Economic Theory: Information + Competition
Economic Theory: Information + Competition
- Job Market Paper: Investment without Coordination Failures (slides)
- I study games with incomplete markets where agents must sink their investments before they can join a match that generates value. I focus on competitive matching markets where there is a public price to join any match. Despite the First Welfare Theorem, coordination failures can still arise because of the market incompleteness. Armen does not invest because Bengt does not invest, vice versa, and they are unable to write enforceable contracts to ensure joint investments. In these games, multiple equilibria can exist, with both efficient investment and not. However, the standard, Nash solution concept used in these games does not help in determining if all equilibria are equally robust or stable. I argue that we should replace the Nash solution concept in this context with a mild, common refinement: trembling-hand perfection. I prove that—in a general class of models with general heterogeneity of types, costs of investments, and matching surpluses—small trembles rule out coordination failures. The main theorem is a modified First Welfare Theorem: even with incomplete markets, every perfect, competitive equilibrium is efficient.
- Price Competition and the Use of Consumer Data (slides)
- Firms have access to vasts amounts of data on consumers, which allows them to strategically vary prices across consumers, i.e. price discriminate. To study the effects of this data on consumer welfare, I study a Bertrand duopoly model where each consumer’s valuation for each firm’s good is uncertain. Instead of imposing that firms have access to specific data, I allow for general information structures; firms may vary in the quality and form of their data. Fixing the available data, due to the discontinuities in Bertrand competition, the unique equilibrium is only supported through price dispersion. I directly can construct the unique equilibrium by harnessing features of each firm’s residual demand curve. In equilibrium, each firm randomizes her price and generates a unit-elastic residual demand for the other firm. I then vary the available data and compare the welfare consequences. In the baseline model, contrary to common concerns regarding price discrimination derived from the monopoly case, under competition, completely public consumer data (perfect price discrimination) is optimal for consumers.
- Market Persuasion: Kamenica-Gentzkow meets Prescott-Townsend (slides)
- This paper is on the information efficiency of markets and builds on recent developments in economic theory: Bayesian persuasion (Kamenica and Gentzkow 2011) and information design (Taneva 2019). Bayesian persuasion is generally formulated as a primal optimization problem where an information designer chooses some “allocation” of information to maximize an objective function. However, the same problem has a dual formulation. In the dual problem, decentralized prices direct decisions. However, the problem is complicated because the information design problem involves moral hazard, which must be incorporated into the competitive model, as in Prescott and Townsend (1984). With moral hazard, optimal prices are not fully revealing. Instead obfuscation—or persuasion—is optimal. The main result is that there exist competitive prices that implement the information designer’s allocation. But we do not need the information designer. Competition is strongest form of persuasion.
- Entrepreneurship as Coordination
- This article presents a new lens for studying entrepreneurship, what I call entrepreneurship as coordination. In certain situations, people have coordination problems. Buyers and sellers may want to go to a market, but only if the other person also goes. Instead of being stuck in a coordination problem, an entrepreneur is able to coordinate the actions of people within a market. Such coordination raises the gains from trade that buyers and sellers realize and allows the entrepreneur to earn a profit. To highlight the specific role of coordination, I use a simple model from the global games literature. I show how the entrepreneur can improve on coordination by sending a signal to each person in the market. In the limit, the entrepreneur’s signal eliminates coordination failures. Finally, I show how my interpretation of entrepreneurship provides new insights by connecting different concepts of coordination used with economics.
Political Economy and Public Economics
Political Economy and Public Economics
- Evolution, Uncertainty, and the Asymptotic Efficiency of Policy with Joshua Hendrickson and Alexander Salter (slides), under review
- Politics, like any social process, involves selection mechanisms that determine whether the outcomes of the process are efficient. This paper presents a model of politics as an evolutionary process. The decisions of interest groups to enter politics determines the selected policy. Our model leads to three main results. First, the political process selects for efficient policies in the long run. This mirrors how markets select for efficient firms. We call this attribute asymptotic efficiency. Second, the bargaining of interest groups bounds the level of inefficiencies that can exist in the short run. The bound decreases when organizing interest groups becomes less costly. Finally, policies that appear inefficient in a static analysis can be efficient once economists consider the dynamic nature of political decisions. We argue that viewing the political process as a selection mechanism allows political economists to use efficiency as a tool for positive economics. In our approach, applied political economy involves looking for relevant costs that make the policy efficient. However, our approach does not rob political economists of the ability to make meaningful normative statements, but only constrains the type of statements made.
- Time Inconsistency, Inflation, and MMT with Jackson Mejia (undergraduate student)
- Price stability is a stated policy objective for many economists, especially economists who subscribe to Modern Money Theory (MMT). To achieve price stability, MMT economists often argue for using a number of different policy tools; the most commonly referenced policies are a jobs guarantee program and using tax policy to temper aggregate demand. This paper focuses on the latter policy while acknowledging that the former is also important. We ask whether the promise to raise taxes is time consistent. Would a benevolent planner—completely versed and committed to the economic argument of MMT but with discretion in terms of policy-making—actually raise taxes when aggregate demand increases start to drive up inflation? By adapting a benchmark model from Kydland and Prescott (1977), we argue that raising taxes to the level necessary to generate optimal inflation is time inconsistent. While it is optimal to promise to raise taxes, when inflation comes, the planner would not want to raise taxes as much as she ought to, leading to higher inflation than optimal. We conclude by arguing that a rules-based system, a large part of which may include automatic stabilizers like a jobs guarantee program that are being further fleshed-out in the MMT literature, can reduce the inflationary bias.
- Political Persuasion
- How can competing political parties use persuasion to win elections? To study the role of competition in persuasion, I construct a voting model where two political parties compete by designing campaigns that release information about their party’s candidate. By designing the whole campaign–as compared to designing a particular message–political parties are able to systematically change the beliefs of a Bayesian voter. Campaigns generate distributions of voter beliefs about the candidate’s quality. Under competition, each party must worry about the other party and does not want to design a campaign that is easy to beat. In the unique equilibrium, both parties design campaigns that generate uniform distributions. The uniform distribution means that the voter is equally likely to have a range of beliefs about the candidate’s quality after the campaign. It also means that the voter has maximum uncertainty about the candidates. The uniform distribution is a common feature in zero-sum games where each party wants to win but only needs a small margin, such as all-pay auctions or Colonel Blotto games. The paper also highlights a similarity between buying votes with money and using persuasion.
- Coase, the Austrians, and Models as Foils with Brian Kogelmann, under review
- This paper precisely articulates the way in which Coase reasons with economic models. The general idea here is that Coase wants to draw a conclusion concerning the function some feature f of the real world plays by looking to a model world in which feature f is conspicuously absent. But as we shall see, there is an important payoff to this investigation for our understanding of the history of economic thought. For though we start out trying to articulate the general form of reasoning that Coase employs, we find that this form of reasoning can also be used to characterize how other out-of-step economists reason with models. We show that the method of inference Coase employs – what we call models as foils – also characterizes how several important thinkers in the Austrian economics tradition reason with models. Across a range of unique and important economic thinkers is thus a common form of reasoning that until now has gone unrecognized. Not only this, but we believe this form of reasoning can profitably be used by contemporary economists as a new way of approaching what is now a decisively model-based discipline.
- Preventing Plunder: Military Technology, Capital Accumulation, and Economic Growth with Joshua Hendrickson and Alexander Salter, Journal of Macroeconomics, 2018
- A growing body of research highlights the correlation between strong, centralized states and economic growth. Given the important role that national defense has played in the development of the state, it seems as though this would imply some relationship between military expenditures and economic development. However, there is no consensus on the direction of the relationship between military expenditures and economic growth. In this paper, we propose a resolution to this puzzle. We argue that military technology is a limiting factor for wealth (and therefore capital) accumulation. Since wealth must be protected from plunder and/or destruction, the amount of wealth that can be accumulated is constrained by a society’s ability to adequately defend it. We present a theoretical model consistent with this idea and perform a Monte Carlo experiment to determine the implications of this hypothesis for empirical work. We find that the long-run relationship between military expenditures and private production is positive. However, in sample sizes consistent with existing data, the relationship is ambiguous. As a result, we provide support for this idea by relying on historical examples consistent with our hypothesis. Finally, we consider the implications of our hypothesis for the development of state capacity.
- Exchange, Search Theory, and Buchanan’s Foundations of Politics, Exploring the Political Economy and Social Philosophy of James M. Buchanan, Rowman and Littlefield, 2018
- James Buchanan urged economists to focus on exchange. Similarly, a goal of search theory is to model “the transactions process explicitly, in the sense that agents trade with each other” (Lagos, Rocheteau, and Wright 2017). However, the trades that search theory has focused on have been exclusively traditional economic exchange, such as barter exchange. The main goal of this chapter is to show by example that search theory can be expanded and harnessed to take on broader questions of political exchange. I constructed a model where social insurance emerges from the decisions of individuals. In the model, exchange is more complex, involving the whole community as Buchanan argues is part of political exchange. In addition to discussing one form of political interaction, I show how the framework of search theory can be used to study preconstitutional decision making.
- The Breakdown of Spontaneous Order: Smith and Hayek Diverge, NYU Journal of Law and Liberty, 2017
- In papers on the history of thought, writers often lump Adam Smith and F. A. Hayek together. Both Smith and Hayek are classical liberal, free-market economists. Each emphasized the spontaneous order that develops without any person planning the order. They also discuss the benefits of such spontaneous orders. Yet, as with any two great thinkers, Smith and Hayek had important differences. This paper adds to the literature by clarifying one such difference. Smith believes that on some margins, particularly education, ends that are not achieved through the spontaneous order should be promoted by governmental action. Hayek is skeptical of the ability and benefit of picking particular ends to promote through government intervention. For Hayek, the beneficial attribute of a spontaneous order is its general application.
- Positive Public Economics: Reinterpreting 'Optimal' Policies, Journal of Economic Methodology, 2017
- The standard positive/normative divide fails to capture the way economists use ‘optimal’ taxation models. This paper argues that the better way to understand public economics is through a three-part division between positive, normative, and instrumental models. An instrumental model is about means and ends. Once this additional dimension is acknowledged, one can see that ‘optimal’ taxation models are closely connected to what are generally seen as purely positive models. I argue that economists have been using similar standards to assess ‘optimal’ taxation models as they use to assess positive models. Recent advances in optimal taxation theory have embraced the positive aspects of models, even about social welfare functions, something that is generally classified as a normative.
Works in Progress
Works in Progress
- Production Efficiency and Hidden Actions: A Mechanism Design Approach with V.V. Chari, Adway De, and Keyvan Eslami (slides, draft available upon request)
- We revisit the optimality of production efficiency and uniform commodity taxation within a full Mirrleesian framework with multiple goods. Instead of restricting the planner to particular taxes---linear or non-linear---as has been the focus of the multi-sector optimal taxation literature, we derive the optimal structure of tax instruments directly from primitive, informational constraints on a planner. If the distribution of types is continuous, then the constrained efficient allocations are production efficient and can be implemented as a competitive equilibrium with a non-linear income tax. This holds in models with fixed occupations or with occupational choice. Recent results that find optimal allocations to be production inefficient assume all workers within an occupation have identical productivities, an assumption we argue is not realistic for policy-makers looking at real-world occupations.
- Wampum: The Political Economy of an Institutional Tragedy with Andrew Young (slides)
- Wampum, shell beads allegedly used as money by northeastern Native American groups in the early colonial period, is a frequent example of a historical commodity money. Yet, there is little evidence that Native Americans used wampum as a general medium of exchange. Instead, Native Americans, especially the Iroquois, used wampum for political purposes. We argue that wampum was an institution that, before and immediately after the arrival of Europeans, was an efficient means to promote reciprocity and enforce credible commitment between previously warring groups. Wampum promoted commitment by (1) screening good from bad trading partners and (2) creating a public memory of past agreements for a pre-literate society. Wampum sustained the Iroquois League for centuries. We then argue that wampum was a harmful institution for Native Americans in the later colonial era. European tools were more productive in crafting wampum. Natives adopted them, and the quantity of wampum soared, which hurt the effectiveness of the wampum institution. But adopting alternative institutions is costly and the wampum institution persisted. Colonists exploited the increased supply of credibility made possible by their technologies in “forest diplomacy” with the Native Americans. Exchanges of wampum led to one-sided credible commitments that favored the colonists. Over time, wampum became so costly that Native Americans abandoned it for practical political purposes.