Poverty and Self‐Control

We argue that poverty can perpetuate itself by undermining the capacity for self‐control. In line with a distinguished psychological literature, we consider modes of self‐control that involve the self‐imposed use of contingent punishments and rewards. We study settings in which consumers with quasi‐hyperbolic preferences confront an otherwise standard intertemporal allocation problem with credit constraints. Our main result demonstrates that low initial assets can limit self‐control, trapping people in poverty, while individuals with high initial assets can accumulate indefinitely. Thus, even temporary policies that initiate accumulation among the poor may be effective. We examine implications concerning the effect of access to credit on saving, the demand for commitment devices, the design of financial accounts to promote accumulation, and the variation of the marginal propensity to consume across income from different sources. We also explore the nature of optimal self‐control, demonstrating that it has a simple and behaviorally plausible structure that is immune to self‐renegotiation.     

Program Evaluation and Causal Inference With High‐Dimensional Data

In this paper, we provide efficient estimators and honest confidence bands for a variety of treatment effects including local average (LATE) and local quantile treatment effects (LQTE) in data‐rich environments. We can handle very many control variables, endogenous receipt of treatment, heterogeneous treatment effects, and function‐valued outcomes. Our framework covers the special case of exogenous receipt of treatment, either conditional on controls or unconditionally as in randomized control trials. In the latter case, our approach produces efficient estimators and honest bands for (functional) average treatment effects (ATE) and quantile treatment effects (QTE). To make informative inference possible, we assume that key reduced‐form predictive relationships are approximately sparse. This assumption allows the use of regularization and selection methods to estimate those relations, and we provide methods for post‐regularization and post‐selection inference that are uniformly valid (honest) across a wide range of models. We show that a key ingredient enabling honest inference is the use of orthogonal or doubly robust moment conditions in estimating certain reduced‐form functional parameters. We illustrate the use of the proposed methods with an application to estimating the effect of 401(k) eligibility and participation on accumulated assets. The results on program evaluation are obtained as a consequence of more general results on honest inference in a general moment‐condition framework, which arises from structural equation models in econometrics. Here, too, the crucial ingredient is the use of orthogonal moment conditions, which can be constructed from the initial moment conditions. We provide results on honest inference for (function‐valued) parameters within this general framework where any high‐quality, machine learning methods (e.g., boosted trees, deep neural networks, random forest, and their aggregated and hybrid versions) can be used to learn the nonparametric/high‐dimensional components of the model. These include a number of supporting auxiliary results that are of major independent interest: namely, we (1) prove uniform validity of a multiplier bootstrap, (2) offer a uniformly valid functional delta method, and (3) provide results for sparsity‐based estimation of regression functions for function‐valued outcomes.     

Asset Markets With Heterogeneous Information

This paper studies competitive equilibria of economies where assets are heterogeneous and traders have heterogeneous information about them. Markets are defined by a price and a procedure for clearing trades, and any asset can, in principle, be traded in any market. Buyers can use their information to impose acceptance rules which specify which assets they are willing to trade in each market. The set of markets where trade takes place is derived endogenously. The model can be applied to find conditions under which these economies feature fire sales, contagion, and flights to quality.     

A Competitive Model of Customization with Lead‐Time Effects

In this article, we study the competitive interactions between a firm producing standard products and a firm producing custom products. Consumers with heterogeneous preferences choose between n standard products, which may not meet their preferences exactly but are available immediately, and a custom product, available only after a certain lead time l. Standard products incur a variety cost that increases with n and custom products incur a lead time cost that is decreasing in the lead time l. We consider a two‐stage game wherein at stage 1, the standard product firm chooses the variety and the custom firm chooses the lead time and then both firms set prices simultaneously. We characterize the subgame‐perfect Nash equilibrium of the game. We find that both firms can coexist in equilibrium, either sharing the market as local monopolists or in a price‐competitive mode. The standard product firm may offer significant or minimal variety depending on the equilibrium outcome. We provide several interesting insights on the variety, lead time, and prices of the products offered and on the impact of problem parameters on the equilibrium outcomes. For instance, we show that the profit margin and price of the custom product are likely to be higher than that of standard products in equilibrium under certain conditions. Also, custom firms are more likely to survive and succeed in product markets with larger potential market sizes. Another interesting insight is that increased consumer sensitivity to product fit may result in lower lead time for the custom product.     

Consistent Probabilistic Social Choice

Two fundamental axioms in social choice theory are consistency with respect to a variable electorate and consistency with respect to components of similar alternatives. In the context of traditional non‐probabilistic social choice, these axioms are incompatible with each other. We show that in the context of probabilistic social choice, these axioms uniquely characterize a function proposed by Fishburn (1984). Fishburn's function returns so‐called maximal lotteries, that is, lotteries that correspond to optimal mixed strategies in the symmetric zero‐sum game induced by the pairwise majority margins. Maximal lotteries are guaranteed to exist due to von Neumann's Minimax Theorem, are almost always unique, and can be efficiently computed using linear programming.     

Bayesian Learning,Smooth Approximate Optimal Behavior,and Convergence to ε‐Nash Equilibrium

In this paper, I construct players' prior beliefs and show that these prior beliefs lead the players to learn to play an approximate Nash equilibrium uniformly in any infinitely repeated slightly perturbed game with discounting and perfect monitoring. That is, given any ε > 0, there exists a (single) profile of players' prior beliefs that leads play to almost surely converge to an ε‐Nash equilibrium uniformly for any (finite normal form) stage game with slight payoff perturbation and any discount factor less than 1.     

What Explains the 2007–2009 Drop in Employment?

We show that deterioration in household balance sheets, or the housing net worth channel, played a significant role in the sharp decline in U.S. employment between 2007 and 2009. Counties with a larger decline in housing net worth experience a larger decline in non‐tradable employment. This result is not driven by industry‐specific supply‐side shocks, exposure to the construction sector, policy‐induced business uncertainty, or contemporaneous credit supply tightening. We find little evidence of labor market adjustment in response to the housing net worth shock. There is no significant expansion of the tradable sector in counties with the largest decline in housing net worth. Further, there is little evidence of wage adjustment within or emigration out of the hardest hit counties.     

Sentiments and Aggregate Demand Fluctuations

We formalize the Keynesian insight that aggregate demand driven by sentiments can generate output fluctuations under rational expectations. When production decisions must be made under imperfect information about demand, optimal decisions based on sentiments can generate stochastic self‐fulfilling rational expectations equilibria in standard economies without persistent informational frictions, externalities, nonconvexities, or strategic complementarities in production. The models we consider are deliberately simple, but could serve as benchmarks for more complicated equilibrium models with additional features.     

Assessment of Uncertainty in High Frequency Data: The Observed Asymptotic Variance

The availability of high frequency financial data has generated a series of estimators based on intra‐day data, improving the quality of large areas of financial econometrics. However, estimating the standard error of these estimators is often challenging. The root of the problem is that traditionally, standard errors rely on estimating a theoretically derived asymptotic variance, and often this asymptotic variance involves substantially more complex quantities than the original parameter to be estimated. Standard errors are important: they are used to assess the precision of estimators in the form of confidence intervals, to create “feasible statistics” for testing, to build forecasting models based on, say, daily estimates, and also to optimize the tuning parameters. The contribution of this paper is to provide an alternative and general solution to this problem, which we call Observed Asymptotic Variance. It is a general nonparametric method for assessing asymptotic variance (AVAR). It provides consistent estimators of AVAR for a broad class of integrated parameters Θ = ∫ θ_t dt, where the spot parameter process θ can be a general semimartingale, with continuous and jump components. The observed AVAR is implemented with the help of a two‐scales method. Its construction works well in the presence of microstructure noise, and when the observation times are irregular or asynchronous in the multivariate case. The methodology is valid for a wide variety of estimators, including the standard ones for variance and covariance, and also for more complex estimators, such as, of leverage effects, high frequency betas, and semivariance.     

An Empirical Equilibrium Model of a Decentralized Asset Market

I estimate a search‐and‐bargaining model of a decentralized market to quantify the effects of trading frictions on asset allocations, asset prices, and welfare, and to quantify the effects of intermediaries that facilitate trade. Using business‐aircraft data, I find that, relative to the Walrasian benchmark, 18.3 percent of the assets are misallocated; prices are 19.2 percent lower; and the aggregate welfare losses equal 23.9 percent. Dealers play an important role in reducing trading frictions: In a market with no dealers, a larger fraction of assets would be misallocated, and prices would be higher. However, dealers reduce aggregate welfare because their operations are costly, and they impose a negative externality by decreasing the number of agents' direct transactions.     

Rushes in Large Timing Games

We develop a continuum player timing game that subsumes standard wars of attrition and pre‐emption games, and introduces a new rushes phenomenon. Payoffs are continuous and single‐peaked functions of the stopping time and stopping quantile. We show that if payoffs are hump‐shaped in the quantile, then a sudden “rush” of players stops in any Nash or subgame perfect equilibrium. Fear relaxes the first mover advantage in pre‐emption games, asking that the least quantile beat the average; greed relaxes the last mover advantage in wars of attrition, asking just that the last quantile payoff exceed the average. With greed, play is inefficiently late: an accelerating war of attrition starting at optimal time, followed by a rush. With fear, play is inefficiently early: a slowing pre‐emption game, ending at the optimal time, preceded by a rush. The theory predicts the length, duration, and intensity of stopping, and the size and timing of rushes, and offers insights for many common timing games.     

Existence of Optimal Mechanisms in Principal‐Agent Problems

We provide general conditions under which principal‐agent problems with either one or multiple agents admit mechanisms that are optimal for the principal. Our results cover as special cases pure moral hazard and pure adverse selection. We allow multidimensional types, actions, and signals, as well as both financial and non‐financial rewards. Our results extend to situations in which there are ex ante or interim restrictions on the mechanism, and allow the principal to have decisions in addition to choosing the agent's contract. Beyond measurability, we require no a priori restrictions on the space of mechanisms. It is not unusual for randomization to be necessary for optimality and so it (should be and) is permitted. Randomization also plays an essential role in our proof. We also provide conditions under which some forms of randomization are unnecessary.     

Insurer Competition in Health Care Markets

The impact of insurer competition on welfare, negotiated provider prices, and premiums in the U.S. private health care industry is theoretically ambiguous. Reduced competition may increase the premiums charged by insurers and their payments made to hospitals. However, it may also strengthen insurers' bargaining leverage when negotiating with hospitals, thereby generating offsetting cost decreases. To understand and measure this trade‐off, we estimate a model of employer‐insurer and hospital‐insurer bargaining over premiums and reimbursements, household demand for insurance, and individual demand for hospitals using detailed California admissions, claims, and enrollment data. We simulate the removal of both large and small insurers from consumers' choice sets. Although consumer welfare decreases and premiums typically increase, we find that premiums can fall upon the removal of a small insurer if an employer imposes effective premium constraints through negotiations with the remaining insurers. We also document substantial heterogeneity in hospital price adjustments upon the removal of an insurer, with renegotiated price increases and decreases of as much as 10% across markets.     

First‐Price Auctions With General Information Structures: Implications for Bidding and Revenue

We explore the impact of private information in sealed‐bid first‐price auctions. For a given symmetric and arbitrarily correlated prior distribution over values, we characterize the lowest winning‐bid distribution that can arise across all information structures and equilibria. The information and equilibrium attaining this minimum leave bidders indifferent between their equilibrium bids and all higher bids. Our results provide lower bounds for bids and revenue with asymmetric distributions over values. We also report further characterizations of revenue and bidder surplus including upper bounds on revenue. Our work has implications for the identification of value distributions from data on winning bids and for the informationally robust comparison of alternative auction mechanisms.     

The Identification of Beliefs From Asset Demand

The demand for assets as prices and initial wealth vary identifies beliefs and attitudes towards risk. We derive conditions that guarantee identification with no knowledge either of the cardinal utility index (attitudes towards risk) or of the distribution of future endowments or payoffs of assets; the argument applies even if the asset market is incomplete and demand is observed only locally.     

Time‐Varying Risk Premium in Large Cross‐Sectional Equity Data Sets

We develop an econometric methodology to infer the path of risk premia from a large unbalanced panel of individual stock returns. We estimate the time‐varying risk premia implied by conditional linear asset pricing models where the conditioning includes both instruments common to all assets and asset‐specific instruments. The estimator uses simple weighted two‐pass cross‐sectional regressions, and we show its consistency and asymptotic normality under increasing cross‐sectional and time series dimensions. We address consistent estimation of the asymptotic variance by hard thresholding, and testing for asset pricing restrictions induced by the no‐arbitrage assumption. We derive the restrictions given by a continuum of assets in a multi‐period economy under an approximate factor structure robust to asset repackaging. The empirical analysis on returns for about ten thousand U.S. stocks from July 1964 to December 2009 shows that risk premia are large and volatile in crisis periods. They exhibit large positive and negative strays from time‐invariant estimates, follow the macroeconomic cycles, and do not match risk premia estimates on standard sets of portfolios. The asset pricing restrictions are rejected for a conditional four‐factor model capturing market, size, value, and momentum effects.     

Aspirations and Inequality

This paper develops a theory of socially determined aspirations, and the interaction of those aspirations with growth and inequality. The interaction is bidirectional: economy‐wide outcomes determine individual aspirations, which in turn determine investment incentives and social outcomes. Thus aspirations, income, and the distribution of income evolve jointly. When capital stocks lie in some compact set, steady state distributions must exhibit inequality and are typically clustered around local poles. When sustained growth is possible, initial histories matter. Either there is convergence to an equal distribution (with growth) or there is perennial relative divergence across clusters, with within‐cluster convergence. A central feature that drives these results is that aspirations that are moderately above an individual's current standard of living tend to encourage investment, while still higher aspirations may lead to frustration.     

Partial Ambiguity

We extend Ellsberg's two‐urn paradox and propose three symmetric forms of partial ambiguity by limiting the possible compositions in a deck of 100 red and black cards in three ways. Interval ambiguity involves a symmetric range of 50 − n to 50 + n red cards. Complementarily, disjoint ambiguity arises from two nonintersecting intervals of 0 to n and 100 − n to 100 red cards. Two‐point ambiguity involves n or 100 − n red cards. We investigate experimentally attitudes towards partial ambiguity and the corresponding compound lotteries in which the possible compositions are drawn with equal objective probabilities. This yields three key findings: distinct attitudes towards the three forms of partial ambiguity, significant association across attitudes towards partial ambiguity and compound risk, and source preference between two‐point ambiguity and two‐point compound risk. Our findings help discriminate among models of ambiguity in the literature.     

A Theory of Intergenerational Altruism

Modeling intergenerational altruism is crucial to evaluate the long‐term consequences of current decisions, and requires a set of principles guiding such altruism. We axiomatically develop a theory of pure, direct altruism: Altruism is pure if it concerns the total utility (rather than the mere consumption utility) of future generations, and direct if it directly incorporates the utility of all future generations. Our axioms deliver a new class of altruistic, forward‐looking preferences, whose weight put on the consumption of a future generation generally depends on the consumption of other generations. The only preferences lacking this dependence correspond to the quasi‐hyperbolic discounting model, which our theory characterizes. Our approach provides a framework to analyze welfare in the presence of altruistic preferences and addresses technical challenges stemming from the interdependent nature of such preferences.     

A Fairness Justification of Utilitarianism

Differences in preferences are important to explain variation in individuals' behavior. There is, however, no consensus on how to take these differences into account when evaluating policies. While prominent in the economic literature, the standard utilitarian criterion is controversial. According to some, interpersonal comparability of utilities involves value judgments with little objective basis. Others argue that social justice is primarily about the distribution of commodities assigned to individuals, rather than their subjective satisfaction or happiness. In this paper, we propose and axiomatically characterize a criterion, named opportunity‐equivalent utilitarian, that addresses these claims. First, our criterion ranks social alternatives on the basis of individuals' ordinal preferences. Second, it compares individuals based on the fairness of their assignments. Opportunity‐equivalent utilitarianism requires society to maximize the sum of specific indices of well‐being that are cardinal, interpersonally comparable, and represent each individual's preferences.