Working Papers 2009

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12-09 - Political Support and Tax Compiance: A Social Interaction Approach
 
Chaim Fershtman and Vilen Lipatov
 

Working Paper #12-09
Political Support and Tax Compiance: A Social Interaction Approach
 
Chaim Fershtman and Vilen Lipatov
People may express their political opinion by adopting different measures of civil disobedience. Tax compliance is an example of an economic decision that may be affected by anti-government sentiment. We consider a model in which political opinion as well as tax compliance decisions are both formed as part of a social interaction process in which individuals interact, exchange ideas and observe behavior. Tax compliance is affected by the level of government support and political opinion may be affected by government’s auditing policy. The government’s role is to set a social spending program which is viewed differently by rich and poor individuals. The paper focuses on the interdependence between tax compliance, government’s social policies and political support, embedding this interdependence in a dynamic social interaction process.

      
Jel Nos.: H26, H50, P16
Keywords: tax evation, political opinion, social interaction

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11-09 - Imperfect Infprmation, Self-Selection and the market for highier Education
 
Tali Regev
 

Published in: Education Signaling with Uncertain Returns, B.E. Journal of Theoretical Economics , Volume 12, Issue 1, Pages 1935-1704, 2012.
 

Working Paper #11-09
Imperfect Infprmation, Self-Selection and the market for highier Education
 
Tali Regev
This paper develops and explores signaling in the market for education based on imperfectly observed heterogeneity in the returns to education rather than heterogeneity in costs. Workers of heterogeneous abilities face the same costs of education, yet the productivity gain from education is higher for more able workers, and employers` observations of productivity are noisy. The paper presents the necessary and sufficient condition replacing the single crossing property in this context, proves that no separating equilibrium exists, and analyzes the mixed strategy equilibrium to produce some new results due to the presence of strategic complementarities.

Published in: Education Signaling with Uncertain Returns, B.E. Journal of Theoretical Economics , Volume 12, Issue 1, Pages 1935-1704, 2012.
Jel Nos.: J24, I21, J31

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10-09 - The Market for R&D Failures
 
Roy Shalem and Manuel Trajtenberg
 

Working Paper #10-09
The Market for R&D Failures
 
Roy Shalem and Manuel Trajtenberg
The informational structure of R&D is characterized by the fact that ?rms are exposed to more information related to R&D successes of their competitors than to data that reveals their failures. This paper theoretically explores the possibility of trading the knowledge of R&D failures. The implications of constructing a market for R&D failures are substantive in that they may decrease the effective cost of R&D, shorten the average time to discovery, and increase the number of active R&D projects. We present the conditions required for a mutually beneficial trading of R&D failures information between competitors, and design a trading mechanism that would account for obstacles auch as moral hazard, verification, over-investment and private gains.

      
Jel Nos.: D23, L42, O3
Keywords: R&D, Patent Races, Cooperation, Licensing, Contract Theory, Information.

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9-09 - Sons or Daughters? Endogenous Sex Preferences and the Reversal of the Gender Educational Gap
 
Moshe Hazan and Hosny Zoabi
 

Working Paper #9-09
Sons or Daughters? Endogenous Sex Preferences and the Reversal of the Gender Educational Gap
 
Moshe Hazan and Hosny Zoabi
This paper provides a new explanation for the long-run decline in fertility, the narrowing of the gender educational gap and its reversal, which has recently occurred in many countries. It highlights the indirect effect of technological progress on the bias in parents’ preferences for sons and the impact of this bias on the demand for children and their education. We extend a standard household decision model regarding the quantity and quality of its offspring along two dimensions. First, we explicitly allow parents to value daughters and sons differently. Second, we model fertility choice as a sequential process. It is assumed that males have relative advantage in physical labor tasks and females have relative advantage in mental labor tasks, which are associated with education. For a low technological level, returns to mental labor are low and returns to physical labor are relatively high, which implies a high gender wage gap. Consequently, bias in parents’ preferences towards sons is high, which implies that families with daughters are larger and left with less education. As technology progresses, the returns to mental labor increases, gender wage gap declines, fertility becomes less uncertain, causing households to choose smaller families. As a result, relative advantages of women in education becomes more important until it dominates differences in family sizes, which, ultimately, triggers the reversal in gender educational gap.

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8-09 - The Financial Labor Supply Accelerator
 
Jeffrey R. Campbell and Zvi Hercowitz
 

Submitted for publication.
 

Working Paper #8-09
The Financial Labor Supply Accelerator
 
Jeffrey R. Campbell and Zvi Hercowitz
When minimum equity stakes in durable goods constrain a household’s debt, a persistent wage increase generates a liquidity shortage. This temporarily limits the income effect, so hours worked grow. This is the financial labor supply accelerator, which links labor supply decisions to limits on household borrowing. This paper examines its implications for the comovement of hours worked and household debt by comparing model-generated data with evidence from the PSID. The drastic deregulation of household debt markets in the early 1980s effectively reduced required equity stakes in durable goods. Since then, the estimated regression effect of mortgage debt on hours worked, interpreted as comovement rather than causality, has dropped dramatically. Analogous estimates from model-generated data display a quantitatively comparable fall after a calibrated reduction in equity requirements.

Published in: submitted for publication.
Jel Nos.: E24
Keywords: Borrowing Constraints, Durable Goods, Wage Shocks, Hours Worked

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7-09 - Renegotiation-Proof Mechanism Design
 
Zvika Neeman and Gregory Pavlov
 

Published in: Ex post renegotiation-proof mechanism design, Journal of Economic Theory Volume 148, Issue 2, March 2013, Pages 473–501
 

Working Paper #7-09
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

Published in: Ex post renegotiation-proof mechanism design, Journal of Economic Theory Volume 148, Issue 2, March 2013, Pages 473–501
Jel Nos.: D02, D70, D82
Keywords: ex-post renegotiation, interim renegotiation, oracle renegotiation proofness

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6-09 - Reflections on the Crisis and on its Lessons for Regulatory Reform and for Central Bank Policies
 
Alex Cukierman
 

Published in: Journal of Financial Stability, Volume 7, Issue 1, January 2011, Pages 26–37
 

Working Paper #6-09
Reflections on the Crisis and on its Lessons for Regulatory Reform and for Central Bank Policies
 
Alex Cukierman
This paper surveys the problems exposed by the global financial crisis in the areas of financial regulation and supervision and possible solutions. It also discusses a number of lessons for central bank policy as well as some international dimensions. The discussion is based on the view that suggestions for regulatory reform must be firmly anchored in prior understanding of the confluence of regulatory and supervisory factors that triggered the crisis. Specific issues include the growth of a poorly regulated shadow financial system, shortermism in executive compensation packages and consequent adverse incentive effects, the too big to fail problem, procyclicality in the behavior of financial institutions, conflicts of interest in the rating agencies industry and the tradeoff between transparency in the valuation of assets and broadening the scope of intermediation through securitization. Once a crisis erupts the central bank is akin to a firefighter. But in the longer term its liquidity injections and related losses create a tradeoff between price and finacial stability, and may compromise central bank independence. The crisis has clearly demonstrated the advantages of a unified world financial regulatory system. But, in a world of nation states aiming at full common regulation is impractical. Coordination appears to be a more achievable second best. Possible benefits of international coordination designed to limit exchange rate variability are also discussed. The paper concludes by pointing out inherent difficulties in distinguishing exante between a fundamentals based expansionon and a ``bubble``.

Published in: Journal of Financial Stability, Volume 7, Issue 1, January 2011, Pages 26–37

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5-09 - Dynamic Female Labor Supply
 
Zvi Eckstein and Osnat Lifshitz
 

Published in: Econometrica, Volume 79, Issue 6, pages 1675–1726, November 2011
 

Working Paper #5-09
Dynamic Female Labor Supply
 
Zvi Eckstein and Osnat Lifshitz
The increase in female employment and participation rates is one of the most dramatic economic changes to have taken place during the last century. However, while the employment rate of married women more than doubled during the last fifty years, that of unmarried women remained almost constant. In order to empirically analyze these trends we divide the paper into two parts: In the first, we empirically estimate a traditional female dynamic labor supply model using an extended version of Eckstein and Wolpin (1989) in order to compare the various explanations in the literature for the observed trends. The main finding is that the rise in education levels accounts for about one-third of the increase in female employment while about 40 percent remains unexplained by observed household characteristics. We show that this unexplained portion can be empirically attributed to changes in preferences or the costs of childrearing and household maintenance. In the second part, we formulate and estimate a new framework for the couple intra-family game that is then used to analyze the household dynamic labor supply. We find that female labor supply may have increased significantly due to a change in the form of the household game.

Published in: Econometrica, Volume 79, Issue 6, pages 1675–1726, November 2011
Jel Nos.: E24, J2, J3
Keywords: Dynamic Discrete Choice, Female Employment, Accounting, Household Game

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4-09 - PREFERRING SIMPLICITY
 
Itzhak Gilboa and Larry Samuelson
 

Published in: Theoretical Economics ,Volume 7, Issue 2, pages 183–215, May 2012.

 

Working Paper #4-09
PREFERRING SIMPLICITY
 
Itzhak Gilboa and Larry Samuelson
This paper examines circumstances under which a preference for simplicity enhances the effectiveness of inductive reasoning. We consider a game in which Fate chooses a data generating process and agents are characterized by inference rules that may or may not favor simpler theories over more complex ones. The basic intuition is that agents who do not prefer simple theories to more complex ones are doomed to ``overfit`` the data and therefore engage in ineffective learning. The analysis places no computational or memory limitations on the agents-a preference for simplicity emerges in the presence of unlimited reasoning powers.

Published in: Theoretical Economics ,Volume 7, Issue 2, pages 183–215, May 2012.

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3-09 - Is It Always Rational to Satisfy Savage’s Axioms?
 
Itzhak Gilboa, Andrew Postlewaite, and David Schmeidler
 

Published in: Economics and Philosophy / Volume 25 / Special Issue 03 / November 2009, pp 285-296

 

Working Paper #3-09
Is It Always Rational to Satisfy Savage’s Axioms?
 
Itzhak Gilboa, Andrew Postlewaite, and David Schmeidler
This note argues that, under some circumstances, it is more rational not to behave in accordance with a Bayesian prior than to do so. The starting point is that in the absence of information, choosing a prior is arbitrary. If the prior is to have meaningful implications, it is more rational to admit that one does not have sufficient information to generate a prior than to pretend that one does. This suggests a view of rationality that requires a compromise between internal coherence and justification, similarly to compromises that appear in moral dilemmas. Finally, it is argued that Savage’s axioms are more compelling when applied to a naturally given state space than to an analytically constructed one; in the latter case, it may be more rational to violate the axioms than to be Bayesian.

Published in: Economics and Philosophy / Volume 25 / Special Issue 03 / November 2009, pp 285-296

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2-09 - Objective and Subjective Rationality
 
Itzhak Gilboa, Fabio Maccheroni, Massimo Marinacci, and David Schmeidler
 

Published in: Econometrica, Volume 78, Issue 2, pages 755–770, March 2010

 

Working Paper #2-09
Objective and Subjective Rationality
 
Itzhak Gilboa, Fabio Maccheroni, Massimo Marinacci, and David Schmeidler
A decision maker is characterized by two binary relations. The first reflects decisions that are rational in an “objective” sense: the decision maker can convince others that she is right in making them. The second relation models decisions that are rational in a “subjective” sense: the decision maker cannot be convinced that she is wrong in making them. We impose axioms on these relations that allow a joint representation by a single set of prior probabilities. It is “objectively rational” to choose f in the presence of g if and only if the expected utility of f is at least as high as that of g given each and every prior in the set. It is “subjectively rational” to choose f rather than g if and only if the minimal expected utility of f (relative to all priors in the set) is at least as high as that of g.

Published in: Econometrica, Volume 78, Issue 2, pages 755–770, March 2010

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1-09 Fairness Motivations and Procedures of Choice between Lotteries as Revealed through Eye Movements
 
Amos Arieli, Yaniv Ben-Ami and Ariel Rubinstein
 

Published in: American Economic Journal: Microeconomics, Volume 3, Number 4, November 2011 , pp. 68-76(9)

 

Working Paper #1-09
Fairness Motivations and Procedures of Choice between Lotteries as Revealed through Eye Movements
 
Amos Arieli, Yaniv Ben-Ami and Ariel Rubinstein
Eye tracking is used to investigate decision makers’ motivations and procedures in choice problems. Patterns of eye movements in problems where the deliberation process is easily discernable are used to understand the deliberation in other problems. We find that in problems which involve the distribution of income between the participant and another individual, participants who behave selfishly nevertheless take into consideration the size of the payment to the other person. In problems that involve choice between two simple lotteries, eye movements indicate that many participants based their decision on a comparison of prizes and probabilities rather than making an expected utility calculation.

Published in: American Economic Journal: Microeconomics, Volume 3, Number 4, November 2011 , pp. 68-76(9)

Keywords: Neuroeconomics, Eye-tracking, Decision Making, Similarity.

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