Department of Economics

Collective action problems emerge when individual incentives and group interests are misaligned, as in the case of climate change. Individuals involved in these problems are generally considered to have two options: contribute toward public solutions such as global warming mitigation or free ride. However, many collective action problems today involve a third option of investing in a private solution such as local adaptation. The availability of this third option can lead to a private solution trap whereby private solutions are adopted, collectively optimal public solutions are not provided, and existing inequalities are exacerbated. We investigated the private solution trap with a collective action game featuring private and public solutions, wealth inequality determined by luck or merit, and participants from 34 countries. We found that the joint existence of private solutions and wealth inequality had a consistent effect across countries: Participants given a higher endowment adopted private solutions almost twice as often as those given a lower endowment, regardless of whether it was determined by luck or merit, and contributed proportionally less toward public solutions. Wealth inequality increased in every country and those given lower endowments were often left unprotected as public solutions were not provided. Across countries, cultural values of hierarchy and harmony were associated with preferences for private and public solutions, respectively. We also identified two universal pathways toward public solution provision: early contributions and conditional cooperation. Our findings highlight the ubiquity of the private solution trap, its cultural underpinnings, and its potential consequences for global collective action problems.

This paper presents novel evidence of price discrimination, using prices of identical goods in 28 countries. I explain the observed phenomenon via non-homothetic preferences, in a model of trade with product differentiation and firm productivity heterogeneity. The model brings theory and data closer along a key dimension: it generates positively related prices of tradables and income, while preserving exporter behavior and trade flows of existing frameworks. It further captures observations that richer countries buy more per product and consume more diverse bundles. Quantitatively, the model suggests that variable markups account for 80% of the positive price-income relationship across 123 countries.

Firm-level stock returns exhibit comovement above that in fundamentals, and the gap tends to be higher in developing countries. We investigate whether correlated beliefs among sophisticated, but imperfectly informed, traders can account for the patterns of return correlations across countries. We take a unique approach by turning to direct data on market participants’ information - namely, real-time firm-level earnings forecasts made by equity market analysts. The correlations of firm-level forecasts exceed those of fundamentals and are strongly related to return correlations across countries. A calibrated information-based model demonstrates that the correlation of beliefs implied by analyst forecasts leads to return correlations broadly in line with the data, both in levels and across countries - the correlation between predicted and actual is 0.63. Our findings have implications for market-wide volatility - the model-implied correlations alone can explain 44% of the cross-section of aggregate volatility. The results are robust to controlling for a number of alternative factors put forth by the existing literature.

Quantitative results from a large class of structural gravity models of international trade depend critically on the elasticity of trade with respect to trade frictions. We develop a new simulated method of moments estimator to estimate this elasticity from disaggregate price and trade-flow data and we use it within Eaton and Kortum's (2002) Ricardian model. We apply our estimator to disaggregate price and trade-flow data for 123 countries in the year 2004. Our method yields a trade elasticity of roughly four, nearly fifty percent lower than Eaton and Kortum's (2002) approach. This difference doubles the welfare gains from international trade.

We provide a new characterization of both belief update and belief revision in terms of a Kripke-Lewis semantics. We consider frames consisting of a set of states, a Kripke belief relation and a Lewis selection function. Adding a valuation to a frame yields a model. Given a model and a state, we identify the initial belief set K with the set of formulas that are believed at that state and we identify either the updated belief set K⋄ϕ or the revised belief set K⁎ϕ (prompted by the input represented by formula ϕ) as the set of formulas that are the consequent of conditionals that (1) are believed at that state and (2) have ϕ as antecedent. We show that this class of models characterizes both the Katsuno-Mendelzon (KM) belief update functions and the Alchourrón, Gärdenfors and Makinson (AGM) belief revision functions, in the following sense: (1) each model gives rise to a partial belief function that can be completed into a full KM/AGM update/revision function, and (2) for every KM/AGM update/revision function there is a model whose associated belief function coincides with it. The difference between update and revision can be reduced to two semantic properties that appear in a stronger form in revision relative to update, thus confirming the finding by Peppas et al. (1996) [30] that, “for a fixed theory K, revising K is much the same as updating K”. It is argued that the proposed semantic characterization brings into question the common interpretation of belief revision and update as change in beliefs in response to new information.