Matt Elliott

Research

Contact Information:

Division of the Humanities and Social Sciences 228-77
California Institute of Technology
Pasadena, California 91125

 

 

I am Assistant Professor of Economics at Caltech.

Social Investments, Informal Risk Sharing, and Inequality

(with Attila Ambrus and Arun Chandrasekhar, Draft date: October 2014)

This paper studies costly network formation in the context of risk sharing. Neighboring agents negotiate agreements as in Stole and Zwiebel (1996), which results in the social surplus being allocated according to the Myerson value. We uncover two types of inefficiency: overinvestment in social relationships within group (caste, occupation, etc), but underinvestment across group. We find a novel tradeoff between efficiency and equality. Both within and across groups, inefficiencies are minimized by increasing social inequality, which results in financial inequality and increasing the centrality of the most central agents. Evidence from 75 Indian village networks is congruent with our model.

 

Decentralized Bargaining: Efficiency and the Core (with Francesco Nava, Draft date: October 2014)

The paper presents a model of decentralized bargaining. The model is non-cooperative, fully decentralized, and in Markov strategies. The main result identifies a necessary and sufficient condition for equilibrium efficiency. This condition is closely related to the core of the economy, thereby connecting non-cooperative bargaining outcomes to the cooperative approach. Bargaining positions evolve endogenously in the game and can lead to both mismatch and delay. Mismatch is necessary for equilibrium delay.

 

Financial Networks and Contagion (with Ben Golub and Matt Jackson)

American Economic Review, 2014.

We model financial contagions and cascades of defaults among organizations that have a network of cross holdings. We first identify a network-based measure that captures the impact of changes in one organization's value on other organizations' values.  We use the measure to study both integration (the increasing of cross holdings) and diversification (the spreading out of cross holdings).  We show that diversification initially increases the probability and extent of cascades as a network of interdependencies grows, and eventually the probability and extent of cascades decreases once organizations become less tied to specific other organizations.  Integration also faces tradeoffs: increased dependence on other organizations versus less sensitivity to own investments. We briefly discuss incentives to seek bailouts, and associated moral-hazard issues. We also show that once an organization approaches a bankruptcy threshold, there are no trades of cross holdings or assets at fair prices that can lower the probability of its failure, and that unduly favorable trades for that organization and/or a direct injection of capital are necessitated. Finally, we illustrate some aspects of the model with European debt cross holdings.

 

Inefficiencies in Networked Markets   (Draft date: June 2014) (Supplementary Appendix)

American Economic Journal: Microeconomics, forthcoming.

In many markets, relationship specific investments are necessary for trade. These formed relationships constitute a networked market in which not all buyers can trade with all sellers. We show that networked markets can be decomposed to identify how alternative trading opportunities affect who trades with whom and at what price. This uncovers agents’ investment incentives. In some markets a buyer and seller must make different, separate investments to trade, while in others investments are jointly negotiated. Either way, inefficiencies can be severe and consume all the gains from trade, but for different reasons. We consider three applications in detail: high-skill labor markets, merger markets when industries are consolidating, and the international market for natural gas.

 

Ranking Agendas for Negotiations (with Ben Golub, Draft date: May 2014)

Consider a negotiation in which agents will make costly concessions to benefit others -- e.g., by implementing tariff reductions, environmental regulations or nuclear disarmament. An agenda specifies which issue or dimension agents will make concessions on; after an agenda is chosen, the negotiation comes down to the magnitude of each agent's contribution.  We seek a ranking of agendas based on the marginal costs and benefits they each generate at the status quo, which are captured in a Jacobian matrix. In a transferable utility (TU) setting, there is a simple ranking based on the best available social return per unit of cost (measured in the numeraire). When transfers are not available, the problem of ranking agendas is more difficult, and we take an axiomatic approach. First, we require the ranking not to depend on economically irrelevant changes of units. Second, we require that the ranking be consistent with the TU ranking on problems that are equivalent to TU problems in a suitable sense. The unique ranking satisfying these axioms is represented by the spectral radius (Frobenius root) of a matrix closely related to the Jacobian, whose entries measure the marginal benefits per unit marginal cost agents can confer on one another.

 

A Network Approach to Public Goods (with Ben Golub, Draft date: April 2014)

Suppose each of several agents can exert costly effort that creates nonrival, heterogeneous benefits for some of the others. How do negotiated outcomes depend on the heterogeneities? To study this question, we construct a matrix — or a weighted, directed network — that describes the marginal benefits agents can confer on one another. We first show that an outcome is Pareto efficient if and only if the largest eigenvalue of the marginal benefits matrix evaluated at that outcome is equal to one. A corollary describes the players whose participation is essential for any Pareto improvement. To refine the Pareto frontier, we then consider a bargaining game and study its efficient equilibria, which turn out to have additional robustness properties. Efficient equilibrium actions are proportional to agents' eigenvector centralities in the benefits network. These action levels correspond to the  Lindahl solution.

(This paper includes results previously circulated in a paper titled “A network centrality approach to coalitional stability”)

 

Heterogeneities and the Fragility of Labor Markets (Draft date: March 2014)

Workers' labor market participation decisions and firms' vacancy creation decisions are studied in a model where different matches generate different surpluses. An immediate consequence of these heterogeneities is that better matches are possible in thicker markets. This creates a thick market externality: when additional workers and firms enter the market, they confer net benefits on the other workers and firms by improving the expected quality of their matches. As a consequence, there is always too little entry by both workers and firms. The thick market externality has further implications. Quite generally labor markets will be fragile. Considering shocks to average match productivities, there will be a critical threshold at which a labor market suddenly collapses from supporting multiple workers and multiple firms in equilibrium to supporting no workers or firms in any equilibrium. All but one agent will suffer discontinuous losses as this threshold is passed and the market collapses.

 

How Better Information Can Garble Experts' Advice (joint with Ben Golub and Andrei Kirilenko, Draft date: June 2012)

We model two experts who must make predictions about whether an event will occur or not. The experts receive private signals about the likelihood of the  event occurring, and simultaneously make one of a finite set of possible predictions, corresponding to varying degrees of alarm. The information structure is commonly known among the experts and the recipients of the advice. Each expert's payoff depends on whether the event occurs, her prediction, and possibly the prediction of the other expert. Our main result shows that when either or both experts receive uniformly more informative signals, their predictions can  become unambiguously less informative. We call such information improvements perverse. Suppose a third party wishes to use the experts' recommendations to decide whether to take some costly preemptive action to mitigate a possible bad event. The third party would then trade off the costs of two kinds of  mistakes: (i) failing to take  action when the  event will occur; and (ii) needlessly taking the  action when the event will not occur. Regardless of how this third party trades off the associated costs, he will be worse off after a perverse information improvement. These perverse information improvements can occur when each expert's payoff is independent of the other expert's predictions and when the information improvement is due to a transfer of technology between the experts.

CV