The aim of this paper is to investigate the effects of bounded rationality on labour market dynamics. The model is based on a standard New Keynesian model that incorporates labour market search and matching frictions developed by Trigari (2006). During the bargaining process, wages and working hours are jointly determined by firms and workers. Expectations heterogeneity is introduced by assumin...

We consider optimal monetary stabilization policy in a New Keynesian model with explicit microfoundations, when the central bank recognizes that private-sector expectations need not be precisely model-consistent, and wishes to choose a policy that will be as good as possible in the case of any beliefs close enough to model-consistency. We show how to characterize robustly optimal policy without...

In this paper, I quantify the impact of state-level macroeconomic conditions during childhood on investment decisions in adulthood. The use of intertemporal withinstate variation allows me to control for potentially confounding unobservable national conditions. Unlike previous research that uses national aggregates, I find a significant effect of childhood macroeconomic conditions on investment...

In this study I construct a novel explanation for inequality persistence and then present supporting evidence from two separate experiments. Building on Just World Beliefs research (Lerner, 1965), I hypothesize that individuals tend to believe they merit the unequal treatment they experience. Because a component of merit is ability, being disadvantaged (advantaged) by inequality may undermine (...

Using banks’ internal models for regulatory purposes, while aimed at making capital requirements more accurate, invites regulatory arbitrage. I develop a framework to study the strategic selection of risk models, and derive predictions in line with recent empirical evidence. I also study optimal regulations. Penalizing banks with low risk-weights when they suffer abnormal losses is a powerful t...

An economic environment is a feedback system, where the dynamics of aggregate variables depend on individual expectations and vice versa. The type of feedback mechanism is crucial for the aggregate outcome. Experiments with human subjects (Heemeijer, Hommes, Sonnemans, and Tuinstra, 2009) have shown that price converges to the fundamental level in a negative feedback environment but fails to do...

This paper reports results from a unique two-stage experiment designed to examine the spillover effects of optimism and pessimism. In stage 1, we induce optimism or pessimism onto subjects by randomly assigning a high or low piece rate for performing a cognitive task. We find that participants receiving the low piece rate are significantly more pessimistic with respect to performance on this ta...

The higher our aspirations, the higher the probability that we have to adjust them downwards when forming more realistic expectations later on. This paper shows that the costs induced by high aspirations are not trivial. We first develop a theoretical framework to identify the factors that determine the effect of aspirations on expected utility. Then we present evidence from a lab experiment on...

Inspired by the recent literature on aggregation theory, we aim at relating the long range correlation of the stocks return volatility to the heterogeneity of the investors’ expectations about the level of the future volatility. Based on a semi-parametric model of investors’ anticipations, we make the connection between the distributional properties of the heterogeneity parameters and the auto-...

The concept of qualitative di¤erences in information, i.e. the distinction between risk and ambiguity, builds the framework of a growing strand of economic research. For non additive set functions as used in the Choquet Expected Utility framework, the independent product in general is not unique and the Fubini theorem is restricted to slice-comonotonic functions. In this paper, we use the repre...