Report

Teaser, summary, work performed and final results

Periodic Reporting for period 2 - MARKLIM (Markets and their limits)

Teaser

The overarching theme of this ERC grant is the advancement of economic institutions through a better understanding of the incentives they create. Economics is first and foremost a moral and philosophical science. To help their field achieve this mission, economists must...

Summary

The overarching theme of this ERC grant is the advancement of economic institutions through a better understanding of the incentives they create. Economics is first and foremost a moral and philosophical science. To help their field achieve this mission, economists must provide rigorous analyses of markets and policy-making. This principle is applied to the entire range of economic problems, from the threats that poor banking regulations may create for our societies to the question of whether markets can achieve moral outcomes.

Work performed

Accepted/published papers
1) The first achievement was to complete “Deadly Embrace: Sovereign and Financial Balance Sheets Doom Loops” (joint with Emmanuel Farhi), which was published in 2018 in a top-5 journal, the Review of Economic Studies. That paper studies the banks’ and the regulators’ incentives to recreate a segmentation/renationalization of Treasury bond markets. It provides a comprehensive account of what may have happened in Europe in the recent years and the hazards this evolution may pose.
2) “Mindful Economics: The Production, Consumption, and Value of Beliefs” (joint with Roland Bénabou) was written upon request of the Journal of Economic Perspectives as part of a three-paper symposium on motivated beliefs (2016). This paper provides a perspective into the main ideas and findings emerging from the growing literature on motivated beliefs and reasoning. This perspective emphasizes that beliefs often fulfil important psychological and functional needs of the individual. They involve some (usually implicit) trade-off between accuracy and desirability. Such beliefs are therefore be resistant to many forms of evidence, with individuals displaying non-Bayesian behaviors such as not wanting to know, wishful thinking, and reality denial. At the same time, motivated beliefs will respond to the costs, benefits, and stakes involved in maintaining different self-views and world-views. This paper was covered in The Economist (June 10, 2017).
The ERC grant allowed me to undertake substantial completions or revisions of papers that had been started during the previous grant. In each case much work was involved, that was facilitated by the grant.
3) “Marking to Market versus Taking to Market” (with Guillaume Plantin), now published at top-5 journal American Economic Review (2018), offers the first micro-founded framework in which the choice of accounting structure (candidates include market-value and historical-cost accounting) can be analysed in terms of its consequences on profit and social welfare. Its framework builds on the primitive ingredients of information economics. It is micro-founded in two ways. First, a firm’s accounting structure is presumed to be privately optimal; second, the liquidity in the asset resale market and the informativeness of sales of “similar assets” are both derived from market equilibrium. The paper concludes that corporate performance measures rely excessively on the information generated by other firms’ asset sales and insufficiently on the realization of a firm’s own capital gains. The paper thus introduces classic accounting considerations into mainstream economics.
4) “Missed Sales and the Pricing of Ancillary Goods” (with Renato Gomes), published in top-5 journal Quarterly Journal of Economics (2018), addresses the classic puzzle of whether add-ons are too expensive or too cheap. The hold-up narrative reflects the concern of consumer advocacy groups and regulators about potential hold-ups on ancillary goods. It has led to policies such as mandated price transparency, or caps on additional fees. By contrast, the give-away narrative reflects the fact that numerous add-ons are provided below or at cost (e.g. free delivery, free Wi-Fi…). The paper is the first to reconcile these two apparently conflicting observations. It argues that the key to explaining these observations and to unifying these conflicting narratives is the seller’s concern about missed sales, whereby some consumers may forgo purchasing the basic good when faced with an additional fee on the ancillary one. The paper derives clear public policy recommendations.
4) For over a century, cooperation among potential competitors has been analysed from the perspective of merger analysis. “Price Caps as Welfare-Enhancing Coopetition” (with P. Rey), forthcoming at top-5 Journal of Political Economy, starts with the observation that assessing whether mergers, joint marketing, and other forms of co

Final results

I intend to pursue several new lines of research: one on the international monetary system, building on the previous ERC work on liquidity and bailouts; one studying the regulation of data transfers (beyond GDPR); one formalizing and drawing the policy implications of the right to be forgotten (also embodied in GDPR). And of course, the ongoing projects will need further work to be ready for publication in top scientific journals.