Look for the next GCER Newsletter in June. Past Newsletters can be found here.
News Archive - Page 12
Feb 12, 2014
Collateral Damage to Standard Economic Theory... GCER Fellow Dan Cao shows how incorrect beliefs can fuel a crisis.
In the years leading up to the financial crisis of 2008, several financial institutions invested heavily in highly risky mortgage-backed securities. Financial markets allowed these institutions, including prominent banks, to speculate on the future returns of these securities. When home prices crashed in around 2006-2007, mortgage interest rates soared, leading to defaults by homeowners. This drastically reduced the value of those securities. During this time, some hedge funds profited by short-selling these securities.
In his paper "Collateral Shortages, Asset Price and Investment Volatility with Heterogeneous Beliefs", GCER Fellow Dan Cao finds that, contrary to standard economic theory, such speculators with possibly incorrect beliefs survive in the long run and their speculative activities permanently drive up price and volatility.The standard view dating back to Friedman (1953) hypothesizes that agents with incorrect beliefs will eventually be driven out under complete markets and will have no influence in the long run. Under incomplete markets, in contrast, Cao shows that financial institutions speculating with potentially incorrect beliefs survive in the long run drive up asset price and real investment volatility. The financial institutions mentioned above could just walk away from their collateral and get back into the market at a later time, using their current and future endowments, since the penalty for bad bets for these institutions is low. Additionally, Cao introduces a framework to model the effect of agents with heterogeneous (potentially incorrect) beliefs on asset prices. Further, using this framework, he studies the impact of different types of regulations on welfare, asset price volatility and investment.
Jan 23, 2014
New research on the role of electronic payment systems in Kenya by GCER Fellow William Jack and MIT's Tavneet Suri made headlines in the MIT News. The article highlights a recent publication by Jack and Suri in the American Economic Review that examines the impact of the new electronic payments system, known as M-PESA. Jack and Suri document the consumption-smoothing benefits to households that use the M-PESA. ( Click here to see the full article. ).
Jan 15, 2014
An NBER study on obesity by GCER Fellow Matthew Harding was recently reported in the January 14, 2014 edition of the Huffington Post. Harding, a Visiting Fellow from Stanford University, and co-author Michael Lovenheim of Cornell examine the potential effect of a sugar tax on obesity outcomes in the U.S. Using data on 123 million food purchases made in the U.S. between 2002 and 2007, they find that a 20% tax on sugar would result in an 18% reduction in overall caloric intake Americans. ( Read here for more information ).
Dec 19, 2013
Congratulations to Georgetown Economics PhD student Alison Weingarden for her recent merit-based grant by the U.S. Department of Labor. The award is the result of a competition initiated by 2013 Employment and Training Administration (ETA) Research Papers Program, and is intended to provide funds for PhD students for research projects related to employment dynamics and job training programs.
Alison's project will examine data on layoff episodes by U.S. companies in order to investigate the timing and size of mass layoff episodes.
Oct 13, 2013
# Oh what a tangled web we weave... † Anderson and Smith explore the dilemmas of deception. On the evening of November 14th 1940 the German Luftwaffe raided Coventry. That night, 515 German bombers destroyed one third of all buildings in the city, while only losing one bomber to Coventry's over-matched air defenses. Some have claimed that Winston Churchill had advanced knowledge of the attack, and yet made a calculated decision not to act. While this claim is disputed, consider the dilemma that a fully informed Churchill might have faced. By taking measures to protect Coventry, he could have limited British casualties and made the raid more costly to the Germans. However, if the Germans detected a shift in British air defenses, they might have realized that the allies had cracked the German code used to transmit orders. The Germans would then abandon the compromised code, and the Allies would lose a valuable source of military intelligence. This example highlights a unique quality of information: Merely using it often gives it away. This "use it and lose it" property of information applies in many important environments. A stock trader attempting to exploit inside information about a company sees his market advantage evaporate with every trade he makes. Attempting to extract gold from public land sparks gold rushes, as on the beaches of Nome, Alaska 1899. Using cutting edge technology in new products allows for reverse engineering by competitors, sacrificing the technological advantage. In their paper ["Dynamic Deception"](http://www9.georgetown.edu/faculty/aza/DynamicDeception.pdf) (forthcoming in The American Economic Review), GCER Fellow and Georgetown Professor [Axel Anderson](http://www9.georgetown.edu/faculty/aza/) and co-author Lones Smith of the University of Wisconsin explore the dynamic use of private information in competitive environments. They posit a model in which an agent with an informational advantage competes over time with a rival. The more the advantaged agent aligns his actions with his information the greater his current benefit. But, his rival observes a noisy signal of his actions --- the more intensely the advantaged agent exploits his informational edge the faster he loses it. By solving for the unique equilibrium of this dynamic game, Anderson and Smith are able to offer sharp predictions about both the dynamics of behavior and the rate at which the informed player monetizes his informational advantage. Further, Anderson and Smith determine the value of information gathering efforts by the uninformed rival, and use this value to overturn a standard result on information demand in non-rivalrous settings. Finally, Anderson and Smith investigate a form of deception that occurs often: the costly veiling of action by adding observational noise to the situation. One such example is a diversion to distract the enemy's attention before a military invasion. † Sir Walter Scott in Marmion, Canto vi. Stanza 17