Long-run selection and the work ethic

That individuals contribute in social dilemma interactions even when contributing is costly is a well-established observation in the experimental literature. Since a contributor is always strictly worse off than a non-contributor the question is raised if an intrinsic motivation to contribute can survive in an evolutionary setting. Using recent results on deterministic approximation of stochastic evolutionary dynamics we give conditions for equilibria with a positive number of contributors to be selected in the long run.

How enforcement institutions affect markets

In an experiment we study market outcomes under alternative incentive structures for third-party enforcers. Our transactions resemble an anonymous credit market where lenders can give loans and borrowers can repay them. When borrowers default, judges are free to enforce repayment but are themselves paid differently in each of three treatments. First, paying judges according to lenders votes maximizes surplus and the equality of earnings. In contrast, paying judges according to borrowers votes triggers insufficient enforcement, destroying the market and producing the lowest surplus and the most unequal distribution of earnings. Lastly, judges paid the average earnings of borrowers and lenders achieve results close to those based on lender voting. We employ a steps-of-reasoning argument to interpret the performances of different institutions. When voting and enforcement rights are allocated to different classes of actors, the difficulty of their task changes, and arguably as a consequence they focus on high or low surplus equilibria.

Overconfidence and market efficiency with heterogeneous agents

We study financial markets in which both rational and overconfident agents coexist and make endogenous information acquisition decisions. We demonstrate the following irrelevance result: when a positive fraction of rational agents (endogeneously) decides to become informed in equilibrium, prices are set as if all investors were rational, and as a consequence the overconfidence bias does not aect informational efficiency, price volatility, rational traders expected profits or their welfare. Intuitively, as overconfidence goes up, so does price infornativeness, which makes rational agents cut their information acquisition activities, effectively undoing the standard effect of more aggressive trading by the overconfident.

On Rothschild-Stiglitz as competitive pooling

Dubey and Geanakoplos [2002] have developed a theory of competitive pooling, which incorporates adverse selection and signaling into general equilibrium. By recasting the Rothschild-Stiglitz model of insurance in this framework, they find that a separating equilibrium always exists and is unique.We prove that their uniqueness result is not a consequence of the framework, but rather of their definition of refined equilibria. When other types of perturbations are used, the model allows for many pooling allocations to be supported as such: in particular, this is the case for pooling allocations that Pareto dominate the separating equilibrium.

Equilibrium unemployment insurance

In this paper, we incorporate a positive theory of unemployment insuranceinto a dynamic overlapping generations model with search-matching frictionsand on-the-job learning-by-doing. The model shows that societies populatedby identical rational agents, but differing in the initial distributionof human capital across agents, may choose very different unemploymentinsurance levels in a politico-economic equilibrium. The interactionbetween the political decision about the level of the unemployment insuranceand the optimal search behavior of the unemployed gives rise to aself-reinforcing mechanism whichmay generate multiple steady-stateequilibria. In particular, a European-type steady-state with highunemployment, low employment turnover and high insurance can co-exist withan American-type steady-state with low unemployment, high employment turnoverand low unemployment insurance. A calibrated version of the model featurestwo distinct steady-state equilibria with unemployment levels and durationrates resembling those of the U.S. and Europe, respectively.

Children's work in Spanish textiles during the 19th and 20th Centuries

This essay deals with the reasons explaining children s work in 19th century textile factories and their removal during the first part of the 20th century. The inadequacy of the structure of incomes and expenditures of the household and the very low economic incentives to educate children can explain why children were in the factories and not in the school. Moreover, the marginal economic contribution to the economy of the household of a child was the same as that of his mother. This normally implied that women and children were perfect substitutes. When the family had a child at working age this allowed to replace the paid work input of the mother. With the beginnings of the 20th century a set of changes leading to the increase of women s productivity and hourly real wages, switched the situation and involved the new incorporation of women into paid work and the investment in children s human capital.

Constant interest rate projections without the curse of indeterminacy

Constant interest rate (CIR) projections are often criticized on the grounds that they are inconsistent with the existence of a unique equilibrium in a variety of forward-looking models. This note shows howto construct CIR projections that are not subject to that criticism, using a standard New Keynesian model as a reference framework.

Tracking the invisible hand: Convergence of double auctions to competitive equilibrium

Economics is the science of want and scarcity. We show that want andscarcity, operating within a simple exchange institution (double auction),are sufficient for an economy consisting of multiple inter--related marketsto attain competitive equilibrium (CE). We generalize Gode and Sunder's(1993a, 1993b) single--market finding to multi--market economies, andexplore the role of the scarcity constraint in convergence of economies to CE.When the scarcity constraint is relaxed by allowing arbitrageurs in multiple markets to enter speculative trades, prices still converge to CE,but allocative efficiency of the economy drops. \\Optimization by individual agents, often used to derive competitive equilibria,are unnecessary for an actual economy to approximately attain such equilibria.From the failure of humans to optimize in complex tasks, one need not concludethat the equilibria derived from the competitive model are descriptivelyirrelevant. We show that even in complex economic systems, such equilibriacan be attained under a range of surprisingly weak assumptions about agentbehavior.

Asset pricing with idiosyncratic risk and overlapping generations

A number of existing studies have concluded that risk sharing allocations supported by competitive, incomplete markets equilibria are quantitatively close to first-best. Equilibrium asset prices in these models have been difficult to distinguish from those associated with a complete markets model, the counterfactual features of which have been widely documented. This paper asks if life cycle considerations, in conjunction with persistent idiosyncratic shocks which become more volatile during aggregate downturns, can reconcile the quantitative properties of the competitive asset pricing framework with those of observed asset returns. We begin by arguing that data from the Panel Study on Income Dynamics support the plausibility of such a shock process. Our estimates suggest a high degree of persistence as well as a substantial increase in idiosyncratic conditional volatility coincident with periods of low growth in U.S. GNP. When these factors are incorporated in a stationary overlapping generations framework, the implications for the returns on risky assets are substantial. Plausible parameterizations of our economy are able to generate Sharpe ratios which match those observed in U.S. data. Our economy cannot, however, account for the level of variability of stock returns, owing in large part to the specification of its production technology.

On p-beauty contest integer games

In this paper we provide a full characterization of the pure-strategyNash Equilibria for the p-Beauty Contest Game when we restrict player schoices to integer numbers. Opposed to the case of real number choices,equilibrium uniqueness may be lost depending on the value of p and thenumber of players: in particular, as p approaches 1 any symmetric profileconstitutes a Nash Equilibrium. We also show that any experimental p-BeautyContest Game can be associated to a game with the integer restriction andthus multiplicity of equilibria becomes an issue. Finally, we show thatin these games the iterated deletion of weakly dominated strategies maynot lead to a single outcome while the iterated best-reply process alwaysdoes (though the outcome obtained depends on the initial conditions).

Long run relationships and price rigidity

I study a repeated buyer-seller relationship for the exchange of a givengood. Asymmetric information over the buyer's reservation price, which issubject to random shocks, may lead the seller to use a rigid pricing policydespite the possibility of making higher profits through price discriminationacross the different satates of the buyer's reservation price. The existence of a flexible price subgame perfect equilibrium is shown for the buyerssufficiently locked-in. When the seller faces a population of buyers whose degree of involvmentin the relatioship is unknown, the flexible price equilibrium is notnecessarily optimal. Thus tipically the seller will prefer to use therigid price strategy. A learning process allowing the seller to screenthe population of buyers is derived abd the existence of a switching pointbetween the two regimes (i.e. price rigidity and price felxibility) isshown.

Effects of uncertain lifetime and annuity insurance on capital accumulation and growth

This paper studies the effects of uncertain lifetime on capitalaccumulation and growth and also the sensitivity of thoseeffects to the existence of a perfect annuities market. Themodel is an overlapping generations model with uncertainlifetimes. The technology is convex and such that the marginalproduct of capital is bounded away from zero. A contribution ofthis paper is to show that the existence of accidental bequestsmay lead the economy to an equilibrium that exhibits asymptoticgrowth, which is impossible in an economy with a perfect annuitiesmarket or with certain lifetimes. This paper also shows that ifindividuals face a positive probability of surviving in everyperiod, they may be willing to save at any age. This effect ofuncertain lifetime on savings may also lead the economy to anequilibrium exhibiting asymptotic growth even if there exists aperfect annuities market.

Bundling and competition for slots: On the portfolio effects of bundling

We consider competition among sellers when each of them sells a portfolio ofdistinct products to a buyer having limited slots. We study how bundling affectscompetition for slots. Under independent pricing, equilibrium often does not existand hence the outcome is often inefficient. When bundling is allowed, each sellerhas an incentive to bundle his products and an efficient equilibrium always exists.Furthermore, in the case of digital goods, all equilibria are efficient if slotting contracts are prohibited. We also identify portfolio effects of bundling and analyze theconsequences on horizontal mergers. Finally, we derive clear-cut policy implications.

Mixed equilibrium in a Downsian model with a favored candidate

This paper examines competition in the standard one-dimensional Downsian model of two-candidate elections, but where one candidate (A) enjoys an advantage over the other candidate (D). Voters' preferences are Euclidean, but any voter will vote for candidate A over candidate D unless D is closer to her ideal point by some fixed distance \delta. The location of the median voter's ideal point is uncertain, and its distribution is commonly known by both candidates. The candidates simultaneously choose locations to maximize the probability of victory. Pure strategy equilibria often fails to exist in this model, except under special conditions about \delta and the distribution of the median ideal point. We solve for the essentially unique symmetric mixed equilibrium, show that candidate A adopts more moderate policies than candidate D, and obtain some comparative statics results about the probability of victory and the expected distance between the two candidates' policies.

Moral hazard and non-exclusive contracts

This paper studies equilibria for economies characterized by moral hazard(hidden action), in which the set of contracts marketed in equilibrium isdetermined by the interaction of financial intermediaries.The crucial aspect of the environment that we study is thatintermediaries are restricted to trade non-exclusive contracts: theagents' contractual relationships with competing intermediaries cannot bemonitored (or are not contractible upon). We fully characterize equilibrium allocations and contracts. In thisset-up equilibrium allocations are clearly incentive constrainedinefficient. A robust property of equilibria with non-exclusivity isthat the contracts issued in equilibrium do not implement the optimalaction. Moreover we prove that, whenever equilibrium contracts doimplement the optimal action, intermediaries make positive profits andequilibrium allocations are third best inefficient (where the definitionof third best efficiency accounts for constraints which capture thenon-exclusivity of contracts).