Showing papers in "The Review of Economic Studies in 2015"
TL;DR: In this paper, the authors use a Ricardian model to quantify the trade and welfare effects from tariff changes and propose a new method to estimate sectoral trade elasticities consistent with any trade model that delivers a multiplicative gravity equation.
Abstract: We build into a Ricardian model sectoral linkages, trade in intermediate goods, and sectoral heterogeneity in production to quantify the trade and welfare effects from tariff changes. We also propose a new method to estimate sectoral trade elasticities consistent with any trade model that delivers a multiplicative gravity equation. We apply our model and use our estimated elasticities to identify the impact of NAFTA's tariff reductions. We find that Mexico's welfare increases by 1.31%, U.S.'s welfare increases by 0.08%, and Canada's welfare declines by 0.06%. We find that intra-bloc trade increases by 118% for Mexico, 11% for Canada, and 41% for the U.S. We show that welfare effects from tariff reductions are reduced when the structure of production does not take into account intermediate goods or input–output linkages. Our results highlight the importance of sectoral heterogeneity, intermediate goods, and sectoral linkages for the quantification of the welfare gains from tariffs reductions
548 citations
TL;DR: This paper investigated global factors associated with bank capital and showed that local currency appreciation is associated with higher leverage of the banking sector, thereby providing a conceptual bridge between exchange rates and financial stability.
Abstract: We investigate global factors associated with bank capital ‡ows. We formulate a model of the international banking system where global banks interact with local banks. The solution highlights the bank leverage cycle as the determinant of the transmission of …nancial conditions across borders through banking sector capital ‡ows. A distinctive prediction of the model is that local currency appreciation is associated with higher leverage of the banking sector, thereby providing a conceptual bridge between exchange rates and …nancial stability. In a panel study of 46 countries, we …nd support for the key predictions of our model.
423 citations
TL;DR: In this paper, the authors run a natural field experiment on job-entry decisions where they randomize almost 9000 job-seekers into different compensation regimes and examine whether a competitive compensation regime, by itself, can cause differential job entry.
Abstract: An important line of research using laboratory experiments has provided a new potential reason for gender imbalances in labour markets: men are more competitively inclined than women. Whether, and to what extent, gender differences in attitudes toward competition lead to differences in naturally occurring labour markets remains an open question. To examine this, we run a natural field experiment on job-entry decisions where we randomize almost 9000 job-seekers into different compensation regimes. By varying the role that individual competition plays in setting the wage and the gender composition, we examine whether a competitive compensation regime, by itself, can cause differential job entry. The data highlight the power of the compensation regime in that women disproportionately shy away from competitive work settings. Yet, there are important factors that attenuate the gender differences, including whether the job is performed in teams, whether the position has overt gender associations, and the age of the job-seekers. We also find that the effect is most pronounced in labour markets with attractive alternative employment options. Furthermore, our results suggest that preferences over uncertainty can be just as important as preferences over competition per se in driving job-entry choices
311 citations
TL;DR: This paper developed a dynamic stochastic general equilibrium (DSGE) model with rational inattention and compared its predictions to data, and showed that rational-inattention is the only source of slow adjustment.
Abstract: We develop a dynamic stochastic general equilibrium (DSGE) model with rational inattention and compare its predictions to data. Households and decision-makers in firms have limited attention and optimally allocate their attention. Rational inattention is the only source of slow adjustment. The model matches the empirical impulse responses to monetary policy shocks and aggregate technology shocks. At the same time, profit losses and utility losses from inattention are very small. Furthermore, it matters whether one uses this model or a conventional DSGE model for policy analysis.
309 citations
TL;DR: This article studied the determinants of college major choice using an experimentally generated panel of beliefs, obtained by providing students with information on the true population distribution of various major-specific characteristics.
Abstract: This article studies the determinants of college major choice using an experimentally generated panel of beliefs, obtained by providing students with information on the true population distribution of various major-specific characteristics. Students logically revise their beliefs in response to the information, and their subjective beliefs about future major choice are associated with beliefs about their own earnings and ability. We estimate a rich model of college major choice using the panel of beliefs data. While expected earnings and perceived ability are a significant determinant of major choice, heterogeneous tastes are the dominant factor in the choice of major. Analyses that ignore the correlation in tastes with earnings expectations inflate the role of earnings in college major choices. We conclude by computing the welfare gains from the information experiment and find positive average welfare gains.
306 citations
TL;DR: In this paper, the authors examined the causal impact of competition on management quality and found that higher competition is positively correlated with increased management quality, and this relationship strengthened when they instrument the number of local hospitals with local political competition.
Abstract: In this paper we examine the causal impact of competition on management quality. We analyze the hospital sector where geographic proximity is a key determinant of competition, and English public hospitals where political competition can be used to construct instrumental variables for market structure. Since almost all major English hospitals are government run, closing hospitals in areas where the governing party has a small majority is rare due to fear of electoral punishment. We find that management quality - measured using a new survey tool - is strongly correlated with financial and clinical outcomes such as survival rates from emergency heart attack admissions (AMI). More importantly, we find that higher competition (as indicated by a greater number of neighboring hospitals) is positively correlated with increased management quality, and this relationship strengthens when we instrument the number of local hospitals with local political competition. Adding another rival hospital increases the index of management quality by one third of a standard deviation and leads to a 10.7% reduction in heart-attack mortality rates.
272 citations
TL;DR: In this paper, a jackknife method is proposed to obtain confidence intervals that are correctly centred under rectangular-array asymptotics, which can be applied to a range of models and estimators.
Abstract: Maximum-likelihood estimation of nonlinear models with fixed effects is subject to the incidental-parameter problem. This typically implies that point estimates suffer from large bias and confidence intervals have poor coverage. This article presents a jackknife method to reduce this bias and to obtain confidence intervals that are correctly centred under rectangular-array asymptotics. The method is explicitly designed to handle dynamics in the data, and yields estimators that are straightforward to implement and can be readily applied to a range of models and estimands. We provide distribution theory for estimators of model parameters and average effects, present validity tests for the jackknife, and consider extensions to higher-order bias correction and to two-step estimation problems. An empirical illustration relating to female labour-force participation is also provided.
254 citations
TL;DR: In this article, the elasticity of exports to credit using matched customs and firm-level bank credit data from Peru is estimated using a model based on the EKG of the same product and to the same destination.
Abstract: We estimate the elasticity of exports to credit using matched customs and firm-level bank credit data from Peru. To account for non-credit determinants of exports, we compare changes in exports of the same product and to the same destination by firms borrowing from banks differentially affected by capital-flow reversals during the 2008 financial crisis. We find that credit shocks affect the intensive margin of exports, but have no significant impact on entry or exit of firms to new product and destination markets. Our results suggest that credit shortages reduce exports through raising the variable cost of production, rather than the cost of financing sunk entry investments.
194 citations
TL;DR: Kim et al. as discussed by the authors apply the procedure of Kim et al. (1998) to the estimation of VAR, DSGE, factor, and unobserved components models with stochastic volatility.
Abstract: This note shows how to apply the procedure of Kim et al . (1998) to the estimation of VAR, DSGE, factor, and unobserved components models with stochastic volatility. In particular, it revisits the estimation algorithm of the time-varying VAR model of Primiceri (2005) . The main difference of the new algorithm is the ordering of the various MCMC steps, with each individual step remaining the same.
188 citations
TL;DR: This paper studied the relationship between the political connections of Chinese firms and workplace fatalities and found that the worker death rate for connected companies is two to three times that of unconnected firms, a pattern that holds for within-firm estimations.
Abstract: We study the relationship between the political connections of Chinese firms and workplace fatalities. In our preferred specification, we find that the worker death rate for connected companies is two to three times that of unconnected firms (depending on the sample employed), a pattern that holds for within-firm estimations. The connections–mortality relationship is attenuated in provinces where safety regulators' promotion is contingent on meeting safety targets. In the absence of fatalities, connected firms receive fewer reports of major violations for safety compliance, whereas in years of fatal accidents the rate of reported violations is identical. Moreover, fatal accidents produce negative returns at connected companies and are associated with the subsequent departure of well-connected executives. These results provide suggestive evidence that connections enable firms to avoid (potentially costly) compliance measures, rather than using connections to avoid regulatory response after accidents occur. Our findings emphasize the social costs of political connections, and suggest that appropriate regulatory incentives may be useful in mitigating these costs.
161 citations
TL;DR: In this article, the authors argue that one major cause of the US postwar baby boom was the rise in female labor supply during World War II and develop a quantitative dynamic general equilibrium model with endogenous fertility and female labor force participation decisions.
Abstract: We argue that one major cause of the US postwar baby boom was the rise in female labor supply during World War II We develop a quantitative dynamic general equilibrium model with endogenous fertility and female labor force participation decisions We use the model to assess the impact of the war on female labor supply and fertility in the decades following the war For the war generation of women, the high demand for female labor brought about by mobilization leads to an increase in labor supply that persists after the war As a result, younger women who reach adulthood in the 1950s face increased labor market competition, which impels them to exit the labor market and start having children earlier The effect is amplified by the rise in taxes necessary to pay down wartime government debt In our calibrated model, the war generates a substantial baby boom followed by a baby bust
TL;DR: This paper investigated empirically both the importance of money for military success and patterns of state-building in early modern Europe using data from 374 battles and found that when finance becomes critical, internally cohesive states invest in state capacity while divided states rationally drop out of the competition, causing divergence.
Abstract: Powerful, centralized states controlling a large share of national income only begin to appear in Europe after 1500. We build a model that explains their emergence in response to the increasing importance of money for military success. When fiscal resources are not crucial for winning wars, the threat of external conflict stifles state-building. As finance becomes critical, internally cohesive states invest in state capacity while divided states rationally drop out of the competition, causing divergence. We emphasize the role of the “Military Revolution”, a sequence of technological innovations that transformed armed conflict. Using data from 374 battles, we investigate empirically both the importance of money for military success and patterns of state-building in early modern Europe. The evidence is consistent with the predictions of our model.
TL;DR: In this paper, the authors used detailed barcode data on purchase transactions by households in 49 U.S. cities to calculate the first theoretically founded urban price index, and they overcome a large number of problems that have plagued spatial price index measurement.
Abstract: This article uses detailed barcode data on purchase transactions by households in 49 U.S. cities to calculate the first theoretically founded urban price index. In doing so, we overcome a large number of problems that have plagued spatial price index measurement. We identify two important sources of bias. Heterogeneity bias arises from comparing different goods in different locations, and variety bias arises from not correcting for the fact that some goods are unavailable in some locations. Eliminating heterogeneity bias causes 97% of the variance in the price level of food products across cities to disappear relative to a conventional index. Eliminating both biases reverses the common finding that prices tend to be higher in larger cities. Instead, we find that price level for food products falls with city size.
TL;DR: In this article, the authors proposed a new methodology for measuring intergenerational mobility in economic well-being, which is based on the joint distribution of surnames and economic outcomes, and applied their method using the 2001 census from Catalonia, a large region of Spain.
Abstract: We propose a new methodology for measuring intergenerational mobility in economic well- being. Our method is based on the joint distribution of surnames and economic outcomes. It circumvents the need for intergenerational panel data, a long-standing stumbling block for understanding mobility. It does so by using cross-sectional data alongside a calibrated structural model in order to recover the traditional intergenerational elasticity measures. Our main idea is simple. If �inheritance� is important for economic outcomes, then rare surnames should predict economic outcomes in the cross-section. This is because rare surnames are indicative of familial linkages. If the number of rare surnames is small this approach will not work. However, rare surnames are abundant in the highly-skewed nature of surname distributions from most Western societies. We develop a model that articulates this idea and shows that the more important is inheritance, the more informative will be surnames. This result is robust to a variety of different assumptions about fertility and mating. We apply our method using the 2001 census from Catalonia, a large region of Spain. We use educational attainment as a proxy for overall economic well-being. A calibration exercise results in an estimate of the intergenerational correlation of educational attainment of 0.60. We also find evidence suggesting that mobility has decreased among the different generations of the 20th century. A complementary analysis based on sibling correlations confirms our results and provides a robustness check on our method. Our model and our data allow us to examine one possible explanation for the observed decrease in mobility. We find that the degree of assortative mating has increased over time. Overall, we argue that our method has promise because it can tap the vast mines of census data that are available in a heretofore unexploited manner.
TL;DR: In this article, the authors studied the relationship between prices of tradable goods and per capita income and developed a highly tractable general equilibrium model of international trade with heterogeneous firms and nonhomothetic consumer preferences.
Abstract: I study the positive relationship between prices of tradable goods and per capita income. I develop a highly tractable general equilibrium model of international trade with heterogeneous firms and non-homothetic consumer preferences that positively links prices of tradables to consumer income. Guided by the model's testable prediction, I estimate the elasticity of price with respect to per capita income from a unique data set that I construct, which features prices of 245 identical goods sold in 29 European, Asian, and North American markets via the Internet by Spain's second largest apparel manufacturer—Mango. I find that doubling a destination's per capita income results in an 18% increase in the price of identical items sold there. Per capita income differences account for a third, whereas shipping cost differences can explain up to a third of the cross-country price variations of identical items purchased via the Internet by consumers who do not take advantage of quantity discounts. The price elasticity estimates compare favourably to estimates that I obtain from a standard data set that features prices across retail locations around the world, suggesting that variable mark-ups play a key role in accounting for observed cross-country differences in prices of tradables.
TL;DR: This article studied the causes of China's Great Famine and found that an inflexible and progressive government procurement policy (where procurement could not adjust to contemporaneous production and larger shares of expected production were procured from more productive regions) was necessary for generating this pattern.
Abstract: This paper studies the causes of China’s Great Famine, during which 16.5 to 45 million individuals perished in rural areas. We document that average rural food retention during the famine was too high to generate a severe famine without rural inequality in food availability; that there was significant variance in famine mortality rates across rural regions; and that rural mortality rates were positively correlated with per capita food production, a surprising pattern that is unique to the famine years. We provide evidence that an inflexible and progressive government procurement policy (where procurement could not adjust to contemporaneous production and larger shares of expected production were procured from more productive regions) was necessary for generating this pattern and that this policy was a quantitatively important contributor to overall famine mortality.
TL;DR: In this article, the evolution of a social norm of "cooperation" in a dynamic environment is studied, where each agent lives for two periods and interacts with agents from the previous and next generations via a coordination game.
Abstract: We study the evolution of a social norm of “cooperation” in a dynamic environment. Each agent lives for two periods and interacts with agents from the previous and next generations via a coordination game. Social norms emerge as patterns of behaviour that are stable in part due to agents' interpretations of private information about the past, influenced by occasional commonly observed past behaviours. For sufficiently backward-looking societies, history completely drives equilibrium play, leading to a social norm of high or low cooperation. In more forward-looking societies, there is a pattern of “reversion” whereby play starting with high (low) cooperation reverts towards lower (higher) cooperation. The impact of history can be countered by occasional “prominent” agents, whose actions are visible by all future agents and who can leverage their greater visibility to influence expectations of future agents and overturn social norms of low cooperation
TL;DR: In this paper, the authors proposed two alternative estimators that do not rely on any assumption on treatment effects, and that can be used when the treatment rate does not change over time in the control group.
Abstract: Difference-in-differences (DID) is a method to evaluate the effect of a treatment. In its basic version, a “control group” is untreated at two dates, whereas a “treatment group” becomes fully treated at the second date. However, in many applications of the DID method, the treatment rate only increases more in the treatment group. In such fuzzy designs, a popular estimator of the treatment effect is the DID of the outcome divided by the DID of the treatment. We show that this ratio identifies a local average treatment effect only if the effect of the treatment is stable over time, and if the effect of the treatment is the same in the treatment and in the control group. We then propose two alternative estimands that do not rely on any assumption on treatment effects, and that can be used when the treatment rate does not change over time in the control group. We prove that the corresponding estimators are asymptotically normal. Finally, we use our results to reassess the returns to schooling in Indonesia.
TL;DR: In this article, the authors develop a model of inattentive consumption and derive equilibrium pricing when consumers are oblivious to their past usage, and evaluate bill-shock regulation requiring firms to disclose information that substitutes for attention.
Abstract: For many goods and services such as electricity, health care, cellular phone service, debit-card transactions, or those sold with loyalty discounts, the price of the next unit of service depends on past usage. As a result, consumers who are inattentive to their past usage but are aware of contract terms may remain uncertain about the price of the next unit. I develop a model of inattentive consumption, derive equilibrium pricing when consumers are inattentive, and evaluate bill-shock regulation requiring firms to disclose information that substitutes for attention. When inattentive consumers are sophisticated but heterogeneous in their expected demand, bill-shock regulation reduces social welfare in fairly-competitive markets, which may be the effect of the Federal Communication Commission's recent bill-shock agreement. If some consumers are attentive while others naively fail to anticipate their own inattention, however, then bill-shock regulation increases social welfare and can benefit consumers. Hence, requiring zero-balance alerts in addition to the Federal Reserve's new opt-in rule for debit-card overdraft protection may benefit consumers
TL;DR: Using administrative panel data on the entire Danish population, a new set of facts characterizing occupational mobility is documented, showing analytically that the patterns are explained consistently within a theory of vertical sorting under absolute advantage that includes learning about workers' abilities.
Abstract: Using administrative panel data on the entire Danish population we document a new set of facts characterizing occupational mobility. For most occupations, mobility is U-shaped and directional: not only low but also high wage earners within an occupation have a particularly large probability of leaving their occupation, and the low (high) earners tend to switch to new occupations with lower (higher) average wages. Exceptions to this pattern of two-sided selection are occupations with steeply rising (declining) productivity, where mainly the lower (higher) paid workers within this occupation tend to leave. The facts conflict with several existing theories that are used to account for endogeneity in occupational choice, but it is shown analytically that the patterns are explained consistently within a theory of vertical sorting under absolute advantage that includes learning about workers' abilities.
TL;DR: In this article, the authors conducted an experiment with 182 inmates from a maximum security prison to analyze the impact of criminal identity saliency on cheating and found that inmates cheat more when they exogenously render their criminal identity more salient.
Abstract: We conducted an experiment with 182 inmates from a maximum security prison to analyze the impact of criminal identity salience on cheating. The results show that inmates cheat more when we exogenously render their criminal identity more salient. This effect is specific to individuals who have a criminal identity, because an additional placebo experiment shows that regular citizens do not become more dishonest in response to crime-related reminders. Moreover, our experimental measure of cheating correlates with inmates' offences against in-prison regulation. Together, these findings suggest that criminal identity salience plays a crucial role in rule violating behaviour.
TL;DR: In this paper, the authors developed a model featuring nonhomothetic preferences for quality and monopolistic competition in which specialization is purely demand-driven and the decision to serve foreign countries via exports or FDI depends on a proximity-concentration trade-off.
Abstract: We study patterns of foreign direct investment (FDI) in a multi-country world economy. We develop a model featuring non-homothetic preferences for quality and monopolistic competition in which specialization is purely demand-driven and the decision to serve foreign countries via exports or FDI depends on a proximity-concentration trade-off. We characterize the joint patterns of trade and FDI when countries differ in income distribution and size and show that FDI is more likely to occur between countries with similar per capita income levels. The model predicts a Linder Hypothesis for horizontal FDI, which is consistent with some patterns we find using establishment-level data on multinational activity
TL;DR: The authors examined data from prediction markets run by Google, Ford Motor Company, and an anonymous basic materials conglomerate (Firm X) and found that these markets are relatively efficient, and improve upon the forecasts of experts at all three firms by as much as a 25% reduction in mean-squared error.
Abstract: Despite the popularity of prediction, markets among economists, businesses, and policymakers have been slow to adopt them in decision-making. Most studies of prediction markets outside the lab are from public markets with large trading populations. Corporate prediction markets face additional issues, such as thinness, weak incentives, limited entry, and the potential for traders with biases or ulterior motives—raising questions about how well these markets will perform. We examine data from prediction markets run by Google, Ford Motor Company, and an anonymous basic materials conglomerate (Firm X). Despite theoretically adverse conditions, we find these markets are relatively efficient, and improve upon the forecasts of experts at all three firms by as much as a 25% reduction in mean-squared error. The most notable inefficiency is an optimism bias in the markets at Google. The inefficiencies that do exist generally become smaller over time. More experienced traders and those with higher past performance trade against the identified inefficiencies, suggesting that the markets' efficiency improves because traders gain experience and less skilled traders exit the market.
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TL;DR: In this paper, the authors apply mechanism design to the study of international conflict resolution, and show that mediators can be equally effective as arbitrators, by using recommendation strategies that do not reveal that one player is weak to a strong opponent.
Abstract: This article applies mechanism design to the study of international conflict resolution. Standard mechanisms in which an arbitrator can enforce her decisions are usually not feasible because disputants are sovereign entities. Nevertheless, we find that this limitation is inconsequential. Despite only being capable of making unenforceable recommendations, mediators can be equally effective as arbitrators. By using recommendation strategies that do not reveal that one player is weak to a strong opponent, a mediator can effectively circumvent the unenforceability constraint. This is because these strategies make the strong player agree to recommendations that yield the same payoff as arbitration in expectation. This result relies on the capability of mediators to collect confidential information from the disputants, before making their recommendations. Simple protocols of unmediated communication cannot achieve the same level of ex ante welfare, as they preclude confidentiality.
TL;DR: In this paper, the authors incorporate quid pro quo policy into a multicountry dynamic general equilibrium model, using micro evidence from Chinese patents to motivate key assumptions about the terms of the technology transfer deals and macro evidence on China's inward foreign direct investment (FDI) to estimate key model parameters.
Abstract: By the 1970s, quid pro quo policy, which requires multinational firms to transfer technology in return for market access, had become a common practice in many developing countries. While many countries have subsequently liberalized quid pro quo requirements, China continues to follow the policy. In this paper, we incorporate quid pro quo policy into a multicountry dynamic general equilibrium model, using microevidence from Chinese patents to motivate key assumptions about the terms of the technology transfer deals and macroevidence on China’s inward foreign direct investment (FDI) to estimate key model parameters. We then use the model to quantify the impact of China’s quid pro quo policy and show that it has had a significant impact on global innovation and welfare.
TL;DR: In this article, the authors introduce ex post participation constraints in the standard sequential screening model to capture the presence of consumer withdrawal rights as mandated by European Union regulation of distance sales contracts.
Abstract: We introduce ex post participation constraints in the standard sequential screening model. This captures the presence of consumer withdrawal rights as, for instance, mandated by European Union regulation of “distance sales contracts”. With such additional constraints, the optimal contract is static and, unlike with only ex ante participation constraints, does not elicit the agent's information sequentially. This holds whenever differences in ex ante and ex post outside options are below a positive upper bound. Welfare effects of mandatory withdrawal rights are ambiguous. Since it is insufficient in our setting to consider only local incentive constraints, we develop a novel technique to identify the relevant global constraints.
TL;DR: In this article, an agent operating in a self-referential environment is aware of potential model misspecification, and tries to detect it, in real-time, using an econometric specification test.
Abstract: This paper studies adaptive learning with multiple models. An agent operating in a self-referential environment is aware of potential model misspecification, and tries to detect it, in real-time, using an econometric specification test. If the current model passes the test, it is used to construct an optimal policy. If it fails the test, a new model is selected. As the rate of coefficient updating decreases, one model becomes dominant, and is used “almost always”. Dominant models can be characterized using the tools of large deviations theory. The analysis is used to address two questions posed by Sargent's Phillips Curve model.
TL;DR: This article studied asset markets in which ambiguity averse investors face Knightian uncertainty about the fundamentals, and coexist with agents who have resolved their uncertainty, although not risk, as a result of a rational information acquisition process.
Abstract: This paper studies asset markets in which ambiguity averse investors face Knightian uncertainty about the fundamentals, and coexist with agents who have resolved their uncertainty, although not risk, as a result of a rational information acquisition process. In these markets, there are complementaries in information acquisition (the larger the number of informed agents, the higher the incentives for anyone else to become informed), multiplicity of equilibria, history-dependent prices, and large price swings occurring after small changes in the uncertainty surrounding the assets fundamentals. Our model predicts the typical market response to an uncertainty shock: a crash, followed by a sustained rally, which the model generates due to the information complementarities. Our model highlights uncertainty as a new channel for episodes of extreme price volatility, media frenzies and neglects.
TL;DR: In this article, the authors conduct a series of laboratory experiments to understand what role commitment and reputation play in bargaining, and find evidence for the presence of complementary types, whose initial demands acquiesce to induced behavioural demands.
Abstract: We conduct a series of laboratory experiments to understand what role commitment and reputation play in bargaining. The experiments implement the Abreu and Gul (2000) bargaining model that demonstrates how introducing behavioral types, which are obstinate in their demands, creates incentives for all players to build reputations for being hard bargainers. The data are qualitatively consistent with the theory, as subjects mimic induced types. Furthermore, we find evidence for the presence of complementary types, whose initial demands acquiesce to induced behavioural demands. However, there are quantitative deviations from the theory: subjects make aggressive demands too often and participate in longer conflicts before reaching agreements. Overall, the results suggest that the Abreu and Gul (2000) model can be used to gain insights to bargaining behavior, particularly in environments where the process underlying obstinate play is well established.
TL;DR: In this paper, the authors analyzed the empirical content of the pure moral hazard (PMH) and the hybrid moral hazard principal-agent models and derived the equilibrium restrictions from the optimal contract and used the restrictions to show that the models have empirical content.
Abstract: This article analyses the identification and empirical content of the pure moral hazard (PMH) and the hybrid moral hazard (HMH) principal–agent models. The PMH model has hidden actions, while the HMH model has hidden information in addition to hidden actions. In both models, agents are risk averse and principals are risk neutral. The article derives the equilibrium restrictions from the optimal contract and uses the restrictions to show that the models have empirical content. For any given risk-aversion parameter, the models' other parameters are non-parametrically point identified. The risk-aversion parameter—and hence the model—are, however, only partially identified. Management's ability to manipulate accounting reports arises endogenously within HMH models, but not in all versions of PMH models. We use our framework to investigate whether shareholders contract with management recognizing that accounting reports are susceptible to manipulation and, therefore, endogenous to the incentives offered to management. The data reject all models in which accounting reports are verifiable. Furthermore, the version of the PMH in which accounting reports can be manipulated is rejected if expected compensation is restricted to be positive.