Cognitive ability and observed behavior in laboratory experiments: implications for macroeconomic theory

This paper discusses the relationships between the “measured” cognitive ability of participants and their behavior as observed during laboratory experiments. Based on such relationships, macroeconomic implications of micro-level “boundedly rational” individual behavior will be discussed. The paper also addresses potential problems that arise when insufficient attention is paid to large differences in the measured cognitive ability of participants across several experimental laboratories, influencing the replicability of existing experimental results but also the interpretation of results from cross-country experimental analyses, and proposes to complement participants’ database with individual characteristics.This version of the article has been accepted for publication, after peer review and is subject to Springer Nature’s AM terms of use, but is not the Version of Record and does not reflect post-acceptance improvements, or any corrections. The Version of Record is available online at: https://doi.org/10.1007/s42973-019-00018-

Speculation and Price Indeterminacy in Financial Markets: An Experimental Study

To explore how speculative trading influences prices in financial markets, we conduct a laboratory market experiment with speculating investors (who do not collect dividends and trade only for capital gains) and dividend-collecting investors. Moreover, we operate markets at two different levels of money supply. We find that in phases with only speculating investors present (i) price deviations from fundamentals are larger; (ii) prices are more volatile; (iii) mispricing increases with the number of transfers until maturity; and (iv) speculative trading pushes prices upward (downward) when the supply of money is high (low). These results suggest that controlling the money supply can help to stabilize asset prices

Learning to deal with repeated shocks under strategic complementarity: An experiment

Experimental evidence shows that the rational expectations hypothesis fails to characterize the path to equilibrium after an exogenous shock when actions are strategic complements. Under identical shocks, however, repetition allows adaptive learning, so that inertia in adjustment should fade away with experience. If this finding proves to be robust, inertia in adjustment may be irrelevant among experienced agents. The conjecture in the literature is that inertia would still persist, perhaps indefinitely, in the presence of real-world complications such as nonidentical shocks. Herein, we empirically test the conjecture that the inertia in adjustment is more persistent if the shocks are nonidentical. For both identical and nonidentical shocks, we find persistent inertia and similar patterns of adjustment that can be explained by backward-looking expectation rules. A reformulation of naïve expectations with similarity-based learning approach is found to have a higher predictive power than rational and trend-following rules

Adventures at the Zero Lower Bound: A Bayesian Time-Varying Parameter Vector Autoregressive Analysis of Monetary Policy Uncertainty Shocks

Using survey-based measures of future interest rate expectations from the Blue Chip Economic Indicators and the Survey of Professional Forecasters, we examine the relationship between monetary policy uncertainty, captured as the dispersion of interest rate forecasts, and fluctuations in real economic activity and core inflation. We use a flexible time-varying parameter vector autoregression (TVP-VAR) model to clearly isolate the dynamic effects of shocks to monetary policy uncertainty. To further study possible a possible nonlinear relationship between monetary policy uncertainty and the macroeconomic aggregates, we extract the impulse-response functions (IRF’s) estimated at each quarter in the time series, and use a multi-variate regression with various measures of the shape of the IRF’s and the level of monetary policy uncertainty at that quarter in the TVP-VAR model to gauge the relationship between the effectiveness of traditional monetary policy (shocks to the Federal Funds rate), forward guidance (shocks to expected interest rates) and uncertainty. The results show that monetary policy uncertainty can have a quantitatively significant impact on output, with a one standard deviation shock to uncertainty associated with a 0.6% rise in unemployment. The indirect effects are more substantial, with a one standard deviation increase in monetary policy uncertainty associated with a 23% decrease in the maximum response of unemployment to a forward guidance episode (interest rate expectations shock). This evidence points to the importance of managing monetary policy uncertainty (clear and direct forward guidance) as a key policy tool in both stimulating economic activity as well as propagating other monetary policy through the macroeconomy

Climate change adaptation and sustainable agricultural intensification in developing countries

The recent threat of climate change has exacerbated the inherent risks in smallholder farming such as soil degradation, resulting in an unprecedented decline in agricultural yields in developing countries. This has threatened the livelihoods of large segments of populations that are heavily dependent on agriculture for survival in these regions. This dissertation focuses on identifying barriers and enablers of effective management of these risks, with an aim of coming up with potential policy interventions that can reduce vulnerability to the mentioned risks. To achieve this, the dissertation utilizes various methods and approaches as well as diverse datasets in two countries in sub Saharan Africa i.e. Namibia and Kenya. Diversification into non-farm activities is seen by many as a risk management strategy in rural areas where highly variable low farm incomes are transformed into stable high non-farm incomes, thus improving the welfare of the rural populations. While this theory of change is uncontested, the importance that the agricultural sector plays as a source of livelihood for rural populations, as well as food provisioning for urban populations, cannot be downplayed. This is more so given the limited non-farm opportunities in developing countries and the exponential population growth in these countries. The two factors combined impede on the envisioned transformation of rural production sectors and also create a sub-population of food insecure urban poor due to rural-urban migration. To mitigate these problems, rural agricultural development is still paramount and strategies that enhance resilience to risks in the sector are still vital. Chapter 2 of this dissertation focuses on this issue and addresses how farm diversification can be leveraged for improved food security in the rural areas, which has potential spill-over effects to other segments of the population. Focusing on northern Namibia, the study evaluates how different levels of diversification in both crop and livestock farming affect household food security outcomes i.e. per capita food expenditure and dietary diversity score. The study employs relatively new econometric methods in these type of studies to evaluate the joint determinants to both crop and livestock diversification, as well as their singular and joint effect on mentioned food security outcomes. The results show that high levels of diversification in either enterprise leads to high food security outcomes. Combined with climate change adaptation strategies that create resilience of agricultural production to climatic shocks, the use of sustainable agricultural intensification practices can further enhance productivity in the sector. Inputs like inorganic fertilizer, organic manure and improved seeds can further build on resilient systems to improve yields. Chapter 3 of this dissertation addresses this issue by looking at whether changes in the larger agri-food systems can be used to incentivize take up of such practices at the farm level. The study evaluates how the emergence of large traders in smallholder grain markets can drive the uptake of inorganic and organic fertilizer and improved seeds. The study thus expands the intervention space available to policy makers who have in the past resorted to potentially distortionary direct policies in the input markets e.g. through subsidy provision, as well as in the output markets e.g. through regulation of prices. To achieve this, the study uses a large panel dataset from Kenya spanning over a decade to evaluate how engagements between farmers and these market actors can be leveraged to drive adoption of these sustainable intensification inputs. Results show that engagements between large grain traders and farmers enhance use of inorganic fertilizer. There is no evidence that these engagements lead to enhanced use of improved seeds or manure. However, past use of improved seeds and manure are shown to affect their subsequent use, implying path dependency in the use of these sustainable inputs hence low dis-adoption rates. Traditional technology adoption studies show that access to information is a critical success factor for the uptake of new technology. Proxy variables for information access, for example proximity to extension services or frequency of extension contact, have consistently been shown to be positively correlated with technology adoption. In the context of climate change, access to weather information can be a critical factor to adoption of adaptation technology. Chapter 4 of this dissertation deals with this issue and assesses whether provision of weather information to farmers can enhance adoption of improved farming technologies that are resilient to climatic shocks. The study focuses on northern Namibia where access to such information, as the study shows, is very limited. A framed experiment approach is utilised to evaluate how climate change-induced uncertainty affects farmers' decision making in a farming season, based on their elicited behavioural attitudes towards risk and uncertainty. Further, the study tests whether providing weather information that reduces this uncertainty leads to adoption of technologies that are welfare improving. Lastly, the demand for weather information is assessed by eliciting the willingness to pay for information under various levels of weather uncertainty. Results indicate that high levels of uncertainty dampen uptake of welfare improving technologies, regardless of individual attitudes towards uncertainty. Availing of weather information leads to welfare improving technology choice, given the prevailing levels of weather uncertainty. There is also a high demand for weather information which is shown to increase with increase in the level of weather uncertainty. The chapters in the dissertation therefore identify key policy variables that can be used to manage vulnerability to risks emanating from climate change and unsustainable production in smallholder farming. Access to comprehensive climate information encompassing weather information and climate change-specific management information on both crop and livestock farming is shown to be a key factor in the uptake of adaptation strategies like use of resilient inputs and farm diversification. Interventions along the value chain like teaming up with large market actors in a private-public engagement is shown to be a potential pathway towards enhancing uptake of sustainable intensification inputs. Other policy variables like credit provision, high education and access to off-farm incomes are also key in explaining uptake of risk management strategies by smallholder farmers in Namibia and Kenya

Managing Distributed Information: Implications for Energy Infrastructure Co-production

abstract: The Internet and climate change are two forces that are poised to both cause and enable changes in how we provide our energy infrastructure. The Internet has catalyzed enormous changes across many sectors by shifting the feedback and organizational structure of systems towards more decentralized users. Today’s energy systems require colossal shifts toward a more sustainable future. However, energy systems face enormous socio-technical lock-in and, thus far, have been largely unaffected by these destabilizing forces. More distributed information offers not only the ability to craft new markets, but to accelerate learning processes that respond to emerging user or prosumer centered design needs. This may include values and needs such as local reliability, transparency and accountability, integration into the built environment, and reduction of local pollution challenges. The same institutions (rules, norms and strategies) that dominated with the hierarchical infrastructure system of the twentieth century are unlikely to be good fit if a more distributed infrastructure increases in dominance. As information is produced at more distributed points, it is more difficult to coordinate and manage as an interconnected system. This research examines several aspects of these, historically dominant, infrastructure provisioning strategies to understand the implications of managing more distributed information. The first chapter experimentally examines information search and sharing strategies under different information protection rules. The second and third chapters focus on strategies to model and compare distributed energy production effects on shared electricity grid infrastructure. Finally, the fourth chapter dives into the literature of co-production, and explores connections between concepts in co-production and modularity (an engineering approach to information encapsulation) using the distributed energy resource regulations for San Diego, CA. Each of these sections highlights different aspects of how information rules offer a design space to enable a more adaptive, innovative and sustainable energy system that can more easily react to the shocks of the twenty-first century.Dissertation/ThesisDoctoral Dissertation Sustainability 201

Leveraging improved seed technology, migration and climate information for building the adaptive capacity and resilience to climate risks in semi-arid regions

Droughts induced by climate change will most likely push dryland ecosystems beyond their biophysical thresholds and lead to long-term decline in agricultural productivity. Subsistence farming in developing countries where agricultural productivity is low will become less viable for many families already ravaged by food insecurity and poverty. This dissertation examines three ways of reducing vulnerability to the adverse effects of climate variability and building resilience in the farming communities residing in semiarid lands. These include the use of adaptive seed technology, migration as a livelihood diversification and adaptive strategy, and the use of climate information in farm decision-making. The second chapter evaluates the impact of improved adaptive seed technology on market participation and food security, using data from a representative sample of 1344 households selected across six agroecological zones in Kenya. The study employed two estimation procedures for impact evaluation: a control function regression using OLS and IV regression estimated by Heckman bivariate sample selection model and 2SLS regression. The study used percentile shares approach to describe distributional inequalities in improved seed adoption across households. Kenya has a well-developed seed system, through which adaptive maize seed has been introduced for various agro-ecological zones. Despite its success with improved maize breeding programs, Kenya is still grappling with food insecurity. The marketed share of household's maize produce, among adopters, was on average 12 percentage points higher than for the control group. This increased with adoption intensity, albeit at a decreasing rate. The top 20% of households accounted for 63% of the quantity and 65% of the area planted with improved maize. The bottom 40% only accounted for 6% of the quantity purchased and 5% of the area planted with improved maize. Adopting households were less vulnerable to food insecurity and stored maize for longer than non-adopters. Larger families participated less in the market and were more food insecure. Wealth and education are other key determinants of food security and market participation. The results of the study indicate a need for a strategic policy on food security in Kenya that considers the concentrated nature of the maize farming sector, to address the problem of food insecurity. Such a policy could aim at food self-sufficiency for small farms and promote commercial production by large-scale producers for national strategic reserves. There is also a need for post-harvest policies that promote safe on-farm grain storage for small and medium scale producers. The third chapter focuses on migration, because of the growing interest among scholars in understanding the relationship between migration and adaptation to climate change. Past studies have looked at climate change as a trigger for migration, but the focus has now shifted to looking at migration as an enabler of climate-change adaptation and a livelihood diversification strategy. However, those most vulnerable to climate variability are the poor who are less able to afford mobility and entry costs. This study adds to the literature by evaluating, in chapter 3, the impact of migration on household consumption expenditure, relative food expenditure share, dietary diversity, spending on agricultural inputs and adaptive capacity. The study used survey data collected from a representative sample of 653 households across three arid regions of Northern Namibia. The study employed a novel identification strategy in migration studies by combining the standard exogenous instruments and Lewbel's constructed instruments using heteroscedastic errors. The study found two-thirds of the sampled households to be migrant-sending households. Poverty and the lack of economic opportunities in the rural villages were the main push factors driving migration to towns and cities. Although tertiary education and technical training of the migrants are key determinants of remittances received by migrant-sending households, over three quarters of the migrants were unskilled and very few having tertiary level training. Migrant-sending households had lower consumption spending and higher food budget share, suggesting relative deprivation. Although consumption spending increased with number of migrants, quality of human capital had greater impact on well-being. Migration had a positive impact on household's adaptive capacity but an inverse relationship between number of migrants and adaptation suggests failure of local adaptive strategies. The study finds households with migrants to have a significantly higher spending on agricultural inputs than those without migrants, with tractor-hire services for land preparation being a major component. The effect of family labour loss is somehow, through remittances, countervailed and compensated by mechanization. In conclusion, migration can potentially play a bigger role as an adaptive and risk-mitigation strategy in the face of climate variability, but poverty, lack of post-school skills training, and low transition to tertiary-level training are key barriers. Developing markets for credit, inputs and farm output, and preparing migrants for participation in labour markets and self-employment through training can further enhance the impact of migration and build resilience to climate shocks. Due to selfreinforcing poverty traps in poor households, the study recommends targeted public programs that support higher education and technical training. Lastly, chapter 4 examined the role of climate information and early warning in decision-making among farming communities in rural Namibia. Improved climate forecasting has been heralded as an important risk management and mitigation tool in climate-sensitive economic sectors such as agriculture. However, Africa has not reaped the benefits of improved climate forecasting and empirical studies about its impact are scanty. Chapter 4 first discusses access to and utilization of climate information in farm decisionmaking, and then evaluates its impact on dietary diversity, food spending and adaptive capacity of the households using propensity score matching, with a sensitivity analysis for hidden bias. Only half of the farmers had access to climate information and most of them relied primarily on traditional knowledge to make decisions on crop and livestock production. Many of the households without access to climate information also had little knowledge of alternative adaptive strategies. The likelihood of receiving climate information increased with the number of migrants per household, household size, social networks, trust and participation in community decision-making processes, but declined with age. Although male heads were more likely to receive climate information, females headed most of the households. The main sources of information for farmers were radios and peer learning. Respondents expressed a low level of trust in information from available channels and most of them rated the information received as insufficient for decision-making. Although 95% of households owned mobile phones, only 5% received information through them, indicating untapped opportunity of using an ICT platform to share information with farmers. Households with climate information had more diversified diets and significantly higher food spending. These households also engaged in more adaptive strategies, but the scale of adoption was small. Community empowerment through enhanced access to extension services, information on alternative adaptive choices, and the development of markets, rural communication and transport infrastructure are prerequisites to access to and effective utilization of improved climate forecast information for successful adaptation

Executive compensation

The optimal design of executive compensation is one of the primary issues in the area of corporate governance and has been investigated in considerable detail in the academic literature over the past three decades. The underlying assumption behind the design of optimal compensation schemes is that the executives of the firm have more information on the firm’s projects and cash flows than the shareholders. In the presence of symmetric information, since the shareholders can completely distinguish the executive’s effort from bad luck or other extraneous factors, there is little need to motivate the executive beyond a flat salary. In the presence of asymmetric information, the shareholder faces two problems: One, to select the right type of agent (the adverse selection problem) and two, to motivate the agent to work hard once selected (the moral hazard problem). All executive compensation schemes represent trade-offs between these two agency problems. In this survey, in the first section, I start by discussing the theory of executive compensation. Why do firms pay executives? I distinguish two major approaches. The first arises from the theory of optimal compensation contracting and focuses on the composition of pay. It argues that the composition of pay is set to attract good executives (to solve the adverse selection problem) and motivate them to work hard (the moral hazard problem). The second approach focuses on the level of pay. It argues that managers have a considerable degree of power in setting their own wages, and in particular, use their power to extract excessive pay or rents from the shareholders. In the second section, I discuss the evidence on both the composition and level of pay and how it has changed over time, treating each component pay separately. I also discuss the composition of pay in countries around the world and in specific industries. In the third section, I describe who decides pay composition and levels. Finally, in the fourth section, I conclude by examining how the structure of pay has real consequences for firms