Discussion Paper No. 18
November 3, 2021
Relative Consumption Preferences and Public Provision of Private Goods
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Abstract:
This paper shows that the public provision of private goods may be justified on pure efficiency grounds in an environment where individuals have relative con- sumption concerns. By providing private goods, governments directly intervene in the consumption structure, and thereby have an instrument to correct for the ex- cessive consumption of positional goods. We identify sufficient conditions when the public provision of private goods is always Pareto-improving, even when (linear) consumption taxes are available. In fact, with the public provision of private goods, there are cases where first-best allocations can be achieved, and a luxury tax on the positional good is redundant.
Keywords:
public provision; social preferences; status-seeking;
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Discussion Paper No. 9
Image Concerns and the Political Economy of Publicly Provided Private Goods
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Abstract:
Governments often provide their citizens with goods and services that are also supplied in markets: education, housing, nutritional assistance, etc. We analyze the political economy of the public provision of private goods when individuals care about their social image. We show that image concerns motivate richer individuals to vote for the public provision of goods they themselves buy in markets, the reason being that a higher provision level attracts more individuals to the public system, enhancing the social exclusivity of market purchases. In effect, majority voting may lead to a public provision that only a minority of citizens use. Users in the public system may enjoy better provision than users in the private system. We characterize the coalitions that can prevail in a political equilibrium.
Keywords:
in-kind provision; status preferences; majority voting;
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Discussion Paper No. 5
November 2, 2021
Self-Confidence and Unraveling in Matching Markets
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Abstract:
We document experimentally how biased self-assessments affect the outcome of matching markets. In the experiments, we exogenously manipulate the self-confidence of participants regarding their relative performance by employing hard and easy real-effort tasks. We give participants the option to accept early offers when information about their performance has not been revealed, or to wait for the assortative matching based on their actual relative performance. Early offers are accepted more often when the task is hard than when it is easy. We show that the treatment effect works through a shift in beliefs, i.e., underconfident agents are more likely to accept early offers than overconfident agents. The experiment identifies a behavioral determinant of unraveling, namely biased self-assessments, which can lead to penalties for underconfident individuals as well as efficiency losses.
Keywords:
market unraveling; experiment; self-confidence; matching markets;
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Discussion Paper No. 203
October 22, 2021
Belief Updating: Does the 'Good-News, Bad-News' Asymmetry Extend to Purely Financial Domains?
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Abstract:
Bayes' statistical rule remains the status quo for modeling belief updating in both normative and descriptive models of behavior under uncertainty. Some recent research has questioned the use of Bayes' rule in descriptive models of behavior, presenting evidence that people overweight 'good news' relative to 'bad news' when updating ego-relevant beliefs. In this paper, we present experimental evidence testing whether this 'good-news, bad-news' effect is present in a financial decision making context (i.e. a domain that is important for understanding much economic decision making). We find no evidence of asymmetric updating in this domain. In contrast, in our experiment, belief updating is close to the Bayesian benchmark on average. However, we show that this average behavior masks substantial heterogeneity in individual updating. We find no evidence in support of a sizeable subgroup of asymmetric updators.
Keywords:
economic experiments; bayes' rule; belief updating; belief measurement; proper scoring rule; motivated beliefs;
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