%0 Generic %D Forthcoming %T Granular Instrumental Variables %A X. Gabaix %A Koijen, R.S.J. %X

We develop a new method to construct instruments in a broad class of economic environments. In the economies we study, a few large firms, industries or countries account for an important share of economic activity. Idiosyncratic shocks to these large players significantly affect aggregate outcomes and are valid instruments. We provide a methodology to extract these idiosyncratic shocks to create ``granular instrumental variables'' (GIVs), which are size-weighted sums of idiosyncratic shocks. We show how GIVs enable us to estimate causal parameters, such as elasticities and multipliers, and are applicable in a broad range of empirically relevant settings.

%B Journal of Political Economy %G eng %0 Journal Article %D 2023 %T Asset Embeddings [Working Paper] %A Xavier Gabaix %A Ralph S. J. Koijen %A Motohiro Yogo %A Robert Richmond %G eng %0 Journal Article %D 2023 %T The Complexity of Economic Decisions [Working Paper] %A Xavier Gabaix %A Thomas Graeber %G eng %0 Journal Article %J SSRN %D 2023 %T Asset Demand of U.S. Households %A Xavier Gabaix %A Ralph J. Koijen %A Federico Mainardi %A Sangmin Oh %A Motohiro Yogo %B SSRN %G eng %U https://ssrn.com/abstract=4251972 %0 Generic %D 2023 %T Behavioral Macroeconomics Via Sparse Dynamic Programming %A Xavier Gabaix %B Journal of the European Economic Association %V 21 %P 2327-2376 %G eng %U https://doi.org/10.1093/jeea/jvad057 %N 6 %0 Generic %D 2022 %T In Search of the Origins of Financial Fluctuations: The Inelastic Markets Hypothesis [Working Paper] %A X. Gabaix %A Koijen, R.S.J. %G eng %0 Generic %D 2022 %T Myopia and Discounting [Working Paper] %A Xavier Gabaix %A David Laibson %G eng %0 Journal Article %J American Economic Review %D 2020 %T A Behavioral New Keynesian Model %A X. Gabaix %X

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This paper presents a framework for analyzing how bounded rationality affects monetary and fiscal policy. The model is a tractable and parsimonious enrichment of the widely-used New Keynesian model – with one main new “cognitive discounting” parameter, which quantifies how poorly agents understand future economic disturbances. That myopia parameter, in turn, affects the power of monetary and fiscal policy in a microfounded general equilibrium. A number of consequences emerge. (i) Fiscal stimulus or “helicopter drops of money” are powerful and, indeed, pull the economy out of the zero lower bound. More generally, the model allows for the joint analysis of optimal monetary and fiscal policy. (ii) The Taylor principle is strongly modified: even with passive monetary policy, equilibrium is determinate, whereas the traditional rational model yields multiple equilibria, which reduces its predictive power, and generates indeterminate economies at the zero lower bound (ZLB). (iii) The ZLB is much less costly than in the traditional model. (iv) The model brings a natural solution to the “forward guidance puzzle”: the fact that in the rational model, shocks to very distant rates have a very powerful impact on today's consumption and inflation; because agents are partially myopic, this effect is muted. (v) Optimal policy changes qualitatively: the optimal commitment policy with rational agents demands “nominal GDP targeting”; this is not the case with behavioral firms, as the benefits of commitment are less strong with myopic firms. (vi) The model is “neo-Fisherian” in the long run, but Keynesian in the short run: a permanent rise in the interest rate decreases inflation in the short run but increases it in the long run. The non-standard behavioral features of the model seem warranted by extant empirical evidence.

 

%B American Economic Review %V 110 %P 2271-2327 %G eng %N 8 %0 Journal Article %J American Economic Review %D 2020 %T Optimal Taxation with Behavioral Agents %A Farhi, E %A X. Gabaix %X

Abstract This paper develops a theory of optimal taxation with behavioral agents. We use a general behavioral framework that encompasses a wide range of behavioral biases such as misperceptions and internalities. We revisit the three pillars of optimal taxation: Ramsey (linear commodity taxation to raise revenues and redistribute), Pigou (linear commodity taxation to correct externalities) and Mirrlees (nonlinear income taxation). We show how the canonical optimal tax formulas are modified and lead to a rich set of novel economic insights. We also show how to incorporate nudges in the optimal taxation frameworks, and jointly characterize optimal taxes and nudges.

%B American Economic Review %V 110 %P 298-336 %8 2015 %G eng %N 1 %0 Book Section %B Handbook of Behavioral Economics, edited by D Bernheim, S DellaVigna and D Laibson %D 2019 %T Behavioral Inattention %A X. Gabaix %X

Inattention is a central, unifying theme for much of behavioral economics. It permeates such disparate fields as microeconomics, macroeconomics, finance, public economics, and industrial organization. It enables us to think in a rather consistent way about behavioral biases, speculate about their origins, and trace out their implications for market outcomes.

This survey first discusses the most basic models of attention, using a fairly unified framework. Then, it discusses the methods used to measure attention, which present a number of challenges on which much progress has been done. It then examines the various theories of attention, both behavioral and more Bayesian. It finally discusses some applications. For instance, inattention offers a way to write a behavioral version of basic microeconomics, as in consumer theory, producer theory, and Arrow-Debreu. A last section is devoted to open questions in the attention literature.

This chapter is a pedagogical guide to the literature on attention. Derivations are self-contained.

%B Handbook of Behavioral Economics, edited by D Bernheim, S DellaVigna and D Laibson %I Elsevier %V 2 %P 261-343 %G eng %U https://www.sciencedirect.com/handbook/handbook-of-behavioral-economics-applications-and-foundations-1/vol/2 %0 Book Section %B Handbook of the Economics of Corporate Governance, Chapter 9 %D 2017 %T Executive Compensation: A Survey of Theory and Evidence %A Edmans, A %A X. Gabaix %A Jenter, D %X

Survey paper on executive compensation, containing (1) Data on CEO and other top executive pay over time and across firms, including private firms and non-US firms. (2) Critical analysis of three explanations for the drivers of pay: shareholder value maximization (including a simple unifying model), rent extraction, institutional influences. (3) The “effects” of executive pay and challenges in causal identification. (4) Directions for future research.

%B Handbook of the Economics of Corporate Governance, Chapter 9 %P 383-539 %G eng %U https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2992287 %N 4 %0 Journal Article %J Journal of Economic Literature %D 2016 %T Executive Compensation: A Modern Primer %A Edmans, A %A X. Gabaix %B Journal of Economic Literature %V 54 %P 1232-1287 %G eng %N 4 %0 Journal Article %J Journal of Economic Perspectives %D 2016 %T Power Laws in Economics: An Introduction %A X. Gabaix %X

An elementary piece, with many pictures.

%B Journal of Economic Perspectives %V 30 %P 185-206 %G eng %N 1 %0 Journal Article %J Journal of Economic Theory %D 2016 %T The Impact of Competition on Prices with Numerous Firms %A X. Gabaix %A Laibson, D %A D Li %A H. Li %A Resnick, S %A de Vries, Casper %X

How the prices respond, or not, to the intensity of competition, particularly when consumers are confused.

%B Journal of Economic Theory %V 165 %P 1-24 %G eng %0 Journal Article %J Econometrica %D 2016 %T The Dynamics of Inequality %A X. Gabaix %A Lasry, J-M %A Lions, P-L %A Moll, B %B Econometrica %V 84 %P 2071-2111 %G eng %N 6 %0 Journal Article %J Quarterly Journal of Economics %D 2016 %T Rare Disasters and Exchange Rates %A Farhi, E %A X. Gabaix %X

A rare disasters model accounts for many puzzling features of the joint fluctuations in exchange rates, interest rates, options, and stock markets.

%B Quarterly Journal of Economics %V 131 %P 1-52 %G eng %N 1 %0 Generic %D 2015 %T Crash Risk in Currency Markets [Working Paper] %A Farhi, E %A Fraiberger, S %A X. Gabaix %A R Ranciere %A Verdelhan, A %X

We measure the importance of crash risk in currencies via new analytical results and options data.

%G eng %0 Journal Article %J Quarterly Journal of Economics %D 2015 %T International Liquidity and Exchange Rate Dynamics %A X. Gabaix %A Maggiori, M %X

A theory of exchange rates based on capital flows in imperfect financial markets.

%B Quarterly Journal of Economics %V 130 %P 1369-1420 %G eng %N 3 %0 Journal Article %J Economic Journal %D 2014 %T CEO Pay and Firm Size: An Update after the Crisis %A X. Gabaix %A Landier, A %A Sauvagnat, J %X

An update of "Why Has CEO Pay Increased So Much?" after the crisis; the theory holds well.

%B Economic Journal %V 124 %P F40-F59 %G eng %0 Journal Article %J Quarterly Journal of Economics %D 2014 %T A Sparsity-Based Model of Bounded Rationality %A X. Gabaix %X

I propose a tractable behavioral "max" operator, the sparse max.  It yields a behavioral version of basic consumer theory (e.g., Marshallian demand, Slutsky matrix, nominal illusion) and equilibrium theory (e.g., Arrow-Debreu, Edgeworth boxes.)

%B Quarterly Journal of Economics %V 129 %P 1661-1710 %G eng %N 4 %0 Journal Article %J American Economic Review %D 2013 %T The Great Diversification and Its Undoing %A Carvalho, V %A X. Gabaix %X

We propose an account of the movement of GDP volatility in the past 50 years, including the great moderation and its undoing.

%B American Economic Review %V 103 %P 1697-1727 %G eng %N 5 %0 Generic %D 2013 %T Learning in the Credit Card Market [Working Paper] %A Agarwal, S. %A Driscoll, JC %A X. Gabaix %A Laibson, D %X

Like rational agents, consumers learn, but like myopic agents, consumers respond to recent events more than events that occurred just a few months ago.

%G eng %0 Journal Article %J Journal of Finance %D 2012 %T Dynamic CEO Compensation %A Edmans, A %A X. Gabaix %A Sadzik, T %A Sannikov, Y %X

Dynamic model of CEO pay featuring manipulation and private saving.  Proposes a reform of CEO compensation to address problems that led to the financial crisis.

%B Journal of Finance %V 67 %P 1603-1647 %G eng %N 5 %0 Journal Article %J Quarterly Journal of Economics %D 2012 %T Variable Rare Disasters: An Exactly Solved Framework for Ten Puzzles in Macro-Finance %A X. Gabaix %X

Ten puzzling features of the macro-finance data are natural outcomes of a model where investors have time-varying perceptions of the risk of economic disaster.

%B Quarterly Journal of Economics %V 127 %P 645-700 %G eng %N 2 %0 Journal Article %J Econometrica %D 2011 %T The Granular Origins of Aggregate Fluctuations %A X. Gabaix %B Econometrica %V 79 %P 733-772 %G eng %0 Journal Article %J American Economic Review %D 2011 %T The Area and Population of Cities: New Insights from a Different Perspective on Cities %A X. Gabaix %A Makse, H %A Rozenfeld, H %A Rybski, D %X

We build cities "from the bottom up" by clustering areas obtained from high-resolution data, and find that a beautiful Zipf's law for population and for areas, for cities about 12,000 inhabitants in the USA and 5,000 inhabitants in Great Britain.

%B American Economic Review %V 101 %P 2205-2225 %G eng %N 5 %0 Journal Article %J American Economic Review, Papers and Proceedings %D 2011 %T Disasterization: A Tractable Way to Fix the Asset Pricing Properties of Macroeconomic Models %A X. Gabaix %X

Take a production economy which has good business cycle properties:  to fix its asset pricing properties (e.g. to have a high and volatile returns to equities), add disaster risk in the right places, i.e. "disasterize" this economy.

%B American Economic Review, Papers and Proceedings %V 101 %P 406-409 %G eng %N 3 %0 Journal Article %J Journal of Business Economics and Statistics %D 2011 %T Rank-1/2: A Simple Way to Improve the OLS Estimation of Tail Exponents %A X. Gabaix %A Ibragimov, R %X

To estimate a Pareto exponent with an OLS regression, it's best to specify it with log(Rank-1/2)=a-b log(Size), and use the standard error s.e. (b)=b (2/n)^0.5, as OLS standard errors strongly biased.

%B Journal of Business Economics and Statistics %V 29 %P 24-39 %G eng %N 1 %0 Journal Article %J Review of Financial Studies %D 2011 %T The Effect of Risk on the CEO Market %A Edmans, A %A X. Gabaix %X

Risk aversion causes distortions in talent allocation--risky firms hire less talented CEOs.  Tractable market equilibrium allowing calibration of costs of corporate governance.

%B Review of Financial Studies %V 24 %P 2822-2863 %8 2011 %G eng %N 8 %0 Journal Article %J Review of Financial Studies %D 2011 %T Tractability in Incentive Contracting %A Edmans, A %A X. Gabaix %X

Develops a framework that delivers tractable (i.e. closed-form) optimal contracts, with few restrictions on the utility function, or noise distribution.

%B Review of Financial Studies %V 24 %P 2865-2894 %8 2011 %G eng %N 9 %0 Generic %D 2011 %T A Primer on Tractable Incentive Contracts [Working Paper] %A Edelman, A %A X. Gabaix %X

Brief, non-technical summary of the framework for achieving tractable incentive contracts developed in "Tractability in Incentive Contracting" and used in "The Effect of Risk on the CEO Market and Dynamic CEO Compensation."

%G eng %0 Journal Article %J Brookings Papers on Economic Activity %D 2009 %T The Age of Reason: Financial Decisions over the Life-Cycle with Implications for Regulation %A Agarwal, S. %A Driscoll, J.C. %A X. Gabaix %A Laibson, D %X

The young and the old make the most mistakes, and people reach maximal performance at age 53.

%B Brookings Papers on Economic Activity %V 2009 %P 51-117 %G eng %N 2 %0 Journal Article %J Annual Review of Economics %D 2009 %T Power Laws in Economics and Finance %A X. Gabaix %X

Most "laws" in economics are power laws:  a survey of theory and empirics on power laws.

%B Annual Review of Economics %V 1 %P 255-293 %G eng %0 Journal Article %J European Financial Management %D 2009 %T Is CEO Pay Really Inefficient? A Survey of New Optimal Contracting Theories %A Edmans, A %A X. Gabaix %B European Financial Management %V 15 %P 486-496 %G eng %N 3 %0 Journal Article %J Review of Financial Studies %D 2009 %T A Multiplicative Model of Optimal CEO Incentives in Market Equilibrium %A Edmans, A %A X. Gabaix %A Landier, A %X

A neoclassical model of both total salary and incentives quantitatively explains various apparently paradoxical features of the data, such as the negative empirical scaling of the Jensen-Murphy incentives with firm size and their seemingly low level.

%B Review of Financial Studies %V 22 %P 4881-4917 %8 2009 %G eng %0 Generic %D 2009 %T Linearity-Generating Processes: A Modelling Tool Yielding Closed Forms for Asset Prices [Working Paper] %A X. Gabaix %X

The paper explains how, by "twisting" regular processes, simple closed forms for stocks and bonds obtain systematically. 

%G eng %0 Generic %D 2009 %T Linearity-Generating Processes, Unspanned Stochastic Volatility, and Interest-Rate Option Pricing [Working Paper] %A Carr, P %A X. Gabaix %A Wu, L. %X

We present a tractable way to price options on any bond portfolios, including both caps and swaptions, using LG processes.

%G eng %0 Book Section %B The New Palgrave Dictionary of Economics, 2nd edition %D 2008 %T Power Laws %A X. Gabaix %X

A short survey on power laws.

%B The New Palgrave Dictionary of Economics, 2nd edition %G eng %0 Generic %D 2008 %T Regularity Conditions to Ensure the Existence of Linearity-Generating Processes [Working Paper] %A Cheridito, P %A X. Gabaix %G eng %0 Journal Article %J Quarterly Journal of Economics %D 2008 %T Why Has CEO Pay Increased So Much? %A X. Gabaix %A Landier, A %X

A tractable model of CEO pay.  An upshot:  the six-fold rise in CEO pay between 1980 and 2003 can be fully attributed to the six-fold increase in market capitalization of large companies during that period.

%B Quarterly Journal of Economics %V 123 %P 49-100 %G eng %N 1 %0 Journal Article %J Journal of Finance %D 2007 %T Limits of Arbitrage: Theory and Evidence from the Mortgage-Backed Securities Market %A X. Gabaix %A Krishnamurthy, A %A Vigneron, O %X

A "limits of arbitrage" model explains patterns of risk premia in MBS.

%B Journal of Finance %V 62 %P 557-595 %G eng %N 2 %0 Journal Article %J American Economic Review %D 2006 %T Costly Information Acquisition: Experimental Analysis of a Boundedly Rational Model %A X. Gabaix %A Laibson, D %A Moloche, G %A Weinberg, S %X

An experimental investigation of the following "directed cognition" boundedly rational algorithm:  "At each decision point, agents act as if their next set of search operations were their last opportunity for search."

%B American Economic Review %V 96 %P 1043-1068 %G eng %N 4 %0 Journal Article %J Quarterly Journal of Economics %D 2006 %T Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets %A X. Gabaix %A David Laibson %X

If enough consumers are boundedly rational, firms will "shroud" some information about easy to forget dimensions (e.g., the cost of the ink cartridge) even in a competitive equilibrium.

%B Quarterly Journal of Economics %V 121 %P 505-540 %8 2006 %G eng %N 2 %0 Journal Article %J Quarterly Journal of Economics %D 2006 %T Institutional Investors and Stock Market Volatility %A X. Gabaix %A Gopikrishnan, P %A Plerou, V %A Stanley, HE %X

The trades of large institutional investors in illiquid markets explain many patterns in the extreme behavior of returns and trading volume.

%B Quarterly Journal of Economics %V 121 %P 461-504 %G eng %N 2 %0 Generic %D 2005 %T Bounded Rationality and Directed Cognition [Working Paper] %A X. Gabaix %A Laibson, D %X

We propose a simple boundedly rational model.

%G eng %0 Book Section %B Handbook of Regional and Urban Economics %D 2004 %T The Evolution of City Size Distributions %A X. Gabaix %A Ioannides, Y %B Handbook of Regional and Urban Economics %I North-Holland %V 4; Chapter 53 %P 2341-2378 %G eng %0 Journal Article %J Nature %D 2003 %T A Theory of Power Law Distributions in Financial Market Fluctuations %A X. Gabaix %A Gopikrishnan, P %A Plerou, V %A Stanley, HE %X

A theory in which the trades of large funds explain the power law fluctuations of returns, volumes, number of trades, and the link between them.

%B Nature %V 423 %P 267-270 %8 2003 %G eng %U http://www.nature.com/search?journal=nature%2Cnews&q=gabaix%202003 %0 Journal Article %J NBER Macroeconomiics Annual %D 2002 %T The 6D Bias and the Equity Premium Puzzle %A X. Gabaix %A Laibson, D %X

A model of limited attention, in which investors update their information every D period.

%B NBER Macroeconomiics Annual %V 16 %P 257-312 %G eng %0 Journal Article %J Quarterly Journal of Economics %D 1999 %T Zipf's Law for Cities: An Explanation %A X. Gabaix %B Quarterly Journal of Economics %V 114 %P 739-767 %8 1999 %G eng %N 3