ERC FUNDED PROJECTS

"A conventional assumption in dynamic models is that agents form their expectations in a very sophisticated manner. In particular, that they have Rational Expectations (RE). We develop some tools to relax this assumption while retaining fully optimal behaviour by agents. We study implications for asset pricing and macro policy. We assume that agents have a consistent set of beliefs that is close, but not equal, to RE. Agents are ""Internally Rational"", that is, they behave rationally given their system of beliefs. Thus, it is conceptually a small deviation from RE. It provides microfoundations for models of adaptive learning, since the learning algorithm is determined by agents’ optimal behaviour. In previous work we have shown that this framework can match stock price and housing price fluctuations, and that policy implications are quite different. In this project we intend to: i) develop further the foundations of internally rational (IR) learning, ii) apply this to explain observed asset price price behavior, such as stock prices, bond prices, inflation, commodity derivatives, and exchange rates, iii) extend the IR framework to the case when agents entertain various models, iv) optimal policy under IR learning and under private information when some hidden shocks are not revealed ex-post. Along the way we will address policy issues such as: effects of creating derivative markets, sovereign spread as a signal of sovereign default risk, tests of fiscal sustainability, fiscal policy when agents learn, monetary policy (more specifically, QE measures and interest rate policy), and the role of credibility in macro policy."

1 970 260 €

Start date: 2013-06-01, End date: 2018-08-31

Development economists and policymakers often face scenarios in which poor people do not make choices that would help them get out of poverty due to an “aspiration failure”: the poor perceive certain goals as unattainable and do not invest towards those goals, thus perpetuating their own state of poverty. The aim of this proposal is to improve our understanding of the relationship between aspirations and socio-economic outcomes of disadvantaged individuals, in order to answer the question: Can we design policy interventions that shift aspirations in a way that is conducive to development? In addressing the above question a fundamental role is played by social norms and by the ability of individuals to coordinate on “new” aspirations, hence the analysis of social effects is a salient feature of this proposal. The proposed research is organized in two workpackages. The first focuses on the media as a vehicle for changing aspirations, examining both commercial TV programs and “educational entertainment”. The second workpackage examines “tailored” interventions designed to address specific determinants of aspiration failures (e.g., psychological support to reduce perceived barriers; inter-racial interaction to change stereotypes; institutional reform to strengthen women’s rights and reduce the gender aspiration gap). The methodology will involve rigorous evaluation of several interventions directly designed to or indirectly affecting aspirations and social norms. Original data collected through survey work, large administrative datasets and media content analysis will be used. The results of this project will advance our knowledge on the sources of aspiration failures by poor people and on the interplay between aspirations and social norms, eventually opening the avenue for a new array of anti-poverty policies.

1 618 125 €

Start date: 2016-11-01, End date: 2021-10-31

"I will study questions of central microeconomic importance via interwoven theoretical, empirical, and experimental analyses, from a behavioural perspective combining standard methods with assumptions that better reflect evidence on behaviour and psychological insights. The contributions of behavioural economics have been widely recognized, but the benefits of its insights are far from fully realized. I propose four lines of inquiry that focus on how institutions interact with cognition and behaviour, chosen for their potential to reshape our understanding of important questions and their synergies across lines. The first line will study nonparametric identification and estimation of reference-dependent versions of the standard microeconomic model of consumer demand or labour supply, the subject of hundreds of empirical studies and perhaps the single most important model in microeconomics. It will allow such studies to consider relevant behavioural factors without imposing structural assumptions as in previous work. The second line will analyze history-dependent learning in financial crises theoretically and experimentally, with the goal of quantifying how market structure influences the likelihood of a crisis. The third line will study strategic thinking experimentally, using a powerful new design that links subjects’ searches for hidden payoff information (“eye-movements”) much more directly to thinking. The fourth line will significantly advance Myerson and Satterthwaite’s analyses of optimal design of bargaining rules and auctions, which first went beyond the analysis of given institutions to study what is possible by designing new institutions, replacing their equilibrium assumption with a nonequilibrium model that is well supported by experiments. The synergies among these four lines’ theoretical analyses, empirical methods, and data analyses will accelerate progress on each line well beyond what would be possible in a piecemeal approach."

1 985 373 €

Start date: 2014-04-01, End date: 2019-03-31

In the field of economics, individual decision making is the basic building block for studying complex environments such as markets, political systems, and social dynamics. Individual decision making is embodied in the neoclassical economically rational agent, whose only concern is the maximization of utility from his own material consumption. Two qualities of this agent are especially important for the research we will undertake: He has perfect understanding of the problems he faces - today and in the future - and unbounded computational ability to solve them. He also has no regard for the consumption of other members of the society or for their feelings about his actions. Huge empirical and experimental evidence shows that departure from these qualities is robust and significant. The failure of the existing models to incorporate bounded rationality and social concerns has proven critical in socially relevant and complex situations such as lifetime consumption and saving, taxation and expenditure policy, labour search and wage determination. The objective of this project is to bring these phenomena into the framework of neoclassical economics, to test their implications, and to tackle important applications. A novel and central feature of our approach is the attempt to retain the parsimonious methodological approach of economic modelling, which has scored groundbreaking successes in matters such as the design of auctions, markets, contracts, and voting mechanisms. Our project envisions the development of theory on individual decision making, the use of experiments to illuminate and test the theory, and the concrete application of theory - mainly to financial markets. The project will push the frontiers of the understanding of the above mentioned socially relevant situations. The explanatory power of our approach will be guaranteed by the continuous feed-back between theory and evidence- experimental and neuroexperimental, and by a departure from ad hoc modelling.

1 399 800 €

Start date: 2009-01-01, End date: 2013-12-31