Confidence-Enhanced Performance

There is ample evidence that emotions affect performance. Positive emotions can improve performance, while negative ones may diminish it. For example, the fears induced by the possibility of failure or of negative evaluations have physiological consequences (shaking, loss of concentration) that may impair performance in sports, on stage or at school. There is also ample evidence that individuals have distorted recollection of past events, and distorted attributions of the causes of successes of failures. Recollection of good events or successes is typically easier than recollection of bad ones or failures. Successes tend to be attributed to intrinsic aptitudes or own effort, while failures are attributed to bad luck. In addition, these attributions are often reversed when judging the performance of others. The objective of this paper is to incorporate the first phenomenon above into an otherwise standard decision theoretic model, and show that in a world where performance depends on emotions, biases in information processing enhance welfare.confidence, perception, psychology

Plausible Cooperation, Second Version

There is a large repeated games literature illustrating how future interactions provide incentives for cooperation. Much of this literature assumes public monitoring: players always observe precisely the same thing. Even slight deviations from public monitoring to private monitoring that incorporate differences in players’ observations dramatically complicate coordination. Equilibria with private monitoring often seem unrealistically complex. We set out a model in which players accomplish cooperation in an intuitively plausible fashion. Players process information via a mental system — a set of psychological states and a transition function between states depending on observations. Players restrict attention to a relatively small set of simple strategies, and consequently, might learn which perform well.Repeated games, private monitoring, bounded rationality, cooperation

Informational Size and Efficient Auctions

We develop an auction model for the case of interdependent values and multidimensional signals in which agents’ signals are correlated. We provide conditions under which a modification of the Vickrey auction which includes payments to the bidders will result in an ex post efficient outcome. Furthermore, we provide a definition of informational size such that the necessary payments to bidders will be arbitrarily small if agents are sufficiently informationally small.Auctions, Incentive Compatibility, Mechanism Design, Interdependent Values

Strategic Firms and Endogenous Consumer Emulation

Better informed consumers may be treated preferentially by firms since their consumption serves as a quality signal for other customers. For normal goods this results in wealthy individuals being treated better than poor individuals. We investigate this phenomenon in an equilibrium model of social learning with heterogeneous consumers and firms that act strategically. Consumers search for high quality firms and condition their choices on observed actions of other consumers. When they observe consumers who are more likely to have identified a high quality firm, uninformed individuals will optimally emulate those consumers. One group of consumers arises endogenously as “leaders” whose consumption behavior is emulated. Follow-on sales induce firms to give preferential treatment to these lead consumers, which reinforces their learning.Search, social learning, consumption signalling

Repeated Relationships with Limits on Information Processing

Many important strategic problems are characterized by repeated interactions among agents. There is a large literature in game theory and economics illustrating how considerations of future interactions can provide incentives for cooperation that would not be possible in one-shot interactions. Much of the work in repeated games assumes public monitoring: players observe precisely the same thing at each stage of the game. It is well-understood that even slight deviations from public monitoring increase dramatically the difficulty the problems players face in coordinating their actions. Repeated games with private monitoring incorporate differences in what players observe at each stage. Equilibria in repeated games with private monitoring, however, often seem unrealistic; the equilibrium strategies may be highly complex and very sensitive to the fine details of the stochastic relationship between players’ actions and observations. Furthermore, there is no realistic story about how players might arrive at their equilibrium strategies. We propose an alternative approach to understanding how people cooperate. Each player is endowed with a mental system that processes information: a mental system consists of a number of psychological states and a transition function between states that depends on observations made. In this world, a strategy is just a function from states to actions. Our framework has the following desirable properties: (i) players restrict attention to a relatively small set of simple strategies. (ii) the number of strategies that players compare is small enough that players might ultimately learn which perform well. We find that some mental systems allow agents to cooperate under a broad set of parameters, while others are not conducive to cooperation.Repeated Games, Private Monitoring, Mental States

Relative Income Concerns and the Rise in Married Women's Employment

We ask whether women's decisions to be in the labor force may be affected by the decisions of other women in ways not captured by standard models. We develop a model that augments the simple neoclassical framework by introducing relative income concerns into women's (or families') utility functions. In this model, the entry of some women into paid employment can spur the entry of other women, independently of wage and income effects. This mechanism may help to explain why, over some periods, women's employment appeared to rise faster than could be accounted for by the simple neoclassical model. We test the model by asking whether women's decisions to seek paid employment depend on the employment decisions of other women with whom relative income comparisons might be important. In particular, we look at the effects of sisters' employment on women's own employment. We find strong evidence that women's employment decisions are positively related to their sisters' employment decisions. We also take account of the possibility that this positive relationship arises from heterogeneity across families in unobserved variables affecting the employment decision. We conduct numerous empirical analyses to reduce or eliminate this heterogeneity bias. We also look at the relationship between husbands' relative income and wives' employment decisions. In our view, the evidence is largely supportive of the relative income hypothesis.

Social Isolation and Inequality

There is an increasing interest in the concept of social exclusion and the related concept of social isolation and their potential role in understanding inequality. We examine the degree to which voluntary separation from social activities during adolescence affects adult wages. It is well-known that participation in high school athletic programs leads to higher adult wages. We present empirical evidence that this premium is not primarily due to selection on predetermined characteristics valued in the labor market.Decision making; Bayesian; Behavioral Economics

Social Isolation and Inequality

There is an increasing interest in the concept of social exclusion and the related concept of social isolation and their potential role in understanding inequality. We examine the degree to which voluntary separation from social activities during adolescence affects adult wages. It is well-known that participation in high school athletic programs leads to higher adult wages. We present empirical evidence that this premium is not primarily due to selection on predetermined characteristics valued in the labor market.Decision making; Bayesian; Behavioral Economics

Confidence-Enhanced Performance

There is ample evidence that emotions affect performance. Positive emotions can improve performance, while negative ones may diminish it. For example, the fears induced by the possibility of failure or of negative evaluations have physiological consequences (shaking, loss of concentration) that may impair performance in sports, on stage or at school. There is also ample evidence that individuals have distorted recollection of past events, and distorted attributions of the causes of successes of failures. Recollection of good events or successes is typically easier than recollection of bad ones or failures. Successes tend to be attributed to intrinsic aptitudes or own effort, while failures are attributed to bad luck. In addition, these attributions are often reversed when judging the performance of others. The objective of this paper is to incorporate the first phenomenon above into an otherwise standard decision theoretic model, and show that in a world where performance depends on emotions, biases in information processing enhance welfare.Confidence, Perception, Psychology