Research Database

We propose a notion of smoothness of nonexpected utility functions, which extends the variational analysis of nonexpected utility functions to more general settings. In particular, our theory applies to state dependent utilities, as well as the multiple prior expected utility model, both of which are not possible in previous literatures. Other nonexpected utility models are shown to satisfy smoothness under more general conditions than the Fréchet and Gateaux differentiability used in the literature. We give more general characterizations of monotonicity and risk aversion without assuming state independence of utility function.

We seem to observe different patterns of exchange at different times and in different places. The first goal of this paper is to develop a model of money as a medium of exchange which allows multiple transaction patterns. A dynamic version of Shubik’s trading post economy is used, and it is shown that this economy allows a role for fiat money, and that fiat money can coexist with barter in exchange. There are multiple decentralized equilibria, and one of these resembles the equilibrium of a cash-in-advance economy—indeed, the model can be viewed as a generalization of the cash-in-advance framework. The second goal of the paper is to show that the present model can help explain why inflation seems far more disruptive and costly than what is implied by empirical studies on the cash-in-advance model. The argument for this is based on misestimations due to the unobservability of the patterns of exchange, which are variable in this model.

This study identifies the impact of access to and the speed of divorce on the welfare of children in a middle income largely Catholic country. Using difference-in-difference estimation techniques, I compare school enrollment for children of married and cohabiting parent households before and after the legalization of divorce. Implementing pro-homemaker divorce laws increased school enrollment anywhere from 3.4 to 5.5 percentage points, and the effect was particularly salient on secondary school students. I provide evidence that administrative processes influencing the speed of divorce affect household bargaining and investments in schooling. With every additional six months wait to the finalization of divorce, school enrollment decreased by approximately one percentage point. The impact almost doubles for secondary schooling. When contemplating development policies, advocates, policymakers, and leaders should not overlook the impact changes in family policies and administrative processes can have on advancements in child welfare and, ultimately, economic development.

This paper provides intertemporal general-equilibrium investigation of the welfare and employment consequences of Europe’s move to a unified market, using a multicountry, multisector applied model with imperfect competition, increasing returns-to-scale, and product differentiation at the firm level. The oligopolistic game between firms is assumed to be Nash in output. In the short-term, market imperfections (such as oligopolistic profits and wage rigidities) may exist. These imperfections vanish in the long run, characterized by stock-flow equilibrium consistent with steady-state growth. “Europe 1992” is interpreted as the elimination of the possibility for oligopolistic firms to price-discriminate between client countries within the European Community. Investigations are performed under alternative wage determination mechanisms (flexible wages v.s. wage indexation). We show, among other things, that the gains remain modest when dynamic effects are taken into account, and that all member countries are not sure to gain from European integration in the long run.

Prior to 1863, state-chartered banks in the United States issued notes–dollar-denominated promises to pay specie to the bearer on demand. Although these notes circulated at par locally, they usually were quoted at a discount outside the local area. These discounts varied by both the location of the bank and the location where the discount was being quoted. Further, these discounts were asymmetric across locations, meaning that the discounts quoted in location A on the notes of banks in location B generally differed from the discounts quoted in location B on the notes of banks in location A. Also, discounts generally increased when banks suspended payments on their notes. In this paper we construct a random matching model to qualitatively match these facts about banknote discounts. To attempt to account for locational differences, the model has agents that come from two distinct locations. Each location also has bankers that can issue notes. Banknotes are accepted in exchange because banks are required to produce when a banknote is presented for redemption and their past actions are public information. Overall, the model delivers predictions consistent with the behavior of discounts.

We study the quantitative properties of constrained efficient allocations in an environment where risk sharing is limited by the presence of private information. We consider a life cycle version of a standard Mirrlees economy where shocks to labor productivity have a component that is public information and one that is private information. The presence of private shocks has important implications for the age profiles of consumption and income. First, they introduce an endogenous dispersion of continuation utilities. As a result, consumption inequality rises with age even if the variance of the shocks does not. Second, they introduce an endogenous rise of the distortion on the marginal rate of substitution between consumption and leisure over the life cycle. This is because, as agents age, the ability to properly provide incentives for work must become less and less tied to promises of benefits (through either increased leisure or consumption) in future periods. Both of these features are also present in the data. We look at the data through the lens of our model and estimate the fraction of labor productivity that is private information. We find that for the model and data to be consistent, a large fraction of shocks to labor productivities must be private information.

We present and empirically implement an equilibrium labor market search model where risk averse workers facing medical expenditure shocks are matched with firms making health insurance coverage decisions. Our model delivers a rich set of predictions that can account for a wide variety of phenomenon observed in the data including the correlations among firm sizes, wages, health insurance offering rates, turnover rates and workers' health compositions. We estimate our model by Generalized Method of Moments using a combination of micro datasets including Survey of Income and Program Participation, Medical Expenditure Panel Survey and Robert Wood Johnson Foundation Employer Health Insurance Survey. We use our estimated model to evaluate the equilibrium impact of the 2010 Affordable Care Act (ACA) and find that it would reduce the uninsured rate among the workers in our estimation sample from about 22% in the pre-ACA benchmark economy to less than 4%. We also find that income-based premium subsidies for health insurance purchases from the exchange play an important role for the sustainability of the ACA; without the premium subsidies, the uninsured rate would be around 18%. In contrast, as long as premium subsidies and health insurance exchanges with community ratings stay intact, ACA without the individual mandate, or without the employer mandate, or without both mandates, could still succeed in reducing the uninsured rates to 7.34%, 4.63% and 9.22% respectively.