Project acronym BayesianMarkets
Project Bayesian markets for unverifiable truths
Researcher (PI) Aurelien Baillon
Host Institution (HI) ERASMUS UNIVERSITEIT ROTTERDAM
Call Details Starting Grant (StG), SH1, ERC-2014-STG
Summary Subjective data play an increasing role in modern economics. For instance, new welfare measurements are based on people’s subjective assessments of their happiness or their life satisfaction. A problem of such measurements is that people have no incentives to tell the truth. To solve this problem and make those measurements incentive compatible, I will introduce a new market institution, called Bayesian markets.
Imagine we ask people whether they are happy with their life. On Bayesian markets, they will trade an asset whose value is the proportion of people answering Yes. Only those answering Yes will have the right to buy the asset and those answering No the right to sell it. Bayesian updating implies that “Yes” agents predict a higher value of the asset than “No” agents do and, consequently, “Yes” agents want to buy it while “No” agents want to sell it. I will show that truth-telling is then the optimal strategy.
Bayesian markets reward truth-telling the same way as prediction markets (betting markets) reward people for reporting their true subjective probabilities about observable events. Yet, unlike prediction markets, they do not require events to be objectively observable. Bayesian markets apply to any type of unverifiable truths, from one’s own happiness to beliefs about events that will never be observed.
The present research program will first establish the theoretical foundations of Bayesian markets. It will then develop the proper methodology to implement them. Finally, it will disseminate the use of Bayesian markets via applications.
The first application will demonstrate how degrees of expertise can be measured and will apply it to risks related to climate change and nuclear power plants. It will contribute to the political debate by shedding new light on what true experts think about these risks. The second application will provide the first incentivized measures of life satisfaction and happiness.
Summary
Subjective data play an increasing role in modern economics. For instance, new welfare measurements are based on people’s subjective assessments of their happiness or their life satisfaction. A problem of such measurements is that people have no incentives to tell the truth. To solve this problem and make those measurements incentive compatible, I will introduce a new market institution, called Bayesian markets.
Imagine we ask people whether they are happy with their life. On Bayesian markets, they will trade an asset whose value is the proportion of people answering Yes. Only those answering Yes will have the right to buy the asset and those answering No the right to sell it. Bayesian updating implies that “Yes” agents predict a higher value of the asset than “No” agents do and, consequently, “Yes” agents want to buy it while “No” agents want to sell it. I will show that truth-telling is then the optimal strategy.
Bayesian markets reward truth-telling the same way as prediction markets (betting markets) reward people for reporting their true subjective probabilities about observable events. Yet, unlike prediction markets, they do not require events to be objectively observable. Bayesian markets apply to any type of unverifiable truths, from one’s own happiness to beliefs about events that will never be observed.
The present research program will first establish the theoretical foundations of Bayesian markets. It will then develop the proper methodology to implement them. Finally, it will disseminate the use of Bayesian markets via applications.
The first application will demonstrate how degrees of expertise can be measured and will apply it to risks related to climate change and nuclear power plants. It will contribute to the political debate by shedding new light on what true experts think about these risks. The second application will provide the first incentivized measures of life satisfaction and happiness.
Max ERC Funding
1 500 000 €
Duration
Start date: 2016-01-01, End date: 2020-12-31
Project acronym CompSCHoice
Project A Comprehensive Approach to School Choice and Education
Researcher (PI) Caterina Calsamiglia Costa
Host Institution (HI) INSTITUTE OF POLITICAL ECONOMY AND GOVERNANCE
Call Details Starting Grant (StG), SH1, ERC-2014-STG
Summary School choice is one of the most hotly debated policies in education. Advocates argue that school choice allows equal access to high quality schooling for all. High-income families have always had more choice, either through residential choice or through enrolment in private schools. Therefore increased choice should also improve equity by allowing minority and low-income students to choose too. On the other hand, school choice critics suggest that school choice can increase sorting between schools based on their socio-economics status, suggesting high-income families benefit more from these policies.
Three different and disconnected literatures in economics provide different and often contradicting answers to these questions. We propose a unified theoretical framework that merges these three literatures and allows for a comprehensive analysis on school choice design and its impact on actual choice, outcomes and segregation in schools and neighborhoods. Unique and newly constructed data sets are used to address novel empirical challenges. The data constructed for Barcelona shall become one of the largest and most comprehensive data sets not only on school choice but also on public education worldwide.
Using the data set from Barcelona we 1) estimate families’ preferences and, for the first time, evaluate the efficiency of different mechanism through structural estimation of our model and counterfactual analysis. We then 2) evaluate the impact that peer effects have on parents' choice and on outcomes. Exploiting the occurrence of hurricane Katrina in New Orleans and the aid programs implemented we aim at 3) estimating the distribution of willingness to pay for quality schools for families with different socio-economics. And last we exploit a policy change in Catalunya in 2009 to 4) provide evidence on how increased flexibility of the school system to adapt for differential maturity levels affects individual short and medium-term outcomes.
Summary
School choice is one of the most hotly debated policies in education. Advocates argue that school choice allows equal access to high quality schooling for all. High-income families have always had more choice, either through residential choice or through enrolment in private schools. Therefore increased choice should also improve equity by allowing minority and low-income students to choose too. On the other hand, school choice critics suggest that school choice can increase sorting between schools based on their socio-economics status, suggesting high-income families benefit more from these policies.
Three different and disconnected literatures in economics provide different and often contradicting answers to these questions. We propose a unified theoretical framework that merges these three literatures and allows for a comprehensive analysis on school choice design and its impact on actual choice, outcomes and segregation in schools and neighborhoods. Unique and newly constructed data sets are used to address novel empirical challenges. The data constructed for Barcelona shall become one of the largest and most comprehensive data sets not only on school choice but also on public education worldwide.
Using the data set from Barcelona we 1) estimate families’ preferences and, for the first time, evaluate the efficiency of different mechanism through structural estimation of our model and counterfactual analysis. We then 2) evaluate the impact that peer effects have on parents' choice and on outcomes. Exploiting the occurrence of hurricane Katrina in New Orleans and the aid programs implemented we aim at 3) estimating the distribution of willingness to pay for quality schools for families with different socio-economics. And last we exploit a policy change in Catalunya in 2009 to 4) provide evidence on how increased flexibility of the school system to adapt for differential maturity levels affects individual short and medium-term outcomes.
Max ERC Funding
1 207 500 €
Duration
Start date: 2015-08-01, End date: 2020-07-31
Project acronym Disasters
Project Market Beliefs and Optimal Policy in the Presence of Disasters
Researcher (PI) Ian William Richard Martin
Host Institution (HI) LONDON SCHOOL OF ECONOMICS AND POLITICAL SCIENCE
Call Details Starting Grant (StG), SH1, ERC-2014-STG
Summary My proposal consists of two strands linked by a common theme--namely a concern for the impact of disasters, in financial markets and more generally--and by a shared methodology.
In the first of these strands, I propose to develop ways of using observable asset price data to infer the beliefs of market participants about various quantities that are central to financial economics, including (i) the equity premium; (ii) the forward-looking autocorrelation of the market (i.e., time-series momentum); (iii) the risk premia associated with individual stocks; (iv) the correlation between stocks; and (v) measures of asymmetric risk, such as the forward-looking probability of a significant downward jump in the stock market over some prescribed time period.
This work will exploit theoretical techniques that I have developed in previous research, and that allow for the possibility of jumps and disasters in financial markets. I will therefore be able to avoid the unpalatable assumption—which is made, implicitly or explicitly, in much of the finance literature—that uncertainty is driven by conditionally Normally distributed shocks (or, in continuous time, by Brownian motions). The importance of doing so is underscored by the turmoil in financial markets over the last few years.
These techniques will also be applied in the second strand of my proposal, which focuses on issues related to catastrophes more generally, including for example climate change; highly contagious viruses on the scale of the influenza pandemic of 1918; or nuclear or bio-terrorism. This project will be joint with Professor Robert S. Pindyck of MIT. The goal is to provide a framework within which policymakers, faced with multiple different types of potential catastrophe, can determine how society’s limited resources should best be used to alleviate the associated risks.
Summary
My proposal consists of two strands linked by a common theme--namely a concern for the impact of disasters, in financial markets and more generally--and by a shared methodology.
In the first of these strands, I propose to develop ways of using observable asset price data to infer the beliefs of market participants about various quantities that are central to financial economics, including (i) the equity premium; (ii) the forward-looking autocorrelation of the market (i.e., time-series momentum); (iii) the risk premia associated with individual stocks; (iv) the correlation between stocks; and (v) measures of asymmetric risk, such as the forward-looking probability of a significant downward jump in the stock market over some prescribed time period.
This work will exploit theoretical techniques that I have developed in previous research, and that allow for the possibility of jumps and disasters in financial markets. I will therefore be able to avoid the unpalatable assumption—which is made, implicitly or explicitly, in much of the finance literature—that uncertainty is driven by conditionally Normally distributed shocks (or, in continuous time, by Brownian motions). The importance of doing so is underscored by the turmoil in financial markets over the last few years.
These techniques will also be applied in the second strand of my proposal, which focuses on issues related to catastrophes more generally, including for example climate change; highly contagious viruses on the scale of the influenza pandemic of 1918; or nuclear or bio-terrorism. This project will be joint with Professor Robert S. Pindyck of MIT. The goal is to provide a framework within which policymakers, faced with multiple different types of potential catastrophe, can determine how society’s limited resources should best be used to alleviate the associated risks.
Max ERC Funding
1 287 755 €
Duration
Start date: 2015-05-01, End date: 2020-04-30
Project acronym EMF-FEIM
Project Empirical Macro-Finance and the Financial Economics of Insurance Markets
Researcher (PI) Ralph Koijen
Host Institution (HI) LONDON BUSINESS SCHOOL
Call Details Starting Grant (StG), SH1, ERC-2013-StG
Summary "My project consists of two lines of work. 1.Empirical Macro-Finance: Asset prices are informative about the macro-economic risks that matter to investors and about the welfare costs of economic fluctuations. However, recent empirical evidence suggests that leading asset pricing models cannot explain how risks are priced across maturities in equity markets, which is a key input to measuring the costs of business cycles. An analysis of what leading models miss will vastly improve our understanding of how the real economy and asset prices are related. Also, by expanding our empirical evidence about the term structure of equity to the firm-level, I plan to study how investment decisions relate to asset prices. My goal is to measure the firms' incentives to invest and how this impacts economic growth more broadly.
2.Financial Economics of Insurance Markets: Households in Europe and the US can choose from a wide variety of insurance products that insure health and mortality risks. Choosing between these products is no easy task and the costs from sub-optimal insurance choices are estimated to be large. My plan is to develop a comprehensive life-cycle theory of insurance choice that accounts for family structure, risk factors such as labor income and housing, and different institutional settings across countries. I also plan to study the supply side of insurance markets. The traditional view is that insurance prices are driven by life-cycle demand or informational frictions. However, as is clear from evidence during the financial crisis, insurance companies are in fact financial institutions. If financial constraints bind, it may affect insurance prices and ultimately consumers' welfare. My goal is to understand how financial frictions affect insurance companies. A policy implication of my research may be that the private supply of insurance is an imperfect substitute for public supply as insurance companies face different incentives and constraints than the government."
Summary
"My project consists of two lines of work. 1.Empirical Macro-Finance: Asset prices are informative about the macro-economic risks that matter to investors and about the welfare costs of economic fluctuations. However, recent empirical evidence suggests that leading asset pricing models cannot explain how risks are priced across maturities in equity markets, which is a key input to measuring the costs of business cycles. An analysis of what leading models miss will vastly improve our understanding of how the real economy and asset prices are related. Also, by expanding our empirical evidence about the term structure of equity to the firm-level, I plan to study how investment decisions relate to asset prices. My goal is to measure the firms' incentives to invest and how this impacts economic growth more broadly.
2.Financial Economics of Insurance Markets: Households in Europe and the US can choose from a wide variety of insurance products that insure health and mortality risks. Choosing between these products is no easy task and the costs from sub-optimal insurance choices are estimated to be large. My plan is to develop a comprehensive life-cycle theory of insurance choice that accounts for family structure, risk factors such as labor income and housing, and different institutional settings across countries. I also plan to study the supply side of insurance markets. The traditional view is that insurance prices are driven by life-cycle demand or informational frictions. However, as is clear from evidence during the financial crisis, insurance companies are in fact financial institutions. If financial constraints bind, it may affect insurance prices and ultimately consumers' welfare. My goal is to understand how financial frictions affect insurance companies. A policy implication of my research may be that the private supply of insurance is an imperfect substitute for public supply as insurance companies face different incentives and constraints than the government."
Max ERC Funding
1 077 765 €
Duration
Start date: 2013-10-01, End date: 2018-09-30
Project acronym FRICTIONS
Project Frictions in the Financial System
Researcher (PI) Péter Kondor
Host Institution (HI) LONDON SCHOOL OF ECONOMICS AND POLITICAL SCIENCE
Call Details Starting Grant (StG), SH1, ERC-2013-StG
Summary "The financial crisis, since its start in 2008 has exposed enormous fractures both in the financial architecture and in the structure of the global economy. Although with some notable exceptions, the magnitude of the events caught the finance profession largely by surprise. Clearly, we have to understand better the institutional mechanism channeling savings towards the best uses of capital, and to what extent this mechanism can sometimes fail. The projects in this proposal will push the boundaries of our knowledge in this direction.
I suggest a dual approach to achieve this goal. First, we have to improve our understanding of which frictions are the crucial impediments of the efficient functioning of markets. As this approach focuses on particular markets in isolation, I call this the micro approach. I propose three projects within this approach: trading and information diffusion in OTC markets, the crowdedness in limits-to-arbitrage, and the interaction of political uncertainty and sovereign bond prices.
Second, from the frictions emerging from the micro approach, we have to select the ones which determine the aggregate liquidity fluctuations in the economy. I use this concept in a broad sense; referring to the changing efficiency with which the financial system allocates resources across investment opportunities. As this approach focuses on the functionality of the financial system as a whole, I call this the macro approach. I propose two projects within this approach. The first project focuses on the determinants of the differences in the financial architecture of different economies. It builds a novel framework to study the dynamics of the financial sector of an economy. The second project studies the role of shadow banking in the fluctuation of aggregate liquidity. In particular, this project concentrates on the fluctuation of the efficiency of private liquidity creation as the state of the economy changes."
Summary
"The financial crisis, since its start in 2008 has exposed enormous fractures both in the financial architecture and in the structure of the global economy. Although with some notable exceptions, the magnitude of the events caught the finance profession largely by surprise. Clearly, we have to understand better the institutional mechanism channeling savings towards the best uses of capital, and to what extent this mechanism can sometimes fail. The projects in this proposal will push the boundaries of our knowledge in this direction.
I suggest a dual approach to achieve this goal. First, we have to improve our understanding of which frictions are the crucial impediments of the efficient functioning of markets. As this approach focuses on particular markets in isolation, I call this the micro approach. I propose three projects within this approach: trading and information diffusion in OTC markets, the crowdedness in limits-to-arbitrage, and the interaction of political uncertainty and sovereign bond prices.
Second, from the frictions emerging from the micro approach, we have to select the ones which determine the aggregate liquidity fluctuations in the economy. I use this concept in a broad sense; referring to the changing efficiency with which the financial system allocates resources across investment opportunities. As this approach focuses on the functionality of the financial system as a whole, I call this the macro approach. I propose two projects within this approach. The first project focuses on the determinants of the differences in the financial architecture of different economies. It builds a novel framework to study the dynamics of the financial sector of an economy. The second project studies the role of shadow banking in the fluctuation of aggregate liquidity. In particular, this project concentrates on the fluctuation of the efficiency of private liquidity creation as the state of the economy changes."
Max ERC Funding
1 122 883 €
Duration
Start date: 2013-12-01, End date: 2018-11-30
Project acronym HISKNOWL
Project Using Historical Quasi-Experiments to Understand the Knowledge Economy
Researcher (PI) Fabian Waldinger
Host Institution (HI) LONDON SCHOOL OF ECONOMICS AND POLITICAL SCIENCE
Call Details Starting Grant (StG), SH1, ERC-2013-StG
Summary This proposal covers three research strands at the intersection of innovation economics, economic history, and labour economics.
In project A I will investigate how the number of entrepreneurs at the city level affects city growth. As the number of entrepreneurs in a city is likely to be endogenous I identify the causal effect of entrepreneurs using the exodus of Jewish entrepreneurs from German cities during the Nazi era. As different German cities were affected to varying extents by the exodus of Jewish entrepreneurs I can investigate how entrepreneurs affect local GDP and employment in the long-run. Furthermore, I will analyse which types of entrepreneurs matter (e.g. bankers versus manufacturers) because different cities lost Jewish entrepreneurs in different professions.
In project B we will analyse how increases in the availability of secondary schools in Germany affect the number of talented people (such as scientists, parliamentarians or entrepreneurs) who originate from certain cities. To analyse the causal effect of secondary school availability we study large expansions in the number of schools in Germany that lowered the cost of attending an academic-track school for children in some locations, in particular for students in rural areas. Furthermore, we will investigate how the school curriculum and how single-sex versus mixed-sex education affect the production of talent.
In project C we investigate the role of open science for the accumulation of knowledge. To investigate the causal effect of open science on the productivity of scientists we will investigate the exclusion of scientists from the losing Central Powers (e.g. Germany) from the international scientific community after WWI. As the exclusion affected scientists in different scientific fields and countries very differently we can identify the role of open science for the number of published articles by a certain scientist and how quickly she cites important work by foreign scientists.
Summary
This proposal covers three research strands at the intersection of innovation economics, economic history, and labour economics.
In project A I will investigate how the number of entrepreneurs at the city level affects city growth. As the number of entrepreneurs in a city is likely to be endogenous I identify the causal effect of entrepreneurs using the exodus of Jewish entrepreneurs from German cities during the Nazi era. As different German cities were affected to varying extents by the exodus of Jewish entrepreneurs I can investigate how entrepreneurs affect local GDP and employment in the long-run. Furthermore, I will analyse which types of entrepreneurs matter (e.g. bankers versus manufacturers) because different cities lost Jewish entrepreneurs in different professions.
In project B we will analyse how increases in the availability of secondary schools in Germany affect the number of talented people (such as scientists, parliamentarians or entrepreneurs) who originate from certain cities. To analyse the causal effect of secondary school availability we study large expansions in the number of schools in Germany that lowered the cost of attending an academic-track school for children in some locations, in particular for students in rural areas. Furthermore, we will investigate how the school curriculum and how single-sex versus mixed-sex education affect the production of talent.
In project C we investigate the role of open science for the accumulation of knowledge. To investigate the causal effect of open science on the productivity of scientists we will investigate the exclusion of scientists from the losing Central Powers (e.g. Germany) from the international scientific community after WWI. As the exclusion affected scientists in different scientific fields and countries very differently we can identify the role of open science for the number of published articles by a certain scientist and how quickly she cites important work by foreign scientists.
Max ERC Funding
733 621 €
Duration
Start date: 2013-11-01, End date: 2018-09-30
Project acronym INFO TECHNOLOGY
Project Information Technology and Institutions Supporting Human Capital Accumulation and Exchange
Researcher (PI) Jeremiah Edward Dittmar
Host Institution (HI) LONDON SCHOOL OF ECONOMICS AND POLITICAL SCIENCE
Call Details Starting Grant (StG), SH1, ERC-2014-STG
Summary Information technology revolutions transform the production and exchange of ideas and drive profound institutional and cultural change. History provides unique settings to document the causal impact of changes in information technology and institutions, and the best evidence on their long-run effects.
The objective of the research is to document the impact of revolutionary transformations in information technology and institutions using evidence from the European Renaissance. Printing was the new information technology of the Renaissance and is arguably the best parallel to the internet. Print media transmitted ideas that led to significant institutional change. But no quantitative research systematically documents the impact of these innovations.
The research will innovate by constructing ground-breaking micro-data on media markets, human capital, and institutions; developing cutting edge estimators for high-dimensional data to measure ideas in the media; and using historical sources of exogenous variation to identify cause and effect.
The research has three strands. The first will document the impact of competition on idea diffusion and institutional change during the Protestant Reformation. The research will construct firm-level data on all known books in German-speaking Europe 1450-1600, use high-dimensional estimators to measure ideas in print, and identify exogenous variation in competition from archival data.
The second strand will document the origins of persistent differences in human capital accumulation by constructing new data on city laws that set up the first experiments in public education and on virtually all German university students 1400-1550, and by using local shocks to support causal inference.
The third strand will document the impact of organizations supporting knowledge diffusion that were complementary to printing by constructing data on all European scholarly societies and journals and using historical shocks to identify their impact.
Summary
Information technology revolutions transform the production and exchange of ideas and drive profound institutional and cultural change. History provides unique settings to document the causal impact of changes in information technology and institutions, and the best evidence on their long-run effects.
The objective of the research is to document the impact of revolutionary transformations in information technology and institutions using evidence from the European Renaissance. Printing was the new information technology of the Renaissance and is arguably the best parallel to the internet. Print media transmitted ideas that led to significant institutional change. But no quantitative research systematically documents the impact of these innovations.
The research will innovate by constructing ground-breaking micro-data on media markets, human capital, and institutions; developing cutting edge estimators for high-dimensional data to measure ideas in the media; and using historical sources of exogenous variation to identify cause and effect.
The research has three strands. The first will document the impact of competition on idea diffusion and institutional change during the Protestant Reformation. The research will construct firm-level data on all known books in German-speaking Europe 1450-1600, use high-dimensional estimators to measure ideas in print, and identify exogenous variation in competition from archival data.
The second strand will document the origins of persistent differences in human capital accumulation by constructing new data on city laws that set up the first experiments in public education and on virtually all German university students 1400-1550, and by using local shocks to support causal inference.
The third strand will document the impact of organizations supporting knowledge diffusion that were complementary to printing by constructing data on all European scholarly societies and journals and using historical shocks to identify their impact.
Max ERC Funding
1 275 044 €
Duration
Start date: 2015-05-01, End date: 2020-10-31
Project acronym InfoAggregation
Project Information Aggregation in Elections
Researcher (PI) Stephan Lauermann
Host Institution (HI) RHEINISCHE FRIEDRICH-WILHELMS-UNIVERSITAT BONN
Call Details Starting Grant (StG), SH1, ERC-2014-STG
Summary Elections are the foundation for democratic decision making. This research program will examine the effects of biased and privately informed entities—election organizers—on the ability of elections to aggregate information: Existing theory demonstrates that large electorates can reach correct decisions by aggregating information dispersed among many voters. However, existing theory does not account for the ubiquitous presence of biased organizers who intend to affect the election outcome. Examples of biased organizers may include a CEO holding a shareholder vote, a regional government holding a referendum, and political parties in general elections.
This project will develop and analyze new models of voting that account for the effects of biased organizers on information aggregation. One of the examples I consider is an election organizer who can increase voter participation at some cost (e.g., through advertising). Preliminary work suggests that the presence of biased organizers has significant impact. As increasing participation becomes cheap, equilibria exist where the election organizer recruits a large number voters and yet the majority votes almost surely for the organizer’s favorite policy. This failure of information aggregation contrasts starkly with existing results for elections in which the number of voters is exogenously large.
I will study the effectiveness of institutional safeguards against such manipulation, including supermajority rules, publicity requirements, and the regulation of communication to voters, and I will apply the theory in the context of shareholder voting and corporate control. Thus, this research program has important implications for the design of elections in realistic voting scenarios.
Summary
Elections are the foundation for democratic decision making. This research program will examine the effects of biased and privately informed entities—election organizers—on the ability of elections to aggregate information: Existing theory demonstrates that large electorates can reach correct decisions by aggregating information dispersed among many voters. However, existing theory does not account for the ubiquitous presence of biased organizers who intend to affect the election outcome. Examples of biased organizers may include a CEO holding a shareholder vote, a regional government holding a referendum, and political parties in general elections.
This project will develop and analyze new models of voting that account for the effects of biased organizers on information aggregation. One of the examples I consider is an election organizer who can increase voter participation at some cost (e.g., through advertising). Preliminary work suggests that the presence of biased organizers has significant impact. As increasing participation becomes cheap, equilibria exist where the election organizer recruits a large number voters and yet the majority votes almost surely for the organizer’s favorite policy. This failure of information aggregation contrasts starkly with existing results for elections in which the number of voters is exogenously large.
I will study the effectiveness of institutional safeguards against such manipulation, including supermajority rules, publicity requirements, and the regulation of communication to voters, and I will apply the theory in the context of shareholder voting and corporate control. Thus, this research program has important implications for the design of elections in realistic voting scenarios.
Max ERC Funding
616 003 €
Duration
Start date: 2015-07-01, End date: 2020-06-30
Project acronym InterMetrix
Project Econometric Analysis of Interaction Models
Researcher (PI) Aureo Nilo De Paula Neto
Host Institution (HI) UNIVERSITY COLLEGE LONDON
Call Details Starting Grant (StG), SH1, ERC-2013-StG
Summary Equilibrium models are one of the pillars of Economics. This proposal focuses on methodological and empirical studies of estimable game theoretic and social interactions models where observed outcomes are assumed to be determined in equilibrium. Ignoring this simultaneity in estimation and inference is likely to mislead conclusions and produce flawed counterfactual analyses.
One pervasive feature in many interaction models is the existence of multiple solutions for various payoff configurations, and this is an aspect that carries over to estimable versions of such systems. Overlooking this possibility or assuming an uninformed equilibrium selection process potentially opens the door to severe misspecifications and erroneous conclusions. Another notable complication in the analysis of interaction models is computability: with a large number of players and sizeable set of outcomes and/or states, the search for an equilibrium solution can be daunting.
The research projects contemplated in this proposal address one or both of these aspects in various different settings. Those projects contain methodological and substantive contributions. The work involves advances in the econometric analysis (identification and estimation) of interaction models and empirical implementation of the devised methodologies to questions of interest. Given the widespread and increasing use of such econometric models, the projects contemplated here will have a fundamental impact.
I divide the projects into three main subtopics:
1) Identification and inference in games with multiple equilibria,
2) Social interactions and network models,
3) Dynamic interaction models.
Summary
Equilibrium models are one of the pillars of Economics. This proposal focuses on methodological and empirical studies of estimable game theoretic and social interactions models where observed outcomes are assumed to be determined in equilibrium. Ignoring this simultaneity in estimation and inference is likely to mislead conclusions and produce flawed counterfactual analyses.
One pervasive feature in many interaction models is the existence of multiple solutions for various payoff configurations, and this is an aspect that carries over to estimable versions of such systems. Overlooking this possibility or assuming an uninformed equilibrium selection process potentially opens the door to severe misspecifications and erroneous conclusions. Another notable complication in the analysis of interaction models is computability: with a large number of players and sizeable set of outcomes and/or states, the search for an equilibrium solution can be daunting.
The research projects contemplated in this proposal address one or both of these aspects in various different settings. Those projects contain methodological and substantive contributions. The work involves advances in the econometric analysis (identification and estimation) of interaction models and empirical implementation of the devised methodologies to questions of interest. Given the widespread and increasing use of such econometric models, the projects contemplated here will have a fundamental impact.
I divide the projects into three main subtopics:
1) Identification and inference in games with multiple equilibria,
2) Social interactions and network models,
3) Dynamic interaction models.
Max ERC Funding
1 028 780 €
Duration
Start date: 2013-10-01, End date: 2018-09-30
Project acronym LTI
Project Long-Term Investment
Researcher (PI) Alexander Edmans
Host Institution (HI) LONDON BUSINESS SCHOOL
Call Details Starting Grant (StG), SH1, ERC-2014-STG
Summary The typical 20th-century firm was capital-intensive and competed on cost efficiency. The 21st-century firm is different. Competitive success increasingly depends on product quality, which in turn hinges on intangible assets such as brand strength, innovation, and corporate culture. Unlike tangible investment such as buying a factory, the fruits of intangible investment may take several years to appear. A manager pressured to maximise short-term earnings may fail to invest, jeopardising the long-term future of his firm. This project will study the determinants and consequences of long-term investment through three linked components.
Financial Markets. The traditional view is that financial markets dissuade investment by forcing firms to cater to short-term shareholders. I will study two channels through which markets promote investment. First, traders gather information about a firm’s past investments and incorporate it into stock prices by trading - rewarding the manager for good investment. Second, traders can gather information about a firm’s future investment opportunities - informing the manager about his future investment decisions. I aim to analyse what determines the efficiency of both channels.
Incentives. Most research on incentives focuses on either the level of pay, or the sensitivity of pay to performance, but it is the horizon of incentives that is key to promoting investment. I will theoretically analyse the optimal incentive horizon, and empirically demonstrate how it affects long-term decisions. Moving beyond managers, I will study how to incentivise teachers to focus on their pupils’ long-run development rather than “teaching-to-the-test.”
Effects of Investment. A key to inducing long-run investment is to demonstrate its benefits, but this is difficult due to data availability. I aim to gather data on a firm’s corporate social responsibility – its investment in its stakeholders – and link it to firm value.
Summary
The typical 20th-century firm was capital-intensive and competed on cost efficiency. The 21st-century firm is different. Competitive success increasingly depends on product quality, which in turn hinges on intangible assets such as brand strength, innovation, and corporate culture. Unlike tangible investment such as buying a factory, the fruits of intangible investment may take several years to appear. A manager pressured to maximise short-term earnings may fail to invest, jeopardising the long-term future of his firm. This project will study the determinants and consequences of long-term investment through three linked components.
Financial Markets. The traditional view is that financial markets dissuade investment by forcing firms to cater to short-term shareholders. I will study two channels through which markets promote investment. First, traders gather information about a firm’s past investments and incorporate it into stock prices by trading - rewarding the manager for good investment. Second, traders can gather information about a firm’s future investment opportunities - informing the manager about his future investment decisions. I aim to analyse what determines the efficiency of both channels.
Incentives. Most research on incentives focuses on either the level of pay, or the sensitivity of pay to performance, but it is the horizon of incentives that is key to promoting investment. I will theoretically analyse the optimal incentive horizon, and empirically demonstrate how it affects long-term decisions. Moving beyond managers, I will study how to incentivise teachers to focus on their pupils’ long-run development rather than “teaching-to-the-test.”
Effects of Investment. A key to inducing long-run investment is to demonstrate its benefits, but this is difficult due to data availability. I aim to gather data on a firm’s corporate social responsibility – its investment in its stakeholders – and link it to firm value.
Max ERC Funding
899 105 €
Duration
Start date: 2015-04-01, End date: 2018-03-31
