Abstract of associated article: I show theoretically that applying the model of Kőszegi and Rabin (2006) to a simple purchasing decision where consumers are ex ante uncertain about the price realisation, gives – when changing the underlying distribution of expected prices – rise to counterintuitive predictions in contrast with a “good deal model” where consumers are predicted to be disappointed (rejoice) when the realised price is perceived as being worse (better) than the other possible realisation. While the underlying ideas of both models are similar with respect to expectation-based reference points, the different results come from the concept of Personal Equilibrium in Kőszegi and Rabin (2006). The experimental results show some support for the simpler good deal model for a number of different real consumption goods though the support is weaker for goods that either have a salient market price or no market price outside of the experiment.
Abstract of associated article: During the recent financial crisis, there were bank runs right after government bailout announcements. This paper develops a global game model of information based bank runs to analyze how the announcement of bailouts affects investors’ bank run incentives. The equilibrium probability of bank runs is uniquely determined. I conclude that before the announcement, the existence of such bailout policy reduces investors’ bank run incentives, but after the announcement, investors may run on the bank, since such an announcement reflects the government's information about the bad bank asset. The empirical evidence from TARP is consistent with my theory.
Abstract of associated article: Bayesian model averaging has become a widely used approach to accounting for uncertainty about the structural form of the model generating the data. When data arrive sequentially and the generating model can change over time, Dynamic Model Averaging (DMA) extends model averaging to deal with this situation. Often in macroeconomics, however, many candidate explanatory variables are available and the number of possible models becomes too large for DMA to be applied in its original form. We propose a new method for this situation which allows us to perform DMA without considering the whole model space, but using a subset of models and dynamically optimizing the choice of models at each point in time. This yields a dynamic form of Occam׳s window. We evaluate the method in the context of the problem of nowcasting GDP in the Euro area. We find that its forecasting performance compares well with that of other methods.
Abstract of associated article: We use factor augmented vector autoregressive models with time-varying coefficients and stochastic volatility to construct a financial conditions index that can accurately track expectations about growth in key US macroeconomic variables. Time-variation in the models׳ parameters allows for the weights attached to each financial variable in the index to evolve over time. Furthermore, we develop methods for dynamic model averaging or selection which allow the financial variables entering into the financial conditions index to change over time. We discuss why such extensions of the existing literature are important and show them to be so in an empirical application involving a wide range of financial variables.
Abstract of associated article: This paper develops a model of international trade where firms are heterogeneous across capacity and productivity. A binding capacity constraint induces firms to raise prices in order to take advantage of access to new markets. This generates markets with a flexible competitive structure giving rise to instances where trade and trade liberalization negatively impact welfare. Its key predictions can be identified by observing the presence of small yet highly productive firms and substitution by firms across markets as accessibility evolves. Using Thai firm-level data I establish the prevalence of these anomalous firms and demonstrate they face capacity constraints.
Abstract of associated article: We propose and estimate a dynamic stochastic general equilibrium model featuring search and matching frictions, deep habits and a CES production function. The model successfully replicates the cyclical properties of labour market variables in the US economy for three main reasons. First, two of the endogenous mechanisms of the model – factor complementarity and unemployment benefits – play a key role for explaining the amplification in unemployment and vacancies. Second, deep habits have a smaller but significant role as an endogenous mechanism. Third, capital-augmenting productivity, investment-specific and matching efficiency innovations explain large part of the variation in labour market variables.
Abstract of associated article: The consequences of regional trade agreements (RTAs) on countries׳ welfare are disputed. In this paper, we assess these effects using stock returns from a recent data set that spans over 200 RTA announcements, 80 economies, and 20 years. We measure the effects of news concerning RTAs on the returns of national stock markets, after adjusting these returns for international stock market movements. We then link these abnormal returns to features of the RTA members and the agreements themselves. We find strong evidence of the natural trading partner hypothesis; stock markets rise more when RTAs are signed between countries that already engage in high volumes of trade. Stock markets also rise more when poorer countries sign RTAs, and when RTAs are signed with smaller partners. We also find no evidence that capital markets expect significant trade diversion effects.
Abstract of associated article: In this paper we show that price equalization does not imply zero barriers to trade. There are many barrier combinations that deliver price equalization, but each combination implies a different volume of trade. We demonstrate this first theoretically in a simple two-country model and then quantitatively for the case of capital goods trade in a multi-country model. To be quantitatively consistent with the observed capital goods trade flows across countries, our model implies that trade barriers must be large, yet our model delivers capital goods prices that are similar across countries. The absence of barriers to trade in capital goods delivers price equalization in capital goods but cannot reproduce the observed trade flows.
Abstract of associated article: Academic fraud by undergraduate students is pervasive, but should it be taken seriously as an economic problem? Our research suggests so. Using a unique data set from the Caucasus, we estimate a large positive effect of academic fraud on the probability of employment. Econometrically, we deal with endogenous selection into academic fraud and possible measurement error in the reporting of academic fraud using partial identification techniques. The findings demonstrate that incentives to commit academic fraud are strong and point towards the potentially damaging consequences of academic fraud in broader settings.
Abstract of associated article: We investigate why two person teams beat the truth wins benchmark in signaling games (Cooper and Kagel, 2005, 2009) by studying an advice treatment where advisees have the benefit of two individuals׳ insight but not bilateral communication. The TW benchmark states that the performance of a team for problems with a demonstrable correct solution should be no worse than the performance of its most able individual. If one individual solves the problem, the team solves it as well. Advisees whose advisors play strategically have significantly higher levels of strategic play, but fall well short of the truth wins benchmark as (i) many advisors who play strategically do not provide advice to this effect, and (ii) many advisees fail to follow sound advice. Effect (i) is largely attributable to female advisors who are far less likely to provide advice than men. Whether or not advice contains a clear explanation for its effectiveness has no effect on the likelihood of advisees’ strategic play, a result at odds with the idea that economic agents regularly consider all the available alternatives.