Working papers results

Consider a set of agents who play a network game repeatedly. Agents may not know the network. They may even be unaware that they are interacting with other agents in a network. Possibly, they just understand that their optimal action depends on an unknown state that is, actually, an aggregate of the actions of their neighbors. Each time, every agent chooses an action that maximizes her instantaneous subjective expected payoff and then updates her beliefs according to what she observes. In particular, we assume that each agent only observes her realized payoff. A steady state of the resulting dynamic is a selfconfirming equilibrium given the assumed feedback. We characterize the structure of the set of selfconfirming equilibria in the given class of network games, we relate selfconfirming and Nash equilibria, and we analyze simple conjectural best-reply paths whose limit points are selfconfirming equilibria.

We present a theory of identity politics that builds on two ideas. First, voters identify with the social group whose interests are closest to theirs and that features the strongest policy conflict with outgroups. Second, identification causes voters to slant their beliefs toward the group's distinctive opinion. The theory yields two main implications: i) voters' beliefs are polarized and distorted along group boundaries; ii) economic shocks that induce new cleavages to emerge also bring about large changes in beliefs and preferences across many policy issues. In particular, exposure to globalization or cultural changes may induce voters to switch identities, dampening their demand for redistribution and exacerbating conflicts in other social dimensions. We show that survey evidence is consistent with these implications.

I study unawareness by the lack of knowledge on a generalized state space. In order to understand and contrast properties of unawareness in a non-partitional standard state space model and a partitional generalized state space model, I provide a generalized framework that accommodates both models. I ask: when and how a generalized (in particular, standard) state space model has a sensible form of unawareness; and how unawareness relates to ignorance and possibility. First, unawareness can only take two forms: an agent is ignorant of knowing that she does not know an event; and the agent is ignorant of knowing an event. In either case, unawareness is also associated with the ignorance of the possibility of knowing an event. Second, the agent, who is unaware of an event, is ignorant (but not necessarily unaware) of being unaware of it. Third, the agent, facing infinitely many objects of knowledge, may know that there is an event of which she is unaware, while she cannot know that she is unaware of any particular event. Fourth, getting more information can cause the agent to become unaware of some event.

Journal of Economic Literature Classification Numbers: C70, D83

We exploit one of the largest data leaks to date to study whether and how firms use secret offshore vehicles. From the leaked data, we identify 338 listed firms as users of secret offshore vehicles and document that these vehicles are used to finance corruption, avoid taxes, and expropriate shareholders. Overall, the leak erased $174 billion in market capitalization among implicated firms. Following the increased transparency brought about by the leak, implicated firms experience lower sales from perceptively corrupt countries and avoid less tax. We estimate conservatively that one in seven firms have offshore secrets.

This paper formalizes an informal idea that an agent's knowledge is characterized by a collection of sets such as a -algebra within the framework of a state space model of knowledge. The formalization is based on the agent's logical and introspective abilities and on the underlying structure of the state space. The agent is logical and introspective about what she knows if and only if her knowledge is summarized by a collection of events with the property that, for any event, the collection has the maximal event included in the original event. When the underlying space is a measurable space, the collection becomes a -algebra if and only if the agent is additionally introspective about what she does not know. The paper characterizes why the agent's knowledge takes (or does not take) such a set algebra as a -algebra or a topology, depending on the agent's logical and introspective abilities and on the underlying environment.

Journal of Economic Literature Classification Numbers: C70, D83

We consider revealed preference relations over risky (or uncertain) prospects, and allow them to be nontransitive and/or fail the classical Independence Axiom. We identify the rational part of any such preference relation as its largest transitive subrelation that satisfies the Independence Axiom and that exhibits some coherence with the original relation. It is shown that this subrelation, which we call the rational core of the given revealed preference, exists in general, and under fairly mild conditions, it is continuous. We obtain various representation theorems for the rational core, and decompose it into other core concepts for preferences. These theoretical results are applied to compute the rational cores of a number of well-known preference models (such as Fishburn's SSB model, justifiable preferences, and variational and multiplier modes of rationalizable preferences). As for applications, we use the rational core operator to develop a theory of risk aversion for nontransitive nonexpected utility mod als (which may not even be complete). Finally, we show that, under a basic monotonicity hypothesis, the Preference Reversal Phenomenon cannot arise from the rational core of one's preferences.

One of the most well-known models of non-expected utility is Gul (1991)'s bmodel of Disappointment Aversion. This model, however, is defined implicitly, as the solution to a functional equation; its explicit utility representation is unknown, which may limit its applicability. We show that an explicit representation can be easily constructed, using solely the components of the implicit one. We also provide a more general result: an explicit representation for preferences in the Betweenness class that also satisfy Negative Certainty Independence (Dillenberger, 2010).

In this teaching note we discuss the relation between rational inattention and a major branch of information theory called rate distortion theory. Focusing on methods, we translate tools from rate distortion theory into the language of rational inattention. These tools provide an alternative, more primitive, approach to the study of optimal attention allocation.

We adopt the epistemic framework of Battigalli and Siniscalchi (J. Econ. Theory 88:188-230, 1999) to model the distinction between a player's behavior at each node, which is part of the external state, and his plan, which is described by his beliefs about his own behavior. This allows us to distinguish between intentional and unintentional behavior, and to explicitly model how players revise their beliefs about the intentions of others upon observing their actions. Rational players plan optimally and their behavior is consistent with their plans. We illustrate our approach with detailed examples and some results. We prove that optimal planning, belief in continuation consistency and common full belief in both imply the backward induction strategies and beliefs in games with perfect information and no relevant ties. More generally, we present within our framework relevant epistemic assumptions about backward and forward-induction reasoning, and relate them to similar ones studied in the previous literature.

We develop a general framework to study source-dependent preferences in economic contexts. We behaviorally identify two key features. First, we drop the assumption of uniform uncertainty attitudes and allow for source-dependent attitudes. Second, we introduce subjective prices to compare outcomes across different sources. Our model evaluates profiles source-wise, by computing the source-dependent certainty equivalents; the latter are converted into the unit of account of a common source and then aggregated into a unique evaluation. By viewing time and location as instances of sources, we show that subjective discount factors and subjective exchange rates are emblematic examples of subjective prices. Finally, we use the model to explore the implications on optimal portfolio allocations and home bias.