Working Papers 2015

Expand all

1-15  Back to Fundamentals: Equilibrium in Abstract Economies

Michael Richter and Ariel Rubinstein

More

Working Paper #1-15

 

Back to Fundamentals: Equilibrium in Abstract Economies
Michael Richter and Ariel Rubinstein

Abstract

We propose a new abstract definition of equilibrium in the spirit of competitive equilibrium: a
profile of alternatives and a public ordering (expressing prestige, price or a social norm), such
that each agent prefers his assigned alternative to all lower-ranked ones. The equilibrium
operates in an abstract setting built upon a concept of convexity borrowed from Convex
Geometry. We apply the concept to a variety of convex economies and relate it to Pareto
optimality. The "magic" of linear equilibrium prices is put into perspective by establishing an
analogy between linear functions in the standard convexity and "primitive orderings" in the
abstract convexity.

Keywords: Competitive Equilibrium, Social Norms, Public Ordering, Convex Geometry

PAPER in PDF
 
 

2-15 “Isn’t everyone like me?”: On the presence of self-similarity in strategic interactions
Ariel Rubinstein and Yuval Salant

More

Working Papers #2-15

“Isn’t everyone like me?”: On the presence of self-similarity in strategic interactions
Ariel Rubinstein and Yuval Salant

Abstract

After playing the Chicken game against an anonymous random opponent, players
report their beliefs about their opponent’s action. It is argued that the reported
beliefs are not consistent with the standard theory of rational choice, which predicts a
negative correlation between a player’s action in the Chicken game and the probability
he assigns to his opponent choosing the same action. It is also argued that the
reported beliefs are influenced by self-similarity considerations, whereby a player
tends to think that other players behave similarly to him, and thus reports beliefs
that gravitate toward his own action. Self-similarity considerations are stronger when
players are asked about the distribution of actions in the population of potential
opponents than when they are asked about their particular opponent.

PAPER in PDF

3-15  Network Dynamics and Knowledge Transfer in Virtual Organizations1

Neil Gandal and Uriel Stettner

 

More

Working Paper #3-15  Network Dynamics and Knowledge Transfer in Virtual Organizations1
Neil Gandal and Uriel Stettner

Abstract

In this paper, we examine whether particular network structures foster knowledge transfer among
distinct open-source projects. Deploying panel data, we compare organizations that were in a
giant component of a network for relatively long periods of time with organizations that joined
the giant component during the sample period. Our findings show that joining a large pool of
knowledge (i.e., a giant component) allows projects to gain access to novel knowledge and ideas.
Moreover, established projects within the giant component benefit differently from changes in
network structures than projects that only recently entered such giant component of a network.

Keywords: Network Dynamics, Knowledge Spillovers, Social Network, Open Source.

PAPER in PDF

4-15  Prenatal Sex Selection and Girls’ Well‐Being: Evidence from India
Luojia Hu and Analia Schlosser

Forthcoming in the Economic journal

 

More

Working Paper #4-15  Prenatal Sex Selection and Girls’ Well‐Being: Evidence from India

Luojia Hu and Analia Schlosser

Forthcoming at the Economic journal

 

We study the impacts of prenatal sex selection on girls’ well‐being in India. We show that
high sex ratios at birth reflect the practice of prenatal sex selection and apply a triple
difference strategy to examine whether changes in health outcomes of girls relative to
boys within states and over time are systematically associated with changes in sex‐ratios
at birth. We find that an increase in prenatal sex selection leads to a reduction in girls’
malnutrition, in particular, underweight and wasting. We further explore various
underlying channels linking between prenatal sex selection and girls’ outcomes.

Keywords: Son preference, prenatal sex selection, ultrasound, sex ratio at birth, gender
discrimination, child health.

JEL codes: J13, J16, I1, O12

PAPER in PDF

5-15 Multidimensional Ellsberg

Kfir Eliaz and Pietro Ortoleva

More

Working Paper # 5-15 
Multidimensional Ellsberg

Kfir Eliaz and Pietro Ortoleva

Abstract

The classical Ellsberg experiment presents individuals with a choice problem
in which the probability of winning a prize is unknown (uncertain). In this
paper, we study how individuals make choices between gambles in which the
uncertainty is in different dimensions: the winning probability, the amount of
the prize, the payment date, and the combinations thereof. While the decisiontheoretic
models accommodate a rich variety of behaviors, we present experimental
evidence that points at systematic behavioral patterns: (i) no uncertainty
is preferred to uncertainty on any single dimension and to uncertainty on
multiple dimensions, and (ii) “correlated” uncertainty on multiple dimensions
is preferred to uncertainty on any single dimension.

JEL Classification: C91, D11, D81.

Keywords: Ellsberg Paradox, Uncertainty Aversion, uncertainty Aversion, Multidimensional
uncertainty.

PAPER in PDF

6-15 Disclosure and Choice

Elchanan Ben-Porath, Eddie Dekel and Barton L. Lipman

 

 

More

Working Paper #6-15 Disclosure and Choice

Elchanan Ben-Porath, Eddie Dekel and Barton L. Lipman

 

Abstract:

An agent chooses among projects with random outcomes. His payoff is increasing in
the outcome and in an observer's expectation of the outcome. With some probability, the
agent can disclose the true outcome to the observer. We show that choice is inefficient:
the agent favors riskier projects even with lower expected returns. If information can be
disclosed by a challenger who prefers lower beliefs of the observer, the chosen project is
excessively risky when the agent has better access to information, excessively risk{averse
when the challenger has better access, and ecient otherwise. We also characterize the
agent's worst{case equilibrium payoff.

 

PAPER in PDF

7-15 Lexicographic Beliefs and Assumption
Eddie Dekely Amanda Friedenbergz Marciano Siniscalchi

 

More

Working Paper #7-15 Lexicographic Beliefs and Assumption
Eddie Dekely Amanda Friedenbergz Marciano Siniscalchi

Abstract

Lexicographic beliefs have become a standard tool in studying re nements and pro-
viding epistemic characterizations of solution concepts. In particular, Brandenburger,
Friedenberg and Keisler (BFK, Econometrica, 2008) use these beliefs to provide an
epistemic characterization of iterated admissibility, i.e., iterated removal of weakly
dominated strategies. However, BFK restricts attention to lexicographic beliefs whose
component measures are mutually singular. Loosely speaking, this is the restriction
that the supports are disjoint. The restriction does not have a compelling behavioral
foundation, or a clear intuitive interpretation. At the same time, it plays a crucial role
in BFK's analysis. Speci cally, central to BFK's analysis is the concept of \assump-
tion." BFK employs a characterization of \assumption" that fails for lexicographic
beliefs which are not mutually singular. We provide an alternate characterization of
\assumption," which applies to arbitrary lexicographic beliefs. Leveraging this result,
we show that mutual singularity of lexicographic beliefs does not play any role in the
epistemic characterization of iterated admissibility.

PAPER in PDF

8-15 Job satisfaction and the wage gap

Eddie Dekely and Ady Pauzner
(Revised)

 

More

8-15 Job satisfaction and the wage gap
Eddie Dekely and Ady Pauzner
(Revised)

Abstract

For many people there is tradeo¤ 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, log-concave.

 

PAPER in PDF

9-15 The Accident Implications of a Company Car Bene…fit

Sarit Weisburd

 

More

Working Paper #9-15 The Accident Implications of a Company Car Bene…fit

Sarit Weisburd

 

Abstract

In many countries company cars which often include fuel, insurance and maintenance
costs are being allocated to employees for both work and private use. Moral hazard
would suggest that the bene…ts associated with these cars would result in lower driving
care and higher accident rates. However, it is often argued that drivers receiving this
bene…t may face longer commutes and/or a more di¢ cult work schedule which would
result in an increased rate of car accidents regardless of a moral hazard e¤ect. We analyze
the impact of a company car bene…t on driving behavior following the announcement by
the Israeli tax authority in August 2007 that over a period of four years the fair value
tax of company cars will double to a monthly value of 2,500 NIS. This legislative change
provides an opportunity to conduct a di¤erence-in-di¤erences speci…cation examining the
relative change in accident rates for those that held company cars prior to the change in
legislation to those that did not. If moral hazard plays a role in this context we would
expect a relative decrease in the accident rate in the post period for those drivers who
may now consider abandoning the company car bene…t.

 

PAPER in PDF

10-15 Really Uncertain Business Cycles
Nicholas Bloom, Max Floetotto, Nir Jaimovich, Itay Saporta-Eksten and Stephen J. Terry

 

More

Working Paper # 10-15 Really Uncertain Business Cycles
Nicholas Bloom, Max Floetotto, Nir Jaimovich, Itay Saporta-Eksten and Stephen J. Terry

Abstract

We propose uncertainty shocks as a new driver of business cycles. First, we demonstrate that microeconomic uncertainty rises sharply during recessions, particularly during the Great Recession of 2007-2009. Second, we show that uncertainty shocks can generate drops in GDP of around 2.5% in a dynamic stochastic general equilibrium
model with heterogeneous firms. Finally, we show that increased uncertainty makes …first-moment policies, like wage subsidies, temporarily less effective because firms become more cautious in responding to price changes.

Keywords: uncertainty, adjustment costs, business cycles.
JEL Classi…cation: D92, E22, D8, C23.

 

PAPER in PDF

11-15 Financial Risk and Unemployment
Zvi Eckstein, Ofer Setty, David Weiss

More

Working Paper #11-15 Financial Risk and Unemployment
Zvi Eckstein, Ofer Setty, David Weiss

Abstract

There is a strong correlation between the corporate interest rate (BAA rated), and its spread relative
to Treasuries, and the unemployment rate. We model how interest rates and potential default rates
impact equilibrium unemployment in a Diamond-Mortesen-Pissarides model. We calibrate the
model using US data without targeting business cycle statistics. Volatility in the corporate interest
rate can explain about 80% of the volatility of unemployment, vacancies, and market tightness.
Simulating the Great Recession shows the model can account for much of the rise in unemployment.
Without Fed action, unemployment would have been 6% higher.

JEL Classification:E22, E24, E32, E44, J41, J63, J64

Keywords: Equilibrium Unemployment, Search and Matching Models, Business Cycles, Corporate
Interest Rates, Interest Rate Spread, Great Recession

PAPER in PDF

12-15 Moral Hazard and Costly State Verification
Ofer Setty

 

 

More

Working Paper #12-15 Moral Hazard and Costly State Verification
Ofer Setty

Newman (2007) studies a principal-agent problem, where the principal has access to a monitoring
technology. He shows (in Proposition 6) that if workers have logarithmic utility for income, then
workers with higher average wages are assigned to more easily observed tasks and are monitored
more intensively. I study a special case of a monitoring technology that produces a two-level
signal. In this environment the principal chooses the (costly) precision of the signal. I show that..(SEE PDF)

Keywords: Principal-agent model, Moral hazard, Monitoring, Costly state verbification

PAPER in PDF

13-15 The Design of ‘Soft’ Welfare-to-Work Programs
Nicola Pavoni, Ofer Setty, and Giovanni L. Violante

 

More

Working Paper #13-15 The Design of ‘Soft’ Welfare-to-Work Programs
Nicola Pavoni, Ofer Setty, and Giovanni L. Violante

Abstract

This paper models welfare-to-work programs as contracts offered by the principal/government
to unemployed agents in an environment with moral hazard. A welfare-to-work program comprises
of several policy instruments (e.g., job-search, assisted search, mandated work) the principal
can use, in combination with welfare benefits, in order to minimize the costs of delivering
promised utility to the agent. The generosity of the program and the skill level of the unemployed
agent determine the optimal policy instrument to be implemented. Restricting attention
to ‘soft programs’ —contracts that make no use of punishments or sanctions— allows a fully
analytical characterization of the optimal program and, in addition, itmakes the solution robust
to hidden saving.

Keywords: Job-search assistance, Hidden saving, Human capital, Social assistance, Unemployment
insurance, Welfare-to-Work, Work requirements.

JEL Classification: D82, H21, J24, J64, J65.

PAPER in PDF

Tel Aviv University, P.O. Box 39040, Tel Aviv 6997801, Israel
UI/UX Basch_Interactive