative effect on the performance of regular students, especially those located at the lower end of the ability distribution. An exploration of the underlying mechanisms of these peer effects shows that, relative to regular students, repeaters report that teachers are better in the individual treatment of students and in the instilment of capacity for individual study. However, a higher proportion of these low achieving students results in a deterioration of teachers’ pedagogical practices, has detrimental effects on the quality of inter-student relationships and the relationships between teachers and students, and increases the level of violence and classroom disruptions.

Published in: The Economic Journal, Volume 122, Issue 559, pages 208–237, March 2012.
Jel Nos.: I2, I21, J24
Keywords: Peer effects, Education production function.

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7-08 - The Tennis Coach Problem: A Game-Theoretic and Experimental Study
 
Ayala Arad
 

Published in: Arad, Ayala. 2012. The Tennis Coach Problem: A Game-Theoretic and Experimental Study. The B.E. Journal of Theoretical Economics 12 (1) (Contributions), Article 10
 

Working Paper #7-08
The Tennis Coach Problem: A Game-Theoretic and Experimental Study
 
Ayala Arad
The paper introduces a new allocation game, related to the Colonel Blotto game: each tennis coach assigns his four different skilled players to four positions, and then each team plays all other teams in the tournament. The set of equilibria is characterized and experimental behavior in variants of the game is analyzed in light of an adapted level-k model. The results exhibit a systematic pattern- a majority of the subjects used a small number of strategies. However, although level-k thinking is naturally specified in this context, only a limited use of low level-k thinking was found. Thus, the results illuminate some bounds of the level-k approach.

Published in: Arad, Ayala. 2012. The Tennis Coach Problem: A Game-Theoretic and Experimental Study. The B.E. Journal of Theoretical Economics 12 (1) (Contributions), Article 10
Jel Nos.: C72, C91
Keywords: level-k thinking, tennis game, experimental game theory, colonel Blotto.

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6-08 Retirement Decisions of Married Couples
 
Chemi Gotlibovski and Yoram Weiss
 

Working Paper #6-08
Retirement Decisions of Married Couples
 
Chemi Gotlibovski and Yoram Weiss
In this paper we construct a simple structural dynamic model of retirement in which partners make joint retirement decisions, based on their age, current health and expected health. We estimate the model using the Israeli SHARE data. The model generates a predicted probability of retirement of each spouse for every year in which the husband age is between 55 and 75. Based on these predicted probabilities we define a synchronization index, which measures difference between the probability that both partners will be in the same state (retired or working) and the probability that they will be in a different state (one works and the other is retired). We show that couples actually synchronize their retirement decisions. Wethen use the model to simulate the predicted impact of the recent changes in official retirement ages of men and women in Israel on synchronization of retirement decisions.

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5-08 - Incorporating Affirmative Action into the Welfare State
 
Tomer Blumkin, Yoram Margalioth and Efraim Sadka
 

Published in: Journal of Public Economics, Volume 93, Issues 9–10, October 2009, Pages 1027–1035.
 

Working Paper #5-08
Incorporating Affirmative Action into the Welfare State
 
Tomer Blumkin, Yoram Margalioth and Efraim Sadka
In this paper, we discuss a novel aspect of affirmative action policy. We examine its redistributive role, asking whether in an egalitarian society, supplementing the tax-transfer system with an affirmative action policy would enhance social welfare. We demonstrate that affirmative action could be a desirable policy tool even if racial discrimination does not exist in the labor market.

Published in: Journal of Public Economics, Volume 93, Issues 9–10, October 2009, Pages 1027–1035.
Jel Nos.: H2, D6
Keywords: Affirmative Action, Optimal Taxation, Tagging

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4-08 - Comments on Neuroeconomics
 
Ariel Rubinstein

Published in: Economics and Philosophy, Volume 24, Special Issue 03 , pp 485-494, 2008.

 

Working Paper #4-08
Comments on Neuroeconomics
 
Ariel Rubinstein
Neuroeconomics is examined critically using data on the response times of subjects who were asked to express their preferences in the context of the Allais Paradox. Different patterns of choice are found among the fast and slow responders. This suggests that we try to identify types of economic agents by the time they take to make their choices. Nevertheless, it is argued that it is far from clear if and how Neuroeconomics will change Economics.

Published in: Economics and Philosophy, Volume 24, Special Issue 03 , pp 485-494, 2008.

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3-08 - Together but Apart: ICT and Productivity Growth in Israel
 
Saul Lach, Gil Shiff, and Manuel Trajtenberg
 

Working Paper #3-08
Together but Apart: ICT and Productivity Growth in Israel
 
Saul Lach, Gil Shiff, and Manuel Trajtenberg
There is widespread agreement about the important role played by Information and Communication Technologies (ICTs) in the US productivity revival and in the evolving US-EU productivity gap. In Israel, the ICT sector grew very rapidly during the 1990s and became a hotbed of innovation and technological advance by worldwide standards. Yet, Israel`s overall productivity growth remained sluggish, with traditional sectors both in manufacturing and services seemingly unable to benefit from the success of the ICT sector. The main goal of this paper is to shed light on these twin developments. We use newly constructed data on industry-level ICT investments between 1990 and 2003 and estimate production functions for manufacturing industries augmented to include ICT capital. We find a significant elasticity of value-added with respect to ICT capital, which increases considerably with the technological sophistication of the industry. We also find that ICT capital deepening is the most important factor contributing to value added growth in manufacturing during 1995-2000, before the burst of the dot.com bubble. Because most ICT capital is concentrated in high tech industries, growth in manufacturing has been mostly confined to the high-tech sector. Facilitating the adoption of ICT in traditional industries is therefore crucial to achieving economy-wide growth. The Israeli experience described here – although restricted to the manufacturing sector – provides a useful example of the benefits and limitations associated with a growth strategy centered on a local ICT producing sector, however successful it might be.

      
Keywords: ICT, productivity growth, general purpose technology (GPT), dual economy.

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2-08 - Affective Decision Making: A Behavioral Theory of Choice
 
Anat Bracha and Donald J. Brown

Published in: Games and Economic Behavior, Volume 75, Issue 1, May 2012, Pages 67–80

 

Working Paper #2-08
Affective Decision Making: A Behavioral Theory of Choice
 
Anat Bracha and Donald J. Brown
Affective decision-making (ADM) is a refutable and predictive theory of individual choice under risk and uncertainty. It generalizes expected utility theory by positing the existence of two cognitive processes – the “rational” and the “emotional” process. Observed choice is the result of their simultaneous interaction. We present a model of affective choice in insurance markets, where risk perceptions are endogenous.

Published in: Games and Economic Behavior, Volume 75, Issue 1, May 2012, Pages 67–80
Jel Nos.: D01, D81, G22
Keywords: Affective Choice, Endogenous Risk Perception, Expected Utility Theory, Insurance

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1-08 - The Allocation of Public Education Resources
 

Limor Hatsor

Forthcoming in Journal of Public Economic Theory

 

Working Paper #1-08
The Allocation of Public Education Resources
 
Limor Hatsor
This paper studies the ‘black box’ of public education that transforms the funds invested in public education into human capital. We shall use an overlapping-generations economy with the following features: (1) consumers are heterogeneous with respect to ability and parental human capital; (2) public education is characterized by ``quality`` of teachers and ``quantity`` of teachers; (3) The provision of public education is determined sequentially by two myopic policy-makers, which differ in their objectives: (a) the government which determines the tax rate, based on the median voter utility and, (b) the Ministry of Education (MOE) planners who allocate these resources. Our purpose is to demonstrate the importance of the allocation of the given resources within the public education sector and the interaction between the authorities. We explore the implications of several possible goals of the MOE: expansion of education and cost-reduction, on taxes, growth, welfare and the income inequality along the equilibrium path. For instance, we demonstrate that ‘maximizing-education’ MOE may enhance growth, decrease the income inequality and avoid poverty traps. However, it may suffer from lower welfare in the short run. Our research demonstrates, that higher budget does not guarantee ‘more education’, as was indicated by several empirical studies. This strengthens our argument that we should study not only the total expenditure for public education but also the internal composition of this budget as well.

Published in: forthcoming `Journal of Public Economic Theory`.
Jel Nos.: D91; I22; I28
Keywords: Human Capital Accumulation;Income Inequality; Public education

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