Project acronym ATTENTION
Project Economics of Inattention
Researcher (PI) Filip Matejka
Host Institution (HI) NARODOHOSPODARSKY USTAV AKADEMIE VED CESKE REPUBLIKY VEREJNA VYZKUMNA INSTITUCE
Country Czechia
Call Details Consolidator Grant (CoG), SH1, ERC-2020-COG
Summary This proposal outlines an agenda that aims to improve our understanding of economies with inattentive agents. Attention to detail, not only to current news, but also to how the world works in general, is central to how we interact with the environment.
In the first part of the agenda, we will study how agents come up with the simplified mental models they use in their decision-making. The aim is to provide a new alternative to rational expectations. We will address the question of endogenous model uncertainty by sidestepping the largely statistical nature of previous work. Our agents learn about a model directly, i.e., all information on the details of the correct model is readily available. The envisioned implications can speak to issues such as the expectations formation and formation of narratives, polarization of opinions, and demand for public policy.
In the second part, we will study how a government optimally intervenes in markets if it finds it costly to get the necessary information. On one hand, a government does not possess the local information of decentralized markets. On the other, markets on their own often generate suboptimal social outcomes. We will explore what information the government should collect, how to use it for regulation, and when instead it should leave markets unaffected.
In the third part, we will leverage recent theories of attention allocation and use uniquely detailed data on attention and treatment choices by hospital personnel (including physicians and nurses). This will allow us to explore in more detail than before what theories describe realistic choices well. Moreover, we will eventually aim at a very practical goal: how to help clinicians decrease their cognitive load and improve medical choices.
Summary
This proposal outlines an agenda that aims to improve our understanding of economies with inattentive agents. Attention to detail, not only to current news, but also to how the world works in general, is central to how we interact with the environment.
In the first part of the agenda, we will study how agents come up with the simplified mental models they use in their decision-making. The aim is to provide a new alternative to rational expectations. We will address the question of endogenous model uncertainty by sidestepping the largely statistical nature of previous work. Our agents learn about a model directly, i.e., all information on the details of the correct model is readily available. The envisioned implications can speak to issues such as the expectations formation and formation of narratives, polarization of opinions, and demand for public policy.
In the second part, we will study how a government optimally intervenes in markets if it finds it costly to get the necessary information. On one hand, a government does not possess the local information of decentralized markets. On the other, markets on their own often generate suboptimal social outcomes. We will explore what information the government should collect, how to use it for regulation, and when instead it should leave markets unaffected.
In the third part, we will leverage recent theories of attention allocation and use uniquely detailed data on attention and treatment choices by hospital personnel (including physicians and nurses). This will allow us to explore in more detail than before what theories describe realistic choices well. Moreover, we will eventually aim at a very practical goal: how to help clinicians decrease their cognitive load and improve medical choices.
Max ERC Funding
1 162 664 €
Duration
Start date: 2021-04-01, End date: 2026-03-31
Project acronym BELIEFS
Project Beliefs and Gender Inequality
Researcher (PI) Teodora Boneva
Host Institution (HI) UNIVERSITAT ZURICH
Country Switzerland
Call Details Starting Grant (StG), SH1, ERC-2020-STG
Summary There are large differences in earnings between men and women. Recent work highlights the importance of parenthood for the existence of gender inequality in the labour market. Estimates of the long-run ‘child penalty’, i.e. the impact of having children on women’s relative to men’s earnings, are large and vary substantially across countries. Neither the existence of child penalties nor the striking cross-country variation in child penalties is well understood. BELIEFS will collect a representative dataset of 80,000 individuals in the 28 EU Member States to study the role of several factors in explaining the cross-country differences in child penalties. It will examine the role of (i) beliefs about the benefits/costs to fertility and labour supply decisions, (ii) preferences for having children and for work/leisure, (iii) constraints, and (iv) social norms. BELIEFS will explore different dimensions of heterogeneity and study the individual-level (gender, age etc.) and country-level (labour regulations, family policies etc.) determinants of these factors. It will study whether there are misperceptions of norms and identify whether informing individuals of prevalent social norms shifts their beliefs about the benefits/costs to men/women working and their support for public policies. BELIEFS examines educational, fertility and labour supply decisions in a dynamic life-cycle framework and explores the role of beliefs, preferences, constraints and norms in those decisions. The dynamic framework will also be used to study the role of perceived child penalties in explaining fertility and educational choices. The project is highly ambitious in its scope and it is highly innovative in its combination of research methods. Ultimately, this research agenda will shed light on what drives gender gaps in labour market outcomes as well as which policies may be effective in narrowing these gaps.
Summary
There are large differences in earnings between men and women. Recent work highlights the importance of parenthood for the existence of gender inequality in the labour market. Estimates of the long-run ‘child penalty’, i.e. the impact of having children on women’s relative to men’s earnings, are large and vary substantially across countries. Neither the existence of child penalties nor the striking cross-country variation in child penalties is well understood. BELIEFS will collect a representative dataset of 80,000 individuals in the 28 EU Member States to study the role of several factors in explaining the cross-country differences in child penalties. It will examine the role of (i) beliefs about the benefits/costs to fertility and labour supply decisions, (ii) preferences for having children and for work/leisure, (iii) constraints, and (iv) social norms. BELIEFS will explore different dimensions of heterogeneity and study the individual-level (gender, age etc.) and country-level (labour regulations, family policies etc.) determinants of these factors. It will study whether there are misperceptions of norms and identify whether informing individuals of prevalent social norms shifts their beliefs about the benefits/costs to men/women working and their support for public policies. BELIEFS examines educational, fertility and labour supply decisions in a dynamic life-cycle framework and explores the role of beliefs, preferences, constraints and norms in those decisions. The dynamic framework will also be used to study the role of perceived child penalties in explaining fertility and educational choices. The project is highly ambitious in its scope and it is highly innovative in its combination of research methods. Ultimately, this research agenda will shed light on what drives gender gaps in labour market outcomes as well as which policies may be effective in narrowing these gaps.
Max ERC Funding
1 496 957 €
Duration
Start date: 2021-01-01, End date: 2025-12-31
Project acronym CoDiM
Project Competition in Digital Markets
Researcher (PI) Francesco Decarolis
Host Institution (HI) UNIVERSITA COMMERCIALE LUIGI BOCCONI
Country Italy
Call Details Consolidator Grant (CoG), SH1, ERC-2020-COG
Summary The advent of digital markets is affecting all economic activities. From how consumers discover and purchase products to how firms connect to consumers and other businesses, from the way workers and firms learn about each other to the way labor itself is organized, digital platforms are creating new opportunities and challenges for individuals, businesses and governments.
The tendency for digital platforms to assume a “winner takes all” form, where the market tips to a situation of highly concentrated oligopoly or even monopoly, puts into question whether the forces of free market competition are enough to guarantee that this concentration does not harm consumers and businesses.
This proposal describes three empirical projects that will advance the frontier of our understanding of the role of competition in digital markets.
1) The Role of Intermediaries in Digital Advertising. This part studies how competition in digital advertising is evolving due to the emergence of intermediaries. Using data on both the links between advertisers and intermediaries and on internet search ad campaigns, it estimates a model of many-to-many matching to examine how advertisers and intermediaries select each other.
2) Competition and Defaults in Online Search. This part studies how consumer bias interacts with competition in internet search. Exploiting a public intervention mandating changes to the default settings for search engines on Android smartphones in Europe, it studies how the design of default options impacts search engine market shares, search quality and advertiser behaviour.
3) The Price of Privacy in Digital Markets. Competition in digital markets involves combinations of prices and forms of monetization of users’ data. Using data from the smartphone app market, this part estimates a structural model of demand and supply to quantify the interplay between prices, ads and privacy and to counterfactually evaluate interventions limiting firms’ ability to monetize users' data.
Summary
The advent of digital markets is affecting all economic activities. From how consumers discover and purchase products to how firms connect to consumers and other businesses, from the way workers and firms learn about each other to the way labor itself is organized, digital platforms are creating new opportunities and challenges for individuals, businesses and governments.
The tendency for digital platforms to assume a “winner takes all” form, where the market tips to a situation of highly concentrated oligopoly or even monopoly, puts into question whether the forces of free market competition are enough to guarantee that this concentration does not harm consumers and businesses.
This proposal describes three empirical projects that will advance the frontier of our understanding of the role of competition in digital markets.
1) The Role of Intermediaries in Digital Advertising. This part studies how competition in digital advertising is evolving due to the emergence of intermediaries. Using data on both the links between advertisers and intermediaries and on internet search ad campaigns, it estimates a model of many-to-many matching to examine how advertisers and intermediaries select each other.
2) Competition and Defaults in Online Search. This part studies how consumer bias interacts with competition in internet search. Exploiting a public intervention mandating changes to the default settings for search engines on Android smartphones in Europe, it studies how the design of default options impacts search engine market shares, search quality and advertiser behaviour.
3) The Price of Privacy in Digital Markets. Competition in digital markets involves combinations of prices and forms of monetization of users’ data. Using data from the smartphone app market, this part estimates a structural model of demand and supply to quantify the interplay between prices, ads and privacy and to counterfactually evaluate interventions limiting firms’ ability to monetize users' data.
Max ERC Funding
1 721 425 €
Duration
Start date: 2021-08-01, End date: 2026-07-31
Project acronym DINFO
Project Dynamic Information Acquisition, Experimentation, and Communication
Researcher (PI) Konrad Mierendorff
Host Institution (HI) UNIVERSITY COLLEGE LONDON
Country United Kingdom
Call Details Consolidator Grant (CoG), SH1, ERC-2020-COG
Summary Individuals, firms, and public organizations spend significant time and reIndividuals, firms, and public organizations spend significant time and resources to acquire, collect, and process information that guides and optimizes their decision making. Information is acquired directly by own research efforts, from academic publications that selectively publish scientific research, or from self-interested third parties that control the flow of information to influence decisions, and often information can also be learned through data-collection during day-to-day business.
How much and what information should be acquired? How can third parties be incentivised to provide information? What is the role of commitment and verifiability of evidence in communication between a self-interested information provider and a user of that information? How should data collected from day-to-day business be used to optimize decisions, if these decisions also affect and feed back into future data collection? How should results of scientific research be communicated if it affects both decision by practitioners as well as the choice of future research topics?
This research programme aims to shed light on these questions. Recognizing that information acquisition takes time, and happens gradually, often in multiple stages, it develops dynamic models of information acquisition and experimentation. The programme has four parts: (1) It develops a novel framework to analyse frictions in dynamic information acquisition and transmission that arise in communication and persuasion. (2) It develops new techniques to analyse robust dynamic information choice. (3) It develops a dynamic model of incentives for information production and communication in scientific research that contributes to the debate on publication standards. (4) It develops a theoretical framework to analyse the optimal use of data in the nascent field of predictive policing and other applications of data-driven resource allocation.
Summary
Individuals, firms, and public organizations spend significant time and reIndividuals, firms, and public organizations spend significant time and resources to acquire, collect, and process information that guides and optimizes their decision making. Information is acquired directly by own research efforts, from academic publications that selectively publish scientific research, or from self-interested third parties that control the flow of information to influence decisions, and often information can also be learned through data-collection during day-to-day business.
How much and what information should be acquired? How can third parties be incentivised to provide information? What is the role of commitment and verifiability of evidence in communication between a self-interested information provider and a user of that information? How should data collected from day-to-day business be used to optimize decisions, if these decisions also affect and feed back into future data collection? How should results of scientific research be communicated if it affects both decision by practitioners as well as the choice of future research topics?
This research programme aims to shed light on these questions. Recognizing that information acquisition takes time, and happens gradually, often in multiple stages, it develops dynamic models of information acquisition and experimentation. The programme has four parts: (1) It develops a novel framework to analyse frictions in dynamic information acquisition and transmission that arise in communication and persuasion. (2) It develops new techniques to analyse robust dynamic information choice. (3) It develops a dynamic model of incentives for information production and communication in scientific research that contributes to the debate on publication standards. (4) It develops a theoretical framework to analyse the optimal use of data in the nascent field of predictive policing and other applications of data-driven resource allocation.
Max ERC Funding
1 705 804 €
Duration
Start date: 2021-09-01, End date: 2026-08-31
Project acronym DUALMARKETS
Project Duality in Market Design: Theory and Applications
Researcher (PI) Alexander Teytelboym
Host Institution (HI) THE CHANCELLOR, MASTERS AND SCHOLARS OF THE UNIVERSITY OF OXFORD
Country United Kingdom
Call Details Starting Grant (StG), SH1, ERC-2020-STG
Summary Market design uses economic theory to improve the function of real-world marketplaces, such as matching systems and auctions. In many markets, participants trade goods which are indivisible and highly heterogeneous. My focus is on settings in which participants also experience “income effects”. Income effects arise when participants face budget constraints or when transactions substantially affect participants’ wealth. Income effects are present in many important markets: from spectrum licenses and airport landing slots to jobs and houses. But designing well-functioning marketplaces for participants who experience income effects is challenging both in theory and in practice. As a result, income effects are often ignored in marketplace design, leading to unfair and inefficient outcomes.
The goal of DUALMARKETS is to understand how to design fair and efficient marketplaces for participants with diverse preferences and income effects. Marketplaces work well when supply equals demand and when participants cannot improve their outcomes by renegotiating. First, I will develop powerful novel conditions on participants’ preferences which allow for income effects and guarantee that market-clearing prices always exist. Second, I will analyse to what extent outcomes in multi-sided matching markets are robust to cooperative renegotiation among unsatisfied participants. To achieve these two objectives, I will establish a Competitive Equilibrium Existence Duality and a Cooperative Solution Concept Duality between economies with and without income effects. Finally, I will explore applications of these Dualities to auction design. Specifically, I will develop several designs of sealed-bid multi-item auctions in which bidders can experience income effects.
The new connections between competitive equilibrium, matching markets, and auctions developed in DUALMARKETS will substantially enrich the market design toolkit to better cope with the diversity of real-world preferences.
Summary
Market design uses economic theory to improve the function of real-world marketplaces, such as matching systems and auctions. In many markets, participants trade goods which are indivisible and highly heterogeneous. My focus is on settings in which participants also experience “income effects”. Income effects arise when participants face budget constraints or when transactions substantially affect participants’ wealth. Income effects are present in many important markets: from spectrum licenses and airport landing slots to jobs and houses. But designing well-functioning marketplaces for participants who experience income effects is challenging both in theory and in practice. As a result, income effects are often ignored in marketplace design, leading to unfair and inefficient outcomes.
The goal of DUALMARKETS is to understand how to design fair and efficient marketplaces for participants with diverse preferences and income effects. Marketplaces work well when supply equals demand and when participants cannot improve their outcomes by renegotiating. First, I will develop powerful novel conditions on participants’ preferences which allow for income effects and guarantee that market-clearing prices always exist. Second, I will analyse to what extent outcomes in multi-sided matching markets are robust to cooperative renegotiation among unsatisfied participants. To achieve these two objectives, I will establish a Competitive Equilibrium Existence Duality and a Cooperative Solution Concept Duality between economies with and without income effects. Finally, I will explore applications of these Dualities to auction design. Specifically, I will develop several designs of sealed-bid multi-item auctions in which bidders can experience income effects.
The new connections between competitive equilibrium, matching markets, and auctions developed in DUALMARKETS will substantially enrich the market design toolkit to better cope with the diversity of real-world preferences.
Max ERC Funding
1 060 381 €
Duration
Start date: 2021-07-01, End date: 2025-06-30
Project acronym FEMPOWER
Project Inefficient Decision Making and Female Bargaining Power
Researcher (PI) Abigail ADAMS-PRASSL
Host Institution (HI) THE CHANCELLOR, MASTERS AND SCHOLARS OF THE UNIVERSITY OF OXFORD
Country United Kingdom
Call Details Starting Grant (StG), SH1, ERC-2020-STG
Summary Dominant economic models of household decision-making assume a utopian scenario characterised by cooperation, commitment, and efficiency. While elegant and tractable, a range of common family behaviours fall outside the scope of these frameworks limiting our understanding of households as economic units and their role in helping individuals insure against shocks. Furthermore, the policy prescriptions implied by the standard models can result in harmful unintended consequences if implemented in contexts where non-cooperative decision-making prevails (Erten and Keskin, 2018; Bobonis et al, 2013).
FEMPOWER will make both methodological and substantive contributions to the economic literature on female bargaining power by harnessing novel sources of administrative and survey data and by building on my expertise in developing innovative ways of modelling family decision making. FEMPOWER will develop frameworks for estimating models of decision-making that can capture potentially inefficient behaviour in three different Work Packages: (1) Violence & Household Decision-Making; (2) Decision-Making at Divorce; (3) A General Model of Inefficient Households. Each work package will be structured around three complementary activities:
1. Developing high quality empirical facts about behaviour in these contexts using novel administrative data sources;
2. Deriving the conditions under which new, innovative economic theories of behaviour can be tested and estimated;
3. Estimating the key economic parameters of interest to assess the positive and normative impact of policy proposals.
To enable me to exploit existing data sets and identifying variation that are particularly well suited to answering the research questions posed, each Work Package draws on data from a different OECD country: Finland (Work Package I), UK (Work Package II), and Sweden (Work Package III).
Summary
Dominant economic models of household decision-making assume a utopian scenario characterised by cooperation, commitment, and efficiency. While elegant and tractable, a range of common family behaviours fall outside the scope of these frameworks limiting our understanding of households as economic units and their role in helping individuals insure against shocks. Furthermore, the policy prescriptions implied by the standard models can result in harmful unintended consequences if implemented in contexts where non-cooperative decision-making prevails (Erten and Keskin, 2018; Bobonis et al, 2013).
FEMPOWER will make both methodological and substantive contributions to the economic literature on female bargaining power by harnessing novel sources of administrative and survey data and by building on my expertise in developing innovative ways of modelling family decision making. FEMPOWER will develop frameworks for estimating models of decision-making that can capture potentially inefficient behaviour in three different Work Packages: (1) Violence & Household Decision-Making; (2) Decision-Making at Divorce; (3) A General Model of Inefficient Households. Each work package will be structured around three complementary activities:
1. Developing high quality empirical facts about behaviour in these contexts using novel administrative data sources;
2. Deriving the conditions under which new, innovative economic theories of behaviour can be tested and estimated;
3. Estimating the key economic parameters of interest to assess the positive and normative impact of policy proposals.
To enable me to exploit existing data sets and identifying variation that are particularly well suited to answering the research questions posed, each Work Package draws on data from a different OECD country: Finland (Work Package I), UK (Work Package II), and Sweden (Work Package III).
Max ERC Funding
1 470 375 €
Duration
Start date: 2021-04-01, End date: 2026-03-31
Project acronym HIPPO
Project Housing, Inequality and Public Policies
Researcher (PI) Sebastian Siegloch
Host Institution (HI) ZEW - LEIBNIZ-ZENTRUM FUR EUROPAISCHE WIRTSCHAFTSFORSCHUNG GMBH MANNHEIM
Country Germany
Call Details Starting Grant (StG), SH1, ERC-2020-STG
Summary In light of rapidly increasing prices of housing, gentrification and increasing regional inequalities within and across cities in many countries, I study the effectiveness of various public policies to counter these challenges. In particular, I will study the efficiency and distributional effects of seven different, commonly used policy instruments directly or indirectly targeted at the housing market: residential property taxes, commercial property taxes, real-estate transaction taxes, capital gains transaction taxes, local public spending, social housing programs and rent control. The overarching research question of the project is how do different public housing policies shape local housing markets and affect regional inequality. Analyzing the effects of these different instruments provides a comprehensive overview of available policy options.
I analyze the policy effects combining state-of-the-art theoretical models with clean empirical evidence. The theoretical predictions about the different policy effects are based on widely used local labor market models, which I tailor and extend to the specific institutional context and specific research questions at hand. Guided by the resulting theoretical predictions, I exploit rich, micro-level data on housing markets, local labor markets, and local policy instruments in various European countries (Finland, Spain and Germany) and the United States. I selected the specific countries based on the availability of suitable data and, importantly, institutional features that allow exploiting quasi-experimental variation to identify the causal effects of the different policy instruments.
I combine the empirical evidence with the theoretical insights to eventually derive the efficiency costs and redistributive effects of the respective policies. These results provide guidance for policymakers when addressing the challenges induced by the current housing crisis.
Summary
In light of rapidly increasing prices of housing, gentrification and increasing regional inequalities within and across cities in many countries, I study the effectiveness of various public policies to counter these challenges. In particular, I will study the efficiency and distributional effects of seven different, commonly used policy instruments directly or indirectly targeted at the housing market: residential property taxes, commercial property taxes, real-estate transaction taxes, capital gains transaction taxes, local public spending, social housing programs and rent control. The overarching research question of the project is how do different public housing policies shape local housing markets and affect regional inequality. Analyzing the effects of these different instruments provides a comprehensive overview of available policy options.
I analyze the policy effects combining state-of-the-art theoretical models with clean empirical evidence. The theoretical predictions about the different policy effects are based on widely used local labor market models, which I tailor and extend to the specific institutional context and specific research questions at hand. Guided by the resulting theoretical predictions, I exploit rich, micro-level data on housing markets, local labor markets, and local policy instruments in various European countries (Finland, Spain and Germany) and the United States. I selected the specific countries based on the availability of suitable data and, importantly, institutional features that allow exploiting quasi-experimental variation to identify the causal effects of the different policy instruments.
I combine the empirical evidence with the theoretical insights to eventually derive the efficiency costs and redistributive effects of the respective policies. These results provide guidance for policymakers when addressing the challenges induced by the current housing crisis.
Max ERC Funding
1 478 638 €
Duration
Start date: 2021-07-01, End date: 2026-06-30
Project acronym IDED
Project Inheritance, Demographics, and Economic Development
Researcher (PI) Paula Gobbi
Host Institution (HI) UNIVERSITE LIBRE DE BRUXELLES
Country Belgium
Call Details Starting Grant (StG), SH1, ERC-2020-STG
Summary Economists study inheritance and demographics in isolation, overlooking the feedback effects between the two. This is surprising given that other social scientists have typically related inheritance schemes to family structures. The general objective of this proposal is to understand the implications of these interconnections for the process of economic development.
First, I will create new databases for European countries between the seventeenth and the nineteenth centuries and for Sub-Saharan African countries during the past century until today. These will allow to cover demographic transitions, a crucial stage in the development process in which drastic demographic changes occur, and the period before. These databases will allow establishing facts relating inheritance schemes, family structures and demographic variables. Second, I will propose structural models of inheritance, family structures, marriage and fertility in order to rationalize these facts. These models will assess the importance of the relationship between inheritance and demographics when studying the effect of inheritance on economic outcomes.
The databases and structural models will provide answers to specific applied research questions: (i) The Demographic Transition: Was the French Revolution responsible for the demographic transition? What were the relevant channels (partible inheritance and inclusion of women)? How did the abolition of primogeniture affect the elites’ demographic transition? (ii) The European Marriage Pattern: how did its characteristics; late marriages and high life-long celibacy, vary across inheritance systems? Which one of these was most beneficial for gender empowerment? (iii) Sub-Saharan Africa’s demographic transitions: Can the harmonization of inheritance practices reactivate stalling demographic transitions? How does land scarcity affect the relationship between inheritance practices, family structures, and demographics?
Summary
Economists study inheritance and demographics in isolation, overlooking the feedback effects between the two. This is surprising given that other social scientists have typically related inheritance schemes to family structures. The general objective of this proposal is to understand the implications of these interconnections for the process of economic development.
First, I will create new databases for European countries between the seventeenth and the nineteenth centuries and for Sub-Saharan African countries during the past century until today. These will allow to cover demographic transitions, a crucial stage in the development process in which drastic demographic changes occur, and the period before. These databases will allow establishing facts relating inheritance schemes, family structures and demographic variables. Second, I will propose structural models of inheritance, family structures, marriage and fertility in order to rationalize these facts. These models will assess the importance of the relationship between inheritance and demographics when studying the effect of inheritance on economic outcomes.
The databases and structural models will provide answers to specific applied research questions: (i) The Demographic Transition: Was the French Revolution responsible for the demographic transition? What were the relevant channels (partible inheritance and inclusion of women)? How did the abolition of primogeniture affect the elites’ demographic transition? (ii) The European Marriage Pattern: how did its characteristics; late marriages and high life-long celibacy, vary across inheritance systems? Which one of these was most beneficial for gender empowerment? (iii) Sub-Saharan Africa’s demographic transitions: Can the harmonization of inheritance practices reactivate stalling demographic transitions? How does land scarcity affect the relationship between inheritance practices, family structures, and demographics?
Max ERC Funding
1 376 916 €
Duration
Start date: 2021-01-01, End date: 2025-12-31
Project acronym INFOMAK
Project Information, Markets, and the Macroeconomy
Researcher (PI) Victoria VANASCO
Host Institution (HI) Centre de Recerca en Economia Internacional (CREI)
Country Spain
Call Details Starting Grant (StG), SH1, ERC-2020-STG
Summary Financial markets play an essential role in allocating an economy’s resources to their most productive use, fostering investment, employment, innovation, and growth. While there is substantial evidence that financial markets are plagued with information asymmetries and its perils, we do not have a good understanding of what economic conditions may foster such information asymmetries, or how they interact with aggregate investment decisions, liquidity in asset markets, or economic fluctuations.
In order to fill this gap, the goal of this proposal is twofold:
The first component focuses on understanding the drivers of information asymmetries. To do this, first, I will develop novel microeconomic frameworks where the degree of information asymmetries and the quality of assets is endogenously determined by agents’ decisions to produce complex financial products (project 1) or to trade in opaque markets (project 2). Second, I will construct a novel dataset of financial products’ attributes to explore the drivers of asset quality and complexity in the data and to test the predictions of my theoretical frameworks.
The second component explores how information asymmetries, through their effect on financial markets, interact with aggregate outcomes, such as market liquidity and investment. To do this, I will develop novel macroeconomic frameworks where I embed my insights on complexity (project 4), and opacity and asset quality (project 5) into dynamic, general equilibrium settings.
Summary
Financial markets play an essential role in allocating an economy’s resources to their most productive use, fostering investment, employment, innovation, and growth. While there is substantial evidence that financial markets are plagued with information asymmetries and its perils, we do not have a good understanding of what economic conditions may foster such information asymmetries, or how they interact with aggregate investment decisions, liquidity in asset markets, or economic fluctuations.
In order to fill this gap, the goal of this proposal is twofold:
The first component focuses on understanding the drivers of information asymmetries. To do this, first, I will develop novel microeconomic frameworks where the degree of information asymmetries and the quality of assets is endogenously determined by agents’ decisions to produce complex financial products (project 1) or to trade in opaque markets (project 2). Second, I will construct a novel dataset of financial products’ attributes to explore the drivers of asset quality and complexity in the data and to test the predictions of my theoretical frameworks.
The second component explores how information asymmetries, through their effect on financial markets, interact with aggregate outcomes, such as market liquidity and investment. To do this, I will develop novel macroeconomic frameworks where I embed my insights on complexity (project 4), and opacity and asset quality (project 5) into dynamic, general equilibrium settings.
Max ERC Funding
767 500 €
Duration
Start date: 2021-01-01, End date: 2025-12-31
Project acronym InfoTrans
Project Information Transmission in Markets
Researcher (PI) Francesc Dilme
Host Institution (HI) RHEINISCHE FRIEDRICH-WILHELMS-UNIVERSITAT BONN
Country Germany
Call Details Starting Grant (StG), SH1, ERC-2020-STG
Summary This proposal studies price negotiations in dynamic markets. The focus is on one of the most primitive economic problems: a seller and a buyer bargain over the price of a good. Their cost and values are private information and, if they do not reach an agreement today, they may continue bargaining tomorrow.
Somewhat surprisingly, our knowledge about bargaining with two-sided asymmetric information is still quite limited. Intuitively, on the one hand, signaling forces induce the seller and the buyer to delay trade to obtain a higher share of the trade surplus. One the other hand, Coasian forces push prices down and make trade efficient. The balance between these two forces determines the efficiency of the market and how the trade surplus is shared between the seller and the buyer.
I will provide a new systematic analysis of markets with asymmetric information. Using recent developments in the characterization of robust behavior and strategic stability, I will first analyze dynamic pricing by privately informed sellers in markets with independent values. Building on the understanding of the basic bilateral bargaining problem, I will then consider related problems. In particular, in the second subproject, I will consider interdependent values and, in the third subproject, I will consider a multilateral setting with multiple sellers. Markets studied in this project will include real estate markets, markets for durable goods, markets for intermediate goods, and financial markets. The results will provide guidance to assess the effect that currently debated policies regarding privacy or confidentiality have on social welfare or market efficiency.
Summary
This proposal studies price negotiations in dynamic markets. The focus is on one of the most primitive economic problems: a seller and a buyer bargain over the price of a good. Their cost and values are private information and, if they do not reach an agreement today, they may continue bargaining tomorrow.
Somewhat surprisingly, our knowledge about bargaining with two-sided asymmetric information is still quite limited. Intuitively, on the one hand, signaling forces induce the seller and the buyer to delay trade to obtain a higher share of the trade surplus. One the other hand, Coasian forces push prices down and make trade efficient. The balance between these two forces determines the efficiency of the market and how the trade surplus is shared between the seller and the buyer.
I will provide a new systematic analysis of markets with asymmetric information. Using recent developments in the characterization of robust behavior and strategic stability, I will first analyze dynamic pricing by privately informed sellers in markets with independent values. Building on the understanding of the basic bilateral bargaining problem, I will then consider related problems. In particular, in the second subproject, I will consider interdependent values and, in the third subproject, I will consider a multilateral setting with multiple sellers. Markets studied in this project will include real estate markets, markets for durable goods, markets for intermediate goods, and financial markets. The results will provide guidance to assess the effect that currently debated policies regarding privacy or confidentiality have on social welfare or market efficiency.
Max ERC Funding
719 596 €
Duration
Start date: 2021-02-01, End date: 2026-01-31
