(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.
Summary. We study loan enforcement in informal credit markets with multiple lenders but no sharing of credit histories, and derive the dynamics of loan size and interest rates for relational lending. In the presence of a sufficient fraction of ‘natural defaulters’, the rest of the market can be incentivized against default by micro-rationing—sharper credit limits and possibly higher interest rates that serve as gateways into new borrowing relationships. When there are too few natural defaulters in the market, this can be supplemented by macro-rationing—random exclusion of some borrowers. When information collection is endogenized, multiple equilibria may arise. (Published version of unpublished notes from 2001.)
(with Joan Esteban), Econometrica62, 819–851, 1994.
Summary. This paper is concerned with the conceptualization and measurement of polarization. Suppose that a population is grouped into significantly-sized “clusters’,” such that each cluster is “similar” in terms of the attributes of its members, but different clusters have “dissimilar” attributes. In that case we would say that the society is “polarized.” We study these intuitive criteria carefully, and provide a theory of measurement.