# Econometrica, Volume 88, Issue 2 (March 2020) has just been published

Submitted by mbz3@nyu.edu on Tue, 2020-03-17 16:05**ECONOMETRICA
Journal of the Econometric Society**

Volume 88, Issue 2 (March 2020) has just been published. The full content of the journal is accessible at

https://www.econometricsociety.org/publications/econometrica/browse

**Articles**

Contract Enforcement and Productive Efficiency: Evidence from the Bidding and Renegotiation of Power Contracts in India

Nicholas Ryan

Weak contract enforcement may reduce the efficiency of production in developing countries. I study how contract enforcement affects efficiency in procurement auctions for the largest power projects in India. I gather data on bidding and ex post contract renegotiation and find that the renegotiation of contracts in response to cost shocks is widespread, despite that bidders are allowed to index their bids to future costs like the price of coal. To study heterogeneity in bidding strategies, I construct a new measure of firm connectedness, based on whether a firm has been awarded coal concessions by the Government. Connected firms choose to index less of the value of their bids to coal prices and, through this strategy, expose themselves to cost shocks to induce renegotiation. I use a structural model of bidding in a scoring auction to characterize equilibrium bidding when bidders are heterogeneous both in cost and in the payments they expect after renegotiation. The model estimates show that bidders offer power *below* cost due to the expected value of later renegotiation. The model is used to simulate bidding and efficiency with strict contract enforcement. Contract enforcement is found to be pro‐competitive. With no renegotiation, equilibrium bids would rise to cover cost, but markups relative to total contract value fall sharply. Production costs decline, due to projects being allocated to lower‐cost bidders over those who expect larger payments in renegotiation.

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Credible Auctions: A Trilemma

Mohammad Akbarpour, Shengwu Li

Consider an extensive‐form mechanism, run by an auctioneer who communicates sequentially and privately with bidders. Suppose the auctioneer can deviate from the rules provided that no single bidder detects the deviation. A mechanism is *credible* if it is incentive‐compatible for the auctioneer to follow the rules. We study the optimal auctions in which only winners pay, under symmetric independent private values. The first‐price auction is the unique credible static mechanism. The ascending auction is the unique credible strategy‐proof mechanism.

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Nonlinear Tax Incidence and Optimal Taxation in General Equilibrium

Dominik Sachs, Aleh Tsyvinski, Nicolas Werquin

We study the incidence of nonlinear labor income taxes in an economy with a continuum of endogenous wages. We derive in closed form the effects of reforming nonlinearly an arbitrary tax system, by showing that this problem can be formalized as an integral equation. Our tax incidence formulas are valid both when the underlying assignment of skills to tasks is fixed or endogenous. We show qualitatively and quantitatively that contrary to conventional wisdom, if the tax system is initially suboptimal and progressive, the general‐equilibrium “trickle‐down” forces may raise the benefits of increasing the marginal tax rates on high incomes. We finally derive a parsimonious characterization of optimal taxes.

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Perfect Conditional ε-Equilibria of Multi-Stage Games With Infinite Sets of Signals and Actions

Roger B. Myerson, Philip J. Reny

We extend Kreps and Wilson's concept of sequential equilibrium to games with infinite sets of signals and actions. A strategy profile is a conditional *ε*‐equilibrium if, for any of a player's positive probability signal events, his conditional expected utility is within *ε* of the best that he can achieve by deviating. With topologies on action sets, a conditional *ε*‐equilibrium is *full* if strategies give every open set of actions positive probability. Such full conditional *ε*‐equilibria need not be subgame perfect, so we consider a non‐topological approach. *Perfect* conditional *ε*‐equilibria are defined by testing conditional *ε*‐rationality along nets of small perturbations of the players' strategies and of nature's probability function that, for any action and for almost any state, make this action and state eventually (in the net) always have positive probability. Every perfect conditional *ε*‐equilibrium is a subgame perfect *ε*‐equilibrium, and, in finite games, limits of perfect conditional *ε*‐equilibria as *ε* → 0 are sequential equilibrium strategy profiles. But limit strategies need not exist in infinite games so we consider instead the limit distributions over outcomes. We call such outcome distributions perfect conditional equilibrium distributions and establish their existence for a large class of regular projective games. Nature's perturbations can produce equilibria that seem unintuitive and so we augment the game with a net of permissible perturbations.

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Liberation Technology: Mobile Phones and Political Mobilization in Africa

Marco Manacorda, Andrea Tesei

Can digital information and communication technology foster mass political mobilization? We use a novel georeferenced data set for the entire African continent between 1998 and 2012 on the coverage of mobile phone signal together with georeferenced data from multiple sources on the occurrence of protests and on individual participation in protests to bring this argument to empirical scrutiny. We find that while mobile phones are instrumental to mass mobilization, this only happens during economic downturns, when reasons for grievance emerge and the cost of participation falls. The results are in line with insights from a network model with imperfect information and strategic complementarities in protest occurrence. Mobile phones make individuals more responsive to both changes in economic conditions—a mechanism that we ascribe to *enhanced information*—and to their neighbors' participation—a mechanism that we ascribe to *enhanced coordination*.

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The Speed of Innovation Diffusion in Social Networks

Itai Arieli, Yakov Babichenko, Ron Peretz, H. Peyton Young

New ways of doing things often get started through the actions of a few innovators, then diffuse rapidly as more and more people come into contact with prior adopters in their social network. Much of the literature focuses on the speed of diffusion as a function of the network topology. In practice, the topology may not be known with any precision, and it is constantly in flux as links are formed and severed. Here, we establish an upper bound on the expected waiting time until a given proportion of the population has adopted that holds independently of the network structure. Kreindler and Young (2014) demonstrated such a bound for regular networks when agents choose between two options: the innovation and the status quo. Our bound holds for directed and undirected networks of arbitrary size and degree distribution, and for multiple competing innovations with different payoffs.

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The Balance Condition in Search-and-Matching Models

Stephan Lauermann, Georg Nöldeke, Thomas Tröger

Most of the literature that studies frictional search‐and‐matching models with heterogeneous agents and random search investigates steady state equilibria. Steady state equilibrium requires, in particular, that the flows of agents into and out of the population of unmatched agents balance. We investigate the structure of this balance condition, taking agents' matching behavior as given. Building on the “fundamental matching lemma” for quadratic search technologies in Shimer and Smith (2000), we establish existence, uniqueness, and comparative statics properties of the solution to the balance condition for *any* search technology satisfying minimal regularity conditions. Implications for the existence and structure of steady state equilibria in the Shimer–Smith model and extensions thereof are noted. These reinforce the point that much of the structure of search‐and‐matching models with quadratic search technologies carries over to more general search technologies.

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Time Lotteries and Stochastic Impatience

Patrick DeJarnette, David Dillenberger, Daniel Gottlieb, Pietro Ortoleva

We study preferences over lotteries in which both the prize and the payment date are uncertain. In particular, a *time lottery* is one in which the prize is fixed but the date is random. With Expected Discounted Utility, individuals must be risk *seeking* over time lotteries (RSTL). In an incentivized experiment, however, we find that almost all subjects violate this property. Our main contributions are theoretical. We first show that within a very broad class of models, which includes many forms of nonexpected utility and time discounting, it is impossible to accommodate even a single violation of RSTL without also violating a property we termed Stochastic Impatience, a risky counterpart of standard Impatience. We then present two positive results. If one wishes to maintain Stochastic Impatience, violations of RSTL can be accommodated by keeping Independence within periods while relaxing it across periods. If, instead, one is willing to forego Stochastic Impatience, violations of RSTL can be accommodated with a simple generalization of Expected Discounted Utility, obtained by imposing only the behavioral postulates of Discounted Utility and Expected Utility.

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Geography, Transportation, and Endogenous Trade Costs

Giulia Brancaccio, Myrto Kalouptsidi, Theodore Papageorgiou

In this paper, we study the role of the transportation sector in world trade. We build a spatial model that centers on the interaction of the market for (oceanic) transportation services and the market for world trade in goods. The model delivers equilibrium trade flows, as well as equilibrium trade costs (shipping prices). Using detailed data on vessel movements and shipping prices, we document novel facts about shipping patterns; we then flexibly estimate our model. We use this setup to demonstrate that the transportation sector (i) attenuates differences in the comparative advantage across countries; (ii) generates network effects in trade costs; and (iii) dampens the impact of shocks on trade flows. These three mechanisms reveal a new role for geography in international trade that was previously concealed by the frequently‐used assumption of exogenous trade costs. Finally, we illustrate how our setup can be used for policy analysis by evaluating the impact of future and existing infrastructure projects (e.g., Northwest Passage, Panama Canal).

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Generalized Belief Operator and Robustness in Binary-Action Supermodular Games

Daisuke Oyama, Satoru Takahashi

This paper studies the robustness of an equilibrium to incomplete information in binary‐action supermodular games. Using a generalized version of belief operator, we explore the restrictions that prior beliefs impose on higher order beliefs. In particular, we obtain a nontrivial lower bound on the probability of a common belief event, uniform over type spaces, when the underlying game has a monotone potential. Conversely, when the game has no monotone potential, we construct a type space with an arbitrarily high probability event in which players never have common belief about that event. As an implication of these results, we show for generic binary‐action supermodular games that an action profile is robust to incomplete information if and only if it is a monotone potential maximizer. Our study offers new methodology and insight to the analysis of global game equilibrium selection.

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Diversity and Conflict

Cemal Eren Arbatlı, Quamrul H. Ashraf, Oded Galor, Marc Klemp

This research advances the hypothesis and establishes empirically that interpersonal population diversity, rather than fractionalization or polarization across ethnic groups, has been pivotal to the emergence, prevalence, recurrence, and severity of intrasocietal conflicts. Exploiting an exogenous source of variations in population diversity across nations and ethnic groups, as determined predominantly during the exodus of humans from Africa tens of thousands of years ago, the study demonstrates that population diversity, and its impact on the degree of diversity within ethnic groups, has contributed significantly to the risk and intensity of historical and contemporary civil conflicts. The findings arguably reflect the contribution of population diversity to the non‐cohesiveness of society, as reflected partly in the prevalence of mistrust, the divergence in preferences for public goods and redistributive policies, and the degree of fractionalization and polarization across ethnic, linguistic, and religious groups.

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Arrovian Aggregation of Convex Preferences

Florian Brandl, Felix Brandt

We consider social welfare functions that satisfy Arrow's classic axioms of *independence of irrelevant alternatives* and *Pareto optimality* when the outcome space is the convex hull of some finite set of alternatives. Individual and collective preferences are assumed to be continuous and convex, which guarantees the existence of maximal elements and the consistency of choice functions that return these elements, even without insisting on transitivity. We provide characterizations of both the domains of preferences and the social welfare functions that allow for anonymous Arrovian aggregation. The domains admit arbitrary preferences over alternatives, which completely determine an agent's preferences over all mixed outcomes. On these domains, Arrow's impossibility turns into a complete characterization of a unique social welfare function, which can be readily applied in settings involving divisible resources such as probability, time, or money.

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