Coordinating expectations through central bank projections
Fatemeh Mokhtarzadeh & Luba Petersen
Abstract: This paper explores how expectations are influenced by central bank projections within a learning-to-forecast laboratory macroeconomy. Subjects are incentivized to forecast output and inflation in a laboratory macroeconomy where their aggregated expectations directly influence macroeconomic dynamics. Using a between-subject design, we systematically vary whether the central bank communicates no information, ex-ante rational nominal interest rate projections, or rational or adaptive dual projections of output and inflation. Our experimental findings suggest that interest rate projections and adaptive dual projections can encourage backward-looking forecasting behavior. Expectations are best coordinated and stabilized by communicating rational output and inflation forecasts.
Opportunity cost, inattention and the bidder's curse
David Freeman, Erik O. Kimbrough, & J. Philipp Reiss
Abstract: Recent research suggests that auction winners sometimes fall prey to a “bidder's curse", paying more for an item at auction than they would have paid at a posted price. One explanation for this phenomenon is that bidders are inattentive to posted prices. We develop a model in which bidders' inattention, and subsequent overbidding, is driven by a rational response to the opportunity cost of acquiring information about the posted price. We test our model in a laboratory experiment in which subjects bid in an auction while facing an opportunity cost of looking up the posted price. We vary the opportunity cost, and we show that information acquisition decreases and consequently overbidding increases with opportunity cost as predicted.
Testing the Boundaries of the Double Auction
Erik O. Kimbrough, & Andrew Smyth
Abstract: We report boundary experiments testing the robustness of price convergence in double auction markets for non-durable goods in which there is extreme earnings inequality at the competitive equilibrium (CE). Following up on a conjecture by Smith (1980), we test whether the well-known equilibrating power of the double auction institution is robust to the presence of complete information about traders' values and costs and the presence of symmetric market power. Contra Smith's conjecture, we find that complete information is insufficient to impede convergence to CE prices; however, introducing market power consistently causes prices to deviate from the CE, whether or not subjects possess complete information. Our design highlights the value of boundary experiments in understanding how market institutions shape behavior, and our findings help delineate the limits of the double auction institution to generate competitive outcomes.
Risk, Uncertainty, and the Dynamics of Inequality
Kenneth Kasa & Xiaowen Lei
Abstract: This paper studies the dynamics of wealth inequality in a continuous-time Blanchard/Yaari model. Its key innovation is to assume that idiosyncratic investment returns are subject to (Knightian) uncertainty. In response, agents formulate robust portfolio policies (Hansen and Sargent (2008)). These policies are nonhomothetic; wealthy agents invest a higher fraction of their wealth in uncertain assets yielding higher mean returns. This produces an endogenous feedback mechanism that amplifies inequality. It also produces an accelerated rate of convergence, which resolves a puzzle recently identified by Gabaix, Lasry, Lions, and Moll (2016). We ask the following question -Suppose the US was in a stationary distribution in 1980, and the world suddenly became more ‘uncertain’. Could this uncertainty explain both the magnitude and pace of recent US wealth inequality? Using detection error probabilities to discipline the degree of uncertainty, we conclude the answer is ‘Yes’.