Homophily in Peer Groups

By Mariagiovanna Baccara and Leeat Yariv

American Economic Journal: Microeconomics, August 2013

The focus of this paper is the endogenous formation of peer groups. In our model agents choose peers before making contributions to public projects, and they differ in how much they value one project relative to another. Thus, the group's preference compo...

Contracts for Agents with Biased Beliefs: Some Theory and an Experiment

By Anja Sautmann

American Economic Journal: Microeconomics, August 2013

This paper experimentally tests the predictions of a principal-agent model in which the agent has biased beliefs about his ability. Overconfident workers are found to earn lower wages than underconfident ones because they overestimate their expected pa...

Too Far Away? The Effect of Distance to Headquarters on Business Establishment Performance

By Arturs Kalnins and Francine Lafontaine

American Economic Journal: Microeconomics, August 2013

In the population of over 1.7 million Texan sales-tax collecting business establishments, we show that greater distance to owner headquarters is associated with shorter establishment longevity. For the lodging industry, where we have revenue data, inc...

Asymmetric Information between Employers

By Lisa B. Kahn

American Economic Journal: Applied Economics, October 2013

This study explores whether potential employers have the same information about worker ability as the incumbent firm. I develop a model of asymmetric learning that nests the symmetric learning case and allows the degree of asymmetry to vary. I then sho...

Information Asymmetries in Consumer Credit Markets: Evidence from Payday Lending

By Will Dobbie and Paige Marta Skiba

American Economic Journal: Applied Economics, October 2013

Information asymmetries are prominent in theory but difficult to estimate. This paper exploits discontinuities in loan eligibility to test for moral hazard and adverse selection in the payday loan market. Regression discontinuity and regression kink ap...

The Cost of Contract Renegotiation: Evidence from the Local Public Sector

By Philippe Gagnepain, Marc Ivaldi, and David Martimort

American Economic Review, October 2013

Contract theory claims that renegotiation prevents attainment of the efficient solution that could be obtained under full commitment. Assessing the cost of renegotiation remains an open issue from an empirical viewpoint. We fit a structural principal-a...

Spontaneous Discrimination

By Marcin Pęski and Balázs Szentes

American Economic Review, October 2013

We consider a dynamic economy in which agents are repeatedly matched and decide whether or not to form profitable partnerships. Each agent has a physical color and a social color. An agent's social color acts as a signal, conveying information about th...

Do We Follow Others When We Should? A Simple Test of Rational Expectations: Comment

By Anthony Ziegelmeyer, Christoph March, and Sebastian Krügel

American Economic Review, October 2013

The payoff of actions is estimated and the resulting empirical payoff is controlled for in regression analyses to formulate a test of rational expectations in information cascade experiments. We show that the empirical payoff of actions is a function of e...

Optimal Contract under Moral Hazard with Soft Information

By Guillaume Roger

American Economic Journal: Microeconomics, November 2013

I study a model of moral hazard with soft information: the agent alone observes the stochastic outcome of her action; hence the principal faces a problem of ex post adverse selection. With limited instruments the principal cannot solve these two proble...

Middlemen Margins and Globalization

By Pranab Bardhan, Dilip Mookherjee, and Masatoshi Tsumagari

American Economic Journal: Microeconomics, November 2013

We study a competitive theory of middlemen with brand-name reputations necessary to overcome product quality moral hazard problems. Agents with heterogeneous abilities sort into different sectors and occupations. Middleman margins do not equalize acros...

A Procurement Auction for Toxic Assets with Asymmetric Information

By Olivier Armantier, Charles A. Holt, and Charles R. Plott

American Economic Journal: Microeconomics, November 2013

The proposed 2008 TARP auction was intended to remove "toxic" assets from portfolios of financially stressed banks. The Treasury selected a design whereby bids to sell different securities would be normalized by "reference prices" that reflect relative...

Bargaining with Deadlines and Private Information

By William Fuchs and Andrzej Skrzypacz

American Economic Journal: Microeconomics, November 2013

We study dynamic bargaining with private information and a deadline. As commitment power disappears, there is a clear "deadline effect." That is, trade takes place smoothly before the deadline and with an atom right at the deadline. Prices, timing of t...

Corruption Dynamics: The Golden Goose Effect

By Paul Niehaus and Sandip Sukhtankar

American Economic Journal: Economic Policy, November 2013

Theoretical work on disciplining corrupt agents has emphasized the role of expected future rents -- for example, efficiency wages. Yet taken seriously this approach implies that illicit future rents should also deter corruption. We study this "golden g...

Adverse Selection and Inertia in Health Insurance Markets: When Nudging Hurts

By Benjamin R. Handel

American Economic Review, December 2013

This paper investigates consumer inertia in health insurance markets, where adverse selection is a potential concern. We leverage a major change to insurance provision that occurred at a large firm to identify substantial inertia, and develop and estim...

Dynamic Deception

By Axel Anderson and Lones Smith

American Economic Review, December 2013

We characterize the unique equilibrium of a competitive continuous time game between a resource-constrained informed player and a sequence of rivals who partially observe his action intensity. Our game adds noisy monitoring and impatient players to Aum...

Debt Contracts with Partial Commitment

By Natalia Kovrijnykh

American Economic Review, December 2013

This paper analyzes a dynamic lending relationship where the borrower cannot be forced to make repayments, and the lender offers long-term contracts that are imperfectly enforced and repeatedly renegotiated. No commitment and full commitment by the len...

Polarization and Ambiguity

By Sandeep Baliga, Eran Hanany, and Peter Klibanoff

American Economic Review, December 2013

We offer a theory of polarization as an optimal response to ambiguity. Suppose individual A's beliefs first-order stochastically dominate individual B's. They observe a common signal. They exhibit polarization if A's posterior dominates her prior and B'...

Risk Shocks

By Lawrence J. Christiano, Roberto Motto, and Massimo Rostagno

American Economic Review, January 2014

We augment a standard monetary dynamic general equilibrium model to include a Bernanke-Gertler-Gilchrist financial accelerator mechanism. We fit the model to US data, allowing the volatility of cross-sectional idiosyncratic uncertainty to fluctuate ove...

Estimating a Structural Model of Herd Behavior in Financial Markets

By Marco Cipriani and Antonio Guarino

American Economic Review, January 2014

We develop a new methodology to estimate herd behavior in financial markets. We build a model of informational herding that can be estimated with financial transaction data. In the model, rational herding arises because of information-event uncertainty...

Partnerships versus Corporations: Moral Hazard, Sorting, and Ownership Structure

By Ayca Kaya and Galina Vereshchagina

American Economic Review, January 2014

Team production takes advantage of technological complementarities but comes with the cost of free-ridership. When workers differ in skills, the choice of sorting pattern may be associated with a nontrivial trade-off between exploiting the technologica...