Influence Of Over‐ And Underconfidence On A Marriage Market*

This paper examines misconfidence (over‐ or underconfidence) and marriage proposal strategies in a two‐sided search model with non‐transferable utility. Single agents are vertically heterogeneous—there exists a ranking of marital charm (types). It is shown that there are two externalities to over‐ or underconfident behaviour: someone's over‐ or underconfidence affects: (i) the duration of search for others who directly meet over‐ or underconfident agents; and (ii) the marriage decision of others who directly or indirectly meet over‐ or underconfident agents. Furthermore, these externalities prevent the lowest‐type agents from marrying in an equilibrium.     

Consumption externalities: a representative consumer model when agents are heterogeneous

We examine a growth model with consumption externalities where agents differ in their initial capital endowment and their reference group. We show under which conditions the aggregate equilibrium with heterogeneous agents replicates that obtained with a representative consumer, despite the fact that different individuals have different consumption levels. Next we consider the implications of the presence of consumption externalities for the long-run distributions of income and wealth. We find that, in a growing economy, “keeping up with the Joneses” results in less inequality than would prevail in an economy with no consumption externalities.     

Eagles and Turkeys: Human Capital Externalities,Departmental Co‐authorship and Research Productivity

Lucas (1988) hypothesised that human capital externalities explain persistent productivity growth and become manifest via interactions between workplace colleagues. Consistent with the first part of this hypothesis, Fox and Milbourne (2006) concluded that an increase in the average level of human capital in Australian economics departments raised the research productivity of departmental members. This paper tests the robustness of this finding by using a direct, rather than a proxy, measure of human capital and confirms the existence of human capital externalities within Australian economics departments. But we extend the analysis in two important dimensions. Firstly, we investigate the second part of Lucas' hypothesis by testing whether the externality becomes manifest via co‐authoring. We find no evidence that this type of interaction is associated with higher research productivity, especially for higher quality outputs. Secondly, we control for the likely endogeneity of one's peer group via instrumental variables estimation. In this case, we find that the peer group effect disappears completely for the highest quality outputs but remains for research output more broadly defined.     

IRRATIONALITY‐PROOFNESS: MARKETS VERSUS GAMES

How robust are economic models to the introduction of irrational agents? The Pareto efficiency of competitive equilibria is not robust since one irrational agent leads to inefficiency. But the property that rational agents cannot use their own resources to Pareto improve on their competitive allocation holds regardless of the number of irrational agents. Full production efficiency can be robust as well, but irrational firms introduce a trade‐off between efficiency and the attainment of Pareto improvements. Regarding games, I show that while existing implementation mechanisms are sensitive to the presence of irrational agents, there are robust alternatives with attractive welfare properties.     

Health spending,savings and fertility in a lifecycle‐dynastic model with longevity externalities

We investigate health spending, savings, fertility and policy implications in a lifecycle‐dynastic model with longevity externalities in annuity returns. We show that such externalities engender not only excessive health spending but also under‐saving and excessive fertility. Social security and health subsidization increase health spending and savings but reduce fertility from laissez‐faire levels. A publicly funded universal health system under labour‐income taxation raises fertility. Taxing health spending or using social security and public health together can obtain socially optimal health spending, savings, longevity and fertility. Numerical results based on US observations suggest substantial variations among these cases, especially in old‐age health spending.     

PLATFORM PRICING IN MIXED TWO‐SIDED MARKETS

When a consumer can appear on both sides of a two‐sided market, such as a user who both buys and sells on eBay, the platform may want to bundle the services it provides to two sides. I develop a general model for such “mixed” two‐sided markets and show that a monopolist platform's incentive to bundle and its optimal pricing strategy are determined by simple formulas using familiar price elasticities of demand, which embody the bundling effect, and price‐cost margins adjusted for network externalities, which incorporate “two‐sidedness.” The optimal pricing rule in such markets generalizes the familiar Lerner formula.     

Thematic Clubs and the Supremacy of Network Externalities

We explore the issue of minorities' survival in the presence of positive network externalities. We rely on a simple example of thematic clubs to illustrate why and how such survival problems might appear, first considering the case of simple‐network effects (fully anonymous externalities) and then the case of cross‐network effects (type‐dependent externalities). In both cases, the analysis is framed as a simple noncooperative game with a continuum of players and binary action sets. There is a unique and interior Nash equilibrium under mild network effects and two corner equilibria under strong network effects, with one club driven out. A utilitarian planner would accentuate the clustering effects of network externalities, and call for the disappearance of the minority club more often than the noncooperative solution. A simple myopic learning algorithm capturing the progression of network lock‐in effects is studied.     

A Strategic Implementation of the Shapley Value for the Nested Cost‐Sharing Problem

When agents have different needs for a public facility but serving a given agent allows serving all agents with smaller needs than his without any extra cost, how should the agents divide the cost of the facility among themselves? We provide a strategic implementation of the Shapley value for this class of cost‐sharing problems. We introduce a three‐stage extensive form game that respects individual rationality and show that there is one and only one subgame‐perfect equilibrium outcome of the game. Moreover, it is the allocation assigned by the Shapley value.     

SECTOR‐SPECIFIC EXTERNALITIES AND STATUS PREFERENCES IN THE UZAWA‐LUCAS MODEL*

This paper shows that introducing preferences for social status based on human capital holdings modifies the finding of Gómez (2004 ) that sector‐specific externalities associated with human capital in the goods sector do not violate the optimality of the competitive economy in the Uzawa–Lucas model. The effect of an increase in the degree of sector‐specific externalities is qualitatively the same as that of an increase in the strength of the desire for status. Hence, paradoxically, a greater degree of sector‐specific externalities makes human capital accumulation more excessive from the social point of view.     

GROWTH AND BUBBLES WITH CONSUMPTION EXTERNALITIES*

This paper explores the role of consumption externalities in an overlapping generations economy with capital accumulation. If consumers in each generation are concerned with other agents’ consumption behaviours, there exist intergenerational as well as intragenerational consumption externalities. It is the presence of intergenreational consumption externalities that may produce fundamental effects both on equilibrium dynamics and on steady‐state characterization of the economy. This paper demonstrates this fact in the context of a simple model of endogenously growing, overlapping‐generations economy with or without asset bubbles.     

DUALITY WITH SECTOR‐SPECIFIC EXTERNALITIES UNDER SOCIAL CONSTANT RETURNS*

We develop dual approaches to quantity and price relationships of production in a general multisectoral model with sector‐specific externalities. The production of each good exhibits socially constant returns to scale but privately decreasing returns. We find that the Stolper‐Samuelson theorem holds for factor intensity ranking from the social perspective and that the Rybczynski theorem holds for factor intensity ranking from the private perspective. The price‐output dual fails to hold in general. Moreover, we re‐establish the Heckscher‐Ohlin theorem in the two‐sector case, as well as the factor endowment–factor price and price‐output comparative statics in the high‐dimension case under proper conditions.     

Taxation In The Two‐Sector Neoclassical Growth Model With Sector‐Specific Externalities And Endogenous Labour Supply*

This paper examines the long‐run impacts of selective (or sector‐specific) commodity, payroll, and profit taxes in a two‐sector endogenous growth model with sector‐specific production externalities, in which one sector produces consumption goods and the other produces investment goods. The novelty of the model is that it allows not only for endogenous labour supply but also for the intersectoral allocation of resources, which may together lead to indeterminacy. We analytically show that the stability properties of the long‐run equilibrium critically affect the long‐run effects of these selective taxes, which may reverse the standard results of the growth effects of distortionary taxes.     

Optimal location in two-sided markets

As the network externality in an industrial organization has been widely discussed in recent years, many researchers in the field have noted a particular type of market, the so-called two-sided market. In a two-sided market, two or more groups of agents such as buyers and sellers interact while exerting cross-group externalities upon each other. They interact with each other via some sort of medium, called the “platform” of interaction. This paper integrates the concept of two-sided markets into the optimal location problem for two platform providers. We show that when the two groups of customers' cross-side network externalities are equal, the duopoly platforms will agglomerate at the market center with no undercutting. However, disparate conditions exist under which the duopoly platforms will stay apart at the market endpoints, or agglomerate at either endpoint, with no undercutting.     

Valuations and dynamics of negotiations

This paper analyzes three‐party negotiations in the presence of externalities. We obtain a closed‐form solution for the Markov perfect equilibrium of a multilateral non‐cooperative bargaining model, yielding an equilibrium value and dynamics of negotiations that are supported by experimental studies. Players’ values are monotonically increasing (or decreasing) in the amount of negative (or positive) externalities that they impose on others. Moreover, players’ values are continuous and piecewise linear on the worth of bilateral coalitions, and are inextricably related to their negotiation strategies: the equilibrium value is the Nash bargaining solution when no bilateral coalitions form; the Shapley value when all bilateral coalitions form; or the nucleolus, when either one bilateral coalition among “natural partners” or two bilateral coalitions including a “pivotal player” form.     

Rule‐of‐Thumb Consumers,Productivity, and Hours*

In this paper, we study the transmission mechanism of productivity shocks in a model with rule‐of‐thumb consumers. In the literature, this financial friction has been studied only with reference to fiscal shocks. We show that the presence of rule‐of‐thumb consumers is also very helpful when accounting for recent empirical evidence on productivity shocks. Rule‐of‐thumb agents, together with nominal and real rigidities, play an important role in reproducing the negative response of hours and the delayed response of output after a productivity shock.     

CAPACITY EXPANSION IN MARKETS WITH INTER‐TEMPORAL CONSUMPTION EXTERNALITIES

This paper analyses market capacity expansion in the presence of inter‐temporal consumption externalities such as consumer learning, networks and bandwagon effects. An externality leads to an endogenous shift of market demand that responds to past market capacity. Whereas market capacity grows in waves, its magnitude depends on the degree of market concentration. The competitive environment contributes to S‐shaped time patterns of market capacity expansion. On the other hand, using a low introductory price, a monopolist plans an initially larger amount of market cultivation than a competitive market capacity expansion.     

The impact of public smoking bans on well‐being externalities: Evidence from a policy experiment

Recent studies on the effects of anti‐smoking policies on subjective well‐being present mixed results and do not account for potential externalities, especially among couples. We contribute to the literature by evaluating the impact of smoking bans on well‐being externalities among smokers and non‐smokers as well as couples of different types of smokers. We exploit the policy experiment provided by the timing of the UK public smoking bans and measure well‐being via the GHQ . We employ matching techniques combined with flexible difference‐in‐differences fixed effects panel data models on data from the British Household Panel Survey. The joint use of matching with fixed effects specifications allows building more comparable treatment and control groups, producing less model‐dependent results and accounting for individual‐level unobserved heterogeneity. We find that public smoking bans appear to have a statistically significant short‐term positive impact on the well‐being of married individuals, especially among women with dependent children. These effects appear to be robust to alternative specifications and placebo tests and are discussed in the light of the economic theory and recent evidence.     

Transplants and Implants: The Economics of Self‐Improvement

This article examines equilibrium self‐improvement and marriage proposal strategies in a two‐sided search model with nontransferable utility. Singles are vertically differentiated—some make better marriage partners than others. A complete characterization of equilibrium is provided. It is shown there are two externalities to self‐improvement decisions. Further, these externalities may support multiple Pareto rankable equilibria. By encouraging everybody to self‐improve, society can create a situation where everybody is forced to improve to remain “acceptable.” But a preferred equilibrium may exist where there is less (costly) self‐improvement.     

Single Object Auctions With Externalities: A Tractable Model

We consider the single object auction model with allocative externalities in a private valuation and quasi‐linear setting. We model externalities by assuming that every agent has a private valuation (for the object) and a strict ranking of other agents. The utility for an agent when another agent receives the object is the product of his own valuation and a real number that depends on the rank of this agent in his ranking. When the only private information is the valuation of the agents, we characterise the implementable allocation rules and use these to derive the optimal auction. The optimal auction collects payments from agents who do not receive the object.