Volume 87, Issue 1 (January 2019) has just been published. The full content of the journal is accessible at
From Aggregate Betting Data to Individual Risk Preferences
Pierre‐André Chiappori, Bernard Salanié, François Salanié, Amit Gandhi
We show that even in the absence of data on individual decisions, the distribution of individual attitudes towards risk can be identified from the aggregate conditions that characterize equilibrium on markets for risky assets. Taking parimutuel horse races as a textbook model of contingent markets, we allow for heterogeneous bettors with very general risk preferences, including non‐expected utility. Under a standard single‐crossing condition on preferences, we identify the distribution of preferences among the population of bettors and we derive testable implications. We estimate the model on data from U.S. races. Specifications based on expected utility fit the data very poorly. Our results stress the crucial importance of nonlinear probability weighting. They also suggest that several dimensions of heterogeneity may be at work.
Equilibria under Knightian Price Uncertainty
Patrick Beissner, Frank Riedel
We study economies with Knightian uncertainty about state prices. We introduce an equilibrium concept with sublinear prices and prove that equilibria exist under weak conditions. In general, such equilibria lead to inefficient allocations; they coincide with Arrow–Debreu equilibria if and only if the values of net trades are ambiguity‐free in mean. In economies without aggregate uncertainty, inefficiencies are generic. Equilibrium allocations under price uncertainty are efficient in a constrained sense that we call uncertainty–neutral efficient. Arrow–Debreu equilibria turn out to be non‐robust with respect to the introduction of Knightian uncertainty.
Stable Matching in Large Economies
Yeon‐Koo Che, Jinwoo Kim, Fuhito Kojima
We study stability of two‐sided many‐to‐one matching in which firms' preferences for workers may exhibit complementarities. Although such preferences are known to jeopardize stability in a finite market, we show that a stable matching exists in a large market with a continuum of workers, provided that each firm's choice is convex and changes continuously as the set of available workers changes. We also study the existence and structure of stable matchings under preferences exhibiting substitutability and indifferences in a large market. Building on these results, we show that an approximately stable matching exists in large finite economies. We extend our framework to ensure a stable matching with desirable incentive and fairness properties in the presence of indifferences in firms' preferences.
The Myopic Stable Set for Social Environments
Thomas Demuynck, P. Jean‐Jacques Herings, Riccardo D. Saulle, Christian Seel
We introduce a new solution concept for models of coalition formation, called the myopic stable set (MSS). The MSS is defined for a general class of social environments and allows for an infinite state space. An MSS exists and, under minor continuity assumptions, it is also unique.
Optimal Development Policies with Financial Frictions
Oleg Itskhoki, Benjamin Moll
Is there a role for governments in emerging countries to accelerate economic development by intervening in product and factor markets? To address this question, we study optimal dynamic Ramsey policies in a standard growth model with financial frictions. The optimal policy intervention involves pro‐business policies like suppressed wages in early stages of the transition, resulting in higher entrepreneurial profits and faster wealth accumulation. This, in turn, relaxes borrowing constraints in the future, leading to higher labor productivity and wages. In the long run, optimal policy reverses sign and becomes pro‐worker. In a multi‐sector extension, optimal policy subsidizes sectors with a latent comparative advantage and, under certain circumstances, involves a depreciated real exchange rate. Our results provide an efficiency rationale, but also identify caveats, for many of the development policies actively pursued by dynamic emerging economies.
Social Networks, Reputation, and Commitment: Evidence from a Savings Monitors Experiment
Emily Breza, Arun G. Chandrasekhar
We conduct an experiment to study whether individuals save more when information about the progress toward their self‐set savings goal is shared with another village member (a “monitor”). We develop a reputational framework to explore how a monitor's effectiveness depends on her network position. Savers who care about whether others perceive them as responsible should save more with central monitors, who more widely disseminate information, and proximate monitors, who pass information to individuals with whom the saver interacts frequently. We randomly assign monitors to savers and find that monitors on average increase savings by 36%. Consistent with the framework, more central and proximate monitors lead to larger increases in savings. Moreover, information flows through the network, with 63% of monitors telling others about the saver's progress. Fifteen months after the conclusion of the experiment, other villagers have updated their beliefs about the saver's responsibility in response to the intervention.
Career and Family Decisions: Cohorts Born 1935–1975
Zvi Eckstein, Michael Keane, Osnat Lifshitz
Comparing the 1935 and 1975 U.S. birth cohorts, wages of married women grew twice as fast as for married men, and the wage gap between married and single women turned from negative to positive. The employment rate of married women also increased sharply, while that of other groups remained quite stable. To better understand these diverse patterns, we develop a life‐cycle model incorporating individual and household decisions about education, employment, marriage/divorce, and fertility. The model provides an excellent fit to wage and employment patterns, along with changes in education, marriage/divorce rates, and fertility. We assume fixed preferences, but allow for four exogenously changing factors: (i) mother's education, health, and taxes/transfers; (ii) marriage market opportunities and divorce costs; (iii) the wage structure and job offers; (iv) contraception technology. We quantify how each factor contributed to changes across cohorts. We find that factor (iii) was the most important force driving the increase in relative wages of married women, but that all four factors are important for explaining the many socio‐economic changes that occurred in the past 50 years. Finally, we use the model to simulate a shift from joint to individual taxation. In a revenue‐neutral simulation, we predict this would increase employment of married women by 9% and the marriage rate by 8.1%.
Precautionary Savings, Illiquid Assets, and the Aggregate Consequences of Shocks to Household Income Risk
Christian Bayer, Ralph Luetticke, Lien Pham‐Dao, Volker Tjaden
Households face large income uncertainty that varies substantially over the business cycle. We examine the macroeconomic consequences of these variations in a model with incomplete markets, liquid and illiquid assets, and a nominal rigidity. Heightened uncertainty depresses aggregate demand as households respond by hoarding liquid “paper” assets for precautionary motives, thereby reducing both illiquid physical investment and consumption demand. We document the empirical response of portfolio liquidity and aggregate activity to surprise changes in idiosyncratic income uncertainty and find both to be quantitatively in line with our model. The welfare consequences of uncertainty shocks and of the policy response thereto depend crucially on a household's asset position.
Optimal Taxation, Marriage, Home Production, and Family Labor Supply
George‐Levi Gayle, Andrew Shephard
An empirical approach to optimal income taxation design is developed within an equilibrium collective marriage market model with imperfectly transferable utility. Taxes distort time allocation decisions, as well as marriage market outcomes, and the within household decision process. Using data from the American Community Survey and American Time Use Survey, we structurally estimate our model and explore empirical design problems. We allow taxes to depend upon marital status, with the form of tax jointness for married couples unrestricted. We find that the optimal tax system for married couples is characterized by negative jointness, although the welfare gains from jointness are modest. These welfare gains are then shown to be increasing in the gender wage gap, with taxes here, as in the case of gender based taxation, providing an instrument to address within household inequality.
Consistent Pseudo-Maximum Likelihood Estimators and Groups of Transformations
C. Gouriéroux, A. Monfort, J.‐M. Zakoïan
In a transformation model , where the errors are i.i.d. and independent of the explanatory variables , the parameters can be estimated by a pseudo‐maximum likelihood (PML) method, that is, by using a misspecified distribution of the errors, but the PML estimator of is in general not consistent. We explain in this paper how to nest the initial model in an identified augmented model with more parameters in order to derive consistent PML estimators of appropriate functions of parameter . The usefulness of the consistency result is illustrated by examples of systems of nonlinear equations, conditionally heteroscedastic models, stochastic volatility, or models with spatial interactions.