Current Research
(In)Stability of the Relationship between Relative Expenditure and Prices of Durable and Non-durable Goods (with N. Kundan Kishor), revise and resubmit, Journal of Money, Credit, and Banking
AbstractUsing an intertertemporal consumption model with non-separable preferences for nondurable and durable goods, we find evidence for a break in the intratemporal elas- ticity of substitution, the parameter capturing the long run equilibrium relationship between the two goods and their relative prices. During the period from 1959 to 1981, nondurable and durable goods were gross substitutes, with an estimated substitution elasticity greater than one. In contrast, in the post-1981 period this elasticity is less than one implying complementarity in the consumption of these two goods. This shift in the long run equilibrium relationship between the two goods also impacts adjustment dynamics. Although durable goods continue to dominate the error correction process, the size of adjustment is much smaller in the post-1981 period. Additionally, we find that the cyclical component of the durable goods consumption has also become more persistent over time. Our findings imply that a shock to durable goods spending, such as the COVID19 shock, would be more persistent due to a much slower adjustment towards equilibrium.
Overconfidence and Performance: Experimental Evidence from a Simple Real-Effort Task (with Angela Smith) , under review
AbstractUsing a simple real-effort counting task and frequency-based forecast elicitation, we document significant absolute and relative overconfidence for a diverse subject pool. Consistent with the Dunning-Kruger effect, an inverse relationship exists between task performance and overconfidence such that low (high) performing individuals exhibit significantly more (less) overconfidence. This relationship holds for absolute overconfidence even after accounting for better-than-average effect and regression-to-the mean and can potentially explain the lack of absolute overconfidence reported in some economic studies. Further, we find negligible correlation between our task-based measures and survey-based overconfidence measures commonly used in psychology studies, indicating these two methodologies may capture different behavioral phenomena.
Should I Stay or Should I Go? An Equilibrium Search Model of Education, Labor Supply, and Living Arrangement Choices (with Min Qiang Zhao)
AbstractMillennials are much more likely to be living with their parents when compared to Generation X and Baby Boomers. We propose an equilibrium search model where individuals make choices about education, labor supply, marriage, and living arrangement at different stages in their life. We calibrate our model to match key data moments for young adults in each of the three generations. Using our calibrated model we quantify the importance differences in economic conditions and preferences in accounting for the rising cohort trend in the proportion of young adults living with parents in the U.S. We find that rent-wage ratio, marriage probability, and utility gains from living with parents are all important drivers of generational differences in the propensity to live with parents. Economic turbulence, on the other hand, is not quantitatively important in explaining the cohort trend. We also find substantial heterogeneity in the relative importance of these factors across groups identified by education and employment status.
Introducing Moral Virtue Ethics into Normative Economics for Models with Endogenous Preferences (with Masao Ogaki)
AbstractAn important role of normative economics is to provide an analytical framework to evaluate social states. Such an evaluation is based on value judgments derived from moral views of the members of the society. There exist three major approaches in normative ethics, which formalize many people's moral views. These are consequentialism that focuses on consequences of actions; deontology that focuses on moral duties, and virtue ethics has two important aspects: acquiring virtues and human flourishing that can be achieved by using virtues and abilities. Among these, formal analytical frameworks have been developed for important aspects of consequentialism, deontology, and the flourishing aspect of virtue ethics. However, normative economics does not have a formal analytical framework for the learning aspect of virtue ethics. In this paper we develop such a framework for models with endogenous preferences. We apply this framework to a rational addiction model and an intergenerational altruism model. We find that introduction of virtue ethics can lead to very different policy recommendations than those based solely on welfarism where emphasis is on maximizing social welfare functions. Importantly, in contrast to the commonly held view, we find that incorporating virtue ethics into normative economic analysis may not always lead to greater government interventions.
Old Working papers
No Discounting as a Moral Virtue in Intertemporal Choice Models
Global Integration of India's Money Market: Interest Rate Parity in India (with Arvind Virmani).