Economics
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Item Essay on Contract Structure in Principal-Agent Problems with Behavioral Models(2018) Lin, Hong; Filiz-Ozbay, Emel; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)Designing employment contracts in a principal-agent relationship is a key problem in the modern firm theory. This dissertation investigates this problem from three different angles, (1) the employment contracts in the labor market with procrastinating workers; (2) the behavior of members and reciprocal leaders in group competitions, where leaders can reward members discretionarily; (3) optimal employment contracts when tasks are endogenously designed. For the chapter about the employment contracts as a commitment device, I build an adverse selection model in a labor market of one firm against many workers, where the workers, if self-employed, procrastinate due to their own quasi-hyperbolic discounting. In the equilibrium, the model shows that workers with the least procrastination are self-employed and workers with the most procrastination are part-time employees in a separating equilibrium where the workers' hiring contracts differ by their quasi-hyperbolic discounting. In between, there exist specific ranges of quasi-hyperbolic discounting factors, in each of which the workers sign the same contract in a pooling equilibrium. This model leads to a “position hierarchy” within the firm as well as separation of paid-employment and self-employment in the labor market. For the chapter about the behavior of reciprocal leaders and members in group competitions, I model the model equilibrium when the leaders are reciprocal and show the existence of the pure strategy equilibrium. A laboratory group all-pay auctions was run to test for the model predictions.Item Essays on Auction Design(2018) Yan, Haomin; Ausubel, Lawrence M; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)This dissertation studies the design of auction markets where bidders are uncertain of their own values at the time of bidding. A bidder's value may depend on other bidders' private information, on total quantity of items allocated in the auction, or on the auctioneer's private information. Chapter 1 provides a brief introduction to auction theory and summarizes the main contribution of each following chapter. Chapter 2 of this dissertation extends the theoretical study of position auctions to an interdependent values model in which each bidder's value depends on its opponents' information as well as its own information. I characterize the equilibria of three standard position auctions under this information structure, including the Generalized Second Price (GSP) auctions, Vickrey-Clarke-Groves (VCG) auctions, and the Generalized English Auctions (GEA). I first show that both GSP and VCG auctions are neither efficient nor optimal under interdependent values. Then I propose a modification of these two auctions by allowing bidders to condition their bids on positions to implement efficiency. I show that the modified auctions proposed in this chapter are not only efficient, but also maximize the search engine's revenue. While the uncertainty of each bidder about its own value comes from the presence of common component in bidders’ ex-post values in an interdependent values model, bidders can be uncertain about their values when their values depend on the entire allocation of the auction and when their values depend on the auctioneer's private information. Chapter 3 of this dissertation studies the design of efficient auctions and optimal auctions in a license auction market where bidders care about the total quantity of items allocated in the auction. I show that the standard uniform-price auction and the ascending clock auction are inefficient when the total supply needs to be endogenously determined within the auction. Then I construct a multi-dimensional uniform-price auction and a Walrasian clock auction that can implement efficiency in a dominant strategy equilibrium under surplus-maximizing reserve prices and achieve optimal revenue under revenue-maximizing reserve prices. Chapter 4 of this dissertation analyzes an auctioneer's optimal information provision strategy in a procurement auction in which the auctioneer has private preference over bidders' non-price characteristics and bidders invest in cost-reducing investments before entering the auction. I show that providing more information about the auctioneer's valuation over bidders' non-price characteristics encourages those favored bidders to invest more and expand the distribution of values in the auction. Concealment is the optimal information provision policy when there are two suppliers.Item Essays in Market Design(2016) Lopez Carbajal, Hector Arturo; Cramton, Peter; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)In this dissertation, I study three problems in market design: the allocation of resources to schools using deferred acceptance algorithms, the demand reduction of employees on centralized labor markets, and the alleviation of traffic congestion. I show how institutional and behavioral considerations specific to each problem can alleviate several practical limitations faced by current solutions. For the case of traffic congestion, I show experimentally that the proposed solution is effective. In Chapter 1, I investigate how school districts could assign resources to schools when it is desirable to provide stable assignments. An assignment is stable if there is no student currently assigned to a school that would prefer to be assigned to a different school that would admit him if it had the resources. Current assignment algorithms assume resources are fixed. I show how simple modifications to these algorithms produce stable allocations of resources and students to schools. In Chapter 2, I show how the negotiation of salaries within centralized labor markets using deferred acceptance algorithms eliminates the incentives of the hiring firms to strategically reduce their demand. It is well-known that it is impossible to eliminate these incentives for the hiring firms in markets without negotiation of salaries. Chapter 3 investigates how to achieve an efficient distribution of traffic congestion on a road network. Traffic congestion is the product of an externality: drivers do not consider the cost they impose on other drivers by entering a road. In theory, Pigouvian prices would solve the problem. In practice, however, these prices face two important limitations: i) the information required to calculate these prices is unavailable to policy makers and ii) these prices would effectively be new taxes that would transfer resources from the public to the government. I show how to construct congestion prices that retrieve the required information from the drivers and do not transfer resources to the government. I circumvent the limitations of Pigouvian prices by assuming that individuals make some mistakes when selecting routes and have a tendency towards truth-telling. Both assumptions are very robust observations in experimental economics.Item Top Income Inequality, Aggregate Saving and the Gains from Trade(2015) Tang, Lixin; Limao, Nuno; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)Canonical studies of trade liberalization focus on its effects on aggregate income and on the distribution of income. The interaction between these two effects of trade liberalization has been less studied. In this dissertation, I study this interaction. More precisely, I study the relationship between international trade and income inequality, with a focus on the implications for aggregate saving and the gains from trade. I argue that accounting for the effects of international trade on income inequality among entrepreneurs can imply higher gains from trade for workers. In the second chapter, I construct a dynamic model of international trade with incomplete markets. In the model, entrepreneurs face uninsurable idiosyncratic productivity risk, and thus save. Since the most productive entrepreneurs have the highest saving rate and are the ones that export, a reduction in trade costs increases their share of total profits and their savings, which leads to a large increase in the aggregate supply of capital and increased capital accumulation. I calibrate the model using US data and examine the effects of international trade on aggregate output, the consumption of workers, and the consumption of entrepreneurs with heterogeneous productivity. In the model, international trade increases aggregate output by 2.5% and the wage of workers by 3.4%. On the other hand, while the aggregate consumption of entrepreneurs is unchanged by international trade, the increase in inequality of profits among entrepreneurs implies that the certainty-equivalent consumption of a typical entrepreneur actually decreases by 4.0%. Capital accumulation plays an important role in the model, accounting for 51.9% of the output gains from trade. To isolate the effects of the proposed mechanism, I construct a benchmark model with complete markets, in which firms with heterogeneous productivity are owned by a single entrepreneur. In this complete markets benchmark, the increase in aggregate output due to international trade is 1.8% while the increase in the wage of workers from trade is 2.7%. Therefore, the novel mechanism in my model increases the wage gains for workers by 25.9%, and the gains in aggregate output by 38.9%, compared to the complete markets benchmark. In the third chapter, I test the key predictions of the model using country-level data. Using fixed-effects (FE) regressions in a large panel of countries, I find a significant and positive correlation between trade openness and the aggregate saving rate. I find a much weaker relationship between trade openness and the investment rate. Furthermore, I show that greater trade openness has a stronger effect on the aggregate saving rate in a country where the initial top 10% share of total income (before any changes in trade openness) is higher. This is in line with my model where the increase in the aggregate saving is driven by top income earners. Additionally, I build on the gravity-based instrumental-variable (IV) approach pioneered by Frankel and Romer (1999) and extend it to a panel setting. I find a larger effect of trade openness on the aggregate saving rate in the fixed-effects panel regressions with IV than without IV. The results provide strong evidence that a supply-side channel of increased capital accumulation is operative following an increase in trade openness. In the fourth chapter, I study the relationship between the household saving rate and openness in China through the lens of the framework outlined in the second chapter. I show that there has been a large increase in top income shares both among entrepreneurs and workers over the past 30 years in China. Additionally, there is a very significant and positive correlation between top income shares and the household saving rate across Chinese counties. Using the setting of the 1992 liberalization episode, I find that provinces with a greater increase in openness experienced a larger increase in the household saving rate during the period. Taken together, the evidence is supportive of the hypothesis that greater openness increases the household saving rate in China, by increasing the share of total income received by the highest-income households who also have the highest saving rate.Item MODELING INTERNATIONAL TRADE UNDER THE THREAT OF TARIFF HIKES IN GENERAL EQUILIBRIUM(2014) Deason, Lauren; Limao, Nuno; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)There is mounting evidence that an important element in explaining the impact of trade policy on trade patterns and the behavior of firms is the role of policy uncertainty in shaping this behavior. In a setup where firms must incur a fixed cost to export, uncertainty over future profits will decrease the incentive of firms to enter into the export market. While uncertainty over any number of factors playing into export decisions (such as demand, productivity, exchange rate, etc.) may affect exporters' incentives to export, I focus here on trade policy uncertainty, specifically tariff rates, as this allows me to quantify the impact of one particular type of policy uncertainty, and can provide insight into the effects of broader policy uncertainty. Unlike most other forms of uncertainty, it is something that can be measured empirically using tariff rates. Further, understanding the effects of uncertainty over future tariff levels is important in its own right, as there is debate over whether trade agreements that do not substantially change applied tariff rates are of any value to exporters. My dissertation will address this question, arguing that there is indeed additional value to some trade agreements beyond that simply obtained by liberalizing tariffs: namely, that there is value in reducing uncertainty over future trade policy. In order to try to quantify this additional value, I develop a general equilibrium framework consistent with the types of Computable General Equilibrium (CGE) models that are often used to evaluate the potential value of proposed trade agreements, where my model takes into account this additional uncertainty-reducing benefit of entering into a trade agreement. Chapter 1 introduces the topic and discusses broader implications of studying tariff uncertainty. In order to motivate the inclusion of tariff uncertainty in a general equilibrium framework, I begin in Chapter 2 by presenting empirical evidence, based on a partial equilibrium framework, of a negative impact of future tariff uncertainty on exports. In this chapter, I extend previous empirical analysis of tariff uncertainty (via tariff bindings) to a large set of countries and find a negative significant effect of policy uncertainty arising from binding overhang, and that this effect is heterogeneous across importing countries. On average, I find that the ad valorem tariff equivalent imposed by uncertainty arising from binding overhang for the set of countries in my sample is 8.2%. In Chapter 3, I extend the theoretical analysis of tariff uncertainty in general equilibrium to a setting with endogenous entry not only into exporting but also into production with multiple countries and sectors. Based on this model, I obtain numerical results for the impacts of an (exogenous) threat of reverting to a permanent non-cooperative tariff level. In a symmetric two-country setting, the effects are a 4.55% reduction in trade and a 0.02% reduction in welfare. I am further able to derive the effect of a tariff threat on third-countries and outside sectors not directly targeted, and find these effects to be small. In Chapter 4, I use the model developed in Chapter [chap:DSGE] to analyze the trade and welfare impacts of a particular agreement: the Chile-US Free Trade Agreement (FTA). This extends and complements econometric analysis of the impact of uncertainty in the context of other FTAs. I find that a model without the tariff threat effect predicts that Chilean exports to the United States should increase by 5.78% and number of exporting firms should increase by 2.80% as a result of the FTA, while the model with the effect of a tariff threat predicts that exports should increase by 6.98% and the number of exporters by 7.43%.Item Essays on Auction Theory(2012) Burkett, Justin Ellis; Ausubel, Lawrence M; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)This dissertation studies two features of high-value auctions that are not explicitly captured by the standard models in the auction theory literature. The first is that bidders in auctions for valuable assets sometimes have binding budget constraints. Standard models of auctions assume that bidders can submit any bid up to their valuation (or willingness to pay). An existing literature has developed models where bidders may face binding budget constraints and from these models has concluded that the presence of budget constraints has important implications for the relative performance of different auction formats, and as a consequence argues that the presence of budget constraints should be an important factor used in choosing an auction format. Chapters 2 and 3 develop and study a model of budget constraints where the budget constraint is chosen explicitly in the model in response to a principal-agent problem between each bidder and a corresponding principal. In previous literature, the budget constraint is assumed to be given by some exogenous procedure, and hence is not affected by changes in the auction rules. The model presented here, however, allows the choice of budget constraint to depend on the auction rules, and the main result of Chapter 2 shows that allowing for this effect leads to outcomes that closely resemble the classic results from the auction literature without budget constraints. Chapter 3 investigates the theoretical predictions of Chapter 2 in an experiment involving undergraduate students at the University of Maryland. The experiment is designed to evaluate the decisions made by the subjects acting as the person responsible for deciding on a budget for the bidder. We perform treatments where the bidding behavior is simulated by computerized agents and ones where half the subjects in each session play the role of the bidder. Our results indicate that the subjects take the auction rules into account when deciding on their respective bidder's budget, and the direction of the response in the data agrees with the theoretical predictions. Chapter 4 studies a separate feature of high-value auctions that is not captured by the standard auction models. That is, the bidders in the auction may have valuations for the auctioned item that depend on the the identities of the other winning bidders. If the auction determines the structure of the market the bidders will compete in after the auction, the bidders' values for the items will be affected by who participates in that market. The typical notion of efficiency in the auction literature corresponds to maximization of producer surplus in this model, but the auctioneer may also be concerned with total surplus in this environment. The main results show that these two notions of efficiency do not agree in this model, and that a sequential auction favors maximization of producer surplus, while a sealed-bid auction can favor maximization of total surplus. The key distinction between the two is that the sequential auction is assumed to reveal the identity of early winners to the later winners, while the sealed-bid auction reveals no information to the participants until the auction concludes.Item Borrowing Constraints and the Business Cycle in Emerging Markets(2012) Komatsuzaki, Takuji; Korinek, Anton; Vegh, Carlos A; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)The global financial crisis of 2008/09 has reminded both policymakers and academics of the powerful effect of sudden changes in the direction of capital flows. A tightening of borrowing constraints was an important contributor to these sudden changes and forced many borrowers into rapid deleveraging. Based on their experience in the 1990s, a number of emerging market economies had prepared for such shocks by accumulating foreign reserves. This dissertation analyzes the effects of such credit shocks and the optimal precautionary response in emerging economies. Chapter 1 is a brief introduction that motivates the topic and overviews main results of the subsequent chapters. Chapter 2 takes the view of a small open economy. It develops a formal model of why emerging markets simultaneously hold external debt and external reserves. Reserves may be held simultaneously with debt even when their return is lower because they are valuable for self-insurance. Two key assumptions generate this finding. First, the economy may experience a sudden stop in its access to new foreign debt issuance. Second, debt has longer maturity than reserves. When a sudden stop occurs, the maturity difference allows the agent to repay the debt gradually, giving a liquidity advantage to reserves. I numerically show that the model economy optimally chooses simultaneous holding for most periods. The model also generates contrasting responses of reserves to the sudden stop shock and the endowment shock, consistent with the data. Chapter 3 takes the view of a firm in an emerging economy. It investigates the relationship between credit shocks and firm financing patterns. After empirically establishing that banking crises are followed by stagnation in credit and that investment is financed less by debt and more by internal fund or equity at the time of banking crises, I develop a dynamic model of the firm consistent with this finding. In the model, the firm increases its reliance on retained earnings or equity issuance in response to a negative credit shock. In the long-run distribution, the introduction of a credit shock leads to a lower average debt and higher volatility in equity payout, debt, and capital. An extended period of negative credit shocks leads to a creditless recovery where investment is financed not by debt but by retained earnings or equity issuance.Item Essays on Matching and Auction Theory(2011) Johnson, Terence R.; Ausubel, Lawrence; Vincent, Daniel; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)This dissertation uses mechanism design theory to show how a matchmaker should design two-sided matching markets when agents are privately informed about their qualities or characteristics as a partner and can make monetary payments. Chapter Two uses a mechanism design approach to derive sufficient conditions for assortative matching to be profit-maximizing for the matchmaker or maximize social welfare, and then shows how to implement the optimal match and payments through two-sided position auctions as a Bayesian Nash equilibrium. Chapter Three broadens these results by showing how the implementation concept can be relaxed to ex post equilibrium through the use of market designs similar to the Vickrey-Clarke-Groves mechanism, as well as implemented through the use of dynamic games. Chapter Four shows how the ideas used in Chapters Two and Three can be extended to a multi-dimensional type framework, moving away from the supermodular paradigm that is the workhorse of models of matching with incomplete information.Item Essays in Labor and Political Economics(2011) Tuzemen, Didem; Haltiwanger, John; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)This dissertation consists of three chapters. The first chapter provides an overview of the dissertation by summarizing the two papers presented in the following chapters. The paper in the second chapter contributes to the labor-macro literature. More specifically, I develop a general equilibrium model with labor market search and matching frictions, endogenous labor force participation and on-the-job search, which can replicate the labor market dynamics observed in the U.S. data. Most existing real business cycle models with labor market frictions assume that all agents in the economy are part of the labor force, therefore these models allow for only two possible labor market states: employment and unemployment. This is a highly problematic and unrealistic assumption. Studies that extend the basic model by incorporating being out of the labor force as a third state, through allowing for a work-home production (or leisure) decision, find that the model generates counterfactual business cycle statistics: labor force participation is very volatile, while unemployment is weakly procyclical or acyclical, and has a high positive correlation with vacancies. The failure of this three-state model to replicate the labor market dynamics observed in the U.S. data is mainly due to the excessive responsiveness of labor force participation to labor market conditions determined by aggregate shocks to productivity. In order to dampen the movements along the labor market participation margin in the simple three-state model, I introduce an on-the-job search mechanism that serves as a second margin along which the household's labor market adjustments can take place. The proposed model successfully generates countercyclical unemployment and the Beveridge Curve relationship between unemployment and vacancies. Additionally, the business cycle statistics reproduced by the modified model are quantitatively more in line with their empirical counterparts. The third chapter presents a joint study with Mauricio Cardenas. We analyze the determinants of the government's decision to invest in fiscal state capacity, which refers to the state's power to raise tax revenue. Using a model we highlight some political and economic dimensions of this decision, and conclude that political stability, democracy, income inequality, as well as the valuation of public goods relative to private goods, are all important variables to consider. We then test the main predictions of the model using cross-country data and find that fiscal state capacity is higher in more stable and equal societies, both in economic and political terms, and in countries where the chances of fighting an external war are high, which is a proxy for the value of public goods.Item ESSAYS ON DEMOGRAPHIC ISSUES IN CHINA(2011) Li, Xue; Rust, John; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)Chapter 1: Why Is the Sex Ratio Unbalanced in China? The Roles of the One-Child Policy, Underdeveloped Social Insurance, and Parental Expectations The sex ratio imbalance in China has reached such an alarming level that, by 2020, men of marriageable age are estimated to outnumber women by 24 million. Using a calibrated life-cycle model, this paper examines the rising sex ratio through three linked but different perspectives: one-child policy, social insurance program, and parental expectation. In a dynamic fertility choice framework, a couple's decision on sex selection is motivated by better returns from investing in a son than in a daughter. I also consider the largely overlooked effect of expected sex imbalance on current fertility choices. The benchmark calibration demonstrates three results. First, moving to a one-and-half-child policy (second allowed if the first is a girl) would dramatically decrease the sex ratio at birth from 125 to 106. Second, if parents are adaptive and take the "can-not-marry" risk into consideration, then the sex ratio under the one-child policy will drop from 125 to 110, while the change in population growth is negligible. Third, when social insurance coverage is universal, the sex ratio only changes by a small amount if parents do not modify their expectation on children's transfer. I also investigate the equilibrium sex ratio when couples are fully rational and forward-looking. If more couples behave in such a manner, the sex ratio would fall; this suggests that publicity and education could help alleviate the sex imbalance problem in China. In a similar spirit, I consider the issue of endogenizing children's transfer to parents. In an infinite-horizon dynastic model, the equilibrium level of transfer is positively related to the attention parents place on grandparents' welfare. Finally, I show that if social insurance could change the social attitude on expected child transfer, then it has the potential to significantly reduce the sex ratio. Chapter 2: Risky Child Investment, Fertility and Social Insurance in China This paper tries to explain the decline in total fertility rate (TFR) in China by investigating the quantitative effect of social insurance on peoples' fertility choice in an environment where investment in children is risky. The price and income effects of social insurance are heterogeneous depending on peoples' position in the income distribution: low-income people tend to raise more children due to the reinforcing income and price effects, whereas for rich families the income effect dominates the price effect so that their fertility declines in the presence of the social insurance program. Our results based on Chinese economy do not support the hypothesis that increasing social insurance tax rate has a negative impact on fertility rate, as argued in Boldrin, Nardi, and Jones (2005). Through decomposing calibration results under hypothetical policy scenarios and simulating TFRs for various parameter values, we show that liquidity constraints created by a public pension program plays a significant role in reducing fertility rate. Factors related to the rate of return on child investment, such as a slowing economic growth, a rise in the cost of childbearing, and potential social attitude changes such as expectations of lower transfers, also contribute to the long-term declining trend in fertility observed in the data.