We introduce and characterize a recursive model of dynamic choice that accommodates naivete about present bias. While recursive representations are important for tractable analysis of in nite-horizon problems, the commonly-used Strotz model of time inconsistency presents well-known technical difficulties in extensions to dynamic environments. Our model incorporates costly self-control in the sense of Gul and Pesendorfer (2001) to overcome these hurdles. The important novel condition is an axiom for naivete. We first introduce appropriate definitions of absolute and comparative naivete for a simple two-period model, and explore their implications for the costly self-control model. We then develop suitable extensions of these definitions to in nite-horizon environments. Incorporating the definition of absolute naivete as an axiom, we characterize a recursive representation of naive quasi-hyperbolic discounting with self-control for an individual who is jointly overoptimistic about her present-bias factor and her ability to resist instant gratification. We also study the implications of our proposed comparison of naivete for this recursive representation and uncover new restrictions on the present-bias and self-control parameters that characterize comparative naivete. Finally, we discuss the subtleties that preclude more general notions of naivete, and illuminate the impossibility of a definition that simultaneously accommodates both random choice and costly self-control.
Airfares fluctuate over time due to both demand shocks and intertemporal variation in willingness to pay. I develop and estimate a model of dynamic airline pricing accounting for both forces with new flight-level data. With the model estimates, I disentangle key interactions between the arrival pattern of consumer types and scarcity of remaining capacity due to stochastic demand. I show that dynamic airline pricing expands output by lowering fares charged to early-arriving, price-sensitive customers. It also ensures seats for late-arriving travelers with the highest willingness to pay (e.g. business travelers) who are then charged high prices. I find that dynamic airline pricing increases total welfare relative to a more restrictive pricing regime. Finally, I show that abstracting from stochastic demand results in incorrect inferences regarding the extent to which airlines utilize intertemporal price discrimination.
This paper uses world running records by age to estimate a biological frontier of decline rates. Two models are compared: a linear/quadratic (LQ) model and a non-parametric model. Two estimation methods are used: 1) minimizing the squared difference between the observed records and the modeled biological frontier and 2) using extreme value theory to estimate the biological frontier that maximizes the probability of observing the existing world records by age. The results support the LQ model and suggest there is linear percentage decline up to the late 70’s and quadratic decline after that. The extreme value estimates suggest that the true biological frontier is on average about 8 percent below the existing world records. The estimated age factors are also compared to the World Master Athletics (WMA) age factors. The two sets of age factors are close except at the old ages, where the WMA factors are noticeably smaller. Also, the WMA age factors do not meet an important biological constraint.
Injury rates in twelve U.S. men’s college sports and five U.S. boys’ high school sports are examined in this paper. The sports are categorized as “contact” or “non-contact,” and differences in injury rates between the two are examined. Injury rates in the contact sports are considerably higher than those in the non-contact sports and they are on average more severe. Estimates are presented of the injury savings that would result if the contact sports were changed to have injury rates similar to those in the non-contact sports. The estimated college savings are 49,600 fewer injuries per year and 6,000 fewer years lost-to-injury per year. The estimated high school savings are 601,900 fewer injuries per year and 96,000 fewer years lost-to-injury per year. For concussions the savings are 6,900 per year for college and 161,400 per year for high school. The estimated dollar value (in 2015 dollars) of the total injury savings is between $446 million and $1.5 billion per year for college and between $5.4 billion and $19.2 billion per year for high school. Section 11 speculates on how the contact sports might be changed to have their injury rates be similar to those in the non-contact sports.
We provide an introduction into the recent developments of dynamic mechanism design with a primary focus on the quasilinear case. First, we describe socially optimal (or efficient) dynamic mechanisms. These mechanisms extend the well known Vickrey-Clark-Groves and D’Aspremont-Gérard-Varet mechanisms to a dynamic environment. Second, we discuss results on revenue optimal mechanism. We cover models of sequential screening and revenue maximizing auctions with dynamically changing bidder types. We also discuss models of information management where the mechanism designer can control (at least partially) the stochastic process governing the agent’s types. Third, we consider models with changing populations of agents over time. This allows us to address new issues relating to the properties of payment rules. After discussing related models with risk-averse agents, limited liability, and different performance criteria for the mechanisms, we conclude by discussing a number of open questions and challenges that remain for the theory of dynamic mechanism design.
Airfares fluctuate due to demand shocks and intertemporal variation in willingness to pay. I estimate a model of dynamic airline pricing accounting for both sources of price adjustments using flight-level data. I use the model estimates to evaluate the welfare effects of dynamic airline pricing. Relative to uniform pricing, dynamic pricing benefits early-arriving, leisure consumers at the expense of late-arriving, business travelers. Although dynamic pricing ensures seat availability for business travelers, these consumers are then charged higher prices. When aggregated over markets, welfare is higher under dynamic pricing than under uniform pricing. The direction of the welfare effect at the market level depends on whether dynamic price adjustments are mainly driven by demand shocks or by changes in the overall demand elasticity.
Humans cooperate a great deal in economic activity, but our two major models of equilibrium – Walrasian competitive in markets and Nash in games – portray us as only non-cooperative. In earlier work, I have proposed a model of cooperative decision making (Kantian optimization); here, I embed Kantian optimization in general equilibrium models and show that ‘Walras-Kant’ equilibria exist and often resolve inefficiencies associated with income taxation, public goods and bads, and non-traditional firm ownership, which typically plague models where agents are Nash optimizers. In four examples, introducing Kantian optimization in one market – often the labor market – suffices to internalize externalities, generating Pareto efficient equilibria in their presence. The scope for efficient decentralization via markets appears to be significantly broadened with cooperative behavior.
We study how cultural distance affects the rejection of imposed institutions. To this purpose, we exploit the transplantation of Piedmontese institutions on Southern Italy which occurred during the Italian unification. We assemble a novel and unique dataset containing information on episodes of brigandage, a form of violent uprising against the unitary government, at the municipal level. We use geographic distance from local settlements of Piedmontese descent as a proxy for cultural distance between each municipality and the new rulers. We find robust evidence that cultural distance from the origins of the transplanted institutions is significantly associated with more intense resistance to these institutions. Our results further suggest that the rejection of the transplanted institutions may have a long lasting effect on political participation.