Chapter 1 is an overview of the thesis in which I explain why work on housing markets merits attention, discuss two broad questions that motivated the research, emphasise the particular avenue I have chosen to pursue, and summarise the new insights to be learned. I also include a short discussion on the methodologies that are used. In Chapter 2, I introduce information heterogeneity into a user-cost house pricing model. I use the model to shed light on two empirical regularities in the housing market: the predictability of housing return and the positive relationship between rent volatility and housing prices. The model also has predictions on overpricing and housing price excess volatility. In Chapter 3, I study a Real Business Cycle model with borrowing constraints and incomplete information. I show that in such an environment noises in signals may have real impacts on the macroeconomy; the effects are induced by learning and amplified and propagated by the collateral effects. Noises may generate sizeable and persistent fluctuations on consumption, credit, asset price, and output. In Chapter 4, I implement a new strategy to identify shocks that drive the co-movements between housing price and consumption. My results show that, in the United Kingdom, productivity shocks and especially news shocks about future productivity explain most of the co-movements. I also show that more than half of the changes in housing price growth were not related to the changes in consumption growth, which casts doubt on the importance of housing wealth effects on consumption.

In Chapter 1, we estimate the causal effect of homeownership on employment using a regression discontinuity design that exploits an arbitrary threshold arising from a homeownership program that assigns a house to low-income families in Chile. We establish that homeownership decreases employment by between 3.95 and 5.60 percentage points. These results contrast with previous non-experimental literature, which has often found positive effects. Our findings seem to be driven by children of the heads of households not entering the labor market, rather than workers being motivated to leave their job. We also find that residential stability and neighbourhood quality are unlikely to drive the effects, contrary to what has been proposed by previous theoretical papers. Chapter 2 studies the effect of homeownership on the academic achievements of children in the household, using a regression discontinuity design that exploits an arbitrary threshold arising from a voucher-based homeownership assistance program in Chile. Despite the fact that the homeownership program substantially increases the quality of the homes in which students live, I do not find that it affects their test scores. In a subgroup analysis, I find that homeownership decreases the test scores of elementary school students by 0.16 to 0.18 standard deviations. These effects may be due to the fact that, when receiving a voucher, many families cease to live with a hosting family, who are often close relatives (e.g. grandparents), and begin living in their own house. This seems to suggest that students experience a decrease in learning support that was previously provided to them by those close relatives. My results contrast with previous studies, which have often found positive effects of homeownership on students' academic achievements. In Chapter 3, I exploit a plausibly exogenous variation in the characteristics of principals to explore their effectiveness in improving school outcomes. Using a difference-in-differences approach, I find that principals appointed under the reform tend to be younger, less experienced, and more highly educated. Drawing from a panel dataset of teacher responses, I observe that the new principals improve the general climate in their schools by decreasing violence and expanding community engagement. On the other hand, they do not improve teacher-monitoring practices, teachers' pedagogical methods, or students' test results. A plausible explanation for these results is the lack of positive or negative incentives given to principals based on the performance of employees in their schools. Evidence in this paper suggests that, in certain institutional settings, school principals do not seem to be as relevant as is often assumed.

Fairness and efficiency are two classical and connected topics in economics. They have become well known, perhaps due to Adam Smith’s two influential works: The Theory of Moral Sentiments (1759), which highlights a concern for fairness concern as part of morality, and The Wealth of Nations (1776), which underlines a concern for efficiency. However, during the rapid development of economics, fairness has received disproportionately less attention than efficiency. As a result, many people, including some economists, have incorrectly understood that economics as a subject no longer cares about fairness. The primary objective of this thesis is to dispel this misperception. We would argue here that, similar to efficiency, fairness is an important factor for both social and individual decisions, and sometimes its effect can be determined. Written in a three-paper format, this thesis explores fairness from three different angles. These angles cover the broad areas of how theoretical economists model fairness in social choice theory, how the general public perceive distributive fairness, and how people implement their fairness norms in making real-life donations. This multidimensional exploration is believed to be crucial to a comprehensive understanding of fairness.

This thesis introduces three novel competitive games that fill the gaps between games of perfect information and games of imperfect information. Each game has a common underlying structure with small, but crucial, differences. Concretely, each game has trials in which dominance should be respected and trials where trickery attempts are possible. Furthermore, we focus on risk attitude (Envelope Game); explore reasoning processes through verbal protocols (Transfer Game); and assess the effects of additional information (Suitcase Game). Behavioural experiments show that even these simple games are cognitively very challenging and that behaviour often deviates from the predictions of popular frameworks. The main contributions from this thesis are (a) the creation of three novel games that help fill the gaps between perfect information and imperfect information; and (b) the exploration of these games and their implications. Findings from the first experiment indicate a linear relationship between the willingness to transfer value from Option A to Option B and a higher initial value for Option A. We also found that decision times for player one reflect which choices he contemplates whilst decision time for player two does not relate to her choices. Finally, most participants are assessed as risk averse. When larger amounts are involved a risk averse player one more strongly desires to transfer value compared with a non-averse player one; but we do not find any behavioural differences for player two. From our second experiment we learn that participants are often not consistent in their reasoning and behaviour across trials. Despite the simplicity of the game we observe many violations of dominance. Furthermore, participants do not strongly adhere to a specific framework. Using verbal protocols we learn about the reasoning that is used to make decisions. This procedure also identified a weakness of the design: participants often consider small amounts irrelevant (since they barely affect payoffs). Our third experiment focuses on the effect of additional knowledge. We find evidence that equal divisions are made more frequently when additional knowledge is provided and that participants attempt to trick their opponents. Furthermore, we explore whether heuristics can explain behaviour since frameworks are often too precise or make ‘random behaviour’ predictions.

Chapter 1 reviews the literature about the bayesian persuasion. It first describes two main approaches to bayesian persuasion: concavification approach and information design approach. Next I consider some extensions to the basic model of bayesian persuasion, like competition between different senders, privately informed receiver and dynamic bayesian persuasion. Some other contributions reviewed include costly bayesian persuasion and bayesian persuasion when receiver’s optimal action is only a function of an expected state. Chapter 2 deals with two-dimensional bayesian persuasion. In this chapter I investigate a model when the receiver has to make two decisions. I am interested in optimal signal structures for the sender. I describe the upper bound of sender’s payoff in terms of his payoff when only marginal distributions of two dimensions are known. Completely characterise optimal simultaneous and sequential signal structures, when each dimension has binary states. This approach extends concavification approach to bigger state space, than explored in previous contributions to bayesian persuasion. Finally I characterise optimal sequential signal structure when there are three states for each dimension. In chapter 3 I investigate together with my co-author the effect of absence of common knowledge on the outcomes of coordination games in a laboratory experiment. In our experiment, around 76% of the subjects have chosen the payoff-dominant equilibrium strategy despite the absence of common knowledge. However, 9% of the players had first-order beliefs that lead to coordination failure and another 9% exhibited coordination failure due to higher-order beliefs.

In Chapter 1 we document how pension investments by individuals in the Chilean social security system are influenced by portfolio recommendations of Happy and Loaded, a pension advice firm. Following H&L's recommendations about which of five portfolios to invest in, investors shift amounts that often exceed 20% of portfolios value and 1.3% of Chilean annual GDP, in a week. We uncover what drives investment recommendations, the resulting return consequences for the Chilean stock market and social security portfolios, and the characteristics of followers and their investment outcomes. Paradoxically, investors who followed H&L's advice would have earned more by sticking with their original portfolio over time, regardless of the portfolio selected. These findings provide a cautionary tale for the design of privatized social security systems. In chapter 2 we study the value of public information in a stochastic pure exchange economy where agents trade assets in financial markets to reallocate risk, and a subset of those agents face a mandatory savings constraint. As the mandatory savings constraint depends on equilibrium prices, changes in information may allow a Planner that faces the same constraints as the agents in terms of the available assets, information, and savings constraints, to obtain Pareto improvements relative to the equilibrium without information. Changes in information cause the posteriors to change, thus affecting equilibrium prices and shifting the constraints that the Planner has to satisfy. We provide conditions for the arrival of new information before trading to obtain ex-post and ex-ante welfare improvements relative to the initial equilibrium without information. The reaction of prices to the arrival of new information is key in our analysis. We relate the value of information in exchange economies with the literature on Bayesian persuasion.

This thesis studies the impact of transaction costs on stocks prices and examine the impact of institutional investors and high frequency traders (HFTs) on market quality and transaction costs. It is comprised of three chapters. Chapter 2 uses a clean and novel field experiment to study how stock prices of publicly listed companies respond to changes in transaction costs. Using the SEC's pilot program that increased the tick size for approximately 1,200 randomly chosen stocks, we find a decrease in market capitalization of $7 billion for stocks affected by the larger tick size relative to a control group. We find that the increase in the present value of transaction costs accounts for a small percentage of the price decrease. We study channels of price variation due to changes in expected returns: investor horizon, liquidity risk, and information risk. The evidence suggests that trading frictions affect the cost of capital. Chapter 3 examines the effects of multimarket high-frequency trading (HFT) activity on liquidity co-movements across different markets. Multimarket trading by HFTs connects individual markets in a single network, which should induce stronger network-wide liquidity co-movements. We use the staggered introduction of an alternative trading platform, Chi-X, in European equity markets as our instrument for an exogenous increase in multimarket HFT activity. Consistent with our predictions, we find that liquidity co-movements within the aggregate network of European markets significantly increase after the introduction of Chi-X and even exceed liquidity co-movements within the home market. They are especially strong in down markets and for stocks with a higher intensity of HFT trading in the post-Chi-X period. Chapter 4 studies optimality of trade execution by institutional trading desks. We document the presence of negative autocorrelation in intraday stock return and show that the temporary price pressure is larger at the beginning and the end of the day. Institutional trading volume exhibits similar intraday pattern. We relate the periodity of price pressure to trading desks' performance using a proprietary database of institutional investor trades. We find that execution quality is the worst at the end of the day yet institutional trading volume is also surprisingly high. Poorer performing brokers in terms of execution shortfall trade more in the last hour of the day, have a higher execution cost at the end of the day, and carry out less order splitting at the end of the day. Our findings suggest that intraday price pressure stems from end of the day clustering of under-performing trading desks strategies results in higher trading costs and poorer execution quality. A trading strategy exploiting this intraday predictability yields a monthly return of 16.11%. Our results have implications on the impact of broker selection and execution strategy on trading costs.

In Chapter 1, I develop a theory of activism and polarization in the context of electoral competition. I establish that the relationship between ideological polarization of activists and political polarization depends critically on the activists' willingness to engage in the campaign. Specifically, when the willingness to engage is within a threshold, increased partisanship among activists reduces political polarization – meaning candidates compromise rather than diverge. Welfare results suggests that partisan gap could hurt voters when activists have a high willingness to engage. In Chapter 2, I analyze a modified version of the classic Crawford-Sobel (CS) model of strategic communication between an informed Sender and uninformed Receiver, with the following two innovations: both players now take actions, and they are strategic substitutes. Contrary to the CS setup, the modified game does allow for perfect information revelation. When the Sender is able to compensate sufficiently for every state, there is full information revelation. When this is violated, there are only partial revelation equilibria. Under partial revelation, the Sender reveals information up to a threshold state, and pools beyond this threshold, resulting in loss of information. Welfare analysis suggests that a partial revelation equilibrium with higher threshold is both ex-ante Pareto efficient and interim efficient. In Chapter 3, we develop a model of alliance formation between players with the following features: substitutability in actions; a need for information sharing; preference heterogeneity; and, resource constraints. The main result is the following: with public communication, there is full information aggregation as long as preferences of players are sufficiently cohesive. We derive a precise bound to characterize cohesiveness, and provide an informational rationale for alliance formation.

This thesis analyses different aspects of financial crises with a focus on the role of pecuniary externalities. The topics explored in these essays are as follows: Chapter 1 provides background on issues of illiquidity and insolvency, and discusses how the two can interact. Chapter 2 studies pecuniary externalities in a `bank run' model where banks supply credit in the form of marketable securities. An aggregate liquidity shock, which triggers `fire sales' of such securities, can lead to insolvency when their value falls. So, in this type of model, a run on several banks can lead to insolvency driven pecuniary externalities. Chapter 3 explores three explanations of the U.S. subprime crisis; insolvency due to externalities, insolvency due to cheating, and illiquidity driven by panic. We argue that these narratives should be treated as complements (rather than as substitutes), with each playing an important role at different stages of the crisis. Chapter 4 studies the reversibility of shocks in a general equilibrium model of competitive markets with heterogeneous beliefs. I find that heterogeneous beliefs can amplify shocks; and, due to asymmetric adjustment of risky asset prices, they can also lead to systemic default when a group of optimistic agents exits the market.

Price and wage setting are key elements in empirical and theoretical macroeconomic research. In recent years, large micro datasets with millions of observations have expanded our knowledge of wage and price setting practices. Aside from addressing old questions, new salient facts have emerged and have led to improvements, clarifications, criticisms and even new research lines. One of these new findings in microeconomic research is the high degree of heterogeneity in the behaviour of price and wage setters. This dissertation adds to the research of using large micro datasets to document heterogeneity in price and wage setting, its implications for aggregate dynamics and potential drivers shaping heterogeneous responses. In chapter one, we provide an introduction to our research on price and wage heterogeneity and provide a short summary of the following two chapters. In chapter two, we merge three large price and wage micro-datasets at industry level and show that the frequency of price and wage adjustments are positively correlated. Furthermore, using a multi-sector DSGE model, we find that adding heterogeneity in both prices and wages generates small differences in aggregate dynamics compared to a model with heterogeneity in only one of them. In chapter three, we investigate whether price responses to exchange rate shocks, the so-called exchange-rate pass-through, are asymmetric across regions and type of goods. Results suggest heterogeneous pass-through elasticities and that regional and industry characteristics play a role in shaping this heterogeneity. For instance, distance to the border, import intensity, price change dispersion and expenditure share affect positively the degree of pass-through; while regional market density has a negative relationship with pass-through rates. In chapter four, we conclude by presenting a recap of findings from the two main chapters of this dissertation and outline future research.