Keywords: Bargaining, Concession, Pre-donation, Kalai-Smorodinsky Solution

This study examines the behavior of simple n-person bargaining problems under pre-donations where the Kalai-Smorodinsky (KS) solution is operant. Pre-donations are a unilateral commitment to transfer a portion of one's utility to someone else, and are used to distort the bargaining set and thereby infuence the bargaining solution. In equilibrium, these pre-donations are Pareto-improving over the undistorted solution; moreover, when the agents' preferences are sufficiently distinct, the equilibrium solution coincides with the Concessionary Division rule.

Online Appendix with Computations in Mathematica (source file available upon request)
          Keywords: Unemployment benefits, potential benefit duration, wage dispersion, equilibrium search, hazard rates
We study unemployment insurance (UI) in a general equilibrium environment in which unemployed workers only receive benefits for a finite length of time. Although all workers have identical productivity and leisure value, the random arrival of job offers creates ex-post differences with respect to their time remaining until benefit expiration. Firms, which are also homogeneous, can exploit these differences, leading to an endogenous wage distribution. This allows us to examine the equilibrium effect of policy changes in both the size and length of UI benefits. Surprisingly, an increase in benefits can actually cause wages to fall, which is contrary to the predictions of on-the-job-search models. Moreover, we explain well-documented patterns of how the hazard rate of exiting unemployment responds to these policy changes. Our theory also explains why this hazard rate spikes at the time of benefit exhaustion.
Online Appendix  with Computations in Mathematica and .do files in Stata for Calibration

           Keywords: Immigration Policy, Social Security, Aging, Overlapping Generations Model, Welfare

I evaluate the effects of exogenous changes in immigration policy on individual welfare by constructing a heterogeneous agent overlapping generations model with agents differing in age, origin, and skills. Calibrating the model to Germany, I match the main features of the social security and tax systems, and account for differences in inter-generational transmission of skills and fertility between immigrants and natives. I find that a prohibition on immigration reduces welfare for the natives, whereas a policy that allows an annual inflow equal to 0.4 percent of the population increases welfare for all agents on the new balanced growth path (by 0.1 to 2.8 percent depending on the type of the agent). The key is the interaction between the social security system, taxes, and equilibrium prices: immigration reduces wages, but generates a rise in the rental rate of capital and in the number of workers per retiree, which allows for higher pension benefits and a lower consumption tax rate.

Matlab Codes for the computation of the transition path and steady state are available on request.

           Keywords: Equilibrium search, uncertain recall, deadlines, price posting, reservation prices

We ask how the ability to recall past prices affects the dynamics of search and price formation. In the model, buyers have limited time to purchase a good and face uncertainty regarding the availability of past price quotes in the future. Sellers cannot observe a potential buyer’s remaining time until deadline nor her quote history, and hence post prices that weigh the probability of sale versus the profit once sold. We find that, in contrast to conventional wisdom, reducing the consumer’s recall ability may actually improve his expected utility because it lowers the average expected price in the market and reduces the duration of search.

Online Appendix  for Computations in Mathematica (source file available upon request)

           Keywords: Coinsurance, search, moral hazard, price dispersion, consumer-driven health care

We examine a service market with two frictions: search is required to obtain price quotes, and insurance coverage for the service reduces household search effort. While fewer draws from a price distribution will raise a household's average price, the indirect effect of reduced search on price competition has a much greater impact, accounting for at least 89% of any increase in average expenditures. We consider how different insurance market structures will address this moral hazard problem. We find that a monopolist insurer offers full insurance, causing all service firms to charge an identical high price. A perfectly competitive insurance market typically results in partial insurance coverage and significant price dispersion. However, the competitive market neglects the indirect effects of search; a second-best contract that internalizes this externality would offer less insurance coverage.

Online Appendix for Computations in Mathematica (source file available upon request)

An earlier version includes our work on price dispersion in prescription drugs using the Medical Expenditure Panel Survey data.

        Keywords: Real Estate Investment Trusts (REITs), equilibrium search, hedonic price analysis, repeat-sales analysis, market                        efficiency, deadlines
We explore the questions of why Real Estate Investment Trusts (REITs) pay more for real estate than non- REIT buyers and by how much. First, we develop a search model where REITs optimally pay more for property because (1) they are willing, due to cost of capital advantages and, (2) they are occasionally rushed, due to external regulatory time constraints and internal incentives to deploy capital. Second, we test the model using a repeat-sales methodology that controls for unobserved property characteristics, and derive more plausible estimates of the REIT premium. Consistent with our model, we also find the REIT-buyer premium depends on the size of the REIT advantage, the rush to deploy, and the relative presence of REITs in the market.

            Keywords: Risk-sharing, altruism, within-family transfers, Health and Retirement Study

We report strong empirical support for the presence of a risk-sharing motive of within-family monetary ‡flows. A standard model of risk-sharing predicts that the share of current family income consumed by a child positively depends on that child’s lifetime contribution to the present value of the total family income. Therefore, sensitivity of transfer receipts to fl‡uctuations in recipient’s current income is smaller for children who contribute more. We test this distinguishing prediction of the risk-sharing model by exploiting the observed variation of parental transfers to siblings over 17 years in a longitudinal dataset derived from the Health
and Retirement Study.

           Keywords: Marriage market frictions, spouse quality, reservation quality over the life-cycle, non-stationary search

The average quality of spouse an individual marries varies significantly with age at marriage, peaking in the mid-twenties, then declining through the mid-forties, as does the hazard rate of marriage. Using a non-stationary sequential search model, we identify the  search frictions that generate these age-dependent marriage outcomes. We find that the arrival rate of suitors is the dominant friction,  responsible for 80% of hazard rate variation and 49% of spouse quality variation. Surprisingly, the distribution of suitor quality is a lower-order concern. Also, individual choice, rather than worsening frictions, is responsible for most of the decline in spouse quality.

           Keywords: Business cycles, stylized facts, potential output, output gap, time series filters, state-space models, Kalman filter

This paper compares the World Bank output gap estimates with estimates resulting from time-series filters as well as those of the IMF for eight different economies. In particular, we use the Hodrick-Prescott, Baxter-King, and Butterworth uni-variate filters and the bi-variate Kalman filter to compare alternative estimates of the output gap. We find that the uni-variate filters deliver relatively smoother measures of the output gap. On the other hand, because it uses additional information on the evolution of inflation in the economy, the bi-variate Kalman filter delivers estimates that are closer to the current World Bank estimates of the output gap, particularly for Brazil, China, and Russia. Furthermore, World Bank estimates are the most volatile and most persistent of all measures. 

           Keywords: Equilibrium search, deadline, reservation prices, private information

We analyze an equilibrium search model where the buyer seeks to purchase a good before a deadline. The buyer's reservation price rises continuously as the deadline approaches. A seller cannot observe a potential buyer's remaining time until deadline, and hence posts a price that weighs the probability of sale versus the profit once sold. The model has a unique equilibrium, which can take exactly one of two forms. In a late equilibrium, buyers initially forgo any purchases, only accepting some offers as the deadline draws near. In an early equilibrium, buyers are willing to accept some offers even as they enter the market. Equilibrium price dynamics are determined by the concentration of buyers near their deadline, as well as their urgency of completing the transaction before their deadline.


  • A Theory of Fire Sales (with B. Platt)
  • The Chinese Savings Rate