Working Papers
By Year:
Paper #  Author  Title  

13043 
Maciej H. Kotowski Fei Li 
"On the Continuous Equilibria of AffiliatedValue, AllPay Auctions with Private Budget Constraints", Second Version  
We consider allpay auctions in the presence of interdependent, affiliated valuations and private budget constraints. For the sealedbid, allpay auction we characterize a symmetric equilibrium in continuous strategies for the case of N bidders. Budget constraints encourage more aggressive bidding among participants with large endowments and intermediate valuations. We extend our results to the war of attrition where we show that budget constraints lead to a uniform amplification of equilibrium bids among bidders with sufficient endowments. An example shows that with both interdependent valuations and private budget constraints, a revenue ranking between the two auction formats is generally not possible. Equilibria with discontinuous bidding strategies are discussed. Download Paper


13042 
Francesco Bianchi Leonardo Melosi 
"Modeling the Evolution of Expectations and Uncertainty in General Equilibrium"  
This paper develops methods to study the evolution of agents’ expectations and uncertainty in general equilibrium models. A central insight consists of recognizing that the evolution of agents' beliefs can be captured by defining a set of regimes that are characterized by the degree of agents' pessimism, optimism, and uncertainty about future equilibrium outcomes. Once this kind of structure is imposed, it is possible to create a mapping between the evolution of agents' beliefs and observable outcomes. Agents in the model are fully rational, conduct Bayesian learning, and they know that they do not know. Therefore, agents form expectations taking into account that their beliefs will evolve according to what they observe in the future. The new modeling framework accommodates both gradual and abrupt changes in agents' beliefs and allows an analytical characterization of uncertainty. Shocks to beliefs are shown to have both firstorder and secondorder effects. To illustrate how to apply the methods, we use a prototypical Real Business Cycle model in which households form beliefs about the likely duration of highgrowth and lowgrowth regimes. Download Paper


13041 
Francesco Bianchi Leonardo Melosi 
"Constrained Discretion and Central Bank Transparency"  
We develop a theoretical framework to quantitatively assess the general equilibrium effects and welfare implications of central bank reputation and transparency. Monetary policy alternates between periods of active inflation stabilization and periods during which the emphasis on inflation stabilization is reduced. When the central bank only engages in short deviations from active monetary policy, inflation expectations remain anchored and the model captures the monetary approach described as constrained discretion. However, if the central bank deviates for a prolonged period of time, agents gradually become pessimistic about future monetary policy, the disanchoring of inflation expectations occurs, and uncertainty rises. Reputation determines the speed with which agents’' pessimism accelerates once the central bank starts deviating. When the model is fitted to U.S. data, we find that the Federal Reserve can accommodate contractionary technology shocks for up to five years before inflation expectations take off. Increasing transparency would improve welfare by anchoring agents’ expectations. Gains from transparency are even more sizeable for countries whose central banks have weak reputation. Download Paper


13040 
Nicholas Grau 
"The Impact of College Admissions Policies on The Performance of High School Students"  
This paper empirically evaluates the effects of college admissions policies on high school student performance. To this end, I build a model where high school students decide their level of effort and whether to take the college admissions test, taking into consideration how those decisions may affect their future university admission chances. Using Chilean data for the 2009 college admissions process, I structurally estimate the parameters of the model in order to study the implications of two types of counterfactual experiments: (a) a SESQuota system, which imposes the population’s SES distribution for each university; (b) increasing the high school GPA weight. The results from these exercises support the claim that increasing the level of equal college opportunities may boost the amount of effort exerted by high school students. Specifically, I find that: (1) average effort significantly increases as opportunities are equalized across different socioeconomic groups. (2) There is a moderate improvement in high school student performance, which is relatively important for certain groups. (3) The highest reactions in terms of exerted effort come from those students who also change their decision about taking the college admissions test. (4) Neither of these policies increases the percentage of students taking the national test for college admission, which is consistent with the fact that in this policy implementation there are winners and losers. However, there are relevant variations in who is taking such a test; in particular, this percentage increases for lowincome students and those who have higher level of learning skills. (5) Because the SESQuota system uses the existing information more efficiently, it implies a more efficient student allocation to equalize opportunities. Download Paper


13039 
Enriqueta Aragones Itzhak Gilboa Andrew Postlewaite David Schmeidler 
"Rhetoric and Analogies"  
The art of rhetoric may be defined as changing other people’s minds (opinions, beliefs) without providing them new information. One technique heavily used by rhetoric employs analogies. Using analogies, one may draw the listener’s attention to similarities between cases and to reorganize existing information in a way that highlights certain regularities. In this paper we offer two models of analogies, discuss their theoretical equivalence, and show that finding good analogies is a computationally hard problem. Download Paper


13038 
Yuichi Yamamoto 
"Individual Learning and Cooperation in Noisy Repeated Games"' (second version)  
We investigate whether two players in a longrun relationship can maintain cooperation when the details of the underlying game are unknown. Specifically, we consider a new class of repeated games with private monitoring, where an unobservable state of the world influences the payoff functions and/or the monitoring structure. Each player privately learns the state over time but cannot observe what the opponent learned. We show that there are robust equilibria in which players eventually obtain payoffs as if the true state were common knowledge and players played a “belieffree” equilibrium. We also provide explicit equilibrium constructions in various economic examples. Download Paper


13037 
Simone CerreiaVioglio David Dillenberger Pietro Ortoleva 
"Cautious Expected Utility and the Certainty Effect"  
Many violations of the Independence axiom of Expected Utility can be traced to subjects' attraction to riskfree prospects. Negative Certainty Independence, the key axiom in this paper, formalizes this tendency. Our main result is a utility representation of all preferences over monetary lotteries that satisfy Negative Certainty Independence together with basic rationality postulates. Such preferences can be represented as if the agent were unsure of how risk averse to be when evaluating a lottery p; instead, she has in mind a set of possible utility functions over outcomes and displays a cautious behavior: she computes the certainty equivalent of p with respect to each possible function in the set and picks the smallest one. The set of utilities is unique in a welldefined sense. We show that our representation can also be derived from a `cautious' completion of an incomplete preference relation. Download Paper


13036 
Jesus FernandezVillaverde Pablo GuerronQuintana Juan F. RubioRamírez 
"Estimating Dynamic Equilibrium Models with Stochastic Volatility"  
We propose a novel method to estimate dynamic equilibrium models with stochastic volatility. First, we characterize the properties of the solution to this class of models. Second, we take advantage of the results about the structure of the solution to build a sequential Monte Carlo algorithm to evaluate the likelihood function of the model. The approach, which exploits the profusion of shocks in stochastic volatility models, is versatile and computationally tractable even in largescale models, such as those often employed by policymaking institutions. As an application, we use our algorithm and Bayesian methods to estimate a business cycle model of the U.S. economy with both stochastic volatility and parameter drifting in monetary policy. Our application shows the importance of stochastic volatility in accounting for the dynamics of the data. Download Paper


13035 
Dirk Krueger Alexander Ludwig 
"Optimal Progressive Taxation and Education Subsidies in a Model of Endogenous Human Capital Formation"  
In this paper we characterize quantitatively the optimal mix of progressive income taxes and education subsidies in a model with endogeneous human capital formation, borrowing constraints, income risk and incomplete financial markets. Progressive labor income taxes provide social insurance against idiosyncratic income risk and redistributes after tax income among exante heterogenous households. In addition to the standard distortions of labor supply progressive taxes also impede the incentives to acquire higher education, generation a nontrivial tradeoff for the benevolent utilitarian government. The latter distortion can potentially be mitigated by an education subsidy. We find that the welfaremaximizing fiscal policy is indeed characterized by a substantially progressive labor income tax code and a positive subsidy for college education. Both the degree of tax progressivity and the education subsidy are larger than in the current U.S. status quo. Download Paper


13034 
George J. Mailath Larry Samuelson 
"Reputations in Repeated Games"  
This paper, prepared for the Handbook of Game Theory, volume 4 (Peyton Young and Shmuel Zamir, editors, Elsevier Press), surveys work on reputations in repeated games of incomplete information. Download Paper


13033 
Chong Huang Fei Li 
"Bargaining While Learning About New Arrivals", Second Version  
We study dynamic bargaining with uncertainty over the buyer's valuation and the seller's outside option. A longlived seller makes offers to a longlived buyer whose value is private information. There may exist a shortlived buyer whose value is higher than that of the longlived buyer. The arrival of the shortlived buyer, if she exists, is determined by a Poisson process. We characterize the unique equilibrium. The equilibrium displays interesting price fluctuations: in some periods, the seller charges a high price unacceptable to the longlived buyer, in the hope that the shortlived buyer will appear in that period; in the other periods, he o_ers a price attractive to some values of the longlived buyer. The price dynamics result from the interaction between two learning processes: exogenous learning about the existence of shortlived buyers, and endogenous learning about the longlived buyer's value. Download Paper


13032 
Francesco Bianchi Leonardo Melosi 
"Dormant Shocks and Fiscal Virtue"  
We develop a theoretical framework to account for the observed instability of the link between inflation and fiscal imbalances across time and countries. Current policy makers’
behavior influences agents’ beliefs about the way debt will be stabilized. The standard policy mix consists of a virtuous fiscal authority that moves taxes in response to debt
and a central bank that has full control over inflation. When policy makers deviate from this Virtuous regime, agents conduct Bayesian learning to infer the likely duration of
the deviation. As agents observe more and more deviations, they become increasingly pessimistic about a prompt return to the Virtuous regime and inflation starts drifting in
response to a fiscal imbalance. Shocks that were dormant under the Virtuous regime now start manifesting themselves. These changes are initially imperceptible, can unfold over
decades, and accelerate as agents’ beliefs deteriorate. Dormant shocks explain the runup of US inflation and uncertainty in the “70s. The currently low longterm interest rates
and inflation expectations might hide the true risk of inflation faced by the US economy. Download Paper


13031 
Francesco Bianchi Leonardo Melosi 
"Constrained Discretion and Central Bank Transparency"  
We develop a theoretical framework to quantitatively assess the general equilibrium effects and welfare implications of central bank reputation and transparency. Monetary policy alternates between periods of active inflation stabilization and periods during which the emphasis on inflation stabilization is reduced. When the central bank only engages in short deviations from active monetary policy, inflation expectations remain anchored and the model captures the monetary approach described as constrained discretion. However, if the central bank deviates for a prolonged period of time, agents gradually become pessimistic about future monetary policy, the disanchoring of inflation expectations occurs, and uncertainty rises. Reputation determines the speed with which agents’ pessimism accelerates once the central bank starts deviating. When the model is fitted to U.S. data, we find that the Federal Reserve can accommodate contractionary technology shocks for up to five years before inflation expectations take off. Increasing transparency would improve welfare by anchoring agents’ expectations. Gains from transparency are even more sizeable for countries whose central banks have weak reputation. Download Paper


13030 
Francesco Bianchi Leonardo Melosi 
"Modeling the Evolution of Expectations and Uncertainty in General Equilibrium"  
This paper develops methods to study the evolution of agents’ expectations and uncertainty in
general equilibrium models. A central insight consists of recognizing that the evolution of agents.
beliefs can be captured by defining a set of regimes that are characterized by the degree of agents.
pessimism, optimism, and uncertainty about future equilibrium outcomes. Once this kind of structure
is imposed, it is possible to create a mapping between the evolution of agents’ beliefs and observable
outcomes. Agents in the model are fully rational, conduct Bayesian learning, and they know that they
do not know. Therefore, agents form expectations taking into account that their beliefs will evolve
according to what they observe in the future. The new modeling framework accommodates both
gradual and abrupt changes in agents’ beliefs and allows an analytical characterization of uncertainty.
Shocks to beliefs are shown to have both .rstorder and secondorder effects. To illustrate how to
apply the methods, we use a prototypical Real Business Cycle model in which households form beliefs
about the likely duration of highgrowth and lowgrowth regimes. Download Paper


13029 
Leonardo Melosi 
"Signaling Effects of Monetary Policy"  
We develop a DSGE model in which the policy rate signals to price setters the central bank’s view about macroeconomic developments. The model is estimated with likelihood methods on a U.S. data set that includes the Survey of Professional Forecasters as a measure of price setters’ inflation expectations. We find that the model fits the data better than a prototypical New Keynesian DSGE model because the signaling effects of monetary policy help the model account for the runup in inflation expectations in the 1970s. The estimated model with signaling effects delivers large and persistent real effects of monetary disturbances even though the average duration of price contracts is fairly short. While the signaling effects do not substantially alter the transmission of technology shocks, they bring about deflationary pressures in the aftermath of positive demand shocks. The
signaling effects of monetary policy have contributed (i ) to heightening inflation expectations in the 1970s, (ii ) to raising inflation and to exacerbating the recession during the first years of Volcker’s monetary tightening, and (iii ) to subduing inflation and to stimulating economic activity from 1991 through 2007. Download Paper


13028 
Qingmin Liu George J. Mailath Andrew Postlewaite Larry Samuelson 
"Stable Matching with Incomplete Information, Second Version"  
We formulate a notion of stable outcomes in matching problems with onesided asymmetric information. The key conceptual problem is to formulate a notion of a blocking pair that takes account of the inferences that the uninformed agent might make. We show that the set of stable outcomes is nonempty in incompleteinformation environments, and is a superset of the set of completeinformation stable outcomes. We then provide sufficient conditions for incompleteinformation stable matchings to be efficient. Lastly, we define a notion of pricesustainable allocations and show that the set of incompleteinformation stable matchings is a subset of the set of such allocations. Download Paper


13027 
Uriel Spiegel 
"Are All Technological Improvements Beneficial? Absolutely Not"  
This paper shows, using a simple model, that wasteful innovations may result in a lossloss situation where no country experiences an increase in welfare. If some countries introduce innovations that result in harmful effects on other countries, it may cause the adversely affected countries to retaliate by imposing impediments to international trade. In a globalized and integrated World economy, such policies can only harm the countries involved. Thus, it is in both countries' best interest to encourage sustainable coordination between policies in order to better their own citizens, as well as the World's aggregate welfare Download Paper


13026 
Philippe Aghion Ufuk Akcigit Peter Howitt 
"What Do We Learn From Schumpeterian Growth Theory?"  
Schumpeterian growth theory has .operationalized. Schumpeter’s notion of creative destruction by developing models based on this concept. These models shed light on several aspects of the growth process that could not be properly addressed by alternative theories. In this survey, we focus on four important aspects, namely: (i) the role of competition and market structure; (ii) firm dynamics; (iii) the relationship between growth and development with the notion of appropriate growth institutions; and (iv) the emergence and impact of longterm technological waves. In each case Schumpeterian growth theory delivers predictions that distinguish it from other growth models and which can be tested using micro data. Download Paper


13025 
Philippe Aghion Ufuk Akcigit Jesus FernandezVillaverde 
"Optimal Capital Versus Labor Taxation with InnovationLed Growth"  
Chamley (1986) and Judd (1985) showed that, in a standard neoclassical growth model with capital accumulation and infinitely lived agents, either taxing or subsidizing capital cannot be optimal in the steady state. In this paper, we introduce innovationled growth into the ChamleyJudd framework, using a Schumpeterian growth model where productivityenhancing innovations result from pro.tmotivated R&D investment. Our main result is that, for a given required trend of public expenditure, a zero tax/subsidy on capital becomes suboptimal. In particular, the higher the level of public expenditure and the income elasticity of labor supply, the less should capital income be subsidized and the more it should be taxed. Not taxing capital implies that labor must be taxed at a higher rate. This in turn has a detrimental effect on labor supply and therefore on the market size for innovation. At the same time, for a given labor supply, taxing capital also reduces innovation incentives, so that for low levels of public expenditure and/or labor supply elasticity it becomes optimal to subsidize capital income. Download Paper


13024 
Kenneth Burdett Guido Menzio 
"(Q, S, s) Pricing Rules"  
We study the effect of menu costs on the pricing behavior of sellers and on the crosssectional distribution of prices in the searchtheoretic model of imperfect competition of Burdett and Judd (1983). We find that, when menu costs are small, the equilibrium is such that sellers follow a (Q, S, s) pricing rule. According to a (Q, S, s) rule, a seller lets inflation erode the real value of its nominal price until it reaches some point s. Then, the seller pays the menu cost and changes its nominal price so that the real value of the new price is randomly drawn from a distribution with support [S,Q], where Q is the buyer’s reservation price and S is some price between s and Q. Only when the menu cost is relatively large, the equilibrium is such that sellers follow a standard (S; s) pricing rule. We argue that whether sellers follow a (Q, S, s) or an (S, s) rule matters for the estimation of menu costs and sellerspecific shocks. Download Paper


13023 
Fei Li 
"Efficient Learning and Job Turnover in the Labor Market"  
This paper studies the dynamics of workers’ onthejob search behavior and its consequences in an equilibrium labor market. In a model with both directed search and learning about the match quality of firmworker pairs, I highlight the job search target effect of learning: as a worker updates the evaluation of his current job, he adjusts his onthejob search target, which results in a different job finding rate. This model generates a nonmonotonic relation between the employmenttoemployment transition rate and tenure, which provides a new explanation of the humpshaped separation ratetenure profile. Download Paper


13022 
Olivier Compte Andrew Postlewaite 
"Folk Theorems, Second Version"  
Much of the repeated game literature is concerned with proving Folk Theorems. The logic of the exercise is to specify a particular game, and to explore for that game specification whether any given feasible (and individually rational) value vector can be an equilibrium outcome for some strategies when agents are sufficiently patient. A game specification includes a description of what agents observe at each stage. This is done by defining a monitoring structure, that is, a collection of probability distributions over the signals players receive (one distribution for each action profile players may play). Although this is simply meant to capture the fact that players don’t directly observe the actions chosen by others, constructed equilibria often depend on players precisely knowing these distributions, somewhat unrealistic in most problems of interest. We revisit the classic Folk Theorem for games with imperfect public monitoring, asking that incentive conditions hold not only for a precisely defined monitoring structure, but also for
a ball of monitoring structures containing it. We show that efficiency and incentives are no longer compatible. Download Paper


13021 
Songnian Chen Shakeeb Khan Xun Tang 
"Informational Content of Special Regressors in Heteroskedastic Binary"  
We quantify the identifying power of special regressors in heteroskedastic binary regressions with medianindependent or conditionally symmetric errors. We measure the
identifying power using two criteria: the set of regressor values that help point identify coefficients in latent payoffs as in (Manski 1988); and the Fisher information of coefficients as in (Chamberlain 1986). We find for medianindependent errors, requiring one of the regressors to be “special" (in a sense similar to (Lewbel 2000)) does not add to the identifying power or the information for coefficients. Nonetheless it does help identify the error distribution and the average structural function. For conditionally symmetric errors, the presence of a special regressor improves the identifying power by the criterion in (Manski 1988), and the Fisher information for coefficients is strictly positive under mild conditions. We propose a new estimator for coefficients that converges at the parametric rate under symmetric errors and a special regressor, and report its decent performance in small samples through simulations. Download Paper


13020 
Olivier Compte Andrew Postlewaite 
"Belief free equilibria"  
The repeated game literature studies long run/repeated interactions, aiming to understand how repetition may foster cooperation. Conditioning future behavior on past play is crucial in this endeavor. For most situations of interest a given player does not directly observe the actions chosen by other players and must rely on noisy signals he receives about those actions. This is typically incorporated into models by defining a monitoring structure, that is, a collection of probability distributions over the signals each player receives (one distribution for each action profile players may play). Although this is simply meant to capture the fact that players don.t directly observe the actions chosen by others, constructed equilibria often depend on players precisely knowing the distributions, somewhat unrealistic in most problems of interest. This paper aims to show the fragility of belief free equilibrium constructions when one adds shocks to the monitoring structure in repeated games. Download Paper


13019 
Rong Hai 
"The Determinants of Rising Inequality in Health Insurance and Wages: An Equilibrium Model of Workers' Compensation and Health Care Policies"  
I develop and structurally estimate a nonstationary overlapping generations equilibrium model of employment and workers' health insurance and wage compensation, to investigate the determinants of rising inequality in health insurance and wages in the U.S. over the last 30
years. I find that skillbiased technological change and the rising cost of medical care services are the two most important determinants, while the impact of Medicaid eligibility expansion is quantitatively small. I conduct counterfactual policy experiments to analyze key features
of the 2010 Patient Protection and Affordable Care Act, including employer mandates and further Medicaid eligibility expansion. I find that (i) an employer mandate reduces both wage and health insurance coverage inequality, but also lowers the employment rate of less educated
individuals; and (ii) further Medicaid eligibility expansion increases employment rate of less educated individuals, reduces health insurance coverage disparity, but also causes larger wage inequality. Download Paper


13018 
Daron Acemoglu Ufuk Akcigit Nicholas Bloom William Kerr 
"Innovation, Reallocation and Growth"  
We build a model of firmlevel innovation, productivity growth and reallocation featuring endogenous entry and exit. A key feature is the selection between high and lowtype firms, which differ in terms of their innovative capacity. We estimate the parameters of the model using detailed US Census micro data on firmlevel output, R&D and patenting. The model provides a good fit to the dynamics of firm entry and exit, output and R&D, and its implied elasticities are in the ballpark of a range of micro estimates. We find industrial policy subsidizing either the R&D or the continued operation of incumbents reduces growth and welfare. For example, a subsidy to incumbent R&D equivalent to 5% of GDP reduces welfare by about 1.5% because it deters entry of new hightype firms. 0n the contrary, substantial improvements (of the order of 5% improvement in welfare) are possible if the continued operation of incumbents is taxed while at the same time R&D by incumbents and new entrants is subsidized. This is because of a strong selection effect: R&D resources (skilled labor) are inefficiently used by lowtype incumbent firms. Subsidies to incumbents encourage the survival and expansion of these firms at the expense of potential hightype entrants. We show that optimal policy encourages the exit of lowtype firms and supports R&D by hightype incumbents and entry. Download Paper


13017 
Olivier Compte Andrew Postlewaite 
"Auctions", Second Version  
Standard Bayesian models assume agents know and fully exploit prior distributions over types. We are interested in modeling agents who lack detailed knowledge of prior distributions. In auctions, that agents know priors has two consequences: (i) signals about own valuation come with precise inference about signals received by others; (ii) noisier estimates translate into more weight put on priors. We revisit classic questions in auction theory, exploring environments in which no such complex inferences are precluded. This is done in a parsimonious model of auctions in which agents are restricted to using simple strategies. Download Paper


13016 
S. Boragan Aruoba Francis X. Diebold Jeremy Nalewaik Frank Schorfheide Dongho Song 
"Improving GDP Measurement: A MeasurementError Perspective"  
We provide a new and superior measure of U.S. GDP, obtained by applying optimal signalextraction techniques to the (noisy) expenditureside and incomeside estimates. Its properties  particularly as regards serial correlation  differ markedly from those of the standard expenditureside measure and lead to substantiallyrevised views regarding the properties of GDP. Download Paper


13015 
Boleslaw Borkowski Monika Krawiec 
"Modeling and Estimating Volatility of Options on Standard & Poor's 500 Index"  
This paper explores the impact of volatility estimation methods on theoretical option values based upon the BlackScholesMerton (BSM) model. Volatility is the only input used in the BSM model that cannot be observed in the market or a priori determined in a contract. Thus, properly calculating volatility is crucial. Two approaches to estimate volatility are implied volatility and historical prices. Iterative techniques are applied, based on daily S&P index options. Additionally, using option data on S&P 500 Index listed on the Chicago Board of Options Exchange, historical volatility can be estimated. Download Paper


13014 
David Dillenberger Juan Sebastian Lleras Philipp Sadowski Norio Takeoka 
“A Theory of Subjective Learning, Second Version”  
We study an individual who faces a dynamic decision problem in which the process of information arrival is unobserved by the analyst. We elicit subjective information directly from choice behavior by deriving two utility representations of preferences over menus of acts. The most general representation identifies a unique probability distribution over the set of posteriors that the decision maker might face at the time of choosing from the menu. We use this representation to characterize a notion of ”more preference for flexibility” via a subjective analogue of Blackwell’s (1951, 1953) comparisons of experiments. A more specialized representation uniquely identifies information as a partition of the state space. This result allows us to compare individuals who expect to learn differently, even if they do not agree on their prior beliefs. On the extended domain of datedmenus, we show how to accommodate an individual who expects to learn gradually over time by means of a subjective filtration. Download Paper


13013 
Milan Lakicevic Milos Vulanovic 
"On Mergers, Acquisitions and Liquidation Using Specified Purpose Acquisition Companies (SPACs)"  
A Specified Purpose Acquisition Company (SPAC) is formed to purchase operating businesses within a priori determined time period. SPACs existed in U.S capital markets since the 1920s. Their corporate structure has recently become debated in the legal and financial literatures, especially their structural response to regulations by the Security and Exchange Commission (SEC) in the late 1990s. SPACs were traded on American Stock Exchange and Overt the Counter Bulletin Board. Since 2008, SPACs are listed on New York Stock Exchange and National Association of Securities Dealers Automated Quotations. This paper examines the determinants of the execution of mergers by SPACs. Download Paper


13012 
Antonio M. Merlo Thomas R. Palfrey 
"External Validation of Voter Turnout Models by Concealed Parameter Recovery"  
We conduct a model validation analysis of several behavioral models of voter turnout, using laboratory data. We call our method of model validation concealed parameter recovery, where estimation of a model is done under a veil of ignorance about some of the experimentally controlled parameters — in this case voting costs. We use quantal response equilibrium as the underlying, common structure for estimation, and estimate models of instrumental voting, altruistic voting, expressive voting, and ethical voting. All the models except the ethical model recover the concealed parameters reasonably well. We also report the results of a counterfactual analysis based on the recovered parameters, to compare the policy implications of the different models about the cost of a subsidy to increase turnout. Download Paper


13011 
Felipe E. Saffie Sina T. Ates 
"Project Heterogeneity and Growth: The Impact of Selection"  
In the classical literature of innovationbased endogenous growth, the main engine of long run economic growth is firm entry. Nevertheless, when projects are heterogeneous, and good ideas are scarce, a masscomposition trade off is introduced into this link: larger cohorts are characterized by a lower average quality. As one of the roles of the financial system is to screen the quality of projects, the ability of financial intermediaries to detect promising projects shapes the strength of this tradeoff. In order to study this relationship, we build a general equilibrium endogenous growth model with project heterogeneity and financial screening. To illustrate the relevance of the mass and composition margins we apply this framework to two important debates in the growth literature. First, we show that corporate taxation has only a weak effect in growth, but a strong effect on firm entry, both well known empirical regularities. A second illustration studies the effects of financial development in growth. A word of caution arises: for economies that are characterized by high rates of firm creation, domestic credit should not be used as a proxy of financial development, in contrast to most of the empirical literature. Download Paper


13010 
Andrea Mattozzi Antonio M. Merlo 
"Mediocracy", Fourth Version  
We study the recruitment of individuals in the political sector. We propose an equilibrium model of political recruitment by two political parties competing in an election. We show that political parties may deliberately choose to recruit only mediocre politicians, in spite of the fact that they could select better individuals. Furthermore, we show that this phenomenon is more likely to occur in proportional than in majoritarian electoral systems. Download Paper


13009 
Ju Hu 
"Reputation in the Presence of Noisy Exogenous Learning"  
This paper studies the reputation effect in which a longlived player faces a sequence of uninformed shortlived players and the uninformed players receive informative but noisy exogenous signals about the type of the longlived player. We provide an explicit lower bound on all Nash equilibrium payoffs of the longlived player. The lower bound shows when the exogenous signals are sufficiently noisy and the longlived player is patient, he can be assured of a payoff strictly higher than his minmax payoff Download Paper
