Working Papers 2014

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18-14 A Boundedly Rational Model of Neuro Agents 

Kfir Eliaz and Ariel Rubinstein 

Published in: Economic Theory, Vol. 57(3), 515-528, November 2014.

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Working Paper #18-14 
A Boundedly Rational Model of Neuro Agents 
  
Kfir Eliaz and Ariel Rubinstein 
We propose a simple model in which a boundedly rational agent observes not only the choices made by others, but also some information about the process that led them to those choices. We consider two cases: In the first, an agent observes whether another agent has compared the alternatives before making his choice. In the second, he also observes whether the decision was hasty. It is shown that the probability of making a mistake is higher in the second case and that the existence of these non-standard neuro” observations systematically biases the equilibrium distribution of choices. 
 
Published in: Economic Theory, Vol. 57(3), 515-528, November 2014.
 
Keywords: Bounded Rationality, Neuroeconomics 

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17-14 On the Fairness of Random Procedures

Kfir Eliaz and Ariel Rubinstein
Published in: Economic Letters 123, pages 168-180, 2014

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Working Paper #17-14
On the Fairness of Random Procedures 
  
Kfir Eliaz and Ariel Rubinstein 

We consider procedures that use randomness to make a decision that involves several individuals. We asked subjects to compare the fairness of six pairs of seemingly equivalent procedures. We propose a classification of subjects into two categories: those who are ‘‘emotional’’ in the sense that they exhibit a systematic ranking of procedures on the basis of intuitive notions of fairness, and those who are ‘‘consequentialists’’ in the sense that they systematically view each pair of procedures as being equally fair.According to this classification, about 30 of the subjects are emotional while 31 are consequentialists.
  
Published in: Economic Letters 123, pages 168-180, 2014
 
Jel Nos.: D9, C6

Keywords: Procedural fairness, Random procedures, Surveys 

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16-14 Competing for Consumer Inattention

Geoffroy de Clippel, Kfir Eliaz and Kareen Rozen
 

Published in: Journal of Political Economy, Vol. 122(6), pp. 1203-1234 (December 2014).

 

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Working Paper #16-14

Competing for Consumer Inattention
 
Geoffroy de Clippel, Kfir Eliaz and Kareen Rozen

Consumers purchase multiple types of goods, but may be able to examine only a limited number of markets for the best price. We propose a simple model which captures these features, conveying new insights. A firm`s price can deflect or draw attention to its market, and consequently,limited attention introduces a new dimension of cross-market competition. We characterize the equilibrium, and show that having partially attentive consumers improves consumer welfare. With less attention,consumers are more likely to miss the best offers; but enhanced cross-market competition decreases average price paid, as leading firms try to stay under the consumers` radar.

Published in: Journal of Political Economy, Vol. 122(6), pp. 1203-1234 (December 2014).

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15-14 On the Selection of Arbitrators

Geoffroy de Clippel, Kfir Eliaz and Brian Knight

Published in: American Economic Review, Volume 194(11), 3434-58, November 2014

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Working Paper #15-14
On the Selection of Arbitrators
 
Geoffroy de Clippel, Kfir Eliaz and Brian Knight

A key feature of arbitration is the possibility for conflicting parties
to participate in the selection of the arbitrator, the individual
who will rule the case. We analyze this problem of the selection
of arbitrators from the perspective of implementation theory. In
particular, theoretical analyses document problems with veto-rank,
a simultaneous procedure that is commonly used in practice, and
develop a new sequential procedure, shortlisting, with better properties.
Experimental results are consistent with the theoretical predictions,
highlighting both the disadvantages associated with the
veto-rank procedure and the advantages associated with the shortlising
procedure.

 

Published in: American Economic Review, Volume 194(11), 3434-58, November 2014

 

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14-14 Bayesian Networks and Boundedly Rational Expectations

Ran Spiegler

 

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Working Paper #14-14
Bayesian Networks and Boundedly Rational Expectations
 
Ran Spiegler
I present a framework for analyzing decision makers with an imperfect understanding of their environment’s correlation structure. The decision maker faces an objective multivariate probability distribution (his own action is one of the random variables). He is characterized by a directed acyclic graph over the set of variables. His subjective belief filters the objective distribution through his graph, via the factorization formula for Bayesian networks. This belief distortion implies that the decision maker’s long-run behavior may affect his perception of the consequences of his actions. Accordingly, I define a ``personal equilibrium`` notion of optimal choices. I show how recent models of boundedly rational expectations (as well as new ones, e.g. reverse causality) can be subsumed into this framework as special cases. Some general properties of the Bayesian-network representation of subjective beliefs are presented, as well as a ``missing data`` foundation.

      
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13-14 Efficient Funding of Higher Education

Limor Hastor

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Working Paper #13-14
Efficient Funding of Higher Education
 
Limor Hastor
I implement a basic tool of financial markets—namely, a portfolio—into student loans. In higher education funding, credit market loans (CMLs) lead to under-investment, while income-contingent loans (ICLs) produce over-investment. This research introduces a ‘portfolio regime’ (PR), which allows students to combine CMLs and ICLs. The model assumes that agents privately invest in higher education after receiving a noisy signal about their future incomes. The article compares a PR with a ‘competition regime’ (CR), which allows students to choose one type of loan but prohibits a portfolio. The key insight is that implementation of a PR may improve the efficiency of investment in higher education and social welfare. Nevertheless, the PR does not maximize social welfare because of adverse selection into ICL programs.

      
Jel Nos.: I21; I22; I23; I24; I28; D31; H31
Keywords: Human capital accumulation; Education policy; Adverse selection; Higher education; Income contingent loans

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12-14 Rationality and the Bayesian Paradigm: An Integrative Note
 
Itzhak Gilboa

Forthcoming in the Journal of Economic Methodology

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Working Paper #12-14

Rationality and the Bayesian Paradigm: An Integrative Note
 
Itzhak Gilboa
It is argued that, contrary to a rather prevalent view within economic theory, rationality does not imply Bayesianism. The note begins by defining these terms and justifying the choice of these definitions, proceeds to survey the main justification for this prevalent view, and concludes by highlighting its weaknesses.

Keywords: rationality, probability, reasoning

Forthcoming in the Journal of Economic Methodology​
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11-14 SSOs: Current Policy Issues and Empirical Evidence
 
Neil Gandal and Pierre Regibeau

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Working Paper #11-14
SSOs: Current Policy Issues and Empirical Evidence
 
Neil Gandal and Pierre Regibeau
      

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10-14 Complex Questionnaires

Jacob Glazer and Ariel Rubinstein

Published in: Econometrica, 82, 1529-1541, 2014

 

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Working Paper #10-14
Complex Questionnaires
 
Jacob Glazer and Ariel Rubinstein
We study a principal-agent model in which the agent is boundedly rational in his ability to understand the principal’s decision rule. The principal wishes to elicit an agent’s true profile in order to determine whether or not to grant him a certain request. The principal designs a questionnaire and commits himself to accepting certain responses. In designing such a questionnaire, the principal takes into account the bounded rationality of the agent and wishes to reduce the success probability of a dishonest agent who is trying to game the system. It is shown that the principal can construct a sufficiently complex questionnaire that will allow him to respond optimally to agents who tell the truth and at the same time to almost eliminate the probability that a dishonest agent will succeed in cheating.

Published in: Econometrica, 82, 1529-1541, 2014.
Jel Nos.: D0
Keywords: Bounded Rationality, persuasion games, questionnaires.

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9-14 Pareto Efficiency with Different Beliefs
 
Gabrielle Gayer, Itzhak Gilboa, Larry Samuelson, and David Schmeidler

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Working Paper #9-14
Pareto Efficiency with Different Beliefs
 
Gabrielle Gayer, Itzhak Gilboa, Larry Samuelson, and David Schmeidler
Pareto efficiency is not as compelling when people hold different beliefs as it is under common beliefs or certainty. Gilboa, Samuelson, and Schmeidler (2013) have suggested that the standard Pareto relation be weakened by imposing the additional constraint that, in order for one allocation to dominate another, there should exist a single hypothetical belief under which all agents prefer the former to the latter. In the present work we propose an alternative definition whereby Pareto efficiency is supplemented by the requirement that according to each agent`s belief the former alternative is preferred to the latter for all other agents. This paper analyzes and compares these and other definitions

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8-14 The Baby Boom and WorldWar II: A Macroeconomic Analysis

Matthias Doepke, Moshe Hazan and Yishay D. Maoz

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Working Paper #8-14
The Baby Boom and WorldWar II: A Macroeconomic Analysis
 
Matthias Doepke, Moshe Hazan and Yishay D. Maoz
We argue that one major cause of the U.S. postwar baby boom was the rise in female labor supply during World War II.We develop a quantitative dynamic general equilibrium model with endogenous fertility and female labor force participation decisions. We use the model to assess the impact of the war on female labor supply and fertility in the decades following the war. For the war generation of women, the high demand for female labor brought about by mobilization leads to an increase in labor supply that persists after the war. As a result, younger women who reach adulthood in the 1950s face increased labor market competition, which impels them to exit the labor market and start having children earlier. The effect is amplified by the rise in taxes necessary to pay down wartime government debt. In our calibrated model, the war generates a substantial baby boom followed by a baby bust.

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7-14 Capital Values, Job Values and the Joint Behavior of Hiring and Investment
 
Eran Yashiv

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Working Paper #7-14
Capital Values, Job Values and the Joint Behavior of Hiring and Investment
 
Eran Yashiv
The decisions of firms on investment and hiring play a crucial role in business cycle fluctuations. This paper explores their dynamics in the presence of frictions. It does so within a unified framework, stressing their mutual dependence and placing the emphasis on their joint, forward-looking behavior. Using estimation of aggregate, private sector U.S. data, it shows that the model with frictions is able to fit the data. A key element is the interaction of hiring costs and investment costs, which is significant and negatively signed, implying complementarity between investment and hiring. The estimated costs are of modest size only. Key findings are, inter alia: U.S. labor market developments, including the fall in unemployment and its subsequent rise in the Great Recession, can be accounted for by changes in job values (as well as in labor force growth rates); there is a substantial effect of the expected capital value on hiring; the cyclical behavior of hiring and investment is markedly different, with counter-cyclical hiring rates and job values; and future returns play a dominant role in determining these capital values and job values.

      
Jel Nos.: E22, E24, E32
Keywords: gross investment, gross hiring, unemployment, frictions, business cycles, job values, capital values, forward-looking behavior, discount rates, complementarities.

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6-14
The Redistributive Role of Child Benefits Revisited
 
Tomer Blumkin, Yoram Margalioth and Efraim Sadka

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Working Paper #6-14
The Redistributive Role of Child Benefits Revisited
 
Tomer Blumkin, Yoram Margalioth and Efraim Sadka
In this paper we reexamine the commonly invoked argument that due to the existence of a negative correlation between earning ability and family size, the latter can be used as a `tagging` device, justifying subsidizing children (via provision of child allowances) to enhance egalitarian objectives. Employing a benchmark setting where the quality-quantity paradigm holds, we show that the case for subsidizing children is far from being a forgone conclusion. We demonstrate that the desirability of subsidizing children crucially hinges on whether benefits are means-tested or being accorded on a universal basis.

      
Jel Nos.: D6, H2, H5
Keywords: child allowance, re-distribution, means-testing, universal, tagging, optimal taxation.

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5-14 Trends in Prenatal Sex Selection and Girls’ Nutritional Status in India
 
Luojia Hu and Analia Schlosser

Published in: CESifo Economic Studies, Vol. 58 No. 2, pp. 348-372, June, 2012.

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Working Paper #5-14
Trends in Prenatal Sex Selection and Girls’ Nutritional Status in India
 
Luojia Hu and Analia Schlosser
We study whether changes in prenatal sex selection across regions in India are associated with changes in girls’ nutritional status. We exploit geographic variation in the incidence of prenatal sex selection and apply a triple difference approach comparing changes in the nutritional status of girls relative to boys across regions and over time. We find a reduction in girls’ malnutrition in regions with an increasing incidence of prenatal sex selection.

Published in: CESifo Economic Studies, Vol. 58 No. 2, pp. 348-372, June, 2012.
Jel Nos.: J13, J16, I1, O12
Keywords: son preference, prenatal sex selection, ultrasound, sex ratio at birth, gender discrimination, child health

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4-14 Why Not Settle Down Already?” A Quantitative Analysis of the Delay in Marriage
 
Cezar Santos and David Weiss

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Working Paper #4-14
Why Not Settle Down Already?” A Quantitative Analysis of the Delay in Marriage
 
Cezar Santos and David Weiss
One of the most striking changes in American society in the last forty years has been the decline and delay in marriage. The fraction of young men and women who have never been married increased significantly between 1970 and 2000. Idiosyncratic labor income volatility also increased over the same period. This paper establishes a quantitatively important link between these two facts. Specifically, if marriage involves consumption commitments, then a rise in income volatility results in a delay in marriage. Marriage, however, also allows for diversification of income risk since earnings fluctuations between spouses need not be perfectly correlated. We assess the hypothesis that rising income volatility contributed to the delay in marriage vis-a-vis other explanations in the literature, using an estimated equilibrium search model of the marriage market. We find that the increase in volatility accounts for about 26 of the observed delay in marriage. Thus, we find that the effects of consumption commitments due to increased income volatility outweigh the effects of the insurance gains provided by spouses.

      
Jel Nos.: E24, D13, J12
Keywords: delayinmarriage, incomevolatility, genderwage gap, technologicalprogress in the household, search models of marriage, simulated method of moments.

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3-14 X-Games
 
Kfir Eliaz and Ran Spiegler

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Working Paper #3-14
X-Games
 
Kfir Eliaz and Ran Spiegler
What is common to the following situations: incentivizing collective action in the presence of social preferences, monopoly pricing when consumers are loss averse, arms races when players are privately informed of their armament costs? We present a simple formalism, called X-games, which unifies these situations as well as others, and use it to unify and extend the separate analyses that they received in the literature.

      
Jel Nos.: C72
Keywords: Strategic complementarities, Externalities, Coordination, Contagion

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2-14 The Market for Keywords
 
Kfir Eliaz and Ran Spiegler

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Working Paper #2-14
The Market for Keywords
 
Kfir Eliaz and Ran Spiegler
Can a competitive market implement an ideal search engine? To address this question, we construct a two-sided market model in which consumers with limited, idiosyncratic vocabulary use keywords to search for their desired products. Firms get access to a keyword if they pay its competitive price-per-click. An underlying ``broad match`` function determines the probability with which a firm will enter the consumer’s search pool as a function of the keyword it ``buys`` and the consumer’s queried keyword. The main question we analyze is whether there exists a broad match function that gives rise to an efficient competitive equilibrium outcome. We provide necessary and sufficient conditions, in terms of the underlying search cost and the joint distribution over consumers’ tastes and vocabulary, and characterize equilibrium keyword prices under such equilibria. The Battachayyara coefficient, a measure of closeness of probability distributions, turns out to play a key role in the analysis.

      
Jel Nos.: D47
Keywords: Keywords

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1-14 Buridanic Competition
 
Benjamin Bachi and Ran Spiegler

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Working Paper #1-14
Buridanic Competition
 
Benjamin Bachi and Ran Spiegler
We analyze a model in which two profit-maximizing firms compete in two-attribute products over agents who follow a non-compensatory choice procedure that responds purely to ordinal quality rankings: sticking to a default option when no market alternative dominates another, and focusing on a random attribute when choosing by default is impossible. Our equilibrium analysis highlights the effect of such trade-off avoidance on various aspects of the market outcome: total quality of the offered products, amount of obfuscation, prevalence of ``hard choices``, as well as market participation and consumer switching rates. We discuss the potential implications of this analysis for ``default architecture``.

      
Jel Nos.: D03, C79
 

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