I am currently working on the following topics:
A Model of State Aggregation (submitted)
Optimizing utility in all states of the world together might be difficult even for a machine. This paper adds to the behavioral literature by introducing a model in which the agent aggregates the states together, even though she is aware of the entire state space. As a result of the state aggregation, the person solves several problems with fewer variables instead of the initial problem with the entire state space. When the person is an SEU-maximizer, the decisions are not affected by the way the states get aggregated. In our model, people still have subjective priors over states and events, however, they lump some states together in a non-linear way, which leads to different choices. The paper provides axioms for a state aggregation model, discusses identification of the state aggregation from choices in a complete market setting, offers comparative statics due to changes in the state aggregation and event aversion, and demonstrates how the model explains a number of ambiguity paradoxes.
State Aggregation in Insurance Choices with A. Teperski (submitted)
Optimizing utility in all states of the world at once might be difficult even for a machine. This paper adds to the behavioral literature by testing models in which the agent aggregates the states together, even though he or she is aware of the entire state space. Different ways of framing objective information may cause agents to aggregate states in predictable ways, which also has a predictable effect on their decisions. Our findings from an experiment suggest the participants respond to the above framing manipulations when asked to choose insurance plans. In addition, the subjects demonstrate event-loving – the desire to make more similar choices in aggregated states. This finding should not be confused with risk aversion, because such behavior is triggered by the aggregation-inducing frame rather than the natural desire to lower the uncertainty. Our results explain why agencies such as insurance companies use heuristics and the innate confusing nature of contracts to engage consumers in choices that are profitable only for the supplier.
This paper studies how ambiguity affects identification of the state aggregation model -- a model with an agent that combines several states into an event in order to simplify decision-making. We show that the state aggregation is partially identified under Maxmin Expected Utility (MEU) and it is uniquely identified if α-MEU model is used. In addition, we offer testable restrictions of the model.
Political Economy behind Central Bank Independence (submitted)
This paper proposes a model that analyzes the reasons behind the establishment and persistence of central bank independence (CBI) in a competitive democracy where both incumbent and opposition parties have the right to veto the delegation of monetary policy. We show that in a country with a high level of corruption, the absence of CBI is used by the opposition party to keep the economy unstable to increase its own chances of getting elected. The model also predicts persistence of CBI once it is established, due to the incumbent's fear of losing the office if the autonomy is removed.
Identification of Electoral Model and Ballot Stuffing (under revision)
This paper introduces a model of electoral choice that allows for derivation of joint distribution of turnout and voter share from unobservable joint distribution of costs of voting and preferences over candidates. Under a set of mild assumptions, we show non-parametric identification of joint distribution of costs of voting and preferences over candidates from observable data on single elections/referendum. We also offer an extension of the model that helps to identify ballot stuffing type of electoral fraud. In addition, we offer an empirical illustration of the model estimation using 2011 Russian parliamentary election data.