Working Papers 2018

Working Paper #1-2018

The Importance of Hiring Frictions in Business Cycles
Renato Faccini, Eran Yashiv

Hiring is a costly activity reflecting firms’ investment in their workers. Because it generates disruption to production, cyclical fluctuations in the value of output, induced by the presence of price rigidities, have consequences for the optimal intertemporal allocation of hiring activities over the cycle. This mechanism generates strong propagation and amplification of all key macroeconomic variables in the responses to technology shocks and mutes the traditional transmission of monetary policy shocks. These results run counter to conventional arguments, whereby hiring frictions do not matter per se, but only insofar as they support bargaining setups conducive to wage rigidity. We highlight a new mechanism, implying that hiring frictions are as important as price frictions for the propagation of shocks over the business cycle.

Working Paper #3-2018

Drug Diffusion through Peer Networks: The Influence of Industry Payments

Leila Agha, Dan Zeltzer

Peer effects may amplify the decisions of early technology adopters as information spreads through local networks. Drug detailing efforts of pharmaceutical companies may leverage peer influence within existing provider networks to broaden their reach beyond the directly targeted physicians. Using matched physician data from Medicare Part D and Open Payments, we investigate the influence of pharmaceutical payments on the prescription of new anticoagulant drugs. First, we show that pharmaceutical payments target physicians who share patients with many different providers and thus may influence a broader network of peers. Within a difference in differences framework, wend a physician's own prescription of new anticoagulant drugs increases following a pharmaceutical payment, relative to the physician-specific baseline prescribing rate for that drug. The effect scales with the size of the payment, with larger payments spurring larger increases in prescribing. Peers of targeted physicians also increase their prescribing of the new drug after the targeted physician receives a large payment. To estimate the scale of peer effects in prescription decisions, we use peer payments as an instrumental variable for peer prescription volume. We find that when doctor's peers increase their use of a new drug by 1 beneficiary per quarter, the doctor's own use rises by 0.3 beneficiaries per quarter. Results suggest that spillover effects on peers are an important channel through which payments influence prescriptions.

Working Paper #5-2018

Learning What is Similar: Precedents and Equilibrium Selection

Rossella Argenziano and Itzhak Gilboa

We argue that a precedent is important not only because it changes the relative frequency of a certain event, making it positive rather than zero, but also because it changes the way that relative frequencies are weighed. Specifically, agents assess probabilities of future events based on past occurrences, where not all of these occurrences are deemed equally relevant. More similar cases are weighed more heavily than less similar ones. Importantly, the similarity function is also learnt from experience by “second-order induction”. The model can explain why a single precedent affects beliefs above and beyond its effect on relative frequencies, as well as why it is easier to establish reputation at the outset than to re-establish it after having lost it. We also apply the model to equilibrium selection in a class of games dubbed "Statistical Game", suggesting the notion of Similarity-Nash equilibria, and illustrate the impact of precedents on the play of coordination games.

Working Paper #7-2018

Decision Theory Made Relevant: Between the Software and the Shrink

Itzhak Gilboa, Maria Rouziou, and Olivier Sibony

Decision theory offers a formal approach to decision making, which is often viewed and taught as the rational way to approach managerial decisions. Half a century ago it generated high hopes of capturing and perhaps replacing intuition, and providing the “right” answer in practically all managerial situations. Today it seems fair to say that decision theory has not lived up to these expectations. Behavioral science provides ample evidence that managers fail to follow the dicta of decision theory, even when these are explained to them. As a result, executives often find decision theory frustrating and useless and prefer to rely on their intuition. This paper suggests that this extreme conclusion is unwarranted and calls for a re-appraisal of decision theory. We propose that it should not always be regarded as a mathematical tool that produces the answer; rather, it can be viewed as a framework for a dialog between the decision maker and the decision theorist. In one extreme, the decision theorist studies the problem and provides the “correct’’ answer. But in another, the decision theorist only challenges the decision maker’s intuition and logic. In between, a whole gamut of possible dialogs exists, in which decision theory doesn’t replace intuition, but supports and refines it.

Working Paper #9-2018

Incentive-Compatible Advertising on Non-Retail Platforms

Kfir Eliaz and Ran Spiegler

Non-retail platforms (e.g., online radio stations, social media) enable users to engage in various non-commercial activities, while at the same time generating information about users that helps advertisers improve their targeting. We study novel incentive issues that arise when the platform tries to maximize its advertising revenues. In our model, the platform's policy consists of a personalized, stationary ad-display rule and an advertising fee (which the platform charges from firms as a function of the consumer type they request to target). We provide conditions for the existence of an incentive-compatible policy that maximizes and fully extracts firms' surplus. This objective is easier to attain when the platform obtains more precise information about users' preferences, consumers are less attentive to advertising and their propensity for repeat purchases is higher. We apply our result to various examples of non-retail platforms, including content platforms and social networks. Our analysis of the latter turns out to be related to the "community detection" problem in Network Science.

Working Paper #11-2018

Incentive-Compatible Estimators

Kfir Eliaz and Ran Spiegler

We study a model in which a "statistician" takes an action on behalf of an agent, based on a random sample involving other people. The statistician follows a penalized regression procedure: the action that he takes is the dependent variable's estimated value given the agent's disclosed personal characteristics. We ask the following question: Is truth-telling an optimal disclosure strategy for the agent, given the statistician's procedure? We discuss possible implications of our exercise for the growing reliance on "machine learning" methods that involve explicit variable selection.

Working Paper 15-2018

Optimal Unemployment Insurance with Monitoring

Ofer Setty
 

I model job-search monitoring in the optimal unemployment insurance framework, in which job-search effort is the worker's private information. In the model, monitoring provides costly information upon which the government conditions unemployment benefits. Using a simple one-period model with two effort levels, I show analytically that the monitoring precision increases and the utility spread decreases if and only if the inverse of the worker's utility in consumption has a convex derivative. The quantitative analysis that follows extends the model by allowing a continuous effort and separations from employment. That analysis highlights two conflicting economic forces affecting the optimal precision of monitoring with respect to the generosity of the welfare system: higher promised utility is associated not only with a higher cost of moral hazard, but also with lower effort and lower value of employment. The result is an inverse U-shaped precision profile with respect to promised utility.  

Published in: Quantitative Economics

Working Paper #17-2018

Normative Equilibrium: The permissible and the forbidden as devices for bringing order to economic environments
Michael Richter and Ariel Rubinstein

We introduce the notion of a normative equilibrium which brings harmony to "general equilibrium"- like environments. Norms stipulate what is permissible and what is forbidden. The main solution concept is a maximally permissive set of alternatives together with a feasible profile of optimal choices. The norms are uniform and play a role analogous to that of price systems in competitive equilibrium and also feature an element of "fairness" since all individuals face the same choice set. The solution concept is analysed and applied to a variety of economic settings.

Working Paper #19-2018 

Remote Work Grant - Midterm Report

Naomi Gershoni, Itay Saporta-Eksten and Analia Schlosser

In 2016, the Israeli Employment Service (IES) began operating the Remote Work Grant program targeted at peripheral areas in Israel. This program enables job seekers in the target areas to receive a monthly grant of 600 ILS for a period of 5 months, if they successfully maintain a job at a workplace located outside the limits of their locality of residence. Following a pilot in Yeruham’s and Shefaram’s employment offices of the IES, the program was gradually extended (starting November 2016) to a total of 26 employment offices nationwide.

The effectiveness of the program is assessed by a Randomized Controlled Trial (RCT) where the target population is randomly allocated into a treatment group (individuals eligible for a grant if criteria is met) and a control group (non-eligible). This report summarizes preliminary findings of the program’s effect based on a comparison between the treatment and control groups. The analysis uses data from the IES to estimate the program’s effect on reporting to employment offices and to provide initial evaluation of the program’s costs relative to savings in welfare payments. In addition to data from the IES, surveys were conducted to collect data on the treatment and control groups: a baseline survey was administered prior to allocation to the program, and a follow-up survey was completed by individuals in treatment and control groups ten weeks after allocation to the program.

A full evaluation of the program requires a long-term follow up on the participants, accumulation of larger samples, as well as the use of administrative data on employment and wages, however, even at this stage, a number of key findings emerge:

• The program leads to a decrease in reporting to employment offices. Under certain assumptions, this decrease can be interpreted as an increase in employment, which will be further examined in a follow-up report. Five months after allocation to the program, the rate of reporting to employment offices of individuals who are eligible for a grant is 3 percentage points lower than the equivalent rate observed in the control group – a decrease of 4.5% relative to the rate of reporting in the control group of 66%.
• The highest decrease in reporting was found among long-term welfare recipients (guaranteed minimal income) and among Arab males. The program led to a 4 percentage points decrease in reporting among long-term welfare recipients, which amounts to a decrease of 4.7%, and to a 5 percentage points (7.5%) decrease among Arab males. Among Arab males, a 4 percentage points (8%) decrease in reporting was also identified for individuals eligible for unemployment benefits.
• A preliminary estimate of savings in welfare payments compared to program costs (based on reporting data 5 months after allocation), indicates a saving of 1,300 ILS per monthly grant among long-term welfare recipients. After 8 months, the saving for this group is 1,600 ILS.
• Preliminary results based on follow-up surveys administered 10 weeks after the allocation date indicate a significant increase in motivation and availability for work outside one’s locality of residence as well as in the number of job interviews outside one’s locality of residence in the group of participants eligible for a Remote Work Grant.

 21-2018 תכנית מעגלי תעסוקה - דו"ח הערכה 

ד"ר אנליה שלוסר, וינאי שנן  ביה"ס לכלכלה, אוניברסיטת תל אביב בשיתוף עם עמרי סנדריי איטח, מחלקת המחקר שירות התעסוקה ומחלקת המחקר המוסד לביטוח לאומי