B. Douglas Bernheim

Multimarket contact and collusive behavior

Traditional analyses of industrial behavior typically link the exercise of market power in an industry to internal features such as demand conditions, concentration, and barriers-to-entry. Nevertheless, some economists have remained concerned that external factors, such as contact across markets, may also play a significant role in determining the level of competitiveness in any particular industry. In this article, we examine the effect of multimarket contact on the degree of cooperation that firms can sustain in settings of repeated competition. We isolate conditions under which multimarket contact facilitates collusion and show that these collusive gains are achieved through modes of behavior that have been identified in previous empirical studies of multimarket firms.

Coalition-Proof Nash Equilibria I. Concepts

Abstract In an important class of “noncooperative” environments, it is natural to assume that players can freely discuss their strategies, but cannot make binding commitments. In such cases, any meaningful agreement between the players must be self-enforcing. Although the Nash best-response property is a necessary condition for self-enforceability, it is not sufficient—it is in general possible for coalitions arrange plausible, mutually beneficial deviations from Nash agreements. We provide a stronger definition of self-enforceability, and label the class of efficient self-enforcing agreements “coalition-proof.”

Social Image and the 50-50 Norm: A Theoretical and Experimental Analysis of Audience Effects

A norm of 50-50 division appears to have considerable force in a wide range of economic environments, both in the real world and in the laboratory. Even in settings where one party unilaterally determines the allocation of a prize (the dictator game), many subjects voluntarily cede exactly half to another individual. The hypothesis that people care about fairness does not by itself account for key experimental patterns. We consider an alternative explanation, which adds the hypothesis that people like to be perceived as fair. The properties of equilibria for the resulting signaling game correspond closely to laboratory observations. The theory has additional testable implications, the validity of which we confirm through new experiments. Copyright 2009 The Econometric Society. (This abstract was borrowed from another version of this item.)

Addiction and Cue-Triggered Decision Processes

We propose a model of addiction based on three premises: (i) use among addicts is frequently a mistake; (ii) experience sensitizes an individual to environmental cues that trigger mistaken usage; (iii) addicts understand and manage their susceptibilities. We argue that these premises find support in evidence from psychology, neuroscience, and clinical practice. The model is tractable and generates a plausible mapping between behavior and the characteristics of the user, substance, and environment. It accounts for a number of important patterns associated with addiction, gives rise to a clear welfare standard, and has novel implications for policy.

The effects of financial education in the workplace: evidence from a survey of households

Abstract We use a novel household survey to investigate the effects of employer-based financial education on personal saving. We explore cross-sectional relations between the availability of employer-based financial education and various measures of asset accumulation, and we interpret these patterns in light of various potentially confounding factors. Our findings favor the hypothesis that employer-based financial education stimulates saving, both in general and for retirement.

How Strong are Bequest Motives? Evidence Based on Estimates of the Demand for Life Insurance and Annuities

This paper presents new empirical evidence in support of the view that a significant fraction of total saving is motivated by the desire to leave bequests. Specifically, I find that social security annuity benefits significantly raise life insurance holdings and depress private annuity holdings among elderly individuals. These patterns indicate that the typical household would choose to maintain a positive fraction of its resources in bequeathable forms, even if insurance markets were perfect. Evidence on the relationship between insurance purchases and total resources reinforces this conclusion.

Ricardian Equivalence: an Evaluation of Theory and Evidence

In evaluating the existing theory and evidence on Ricardian equivalence, it is essential to distinguish between the short-run effects of government borrowing (primarily the potential for stimulating aggregate demand) and the long-run effects (primarily the potential for depressing capital accumulation). I argue that the theoretical case for long-run neutrality is extremely weak, in that it depends upon improbable assumptions that are either directly or indirectly falsified through empirical observation. In contrast, the approximate validity of short-run neutrality depends primarily upon assumptions that have at least an aura of plausibility. Nevertheless, even in this case behavioral evidence weighs heavily against the Ricardian view. Efforts to measure the economic effects of deficits directly through aggregate data confront a number of problems which, taken together, may well be insuperable. It is therefore not at all surprising that this evidence has, by itself, proven inconclusive. Taken together, the existing body of theory and evidence establishes a significant likelihood that deficits have large effects on current consumption, and there is good reason to believe that this would drive up interest rates. In addition, I find a complete lack of either evidence or coherent theoretical argument to dispute the view that sustained deficits significantly depress capital accumulation in the long run.

Collective Dynamic Consistency in Repeated Games

We formalize the notion of collective dynamic consistency for noncooperative repeated games. Intuitively, we require that an equilibrium not prescribe any course of action in any subgame that players would jointly wish to renegotiate, given the restriction that any alternative must itself be invulnerable to subsequent deviations and renegotiation. While the appropriate definition of collective dynamic consistency is clear for finitely repeated games, serious conceptual difliculties arise when games are repeated infinitely. We investigate several alternative solution concepts, and establish existence (under reasonably general conditions) for each.

Private Saving and Public Policy

The evidence presented in this paper supports the view that many Americans, particularly those without a college education, save too little. Our analysis also indicates that it should be possible to increase total personal saving among lower income households by encouraging the formation and expansion of private pension plans. It is doubtful that favorable tax treatment of capital income would stimulate significant additional saving by this group. Conversely, the expansion of private pensions would probably have little effect on saving by higher income households. However, these households are more likely to increase saving significantly in response to favorable tax treatment of capital income. Currently, eligibility for IRAs is linked to an AGI cap, and pension coverage is more common among higher income households than among low income households. The most effective system for promoting personal saving would have precisely the opposite features. Extending tax incentives for saving to higher income households is problematic. We discuss three competing policy options, IRAs with AGI caps, the universal IRA, and the Premium Saving Account (PSA). Our analysis reveals that the PSA system is a more cost-effective vehicle for providing saving incentives to all households, particularly those in the top quintile of the income distribution.

Bequests as Signals: An Explanation for the Equal Division Puzzle

In the United States, more than two‐thirds of decedents with multichild families divide their estates exactly equally among their children. In contrast, gifts given before death are usually unequal. These findings challenge the validity of existing theories regarding the determination of intergenerational transfers. In this paper, we develop a theory that accounts for this puzzle based on the notion that the division of bequests provides a signal about a parent’s altruistic preferences. The theory can also explain the norm of unigeniture, which prevails in other societies.