Score manipulation,density continuity and intent-to-treat effect for regression discontinuity

Regression discontinuity (RD) is widely used in many disciplines of science to find treatment effect when the treatment is determined by an underlying running variable (‘score') crossing a cutoff or not. The main attraction of RD is local randomization around , which is, however, often ruined by manipulation on . To detect manipulation, the continuity of score density function at is routinely tested in practice. In this paper, we examine how informative is for RD, and show the following. First, for incumbency effect in election to which RD has been heavily applied, may have no information content. Second, for RD in general, the continuity is neither necessary nor sufficient for RD validity. Third, if the treatment cannot be implemented without manipulation of , then the manipulation had better be considered as part of the treatment effect, much as in ‘intent-to-treat effect’ for clinical trials. These findings call for relying less on continuity tests and, instead, thinking more about how subjects react to the treatment to modify their , how to design the treatment to lessen manipulation, and what to take as the desired treatment effect.     

Do Rising Top Incomes Spur Economic Growth? Evidence From OECD Countries Based on a Novel Identification Strategy

We investigate the causal relationship between the growth rate of top income shares and economic growth in 12 OECD economies for the period 1950–2010. To analyze patterns of short- and long-run causality, we build upon recent advances in structural-vector autoregressive modeling of non-Gaussian systems. This framework allows us to discriminate between rival transmission channels by means of dependence tests, since independent shocks are unique for a particular causation pattern. We consider the share of income accruing to the top 1 percent (1), to the next 9 percent (9), and to the top decile (10). While structural models display considerable heterogeneity across countries, mean group and pooled results strongly favor a specific transmission pattern. In particular, 1 has a long-run positive impact on economic development. This result, which is also confirmed by identified impulse-response functions, is particularly evident for the post-1980 period.     

GLOBAL GAMES WITH STRATEGIC SUBSTITUTES

We study global games with strategic substitutes. Specifically, for a class of binary‐action, ‐player games with strategic substitutes, we prove that under payoff asymmetry, as incomplete information vanishes, the global games approach selects a unique equilibrium. We characterize this equilibrium profile ; players employ switching strategies at different cutoff signals, the order of which is directly determined by payoff asymmetry. We provide examples that illustrate our result and its connection with dominance solvability. We extend the global game literature, which has thus far been developed for games with strategic complementarities, to new applications in industrial organization, collective action problems, finance, etc .     

Updating Beliefs Under Risk and Uncertainty

It is possible to represent decision makers’ beliefs on the algebra , rather than alone. Doing so allows us to represent decision makers’ perceptions of risk on one part of the algebra, and their perceptions of uncertainty on the other. This paper shows that such beliefs can be updated in a ‘Bayesian’ manner and that the resulting representation of beliefs is reasonable relative to some other approaches. The model of belief formation and decision making is then used to explain some instances of anomalous economic behaviour.     

POLLUTION PERMIT SYSTEMS AND FIRM DYNAMICS: HOW DOES THE ALLOCATION SCHEME MATTER?*

I use a firm dynamics model to compare two permit allocation schemes commonly used in pollution permit systems. In the first, closing plants keep their permits, and new entrants do not get them, whereas in the second, closing plants lose their permits, and new entrants get free allowances. Calibrating the model with data from power plants participating in the U.S. program, I find that, compared to the first scheme, in the second arrangement, (i) plants stay, on average, 3.6 years longer and (ii) although the aggregate emission rate is lower, the plant distribution displays more dirty and low‐productivity plants.     

EFFICIENT LEARNING AND JOB TURNOVER IN THE LABOR MARKET

This article nests a continuous‐time learning model la Jovanovic (Journal of Political Economy 92 (1984), 108–22) into a directed on‐the‐job search framework. We prove that the socially efficient allocation is separable, that is, the workers' value functions and optimal controls are independent of both the distribution of workers across their current match qualities and the unemployment rate. We characterize the dynamics of job transitions in the efficient allocation. Furthermore, when the matching technology is linear, our numerical results show that increasing the vacancy creation cost and the speed of learning have ambiguous effects on the unemployment rate and aggregate job transition.     

DIRECTED SEARCH,COORDINATION FAILURE,AND SELLER PROFITS: AN EXPERIMENTAL COMPARISON OF POSTED PRICING WITH SINGLE AND MULTIPLE PRICES

We experimentally examine posted pricing and directed search. In one treatment, capacity‐constrained sellers post fixed prices, which buyers observe before choosing whom to visit. In the other, firms post both “single‐buyer” (applied when one buyer visits) and “multibuyer” (when multiple buyers visit) prices. We find, based on a 2 × 2 (two buyers and two sellers) market and a follow‐up experiment with 3 and 2 × 3 markets, that multibuyer prices can be lower than single‐buyer prices or prices in the one‐price treatment. Also, allowing the multibuyer price does not affect seller profits and increases market frictions.     

Strategy-proof size improvement: is it possible?*

The number of assigned agents (i.e., size) is an important parameter in object allocations. While size maximality clashes with individual rationality and strategy-proofness, it can still be possible to increase the size over a mechanism while keeping these properties. To pursue this research, we devise a size comparison criterion to investigate the possibility of size increase. A mechanism $\psi$ size-wise dominates another mechanism $\varphi$ if the latter never assigns more agents than the former, and at some problem, $\psi$ assigns more agents than $\varphi$. We obtain arguably mild conditions for a mechanism to not be dominated size-wise by an individually rational and strategy-proof mechanism. Moreover, whenever there are at least as many objects as the total number of agents, we find conditions, different from those previously mentioned, for a mechanism to not be dominated size-wise by an individually rational and group strategy-proof mechanism. These results have implications for deferred-acceptance, top trading cycles, efficiency-adjusted deferred-acceptance, serial dictatorship, and Boston mechanisms.     

Assurance payments on the coordination of threshold public goods provision: An experimental investigation

We investigate the assurance payment mechanism (APM) in a single-unit threshold public good game. APM offers an assurance payment ($AP$) as compensation to would-be contributors if the group fails to provide the good and individual contributions reach a pre-determined price. We characterize the set of pure-strategy Nash equilibria for APM under complete information and show that assurance payments substantially reduce the multiplicity of equilibria and eliminate the set of non-provision equilibria in a general setup. We find strong evidence that APM improves upon the baseline provision point mechanism without assurance in lab experiments. Assurance payments act as a coordination device and induce more contributions concentrated on $AP$, especially for agents with values above $AP$, leading to more frequent successful provision, higher group contributions, and an overall welfare improvement. Our experimental findings highlight the non-equilibrium mis-coordination as the main reason for the non-provision of threshold public goods and indicate that the format of assurance payments plays a key role in successful coordination even when provision is the unique equilibrium outcome.     

One-sided bargaining over a finite set of alternatives

I consider a bargaining game in which only one player can make proposals and the space of proposals is finite. Thus, the game is like a situation where: (i) a CEO suggests a possible hire, who must be okayed by a board of directors, or (ii) the US president nominates a potential judge, who must be okayed by the Senate. My main result is an algorithm that finds the unique subgame-perfect equilibrium. The number of steps in the algorithm is on the order of $n$, the number of possibilities (e.g., applicants to a job) that the bargainers may consider. By contrast, if one uses backwards induction to solve the game, then the number of steps is on the order of $n!$. A corollary of the main result, similar to some results of previous bargaining models, is that the wait costs of only one player, the non-proposer, is relevant to the outcome. The wait costs of the proposer are irrelevant, provided that they are positive. Applied to the nomination process specified by the US Constitution, the corollary suggests that only the Senate's wait costs are relevant to the outcome—the president's wait costs are irrelevant. As I argue, this result may explain a little-noticed regularity of American politics. This is that the Senate seems to have much influence in the selection of lower-court judges but relatively little influence in the selection of Supreme Court justices.     

Manufacturing output and extreme temperature: Evidence from Canada

This paper analyzes the effects of extreme temperature on manufacturing output using a data set covering the universe of manufacturing establishments in Canada from 2004 to 2012. Extreme temperature can affect manufacturing activity directly through its impact on labour productivity and indirectly through a change in demand for products. Using a panel fixed effects method, our results suggest a non-linear relationship between outdoor extreme temperature and manufacturing output. Each day where outdoor mean temperatures are below $-18$ °C or above 24 °C reduces annual manufacturing output by 0.18% and 0.11%, respectively, relative to a day with mean temperature between 12 ° and 18 °C. In a typical year, extreme temperatures, as measured by the number of days below $-18$ °C or above 24 °C, reduce annual manufacturing output by 2.2%, with extreme hot temperatures contributing the most to this impact. Given the predicted change in climate for the mid- and end of century, we predict annual manufacturing output losses due to extreme temperature to range between 2.8% and 3.7% in mid-century and 3.7% and 7.2% in end of century.     

On Risk and Uncertainty,and Objective versus Subjective Probability

In this paper, we use the algebra to characterise decision‐makers’ representations of risk and uncertainty. We show that risk can be represented by objective probabilities on one part of the algebra, and that uncertainty can be represented by subjective probabilities on the other part. Decision‐makers are shown to maximise a generalised form of rank‐dependent expected utility. Their occasionally anomalous behaviour is discussed.     

Reworking wild bootstrap-based inference for clustered errors

Cluster-robust inference is increasingly common in empirical research. With few clusters, inference is often conducted using the wild cluster bootstrap. With conventional bootstrap weights the set of valid $P$-values can create ambiguities in inference. I consider several modifications to the bootstrap procedure to resolve these ambiguities. Monte Carlo simulations provide evidence that both a new 6-point bootstrap weight distribution and a kernel density estimation approach improve the reliability of inference. A brief empirical example highlights the implications of these findings.     

PROGRESSIVE TAXATION,ENDOGENOUS GROWTH,AND MACROECONOMIC (IN)STABILITY

In the context of a standard one‐sector model of endogenous growth, we show that the economy exhibits equilibrium indeterminacy and belief‐driven aggregate fluctuations under progressive taxation of income. When the tax schedule is regressive or flat, the economy's balanced growth path displays saddle‐path stability and equilibrium uniqueness. These results imply that in sharp contrast to a conventional automatic stabilizer, progressive income taxation may destabilize an endogenously growing macroeconomy by generating cyclical fluctuations driven by agents' self‐fulfilling expectations or sunspots.     

ON THE CONCAVITY AND QUASICONCAVITY PROPERTIES OF UTILITY FUNCTIONS

Concavity and quasiconcavity have always been important properties in financial economics particularly in decision problems when an objective function has to be maximized over a convex set. Both properties have mainly been used as purely technical assumptions. In this paper, we link concavity and quasiconcavity of a utility function to the basic concepts of risk aversion, prudence, risk vulnerability and temperance. We show that concavity means the agent is more risk vulnerable than prudent. In particular, we can see when a function is both concave and quasiconcave and when it is only quasiconcave.     

A noncooperative model of contest network formation

In this paper we study a model of weighted network formation. The bilateral interaction is modeled as a Tullock contest game with the possibility of a draw. We describe stable networks under different concepts of stability. We show that a Nash stable network is either the empty network or the complete network. The complete network is not immune to bilateral deviations. When we allow for limited farsightedness, a stable network immune to bilateral deviations must be a complete $M$-partite network, with partitions of different sizes. We provide several comparative statics results illustrating the importance of the structure of stable networks in mediating the effects of shocks and interventions. In particular, we show that an increase in the likelihood of a draw has a nonmonotonic effect on the level of wasteful contest spending in the society. To the best of our knowledge, this paper is the first attempt to model weighted network formation when the actions of individuals are neither strategic complements nor strategic substitutes.     

Marginal Subsidies in Tullock Contests

In a general Tullock contest, we examine a situation where a limited resource can be used to provide marginal subsidies to either player (weak or strong), or to increase the prize directly. We show that to maximize total effort, subsidizing the weak/strong player is preferred when the contest is sufficiently accurate/inaccurate. This result generalizes to n‐player lottery contests. In a lottery contest (Tullock contest with ), we derive the optimal scheme for a full range of resource: when the resource is small, it is optimal to only subsidize the weak player; when it is large, both players should be subsidized simultaneously.     

Endogenous Market Structures and International Trade: Theory and Evidence

Under constant elasticity of substitution (CES) preferences and Cournot (or Bertrand) competition, a larger market induces exits of domestic firms, lower prices, and larger production of surviving firms because of competition from more foreign firms, even without resorting to the selection effects of Melitz. The elasticity of the number of firms to population decreases with substitutability between goods, and it reaches 0.5 under Cournot competition with homogeneous goods: empirical evidence supports this structural relation against the unitary elasticity of monopolistic competition. The results hold also in a Heckscher–Ohlin model with imperfect competition generating inter‐ and intra‐industry trade due to comparative advantage or comparative preferences.     

Kantian equilibria of a class of Nash bargaining games

We study Kantian equilibria of an $n$-player bargaining game, which is a modified version of the well-known divide-the-dollar game. We first show that the Kantian equilibrium exists under fairly minimal assumptions. Second, if the bankruptcy rule used satisfies equal treatment of equals, and is almost nowhere proportional, then only equal division can prevail in any Kantian equilibrium. On the other hand, we show that an “anything goes” type result emerges only under the proportional rule. Finally, using hybrid bankruptcy rules that we construct in a novel fashion, we can characterize the whole equilibrium set. Our results highlight the interactions between institutions (axiomatic properties of division rules) and agents' equilibrium behavior.     

Tax evasion with a conscience

How do moral concerns affect fraud and detection, for example, tax compliance and the need for audits? We propose answers by exploring a psychological $2\times 1\times 2\times 1$ inspection game which incorporates belief-dependent guilt, unawareness, and third-party audience effects. Novel conclusions are drawn regarding whose behavior is affected by moral concerns (it's the inspector's more than the inspectee's) as well as the policy issue whether to allow the use of a principle of public access whereby tax returns are made public information.