Showing papers in "Econometrica in 2019"
TL;DR: The authors show that people lie surprisingly little and that a preference for being seen as honest is one of the main motivations for truth-telling in economics, psychology, and sociology, and formalize a wide range of potential explanations for the observed behavior and identify testable predictions that can distinguish between the models.
Abstract: Private information is at the heart of many economic activities. For decades, economists have assumed that individuals are willing to misreport private information if this maximizes their material payoff. We combine data from 90 experimental studies in economics, psychology, and sociology, and show that, in fact, people lie surprisingly little. We then formalize a wide range of potential explanations for the observed behavior, identify testable predictions that can distinguish between the models, and conduct new experiments to do so. Our empirical evidence suggests that a preference for being seen as honest and a preference for being honest are the main motivations for truth‐telling.
308 citations
TL;DR: The authors developed a dynamic trade model with spatially distinct labor markets facing varying exposure to international trade and found that the China trade shock resulted in a loss of 0.8 million U.S. manufacturing jobs, about 25% of the observed decline in manufacturing employment.
Abstract: We develop a dynamic trade model with spatially distinct labor markets facing varying exposure to international trade. The model captures the role of labor mobility frictions, goods mobility frictions, geographic factors, and input-output linkages in determining equilibrium allocations. We show how to solve the equilibrium of the model and take the model to the data without assuming that the economy is at a steady state and without estimating productivities, migration frictions, or trade costs, which can be difficult to identify. We calibrate the model to 22 sectors, 38 countries, and 50 U.S. states. We study how the rise in Chinas trade for the period 2000 to 2007 impacted U.S. households across more than a thousand U.S. labor markets distinguished by sector and state. We find that the China trade shock resulted in a loss of 0.8 million U.S. manufacturing jobs, about 25% of the observed decline in manufacturing employment from 2000 to 2007. The U.S. gains in the aggregate but, due to trade and migration frictions, the welfare and employment effects vary across U.S. labor markets. Estimated transition costs to the new long-run equilibrium are also heterogeneous and reflect the importance of accounting for labor dynamics.
294 citations
TL;DR: In this article, the authors measure the macroeconomic consequences of the convergence of occupational distribution between white men, women, and blacks over the last 50 years and show that the changing frictions implied by the observed occupational convergence account for 15 to 20 percent of growth in aggregate output per worker since 1960.
Abstract: Over the last 50 years, there has been a remarkable convergence in the occupational distribution between white men, women, and blacks. We measure the macroeconomicconsequencesofthisconvergencethroughtheprismofaRoymodel of occupational choice in which women and blacks face frictions in the labor market and in the accumulation of human capital. The changing frictions implied by the observed occupational convergence account for 15 to 20 percent of growth in aggregate output per worker since 1960.
252 citations
TL;DR: In this article, a discrete heterogeneity framework for matched employer employee data is developed, which allows unrestricted interactions between worker and job movers and unrestricted sorting based on these unobservables.
Abstract: We develop a discrete heterogeneity framework for matched employer employee data. The framework allows for unrestricted interactions between worker and rm unobserved characteristics in the wage function, as well as unrestricted sorting based on these unobservables. Pooling cross-sectional observations together with information from the joint distribution of wages of job movers, we establish a series of nonparametric identication results in short panels. We evaluate our method on data simulated from a theoretical model under both positive and negative sorting. We apply our method to Swedish matched employer employee panel data and report estimated wage functions and sorting patterns.
96 citations
TL;DR: This work shows that standard approaches to measuring group differences in choices when the dimensionality of the choice set is large suffer from a severe finite‐sample bias, and proposes an estimator that applies recent advances in machine learning to address this bias.
Abstract: We study the problem of measuring group differences in choices when the dimensionality of the choice set is large. We show that standard approaches suffer from a severe finite‐sample bias, and we propose an estimator that applies recent advances in machine learning to address this bias. We apply this method to measure trends in the partisanship of congressional speech from 1873 to 2016, defining partisanship to be the ease with which an observer could infer a congressperson's party from a single utterance. Our estimates imply that partisanship is far greater in recent years than in the past, and that it increased sharply in the early 1990s after remaining low and relatively constant over the preceding century.
92 citations
TL;DR: In this paper, a two-country model of directed technical change with a continuum of sectors under nonhomothetic preferences is presented, which is rich enough to capture all these effects as well as their interactions.
Abstract: Endogenous demand composition across sectors due to income elasticity differences, or Engel's Law for brevity, affects (i) sectoral compositions in employment and in value‐added, (ii) variations in innovation rates and in productivity change across sectors, (iii) intersectoral patterns of trade across countries, and (iv) product cycles from rich to poor countries. Using a two‐country model of directed technical change with a continuum of sectors under nonhomothetic preferences, which is rich enough to capture all these effects as well as their interactions, this paper offers a unifying perspective on how economic growth and globalization affect the patterns of structural change, innovation, and trade across countries and across sectors in the presence of Engel's Law. Among the main messages is that globalization amplifies, instead of reducing, the power of endogenous domestic demand composition differences as a driver of structural change.
85 citations
TL;DR: The intersection count theorem as mentioned in this paper checks equilibrium existence for combinations of agents with specific valuations by counting the intersection points of geometric objects, which can be used for matching and coalition-formation.
Abstract: We propose new techniques for understanding agents' valuations. Our classification into \demand types", incorporates existing definitions (substitutes, complements, \strong substitutes", etc.) and permits new ones. Our Unimodularity Theorem generalises previous results about when competitive equilibrium exists for any set of agents whose valuations are all of a \demand type" for indivisible goods. Contrary to popular belief, equilibrium is guaranteed for more classes of purely-complements, than of purely-substitutes, preferences. Our Intersection Count Theorem checks equilibrium existence for combinations of agents with specific valuations by counting the intersection points of geometric objects. Applications include matching and coalition-formation; and the Product-Mix Auction, introduced by the Bank of England in response to the financial crisis.
73 citations
TL;DR: In this article, a sender persuades a receiver to accept a project by disclosing information about a payoff-relevant quality, referred to as his type, and the receiver has private information about the quality.
Abstract: A sender persuades a receiver to accept a project by disclosing information about a payoff‐relevant quality. The receiver has private information about the quality, referred to as his type. We show that the sender‐optimal mechanism takes the form of nested intervals: each type accepts on an interval of qualities and a more optimistic type's interval contains a less optimistic type's interval. This nested‐interval structure offers a simple algorithm to solve for the optimal disclosure and connects our problem to the monopoly screening problem. The mechanism is optimal even if the sender conditions the disclosure mechanism on the receiver's reported type.
68 citations
TL;DR: In this paper, an equilibrium search model of the Malawian HIV/AIDS epidemic is presented, where topical policies (e.g., male circumcision, treatment of other STDs, and promoting marriage) are studied and found to have potential to backfire: moderate interventions may actually increase the prevalence of HIV, due to shifts in human behavior and equilibrium effects.
Abstract: An equilibrium search model of the Malawian HIV/AIDS epidemic is presented. Individuals engage in different types of sexual activity, which vary in their riskiness. When choosing a sexual activity, such as short-term sex without a condom, a person rationally considers its risk. A simulated version of the model is parameterized to match some salient facts about the Malawian epidemic. Some topical policies (e.g., male circumcision, treatment of other STDs, and promoting marriage) are studied and found to have potential to backfire: Moderate interventions may actually increase the prevalence of HIV/AIDS, due to shifts in human behavior and equilibrium effects.
68 citations
TL;DR: In this article, the authors study the stability of two-sided many-to-one matching in which firms' preferences for workers may exhibit complementarities and show that an approximately stable matching exists in large finite economies.
Abstract: We study stability of two‐sided many‐to‐one matching in which firms' preferences for workers may exhibit complementarities. Although such preferences are known to jeopardize stability in a finite market, we show that a stable matching exists in a large market with a continuum of workers, provided that each firm's choice is convex and changes continuously as the set of available workers changes. We also study the existence and structure of stable matchings under preferences exhibiting substitutability and indifferences in a large market. Building on these results, we show that an approximately stable matching exists in large finite economies. We extend our framework to ensure a stable matching with desirable incentive and fairness properties in the presence of indifferences in firms' preferences.
55 citations
TL;DR: In this article, the interactions between sovereign debt default and maturity choice in a setting with limited commitment for repayment as well as future debt issuances were studied, and it was shown that any attempt to manipulate the existing maturity profile of outstanding long-term bonds generates losses, as bond prices move against the sovereign.
Abstract: We study the interactions between sovereign debt default and maturity choice in a setting with limited commitment for repayment as well as future debt issuances. Our main finding is that, under a wide range of conditions, the sovereign should, as long as default is not preferable, remain passive in long‐term bond markets, making payments and retiring long‐term bonds as they mature but never actively issuing or buying back such bonds. The only active debt‐management margin is the short‐term bond market. We show that any attempt to manipulate the existing maturity profile of outstanding long‐term bonds generates losses, as bond prices move against the sovereign. Our results hold regardless of the shape of the yield curve. The yield curve captures the average costs of financing at different maturities but is misleading regarding the marginal costs.
TL;DR: The authors examined the macroeconomic consequences of these variations in a model with incomplete markets, liquid and illiquid assets, and a nominal rigidity, and found that the welfare consequences of uncertainty shocks and of the policy response depend crucially on a household's asset position.
Abstract: Households face large income uncertainty that varies substantially over the business cycle. We examine the macroeconomic consequences of these variations in a model with incomplete markets, liquid and illiquid assets, and a nominal rigidity. Heightened uncertainty depresses aggregate demand as households respond by hoarding liquid “paper” assets for precautionary motives, thereby reducing both illiquid physical investment and consumption demand. We document the empirical response of portfolio liquidity and aggregate activity to surprise changes in idiosyncratic income uncertainty and find both to be quantitatively in line with our model. The welfare consequences of uncertainty shocks and of the policy response thereto depend crucially on a household's asset position
TL;DR: In this article, the authors study optimal dynamic Ramsey policies in a standard growth model with financial frictions and show that the optimal policy intervention involves suppressing wages in early stages of the transition, resulting in higher entrepreneurial profits and faster wealth accumulation.
Abstract: Is there a role for governments in emerging countries to accelerate economic development by intervening in product and factor markets? To address this question, we study optimal dynamic Ramsey policies in a standard growth model with financial frictions. The optimal policy intervention involves pro-business policies like suppressed wages in early stages of the transition, resulting in higher entrepreneurial profits and faster wealth accumulation. This, in turn, relaxes borrowing constraints in the future, leading to higher labor productivity and wages. In the long run, optimal policy reverses sign and becomes pro-worker. In a multi-sector extension, optimal policy subsidizes sectors with a latent comparative advantage and, under certain circumstances, involves a depreciated real exchange rate. Our results provide an efficiency rationale, but also identify caveats, for many of the development policies actively pursued by dynamic emerging economies.
TL;DR: In this paper, the authors study whether individuals save more when information about their savings is shared with another village member (a "monitor") and focus on whether the monitor's eectiveness depends on her network position.
Abstract: We study whether individuals save more when information about their savings is shared with another village member (a "monitor") We focus on whether the monitor's eectiveness depends on her network position Central monitors may be better able to disseminate information, and more proximate monitors may pass information to individ- uals who interact with the saver frequently In 30 villages, we randomly assign monitors Average monitors increase savings by 35% A one-standard deviation more central monitor increases savings by 14%; increasing proximity from social distance three to two increases savings by 16% The increased savings persist over a year after the intervention's end, and monitored savers better respond to shocks In 30 other villages, savers choose their monitors Proximate and central monitors are chosen Information flows 63% of monitors tell others about the saver's progress 15 months later, others know more about the saver's progress and believe she is responsible if the saver was assigned a more central monitor
TL;DR: This paper considered heterogeneous bettors and allowed for very general risk preferences, including non-expected utility, in horse races and showed evidence for both heterogeneity and nonlinear probability weighting.
Abstract: As a textbook model of contingent markets, horse races are an attractive environment to study the attitudes towards risk of bettors. We innovate on the literature by explicitly considering heterogeneous bettors and allowing for very general risk preferences, including non-expected utility. We build on a standard single-crossing condition on preferences to derive testable implications; and we show how parimutuel data allow us to uniquely identify the distribution of preferences among the population of bettors. We then estimate the model on data from US races. Within the expected utility class, the most usual specifications (CARA and CRRA) fit the data very badly. Our results show evidence for both heterogeneity and nonlinear probability weighting.
TL;DR: In this article, the authors provide a nonlinear characterization of the macroeconomic impact of microeconomic productivity shocks in terms of reduced-form non-parametric elasticities for efficient economies.
Abstract: We provide a nonlinear characterization of the macroeconomic impact of microeconomic productivity shocks in terms of reduced-form non-parametric elasticities for efficient economies. We also show how structural parameters are mapped to these reduced-form elasticities. In this sense, we extend the foundational theorem of Hulten (1978) beyond first-order terms. Key features ignored by first-order approximations that play a crucial role are: structural elasticities of substitution, network linkages, structural returns to scale, and the extent of factor reallocation. Higher-order terms magnify negative shocks and attenuate positive shocks, resulting in an output distribution that is asymmetric, fat-tailed, and has a lower mean even when shocks are symmetric and thin-tailed. In our calibration, output losses due to business-cycle fluctuations are an order of magnitude larger than the cost calculated by Lucas (1987). Second-order terms also show how shocks to critical sectors can have large macroeconomic impacts, tripling the estimated impact of the 1970s oil price shocks.
TL;DR: In this article, a search-and-bargaining model of liquidity provision in over-the-counter markets where investors differ in their search intensities was developed. And the authors used the model to study the effect of trading restrictions on the supply and price of liquidity.
Abstract: I develop a search-and-bargaining model of liquidity provision in over-the-counter markets where investors differ in their search intensities. A distinguishing characteristic of my model is its tractability: it allows for heterogeneity, unrestricted asset positions, and fully decentralized trade. I find that investors with higher search intensities (i.e., fast investors) are less averse to holding inventories and more attracted to cash earnings, which makes the model corroborate a number of stylized facts that do not emerge from existing models: (i) fast investors provide intermediation by charging a speed premium, and (ii) fast investors hold larger and more volatile inventories. Then, I use the model to study the effect of trading
frictions on the supply and price of liquidity. The results have policy implications concerning the Volcker rule.
TL;DR: In this paper, a life cycle model incorporating individual and household decisions about education, employment, marriage/divorce, and fertility was developed to better understand the diverse patterns of diverse patterns.
Abstract: Comparing the 1935 and 1975 U.S. birth cohorts, wages of married women grew twice as fast as for married men, and the wage gap between married and single women turned from negative to positive. The employment rate of married women also increased sharply, while that of other groups remained quite stable. To better understand these diverse patterns, we develop a life‐cycle model incorporating individual and household decisions about education, employment, marriage/divorce, and fertility. The model provides an excellent fit to wage and employment patterns, along with changes in education, marriage/divorce rates, and fertility. We assume fixed preferences, but allow for four exogenously changing factors: (i) mother's education, health, and taxes/transfers; (ii) marriage market opportunities and divorce costs; (iii) the wage structure and job offers; (iv) contraception technology. We quantify how each factor contributed to changes across cohorts. We find that factor (iii) was the most important force driving the increase in relative wages of married women, but that all four factors are important for explaining the many socio‐economic changes that occurred in the past 50 years. Finally, we use the model to simulate a shift from joint to individual taxation. In a revenue‐neutral simulation, we predict this would increase employment of married women by 9% and the marriage rate by 8.1%.
TL;DR: Nonparametric identification results for a class of latent utility models with additively separable unobservable heterogeneity are provided, which can identify how regressors alter the desirability of goods using only average demands.
Abstract: This paper provides nonparametric identification results for a class of latent utility models with additively separable unobservable heterogeneity. These results apply to existing models of discrete choice, bundles, decisions under uncertainty, and matching. Under an independence assumption, such models admit a representative agent. As a result, we can identify how regressors alter the desirability of goods using only average demands. Moreover, average indirect utility (“welfare”) is identified without needing to specify or identify the distribution of unobservable heterogeneity.
TL;DR: In this paper, the authors show that in a class of I•agent design problems with evidence, commitment is unnecessary, randomization has no value, and robust incentive compatibility has no cost.
Abstract: We show that in a class of I‐agent mechanism design problems with evidence, commitment is unnecessary, randomization has no value, and robust incentive compatibility has no cost. In particular, for each agent i, we construct a simple disclosure game between the principal and agent i where the equilibrium strategies of the agents in these disclosure games give their equilibrium strategies in the game corresponding to the mechanism but where the principal is not committed to his response. In this equilibrium, the principal obtains the same payoff as in the optimal mechanism with commitment. As an application, we show that certain costly verification models can be characterized using equilibrium analysis of an associated model of evidence.
TL;DR: The authors derived asymptotic properties of estimators and test statistics to determine common versus group-specific factors for the U.S. economy using a mixed-frequency data panel of IP and non-IP sectors and found that a single common factor explains 89% of IP output growth and 61% of total GDP growth despite the diminishing role of manufacturing.
Abstract: We derive asymptotic properties of estimators and test statistics to determine—in a grouped data setting—common versus group‐specific factors. Despite the fact that our test statistic for the number of common factors, under the null, involves a parameter at the boundary (related to unit canonical correlations), we derive a parameter‐free asymptotic Gaussian distribution. We show how the group factor setting applies to mixed‐frequency data. As an empirical illustration, we address the question whether Industrial Production (IP) is still the dominant factor driving the U.S. economy using a mixed‐frequency data panel of IP and non‐IP sectors. We find that a single common factor explains 89% of IP output growth and 61% of total GDP growth despite the diminishing role of manufacturing.
TL;DR: Analysis of Medicaid, administrative costs, and asymmetric information about nursing home entry risk to low LTCI takeup rates in a quantitative equilibrium contracting model finds that Medicaid accounts for low LTP rates of poorer individuals and administrative costs and adverse selection are responsible for low take up rates of the rich.
Abstract: Half of U.S. 50‐year‐olds will experience a nursing home stay before they die, and one in ten will incur out‐of‐pocket long‐term care expenses in excess of $200,000. Surprisingly, only about 10% of individuals over age 62 have private long‐term care insurance (LTCI) and LTCI takeup rates are low at all wealth levels. We analyze the contributions of Medicaid, administrative costs, and asymmetric information about nursing home entry risk to low LTCI takeup rates in a quantitative equilibrium contracting model. As in practice, the insurer in the model assigns individuals to risk groups based on noisy indicators of their nursing home entry risk. All individuals in frail and/or low‐income risk groups are denied coverage because the cost of insuring any individual in these groups exceeds that individual's willingness‐to‐pay. Individuals in insurable risk groups are offered a menu of contracts whose terms vary across risk groups. We find that Medicaid accounts for low LTCI takeup rates of poorer individuals. However, administrative costs and adverse selection are responsible for low takeup rates of the rich. The model reproduces other empirical features of the LTCI market including the fact that owners of LTCI have about the same nursing home entry rates as non‐owners.
TL;DR: In this paper, the authors develop a dynamic model of rational behavior under uncertainty, in which the agent maximizes the stream of future τ-quantile utilities, for τ ∈ (0, 1).
Abstract: This paper develops a dynamic model of rational behavior under uncertainty, in which the agent maximizes the stream of future τ‐quantile utilities, for τ ∈ (0,1). That is, the agent has a quantile utility preference instead of the standard expected utility. Quantile preferences have useful advantages, including the ability to capture heterogeneity and allowing the separation between risk aversion and elasticity of intertemporal substitution. Although quantiles do not share some of the helpful properties of expectations, such as linearity and the law of iterated expectations, we are able to establish all the standard results in dynamic models. Namely, we show that the quantile preferences are dynamically consistent, the corresponding dynamic problem yields a value function, via a fixed point argument, this value function is concave and differentiable, and the principle of optimality holds. Additionally, we derive the corresponding Euler equation, which is well suited for using well‐known quantile regression methods for estimating and testing the economic model. In this way, the parameters of the model can be interpreted as structural objects. Therefore, the proposed methods provide microeconomic foundations for quantile regression methods. To illustrate the developments, we construct an intertemporal consumption model and estimate the discount factor and elasticity of intertemporal substitution parameters across the quantiles. The results provide evidence of heterogeneity in these parameters.
TL;DR: In this paper, the authors use U.S. Census data on manufacturing firms from 1963 through 2002 to show that most growth comes from incumbents' innovation rather than innovation by entrants.
Abstract: Entering and incumbent firms can create new products and displace other firms’ products. Incumbents can also improve their existing products. How much of aggregate growth occurs through each of these channels? The answer matters for optimal innovation policy because knowledge spillovers and business stealing differ depending on the source of growth. Using U.S. Census data on manufacturing firms from 1963 through 2002, we arrive at three main conclusions: First, most growth comes from incumbents’ innovation rather than innovation by entrants. This follows from the modest market share of entering firms. Second, most growth comes from improvements of existing varieties rather than creation of brand new varieties. Third, own-product improvement by incumbents is roughly as important as quality improvements through creative destruction.
TL;DR: The coalitional minmax expected utility representation (CUMU) as discussed by the authors is a generalization of the expected utility theorem, and it can be used to answer many economic questions, such as the maximization of preferences, the existence of Nash equilibrium, the preference for portfolio diversification, and the possibility of the preference reversal phenomenon.
Abstract: This paper begins by observing that any reflexive binary (preference) relation (over risky prospects) that satisfies the independence axiom admits a form of expected utility representation. We refer to this representation notion as the coalitional minmax expected utility representation. By adding the remaining properties of the expected utility theorem, namely, continuity, completeness, and transitivity, one by one, we find how this representation gets sharper and sharper, thereby deducing the versions of this classical theorem in which any combination of these properties is dropped from its statement. This approach also allows us to weaken transitivity in this theorem, rather than eliminate it entirely, say, to quasitransitivity or acyclicity. Apart from providing a unified dissection of the expected utility theorem, these results are relevant for the growing literature on boundedly rational choice in which revealed preference relations often lack the properties of completeness and/or transitivity (but often satisfy the independence axiom). They are also especially suitable for the (yet overlooked) case in which the decision‐maker is made up of distinct individuals and, consequently, transitivity is routinely violated. Finally, and perhaps more importantly, we show that our representation theorems allow us to answer many economic questions that are posed in terms of nontransitive/incomplete preferences, say, about the maximization of preferences, the existence of Nash equilibrium, the preference for portfolio diversification, and the possibility of the preference reversal phenomenon.
TL;DR: In this paper, the authors show how frictions and continuous transfers jointly affect equilibria in a model of matching in trading networks and incorporate distortionary frictions such as transaction taxes and commissions.
Abstract: We show how frictions and continuous transfers jointly affect equilibria in a model of matching in trading networks. Our model incorporates distortionary frictions such as transaction taxes and commissions. When contracts are fully substitutable for firms, competitive equilibria exist and coincide with outcomes that satisfy a cooperative solution concept called trail stability. However, competitive equilibria are generally neither stable nor Pareto‐efficient.
TL;DR: It is shown that every farsighted stable set satisfying some reasonable and easily verifiable properties is unaffected by the imposition of these stringent maximality constraints.
Abstract: Harsanyi (1974) and Ray and Vohra (2015) extended the stable set of von Neumann and Morgenstern to impose farsighted credibility on coalitional deviations. But the resulting farsighted stable set suffers from a conceptual drawback: while coalitional moves improve on existing outcomes, coalitions might do even better by moving elsewhere. Or other coalitions might intervene to impose their favored moves. We show that every farsighted stable set satisfying some reasonable and easily verifiable properties is unaffected by the imposition of these stringent maximality constraints. The properties we describe are satisfied by many, but not all farsighted stable sets.
TL;DR: In this paper, a nonparametric dynamic potential outcomes (DPO) model was developed to measure state dependence in dynamic discrete outcomes and it was shown that state dependence accounts for at least 30% of the four-month persistence in unemployment among high school educated men.
Abstract: This paper is about measuring state dependence in dynamic discrete outcomes. I develop a nonparametric dynamic potential outcomes (DPO) model and propose an array of parameters and identifying assumptions that can be considered in this model. I show how to construct sharp identified sets under combinations of identifying assumptions by using a flexible linear programming procedure. I apply the analysis to study state dependence in unemployment for working age high school educated men using an extract from the 2008 Survey of Income and Program Participation (SIPP). Using only nonparametric assumptions, I estimate that state dependence accounts for at least 30–40% of the four‐month persistence in unemployment among high school educated men.
TL;DR: In this article, the authors developed an econometric procedure that combines cross-region data with aggregate time series data to infer the underlying shocks driving both aggregate and regional business cycles.
Abstract: During the last recession and its aftermath, aggregate price growth and aggregate nominal wage growth remained robust despite the high rate of unemployment. We document that U.S. states with weaker labor markets experienced lower price growth, lower nominal wage growth, and lower real wage growth during the Great Recession. Given that reliable measures of local prices do not exist, we create our own state price indices using scanner data from the Nielsen Retail Scanner Database. The main innovation of the paper is the development of an econometric procedure that combines cross-region data with aggregate time series data to infer the underlying shocks driving both aggregate and regional business cycles. Applying our procedure to the Great Recession, we find that a combination of both “demand” and “supply” shocks are necessary to account for the joint dynamics of aggregate prices, wages and employment during the 2007-2012 period. In contrast, we find that only demand shocks are needed to explain the cross-region variation. The results suggest that only using cross-region variation to explain aggregate fluctuations is insufficient when shocks do not have a substantive regional component.
TL;DR: In this article, the authors define and investigate a property of mechanisms that they call "strategic simplicity", which is meant to capture the idea that, in strategically simple mechanisms, strategic choices require limited strategic sophistication.
Abstract: We define and investigate a property of mechanisms that we call “strategic simplicity,” and that is meant to capture the idea that, in strategically simple mechanisms, strategic choices require limited strategic sophistication. We define a mechanism to be strategically simple if choices can be based on first‐order beliefs about the other agents' preferences and first‐order certainty about the other agents' rationality alone, and there is no need for agents to form higher‐order beliefs, because such beliefs are irrelevant to the optimal strategies. All dominant strategy mechanisms are strategically simple. But many more mechanisms are strategically simple. In particular, strategically simple mechanisms may be more flexible than dominant strategy mechanisms in the bilateral trade problem and the voting problem.