Economics Commons^™

Thin Sets Are Not Equally Thin: Minimax Learning Of Submanifold Integrals, Xiaohong Chen, Wayne Yuan Gao

Cowles Foundation Discussion Papers

Many economic parameters are identified by “thin sets” (submanifolds with Lebesgue measure zero) and hence difficult to recover from data in an ambient space. This paper provides a unified theory for estimation and inference of such “thin-set” identified functionals. We show that thin sets are not equally thin: their intrinsic dimensionality m matters in a precise manner. For a nonparametric regression h0 with Hölder smoothness s and d-dimensional covariates in the ambient space, we show that n^{-s/(2s+d−m)} is the minimax optimal rate of estimating linear and nonlinear (e.g., quadratic, upper contour) integrals of h0 on an m-dimensional submanifold (0 ≤ …

Screening And Segmenting: A Consumer Surplus Perspective, Dirk Bergemann, Tibor Heumann, Michael C. Wang

Cowles Foundation Discussion Papers

We analyze consumer surplus when a monopolist can adjust both prices and prod-uct qualities across segments, engaging in second- and third-degree price discrimination simultaneously. We characterize the consumer-optimal segmentation and show that it has a striking structure: consumers with the same value receive the same quality in every segment, though prices differ. Under mild conditions, any segmentation harms consumers if and only if demand is sufficiently more elastic than supply. Hence, po-tential benefits for consumers depend critically on demand and supply elasticities. These findings have implications for regulatory policy regarding price discrimination and market segmentation.

Identifying Common Trend Determinants In Panel Data, Yoonseok Lee, Peter C.B. Phillips, Suyong Song, Donggyu Sul

Cowles Foundation Discussion Papers

This paper develops a novel method for identifying observable determinants of latent common trends in nonstationary panel data, which are typically removed or controlled in two-way fixed effects regressions. By examining cross sectional dispersion processes, we assess whether panel series exhibit distributional convergence toward specific observed time series, revealing them as long run determinants of the underlying latent trend. The approach also offers a new perspective on cointegration between time series and panel data, focusing on the relative variation of the panel data with respect to the cointegration error. Applying this method to U.S. state-level crime rates demonstrates that the …

The Skill Premium In Times Of Rapid Technological Change, Tarek Hassan, Aakash Kalyani, Pascual Restrepo

Cowles Foundation Discussion Papers

No abstract provided.

Trade, Labor Market Concentration, And Wages, Mayara Felix

Cowles Foundation Discussion Papers

I estimate the effect of trade on local labor market concentration and its implications for wages using employer-employee linked data and tariff shocks from Brazil’s trade liberalization. Trade increased concentration by 7%, an effect driven by firm exit and worker flows to surviving import-competing firms. Increased concentration reduced wage take-home shares—estimated at 50 cents on the dollar pre-shock—enough to offset small wage gains from reallocation, but did not meaningfully reduce wages on net. Most of the wage declines attributed to Brazil’s trade liberalization resulted instead from reductions in the marginal revenue product of labor. Incorporating informality reveals substantial regional heterogeneity.

Subjective Earnings And Employment Dynamics, Manual Arellano, Orazio Attanasio, Margherita Borella, Mariacristina De Nardi, Gonzalo Paz-Pardo

Cowles Foundation Discussion Papers

We develop a new approach to estimating earnings, job, and employment dynamics using subjective expectations data from the NY Fed Survey of Consumer Expectations. These data provide beliefs about future earnings offers and acceptance probabilities, offering direct information on counterfactual outcomes and enabling identification under weaker assumptions. Our framework avoids biases from selection and unobserved heterogeneity that affect models using realized outcomes. First-step fixed-effects regressions identify risk, persistence, and transition effects; second-step GMM recovers the covariance structure of unobserved heterogeneities such as ability, mobility, and match quality. We find lower risk and persistence of the individual productivity component than in …

Pricing And Production Without The Invisible Hand, Joel P. Flynn, George Nikolakoudis, Karthik A. Sastry

Cowles Foundation Discussion Papers

Modern theories of the business cycle do not allow for the simultaneous rational choice of both prices and quantities, instead assuming that an “invisible hand” determines one of these variables to clear markets. In this paper, we develop a macroeconomic framework in which both prices and quantities are chosen directly by firms, and exchange is both voluntary and efficient. Because of uncertainty about demand and productivity, individual product markets can be in excess supply or rationed. The absence of market-clearing changes pricing and production in qualitatively important ways: markups are no longer determined solely by the elasticity of demand, and …

Digital Ecosystems And Data Regulation, Andrew Rhodes, Jidong Zhou, Junjie Zhou

Cowles Foundation Discussion Papers

This paper develops a framework in which a multiproduct ecosystem competes with multiple single-product firms in both price and innovation. The ecosystem can use data from one product to improve the quality of its other products. We use the framework to study three regulatory policies aimed at leveling the playing field. Restricting the ecosystem’s cross-product data usage, or forcing it to share data with single-product firms, benefits those firms and induces them to innovate more. However, these policies also dampen the ecosystem’s incentive to collect data and innovate, potentially raising prices. Consumers are better off only when single-product firms are …

Initial-Condition-Robust Inference In Autoregressive Models, Donald W. K. Andrews, Ming Li, Yapeng Zheng

Cowles Foundation Discussion Papers

This paper considers confidence intervals (CIs) for the autoregressive (AR) parameter in an AR model with an AR parameter that may be close or equal to one. Existing CIs rely on the assumption of a stationary or fixed initial condition to obtain correct asymptotic coverage and good finite sample coverage. When this assumption fails, their coverage can be quite poor. In this paper, we introduce a new CI for the AR parameter whose coverage probability is completely robust to the initial condition, both asymptotically and in finite samples. This CI pays only a small price in terms of its length …

Willingness To Travel With Endogenous Distance: Evidence From The Changing Retail Landscape, Yue Cao, Judith Chevalier, Jessie Handbury, Hayden Parsley, Kevin Williams

Cowles Foundation Discussion Papers

Economists often use variation in consumers’ distance from services as a source of demand variation. This approach typically treats consumer-supplier distance as exogenous, despite suppliers strategically choosing locations. We develop a novel class of instruments to address this endogeneity. These instruments exploit the spatial distribution of consumer demographics and can be constructed from standard cross-sectional data, making them useful in a variety of spatial applications. Our preferred instruments use the income composition of concentric discs centered on the Central Business District. Applying these instruments to smartphone geolocation data for millions of devices across 18 metropolitan areas, we estimate consumer preferences …

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 only the individual’s own action and on the profile of welfare levels of others. Under an assumption on the structure of mutual affection that we interpret as non-reinforcing mutual affection, we show that equilibria of affective interaction are Pareto optimal. Moreover, if purely affective interaction induces a standard game, then an equilibrium profile of actions is a Nash equilibrium of the induced game, and this Nash equilibrium and Pareto optimal profile of strategies is locally dominant.

Human Capital And Development, Philippe Aghion, Ingvild Almås, Costas Meghir

Cowles Foundation Discussion Papers

Human capital is central to efforts to promote growth, convergence, and the elimination of poverty. Drawing on seminal macroeconomic frameworks by Nelson-Phelps, Lucas, and subsequent developments, alongside macro and microeconomic evidence, the chapter examines the role of human capital in driving innovation and growth, emphasizing how different types of human capital matter at different stages of development, and discussing obstacles to accumulation and evidence from policy interventions.

Wedges: A Microeconomic Perspective On Misallocation, Lauren Falcao Bergquist, Daniel Lashkari, Eric Verhoogen

Cowles Foundation Discussion Papers

This chapter, prepared for the Handbook of Development Economics (Vol. 6), reviews recent microeconomic evidence on the causes of resource misallocation in developing countries. It distinguishes between “technological” and “distortionary” wedges, develops a unified theoretical framework linking market power, taxes, financial frictions, and firm dynamics, and summarizes empirical findings from the “direct approach” to misallocation. The authors emphasize how wedges vary by firm size and discuss policy implications for improving allocative efficiency.

Information Design And Mechanism Design: An Integrated Framework, Dirk Bergemann, Tibor Heumann, Stephen Morris

Cowles Foundation Discussion Papers

We develop an integrated framework for information design and mechanism design in screening environments with quasilinear utility. Using the tools of majorization theory and quantile functions, we show that both information design and mechanism design problems reduce to maximizing linear functionals subject to majorization constraints. For mechanism design, the designer chooses allocations weakly majorized by the exogenous inventory. For information design, the designer chooses information structures that are majorized by the prior distribution. When the designer can choose both the mechanism and the information structure simultaneously, then the joint optimization problem becomes bilinear with two majorization constraints. We show that …

Extreme Points And Majorization, Andreas Kleiner, Benny Moldovanu, Philipp Strack

Cowles Foundation Discussion Papers

Many seemingly different economic problems share a common mathematical structure: they involve the maximization of a functional over sets of monotonic functions that are either majorized by, or majorize, a given function. This paper presents new, simpler proofs for the main characterization results of the extreme points of sets defined by monotonicity and majorization constraints obtained by Kleiner, Moldovanu, and Strack (2021). It demonstrates how these characterizations can be applied to a broad range of economic applications, including auction and information design, contest design, optimal delegation, optimal stopping, and decision problems under risk. The paper concludes with an overview of …

Employment Preferences Of Favela Residents, Mayara Felix, Beatriz Marcoje, Ieda Matavelli, Maria Clara Rodrigues

Cowles Foundation Discussion Papers

We document employment preferences of workers at the margin of informality using open-ended questions and discrete choice experiments in Brazil’s largest favela complex. Stated preferences emphasize pay and tangible job benefits rather than meaning or purpose, while primary complaints center on poor management, customers, and inflexible schedules. Workers exhibit high valuations for all formal sector amenities on average—unemployment insurance, parental leave, and termination notice—as well as for learning opportunities, but lower for non-formal sector amenities such as shorter commutes. Valuations vary systematically by employment sector in ways consistent with sorting: formal workers value formal amenities most, the self-employed value them …

Wedges: A Microeconomic Perspective On Misallocation, Lauren Falcao Bergquist, Danial Lashkari, Eric Verhoogen

Discussion Papers

This chapter takes stock of what has been learned from the recent micro-development literature about wedges—mechanisms generating dispersion in marginal revenue products of factors across firms, which are commonly interpreted as indicators of misallocation. We present a general theoretical framework that allows us to consider several different types of wedges simultaneously. We argue that it is important to distinguish between between technological wedges, which are present even in the efficient allocation that would be chosen by the social planner, and distortionary wedges, which are present in market equilibrium but not the social planner's allocation. Not all wedges, as we have …

Economic Development And The Environment, Kelsey Jack, Nicholas Ryan

Discussion Papers

Economic development relies on and transforms the environment. The transformation is evident in the poor environmental quality in many developing countries. For example, air quality in Southeast Asia is three times worse than in the United States, in sub-Saharan Africa four times worse and in South Asia more than six times worse. We model how environmental quality affects health, productivity and well-being and how individuals privately adapt to environmental hazards. We also model how collective action and formal regulation contribute to environmental quality. We draw three main findings from a review of empirical research on these mechanisms. First, individual adaptation …

Skipping The Factory: Service-Led Growth And Structural Transformation In The Developing World, Michael Peters, Youdon Zhang, Fabrizio Zilibotti

Discussion Papers

In today’s developing world, many economies appear to bypass industrialization and transition directly from agriculture to services. The largest rise in service employment has occurred in non-tradable consumer services, such as retail and hospitality, especially in urban areas, where many cities resemble consumer hubs built around local demand. These patterns of growth raise fundamental questions: Can service-led growth sustain improvements in living standards over time? Is service-led growth inherently biased toward affluent urban consumers? What role should policy play? To address these questions, we propose a parsimonious general equilibrium framework that incorporates non-homothetic preferences and locally non-tradable consumer services in …

Human Capital And Development, Philippe Aghion, Ingvild Almås, Costas Meghir

Discussion Papers

Human capital is central to efforts to promote growth, convergence, and the elimination of poverty. Drawing on the seminal macroeconomic frameworks by Nelson-Phelps, Lucas and subsequent developments, alongside macro and microeconomic evidence, we examine the role of human capital in driving innovation and growth. We highlight how different types of human capital, characterized by education level, matter in different stages of development. Despite documented increases in years of schooling, the world’s poorest regions still see stagnating outcomes in learning and education quality, potentially creating poverty traps where investments in neither physical nor human capital materialize. We discuss obstacles to human …

The Trade-Off Between Quality And Quantity: Evidence From A Field Experiment On Tutoring, Rohen Shaw

Cowles Foundation Discussion Papers

High-dosage tutoring has the potential to substantially raise adolescent academic achievement, but schools may lack the resources to deliver small-group tutoring frequently at scale. This paper studies the relative importance of tutoring group size (quality) versus tutoring frequency (quantity) using a randomized controlled trial in a Midwestern U.S. charter middle school. Students were randomized to a control group, tutoring twice a week in 2-student groups, or tutoring three times a week in 3-student groups, with equal total cost per student across the two treatment arms. The results show that tutoring in 2-student groups led to a statistically significant improvement in …

The First 1000 Days And Beyond: The Process Of Child Development, Orazio Attanasio

Cowles Foundation Discussion Papers

This paper reviews recent developments in the economics of human development, focusing on the early years of life as a critical period for shaping long-term outcomes. Early childhood development is inherently multidimensional: cognitive and socioemotional skills evolve dynamically and interact with health, nutrition, and environmental influences. Economists have contributed to this field by providing a conceptual unifying framework that highlights how key drivers of development reflect the choices of individuals operating under incentives and constraints. Within this framework, the paper emphasizes two central challenges: understanding the interactions among multiple dimensions of development and identifying causal links—particularly the effects of different …

Lessons Learned: Andreas Verykios And Kostas Tsatsaronis, Mercedes Cardona

Journal of Financial Crises

Andreas Verykios was appointed in 2018 to lead the board of directors of the General Council of the Hellenic Financial Stability Fund (HFSF), an independent special purpose vehicle created to stabilize the Greek banking sector in the wake of the country’s debt crisis. The Greek economy was badly affected by the Global Financial Crisis (GFC) and the Sovereign Debt Crisis, when the government was found to have underreported its fiscal deficits and public debt. This led to a downgrade and eventual default of its sovereign bonds, requiring assistance from the European Commission. From 2010 through 2018, the commission implemented three …

Lessons Learned: Paul Tucker, Salil Gupta

Journal of Financial Crises

After joining the Bank of England (BoE) in 1980, Sir Paul Tucker held a number of positions of increasing responsibility including serving as a member of several key committees. Tucker played a crucial role in the BoE’s response to the Global Financial Crisis (GFC) as director for markets, through March 2009, then as deputy governor of the bank until November 2013. Post-crisis, he has been instrumental in constructing the international regulatory framework on financial stability. From 2016 to 2021, Tucker also chaired the Systemic Risk Council.

Currently, Tucker is a research fellow at Harvard Kennedy School, Mossavar-Rahmani Center for Business …

Lessons Learned: Ewald Nowotny, Maryanne Chute Lynch, Rosalind Z. Wiggins

Journal of Financial Crises

Ewald Nowotny was appointed governor of the National Bank of Austria in September 2008 at the start of the Global Financial Crisis (GFC), having previously served as a vice president of the European Investment Bank in Luxembourg, the house bank of the European Union. Nowotny participated in the implementation of the multilateral stabilization framework known as the Vienna Initiative, which helped restore stability in the financial markets of Central, Eastern, and Southeastern Europe during the GFC. Working with the Austrian Central Bank, the European Commission, and the International Monetary Fund (IMF), he steered the Austrian economy away from recession. During …

Lessons Learned: Pedro Machado, Mercedes Cardona

Journal of Financial Crises

Pedro Machado began his career as a legal adviser to the European Central Bank in the years leading up the Global Financial Crisis (GFC), then joined the Bank of Portugal (BOP) in 2006, where he has held several positions. He was chief of staff to Portugal’s minister of state and finance in 2011, during the European Sovereign Debt Crisis, when the government negotiated a bailout with the International Monetary Fund (IMF) and European Union. He returned to the BOP, as deputy director of the prudential supervision department, while the program was being implemented. The EUR 78 billion bailout was largely …

Central Bank Crisis Interventions: A Review Of The Recent Literature On Potential Costs, Patrick Aldridge, David A. Cimon, Rishi Vala

Journal of Financial Crises

Central banks may engage in large-scale lending and asset purchases to stabilize financial markets and implement monetary policy during crises. The ability of these actions to restore financial market functioning is well documented; however, they come with costs. We provide a literature review of the costs associated with these post-Global Financial Crisis central bank actions, without commenting on the net benefits they provide. We find support for the premise that crisis actions may negatively impact market liquidity, distort asset prices, increase rent-seeking and inefficient uses of the liquidity provided by the central bank, create international spillovers, and create distortions in …

Replacement And Reputation, Navin Kartik, Elliot Lipnowski, Harry Pei

Cowles Foundation Discussion Papers

Does electoral replacement ensure that officeholders eventually act in voters’ interests? We study a reputational model of accountability. Voters observe incumbents’ performance and decide whether to replace them. Politicians may be “good” types who always exert effort or opportunists who may shirk. We find that good long-run outcomes are always attainable, though the mechanism and its robustness depend on economic conditions. In environments conducive to incentive provision, some equilibria feature sustained effort, yet others exhibit some long-run shirking. In the complementary case, opportunists are never fully disciplined, but selection dominates: every equilibrium eventually settles on a good politician, yielding permanent …

Gender Gaps And Economic Growth: Why Haven't Women Won Globally (Yet)?, Patrick Agte, Orazio Attanasio, Pinelopi K. Goldberg, Charles Gottlieb, Aishwarya Lakshmi Ratan, Rohini Pande, Michael Peters, Charity Troyer Moore, Fabrizio Zilibotti

Discussion Papers

Globally women’s labor force participation lags that of men and women, on average, have lower labor market earnings than men. Does economic growth reduce gender disparities in labor market outcomes between women and men? Conversely, do gender inequalities in the labor market impede growth? To inform these questions, we conduct two analyses. First, we estimate regressions using harmonized data on gender gaps in a range of labor market outcomes from 153 countries spanning two decades (1998-2018). Second, we conduct a systematic review of the recent economics literature on gender gaps in labor markets, examining 16 journals over 21 years. Our …

Procurement Without Priors: A Simple Mechanism And Its Notable Performance, Dirk Bergemann, Tibor Heumann, Stephen Morris

Cowles Foundation Discussion Papers

How should a buyer design procurement mechanisms when suppliers’ costs are unknown, and the buyer does not have a prior belief? We demonstrate that notably simple mechanisms—those that share a constant fraction of the buyer utility with the seller—allow the buyer to realize a guaranteed positive fraction of the efficient social surplus across all possible costs. Moreover, a judicious choice of the share based on the known demand maximizes the surplus ratio guarantee that can be attained across all possible (arbitrarily complex and nonlinear) mechanisms and cost functions. Results apply to related nonlinear pricing and optimal regulation problems.