Project acronym COMPLEXITY
Project Understanding the Complexity of Modern Financial Systems
Researcher (PI) Vikrant Vig
Host Institution (HI) LONDON BUSINESS SCHOOL
Call Details Starting Grant (StG), SH1, ERC-2015-STG
Summary The modern financial system has undergone immense transformation in recent years and is far more complex than ever before. In lockstep, financial regulation has also become more complex. This research proposal attempts to improve our understanding of potential drivers of this complexity and the implications of this change on the allocation of resources.
Taking a positive rather than a normative approach, I will analyse post-crisis changes at both the micro- and at the macro-levels to create a broader understanding of complexities in the current financial system. In order to do so, I will employ a set of advanced research designs, as well as a uniquely assembled micro-level dataset covering state and privately owned financial institutions in Asia, Africa, South America and Europe.
This project will focus on two interconnected areas of research: 1) Organisation of Credit, 2) Financial regulation in a complex environment. The aim of this project is to create a sustainable framework for the study of post-crisis financial systems, and to shape the current debate on the future of post-crisis financial structures and the development of policy in this area. Not only will this research have a considerable impact on our understanding of financial systems, it will also impact fields beyond finance, like Organisational Economics, Industrial Organisation and Development Economics.
Summary
The modern financial system has undergone immense transformation in recent years and is far more complex than ever before. In lockstep, financial regulation has also become more complex. This research proposal attempts to improve our understanding of potential drivers of this complexity and the implications of this change on the allocation of resources.
Taking a positive rather than a normative approach, I will analyse post-crisis changes at both the micro- and at the macro-levels to create a broader understanding of complexities in the current financial system. In order to do so, I will employ a set of advanced research designs, as well as a uniquely assembled micro-level dataset covering state and privately owned financial institutions in Asia, Africa, South America and Europe.
This project will focus on two interconnected areas of research: 1) Organisation of Credit, 2) Financial regulation in a complex environment. The aim of this project is to create a sustainable framework for the study of post-crisis financial systems, and to shape the current debate on the future of post-crisis financial structures and the development of policy in this area. Not only will this research have a considerable impact on our understanding of financial systems, it will also impact fields beyond finance, like Organisational Economics, Industrial Organisation and Development Economics.
Max ERC Funding
1 498 947 €
Duration
Start date: 2016-04-01, End date: 2021-03-31
Project acronym DYNAMICSS
Project Labour market dynamics and optimal policies
Researcher (PI) Camille Gregoire Alexis Landais
Host Institution (HI) LONDON SCHOOL OF ECONOMICS AND POLITICAL SCIENCE
Call Details Starting Grant (StG), SH1, ERC-2015-STG
Summary From pension reforms to UI extensions, the optimal tax and program design literature is often ill-equipped to provide clear guidance in policy debates on the reform of social insurance and tax-and-benefit systems. The reason is that this literature is mostly focused on static settings, while these programs are inherently dynamic: they specify a schedule of tax and benefits that is time or state dependent and they affect individuals’ decisions throughout their lifetime.
DYNAMICSS will offer a simple and general approach to the analysis of optimal dynamic policies that connects to the data. The key idea of DYNAMICSS is to extend the sufficient statistics (SS) approach to dynamic settings and characterize the full time profile, rather than the average generosity, of social insurance and transfer policies. By expressing optimal policy as a function of a limited set of statistics, the SS approach has the advantage of making clear the trade-offs implied in optimal tax or benefit formulae and of tightly integrating the theory and the empirics of optimal policy analysis, to offer robust policy guidance.
DYNAMICSS will use unique administrative data and cutting-edge econometric techniques to exploit compelling variations in policy profiles and offer significant contributions to the empirical analysis of dynamic behavioural responses to policies. A central contribution will be to create a unique measure of consumption expenditures based on leveraging complete administrative information on income, transfers and wealth to offer ground-breaking evidence of the effect of social insurance on consumption dynamics.
Part I will use and extend the SS framework to analyse the optimal time profile of UI benefits. Part II will develop this approach for analysing the optimal design of retirement pension systems. Part III will address optimal family policies with a focus on understanding the different dynamics of men and women in the labour market, and exploring the role of cultural norm
Summary
From pension reforms to UI extensions, the optimal tax and program design literature is often ill-equipped to provide clear guidance in policy debates on the reform of social insurance and tax-and-benefit systems. The reason is that this literature is mostly focused on static settings, while these programs are inherently dynamic: they specify a schedule of tax and benefits that is time or state dependent and they affect individuals’ decisions throughout their lifetime.
DYNAMICSS will offer a simple and general approach to the analysis of optimal dynamic policies that connects to the data. The key idea of DYNAMICSS is to extend the sufficient statistics (SS) approach to dynamic settings and characterize the full time profile, rather than the average generosity, of social insurance and transfer policies. By expressing optimal policy as a function of a limited set of statistics, the SS approach has the advantage of making clear the trade-offs implied in optimal tax or benefit formulae and of tightly integrating the theory and the empirics of optimal policy analysis, to offer robust policy guidance.
DYNAMICSS will use unique administrative data and cutting-edge econometric techniques to exploit compelling variations in policy profiles and offer significant contributions to the empirical analysis of dynamic behavioural responses to policies. A central contribution will be to create a unique measure of consumption expenditures based on leveraging complete administrative information on income, transfers and wealth to offer ground-breaking evidence of the effect of social insurance on consumption dynamics.
Part I will use and extend the SS framework to analyse the optimal time profile of UI benefits. Part II will develop this approach for analysing the optimal design of retirement pension systems. Part III will address optimal family policies with a focus on understanding the different dynamics of men and women in the labour market, and exploring the role of cultural norm
Max ERC Funding
1 049 855 €
Duration
Start date: 2016-03-01, End date: 2021-02-28
Project acronym INATTENTION
Project Behavioral and Policy Implications of Rational Inattention
Researcher (PI) Filip Matejka
Host Institution (HI) NARODOHOSPODARSKY USTAV AKADEMIE VED CESKE REPUBLIKY VEREJNA VYZKUMNA INSTITUCE
Call Details Starting Grant (StG), SH1, ERC-2015-STG
Summary This proposal outlines agenda which aims to improve our understanding of policies in environments with cognitively limited agents. It seeks to extend and apply the theory of rational inattention developed in macroeconomics. Citizens are inattentive to details of tax codes, government bureaucrats cannot inspect all data about people in need, and voters are highly uninformed about politicians’ campaign platforms. The agenda is specifically targeted at applications where human inability to digest all available information has strong implications for public policy formation. It falls into three broad parts.
First (macroeconomics), the proposed research will develop a new model of risk-sharing in a typical modern-macro setting with heterogeneous agents. Instead of incentive constraints, the imperfections will be driven by the government’s or citizens’ inability to process all available information. What are the properties of the resulting system of redistribution? Why do taxes often take a simple form? Can minorities be left behind because they attract less of the government’s attention?
Second (behavioral economics), it will extend the rational inattention theory to model how agents simplify multidimensional features of the environment. Among many applications, the theory is likely to provide an alternative explanation for mental accounting, when people have separate budgets for different types of expenditures (critical to consumption decisions, especially of the poor), and for salience of different elements of the tax code.
Third (political economy), it will develop a unified framework to study implications of voters’ rational inattention (selective ignorance) for the outcomes of political processes, such as for popular demand for misguided policies, public good provision, and the complexity of announced platforms. Voters’ information acquisition and fragmented information processing will be studied in a field experiment.
Summary
This proposal outlines agenda which aims to improve our understanding of policies in environments with cognitively limited agents. It seeks to extend and apply the theory of rational inattention developed in macroeconomics. Citizens are inattentive to details of tax codes, government bureaucrats cannot inspect all data about people in need, and voters are highly uninformed about politicians’ campaign platforms. The agenda is specifically targeted at applications where human inability to digest all available information has strong implications for public policy formation. It falls into three broad parts.
First (macroeconomics), the proposed research will develop a new model of risk-sharing in a typical modern-macro setting with heterogeneous agents. Instead of incentive constraints, the imperfections will be driven by the government’s or citizens’ inability to process all available information. What are the properties of the resulting system of redistribution? Why do taxes often take a simple form? Can minorities be left behind because they attract less of the government’s attention?
Second (behavioral economics), it will extend the rational inattention theory to model how agents simplify multidimensional features of the environment. Among many applications, the theory is likely to provide an alternative explanation for mental accounting, when people have separate budgets for different types of expenditures (critical to consumption decisions, especially of the poor), and for salience of different elements of the tax code.
Third (political economy), it will develop a unified framework to study implications of voters’ rational inattention (selective ignorance) for the outcomes of political processes, such as for popular demand for misguided policies, public good provision, and the complexity of announced platforms. Voters’ information acquisition and fragmented information processing will be studied in a field experiment.
Max ERC Funding
950 424 €
Duration
Start date: 2016-04-01, End date: 2021-03-31
Project acronym MACROPMF
Project Macroeconomic Dynamics with Product Market Frictions
Researcher (PI) Luigi Paciello
Host Institution (HI) Istituto Einaudi per l'Economia e la Finanza
Call Details Starting Grant (StG), SH1, ERC-2015-STG
Summary The transmission of microeconomic and macroeconomic shocks to firms' price and demand in product markets is the cornerstone of a large volume of macroeconomic literature. Product market frictions, by reducing the ability of demand to relocate across different suppliers, affect firms' incentives when setting prices, and therefore the pass-through of shocks to both demand and prices.
In this project we plan to study the implications of product market frictions for firm level price and demand dynamics, as well as for macroeconomic dynamics. The aim is to integrate micro and macro economics, both theoretically and empirically, to a greater extent than is currently done in the literature.
We will apply our tools to two main areas of interest. First, we will study how product market frictions affect the optimal pricing decision of firms, and the relocation of consumers across different suppliers. We will provide novel empirical microeconomic evidence on the relationship between price and consumer dynamics. We will build a rich but yet tractable model where product market frictions give rise to firm pricing with customer markets. The aim is to use observable statistics from the micro data to estimate the key parameters of the model and quantify the relevance of the product market frictions for firm pricing and demand dynamics.
Second, we will explore the importance of product market frictions for macroeconomic dynamics. We will apply our quantified model of price and consumer dynamics to areas of macroeconomics where we expect our methodology and empirical analysis to be more relevant, both because of the types of questions addressed and because of a direct relationship with the mechanism. In particular we will focus on the role of product market frictions for business cycle fluctuations and international trade.
Summary
The transmission of microeconomic and macroeconomic shocks to firms' price and demand in product markets is the cornerstone of a large volume of macroeconomic literature. Product market frictions, by reducing the ability of demand to relocate across different suppliers, affect firms' incentives when setting prices, and therefore the pass-through of shocks to both demand and prices.
In this project we plan to study the implications of product market frictions for firm level price and demand dynamics, as well as for macroeconomic dynamics. The aim is to integrate micro and macro economics, both theoretically and empirically, to a greater extent than is currently done in the literature.
We will apply our tools to two main areas of interest. First, we will study how product market frictions affect the optimal pricing decision of firms, and the relocation of consumers across different suppliers. We will provide novel empirical microeconomic evidence on the relationship between price and consumer dynamics. We will build a rich but yet tractable model where product market frictions give rise to firm pricing with customer markets. The aim is to use observable statistics from the micro data to estimate the key parameters of the model and quantify the relevance of the product market frictions for firm pricing and demand dynamics.
Second, we will explore the importance of product market frictions for macroeconomic dynamics. We will apply our quantified model of price and consumer dynamics to areas of macroeconomics where we expect our methodology and empirical analysis to be more relevant, both because of the types of questions addressed and because of a direct relationship with the mechanism. In particular we will focus on the role of product market frictions for business cycle fluctuations and international trade.
Max ERC Funding
1 192 000 €
Duration
Start date: 2016-02-01, End date: 2020-01-31
Project acronym Observable Stability
Project Evolutionary stability, observability, and efficiency
Researcher (PI) Yuval Heller
Host Institution (HI) BAR ILAN UNIVERSITY
Call Details Starting Grant (StG), SH1, ERC-2015-STG
Summary The existing literature mainly focuses on two kinds of interactions: short-term interactions in which the behavior today does not influence the future, and long-term interactions with the same partner. In the former model, the only stable outcomes are Nash equilibria (which are typically non-efficient), while the latter model allows one to achieve efficient outcomes. Many interesting situations lie somewhere in between, typically when people engage in short-term interactions but future partners may obtain some information about the behavior today. For example, how do people behave when interacting in one-off purchases in an online site with a feedback mechanism (e.g., eBay)?
In this project I will fill the large gap in the literature, by characterizing evolutionary stable outcomes when players have limited information about the partner’s past, and how this stable behavior depends on the richness and the structure of the observed information. This will shed new light on indirect reciprocity and its use to achieve efficiency in social dilemmas.
The evolutionary stable outcomes capture the long run behavior in a dynamic process of cultural learning. Agents are randomly matched in each round to play a game with a new partner. Each agent may observe some information about the partner’s past behavior. New agents, who join the interactions, usually mimic one of the existing behaviors, with a larger tendency to choose more successful incumbents. Occasionally, few agents experiment with a new behavior.
The research agenda includes several theoretical subprojects with various research questions, such as:
(1) Would non-material preferences be stable?
(2) What will be the influence of non-verifiable reports about past behavior?
(3) Which of the (locally) stable outcomes would be selected?
(4) What will happen in asymmetric interactions between professional sellers and non-experienced buyers?
The final subproject experimentally tests the various predictions and key implications.
Summary
The existing literature mainly focuses on two kinds of interactions: short-term interactions in which the behavior today does not influence the future, and long-term interactions with the same partner. In the former model, the only stable outcomes are Nash equilibria (which are typically non-efficient), while the latter model allows one to achieve efficient outcomes. Many interesting situations lie somewhere in between, typically when people engage in short-term interactions but future partners may obtain some information about the behavior today. For example, how do people behave when interacting in one-off purchases in an online site with a feedback mechanism (e.g., eBay)?
In this project I will fill the large gap in the literature, by characterizing evolutionary stable outcomes when players have limited information about the partner’s past, and how this stable behavior depends on the richness and the structure of the observed information. This will shed new light on indirect reciprocity and its use to achieve efficiency in social dilemmas.
The evolutionary stable outcomes capture the long run behavior in a dynamic process of cultural learning. Agents are randomly matched in each round to play a game with a new partner. Each agent may observe some information about the partner’s past behavior. New agents, who join the interactions, usually mimic one of the existing behaviors, with a larger tendency to choose more successful incumbents. Occasionally, few agents experiment with a new behavior.
The research agenda includes several theoretical subprojects with various research questions, such as:
(1) Would non-material preferences be stable?
(2) What will be the influence of non-verifiable reports about past behavior?
(3) Which of the (locally) stable outcomes would be selected?
(4) What will happen in asymmetric interactions between professional sellers and non-experienced buyers?
The final subproject experimentally tests the various predictions and key implications.
Max ERC Funding
831 488 €
Duration
Start date: 2016-10-01, End date: 2021-09-30
Project acronym POLICIES_FOR_PEACE
Project The economics of lasting peace: The role of policies and institutions
Researcher (PI) Dominic Patrick Rohner
Host Institution (HI) UNIVERSITE DE LAUSANNE
Call Details Starting Grant (StG), SH1, ERC-2015-STG
Summary This project aims to study what key institutions and policies are best suited to reduce incentives for engaging in appropriation and armed conflict. For achieving and sustaining peace it is crucial to get the incentives right of all main actors in society. While subproject 1 focuses on short-run policies to stop the fighting by drying out the funding of rebel groups and hence move from war to peace, all the remaining subprojects take a medium- to long-run perspective. Subprojects 2 and 3 focus on the medium-run and assess what mix of policies can help to bridge the short- with the long-run and consolidate peace. In particular, drawing on very fine-grained data from Northern Ireland I will in subproject 2 assess the role and interplay of factors of escalation / containment of violence (“Orange marches”, “peace walls”) and factors driving democratic representation (gerrymandering and power-sharing). In subproject 3 I will perform a network and conflict analysis based on Twitter data for the Arab Spring to assess the role of civil liberties and freedom of speech in consolidating peace. Subprojects 4 to 6 study factors that are crucial for sustaining long-run peace. In subproject 4 I will build a model of how the main political institutions affect the incentives for contesting democracy on the battlefield, focusing on the role of electoral systems, coalition governments, federalism and direct democracy. Subproject 5 studies the role of education for sustaining peace. With the help of a game-theoretic model I will study the various channels through which education affects incentives for conflict, before testing the main predictions empirically. Subproject 6 focuses on another key role of modern states: Health policies. After building a theory of how health affects combat incentives, I will exploit medical innovations to assess the causal impact of health improvement on conflict incentives.
Summary
This project aims to study what key institutions and policies are best suited to reduce incentives for engaging in appropriation and armed conflict. For achieving and sustaining peace it is crucial to get the incentives right of all main actors in society. While subproject 1 focuses on short-run policies to stop the fighting by drying out the funding of rebel groups and hence move from war to peace, all the remaining subprojects take a medium- to long-run perspective. Subprojects 2 and 3 focus on the medium-run and assess what mix of policies can help to bridge the short- with the long-run and consolidate peace. In particular, drawing on very fine-grained data from Northern Ireland I will in subproject 2 assess the role and interplay of factors of escalation / containment of violence (“Orange marches”, “peace walls”) and factors driving democratic representation (gerrymandering and power-sharing). In subproject 3 I will perform a network and conflict analysis based on Twitter data for the Arab Spring to assess the role of civil liberties and freedom of speech in consolidating peace. Subprojects 4 to 6 study factors that are crucial for sustaining long-run peace. In subproject 4 I will build a model of how the main political institutions affect the incentives for contesting democracy on the battlefield, focusing on the role of electoral systems, coalition governments, federalism and direct democracy. Subproject 5 studies the role of education for sustaining peace. With the help of a game-theoretic model I will study the various channels through which education affects incentives for conflict, before testing the main predictions empirically. Subproject 6 focuses on another key role of modern states: Health policies. After building a theory of how health affects combat incentives, I will exploit medical innovations to assess the causal impact of health improvement on conflict incentives.
Max ERC Funding
1 013 720 €
Duration
Start date: 2016-08-01, End date: 2021-07-31
Project acronym REPCOR
Project The Role of Reputation and Corruption in Procurement
Researcher (PI) Francesco Decarolis
Host Institution (HI) UNIVERSITA COMMERCIALE LUIGI BOCCONI
Call Details Starting Grant (StG), SH1, ERC-2015-STG
Summary Nearly all activities in which the public sector is involved, from defense to transportation, from education to healthcare, require the public sector to procure works or goods from private contractors. Thus, it is crucial that the procedures through which procurement occurs be designed to avoid waste and enhance social welfare. Preventing corruption and ensuring contractor compliance with their obligations constitute primary design goals. Nevertheless, very limited evidence exists as to how different awarding methods are susceptible to corruption, and how contractors’ past reputation should be used to award new tenders.
This research proposal describes three empirical projects that will advance the frontier of our understanding of the roles of corruption and reputation in procurement.
Component 1 focuses on the use of reputation in contract procurement. It analyzes the evidence produced by the introduction of a vendor rating system to: i) determine whether the new system induced contractors to improve their performance, ii) determine whether performance improvements caused higher procurement costs, and iii) evaluate concerns on corruption and entry of new bidders.
Component 2 focuses on corruption in public procurement. It analyzes evidence on the presence of networks of firms engaged in criminal activities in public procurement to determine: i) the extent of the phenomenon, (ii) the functioning of different awarding rules against corruption, and iii) the use of tests to detect corruption.
Component 3 focuses on healthcare procurement regulations. It analyzes evidence on the public procurement of medical devices to accomplish: i) a descriptive analysis of the procurement practices across the EU, ii) an assessment of whether discretionary awarding rules are used to foster corruption or to reward contractors with better reputation, and iii) an evaluation of these procurement practices in terms of patients’ welfare.
Summary
Nearly all activities in which the public sector is involved, from defense to transportation, from education to healthcare, require the public sector to procure works or goods from private contractors. Thus, it is crucial that the procedures through which procurement occurs be designed to avoid waste and enhance social welfare. Preventing corruption and ensuring contractor compliance with their obligations constitute primary design goals. Nevertheless, very limited evidence exists as to how different awarding methods are susceptible to corruption, and how contractors’ past reputation should be used to award new tenders.
This research proposal describes three empirical projects that will advance the frontier of our understanding of the roles of corruption and reputation in procurement.
Component 1 focuses on the use of reputation in contract procurement. It analyzes the evidence produced by the introduction of a vendor rating system to: i) determine whether the new system induced contractors to improve their performance, ii) determine whether performance improvements caused higher procurement costs, and iii) evaluate concerns on corruption and entry of new bidders.
Component 2 focuses on corruption in public procurement. It analyzes evidence on the presence of networks of firms engaged in criminal activities in public procurement to determine: i) the extent of the phenomenon, (ii) the functioning of different awarding rules against corruption, and iii) the use of tests to detect corruption.
Component 3 focuses on healthcare procurement regulations. It analyzes evidence on the public procurement of medical devices to accomplish: i) a descriptive analysis of the procurement practices across the EU, ii) an assessment of whether discretionary awarding rules are used to foster corruption or to reward contractors with better reputation, and iii) an evaluation of these procurement practices in terms of patients’ welfare.
Max ERC Funding
1 046 850 €
Duration
Start date: 2016-02-01, End date: 2021-01-31
Project acronym SDDM-TEA
Project Static and Dynamic Decision Making under Uncertainty: Theory and Applications
Researcher (PI) Simone Cerreia Vioglio
Host Institution (HI) UNIVERSITA COMMERCIALE LUIGI BOCCONI
Call Details Starting Grant (StG), SH1, ERC-2015-STG
Summary Everyday actions involve an amount of uncertainty in the final outcome they will deliver. Following Knight's view, some of this uncertainty is “measurable” (Risk) while some of it is “not measurable” (Ambiguity). In Economics, understanding agents’ behavior under uncertainty is of fundamental importance. For many years, and in both contexts, the standard model of decision making has been the Expected Utility model. Since the famous thought experiments of Allais and Ellsberg, many alternative approaches and departures from Expected Utility were proposed.
Our research agenda has two main goals. First, we aim to show how different approaches and concepts in Decision Theory are connected to each other: namely, incompleteness of preferences, violations of Independence, preference for randomization, the certainty effect, and random choice. Economists have long understood the relevance of these behavioral phenomena, and more and more models are now including them in applications, for example in Macroeconomics and Finance. A deeper understanding of these phenomena and of their relationship would significantly benefit research in several fields of Economics. More practically, it will help in developing comprehensive models in which these biases are linked to each other benefiting more applied research.
Second, decision theorists have studied Ambiguity mostly in static (atemporal) contexts that are insufficient for the analysis of the steady state and dynamic decision problems that characterize applications. Thus, for example, as a result, Macro-Finance mostly keeps relying on traditional decision models that cannot properly cope with model uncertainty. We intend to develop a general theory of recursive intertemporal preference models under uncertainty to address this important issue.
We expect that the novel theoretical findings of our research agenda will push the research frontier and will be relevant for the analysis of the role of uncertainty in several fields.
Summary
Everyday actions involve an amount of uncertainty in the final outcome they will deliver. Following Knight's view, some of this uncertainty is “measurable” (Risk) while some of it is “not measurable” (Ambiguity). In Economics, understanding agents’ behavior under uncertainty is of fundamental importance. For many years, and in both contexts, the standard model of decision making has been the Expected Utility model. Since the famous thought experiments of Allais and Ellsberg, many alternative approaches and departures from Expected Utility were proposed.
Our research agenda has two main goals. First, we aim to show how different approaches and concepts in Decision Theory are connected to each other: namely, incompleteness of preferences, violations of Independence, preference for randomization, the certainty effect, and random choice. Economists have long understood the relevance of these behavioral phenomena, and more and more models are now including them in applications, for example in Macroeconomics and Finance. A deeper understanding of these phenomena and of their relationship would significantly benefit research in several fields of Economics. More practically, it will help in developing comprehensive models in which these biases are linked to each other benefiting more applied research.
Second, decision theorists have studied Ambiguity mostly in static (atemporal) contexts that are insufficient for the analysis of the steady state and dynamic decision problems that characterize applications. Thus, for example, as a result, Macro-Finance mostly keeps relying on traditional decision models that cannot properly cope with model uncertainty. We intend to develop a general theory of recursive intertemporal preference models under uncertainty to address this important issue.
We expect that the novel theoretical findings of our research agenda will push the research frontier and will be relevant for the analysis of the role of uncertainty in several fields.
Max ERC Funding
667 875 €
Duration
Start date: 2016-03-01, End date: 2021-02-28
