Working Papers 2012

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#14-12 Minorities: Cultural Transmission, Fertility and Integration Policy
 
Sagit Bar-Gill and Chaim Fershtman

Published in: Integration Policy: Cultural Transmission with Endogenous Fertility, Journal of Population Economics, June 2014.

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Working Paper #14-12
Minorities: Cultural Transmission, Fertility and Integration Policy
 
Sagit Bar-Gill and Chaim Fershtman
We live in heterogeneous societies with many cultural and ethnic minorities. The cultural composition of our societies changes over time as a result of fertility choices and cultural assimilation. Studying such population dynamics, we introduce optimal fertility choice into the cultural transmission framework, and examine the effect of integration policies which increase the cost of the direct socialization effort. We show that integration policies, while aimed at reducing the minority`s size, may have the opposite effect of increasing minority fertility and its growth rate. We further show that even a one-period increase in the cost of direct socialization may change the long run population structure to one with a larger minority.

Published in: Integration Policy: Cultural Transmission with Endogenous Fertility, Journal of Population Economics, June 2014.
Jel Nos.: J13 J15 J18
Keywords: Minorities, Fertility, Cultural transmission, Integration policies.

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 #13-12 Talent Utilization and Search for the Appropriate Technology
 
Tali Regev and Hosny Zoabi

Published in: Macroeconomic Dynamics, 18, pp: 863-882, 2014

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Working Paper #13-12
Talent Utilization and Search for the Appropriate Technology
 
Tali Regev and Hosny Zoabi
This paper analyzes a model of economic development which is propagated by matching between technologies and the talents they require. Differences in productivity across countries are amplified by three dimensions of talent utilization. First, the range of different talents utilized. Second, the density of a specific talent utilized. Third, the average matches quality in the economy. In our setup, the equilibrium variety of technologies increases with productivity. A larger number of technologies enables higher match quality between individuals’ talents and requirements of technologies and thus increases the returns to search. More intensive search further contributes to talent utilization.

Published in: Macroeconomic Dynamics, 18, pp: 863-882, 2014.
Jel Nos.: J21, L16, O11, O33, O47.
Keywords: income level, total factor productivity, technological density, appropriate technology, talent utilization, search.

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 #12-12 When Stolper-Samuelson Does Not Apply:International Trade and Female Labor
 
Philip Saur and Hosny Zoabi

 

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Working Paper #12-12
When Stolper-Samuelson Does Not Apply:International Trade and Female Labor
 
Philip Saur and Hosny Zoabi
Whenever a country specializes on industries that use female labor intensively, its female labor force participation should increase. This intuition, which bases on the Stolper-Samuleson Theorem, may fail in a three-factor, two-good model. We develop a model where capital, male and female work are distinct factors of production. We follow an established assumption and postulate that capital accumulation closes the gender wage gap. In this setup, the Stolper-Samuleson based intuition fails necessarily: the gender wage gap widens in countries that specialize on sectors intensive in female labor, and vice versa.

      
Jel Nos.: F10, F16, J16, J31
Keywords: International Trade, Factor Prices, Gender Wage Gap, Female Labor.

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#11-12 Stochastic Growth with Short-run Prediction of Shocks
 
Santanu Roy and Itzhak Zilcha

Published in: Economic Theory, November 2012, Volume 51, Issue 3, pp 539-580.

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Working Paper #11-12
Stochastic Growth with Short-run Prediction of Shocks
 
Santanu Roy and Itzhak Zilcha
We study a one sector stochastic growth model with independent and identically distributed shocks where agents acquire information that enables them to accurately predict next period.s productivity shock (but not shocks in later periods). Optimal policy depends on the forthcoming shock. We derive conditions under which a more productive realization of the forthcoming shock increases or decreases current investment; relative risk aversion and the elasticity of marginal product play important roles in these conditions. A better shock always increases next periods optimal output if it increases both marginal and total product. We derive explicit solutions to the optimal policy function for three well known families of production and utility functions. Volatility of output, sensitivity of output to shocks and expected total invstment may be higher or lower than in the standard stochastic growth model where no new information is acquired over time. Under restrictions similar to that used in the standard model, optimal outputs converge in distribution to a unique invariant distribution whose support is bounded away from zero; the limiting distribution may differ from that obtained in the standard model.

Published in: Economic Theory, November 2012, Volume 51, Issue 3, pp 539-580.
Jel Nos.: D90; E2; E32; O41;
Keywords: Stochastic growth; information; prediction; productivity shocks

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 #10-12 Fiscal Policy in an Open Economy
 
Amit Friedman, Zvi Hercowitz and Jonathan Sidi

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Working Paper #10-12
Fiscal Policy in an Open Economy
 
Amit Friedman, Zvi Hercowitz and Jonathan Sidi
This paper addresses the macroeconomic implications of a fiscal policy regime based on exogenous tax rates paths and public debt/GDP target in an open economy. In this setup, government spending accommodates tax revenues and target deficits. The analysis is motivated by the Israeli fiscal policy experience during the 2000s. We use a model where domestic production requires imported inputs. The model is calibrated and the effects of pre-announced tax cuts, and adoption of a lower debt target, are simulated. The analysis focuses on the dynamics generated by the announcements of these policy shifts followed by their implementation. The open-economy setup has the property that demands shifts - as government spending being cut to comply with a lower tax rate or lower debt target -have macroeconomic effects which are similar to those of productivity shocks.

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 #9-12 Labor Migration and the Case for Flat Tax
 
Tomer Blumkin, Efraim Sadka and Yotam Shem-Tov

 

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Working Paper #9-12
Labor Migration and the Case for Flat Tax
 
Tomer Blumkin, Efraim Sadka and Yotam Shem-Tov
In this paper we employ a tax-competition model to demonstrate that in the presence of migration the re-distributive advantage of a non-linear income tax system over a linear (flat) one is significantly mitigated relative to the autarky (no-migration) equilibrium. When migration threats are sufficiently strong, a coordinated shift from a non-linear (prima-facie superior) system to a flat (inferior) regime is not too welfarecostly, even when the extent of re-distribution is significant. Therefore, such a shift may be warranted on administrative grounds. We also show, as expected, that migration reduces the extent of redistribution.

      
Jel Nos.: D6, H2, H5
Keywords: flat tax, re-distribution, migration, tax-competition.

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 #8-12 Job satisfaction and the wage gap
 
Eddie Dekel and Ady Pauzner

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Working Paper #8-12
Job satisfaction and the wage gap
 
Eddie Dekel and Ady Pauzner
For many people there is tradeoff between choosing a job that they will enjoy and one at which they are good and will earn a high income. We embed this observation in a matching model. Consider then men and women who are a priori identical in the sense that both are equally likely to be good at one of two jobs and their satisfaction from each job is drawn from the same distribution. They are randomly matched into households after making a career choice, and have decreasing marginal utility of money. Thus, a career is chosen before knowing one`s future spouse`s income. If the distribution of enjoyment is log concave and single peaked, with the modal individual enjoying the job at which they are good, then there is either a unique symmetric equilibrium that is stable or an unstable symmetric equilibrium and two (mirror image) asymmetric equilibria that are stable. The latter display a wage gap and an opposite satisfaction gap, with one gender, wlog men, earning more even controlling for occupation. These equilibria display novel comparative statics. For example a tax on high wage couples results in women shifting into their more satisfying jobs and forgoing income (as one would expect), while interestingly men shift into higher income jobs, forgoing job satisfaction.

Keywords: Wage gap, job satisfaction, random matching.

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Working Paper #7-12
The Strategic Disadvantage of Voting early
 
Eddie Dekel and Michele Piccione
 

Accepted for publication in AEJ Micro.

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Working Paper #7-12
The Strategic Disadvantage of Voting early
 
Eddie Dekel and Michele Piccione
The objective of this paper is to study a model of voting with multiple candidates in which the voters choose the time in which they cast their votes. By moving late a voter can condition his vote on which candidates are still viable. By moving early the voter can decrease the set of viable opponents, i.e., the field of candidates. It turns out that the latter factor is harmful: while decreasing the .eld increases the likelihood that future voters vote for one`s favorite candidate, it also increases the likelihood that they vote for one of the remaining viable opponents, and the latter effect is dominant in some situations. In particular, if voters vote for their favorite candidates as long as the probability of that candidate winning is strictly positive, then early voting has a strategic disadvantage and all equilibria are equivalent to simultaneous voting. Voting in this manner is equilibrium when one`s favorite candidate is significantly better than all the others. On the other hand, when some other candidate is almost as good then any Markov, symmetric and anonymous equilibrium must involve sequential voting (and differ from simultaneous voting). In general in sequential voting environments, because of the disadvantage of narrowing the .eld of candidates highlighted here, optimal voting strategies can be counter intuitive and involve voting for one`s least favorite candidate so as to keep the field large.

Published in: accepted for publication in AEJ Micro. http://www.aeaweb.org/forthcoming/output/accepted_MIC.php

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#6-12 Costly Self Control and Random Self Indulgence
 
Eddie Dekel and Barton L. Lipman

Published in: Econometrica, Volume 80, Issue 3, pages 1271–1302, May 2012

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Working Paper #6-12
Costly Self Control and Random Self Indulgence
 
Eddie Dekel and Barton L. Lipman
We study the random Strotz model, a version of the Strotz (1955) model with uncertainty about the nature of the temptation that will strike. We show that the random Strotz representation is unique and characterize a comparative notion of more temptation averse.`` Also, we demonstrate an unexpected connection between the random Strotz model and a generalization of the Gul-Pesendorfer (GP) (2001) model of temptation which allows for the temptation to be uncertain and which we call random GP. In particular, a preference over menus has a random GP representation i it also has a representation via a random Strotz model with sufficiently smooth uncertainty about the intensity of temptation. We also show that choices of menus combined with choices from menus can distinguish the random GP and random Strotz models.

Published in: Econometrica, Volume 80, Issue 3, pages 1271–1302, May 2012

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 #5-12 A Model of Persuasion with Boundedly Rational Agents
 
Jacob Glazer and Ariel Rubinstein

Published in: Journal of Political Economy, Vol. 120, No. 6, December 2012

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Working Paper #5-12
A Model of Persuasion with Boundedly Rational Agents
 
Jacob Glazer and Ariel Rubinstein
A new model of mechanism design with a boundedly rational agent is studied. A speaker presents a request to a listener who would like to accept the request only if certain conditions are met by the speaker’s true profile. This persuasion situation is modeled as a leader-follower relationship. The listener first announces and commits to a persuasion rule, i.e., a set of conditions to be satisfied by the profile in order for him to be persuaded. Then, the speaker presents a profile, though not necessarily the true one. The speaker is boundedly rational in the sense that his ability to come up with a persuasive profile is limited and depends on the true profile and on the persuasion rule and the way in which it is framed. We fully characterize the circumstances under which the listener’s goal can be achieved.

Published in: Journal of Political Economy, Vol. 120, No. 6, December 2012

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#4-12 Optimal Unemployment Insurance with Monitoring
 
Ofer Setty

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Working Paper #4-12
Optimal Unemployment Insurance with Monitoring
 
Ofer Setty
Monitoring the job-search activities of unemployed workers is a common government intervention. I model monitoring in the optimal unemployment insurance framework of Hopenhayn and Nicolini (1997), where job-search effort is private information for the unemployed worker. In the model, monitoring provides costly imperfect information upon which the government conditions the unemployment benefits. In the optimal monitoring scheme, random monitoring, together with endogenous sanctions and rewards, create effective job-search incentives for the unemployed worker. For CRRA utility, the monitoring frequency increases and the spreads decrease with promised utility, if and only if the coeffcient of risk aversion is greater than 1/2 . Compared to optimal unemployment insurance, monitoring saves, at the balanced budget point, about eighty percent of the cost associated with moral hazard. The gain is achieved by a decrease of more than half in the standard deviation of consumption.

      
Jel Nos.: D82; H21; J64; J65
Keywords: Recursive Contracts; Unemployment Insurance; Job Search Monitoring

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#3-12 Unemployment Accounts
 
Ofer Setty

 

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Working Paper #3-12
Unemployment Accounts
 
Ofer Setty
Unemployment Accounts (UA) are mandatory individual saving accounts that can be used by governments as an alternative to the Unemployment Insurance (UI) system. The goal of this paper is to study the welfare implications of a shift from the current UI system to a new UA system in the United States. The UA system works as follows. During employment, the worker is mandated to make deposits into an individual saving account. The worker is entitled to withdraw payments from this account only during unemployment or upon retirement. In contrast, UI is funded by a payroll tax and provides bene.ts for a limited duration. I build an heterogeneous agents, incomplete-markets life-cycle model, in which workers face income .uctuations and unemployment shocks. I study a two tier UA-UI system where the unemployed .rst withdraw from their unemployment account until it is exhausted and then receive unemployment bene.ts. This hybrid policy provides insurance to workers more e¢ ciently than either a traditional UI or a pure UA systems. Relative to a two tier UI system the hybrid policy leads to a welfare gain of 0.9, and all initial deciles of wealth are better

      
Jel Nos.: E24; E61; J64; J65
Keywords: Unemployment Accounts; Unemployment Insurance; Job-search; Moral hazard;Mechanism Design; Optimal Policy;

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 #2-12 A Model of Persuasion with a Boundedly Rational Agent
 
Jacob Glazer and Ariel Rubinstein
 

Published in: Journal of Political Economy, Vol. 120, No. 6, December 2012.

 

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Working Paper #2-12
A Model of Persuasion with a Boundedly Rational Agent
 
Jacob Glazer and Ariel Rubinstein
A new model of mechanism design with a boundedly rational agent is studied. speaker presents a request to a listener who would like to accept the request only if certain conditions are met by the speaker’s true case. This persuasion situation is modeled as a leader-follower relationship. The listener first announces and commits to a persuasion rule, i.e. a set of conditions to be satisfied by the case in order for him to be persuaded. Then, the speaker presents a case, though not necessarily the true one. The speaker is boundedly rational in the sense that his ability to come up with a persuasive case is limited and depends on the true case and on the persuasion rule and the way in which it is framed. We fully characterize the circumstances under which the listener’s goal can be achieved

Published in: Journal of Political Economy, Vol. 120, No. 6, December 2012.

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#1-12 Occupational Choice: Teacher Quality Versus Teacher Quantity
 
Limor Hatsor
 

Published in: Labour Economics, Volume 19, Issue 4, August 2012, Pages 608–623

 

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Working Paper #1-12
Occupational Choice: Teacher Quality Versus Teacher Quantity
 
Limor Hatsor
This article examines the relationship between skill-biased technological changes and the decline in both teacher quality and pupil–teacher ratio—called the “quality–quantity trade-off”—in the United States and other advanced economies during the past several decades. The study presents a theory of educational production that emphasizes teachers’ occupational choices. A key assumption is that talented agents have a comparative advantage in learning. The model endogenously generates a teachers sector with intermediate abilities between two types of skilled workers with tertiary education: highly skilled workers and vocational workers. This unique feature helps specify which technological changes may lead to quality–quantity trade-offs. In particular, a crucial element is that the ratio of incomes and thus income inequality rises within the skilled sector. In this case, the most talented teachers depart from the teachers sector to join the highly skilled sector, and as such, teacher quality declines. In other cases, both teacher quality and teacher quantity may increase. The results are consistent with the observed patterns of technology, educational attainment, educational expenditure, and wage inequality in advanced economies. Finally, other potential causes for the quality–quantity trade-off include a reduction in the teacher certification requirements and shifts in the distribution of initial endowments.

Published in: Labour Economics, Volume 19, Issue 4, August 2012, Pages 608–623
Jel Nos.: I21; O33
Keywords: Human capital accumulation; Skill biased technological change; Teacher quality; Pupil-teacher ratio;Education policy

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