Microeconomic Theory in Canada

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Recent Papers

• Matching by Luck or Search? Empirical Evidence from the Executive Labor Market
  
  Li, Kun, Toulouse,
  Peters, Michael, University of British Columbia - Economics, peters@econ.ubc.ca
  Xu, Pai, University of Hong Kong, paixu@hku.hk
  This paper provides a dynamic extension of Peters (2010) directed search model. The point is to characterize the evolution of wage outcomes over time. The primary result of that paper, which is reproduced here, is that workers use random application strategies when they are searching for new jobs. As a consequence, matching markets will be characterized by kind of mismatch of worker and firm types. This mismatch varies in a systematic way with worker types, making it possible to look for evidence of this mismatch in market data. The main predictions are that lower worker types should have a larger variance of lifetime income than high types do, and that there should be a limit on the auto correlation of lifetime income. In particular, these predictions make it possible to distinguish between the model presented here and earlier models, like Peters (2001) where market outcomes are uncorrelated over time, or Eeckhout and Kircher (2010) where outcomes are perfectly correlated over time. The paper then explores a dataset on the executive labor market from 1993 to 2009. Using wage histories to identify the unobservable types of the various workers, the paper proceeds to check some of the main predictions of the model. In addition, the 'type' information recovered from the data can be used to increase the explanatory power of the wage equation by up to 22 percentage points relative to what is is accomplished using observable characteristics alone.
  Creation Date: 2013-04-26   Revision Date: 2013-04-30
• Parametric Recoverability of Preferences
  
  Halevy, Yoram, University of British Columbia, yoram.halevy@ubc.ca
  We propose a procedure to recover parametric preferences from choices made from convex budget sets. The objective of the method is to minimize the inconsistency between the revealed preference information contained in the choices and the ranking information contained in the recovered preferences. For a given parametric utility function the procedure calculates, for every choice, the minimal proportional adjustment to the budget such that the two rankings are aligned. The closest element in a parametric family is found by minimizing a metric that is based on these minimal adjustments. Additionally, we show that this method can be used to recover approximate preferences even for inconsistent decision makers. The goodness of fit of such approximation can be decomposed into a familiar measure of inconsistency and a natural measure of misspecification. This decomposition provides a reasonable way to test restrictions and to select among different parametric models. We apply this method to a data set constructed in a lab experiment on choice under risk. The recovered utility structure(within the same parametric family) exhibits, on average, higher first-order risk aversion (non-expected utility) and lower second-order risk aversion (expected utility), thanthe standard method that is based on statistical distance.
  Creation Date: 2012-06-30   Revision Date: 2012-06-30
• Time Consistency: Stationarity and Time Invariance
  
  Halevy, Yoram, University of British Columbia, yoram.halevy@ubc.ca
  A sequence of experiments documents static and dynamic "preference reversals" between sooner-smaller and later-larger rewards, when the sooner reward could be immediate. The theoretically-motivated design permits separate identification of time-consistent, stationary and time-invariant choices. Half of the subjects are time consistent, but only two-thirds of them exhibit stationary choices. About half of subjects with time inconsistent choices have stationary preferences. These results challenge the view that present-bias preferences are the main source of time inconsistent choices.
  Creation Date: 2012-06-24   Revision Date: 2012-06-24
• Repeated Contracting in Decentralised Markets
  
  Ghosh, Sambuddha, Boston University, sghosh@bu.edu
  Han, Seungjin, McMaster University, hansj@mcmaster.ca
  We consider a model where multiple principals repeatedly offer short-term contracts to three or more agents with private information. Under low discounting there exists a simple class of mechanisms that sustains all equilibrium allocations that could be generated by arbitrarily complex mechanisms. This equivalence result leads to a simple algorithm for computing equilibrium payoffs; this contrasts with the one-shot setting, where closed form expressions of such payoffs do not exist. Endogenous monitoring by agents weakens incentive compatibility relative to one-shot contracting; this lowers minmax values, expanding the set of equilibrium payoffs.
  Creation Date: 2012-04-04   Revision Date: 2013-05-02
• Compensating Wage Differentials in Stable Job Matching Equilibrium
  
  Han, Seungjin, McMaster University, hansj@mcmaster.ca
  Yamaguchi, Shintaro, McMaster University, yamtaro@mcmaster.ca
  This paper studies implicit pricing of non-wage job characteristics in the labour market using a two-sided matching model. It departs from the previous literature by allowing worker heterogeneity in productivity, which gives rise to a double transaction problem in a hedonic model. Deriving sufficient conditions under which assortative matching is the unique stable job-worker matching, we show that observed wage differentials between jobs reflect not only compensating wage differentials, but also worker productivity gaps between the jobs. We find that the job-worker matching pattern determines the extent to which compensating wage differentials are confounded with the worker productivity gap effect.
  Creation Date: 2012-01-30   Revision Date: 2013-02-27