Essays on social learning, cooperation, asset markets and human capital

Abstract

In the first chapter, I examine the effect of social learning on social norms of cooperation. To this end I develop an 'anti-social learning' game. This is a dynamic social dilemma in which all agents know how to cooperate but a proportion are informed and know of privately profitable but socially costly, or uncooperative, actions. In equilibrium agents are able to infer, or learn, the payoffs to the actions of prior agents. Agents can then learn through observation that some socially costly action is privately profitable. This implies that an informed agent behaving uncooperatively can induce others to behave uncooperatively when, in the absence of observational learning, they would have otherwise been cooperative. However, this influence also gives informed agents an incentive to cooperate - not cooperating may induce others to not cooperate. I use this model to give conditions under which social learning propagates cooperative behaviour and conditions under which social learning propagates uncooperative behaviour. In the second chapter, I present a co-authored model of a self-fulfilling price cycle in an asset market. In this model the dividend stream of the economy's asset stock is constant yet price oscillates deterministically even though the underlying environment is stationary. This creates a model in which there is rational excess volatility - 'excess' in the sense that it does not reflect changes in dividend streams and 'rational' in that all agents are acting on their best information. The mechanism that we uncover is driven by endogenous variation in the investment horizons of the different market participants, informed and uninformed. On even days, the price is high; on odd days it is low. On even days, informed traders are willing to jettison their good assets, knowing that they can buy them back the next day, when the price is low. The anticipated drop in price more than offsets any potential loss in dividend. Because of these asset sales, the informed build up their cash holdings. Understanding that the market is flooded with good assets, the uninformed traders are willing to pay a high price. But their investment horizon is longer than that of the informed traders: their intention is to hold the assets they purchase, not to resell. On odd days, the price is low because the uninformed recognise that the informed are using their cash holdings to cherry-pick good assets from the market. Now the uninformed, like the informed, are investing short-term. Rather than buy-and-hold as they do with assets purchased on even days, on odd days the uninformed are buying to sell. Notice that, at the root of the model, there lies a credit constraint. Although the informed are flush with cash on odd days, they are not deep pockets. On each cherry that they pick out of the market, they earn a high return: buying cheap, selling dear. However they don't have enough cash to strip the market of cherries and thereby bid the price up. The final chapter is on identifying the role of privilege in determining inter- generational mobility. The intergenerational elasticity of income is the standard measurement economists use for intergenerational mobility. It is not clear how we should interpret intergenerational elasticities. Particularly, high intergenerational elasticities could either reflect inequality of opportunity or the importance of genetically heritable characteristics in determining genes. Behavioural geneticists have long been using a twin based variance decomposition method, the ACE model, to estimate the genetic heritability of various characteristics. It is not clear, however, what this approach implies for intergenerational mobility of equality of opportunity. I develop a novel method that extends the methodology used in behavioural genetics to identifying how much of the intergenerational elasticity of income is determined by the presence (absence) of environmental privileges associated with being children of high (low) earners. Using this approach we can examine the counterfactuals of giving a poorer child the environment of a richer child; equalising the privileges associated with family income; and equalising the family environmental factors not associated with parental income. Furthermore, this method allows us to identify how good parental income is as a measure of family environment. The model I develop nests the behavioural genetics model allowing us to relax some of the identifying assumptions used in the standard ACE model. Finally, I apply this method to data on the income elasticities between American males of different types of relation: fraternal twins, identical twins and father-son relationships. The results of this application suggest that a 1 percent increase in the privilege associated with parental income increases child income by about 1 tenth of a percent. Equalising, to the mean, the environmental privileges across the population results in about a 30 percent drop in the intergenerational elasticity of income and a 5 percent drop in the variance of income across the population. These results must be treated tentatively as the twin data comes from a separate survey to the data on intergenerational elasticities.