Spatial units typically vary over many of their characteristics, introducing potential unobserved heterogeneity which invalidates commonly used homoskedasticity conditions. In the presence of unobserved heteroskedasticity, methods based on the quasi-likelihood function generally produce inconsistent estimates of both the spatial parameter and the coefficients of the exogenous regressors. A robust generalized method of moments estimator as well as a modified likelihood method have been proposed in the literature to address this issue. The present paper constructs an alternative indirect inference (II) approach which relies on a simple ordinary least squares procedure as its starting point. Heteroskedasticity is accommodated by utilizing a new version of continuous updating that is applied within the II procedure to take account of the parameterization of the variance–covariance matrix of the disturbances. Finite-sample performance of the new estimator is assessed in a Monte Carlo study. The approach is implemented in an empirical application to house price data in the Boston area, where it is found that spatial effects in house price determination are much more significant under robustification to heterogeneity in the equation errors.
We study the intergenerational effect of education policy on crime. We use Swedish administrative data that links outcomes across generations with crime records and we show that the comprehensive school reform, gradually implemented between 1949 and 1962, reduced conviction rates both for the generation directly affected by the reform and for their sons. The reduction in conviction rates occurred across many types of crime. Key mediators for this reduction in the child generation are an increase in education and a decline in crime amongst their fathers.
Fundraising campaigns draw support from a wide pool of contributors. Some contributors are interested in private rewards offered in exchange for contributions (buyers), whereas others are publicly-minded and value success (donors). Buyers face a coordination problem because of the positive externalities of campaign success. A leadership donor who strategically times contributions can promote coordination by dynamically signaling his valuation. The ability to signal increases the probability of success and benefits all participants relative to the donor valuation being known. We validate our modeling assumptions and theoretical predictions using Kickstarter data.
We compare contrarian to conformist advice, a contrarian expert being one whose preference bias is against the decision-maker’s prior optimal decision. Optimality of an expert depends on characteristics of prior information and learning. If either the expert is fully informed or fine information can be acquired cheaply, then for symmetric distributions F (of the state), a conformist (contrarian) is superior if F is single peaked bimodal. If only coarse information can be acquired, then a contrarian acquires more on average and hence is superior. If information is verifiable, a contrarian has less incentive to hide unfavorable evidence and again is superior.
Addressing public health externalities often requires community-level collective action. Due to social norms, each person’s sanitation investment decisions may depend on the decisions of neighbors. We report on a cluster randomized controlled trial conducted with 19,000 households in rural Bangladesh where we grouped neighboring households and introduced (either financial or social recognition) rewards with a joint liability component for the group, or asked each group member to make a private or public pledge to maintain a hygienic latrine. The group financial reward has the strongest impact in the short term (3 months), inducing a 7.5–12.5 percentage point increase in hygienic latrine ownership, but this effect dissipates in the medium term (15 months). In contrast, the public commitment induced a 4.2–6.3 percentage point increase in hygienic latrine ownership in the short term, but this effect persists in the medium term. Non-financial social recognition or a private pledge has no detectable effect on sanitation investments.
Limit distribution theory in the econometric literature for functional coefficient cointegrating regression is incorrect in important ways, influencing rates of convergence, distributional properties, and practical work. The correct limit theory reveals that components from both bias and variance terms contribute to variability in the asymptotics. The errors in the literature arise because random variability in the bias term has been neglected in earlier research. In stationary regression this random variability is of smaller order and can be ignored in asymptotic analysis but not without consequences for finite sample performance. Implications of the findings for rate efficient estimation are discussed. Simulations in the Online Supplement provide further evidence supporting the new limit theory in nonstationary functional coefficient regressions.
We consider a nonlinear pricing environment with private information. We provide profit guarantees (and associated mechanisms) that the seller can achieve across all possible distributions of willingness to pay of the buyers. With a constant elasticity cost function, constant markup pricing provides the optimal revenue guarantee across all possible distributions of willingness to pay and the lower bound is attained under a Pareto distribution. We characterize how profits and consumer surplus vary with the distribution of values and show that Pareto distributions are extremal. We also provide a revenue guarantee for general cost functions. We establish equivalent results for optimal procurement policies that support maximal surplus guarantees for the buyer given all possible cost distributions of the sellers.
We analyze the consequences of noisy information aggregation for investment. Market imperfections create endogenous rents that cause overinvestment in upside risks and underinvestment in downside risks. In partial equilibrium, these inefficiencies are particularly severe if upside risks are coupled with easy scalability of investment. In general equilibrium, the shareholders' collective attempts to boost value of individual rms leads to a novel externality operating through price that amplifies investment distortions with downside risks but o sets distortions with upside risks.
We quantify the distortionary effects of nexus tax laws on Amazon’s distribution net- work investments between 1999 and 2018. We highlight the role of two features of the expansion of Amazon’s network: densification of the network of distribution facilities and vertical integration into package sortation. Densification results in a reduction in the cost of shipping orders, but comes at the expense of higher facility operating costs in more expensive areas and lower scale economies of processing shipments. Nexus laws furthermore generate additional sales tax liabilities as the network grows. Combining data on household spending across online and offline retailers with detailed data on Amazon’s distribution network, we quantify these trade-offs through a static model of demand and a dynamic model of investment. Our results suggest that Amazon’s expansion led to significant shipping cost savings and facilitated the realization of aggregate economies of scale. We find that abolishing nexus tax laws in favor of a non-discriminatory tax policy would induce the company to decentralize its network, lowering its shipping costs. Non-discriminatory taxation would also entail lower revenue, however, as tax-inclusive prices would rise, resulting in a fall in profit overall. This drop and the decline in consumer welfare from higher taxes together fall short of the increases in tax revenue and rival profit, suggesting that the abolishment of nexus laws would lead to an increase in total welfare.
We characterize the extreme points of first-order stochastic dominance (FOSD) intervals and show how these intervals are at the heart of many topics in economics. Using knowledge of these extreme points, we characterize the distributions of posterior quantiles under a given prior, leading to an analogue of a classical result regarding the distribution of posterior means. We apply this analogue to various economic subjects, including the psychology of judgement, political economy, and Bayesian persuasion. In addition, FOSD intervals provide a common structure to security design. We use the extreme points to unify and generalize seminal results in that literature when either adverse selection or moral hazard pertains.