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Full-Text Articles in Social and Behavioral Sciences

Screening With Persuasion, Dirk Bergemann, Tibor Heumann, Stephen Morris Jul 2022

Screening With Persuasion, Dirk Bergemann, Tibor Heumann, Stephen Morris

Cowles Foundation Discussion Papers

We consider a general nonlinear pricing environment with private information. We characterize the information structure that maximizes the seller's profits. The seller who cannot observe the buyer's willingness to pay can control both the signal that a buyer receives about his value and the selling mechanism. The optimal screening mechanism has finitely many items even with a continuum of types. We identify sufficient conditions under which the optimal mechanism has a single item. Thus, the socially efficient variety of items is decreased drastically at the expense of higher revenue and lower information rents.


Trade, Leakage, And The Design Of A Carbon Tax, David A. Weisbach, Samuel Kortum, Michael Wang, Yujia Yao Jul 2022

Trade, Leakage, And The Design Of A Carbon Tax, David A. Weisbach, Samuel Kortum, Michael Wang, Yujia Yao

Cowles Foundation Discussion Papers

Climate policies vary widely across countries, with some countries imposing stringent emissions policies and others doing very little. When climate policies vary across countries, energy-intensive industries have an incentive to relocate to places with few or no emissions restrictions, an effect known as leakage. Relocated industries would continue to pollute but would be operating in a less desirable location. We consider solutions to the leakage problem in a simple setting where one region of the world imposes a climate policy and the rest of the world is passive. We solve the model analytically and also calibrate and simulate the model. …


A General Limit Theory For Nonlinear Functionals Of Nonstationary Time Series, Qiying Wang, Peter C. B. Phillips Jul 2022

A General Limit Theory For Nonlinear Functionals Of Nonstationary Time Series, Qiying Wang, Peter C. B. Phillips

Cowles Foundation Discussion Papers

Limit theory is provided for a wide class of covariance functionals of
a nonstationary process and stationary time series. The results are relevant
to estimation and inference in nonlinear nonstationary regressions that involve unit root, local unit root or fractional processes and they include both parametric and nonparametric regressions. Self normalized versions of these
statistics are considered that are useful in inference. Numerical evidence reveals a strong bimodality in the finite sample distributions that persists for very large sample sizes although the limit theory is Gaussian. New self normalized versions are introduced that deliver improved approximations.


Why Have Interest Rates Been Low?, Ray C. Fair Jul 2022

Why Have Interest Rates Been Low?, Ray C. Fair

Cowles Foundation Discussion Papers

This paper uses an estimated interest rate rule of the Fed to argue that the low recent interest rates may be due to a change in Fed behavior. Prior to the Great Recession the Fed’s behavior is consistent with the rule. During the recession the zero lower bound was hit in 2008.4. The rule unconstrained called for negative nominal interest rates during this period, and so it became inoperative. The Fed kept the interest rate at roughly zero through 2015. This was a period of low inflation and still fairly high unemployment rates, and the rule called for essentially zero …


Prudential Policy With Distorted Beliefs, Eduardo Dávila, Ansgar Walther Jun 2022

Prudential Policy With Distorted Beliefs, Eduardo Dávila, Ansgar Walther

Cowles Foundation Discussion Papers

This paper studies leverage regulation when equity investors and/or creditors have distorted beliefs relative to a planner. We characterize how the optimal regulation responds to arbitrary changes in investors’/creditors’ beliefs, relating our results to practical scenarios. We show that the optimal regulation depends on the type and magnitude of such changes. Optimism by investors calls for looser leverage regulation, while optimism by creditors, or jointly by both investors/creditors, calls for tighter leverage regulation. Our results apply to environments with i) planners with imperfect knowledge of investors’/creditors’ beliefs, ii) monetary policy, iii) bailouts and pecuniary externalities, and iv) endogenous beliefs.


Lookalike Targeting On Others' Journeys: Brand Versus Performance Marketing, K. Sudhir, Seung Yoon Lee, Subroto Roy Jun 2022

Lookalike Targeting On Others' Journeys: Brand Versus Performance Marketing, K. Sudhir, Seung Yoon Lee, Subroto Roy

Cowles Foundation Discussion Papers

Lookalike targeting is a widely used model-based ad targeting approach that uses a seed database of individuals to identify matching “lookalikes” for targeted customer acquisition. An advertiser has to make two key choices: (1) who to seed on and (2) seed-match rank range. First, we find that seeding on others’ journey stage can be effective in new customer acquisition; despite the cold start nature of customer acquisition using Lookalike audiences, third parties can indeed identify factors unobserved to the advertiser that move individuals along the journey and can be correlated with the lookalikes. Further, while journey-based seeding adds no incremental …


Econometric Analysis Of Asset Price Bubbles, Shuping Shi, Peter C. B. Phillips Jun 2022

Econometric Analysis Of Asset Price Bubbles, Shuping Shi, Peter C. B. Phillips

Cowles Foundation Discussion Papers

In the presence of bubbles, asset prices consist of a fundamental and a bubble component, with the bubble component following an explosive dynamic. The general idea for bubble identification is to apply explosive root tests to a proxy of the unobservable bubble. Three notable proxies are the real asset prices, log price-payoff ratios, and estimated non-fundamental components. The rationale for all three proxy choices rests on the definition of bubbles, which has been presented in various forms in the literature. This chapter provides a theoretical framework that incorporates several definitions of bubbles (and fundamentals) and offers guidance for selecting proxies. …


Weak Identification Of Long Memory With Implications For Inference, Peter C. B. Phillips Jun 2022

Weak Identification Of Long Memory With Implications For Inference, Peter C. B. Phillips

Cowles Foundation Discussion Papers

This paper explores weak identification issues arising in commonly used models of
economic and financial time series. Two highly popular configurations are shown to
be asymptotically observationally equivalent: one with long memory and weak autoregressive dynamics, the other with antipersistent shocks and a near-unit autoregressive
root. We develop a data-driven semiparametric and identification-robust approach to
inference that reveals such ambiguities and documents the prevalence of weak identification in many realized volatility and trading volume series. The identification-robust empirical evidence generally favors long memory dynamics in volatility and volume, a conclusion that is corroborated using social-media news flow data.


Selection In The Presence Of Implicit Bias: The Advantage Of Intersectional Constraints, Anay Mehrota, Bary S.R. Pradelski, Nisheeth Vishnoi Jun 2022

Selection In The Presence Of Implicit Bias: The Advantage Of Intersectional Constraints, Anay Mehrota, Bary S.R. Pradelski, Nisheeth Vishnoi

Cowles Foundation Discussion Papers

In selection processes such as hiring, promotion, and college admissions, implicit bias toward socially-salient attributes such as race, gender, or sexual orientation produces persistent inequality and reduces utility for the decision-maker. Recent works show that interventions like the Rooney Rule, which require a minimum quota of individuals from each affected group, are very effective in improving utility when individuals belong to at most one affected group. However, in several settings, individuals belong to multiple affected groups and, consequently, face more extreme implicit bias due to this intersectionality. We consider independently drawn utilities and show that, with intersectionality, the aforementioned non-intersectional …


Asymptotics Of Polynomial Time Trend Estimation And Hypothesis Testing Under Rank Deficiency, Peter C. B. Phillips May 2022

Asymptotics Of Polynomial Time Trend Estimation And Hypothesis Testing Under Rank Deficiency, Peter C. B. Phillips

Cowles Foundation Discussion Papers

Limit theory is developed for least squares regression estimation of a model involving time trend polynomials and a moving average error process with a unit root. Models with these features can arise from data manipulation such as overdifferencing and model features such as the presence of multicointegration. The impact of such features on the asymptotic equivalence of least squares and generalized least squares is considered. Problems of rank deficiency that are induced asymptotically by the presence of time polynomials in the regression are also studied, focusing on the impact that singularities have on hypothesis testing using Wald statistics and matrix …


The Impact Of Upzoning On Housing Construction In Auckland, Ryan Greenaway-Mcgrevy, Peter C. B. Phillips May 2022

The Impact Of Upzoning On Housing Construction In Auckland, Ryan Greenaway-Mcgrevy, Peter C. B. Phillips

Cowles Foundation Discussion Papers

There is a growing debate about whether upzoning is an effective policy response to housing shortages and unaffordable housing. This paper provides empirical evidence to further inform debate by examining the various impacts of recently implemented zoning reforms on housing construction in Auckland, the largest metropolitan area in New Zealand. In 2016, the city upzoned approximately three quarters of its inner suburban land to facilitate construction of more intensive housing. We use a quasi-experimental approach to analyze the short-run impacts of the reform on construction, allowing for potential shifts in construction from non-upzoned to upzoned areas (negative spillovers) that would, …


Personalized Pricing And Competition, Andrew Rhodes, Jidong Zhou May 2022

Personalized Pricing And Competition, Andrew Rhodes, Jidong Zhou

Cowles Foundation Discussion Papers

We study personalized pricing (or first-degree price discrimination) in a general oligopoly model. In the short-run, when the market structure is fixed, the impact of personalized pricing hinges on the degree of market coverage (i.e., how many consumers buy). If coverage is high (e.g., because the production cost is low, or the number of firms is large), personalized pricing intensifies competition and so harms firms but benefits consumers, whereas the opposite is true if coverage is low. However in the long-run, when the market structure is endogenous, personalized pricing always benefits consumers because it induces the socially optimal level of …


Belief Convergence Under Misspecified Learning: A Martingale Approach, Mira Frick, Ryota Iijima, Yuhta Ishii Apr 2022

Belief Convergence Under Misspecified Learning: A Martingale Approach, Mira Frick, Ryota Iijima, Yuhta Ishii

Cowles Foundation Discussion Papers

We present an approach to analyze learning outcomes in a broad class of misspecified environments, spanning both single-agent and social learning. We introduce a novel “prediction accuracy” order over subjective models, and observe that this makes it possible to partially restore standard martingale convergence arguments that apply under correctly specified learning. Based on this, we derive general conditions to determine when beliefs in a given environment converge to some long-run belief either locally or globally (i.e., from some or all initial beliefs). We show that these conditions can be applied, first, to unify and generalize various convergence results in previously …


Gerrymandering And The Limits Of Representative Democracy, Kai Hao Yang, Alexander K. Zentefis Mar 2022

Gerrymandering And The Limits Of Representative Democracy, Kai Hao Yang, Alexander K. Zentefis

Cowles Foundation Discussion Papers

We assess the capacity of gerrymandering to undermine the will of the people in a representative democracy. Citizens have political positions represented on a spectrum, and electoral maps separate people into districts. We show that unrestrained gerrymandering can severely distort the composition of a legislature, potentially leading half the population to lose all representation of their views. This means that, under majority rule in the congress, gerrymandering enables politicians to enact any legislation of their choice as long as it falls within the interquartile range of the political spectrum. Just as worrisome, gerrymandering can rig any legislation to pass instead …


Framing Human Action In Physics: Valid Reconstruction, Invalid Reduction, Shabnam Mousavi, Shyam Sunder Mar 2022

Framing Human Action In Physics: Valid Reconstruction, Invalid Reduction, Shabnam Mousavi, Shyam Sunder

Cowles Foundation Discussion Papers

We propose framing human action in physics before reaching to biology and social sciences, rearranging the order of their usual deployment. As an example, consider efforts to model altruism that start in a frame of psychological or social attributes such as reciprocity, empathy, and identity. Evolutionary roots might also be used by appeal to survival of the species from biology. Only then the modeler abstracts to work on notations, and to establish relationships using mathematical apparatus from physics. This top-down deployment of principles from various scientific disciplines has generated a body of coherent models, partially generalizable theories, and disagreements. In …


Consumer Bankruptcy, Mortgage Default And Labor Supply, Wenli Li, Costas Meghir, Florian Oswald Mar 2022

Consumer Bankruptcy, Mortgage Default And Labor Supply, Wenli Li, Costas Meghir, Florian Oswald

Cowles Foundation Discussion Papers

We specify and estimate a lifecycle model of consumption, housing demand and labor supply in an environment where individuals may file for bankruptcy or default on their mortgage. Uncertainty in the model is driven by house price shocks, education specific productivity shocks, and catastrophic consumption events, while bankruptcy is governed by the basic institutional framework in the US as implied by Chapter 7 and Chapter 13. The model is estimated using micro data on credit reports and mortgages combined with data from the American Community Survey. We use the model to understand the relative importance of the two chapters (7 …


Distributions Of Posterior Quantiles And Economic Applications, Kai Hao Yang, Alexander K. Zentefis Mar 2022

Distributions Of Posterior Quantiles And Economic Applications, Kai Hao Yang, Alexander K. Zentefis

Cowles Foundation Discussion Papers

We characterize the distributions of posterior quantiles under a given prior. Unlike the distributions of posterior means, which are known to be mean-preserving contractions of the prior, the distributions of posterior quantiles coincide with a first-order stochastic dominance interval bounded by an upper and a lower truncation of the prior. We apply this characterization to several environments, ranging across political economy, Bayesian persuasion, industrial organization, econometrics, finance, and accounting.


Is Selling Complete Information (Approximately) Optimal?, Dirk Bergemann, Yang Cai, Grigoris Velegkas, Mingfei Zhao Feb 2022

Is Selling Complete Information (Approximately) Optimal?, Dirk Bergemann, Yang Cai, Grigoris Velegkas, Mingfei Zhao

Cowles Foundation Discussion Papers

We study the problem of selling information to a data-buyer who faces a decision problem under uncertainty. We consider the classic Bayesian decision-theoretic model pioneered by Blackwell [Bla51, Bla53]. Initially, the data buyer has only partial information about the payoff-relevant state of the world. A data seller offers additional information about the state of the world. The information is revealed through signaling schemes, also referred to as experiments. In the single-agent setting, any mechanism can be represented as a menu of experiments. A recent paper by Bergemann et al. [BBS18] present a complete characterization of the revenue-optimal mechanism in a …


The Value Of Arbitrage, Eduardo Dávila, Daniel Graves, Cecilia Parlatore Feb 2022

The Value Of Arbitrage, Eduardo Dávila, Daniel Graves, Cecilia Parlatore

Cowles Foundation Discussion Papers

This paper studies the social value of closing price differentials in financial markets. We show that arbitrage gaps (price differentials between markets) exactly correspond to the marginal social value of executing an arbitrage trade. We further show that arbitrage gaps and measures of price impact are sufficient to compute the total social value from closing an arbitrage gap. Theoretically, we show that, for a given arbitrage gap, the total social value of arbitrage is higher in more liquid markets. We apply our framework to compute the welfare gains from closing arbitrage gaps in the context of covered interest parity violations …


A Panel Clustering Approach To Analyzing Bubble Behavior, Yanbo Liu, Peter C. B. Phillips, Jun Yu Feb 2022

A Panel Clustering Approach To Analyzing Bubble Behavior, Yanbo Liu, Peter C. B. Phillips, Jun Yu

Cowles Foundation Discussion Papers

This study provides new mechanisms for identifying and estimating explosive bubbles in mixed-root panel autoregressions with a latent group structure. A post-clustering approach is employed that combines a recursive k-means clustering algorithm with panel-data test statistics for testing the presence of explosive roots in time series trajectories. Uniform consistency of the k-means clustering algorithm is established, showing that the post-clustering estimate is asymptotically equivalent to the oracle counterpart that uses the true group identities. Based on the estimated group membership, right-tailed self-normalized t-tests and coefficient-based J-tests, each with pivotal limit distributions, are introduced to detect the explosive roots. The usual …


Optimal Inter-Release Time Between Sequentially Released Products, Jackie Luan, K. Sudhir Feb 2022

Optimal Inter-Release Time Between Sequentially Released Products, Jackie Luan, K. Sudhir

Cowles Foundation Discussion Papers

Marketers routinely use timing as a segmentation device through sequential product releases. While there has been much theoretical research on the optimal introduction strategy of sequential releases, there is little empirical research on this problem. This paper develops an econometric model to empirically solve the inter-release timing problem: it involves (1) developing and estimating a structural model of consumers’ choice for sequentially released products and (2) using the estimates of the structural model to solve for the optimal inter-release time. The empirical application focuses on the movie industry, where we specifically address the issue of the inter-release time between a …


Market-Minded Informational Intermediary And Unintended Welfare Loss, Wenji Xu, Kai Hao Yang Jan 2022

Market-Minded Informational Intermediary And Unintended Welfare Loss, Wenji Xu, Kai Hao Yang

Cowles Foundation Discussion Papers

This paper examines the welfare effects of informational intermediation. A (short-lived) seller sets the price of a product that is sold through a (long-lived) informational intermediary. The intermediary can disclose information about the product to consumers, earns a fixed percentage of the sales revenue in each period, and has concerns about its prominence---the market size it faces in the future, which in turn is increasing in past consumer surplus. We characterize the Markov perfect equilibria and the set of subgame perfect equilibrium payoffs of this game and show that when the market feedback (i.e., how much past consumer surplus affects …


Consumer Guilt And Sustainable Choice: Environmental Impact Of Durable Goods Innovation, K. Sudhir, Ramesh Shankar, Yuan Jin Jan 2022

Consumer Guilt And Sustainable Choice: Environmental Impact Of Durable Goods Innovation, K. Sudhir, Ramesh Shankar, Yuan Jin

Cowles Foundation Discussion Papers

The paper develops a modeling framework to study how sustainability interventions impact consumer adoption of durable goods innovation, firm profit and environmental outcomes in equilibrium. Our two period model with forward looking consumers and a monopoly firm introducing an innovation in the second period accommodates three key features: (1) it builds on the psychology literature linking reactive and anticipatory guilt to consumers’ environmental sensitivity on initial purchase and upgrade decisions; (2) it disentangles environmental harm over the product life into that arising from product use and dumping at replacement; and (3) it clarifies how a taxonomy of innovations (function, fashion …


Informational Intermediation, Market Feedback, And Welfare Losses, Wenji Xu, Kai Hao Yang Jan 2022

Informational Intermediation, Market Feedback, And Welfare Losses, Wenji Xu, Kai Hao Yang

Cowles Foundation Discussion Papers

This paper examines the welfare implications of third-party informational intermediation. A seller sets the price of a product that is sold through an informational intermediary. The intermediary can disclose information about the product to consumers and earns a fied percentage of sales revenue in each period. The intermediary's market base grows at a rate that increases with past consumer surplus. We characterize the stationary equilibria and the set of subgame perfect equilibrium payoffs. When market feedback (i.e., the extent to which past consumer surplus affects future market bases) increases, welfare may decrease in the Pareto sense.


Efficient Estimation Of Average Derivatives In Npiv Models: Simulation Comparisons Of Neural Network Estimators, Jiafeng Chen, Xiaohong Chen, Elie Tamer Dec 2021

Efficient Estimation Of Average Derivatives In Npiv Models: Simulation Comparisons Of Neural Network Estimators, Jiafeng Chen, Xiaohong Chen, Elie Tamer

Cowles Foundation Discussion Papers

Artificial Neural Networks (ANNs) can be viewed as \emph{nonlinear sieves} that can approximate complex functions of high dimensional variables more effectively than linear sieves. We investigate the computational performance of various ANNs in nonparametric instrumental variables (NPIV) models of moderately high dimensional covariates that are relevant to empirical economics. We present two efficient procedures for estimation and inference on a weighted average derivative (WAD): an orthogonalized plug-in with optimally-weighted sieve minimum distance (OP-OSMD) procedure and a sieve efficient score (ES) procedure. Both estimators for WAD use ANN sieves to approximate the unknown NPIV function and are root-n asymptotically normal …


A Game-Theoretic Analysis Of Childhood Vaccination Behavior: Nash Versus Kant, Philippe De Donder, Humberto Llavador, Stefan Penczynski, John E. Roemer, Roberto Vélez Dec 2021

A Game-Theoretic Analysis Of Childhood Vaccination Behavior: Nash Versus Kant, Philippe De Donder, Humberto Llavador, Stefan Penczynski, John E. Roemer, Roberto Vélez

Cowles Foundation Discussion Papers

Whether or not to vaccinate one’s child is a decision that a parent may approach in several ways. The vaccination game, in which parents must choose whether to vaccinate a child against a disease, is one with positive externalities (herd immunity). In some societies, not vaccinating is an increasingly prevalent behavior, due to deleterious side effects that parents believe may accompany vaccination. The standard game-theoretic approach assumes that parents make decisions according to the Nash behavioral protocol, which is individualistic and non-cooperative. Because of the positive externality that each child’s vaccination generates for others, the Nash equilibrium suffers from a …


The Measuring Of Assortativeness In Marriage, Pierre-André Chiappori, Monica Costa-Dias, Costas Meghir Dec 2021

The Measuring Of Assortativeness In Marriage, Pierre-André Chiappori, Monica Costa-Dias, Costas Meghir

Cowles Foundation Discussion Papers

Measuring the extent to which assortative matching
differs between two economies is challenging when the marginal distributions of the characteristic along which sorting takes place (e.g. education) also changes for either or both sexes. Drawing from the statistics literature we define simple conditions that any index has to satisfy to provide a measure of change in sorting that is not distorted by changes in the marginal distributions of the characteristic. While our characterisation of indices of assortativeness is not complete, and hence cannot exclude the possibility of multiple indices providing contradictory results, in an empirical application to US data we …


A Structural Model Of Organizational Buying For B2b Markets: Innovation Adoption With Share Of Wallet Contracts, Navid Mojir, K. Sudhir Nov 2021

A Structural Model Of Organizational Buying For B2b Markets: Innovation Adoption With Share Of Wallet Contracts, Navid Mojir, K. Sudhir

Cowles Foundation Discussion Papers

The paper develops the first structural model of organizational buying to study innovation diffusion in a B2B market. Our model is particularly applicable for routinized exchange relationships, whereby centralized buyers periodically evaluate and choose contracts, then downstream users or- der items on contracted terms. The model captures different utility tradeoffs for users and buyers while accounting for how buyer and user choices interact to impact user adoption/usage and buyer contracting. Further, the paper considers the dynamics induced by share of wallet (SOW) pricing contracts, commonly used in B2B markets to reward customer loyalty with discounts for buying more than a …


Incorporating Search And Sales Information In Demand Estimation, Ali Hortaçsu, Olivia R. Natan, Hayden Parsley, Timothy Schwieg, Kevin R. Williams Nov 2021

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

Cowles Foundation Discussion Papers

We propose an approach to modeling and estimating discrete choice demand 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 then 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 and measures of consumer search intensity. After presenting simulation studies, we consider an empirical application of air travel demand where product-level sales …


Endogenous Spatial Production Networks: Quantitative Implications For Trade & Productivity, Piyush Panigrahi Nov 2021

Endogenous Spatial Production Networks: Quantitative Implications For Trade & Productivity, Piyush Panigrahi

Cowles Foundation Discussion Papers

Larger Indian firms selling inputs to other firms tend to have more customers, tend to be used more intensively by their customers, and tend to have larger customers. Motivated by these regularities, I propose a novel empirical model of trade featuring endogenous formation of input-output linkages between spatially distant firms. The empirical model consists of (a) a theoretical framework that accommodates first order features of firm-to-firm network data, (b) a maximum likelihood framework for structural estimation that is uninhibited by the scale of data, and (c) a procedure for counterfactual analysis that speaks to the effects of micro- and macro- …