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Information Aggregation in a Financial Market with General Signal Structure

(with Youcheng Lou, Sahar Parsa, Duan Li and Shouyang Wang), May 2019, forthcoming, Journal of Economic Theory.

Summary. We study a financial market with asymmetric, multidimensional trader signals that have general correlation structure. Each of a continuum of traders belongs to one of finitely many “information groups.” There is a multidimensional aggregate signal for each group. Each trader observes an idiosyncratic signal about the fundamental, built from this group signal. Correlations across group signals are arbitrary. Several existing models serve as special cases, and new applications become possible. We establish existence and regularity of linear equilibrium, and demonstrate that the equilibrium price aggregates information perfectly as noise trade vanishes. Combines and extends results in Parsa and Ray (2017) and Lou, Li and Wang (2017), both mimeo. Online Appendix.

Certified Random: A New Order for Co-Authorship

(with Arthur Robson), American Economic Review 108, 489–520 (2018).

Summary. Certified random order (a) distributes the gain from first authorship evenly over the alphabet, (b) allows either author to signal when contributions are extremely unequal, (c) will invade an environment where alphabetical order is dominant, (d) is robust to deviations, (e) may be ex-ante more efficient than alphabetical order, and (f) is no more complex than the existing alphabetical system modified by occasional reversal of name order.

Kenneth Arrow

El Trimestre Económico 84. 761-769, 2017.

Summary. A translation into Spanish of my post on the event of Kenneth Arrow’s death. The original post is available here.

Nit-Piketty

CesIfo Economic Studies 2015.

Summary. Yes, capital must displace labor, but not because r > g. This article is based on this blog post, Branko Milanovic objected here; I replied. Piketty replies to some of his critics here.

 

A Theory of Occupational Choice with Endogenous Fertility

(with Dilip Mookherjee and Silvia Prina), American Economic Journal: Microeconomics  4, 1–34, 2012.

Summary. Theories based on partial equilibrium reasoning alone cannot explain the widespread negative cross-sectional correlation between parental wages and fertility, without restrictive assumptions on preferences and childcare costs. We argue that incorporating a dynamic general equilibrium analysis of returns to human capital can help explain observed empirical patterns.

Apples and Oranges: Building a Better Dow

(with Rajiv Sethi), August 2012.

Summary. The Dow relies on price-weighting, which is decidedly an odd methodology. We propose a bridging process that generates convergence to a value-weighted index without compromising the historical continuity of the Dow.

A Remark on Color-Blind Affirmative Action

(with Rajiv Sethi), Journal of Public Economic Theory 12, 399-406, 2010.

Summary. Elite educational institutions have turned to criteria that meet diversity goals without being formally contingent on applicant identity. Under weak and generic conditions, such color-blind affirmative action policies must be nonmonotone in student test scores.

Social Interactions And Segregation In Skill Accumulation

(with Dilip Mookherjee and Stefan Napel), Journal of the European Economic Association 8, 1–13, 2010.

Summary. This paper studies human capital investment in a spatial setting with interpersonal complementarities. A mixture of local and global social interactions affect the cost of acquiring education, and the return to human capital is determined endogenously in the market.

Group Decision-Making in the Shadow of Disagreement

(with Kfir Eliaz and Ronny Razin), Journal of Economic Theory 132, 236–273, 2007.

Summary.  A model of group decision-making is studied, in which one of two alternatives must be chosen. Our model is distinguished by three features: private information regarding valuations, differing intensities in preferences, and the option to declare neutrality to avoid disagreement. There is always an equilibrium in which the majority is more aggressive in pushing its alternative, thus enforcing their will via both numbers and voice. However, under general conditions an aggressive minority equilibrium inevitably makes an appearance, provided that the group is large enough. Such equilibria invariably display a “tyranny of the minority”: the increased aggression of the minority always outweighs their smaller number, leading to the minority outcome being implemented with larger probability than the majority alternative.

 

Reciprocity in Groups and the Limits to Social Capital

(with Francis Bloch and Garance Genicot), American Economic Review 97 (Papers and Proceedings), 65–69, 2007.

Summary. Based on our earlier work on risk sharing in groups and networks (Garance Genicot and Debraj Ray, 2003, 2005 and Francis Bloch, Garance Genicot and Debraj Ray, 2006), this paper proposes a simple model of mutual help in groups and networks. We argue that, if social capital can promote cooperation among groups of individuals, it can also hurt it. When groups of individuals can jointly deviate from a social norm, the fact that they have built strong ties among themselves may in fact make deviations easier, and weaken cooperation in society as a whole.

A Decision-Theoretic Basis for Choice Shifts in Groups

(with Kfir Eliaz and Ronny Razin), American Economic Review 96, 1321-1332, 2006.

Summary. The phenomenon of choice shifts in group decision-making has received much attention in the social psychology literature. Faced with a choice between a “safe” and “risky” decision, group members appear to move to one extreme or the other, relative to the choices each member might have made on her own. Both risky and cautious shifts have been identified in different situations. This paper demonstrates that from an individual decision-making perspective, choice shifts may be viewed as a systematic violation of expected utility theory. We propose a model in which a well-known failure of expected utility — captured by the Allais paradox — is equivalent to a particular configuration of choice shifts. Thus, our results imply a connection between two well-known behavioral regularities, one in individual decision theory and another in the social psychology of groups.

Satisficing and Selection in Electoral Competition

(with Jon Bendor and Dilip Mookherjee), Quarterly Journal of Political Science 1, 171–200, 2006.

Summary. We model political parties as adaptive decision makers who compete in a sequence of elections. The key assumptions are that winners satisfice (the winning party in period t keeps its platform in t + 1) while losers search. Under fairly mild assumptions about losers’ search rules, we show that the sequence of winning platforms is absorbed into the top cycle of the (finite) set of feasible platforms with probability one.

Robert Rosenthal

(with Roy Radner), Journal of Economic Theory y 112, 365–368, 2003.

Summary. Robert Rosenthal died on February 25, 2002, of a sudden heart attack. He was just 58, in the prime of his professional life. He is missed and loved by the many friends, colleagues and students who knew him. Publications of Bob Rosenthal.

Quantity Controls

(with Arunava Sen), in B. Dutta (ed), Welfare Economics and India, Oxford University Press, 1993.

Summary. We explore the role and necessity of quantity controls in decentralizing Pareto-optimal allocations in a market setting.

Monetary Equilibrium in the Overlapping Generations Model With Productive Capital

(with Amitava Bose), Economic Theory 3, 697-716, 1993.

Summary. We study perfect foresight competitive equilibrium in an overlapping generations model with productive capital and a fixed nominal stock of money. We obtain almost-complete characterizations of (a) the existence of a monetary equilibrium from an arbitrary initial capital stock, and (b) the existence of an efficient monetary equilibrium from an arbitrary initial capital stock,

Efficient Monetary Equilibrium in the Overlapping Generations Model

(with Joan Esteban and Tapan Mitra), Journal of Economic Theory  64, 372–389, 1993.

Summary. This paper characterizes equilibria with public debt in the overlapping generations model in which (a) money has a positive price and (b) the resulting intertemporal allocation is efficient. We identify a necessary and sufficient condition for (a) and (b), which states, loosely speaking, that the public debt must not grow “too fast.”

Wages and Involuntary Unemployment in the Slack Season of a Village Economy

(with Anindita Mukherjee), Journal of Development Economics 37, 227-264, 1992.

Summary. We model slack season wages in a village economy, in the presence of involuntary unemployment. Our model draws its inspiration from sociological notions of ‘everyday peasant resistance’.  A continuum of equilibrium wage configurations is obtained. These configurations, barring one, involve wages exceeding reservation wages, despite the presence of involuntary unemployment.

On the Economic Theory of Quantity Controls

(with Arunava Sen), in K. Basu and P. Nayak (eds.), Economic Theory and Development, Oxford University Press, 1992.

Summary. We study when quantity controls are needed for decentralization of Pareto-optima.

Profitability and Concentration

(with Bhaskar Dutta, Shubhashis Gangopadhyay and Kunal Sengupta), in B. Dutta et al (eds.), Theoretical Issues in Economic Development, Oxford University Press.

Increasing Returns, Economic Growth and Decentralization

(with Mukul Majumdar), in B. Dutta, S. Gangopadhyay, D. Mookherjee and D. Ray (eds), Economic Theory and Policy: Essays in Honor of Dipak Banerjee, Oxford University Press, 1990.

Summary. We discuss quantity controls that can be used for decentralization of competitive economies with non-convex production sets.

Feasible Alternatives Under Deteriorating Terms of Trade

(with Mukul Majumdar and Tapan Mitra), Journal of International Economics 13, 105-134, 1982.

Summary. The paper presents a dynamic general equilibrium model of a small open economy which employs an essential imported input in production. We describe necessary and sufficient conditions on the technology and the rate of decline of the terms of trade that ensure survival.