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.

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.

 

Financial Networks and Contagion (with Ben Golub and Matt Jackson, Draft date: January 2014)

American Economic Review, forthcoming.

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.

 

A Network Approach to Public Goods (with Ben Golub, Draft date: January 2013)

We study settings where each agent can exert costly effort that creates nonrival, heterogeneous benefits for some of the others. For example, municipalities can forgo consumption to reduce pollution. How do asymmetries in the environment affect the prospects for efficient cooperation? We approach this question by analyzing a network that describes the marginal benefits agents can confer on one another. The first set of results explains how the largest eigenvalue of this network measures the marginal gains available from cooperating; as an application, we describe the players whose participation is essential to achieving any Pareto improvement on an inefficient status quo. Next, we examine mechanisms all of whose equilibria are Pareto efficient and individually rational; an outcome is called robust if it is an equilibrium outcome in every such mechanism. Robust outcomes exist and correspond to the Lindahl public goods solutions. The main result is a characterization of effort levels at these outcomes in terms of players' centralities in the benefits network. It entails that in any robust outcome, agents contribute in proportion to how much they value the efforts of those who help them.

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

 

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.

Inefficiencies in Networked Markets   (Draft date: April 2013) (Supplementary Appendix)

In many markets relationship specific investments are necessary to enable trade. Typically there are multiple buyers, multiple sellers and heterogeneous gains from trade. In some markets a buyer and seller must make different and separate investments to trade, in others investments are jointly made and negotiated. These investments are subject to inefficiencies: under-investment, due to potential hold-up, and over-investment to generate ``outside options''. When investments are separate over-investment is limited. In contrast, inefficiency from under-investment cannot be bounded. This result reverses when investments are negotiated. In this setting there is no under-investment. However, inefficiency from over-investment cannot now be bounded. This analysis is made possible by an algorithm that decomposes any networked market to identify how buyers' and sellers' alternative possible trade partners affect their bargained outcomes.