Endogenous Beliefs and Institutional Structure in Competitive Equilibrium with Adverse Selection

I model financial markets that structure decision-making into discrete points separating contract offers, applications, and acceptance/denial decisions. Endogenous beliefs about applicants’ risk types emerge as the institutional process extracts private information allowing uninformed firms to infer risk qualities by comparing applications of many consumers. Endogenous beliefs and low-risk consumer behavior render truthful disclosure of transactions incentive compatible supporting a unique equilibrium robust to cream-skimming and cross-subsidizing deviations, even under Hellwig’s “secret” policy assumption. In equilibrium each type demands low-risk’s optimal pooling policy and high-risk supplement to full coverage at fair-price. Nonpassive consumers’ belief firms are sequentially rational necessary for equilibrium; lemon equilibrium with only high-risk insured possible

Competitive Screening and Market Segmentation

We characterize competitive equilibrium in markets (financial etc.) where price taking Bayesian decision makers screen to accept or reject applicants. Unlike signaling models, equilibrium fails to resolve imperfect information. In classical statistics terminology, some qualified applicants are rejected (type I error) and some unqualified applicants are accepted (type II error). We report three new results: i. optimal firm behavior is deduced to be a Bayesian variant of the Neyman-Pearson theorem; ii. competitive equilibrium entails screening if and only if (net of screening costs) the cost of type II errors exceed the cost of type I errors, i.e. contrary to signaling (where buyers identify more qualified applicants who self screen to differentiate themselves e.g. Stiglitz 1975), price taking firms screen to avoid lower quality sellers; iii. equilibrium groups the least attractive applicants into a single high risk assignment pool. Depending on costs of screening, the unique equilibrium may involve complete pooling (all applicants trade at one price) or partial separation (there are m separate pools with successive pools supported by a single (rising) price and a subset of agents of different screen levels trading at that price). A screening equilibrium has and the mth secondary market entails no screening, as the most adversely selected agents are assigned to the high risk pool. Screening induces market segmentation. Invariably secondary markets contain individuals who with better or different screening mechanisms could be accepted in the primary market. What roles traits such as ethnicity, gender, and race might assume in such decision making is relegated to subsequent research to explore the statistical theory of discrimination

A Behavioral Interpretation of the Origins of African American Family Structure

1960 to 1980 doubling (21% to 41%) of black children in one-parent families emerged from 1940-to-1970 urbanization converging population toward urbanized blacks’ historically stable high rate, not post-1960 welfare liberalization or deindustrialization. Urban and rural child socializations structured different Jim Crow Era black family formations. Agrarian economic enclaves socialized conformity to Jim Crow and two-parent families; urban enclaves rebellion, male joblessness, and destabilized families. Proxying urban/rural residence at age 16 for socialization location, logistic regressions on sixties census data confirm the hypothesis. Racialized urban socialization negatively affected two-parent family formation and poverty status of blacks but not whites

Efficiency and Distributional Effects of Federal College Subsidies during the Great Depression

We conduct the first quantitative assessment of federal college subsidies during the 1930s. Overlapping generation households invest in children’s education to maximize multigenerational utility, and the government subsidizes college to maximize enrollment subject to a budget constraint and recipients satisfying ability and income qualifications. A modelling innovation assigns children educational ability through a random regression to the population mean correlated with father’s presumed ability ranking via his percentile in fathers’ earnings distribution. Simulating the theoretical model, the equilibrium that replicates actual education distributions estimates federal college subsidies increased graduation rates of the cohort of White Americans reaching college age during the 1930s by 22.12% for men and 19.16% for women; the mean ability of subsidy recipients exceeded nonsubsidized students’ mean .4 s.d. The program favored middle income groups. Most benefits accrued to high ability students with fathers in the 4th through 6th deciles of fathers’ earnings distribution. The subsidies had no effect on the graduation rates of high ability students in the bottom two deciles of fathers’ earnings. A more universal government policy that maximized stipends subject only to the budget and income criteria would have increased annual stipends by about 50 thousand while only decreasing college students’ mean ability .13 s.d. Gender biases favoring higher male graduation rates remain a puzzle

The Double Role of Ethnic Heterogeneity in Explaining Welfare-State Generosity

Based on theoretical models of budget-balanced social insurance and individual choice, we argue that in addition to the well-known empathy mechanism whereby ethnic heterogeneity undermines sentiments of solidarity among a citizenry to reduce welfare generosity, population heterogeneity affects the generosity of a polity’s social insurance programs through another distinct mechanism, political conflict . Ethnic heterogeneity likely intensifies political conflict and reduces welfare generosity because heterogeneity of unemployment risk makes it more difficult to achieve social consensus concerning tax-benefit programs. Utilizing two separate regression analyses covering highly diverse polities, the 50 U.S. states and District of Columbia (CPS data), and 13 OECD countries (LIS data), we find strong evidence that empirically distinct empathy and political conflict effects on unemployment insurance programs characterize contemporary politics. Our findings suggest existing analyses of the negative relationship between ethnic heterogeneity and the size of the welfare state likely over- or underestimate the empathy effect. For example, perhaps surprisingly, had our analysis of US data omitted a measure of unemployment dispersion, the negative effect of ethnic fractionalization would have been underestimated

A Preliminary Quantification of the Impacts of Aspen to Conifer Succession on Water Yield Within the Colorado River Basin (A Process Aggravating the Salt Pollution Problem)

Heat pulse velocity techniques were developed for effectively monitoring water movement in aspen (Populus ttremuloides), subalpine fir (Abies lasiocarpa), and Englemann spruce (Picea engelmannii). Once the techniques were perfected, transpiration was monitored in replicated trees of each species for one year. This data was used to modify the plant activity index and the crop coefficient for each species within the model ASPCON, a deterministic, lumped-parameter model describing the hydrology of aspen to conifer succession. Results of the modeling indicate 18.5 cm(7.3 in) net loss of moisture available for stream flow when spruce replace aspen, and a loss of 7.1 cm (2.8 in) when fir forests cover the watershed. The aspen to conifer successional trend is therefore significantly reducing water yields within the Colorado River Basin, water that could be used to dilute salt downstream from the high water-yielding watersheds