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Overconfidence and Prejudice

Paul Heidhues, Botond Kőszegi, and Philipp Strack

We 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.

Community Enforcement with Endogenous Records

Harry Pei

I study repeated games with anonymous random matching where players can add or remove signals from their records. The ability to manipulate records introduces monotonicity constraints on players’ continuation values, under which sufficiently long-lived players will almost never cooperate. When players’ expected lifespans are intermediate, their ability to sustain cooperation depends on (i) whether their actions are complements or substitutes and (ii) whether manipulation takes the form of adding or removing signals.

Behavioral Causal Inference

Ran Spiegler

When inferring causal effects from correlational data, a common practice by professional researchers but also lay people is to control for potential confounders. Inappropriate controls produce erroneous causal inferences. I model decision-makers who use endogenous observational data to learn actions’ causal effect on payoff-relevant outcomes. Different decision-maker types use different controls. Their resulting choices affect the very correlations they learn from, thus calling for equilibrium analysis of the steady-state welfare cost of bad controls.

Making Decisions under Model Misspecification

Simone Cerreia-Vioglio, Lars Peter Hansen, Fabio Maccheroni, and Massimo Marinacci

We use decision theory to confront uncertainty that is sufficiently broad to incorporate “models as approximations.” We presume the existence of a featured collection of what we call “structured models” that have explicit substantive motivations. The decision maker confronts uncertainty through the lens of these models, but also views these models as simplifications, and hence, as misspecified.

Pseudo Lindahl Equilibrium as a Collective Choice Rule

Faruk Gul and Wolfgang Pesendorfer

A collective choice problem specifies a finite set of alternatives from which a group of expected utility maximizers must choose. We associate a collective pseudo market with every collective choice problem and establish the existence and efficiency of pseudo Lindahl equilibrium (PLE) allocations. We also associate a cooperative bargaining problem with every collective choice problem and define a set-valued solution concept, the ω-weighted Nash bargaining set where ω is a vector of welfare weights. We provide axioms that characterize the ω-weighted Nash bargaining set.

Surviving Childhood: Effects of Removing a Child From Home

Ronja Helénsdotter

This paper studies the effects of the court-ordered removal of children from home on health, crime, and education. To isolate causal effects, I exploit quasi-random variation in judge assignment together with across-judge variation in the tendency to favor removal in an instrumental variable (IV) design. Using a novel data set (N=26,579) based on Swedish court documents that I transcribe and link with detailed register data, I find that court-ordered out-of-home placement has large adverse effects on the mortality of the marginal child.

Good Dispersion, Bad Dispersion

Matthias Kehrig and Nicolas Vincent

We document that most dispersion in marginal revenue products of inputs occurs across plants within firms rather than between firms. This is commonly thought to reflect misallocation: dispersion is “bad.” However, we show that eliminating frictions hampering internal capital markets in a multi-plant firm model may in fact increase productivity dispersion and raise output: dispersion can be “good.” This arises as firms optimally stagger investment activity across their plants over time to avoid raising costly external finance, instead relying on reallocating internal funds.

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"New study finds salary benchmarking cuts pay gaps by 25%. Pay dispersion partly arises from firms’ uncertainty about market rates, with key implications for pay transparency policy."

New paper from @pereztruglia, @zoebcullen, @ShengwuLi:

https://www.restud.com/whats-my-employee-worth-the-effects-of-salary-benchmarking/

#econtwitter

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"Competition via repo contracts resolves the lemons problem! A closed-form solution
for the unique pooling equilibrium explains why markets feature high haircuts and
low repo rates."

New paper from @SakiBigio & @liyan_shi:

https://www.restud.com/repurchase-options-in-the-market-for-lemons/

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"Wars disrupt supply chains, but firms adapt by reorganizing them. The 2014 war cut
Ukraine’s output in nonconflict areas by 5.5%, with one-third mitigated by link
reorganization."

New paper from @KorovkinVasily, @alexeymakarin & @MiyauchiYuhei:

https://www.restud.com/supply-chain-disruption-and-reorganization-theory-and-evidence-from-ukraines-war/
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Recently accepted to #REStud, "Normalizations and misspecification in skill formation models," from Joachim Freyberger:

https://www.restud.com/normalizations-and-misspecification-in-skill-formation-models/

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