Quantifying the Benefits of Labor Mobility in a Currency Union 29 June 2025 Christopher L. House, Christian Proebsting, and Linda L. TesarUnemployment differentials are greater between countries in the euro area than between U.S. states. In both regions, net migration responds to unemployment differentials, though the response is smaller in the euro area compared to the United States. We use a multi-country DSGE model with cross-border migration to quantify Mundell’s hypothesis that labor mobility could substitute for independent monetary policy in a currency union.
Endogenous clustering and analogy-based expectation equilibrium 26 June 2025 Philippe Jehiel and Giacomo WeberNormal-form two-player games are categorized by players into K analogy classes so as to minimize the prediction error about the behavior of the opponent. This results in Clustered Analogy-Based Expectation Equilibria in which strategies are analogy-based expectation equilibria given the analogy partitions and analogy partitions minimize the prediction errors given the strategies.
Bargaining Foundations for the Outside Option Principle 26 June 2025 Dilip Abreu and Mihai ManeaWe study a bargaining game in which a seller can trade with one of two buyers, who have values h and l (h > l). The outside option principle (OOP) predicts that the seller trades with the high-value buyer with probability converging to 1 at a price converging to max(h/2, l) as players become patient. While this prediction is supported by the Markov perfect equilibrium (MPE), a wide range of trading outcomes may emerge in subgame perfect equilibria (SPEs): in the patient limit, the seller can obtain any price in the interval [h/2, h] (and no other); moreover, allocative inefficiency and costly delay are possible.
Auctions with Frictions: Recruitment, Entry, and Limited Commitment 15 June 2025 Stephan Lauermann and Asher WolinskyAuction models are convenient abstractions of informal price-formation processes that arise in markets for assets or services. These processes involve frictions like bidder recruitment costs for sellers, participation costs for bidders, and limitations on sellers’ commitment abilities. This paper develops an auction model that captures such frictions.
Search Direction: Position Externalities and Position Auction Bias 15 June 2025 Simon P. Anderson and Régis RenaultWe formulate a tractable model of pricing under directed search with heterogeneous firm demands. Demand characteristics drive bids in a position auction and enable us to bridge insights from the ordered search literature to those in the position auction literature. Equilibrium pricing implies that the marginal consumer’s surplus decreases down the search order, so consumers optimally follow the firms’ position ordering. A firm suffers from “business stealing” by firms that precede it and “search appeal” from subsequent firms.
Revisiting the Non-Parametric Analysis of Time-Inconsistent Preferences 9 June 2025 Federico Echenique and Gerelt TserenjigmidWe revisit the recent revealed preference analysis of sophisticated quasi-hyperbolic consumers by Blow, Browning, and Crawford (2021) (BBC). We show that BBC’s revealed preference test is too lax. There are non-rationalizable data that would pass their test. A basic problem with their test is that it requires finding a certain endogenous elasticity, without regard to the rationalizing utility. Their approach motivates a more stringent test, also based on first-order conditions, that would connect the endogenous elasticity and utility: We show that this test is also too lax.
Overconfidence and Prejudice 9 June 2025 Paul Heidhues, Botond Kőszegi, and Philipp StrackWe develop a model of multi-dimensional misspecified learning in which an overconfident agent learns about groups in society from observations of his and others’ successes. We show that the average person sees his group relative to other groups too positively, and this in-group bias exhibits systematic comparative-statics patterns. First, a person is most likely to have negative opinions about other groups he competes with. Second, while information about another group’s achievements does not lower a person’s prejudice, information about economic or social forces affecting the group can, and personal contact with group members has a beneficial effect that is larger than in classical settings.
