I appreciate helpful comments and suggestions from the editor laura veldkamp, an anonymous associate editor, two anonymous referees, patrick augustin, erin berman, adam brandenburger, menachem brenner, xavier gabaix, itzhak gilboa, william greene, sergiu hart, richard herron, zur izhakian, sharon kaminer, edi karni, ruth kaufman, ilan kremer, dan levin, mark machina, efe ok, jacob sagi, thomas. Xavier gabaix, arvind krishnamurthy, and olivier vigneron nber working paper no. Optimal taxation with behavioral agents yale law school. Deviations from covered interest rate parity du 2018. Gabaix 2011 also highlights the conceptual usefulness of the notion of fundamental volatility, showing in particular how it does not require the knowledge of detailed linkages, which greatly.
Multidimensional skills, sorting, and human capital accumulation pp. A behavioral new keynesian model american economic association. Edmans, alex and gabaix, xavier, executive compensation. One goal of this paper is to bridge the gap between the microfoundations of economics and the regularities uncovered in econophysics. Huang gabaix, xavier and david laibson, the seven properties of good models, chapter in. He has been listed among the top 8 young economists in the world by the economist. Xavier gabaix in search of the origins of financial. We thank four anonymous referees, alberto bisin, xavier gabaix, fatih guvenen, tullio jappelli, benjamin moll, gueorgui kambourov, daniele massacci, giovanni mastrobuoni, andrea pozzi, ali shourideh, terje skjerpen, kjetil storesletten, and anton tsoy for very fruitful discussions. Experimental analysis of a boundedly rational model by xavier gabaix, david laibson, guillermo moloche and stephen weinberg. It builds on previous work by the author in the context of oneagent deci. Xavier gabaix presents his work with ralph koijen on in search of the origins of financial fluctuations in the virtual finance workshop. Syllabus foundations of financial markets spring 2010.
An exactly solved framework for ten puzzles in macrofinance farhi, emmanuel and xavier gabaix, rare disasters and exchange rates agarwal, sumit, john driscoll, xavier gabaix, and david laibson, the age of reason. Gabaix 2011 also highlights the conceptual usefulness of the notion of fundamental volatility, showing in particular how it does not. Published in volume 54, issue 4, pages 123287 of journal of economic literature, december 2016, abstract. Xavier gabaix pershing square professor of economics and finance. Why has ceo pay increased so much quarterly journal of economics. This paper develops a theory of optimal taxation with behavioral agents. Using the recent technique of linearitygenerating processes gabaix 2007, the model is very tractable, and all prices are in closed form. Eugene stanley mit, economics department and nber boston university, physics department, center for polymer studies march 20, 2004 abstract we propose a theory of large movements in stock market activity. Xavier gabaix march 16, 2017 abstract this paper proposes a tractable way to model boundedly rational dynamic programming. We are grateful to marios angeletos, olivier blanchard, phil bond, craig burnside, jon faust, xavier gabaix, jordi gali, michael golosov, campbell harvey, william hawkins, burton hollifield, bengt holmstrom, urban jermann, dimitri vayanos, ivan werning, an associate editor and anonymous referee, as well as. This article defines and analyzes a sparse max operator, which is a less than fully attentive and rational version of the traditional max operator.
The loss aversion narrow framing approach to the equity premium puzzle, in handbook of equity the risk premium, rajnish mehra editor, 2008, elsevier, p. A behavioral new keynesian model american economic. Spikes in the stock market 565 gabaix and ioannides 2004. Optimal monetary policy under bounded rationality, wp19166. This paper presents a framework for analyzing how bounded rationality affects monetary and fiscal policy. Optimal taxation with behavioral agents american economic. Stern school, new york university, new york, ny 10012. A sparsitybased model of bounded rationality xavier gabaix. Economic inequality exacerbated by economic rents from. We propose a quite general way to construct instruments.
G12, g14, g21 abstract limits of arbitrage theories hypothesize that the marginal investor in a particular asset market is a specialized arbitrageur rather than a diversified representative investor. Dufresne, doug diamond, charles engel, xavier gabaix, benjamin hebert, sebastian infante, arvind krishnamurthy, martin lettau, hanno lustig, matteo maggiori, robert mccauley, tyler muir, warren naphtal, brent neiman, pierre. Xavier gabaix born august 1971 is a french economist, currently the pershing square professor of economics and finance at harvard university. Xavier gabaix nyu, cepr and nber august 26, 2015 abstract this paper develops a theory of optimal taxation with behavioral agents. An exactly solved framework for ten puzzles in macrofinance, revise and resubmit 3 nd round at the quarterly journal of economics. Heterogeneity and persistence in returns to wealth. Optimal taxation with behavioral agents by emmanuel farhi and xavier gabaix. This chapter is a pedagogical guide to the literature on attention. It says that for most countries the size distribution of cities strikingly fits a power law. Xavier gabaix nyu stern, cepr and nber june 16, 2011 extremely preliminary and incomplete. Gabaix, xavier and david laibson 2006 shrouded attributes, consumer.
Alex edmans, xavier gabaix, and augustin landier nber working paper no. Nyu stern school of business fulltime mba, parttime. Eugene stanley boston university abstract we survey a theory of the economic underpinnings of the fattailed distributions of a number of. This exponent is also sometimes called the pareto exponent. A sparsitybased model of bounded rationality, the quarterly journal of economics, oxford university press, vol.
Behavioral macroeconomics via sparse dynamic programming. Rare disasters, stochastic discount factor, linearitygenerating process, long term risk, interest rate processes, yield curve, bond pricing, equity premium, value premium, riskfree rate puzzle, excess volatility, forward premium puzzle, uncovered interest rate parity puzzle. This article studies traditional and modern theories of executive compensation, bringing them together under a simple u. In turn, the large firms or sectors coming from that fattailed distribution create gdp fluctuations. We thank claudio borio, francois cocquemas, pierre collin. Xavier gabaix 187 a given finitely sized sample, it generates an approximate relation of type shown in figure 1 and in the accompanying regression equation.
Pdf models are significant as they are used to provide a supposedly reliable. Agarwal, sumit, john driscoll, xavier gabaix, and david laibson, learning in the credit. Financial decisions over the life cycle working papers. Xavier gabaix, parameswaran gopikrishnan, vasiliki plerou, h. Finally, the paper proposes a specification that integrate rare disasters with a standard real business cycle economy. Gabaix 1999, the latest in a series of notable contributions to this literature, derives a statistical explanation of zipfs law for cities. Abstract this paper proposes a way to enrich traditional game theory via an element of bounded rationality. Xavier gabaix stern school, new york university, new york, ny 10012. The model is a tractable and parsimonious enrichment of the widelyused new keynesian model with one main new cognitive discounting parameter, which quantifies how poorly agents understand future economic disturbances. D2,d3,g34,j3,j41 abstract this paper presents a unified framework for understanding the determinants of both ceo incentives and total pay levels in competitive market equilibrium. Jorge ivan canales kriljenko, xavier gabaix, lars peter hansen, ori heffetz, seppo honkapohja, doron kliger. We use a general behavioral framework that encompasses a wide range of behavioral biases such as misperceptions, internalities and mental accounting. This paper analyzes how bounded rationality affects monetary and fiscal policy via an empirically relevant enrichment of the new keynesian model. Krishnamurthy is from northwestern university and nber.
A unified theory of ten financial puzzles by xavier gabaix. Read the latest chapters of handbook of behavioral economics. The agent uses an endogenously simpli ed, or \sparse, model of the world and the consequences of his actions and acts according to a behavioral bellman equation. The loss aversion narrow framing approach to the equity premium puzzle, in handbook of the equity risk premium, rajnish mehra editor, 2008, elsevier, p. Granular instrumental variables by xavier gabaix, ralph s. Collective risk management in a flight to quality episode. A theoretical foundation of ambiguity measurement sciencedirect. Gabaix, xavier, behavioral inattention december 2017. A calibratable model of optimal ceo incentives in market.
Jan 31, 2006 using the recent technique of linearitygenerating processes gabaix 2007, the model is very tractable, and all prices are in closed form. Huang gabaix, xavier and david laibson, the seven properties of good models, chapter in the. In the size of stakes view quantitatively formalised in gabaix and landier quarterly journal of economics, 1211. Institutional investors and stock market volatility. In search of the origins of financial fluctuations. Xavier gabaix mit parameswaran gopikrishnan boston university vasiliki plerou boston university h. D31,e24 abstract the past forty years have seen a rapid rise in top income inequality in the united states. Zipfs law is a very tight constraint on the class of admissible models of local growth. A theory of large fluctuations in stock market activity.
Jul 22, 2011 gabaix, xavier variable rare disasters. He shows that if di erent cities grow randomly with the same expected growth rate and the same variance gibrats law, the limit distribution of city size will converge so as to obey zipfs law. Pdf the seven properties of good models1 researchgate. Pdf crash risk in currency markets xavier gabaix and. Olivier gourinchas, jonathan parker, thomas philippon. An exactly solved framework for ten puzzles in macrofinance farhi, emmanuel and xavier gabaix, rare disasters and exchange rates. Xavier gabaix stern school of finance, new york university, 44 west 4th street, suite 9. Econophysics is a broad movement comprising several hundred researchers. Suppose that, at least in the upper tail, all cities follow some proportional growth process this appears to be verified. While there is a large number of existing theories of the pareto tails of the income and wealth distributions at a. D1,d8,g2,j14 abstract in crosssectional data sets from ten credit markets, we find that middleaged adults borrow at lower interest rates and pay fewer fees relative to younger and older adults. A sparsitybased model of bounded rationality xavier. Munich personal repec archive the allocation of attention.
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