Which information structures are more effective at eliminating first- and higher-order uncertainty and hence at facilitating efficient play in coordination games? We consider a learning setting where players observe many private signals about the state. First, we characterize multiagent learning efficiency, that is, the rate at which players approximate common knowledge. We find that this coincides with the rate at which first-order uncertainty disappears, as higher-order uncertainty vanishes faster than first-order uncertainty. Second, we show that with enough signal draws, information structures with higher learning efficiency induce higher equilibrium welfare. We highlight information design implications for games in data-rich environments.
Conditional cash transfer (CCT) programs aim to reduce poverty or advance social goals by encouraging desirable behavior that recipients under-invest in. An unintended consequence of conditionality may be the distortion of recipients’ behavior in ways that lower welfare. We first illustrate a range of potential distortions arising from CCT programs around the world. We then show that in the simple case where a CCT causes low return participants to select into a behavior, and social returns and private perceived returns are aligned, transfer size plays an important role: the larger the transfer, the stronger the distortion becomes, implying that (i) there is an optimal transfer size for such CCTs, and (ii) unconditional cash transfers (UCTs) may be better than CCTs when the transfer amount is large. We provide empirical evidence consistent with these claims by studying a cash transfer program conditional on seasonal labor migration in rural Indonesia. In line with theory, we show that when the transfer size exceeds the amount required for travel expenses, distortionary effects dominate and migration earnings decrease.
Reliable testing data for new infectious diseases like COVID-19 is scarce in developing countries making it difficult to rapidly diagnose spatial disease transmission and identify at-risk areas. We propose a method that uses readily available data on bi-lateral migration channels combined with COVID-19 cases at respective migrant destinations to construct a spatially oriented risk index. We find significant and consistent association between our measure and various types of outcomes including actual COVID-19 cases and deaths, indices of government policy responses, and community mobility patterns. Results suggest that future pandemic models should incorporate migration-linkages to predict regional socio-economic and health risk exposure.
What is the pathway to development in a world marked by rising economic nationalism and less international integration? This paper answers this question within a framework that emphasizes the role of demand-side constraints on national development, which is identified with sustained poverty reduction. In this framework, development is linked to the adoption of an increasing returns to scale technology by imperfectly competitive firms that need to pay the fixed setup cost of switching to that technology. Sustained poverty reduction is measured as a continuous decline in the share of the population living below $1.90/day purchasing power parity in 2011 U.S. dollars over a five-year period. This outcome is affected in a statistically significant and economically meaningful way by domestic market size, which is measured as a function of the income distribution, and international market size, which is measured as a function of legally-binding provisions to international trade agreements, including the General Agreement on Tariffs and Trade, the World Trade Organization, and 279 preferential trade agreements. Counterfactual estimates suggest that, in the absence of international integration, the average resident of a low- or lower-middle-income country does not live in a market large enough to experience sustained poverty reduction. Domestic redistribution targeted towards generating a larger middle class can partially compensate for the lack of an international market.
We reconsider trend-based predictability by employing flexible learning methods to identify price patterns that are highly predictive of returns, as opposed to testing predefined patterns like momentum or reversal. Our predictor data are stock-level price charts, allowing us to extract the most predictive price patterns using machine learning image analysis techniques. These patterns differ significantly from commonly analyzed trend signals, yield more accurate return predictions, enable more profitable investment strategies, and demonstrate robustness across specifications. Remarkably, they exhibit context independence, as short-term patterns perform well on longer time scales, and patterns learned from U.S. stocks prove effective in international markets.
Commitment to the behaviorist approach to utility theory, to the usefulness of mathematics in economic analysis, and to equalization of the marginal utility of income as a principle of just taxation brought Irving Fisher and Ragnar Frisch to attempt to measure the marginal utility of income and led them to collaborate in forming the Econometric Society and sponsoring the establishment of the Cowles Commission, institutions advancing economic theory in connection to mathematics and statistics, and led Frisch to pioneer an axiomatic approach to utility and microeconomic theory.
We study equilibria in static entry games with single-dimensional private information. Our framework embeds many models commonly used in applied work, allowing for firm heterogeneity and selective entry. We introduce the notion of strength, which summarizes a firm's ability to endure competition. In environments of applied interest, an equilibrium in which entry strategies are ordered according to the firms' strengths always exists. We call this equilibrium herculean. We derive simple and testable sufficient conditions guaranteeing equilibrium uniqueness and, consequently, a unique counterfactual prediction.
We derive a new formula for the optimal uniform tariff in a small-country, heterogeneous-firm model with roundabout production and a nontraded good. Tariffs are applied on imported intermediate inputs. First-best policy requires that markups on domestic intermediate inputs are offset by subsidies. In a second-best setting where such subsidies are not used, roundabout production and the monopoly distortion in the traded sector create strong incentives to lower the optimal tariff on imported inputs. In a quantitative version of our two-sector small open economy, we find that the optimal tariff is lowered under nearly all parameter values considered, and can be negative.
In panel data on Chinese establishments spanning the 2001 WTO accession, import competition is associated with increases in revenue productivity. We propose a model that interprets this (and additional evidence) as firms choosing to differentiate their products to escape import competition. In the model, the profit from endogenous differentiating is decreasing in trade costs and is an inverted U-shaped function of productivity. We estimate the model and study a counterfactual trade liberalization. In response to import competition, firms differentiate their products and increase their markups, thereby increasing revenue productivity as in the data. Since product differentiation is underprovided by the market, the endogenous differentiation increases welfare relative to a model without firms’ option to differentiate. So, the model rationalizes the positive relationship between import competition and revenue productivity in the data, and it puts forth a new source of gain from trade.
Economic disruptions generally create winners and losers. The compensation problem consists of designing a reform of the existing income tax system that offsets the welfare losses of the latter by redistributing the gains of the former. We derive a formula for the compensating tax reform and its impact on the government budget when only distortionary tax instruments are available and wages are determined endogenously in general equilibrium. We apply this result to the compensation of robotization in the United States.