Social and Behavioral Sciences Commons^™

Bidder-Optimal Information Structures In Auctions, Dirk Bergemann, Tibor Heumann, Stephen Morris

Cowles Foundation Discussion Papers

We characterize the bidders' surplus maximizing information structure in an optimal auction for a single unit good and related extensions to multi-unit and multi-good problems. The bidders seeks to find a balance between participation (and the avoidance of exclusion) and efficiency. The information structure that maximizes the bidders surplus is given by a generalized Pareto distribution at the center of demand distribution, and displays complete information disclosure at either end of the Pareto distribution.

An Interview Study Of Pricing, Truman F. Bewley

Cowles Foundation Discussion Papers

Why do the prices of some products change little during business cycles while the prices of others vary wildly and tend to rise during economic booms and fall during recessions? In particular, why do the prices of some products not fall or fall only a little when the demand for them declines dramatically. It is not surprising that in highly competitive industries prices fluctuate with shifts in demand and supply, but what explains the stability of prices in markets where firms have more direct control of prices? These questions are central to an understanding of business cycles, and good answers …

On The Alignment Of Consumer Surplus And Total Surplus Under Competitive Price Discrimination, Dirk Bergemann, Benjamin Brooks, Stephen Morris

Cowles Foundation Discussion Papers

A number of producers of heterogeneous goods with heterogeneous costs compete in prices. When producers know their own production costs and consumers know their values, consumer surplus and total surplus are aligned: the information structure and equilibrium that maximize consumer surplus also maximize total surplus. We report when alignment extends to the case where either consumers are uncertain about their own values or producers are uncertain about their own costs, and we also give examples showing when it does not. Less information for either producers or consumers may intensify competition in a way that benefits consumers but results in inefficient …

Physical Decline Rates: Men Versus Women, Ray C. Fair

Cowles Foundation Discussion Papers

This paper uses world records by age in running, swimming, and rowing to estimate a biological frontier of decline rates for both men and women. Decline rates are assumed to be linear in percent terms up to a certain age and then quadratic after that, where the transition age is estimated. For both men and women decline rates are smallest for rowing, followed by swimming and then running.

Decline rates for women are roughly the same as those for men for the short swimming events. They are slightly larger for the longer swimming events and for the rowing events. They …

Managing Persuasion Robustly: The Optimality Of Quota Rules, Dirk Bergemann, Tan Gan, Yingkai Li

Cowles Foundation Discussion Papers

We study a sender-receiver model where the receiver can commit to a decision rule before the sender determines the information policy. The decision rule can depend on the signal structure and the signal realization that the sender adopts. This framework captures applications where a decision-maker (the receiver) solicit advice from an interested party (sender). In these applications, the receiver faces uncertainty regarding the sender’s preferences and the set of feasible signal structures. Consequently, we adopt a unified robust analysis framework that includes max-min utility, min-max regret, and min-max approximation ratio as special cases. We show that it is optimal for …

Leverage Cycle Theory Of Economic Crises And Booms, John Geanakoplos

Cowles Foundation Discussion Papers

Traditionally, booms and busts have been attributed to investors' excessive or insufficient demand, irrational exuberance and panics, or fraud. The leverage cycle begins with the observation that much of demand is facilitated by borrowing, and that crashes often occur simultaneously with the withdrawal of lending.

Lenders are worried about default, and therefore attach credit terms like collateral or minimum credit ratings to their contracts. The credit surface, depicting interest rates as a function of the credit terms, emerges in leverage cycle equilibrium. Investors and lenders (and regulators) choose where on the credit surface they trade. The leverage cycle …

Cost Based Nonlinear Pricing, Dirk Bergemann, Tibor Heumann, Stephen Morris

Cowles Foundation Discussion Papers

How should a seller offer quantity or quality differentiated products if they have no information about the distribution of demand? We consider a seller who cares about the "profit guarantee" of a pricing rule, that is, the minimum ratio of expected profits to expected social surplus for any distribution of demand.

We show that the profit guarantee is maximized by setting the price markup over cost equal to the elasticity of the cost function. We provide profit guarantees (and associated mechanisms) that the seller can achieve across all possible demand distributions. With a constant elasticity cost function, constant markup pricing …

Policy With Stochastic Hysteresis, Job Boerma, Georgii Riabov, Aleh Tsyvinski

Cowles Foundation Discussion Papers

This paper studies stochastic hysteresis − general dependence on the path of past decisions and shocks. We develop a new methodology for deriving the explicit dynamics of optimal policy with path-dependence and show that stochastic hysteresis changes optimal policy both qualitatively and quantitatively. We showcase our methodology by deriving new results for optimal policy with stochastic habits, tipping points, robustness concerns, limited commitment, and dynamic private information.

How Do Digital Advertising Auctions Impact Product Prices?, Alessandro Bonatti, Dirk Bergemann, Nicholas Wu

Cowles Foundation Discussion Papers

We ask how the advertising mechanisms of digital platforms impact product prices. We present a model that integrates three fundamental features of digital advertising markets: (i) advertisers can reach customers on and off-platform, (ii) additional data enhances the value of matching advertisers and consumers, and (iii) bidding follows auction-like mechanisms. We compare data-augmented auctions, which leverage the platform’s data advantage to improve match quality, with managed campaign mechanisms, where advertisers’ budgets are transformed into personalized matches and prices through auto-bidding algorithms. In data-augmented second-price auctions, advertisers increase off-platform product prices to boost their competitiveness on-platform. This leads to socially efficient …

How Do Digital Advertising Auctions Impact Product Prices?, Dirk Bergemann, Alessandro Bonatti, Nick Wu

Cowles Foundation Discussion Papers

We ask how the advertising mechanisms of digital platforms impact product prices. We present a model that integrates three fundamental features of digital advertising markets: (i) advertisers can reach customers on and off-platform, (ii) additional data enhances the value of matching advertisers and consumers, and (iii) bidding follows auction-like mechanisms. We compare data-augmented auctions, which leverage the platform’s data advantage to improve match quality, with managed campaign mechanisms, where advertisers’ budgets are transformed into personalized matches and prices through auto-bidding algorithms. In data-augmented second-price auctions, advertisers increase off-platform product prices to boost their competitiveness on-platform. This leads to socially efficient …

Housing Fever In Australia 2020-2023: Insights From An Econometric Thermometer, Shuping Shi, Peter C. B. Phillips

Cowles Foundation Discussion Papers

Australian housing markets experienced widespread and, in some cases, extraordi-nary growth in prices between 2020 and 2023. Using recently developed methodology that accounts for fundamental economic drivers, we assess the existence and degree of speculative behaviour as well as the timing of exuberance and downturns in these markets. Our findings indicate that speculative behaviour was indeed present in six of the eight capital cities at some time over the period studied. The sequence of events in this nation-wide housing bubble began in the Brisbane market and concluded in Melbourne, Canberra, and Hobart following the interest rate hike implemented by the …

Policy Evaluation With Nonlinear Trended Outcomes: Covid-19 Vaccination Rates In The Us, Lynn Bergeland Morgan, Peter C. B. Phillips, Donggyu Sul

Cowles Foundation Discussion Papers

This paper points out some pitfalls in the use of two-way fixed effects (TWFE) regressions when outcome variables contain nonlinear or stochastic trend components. When a policy change shifts trend paths of outcome variables conventional TWFE estimation can distort results and invalidate inference. A robust solution is proposed by identifying determinants of dynamic club membership based on the idea of relative convergence, which can be assessed empirically by the so-called ‘logt’ test (Phillips & Sul, 2007a). Club membership in each time period is estimated by recursive regression, transforming outcome variables to statistically stable, stationary status. Time varying club membership can …

Privacy Preserving Signals, Philipp Strack, Kai Hao Yang

Cowles Foundation Discussion Papers

A signal is privacy-preserving with respect to a collection of privacy sets, if the posterior probability assigned to every privacy set remains unchanged conditional on any signal realization. We characterize the privacy-preserving signals for arbitrary state space and arbitrary privacy sets. A signal is privacy-preserving if and only if it is a garbling of a reordered quantile signal. These signals are equivalent to couplings, which in turn lead to a characterization of optimal privacy-preserving signals for a decisionmaker. We demonstrate the applications of this characterization in the contexts of algorithmic fairness, price discrimination, and information design.

Panel Data Models With Time-Varying Latent Group Structures, Peter C. B. Phillips, Liangjun Su, Yiren Wang

Cowles Foundation Discussion Papers

This paper considers a linear panel model with interactive fixed effects and unobserved individual and time heterogeneities that are captured by some latent group structures and an unknown structural break, respectively. To enhance realism the model may have different numbers of groups and/or different group memberships before and after the break. With the preliminary nuclear-norm-regularized estimation followed by row- and column-wise linear regressions, we estimate the break point based on the idea of binary segmentation and the latent group structures together with the number of groups before and after the break by sequential testing K-means algorithm simultaneously. It is shown …

New Asymptotics Applied To Functional Coefficient Regression And Climate Sensitivity Analysis, Qiying Wang, Peter C. B. Phillips, Ying Wang

Cowles Foundation Discussion Papers

A general asymptotic theory is established for sample cross moments of nonstationary time series, allowing for long range dependence and local unit roots. The theory provides a substantial extension of earlier results on nonparametric regression that include near-cointegrated nonparametric regression as well as spurious nonparametric regression. Many new models are covered by the limit theory, among which are functional coefficient regressions in which both regressors and the functional covariate are nonstationary. Simulations show finite sample performance matching well with the asymptotic theory and having broad relevance to applications, while revealing how dual nonstationarity in regressors and covariates raises sensitivity to …

Demand Estimation With Infrequent Purchases And Small Market Sizes, Ali Hortaçsu, Olivia R. Natan, Hayden Parsley, Timothy Schwieg, Kevin R. Williams

Cowles Foundation Discussion Papers

We propose a demand estimation method that allows for a large number of zero sale observations, rich unobserved heterogeneity, and endogenous prices. We do so by modeling small market sizes through Poisson arrivals. Each of these arriving consumers solves a standard discrete choice problem. We present a Bayesian IV estimation approach that addresses sampling error in product shares and scales well to rich data environments. The data requirements are traditional market-level data as well as a measure of market sizes or consumer arrivals. After presenting simulation studies, we demonstrate the method in an empirical application of air travel demand.

Organizational Structure And Pricing: Evidence From A Large U.S. Airline, Ali Hortaçsu, Olivia R. Natan, Hayden Parsley, Timothy Schwieg, Kevin R. Williams

Cowles Foundation Discussion Papers

Firms facing complex objectives often decompose the problems they face, delegating different parts of the decision to distinct sub-units. Using comprehen-sive data and internal models from a large U.S. airline, we establish that airline pricing is not well approximated by a model of the firm as a unitary decision-maker. We show that observed prices, however, can be rationalized by account-ing for organizational structure and the decisions by departments that are tasked with supplying inputs to the observed pricing heuristic. Simulating the prices the firm would charge if it were a rational unitary decision-maker results in lower welfare than we estimate …

Rational Dialogues, John Geanakoplos, Heracles M. Polemarchakis

Cowles Foundation Discussion Papers

Any finite conversation can be rationalized.

The People And The Experts: Alternative Views On Economic Affairs, William D. Nordhaus, Douglas Rivers

Cowles Foundation Discussion Papers

Are speculators driving up oil prices? Should we raise energy prices to slow global warming? The present study takes a small number of such questions and compares the views of economic experts with those of the public. This comparison uses a panel of 2000+ respondents from YouGov with the views of the panel of experts from the IGM at the Chicago Booth School. We found that most of the US population is at best modestly informed about major economic questions and policies. The low level of knowledge is generally associated with the intrusion of ideological, political, and religious views that …

Affective Interdependence And Welfare, Aviad Heifetz, Enrico Minelli, Heracles M. Polemarchakis

Cowles Foundation Discussion Papers

Purely affective interaction allows the welfare of an individual to depend on her own actions and on the profile of welfare levels of others. Under an assumption on the structure of mutual affection that we interpret as “non-explosive mutual affection,” we show that equilibria of simultaneous-move affective interaction are Pareto optimal independently of whether or not an induced standard game exists. Moreover, if purely affective interaction in-duces a standard game, then an equilibrium profile of actions is a Nash equilibrium of the game, and this Nash equilibrium and Pareto optimal profile of strategies is locally dominant.

Managed Campaigns And Data-Augmented Auctions For Digital Advertising, Dirk Bergemann, Alessandro Bonatti, Nicholas Wu

Cowles Foundation Discussion Papers

We develop an auction model for digital advertising. A monopoly platform has access to data on the value of the match between advertisers and consumers. The platform support bidding with additional information and increase the feasible surplus for on-platform matches. Advertisers jointly determine their pricing strategy both on and off the platform, as well as their bidding for digital advertising on the platform. We compare a data-augmented second-price auction and a managed campaign mechanism. In the data-augmented auction, the bids by the advertisers are informed by the data of the platform regarding the value of the match. This results in …

Data, Competition, And Digital Platforms, Dirk Bergemann, Alessandro Bonatti

Cowles Foundation Discussion Papers

We analyze digital markets where a monopolist platform uses data to match multiproduct sellers with heterogeneous consumers who can purchase both on and o§ the platform. The platform sells targeted ads to sellers that recommend their products to consumers and reveals information to consumers about their values. The revenueoptimal mechanism is a managed advertising campaign that matches products and preferences e¢ ciently. In equilibrium, sellers o§er higher qualities at lower unit prices on than o§ the platform. Privacy-respecting data-governance rules such as organic search results or federated learning can lead to welfare gains for consumers.

Dynamic Price Competition: Theory And Evidence From Airline Markets, Jose M. Betancourt, Ali Hortaçsu, Aniko Öry (Oery), Kevin R. Williams

Cowles Foundation Discussion Papers

We introduce a model of dynamic pricing in perishable goods markets with competition and provide conditions for equilibrium uniqueness. Pricing dynamics are rich because both own and competitor scarcity affect future profits. We identify new competitive forces that can lead to misallocation due to selling units too quickly: the Bertrand scarcity trap. We empirically estimate our model using daily prices and bookings for competing U.S. airlines. We compare competitive equilibrium outcomes to those where firms use pricing heuristics based on observed internal pricing rules at a large airline. We find that pricing heuristics increase revenues (4-5%) and consumer surplus (3%).

Incorporating Sales And Arrivals Information In Demand Estimation, Ali Hortaçsu, Olivia R. Natan, Hayden Parsley, Timothy Schwieg, Kevin R. Williams

Cowles Foundation Discussion Papers

We propose a demand estimation method that allows for a large number of zero sale observations, rich unobserved heterogeneity, and endogenous prices. We do so by modeling small market sizes through Poisson arrivals. Each of these arriving con-sumers solves a standard discrete choice problem. We present a Bayesian IV estima-tion approach that addresses sampling error in product shares and scales well to rich data environments. The data requirements are traditional market-level data as well as a measure of market sizes or consumer arrivals. After presenting simulation studies, we demonstrate the method in an empirical application of air travel demand.

Policies, Projections, And The Social Cost Of Carbon: Results From The Dice-2023 Model, Lint Barrage, William D. Nordhaus

Cowles Foundation Discussion Papers

The present study examines the assumptions, modeling structure, and preliminary results of DICE-2023, the revised Dynamic Integrated Model of Climate and the Economy (DICE), updated to 2023. The revision contains major changes in the carbon and climate modules, the treatment of non-industrial greenhouse gases, discount rates, as well as updates on all the major components. The major changes are a significant reduction in the target for the optimal (cost-beneficial) temperature path, a lower cost of reaching the 2 °C target, an analysis of the impact of the Paris Accord, and a major increase in the estimated social cost of carbon.

The Effect Of Education Policy On Crime: An Intergenerational Perspective, Costas Meghir, Marten Palme, Marieke Schnabel

Cowles Foundation Discussion Papers

We study the intergenerational effect of education policy on crime. We use Swedish administrative data that links outcomes across generations with crime records and we show that the comprehensive school reform, gradually implemented between 1949 and 1962, reduced conviction rates both for the generation directly affected by the reform and for their sons. The reduction in conviction rates occurred across many types of crime. Key mediators for this reduction in the child generation are an increase in education and a decline in crime amongst their fathers.

When Do Consumers Talk?, Ishita Chakraborty, Joyee Deb, Aniko Öry (Oery)

Cowles Foundation Discussion Papers

The propensity of consumers to talk after a good versus bad experience with a product can differ based on information available from other marketing channels, for example the brand image or advertising. This can result in selection of positive/negative word-of-mouth for reasons outside of product quality. We develop a unifying framework of WOM, brand image, product advertising, and pricing with a focus on the instrumentality motive of word-of-mouth: early adopters talk to inform new buyers’ purchasing decisions. The different marketing channels shape the information sharing behavior of the early adopter as well as the target consumer’s purchase decision. We show …

The Optimality Of Constant Mark-Up Pricing, Dirk Bergemann, Tibor Heumann, Stephen Morris

Cowles Foundation Discussion Papers

We consider a nonlinear pricing environment with private information. We provide profit guarantees (and associated mechanisms) that the seller can achieve across all possible distributions of willingness to pay of the buyers. With a constant elasticity cost function, constant markup pricing provides the optimal revenue guarantee across all possible distributions of willingness to pay and the lower bound is attained under a Pareto distribution. We characterize how profits and consumer surplus vary with the distribution of values and show that Pareto distributions are extremal. We also provide a revenue guarantee for general cost functions.We establish equivalent results for optimal procurement …

Extreme Points Of First-Order Stochastic Dominance Intervals: Theory And Applications, Kai Hao Yang, Alexander K. Zentefis

Cowles Foundation Discussion Papers

We characterize the extreme points of first-order stochastic dominance (FOSD) intervals and show how these intervals are at the heart of many topics in economics. Using knowledge of these extreme points, we characterize the distributions of posterior quantiles under a given prior, leading to an analogue of a classical result regarding the distribution of posterior means. We apply this analogue to various economic subjects, including the psychology of judgement, political economy, and Bayesian persuasion. In addition, FOSD intervals provide a common structure to security design. We use the extreme points to unify and generalize seminal results in that literature when …

Influence Or Advertise: The Role Of Social Learning In Influencer Marketing, Ron Berman, Aniko Öry (Oery), Xudong Zheng

Cowles Foundation Discussion Papers

We compare influencer marketing to targeted advertising from information aggregation and product awareness perspectives. Influencer marketing leverages network effects by allowing consumers to socially learn from each other about their experienced content utility, but consumers may not know whether to attribute promotional post popularity to high content or high product quality. If the quality of a product is uncertain (e.g., it belongs to an unknown brand), then a mega influencer with consistent content quality fosters more information aggregation than a targeted ad and thereby yields higher profits. When we compare influencer marketing to untargeted ad campaigns or if the product …