PUBLICATIONS
Abstract: This paper studies the implementation problem of a mechanism designer with ambiguity averse agents. The mechanism designer, desiring to implement a choice correspondence, can create ambiguity for agents by committing to multiple allocation rules and transfer schemes without revealing which one to use. By extending the cyclical monotonicity condition from choice functions to choice correspondences, we show that the condition can fully characterize implementable choice correspondences. We then study the implementability of choice correspondences in supermodular environments. As an application, we consider a mechanism designer who wants to allocate one object to one of her most desired agents and show that she can strictly benefit from concealing the tie-breaking rules. An intuitive and computationally tractable condition is provided to characterize when the mechanism designer's preference induces an implementable choice correspondence.
A Robust Reference-dependent Model for Rational Speculative Bubbles (with Jie Zheng) Journal of Economic Behavior & Organization, 137: 232-258, 2017.
Abstract: We present a robust model of speculative bubbles by introducing loss-averse reference-dependent preferences by Kőszegi and Rabin (2006) into the framework of Allen et al. (1993), where in equilibrium, asymmetrically-informed rational investors buy overvalued assets, hoping to sell them to less informed agents before the crash occurs. With reference-dependent preferences, the asset price may not necessarily be observable to agents when there is no trade. However, this is never the case with classical preferences, as shown in the paper. Incorporating the classical model as a special case, we generalize the notion of bubbles to allow for the analysis in the case of a silent market with unobservable prices, and our model is able to generate strong bubbles robust to moderate perturbations in parameters without the need for stronger conditions as suggested in previous literature. Assuming for simplicity that dividends can only take on two values, we construct an example of a robust reference-dependent bubble which is not robust in the classical setting, and we also show that the positive results regarding the limit of the bubble size and bubble frequency in the classical setting are preserved in our framework. Our main results and economic implications remain valid in more general settings.
WORKING PAPERS
Extended abstract appears in EC'21
Abstract: In this paper, we study two heuristics, narrow bracketing and correlation neglect, that decision makers adopt to simplify the evaluation of risk from multiple sources and axiomatize them as behavioral deviations from the expected utility benchmark by relaxing the independence axiom. Our axiomatization reveals decision rules that (i) allow for narrow bracketing or correlation neglect or both and (ii) allow for different levels of narrow bracketing. We interpret the different sources as different streams of income to explain experimental evidence on violations of first order stochastic dominance. We propose a rationality ranking of decision makers based on their tendency to violate first order stochastic dominance and rank our models accordingly. Then, we interpret one source as background risk and show that narrow bracketing can explain risk aversion over small gambles. Finally, we interpret the different sources as consumption in different periods to explore the implications of narrow bracketing and correlation neglect on the optimal saving behavior. We also show that an Epstein-Zin type utility function can emerge because of narrow bracketing. This new utility function achieves separation between time and risk preferences without inducing an implausibly high early resolution premium as observed by Epstein, Farhi, and Strzalecki (2014).
Abstract: In this paper, we study two heuristics, narrow bracketing and correlation neglect, that decision makers adopt to simplify the evaluation of risk from multiple sources and axiomatize them as behavioral deviations from the expected utility benchmark by relaxing the independence axiom. Our axiomatization reveals decision rules that (i) allow for narrow bracketing or correlation neglect or both and (ii) allow for different levels of narrow bracketing. We interpret the different sources as different streams of income to explain experimental evidence on violations of first order stochastic dominance. We propose a rationality ranking of decision makers based on their tendency to violate first order stochastic dominance and rank our models accordingly. Then, we interpret one source as background risk and show that narrow bracketing can explain risk aversion over small gambles. Finally, we interpret the different sources as consumption in different periods to explore the implications of narrow bracketing and correlation neglect on the optimal saving behavior. We also show that an Epstein-Zin type utility function can emerge because of narrow bracketing. This new utility function achieves separation between time and risk preferences without inducing an implausibly high early resolution premium as observed by Epstein, Farhi, and Strzalecki (2014).
Abstract: We provide conditions under which market mechanisms can be used to allocate indivisible goods. We consider economies with limited or no transfers and stochastic consumption and show the existence and efficiency of Walrasian equilibria in these settings. We demonstrate that constraints on minimum and maximum levels of individual consumption and aggregate constraints of the kind that are relevant in combinatorial allocation problems can be accommodated by either incorporating these constraints into individual preferences or by incorporating a suitable production technology.
(Previous title: Market Design and Walrasian Equilibrium)
(Previous title: Market Design and Walrasian Equilibrium)
Abstract: We study asymptotic learning when the decision-maker is ambiguous about the precision of her information sources. She aims to estimate a state and evaluates outcomes according to the worst-case scenario. Under prior-by-prior updating, ambiguity regarding information sources induces ambiguity about the state. We show this induced ambiguity does not vanish even as the number of information sources grows indefinitely, and characterize the limit set of posteriors. The decision-maker's asymptotic estimate of the state is generically incorrect. We consider several applications. Among them we show that a small amount of ambiguity can exacerbate the effect of model misspecification on learning, and analyze a setting in which the decision-maker learns from observing others' actions.
(Previous title: Information Aggregation under Ambiguity)
(Previous title: Information Aggregation under Ambiguity)
Abstract: We consider a decision maker who knows her set of possible future preferences but cannot form a probabilistic belief over them. When choosing over a set of menus, the DM is optimistic in the sense that she considers all possible future choices under different future preferences in each menu and chooses the menu that contains the best future choice under her current preference. We characterize this menu preference, discuss the uniqueness of our representation and propose a comparative measure of optimism. We apply our model to two behavioral biases: naivete about present bias and the disjunction effect.
(Previous title: Optimistic Dynamic Inconsistency)
(Previous title: Optimistic Dynamic Inconsistency)