Quantitative Economics November 2017 is now online
TABLE OF CONTENTS, Volume 8, Issue 3 (November 2017)
Full Issue
Articles
Abstracts follow the listing of articles.
Latent indices in assortative matching models
William Diamond, Nikhil Agarwal
Determining the number of groups in latent panel structures with an application to income and democracy
Xun Lu, Liangjun Su
Does redistribution increase output? The centrality of labor supply
Kartik Athreya, Andrew Owens, Felipe Schwartzman
Identification of time and risk preferences in buy price auctions
Daniel Ackerberg, Keisuke Hirano, Quazi Shahriar
How to solve dynamic stochastic models computing expectations just once
Kenneth L. Judd, Lilia Maliar, Serguei Maliar, Inna Tsener
Dynamic skill accumulation, education policies, and the return to schooling
Christian Belzil, Jorgen Hansen, Xingfei Liu
Demand heterogeneity in insurance markets: Implications for equity and efficiency
Michael Geruso
The distribution of wealth and the marginal propensity to consume
Christopher Carroll, Jiri Slacalek, Kiichi Tokuoka, Matthew N. White
A note on identification of discrete choice models for bundles and binary games
Jeremy T. Fox, Natalia Lazzati
Measuring the willingness‐to‐pay for others' consumption: An application to joint decisions of children
Sabrina Bruyneel, Laurens Cherchye, Sam Cosaert, Bram De Rock, Siegfried Dewitte
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Latent indices in assortative matching models
William Diamond, Nikhil Agarwal
Abstract
A large class of two‐sided matching models that include both transferable and non‐transferable utility result in positive assortative matching along a latent index. Data from matching markets, however, may not exhibit perfect assortativity due to the presence of unobserved characteristics. This paper studies the identification and estimation of such models. We show that the distribution of the latent index is not identified when data from one‐to‐one matches are observed. Remarkably, the model is nonparametrically identified using data in a single large market when each agent on one side has at least two matched partners. The additional empirical content in many‐to‐one matches is demonstrated using simulations and stylized examples. We then derive asymptotic properties of a minimum distance estimator as the size of the market increases, allowing estimation using dependent data from a single large matching market. The nature of the dependence requires modification of existing empirical process techniques to obtain a limit theorem. Matching identification estimation C51 C78
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Determining the number of groups in latent panel structures with an application to income and democracy
Xun Lu, Liangjun Su
Abstract
We consider a latent group panel structure as recently studied by Su, Shi, and Phillips (2016), where the number of groups is unknown and has to be determined empirically. We propose a testing procedure to determine the number of groups. Our test is a residual‐based Lagrange multiplier‐type test. We show that after being appropriately standardized, our test is asymptotically normally distributed under the null hypothesis of a given number of groups and has the power to detect deviations from the null. Monte Carlo simulations show that our test performs remarkably well in finite samples. We apply our method to study the effect of income on democracy and find strong evidence of heterogeneity in the slope coefficients. Our testing procedure determines three latent groups among 74 countries. Classifier Lasso dynamic panel latent structure penalized least square number of groups test C12 C23 C33 C38 C52
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Does redistribution increase output? The centrality of labor supply
Kartik Athreya, Andrew Owens, Felipe Schwartzman
Abstract
The aftermath of the recent recession has seen calls to use transfers to poorer households as a means to enhance aggregate economic activity. The goal of this paper is to study the effects of wealth redistribution from rich to poor households on consumption and output in the short run. We first demonstrate analytically how the direction and size of the output effects of such interventions depend on labor supply decisions. We then show that in a standard incomplete‐markets model extended to allow for nominal rigidities and parametrized to match the U.S. wealth distribution, wealth redistribution does lead to a temporary boom in consumption but a far smaller increase in output. Our results suggest substantial value in empirical research uncovering the distribution of marginal propensities to work in the population. Multipliers redistribution labor supply idiosyncratic risk D90 E21 E25 E63
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Identification of time and risk preferences in buy price auctions
Daniel Ackerberg, Keisuke Hirano, Quazi Shahriar
Abstract
Buy price auctions merge a posted price option with a standard bidding mechanisms, and have been used by various online auction sites including eBay and General Motors Assistance Corporation. A buyer in a buy price auction can accept the buy price to win with certainty and end the auction early. Intuitively, the buy price option may appeal to bidders who are risk averse or impatient to obtain the good, and a number of authors have examined how such mechanisms can increase the seller's expected revenue over standard auctions. We show that data from buy price auctions can be used to identify bidders' risk aversion and time preferences. We develop a private value model of bidder behavior in a buy price auction with a temporary buy price. Bidders arrive stochastically over time, and the auction proceeds as a second‐price sealed bid auction after the buy price disappears. Upon arrival, a bidder in our model is allowed to act immediately (i.e., accept the buy price if it is still available or place a bid) or wait and act later. Allowing for general forms of risk aversion and impatience, we first characterize equilibria in cutoff strategies and describe conditions under which all symmetric pure‐strategy subgame‐perfect Bayesian Nash equilibria are in cutoff strategies. Given sufficient exogenous variation in auction characteristics such as reserve and buy prices and in auction lengths, we then show that the arrival rate, valuation distribution, utility function, and time‐discounting function in our model are all nonparametrically identified. We also develop extensions of the identification results for cases where the variation in auction characteristics is more limited. Nonparametric identification auctions risk aversion time preferences C14 C57 D44 L81
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How to solve dynamic stochastic models computing expectations just once
Kenneth L. Judd, Lilia Maliar, Serguei Maliar, Inna Tsener
Abstract
We introduce a computational technique—precomputation of integrals—that makes it possible to construct conditional expectation functions in dynamic stochastic models in the initial stage of a solution procedure. This technique is very general: it works for a broad class of approximating functions, including piecewise polynomials; it can be applied to both Bellman and Euler equations; and it is compatible with both continuous‐state and discrete‐state shocks. In the case of normally distributed shocks, the integrals can be constructed in a closed form. After the integrals are precomputed, we can solve stochastic models as if they were deterministic. We illustrate this technique using one‐ and multi‐agent growth models with continuous‐state shocks (and up to 60 state variables), as well as Aiyagari's (1994) model with discrete‐state shocks. Precomputation of integrals saves programming efforts, reduces computational burden, and increases the accuracy of solutions. It is of special value in computationally intense applications. MATLAB codes are provided. Dynamic model precomputation numerical integration dynamic programming value function iteration Bellman equation Euler equation envelope condition method endogenous grid method Aiyagari model C61 C63 C68
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Dynamic skill accumulation, education policies, and the return to schooling
Christian Belzil, Jorgen Hansen, Xingfei Liu
Abstract
Using a dynamic skill accumulation model of schooling and labor supply with learning‐by‐doing, we decompose early life‐cycle wage growth of U.S. white males into four main sources: education, hours worked, cognitive skills (Armed Forces Qualification Tests scores), and unobserved heterogeneity, and evaluate the effect of compulsory high school graduation and a reduction in the cost of college. About 60 percent of the differences in slopes of early life‐cycle wage profiles are explained by heterogeneity while individual differences in hours worked and education explain the remaining part almost equally. We show how our model is a particularly useful tool to comprehend the distinctions between compulsory schooling and a reduction in the cost of higher education. Finally, because policy changes induce simultaneous movements in observed choices and average per‐year effects, linear instrumental variable (IV) estimates generated by those policy changes are uninformative about the returns to education for those affected. This is especially true for compulsory schooling estimates as they exceed IV estimates generated by the reduction in the cost of higher education even if the latter policy affects individuals with much higher returns than than those affected by compulsory schooling. Dynamic skill accumulation education policies returns to schooling learning‐by‐doing life‐cycle labor supply IV estimation I2 J1 J3
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Demand heterogeneity in insurance markets: Implications for equity and efficiency
Michael Geruso
Abstract
In many markets insurers are barred from price discrimination based on consumer characteristics like age, gender, and medical history. In this paper, I build on a recent literature to show why such policies are inefficient if consumers differ in their willingness‐to‐pay for insurance conditional on the insured losses they generate. Using administrative claims data, I then show that this type of demand heterogeneity is empirically relevant in a consumer health plan setting. Younger and older consumers and men and women reveal strikingly different demand for health insurance, conditional on their objective medical spending risk. This implies that these groups must face different prices so as to sort themselves efficiently across insurance contracts. The theoretical and empirical analysis highlights a fundamental trade‐off between equity and efficiency that is unique to selection markets. Community rating adverse selection demand heterogeneity D82 I11 I13 I18
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The distribution of wealth and the marginal propensity to consume
Christopher Carroll, Jiri Slacalek, Kiichi Tokuoka, Matthew N. White
Abstract
In a model calibrated to match micro‐ and macroeconomic evidence on household income dynamics, we show that a modest degree of heterogeneity in household preferences or beliefs is sufficient to match empirical measures of wealth inequality in the United States. The heterogeneity‐augmented model's predictions are consistent with microeconomic evidence that suggests that the annual marginal propensity to consume (MPC) is much larger than the roughly 0.04 implied by commonly used macroeconomic models (even ones including some heterogeneity). The high MPC arises because many consumers hold little wealth despite having a strong precautionary motive. Our model also plausibly predicts that the aggregate MPC can differ greatly depending on how the shock is distributed across households (depending, e.g., on their wealth, or employment status). Wealth distribution marginal propensity to consume heterogeneity inequality D12 D31 D91 E21
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A note on identification of discrete choice models for bundles and binary games
Jeremy T. Fox, Natalia Lazzati
Abstract
We study nonparametric identification of single‐agent discrete choice models for bundles (without requiring bundle‐specific prices) and of binary games of complete information. We show that these two models are quite similar from an identification standpoint. Moreover, they are mathematically equivalent when we restrict attention to the class of potential games and impose a specific equilibrium selection mechanism in the data generating process. We provide new identification results for the two related models. Discrete choice demand binary games identification bundles complements substitutes entry games potential games C14 C35 C57 C72
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Measuring the willingness‐to‐pay for others' consumption: An application to joint decisions of children
Sabrina Bruyneel, Laurens Cherchye, Sam Cosaert, Bram De Rock, Siegfried Dewitte
Abstract
We propose a method to quantify other‐regarding preferences in group decisions. Our method is based on revealed preference theory. It measures willingness‐to‐pay for others' consumption and willingness‐to‐pay for equality in consumption by evaluating consumption externalities in monetary terms. We introduce an altruism parameter and an inequality aversion parameter. Each parameter defines a continuum of models characterized by varying degrees of externalities. We study the empirical performance of our method through a simulation analysis, in which we also investigate the impact of measurement error and increased sample size. Finally, we use our method to analyze decisions made by dyads of children in an experimental setting. We find that children's decisions are particularly characterized by varying levels of altruism. We relate this heterogeneity across children to age, gender, and the degree of friendship in dyads. Consumption externalities altruism inequality aversion revealed preferences children's consumption D11 D12 C14
