Working Papers 2017

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1-16 Competition for the attention of a "problem solver" 

Jacob Glazer  and Ariel Rubinstein 

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Working Paper #1-16

 

Competition for the attention of a "problem solver"

Jacob Glazer  and Ariel Rubinstein

Abstract

We introduce a new type of agent whom we refer to as a "problem solver" (PS). The PS interacts with conventional players and wishes to respond optimally to their moves. The PS has only partial information about the moves of the other players. Unlike a regular player, the PS does not "put himself in the shoes" of other players and does not form beliefs about their moves. Rather, he treats the data as a logic puzzle: he calculates the set of possible configurations of moves that are consistent with the data he observes and responds to it. We insert such a problem solver into a simple model of competition for attention and analyze its equilibria. We demonstrate a novel feature of equilibrium in the model, whereby even though the PS always succeeds in his task, he may be uncertain that he will do so.

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2-16 Can Agents with Causal Misperceptions be Systematically Fooled?
Ran Spiegler

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Working Papers #2-16

Can Agents with Causal Misperceptions be Systematically Fooled?
Ran Spiegler

Abstract

Can a policy maker lead an agent to form systematically biased
economic forecasts? This possibility is ruled out by the conventional
rational-expectations postulate. I revisit this question and assume
that the agent misperceives causal relations among economic variables,
which may lead to non-rational expectations. The agent forms fore-
casts of economic variables after observing the policy maker’s action.
The agent’s forecasts are based on …tting a subjective causal model
- formalized as a direct acyclic graph, following the “Bayesian net-
works”literature - to objective long-run data. I show that the agent’s
forecasts can be systematically biased if and only if the agent’s graph
is not perfect - i.e., if the direction of at least some of the causal
links he postulates is empirically meaningful. I characterize the pol-
icy maker’s optimal strategy for several examples, mainly a stylized
“monetary policy”application.

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3-16 Incentive-Compatible Advertising on a Social Network

Kfi…r Eliaz and Ran Spiegler

 

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Working Paper #3-16  Incentive-Compatible Advertising on a Social Network
K…fir Eliaz and Ran Spiegler

Abstract

Abstract
A platform that operates a social network allows …rms to post display ads
to network members. Each member is interested in exactly one type of product.
The network structure is correlated with the pro…le of members’privately known
preferences over product types. The platform’s policy consists of a display rule
(which speci…es the stationary probability with which each product is shown to
each network member, as a function of the network structure) and an advertis-
ing fee (which the platform charges from …rms as a function of their reported
type). We provide conditions for the existence of an incentive-compatible policy
that maximizes and fully extracts …rms’surplus. This objective is easier to at-
tain when the network is more informative of members’preferences, consumers
are more attentive to advertising and their frequency of repeated purchases is
higher, and advertisers are less informed of the network structure. We provide
a more detailed characterization when the network is generated according to the
“stochastic block model”, thus linking our model to the “community detection”
problem in Network Science.

 

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4-16  Can We Predict the Winner in a Market with Network Effects? Competition in Cryptocurrency Market

Neil Gandal  and Hanna Halaburda

 

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Working Paper #4-16

Can We Predict the Winner in a Market with Network Effects? Competition in Cryptocurrency Market

Neil Gandal  and Hanna Halaburda

 

Abstract

We analyze how network e ects a ect competition in the nascent cryptocurrency
market. We do so by examining early dynamics of exchange rates among di erent
cryptocurrencies. While Bitcoin eventually dominates this market, our data suggest
no evidence of a winner-take-all e ect early in the market. Indeed, for a relatively
long period, a few other cryptocurrencies competing with Bitcoin (the early industry
leader) appreciated much more quickly than Bitcoin. The data in this period are
consistent with the use of cryptocurrencies as nancial assets (popularized by Bitcoin),
and not consistent with winner-take-all dynamics. Toward the end of our sample,
however, things change dramatically. Bitcoin appreciates against the USD, while other
currencies depreciate against the USD. The data in this period are consistent with
strong network e ects and winner-take-all dynamics. This trend continues as at the
time of writing.

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5-16 Aggregate Hiring and the Value of Jobs Along the Business Cycle

Eran Yashiv

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Working Paper # 5-16 Aggregate Hiring and the Value of Jobs Along the Business Cycle

Eran Yashiv

Abstract

U.S. CPS gross flows data indicate that in recessions firms actually
increase their hiring rates from the pools of the unemployed and out
of the labor force. Why so? The paper provides an explanation by
studying the optimal recruiting behavior of the representative firm.
The model combines labor frictions, of the search and matching type,
with capital frictions, of the q-model type.
Optimal firm behavior is a function of the value of jobs, i.e., the
expected present value of the marginal worker to the firm. Job values
are estimated to be counter-cyclical in U.S. data, the underlying
reason being the dynamic behavior of the labor share of GDP.
The counter-cyclicality of hiring rates and job values, which may
appear counter-intuitive, is shown to be consistent with well-known
business cycle facts, such as pro-cyclical employment and pro-cyclical
vacancy and job-finding rates (as well as job to job flows). The analysis
emphasizes the difference between current labor productivity and
the wider, forward-looking concept of job values.
The paper explains the high volatility of firm recruiting behavior,
which has drawn an enormous amount of attention in the literature,
as well as the reduction over time in labor market fluidity in the U.S.,
using the same estimated model. Part of the explanation has to do
with job values and another part with the interaction of hiring and investment
costs, both determinants having been typically overlooked.
Key words: business cycles, aggregate hiring, job values, vacancies,
labor market frictions, capital market frictions, volatility, labor
market fluidity.
JEL codes: E24, E32

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6-2016 Optimal Unemployment Benefit Policy and the Firm Productivity Distribution
Tomer Blumkin, Leif Danziger, and Eran Yashiv

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Working Paper #6-2016 Optimal Unemployment Benefit Policy and the Firm Productivity Distribution

Tomer Blumkin, Leif Danziger, and Eran Yashiv

Abstract

This paper provides a novel justification for a declining time profile of unemployment benefits
that does not rely on moral hazard or consumption-smoothing considerations. We consider
a simple search environment with homogeneous workers and low- and high-productivity
firms. By introducing a declining time profile of benefits, the government can affect the
equilibrium wage profile in a manner that enhances the sorting of workers across low- and
high-productivity firms. We demonstrate that optimal government policy depends on the
dispersion and skewness of the firms’ productivity distribution.

JEL Classifications: J64, J65

Keywords: Unemployment benefit policy, declining unemployment benefits, productivity
distribution, skewness, dispersion.

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7-2016 Police Presence, Rapid Response Rates, and Crime Prevention

Sarit Weisburd

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Working Paper # 7-2016 Police Presence, Rapid Response Rates, and Crime Prevention
Sarit Weisburd

Abstract

This paper estimates the impact of police presence on crime using a unique database
that tracks the exact location of Dallas Police Department patrol cars throughout 2009.
To address the concern that o¢ cer location is often driven by crime, my instrument
exploits police responses to calls outside of their allocated coverage beat. This variable
provides a plausible shift in police presence within the abandoned beat that is driven by
the police goal of minimizing response times. I …nd that a 10 percent decrease in police
presence at that location results in a 1.2 to 2.9 percent increase in crime. These results
shed light on the black box of policing and crime and suggest that routine changes in
police patrol can signi…cantly impact criminal behavior. 

JEL Codes: D29, K42.

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8-2016 Weighted Utilitarianism, Edgeworth, and the Market

Rossella Argenzianoy and Itzhak Gilboaz

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Working Paper #8-2016 Weighted Utilitarianism, Edgeworth, and the Market

Rossella Argenzianoy and Itzhak Gilboaz

Social choice involves trading of agents’utilities, and often people share strong moral intuitions about the way such trade-offs should be addressed. Yet, the textbook derivation of a utility function suggests that utility is only ordinal, and that interpersonal comparisons of utility are meaningless. We argue that comparisons of utility differences, and the use of social welfare functions, are rendered meaningful by information contained in real choice data that the textbook model ignores. In particular, human perception has limited and measurable accuracy. Just noticeable di¤erences (jnd’s) single out utility functions that are almost unique and can be used to make interpersonal comparisons of utility. Next, we show that a very weak monotonicity condition on society’s preferences necessitates weighted utilitarianism, where the weights are the inverse of the individual jnd’s. This was …rst suggested by Edgeworth, and re‡ects common moral intuitions. Finally, we use the language of weighted utilitarianism to enrich the debate over free markets and their normative appeal. Competitive markets compute an allocation that maximizes a weighted utilitarian function, with Negishi weights re‡ecting a “one dollar one vote” principle. We contrast this with the “one person one vote” principle re‡ected by the Edgeworth weights.

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9-2016 When to Learn What in Bilateral Trade

Kfi…r Eliaz and Alexander Frug

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Working paper # 9-2016 When to Learn What in Bilateral Trade

Kfi…r Eliaz and Alexander Frug

Abstract

We propose and analyze a model of bilateral trade in which private infor-
mation about the quality of an asset can be acquired only gradually over time.
An asset is characterized by a vector of binary i.i.d. attributes. The value of
this asset to the seller and buyer is a weighted sum of the attributes, where the
buyer’s weights differ from the seller’s. Initially, the seller is uninformed about
the quality of the asset. In each period he decides whether to make a price o¤er
(based on his current information) or to inspect the asset (postponing the sales
o¤er). In the latter case, he chooses an attribute and (costlessly) learns its re-
alization. The buyer does not observe the realized attributes before purchasing
the good, however, he may or may not observe which inspections were performed
by the seller (we consider both cases). We study the seller’s strategic scheduling
of inspections in this environment and its e¤ect on the realized gains from trade
in equilibrium. We identify the necessary and sufficient conditions under which
the players can realize some gains from trade, and all gains from trade.

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10-2016 The Silent Treatment

Geoffroy de Clippel, Kfir Eliaz and Kareen Rozen

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Working paper #10-2016 The Silent Treatment

Geoffroy de Clippel, Kfir Eliaz and Kareen Rozen

 

Abstract

Information overload is costly to organizations. Limited cognitive resources, multiple
obligations, and short deadlines can lead a principal to overlook important ideas
from subordinates. We propose a stylized model to highlight a remedy to this problem
that should be relevant in many contexts. Since interactions in organizations are often
repeated over time, there may be ways to incentivize agents to speak up only when
they have something important to communicate; that is, to be discerning. One of the
principal's jobs is then to steer the organization in this direction.
In our model, a principal's attention is repeatedly sought by multiple agents, each
eager for his ideas to be implemented. An idea's quality stochastically a ects the principal's
pro t, and agents' abilities to generate good ideas may be private information.
The principal is unable to review proposals before choosing one each period. She can
provide incentives only through her selection rule among proposals, but cannot commit
to this rule in advance. We show how she may discipline agents to exercise restraint,
achieving her rst-best in an intuitive belief-free equilibrium. Whether rst best is
achievable hinges on the worst possible agent, the organization's `weakest link.'
Selecting ideas in our model is reminiscent of multi-armed bandit problems, with
the new feature that an arm's availability is a strategic decision each round. Our analysis
also shows that such problems admit simple, robust solutions.

Keywords: limited attention, organizations, belief-free equilibrium, mechanism design
without commitment, multi-armed bandit

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11-2016 A Simple Model of Competition Between Teams

Kfir Eliaz and Qinggong Wu

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Working paper #11-2016  A Simple Model of Competition Between Teams

Kfir Eliaz and Qinggong Wu

 

Abstract

We model a competition between two teams (that may di er in size) as
an all-pay auction with incomplete information. Individuals exert e ort
to increase the performance of one's own team via an additively separable
aggregation function. The team with a higher performance wins, and its
members enjoy the prize as a public good. The value of the prize is iden-
tical to members of the same team but is unknown to the other team. We
show that in any monotone equilibrium in which everyone actively partic-
ipates, the bigger team is more likely to win if the aggregation function is
concave, less likely if convex, or equally likely if linear. We also show that
if the aggregation function is concave or linear then the expected payo
for a player in the bigger team is higher than that in the smaller team.
Finally, we investigate how teams may form endogenously.

 

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12-2016 From Unemployment Benefits to Employment Insurance Accounts: Reforming Unemployment Insurance in Israel

Ofer Setty and Ido Shlomo

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Working paper #12-2016 From Unemployment Benefits to Employment Insurance Accounts: Reforming Unemployment Insurance in Israel

Ofer Setty and Ido Shlomo

Abstract

Unemployment Accounts are private mandatory savings accounts which can only be used during unemployment or retirement. As opposed to unemployment insurance, unemployment accounts are able to mitigate the problem of moral hazard but at the cost of denying the unemployed any public insurance. We study a mixed approach, called Unemployment Insurance Accounts (UIA), which takes elements from both Unemployment Accounts and unemployment insurance. Under UIA, workers save in a mandatory savings account when employed and withdraw from that account when unemployed. Unemployed workers with depleted accounts receive unemployment benefits. This approach is more efficient than unemployment insurance since it can provide benefits selectively. We calibrate the model to the Israeli economy by making use of both existing and newly developed parameter estimates. We find that the transition to UIA yields a welfare gain of about 1%, measured as consumption equivalent variation.

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13-2016 Lexicographic Beliefs and Assumption

Eddie Dekel, Amanda Friedenberg and Marciano Siniscalchi

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Working paper #13-2016 Lexicographic Beliefs and Assumption

Eddie Dekel, Amanda Friedenberg and Marciano Siniscalchi

 

Abstract

 

Foundations for iterated admissibility (i.e., the iterated removal of weakly dominated strategies) need to confront a fundamental challenge. On the one hand, admissibility requires that a player consider every strategy of their opponents possible. On the other hand, reasoning that the opponents are rational requires ruling out certain strategies. Brandenburger, Friedenberg and Keisler’s (BFK, Econometrica, 2008) foundations for iterated admissibility address this challenge with two ingredients: lexicographic beliefs and the concept of “assumption.” However, BFK restrict attention to lexicographic beliefs whose supports are essentially disjoint. This restriction does not have a compelling behavioral rationale, or a clear intuitive interpretation. At the same time, it plays a crucial role in BFK’s foundations for iterated admissibility—specifically, in their analysis of assumption. We provide an alternate characterization of assumption, which applies to all lexicographic beliefs. We also characterize two variants of assumption, based on two extensions of ‘weak dominance’ to infinite state spaces. These notions of assumption coincide with BFK’s notion when the state space is finite and lexicographic beliefs have disjoint support; but they are different in more general settings. Leveraging these characterization results, we show that disjoint supports do not play a role in the foundations for iterated admissibility. 

JEL classification: C72; D81; D83

Keywords: Weak dominance, Weak dominance in infinite games, Iterated admissibility, Lexicographic probability systems, Assumption, Epistemic game theory

 

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14-2016 Out of Africa: Human Capital Consequences of In Utero Conditions

Victor Lavy, Analia Schlosser and Adi Shany

 

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Working paper #14-2016 Out of Africa: Human Capital Consequences of In Utero Conditions

Victor Lavy, Analia Schlosser and Adi Shany

 

Abstract

This paper investigates the effects of environmental conditions during pregnancy on later life
outcomes using quasi‐experimental variation created by the immigration of Ethiopian Jews to Israel
in May 24th 1991. Children in utero prior to immigration faced dramatic differences in medical care
technologies, prenatal conditions, and prenatal care at the move from Ethiopia to Israel. One of the
major differences was adequacy of micronutrient supplements, particularly iodine, iron and folic acid.
We find that children exposed in an earlier stage of the pregnancy to better environmental conditions
in utero have higher educational attainment (lower repetition and dropout rates and higher
Baccalaureate rate) and higher education quality (achieve a higher proficiency level in their
Baccalaureate diploma). The average treatment effect we estimate is driven mainly by a strong effect
on girls. We find however, no effect on birth weight or mortality for girls.

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15-2016 Women’s Liberation as a Financial Innovation

Moshe Hazan, DavidWeiss and Hosny Zoabi

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Working paper #15-2016 Women’s Liberation as a Financial Innovation

Moshe Hazan, DavidWeiss and Hosny Zoabi

 

Abstract

Property rights are at the heart of capitalism’s ability to efficiently allocate
resources. Historically, married women have been one of the groups with
the greatest legal disabilities in this regard, to the benefit of their husbands.
Starting in the second half of the 19th century, common law countries, which
were entirely dominated by men, gave married women property rights. Before
this “women’s liberation,” married women were subject to the laws of
coverture. Coverture had detailed laws as to which spouse had ownership
and control over various aspects of property both before and after marriage.
These laws created a strong disincentive for women to invest in financial assets,
such as stocks, bonds, and even bank deposits. This paper develops
a general equilibrium model with endogenous determination of women’s
rights in which these laws affect portfolio choices, leading to inefficient allocations.
We show how technological advancement eventually leads to men
granting rights, and in turn how these rights affect development. Exploiting
cross-state variation in the timing of rights, we show that increases in
non-agricultural TFP predict the granting of rights. The granting of rights in
turn leads to a dynamic labor reallocation towards the non-agricultural sector,
representing further development. Finally, we show that women’s rights
are associated with lower interest rates and greater financial intermediation,
consistent with an increase in the supply of credit.

 

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16-2016 תכנית מעגלי תעסוקה - דו"ח ביניים  

אנליה שלוסר, ינאי שנן  בשיתוף עם רוני הכהן, רייצ'ל ברנר-שלם, ליאור בראון ומחלקת המחקר המוסד לביטוח לאומי

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Working paper #16-2016 (In Hebrew)

נייר דיון 16-2016 תכנית מעגלי תעסוקה - דו"ח ביניים

אנליה שלוסר, ינאי שנן  בשיתוף עם רוני הכהן, רייצ'ל ברנר-שלם, ליאור בראון ומחלקת המחקר המוסד לביטוח לאומי

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