Working papers results

We analyze the infinite repetition with imperfect feedback of a simultaneous or sequential game, assuming that players are strategically sophisticated---but impatient---expected-utility maximizers. Sophisticated strategic reasoning in the repeated game is combined with belief updating to provide a foundation for a refinement of self-confirming equilibrium. In particular, we model strategic sophistication as rationality and common strong belief in rationality. Then, we combine belief updating and sophisticated reasoning to provide sufficient conditions for a kind of learning---that is, the ability, in the limit, to exactly forecast the sequence of future observations---thus showing that impatient agents end up playing a sequence of self-confirming equilibria in strongly rationalizable conjectures of the one-period game.

How do people form beliefs about novel risks, with which they have little or no experience? Motivated by survey data we collected in 2020, which showed that beliefs about Covid’s lethality depended on a range of personal experiences in unrelated domains, we build a model based on the psychology of selective memory. When a person thinks about an event, different experiences compete for retrieval, and retrieved experiences are used to simulate the event based on how similar they are to it. The model yields predictions on how experiences interfere with each other in recall and how non domain-specific experiences bias beliefs based on their similarity to the assessed event. We test these predictions using data from our Covid survey and from a primed-recall experiment about cyberattack risk. Experiences and their measured similarity to the cued event successfully help explain beliefs, with patterns consistent with our theory. Our approach offers a new, structured way to study and jointly account for systematic biases and substantial belief heterogeneity.

We construct an index of long term expected earnings growth for S&P500 firms and show that it has remarkable power to jointly predict future errors in these expectations and stock returns, in both the aggregate market and the cross section. The evidence supports a mechanism whereby good news cause investors to become too optimistic about long term earnings growth, for the market as a whole but especially for a subset of firms. This leads to inflated stock prices and, as beliefs are systematically disappointed, to subsequent low returns in the aggregate market and for the subset of firms. Overreaction of long term expectations helps resolve or asset pricing puzzles without time series or cross-sectional variation in required returns.

We document two new facts about the distributions of answers in famous statistical problems: they are i) multi-modal and ii) unstable with respect to irrelevant changes in the problem. We offer a model in which, when solving a problem, people represent each hypothesis by attending “bottom up” to its salient features while neglecting other, potentially more relevant, ones. Only the statistics associated with salient features are used, others are neglected. The model unifies Gambler’s Fallacy, its variation by sample size, under- and overreaction in inference, and insensitivity to multiple signals, all as a byproduct of selective attention. The model also makes new predictions on how controlled changes in the salience of specific features should jointly shape measured attention and biases. We test and confirm these predictions experimentally, including by measuring attention and documenting novel biases predicted by the model. Bottom-up attention to features emerges as a unifying framework for biases conventionally explained using a variety of stable heuristics or distortions of the Bayes rule. 

This handbook chapter studies how natural resource wealth can in many contexts fuel armed conflict. Starting from a simple theoretical model, we stress the role of geography and power mismatch in the so called "natural resource curse". Drawing on recent empirical evidence, the importance of resource abundance, asymmetry and capital-intensiveness is highlighted, alongside local grievances and international interventions. We propose a series of evidence-driven policy conclusions, ranging from "smart green transition" and democratic institution building over labor-market intervention to a series of specific policies requiring international coordination.

This paper discusses the historical and social origins of the bifurcation in the political institutions of China and Western Europe. An important factor, recognized in the literature, is that China centralized state institutions very early on, while Europe remained politically fragmented for much longer. These initial differences, however, were amplified by the different social organizations (clans in China, corporate structures in Europe) that spread in these two societies at the turn of the first millennium AD. State institutions interacted with these organizations, and were shaped and influenced by this interaction. The paper discusses the many ways in which corporations contributed to the emergence of representative institutions and gave prominence to the rule of law in the early stages of state formation in Europe, and how specific features of lineage organizations contributed to the consolidation of the Imperial regime in China. 

This paper explores the tradeoff between competition and financial inclusion given by the vertical integration between mobile network and money operators. Joining novel data on mobile money fees built through the WayBack machine, with sources on network coverage and financials, we examine the staggering across African operators and countries of platform interoperability – a policy that promotes transactions and competition across mobile money operators. Our findings show that interoperability lowers mobile money fees and reduces network coverage and mobile towers, especially in rural and poor districts. Interoperability also results in a decline in various survey metrics of financial inclusion.

We compute new estimates for Total Factor Productivity (TFP) growth in five European countries and in the United States. Departing from standard methods, we account for positive profits and use firm surveys to proxy for unobserved changes in factor utilization. These novelties have a major impact in Europe, where our estimated TFP growth series are less volatile and less cyclical than the ones obtained with standard methods. Based on our approach, we provide annual industry-level and aggregate TFP series, as well as the first estimates of utilization-adjusted quarterly TFP growth in Europe.

JEL Codes: E01, E30, O30, O40

We study the stabilizing role of benefit extensions. We develop a tractable quantitative model with heterogeneous agents, search frictions, and nominal rigidities. The model allows for a stabilizing aggregate demand channel and a destabilizing labor market channel. We characterize each channel analytically and find that aggregate demand effects quantitatively prevail in the US. When feeding-in estimated shocks, the model tracks unemployment in the two most recent downturns. We find that extensions lowered unemployment by a maximum of 0.35 pp in the Great Recession, while the joint stabilizing effect of extensions and benefit compensation peaked at 1.08 pp in the pandemic. 

We offer a theory of changing dimensions of political polarization based on endogenous social identity. We formalize voter identity and stereotyped beliefs as in Bonomi et al. (2021), but add parties that compete on policy and also spread or conceal group stereotypes to persuade voters. Parties are historically connected to different social groups, whose members are more receptive to the ingroup party messages. An endogenous switch from class to cultural identity accounts for three major observed changes: i) growing conflict over cultural issues between voters and between parties, ii) dampening of political conflict over redistribution, despite rising inequality, and iii) a realignment of lower class voters from the left to the right. The incentive of parties to spread stereotypes is a key driver of identity-based polarization. Using survey data and congressional speeches we show that - consistent with our model - there is evidence of i) and ii) also in the voting realignment induced by the ”China Shock” (Autor et al. 2020).