On the distribution of college dropouts: household wealth and uninsurable idiosyncratic risk
This paper presents a dynamic model of the decision to pursue a college education in which students face uncertainty about their future income stream after graduation due to unobserved heterogeneity in their innate scholastic ability. After students matriculate and start taking exams, they reevaluate their expectations about succeeding in college and may find it optimal to drop out and join the workforce without completing an undergraduate degree. The model shows that, in accordance with the data, poorer students are less likely to graduate and are more apt to drop out earlier than are wealthier students. Our model generates these results without introducing credit constraints. Conditioning on measures of innate ability, in the data we find that poor students are at least 27 percent more likely to drop out of college and they do so sooner than wealthier students.
AUTHORS: Ozdagli, Ali K.; Trachter, Nicholas
The Role of Option Value in College Decisions
Despite the large and persistent wage premium earned by college graduates, college enrollment and graduation rates remain relatively low, particularly for students from lower-income families. Economic models that highlight the role of risk and option value in higher education decisions can help explain these trends.
AUTHORS: Romero, Jessica Sackett; Trachter, Nicholas
Are Markets Becoming Less Competitive?
National markets in many U.S. industries seem to be increasingly dominated by large companies. Some policymakers have argued that this growing market concentration is a sign of weakening competition, but concentration by itself does not necessarily translate into market power. It may be too soon to reach a decisive conclusion about whether market power, not simply market concentration, is on the rise.
AUTHORS: Sablik, Timothy; Trachter, Nicholas
Switching Occupational Categories
Worker mobility, across jobs and across state lines, has fallen in recent decades. Changing jobs is one way workers gain new skills and improve their wages. New research also suggests that switching between white-collar and blue-collar occupations enables workers to learn valuable information about their abilities and the types of jobs they are best suited for. Any frictions inhibiting the ability of workers to switch occupations would be costly, particularly for young workers.
AUTHORS: Devon, Gorry; Gorry, Aspen; Sablik, Timothy; Trachter, Nicholas
Buyers' Ability and Willingness to Shop Around: An Explanation for Price Dispersion
For many years, economists have observed substantial and pervasive price dispersion ? wide variations in price for the same product. Some economists have attributed price dispersion to "ignorance in the market," a lack of information among buyers and sellers. More recently, economists at the Richmond Fed and the University of Pennsylvania have developed a model that combines price dispersion theory with intertemporal price discrimination theory to suggest that buyers' differing ability and willingness to shop around might explain price dispersion.
AUTHORS: Rhodes, Karl; Trachter, Nicholas
Inefficiency in a Simple Model of Production and Bilateral Trade
We study a simple model of over-the-counter trade with production. We characterize the equilibrium, and we show that the equilibrium is always inefficient, independent of how the trade surplus is split among trade participants. We argue that this is due to a double hold-up problem that it is at the core of models used to study trade in over-the-counter markets. Finally, we show an example, which we interpret as a limiting case of the general model where the inefficiency vanishes.
AUTHORS: Sultanum, Bruno; Bethune, Zachary; Trachter, Nicholas
The Dropout Option in a Simple Model of College Education
We present a simple dynamic model of education where students are uncertain about their ability to accumulate human capital in college. While enrolled in college, students are faced with exams that motivate them to update their beliefs. The process of belief-updating implies that some students will optimally choose to drop out. The model that we build is highly tractable and allows for close-form solutions for many objects of interest, so that calibrating the model is a straightforward exercise. We use a calibrated version of the model to gauge the importance of the dropout option in shaping up returns to postsecondary education. We find that the dropout option accounts for a large fraction of the measured returns.
AUTHORS: Trachter, Nicholas; Ozdagli, Ali K.
Price Dispersion When Stores Sell Multiple Goods
A notable feature of most markets is that firms are multiproduct, in the sense that they offer for sale more than one single type of good. In this paper, I discuss a recent paper, Kaplan et al. (2016), that explores both empirically and theoretically price dispersion in a multiproduct setting. I discuss, with some detail, their empirical strategy and main empirical findings: a big part of price dispersion for a good in an area comes from stores with the same overall price level pricing individual goods in persistently different ways. I then go over the simple model proposed by the authors that can make sense of the novel empirical finding.
AUTHORS: Trachter, Nicholas
Relative price dispersion: evidence and theory
REVISED: 8/1/18: We use a large data set on retail pricing to document that a sizable portion of the cross-sectional variation in the price at which the same good trades in the same period and in the same market is due to the fact that stores that are, on average, equally expensive set persistently different prices for the same good. We refer to this phenomenon as relative price dispersion. We argue that relative price dispersion stems from sellers? attempts to discriminate between high-valuation buyers who need to make all of their purchases in the same store and low-valuation buyers who are willing to purchase different items from different stores. We calibrate our theory and show that it is not only consistent with the extent and sources of dispersion in the price that different sellers charge for the same good, but also with the extent and sources of dispersion in the prices that different households pay for the same basket of goods and with the relationship between prices paid and the number of stores visited by different households.
AUTHORS: Trachter, Nicholas; Rudanko, Leena; Menzio, Guido; Kaplan, Greg
Commodity money with frequent search
A prominent feature of the Kiyotaki and Wright (1989) model of commodity money is the multiplicity of dynamic equilibria. We show that the frequency of search is strongly related to the extent of multiplicity. To isolate the role of frequency of search in generating multiplicity, we (i) vary the frequency of search without changing the frequency of finding a trading partner and (ii) focus on symmetric dynamic equilibria, a class for which we can sharply characterize several features of the set of equilibria. For any finite frequency of search this class retains much of the multiplicity. For each frequency we characterize the full set of equilibrium payoffs, strategies played and dynamic paths of the state variables. Indexed by any of these features, the set of equilibria converges uniformly to a unique equilibrium in the continuous search limit. We conclude that when search is frequent, the seemingly exotic dynamics are irrelevant.
AUTHORS: Oberfield, Ezra; Trachter, Nicholas