- Dynamic Free Riding with Irreversible Investments
- February 2013
Joint with Marco Battaglini and Thomas Palfrey
Earlier version available as NBER Working Paper No. 17926
We study the Markov equilibria of a model of free riding in which n infinitely lived agents choose between private consumption and contributions to a durable public good. We compare economies with reversibility, where investments can be positive or negative to economies with irreversibility, where investments are non-negative and the public good can only be reduced by depreciation. With reversibility, there is a continuum of equilibrium steady states: the highest equilibrium steady state of g is increasing in n, and the lowest is decreasing. With irreversibility, the set of equilibrium steady states converges to a unique point as depreciation converges to zero: the highest steady state possible with reversibility. In both cases, the highest steady state converges to the efficient steady state as agents become increasingly patient.
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- The Dynamic Free Rider Problem: A Laboratory Study
- January 2013
Joint with Marco Battaglini and Thomas Palfrey
Most public goods are durable and have a significant dynamic component. In this paper, we report the results from a laboratory experiment designed explicitly to study the dynamics
of free riding behavior in the accumulation of a durable public good that provides a stream of discounted benefits over a potentially infinite horizon. This dynamic free-rider problem
differs from static ones in fundamental ways and implies several economically important predictions that are absent in static frameworks. We consider two cases: economies with
reversibility (RIE), where agents' voluntary contributions to the public good can be positive or negative; and economies with irreversibility (IIE), where contributions are non
negative. For both economies, we characterize the unique Markov perfect equilibrium. The evidence supports the main predictions from the theory: behavior is generally consistent
with stationary, forward-looking behavior; both in RIE and IIE the accumulation path is inefficiently slow and the public good under-provided; and RIE induces significantly higher
public good contributions than IIE. A number of interesting deviations from the theoretical predictions are observed: both in RIE and in IIE we have over-investment in the early rounds
of the game; in RIE over-investment is followed by periods in which negative contributions correct the stock, bringing it back to the predicted steady state; in IIE over-investment tends
to decline approaching zero. To test the Markovian assumption, we compare the predictions of the Markov equilibrium with the prediction of the most efficient subgame perfect equilibrium and propose a novel experimental methodology that relies on the comparison between the behavior in the dynamic game and the behavior in a one-period reduced-form version of
the dynamic game.
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- Dynamic Legislative Bargaining with Veto Power - October 2012
Many assemblies grant one or more of their members the right to block decisions even when a proposal has secured the necessary majority—a veto right. In this paper, I analyze the consequences of veto power in an infinitely repeated divide-the-dollar bargaining game with an endogenous status quo policy. The division of the dollar among legislators is unchanged until the committee agrees on a new allocation, which becomes the new status quo. In each period, a committee member is randomly recognized to propose a new division of the dollar. If a majority that includes the veto player prefers this proposal, it is implemented; otherwise, the dollar is divided according to the previous period's allocation. I show that a Markov equilibrium of this dynamic game exists, and that, irrespective of the discount factor of legislators, their recognition probabilities, and the initial division of the dollar, policy eventually gets arbitrarily close to full appropriation of the dollar by the veto player. Finally, I analyze some measures to reduce the excessive power of the veto player: reducing his or her recognition probability, expanding the committee by increasing the number of veto players, and changing the identity of the veto player in each bargaining round.
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- Quantal Response and Nonequilibrium Beliefs Explain Overbidding in Maximum-Value Auctions - January 2012
Joint with Colin Camerer and Thomas Palfrey, Caltech Social Science Working Paper no. 1349
We analyze data from the second-price maximum-value auction experiment reported in Ivanov, Levin and Niederle (2010) in order to investigate the extent to which the winner's curse can be explained by quantal response, in combination with different assumptions about equilibrium (QRE) or nonequilibrium beliefs (QCH or QCE). We find a close correspondence between the theoretical predictions of those models and experimental behavior, even in the presence of frequent (and extreme) overbidding. The basic pattern in the data consists of a combination of flat overbidding for low signals, and monotonically increasing bidding for higher signals. The logit QRE model fits this pattern reasonably well. Incorporating nonequilibrium beliefs into the QRE model, in the form of either levels of strategic sophistication or cursed beliefs, leads to an even better match with the data, as these models imply slightly higher bids. We also show that these imperfect best response models predict essentially no treatment effects across different versions of the game, consistent with the experimental findings. Overall, our study indicates that the winner curse phenomenon in this auction is plausibly attributable to limits on strategic thinking combined with imperfect best response.
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- Electoral Incentives and Economic Policy Across Political Regimes - November 2011
Joint with Vincenzo Galasso
Earlier version available as CEPR Working Paper no. 7959
This paper provides a direct test of the causal link from electoral rules to economic policy. Our theoretical model delivers unambigous predictions on the interaction between institutions and a time varying event, namely the unemployment rate in pivotal and non-pivotal districts. We use local level data on unemployment rate and political competition to obtain an empirical specification which matches our model. First, we test the effect of electoral incentives under majority rule, by analyzing the US House representatives voting records on the 2009 Emergency Unemployment Compensation Extension Act, which increased unemployment benefit coverage and generosity. Second, we exploit the time-varying dimension of our theoretical prediction to test the causal effect on panel data. We use a dataset with local information on electoral competitiveness and unemployment rates for 29 OECD countries in 1980-2001 and employ panel analysis on different measures of UB generosity. The empirical evidence strongly supports our theoretical predictions.
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- The Political Economy of the U.S. Auto Industry Crisis - May 2011
I examine how ideology, special interests - measured by campaign contributions from automotive manufacturers and unions - and constituent interests - measured by employment in domestic and foreign automotive plants at the congressional district level - may have influenced U.S. Congress voting behavior on the Auto Industry Financing and Restructuring Act of 2008 (AIFRA). House representatives from districts with high employment in domestic (foreign) automakers plants are more (less) likely to vote in favor of AIFRA, and the response is stronger in more competitive districts. Moreover, higher campaign contributions from the Big Three (GM, Chrysler, Ford) are associated with an increased likelihood of voting in favor of AIFRA. Retiring representatives are affected by constituent interests, but not by financial contributions, and representatives with the best college education vote on purely ideological grounds. In the Senate, voting behavior is more ideological, with weak response to constituent interests and negligible impact of campaign contributions.
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- The Effects of Redistricting on Distributive Outcomes - February 2010
Joint with Michiko Ueda
While the effects of redistricting on electoral outcomes have extensively been studied, little is known about its impact on policy outcomes. This paper argues that redistricting changes the incentives of legislators to serve their constituencies. This possibility arises because congressional redistricting in the United States typically involves violations of political boundaries. Examining the flow of federal assistance to counties before and after the 2000s rounds of redistricting, we find that when political subdivisions are split into multiple congressional districts, they receive less federal assistance than they did before the split. The result is robust to different specifications and holds even when we take into account other factors that can have an impact on the amount of transfers, such as the effect of being represented by non-incumbent House members, the presence of split-party county "delegations," and the distinction between electorally core and marginal areas.
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- Inefficient Delays in Dynamic Legislative Bargaining with Career Concerns, with Helios Herrera and Andrea Mattozzi
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- Quantal Response and Gambler's Fallacy Explain Suboptimal Behavior in Bargaining Experiments, with Jan Zapal
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- Dynamic Policy Competition, Ideological Polarization, and the Value of Veto Rights, with Jan Zapal
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- An Experimental Investigation of Strategic Voting in Multicandidate Elections, with Marina Agranov and Leeat Yariv
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- Team Size Effects in Dynamic Contribution Games, with Florian Ederer and George Georgiadis
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- Power Wars, with Helios Herrera and Massimo Morelli
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