Template-type: ReDIF-Paper 1.0 Author-Name: Chirok Han Author-X-Name-First: Chirok Author-X-Name-Last: Han Author-Workplace-Name: Victoria University of Wellington Author-Name: Peter C.B. Phillips Author-X-Name-First: Peter C.B. Author-X-Name-Last: Phillips Author-Email: peter.phillips@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/phillips.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: GMM Estimation for Dynamic Panels with Fixed Effects and Strong Instruments at Unity Abstract: This paper develops new estimation and inference procedures for dynamic panel data models with fixed effects and incidental trends. A simple consistent GMM estimation method is proposed that avoids the weak moment condition problem that is known to affect conventional GMM estimation when the autoregressive coefficient (rho) is near unity. In both panel and time series cases, the estimator has standard Gaussian asymptotics for all values of rho in (-1, 1] irrespective of how the composite cross section and time series sample sizes pass to infinity. Simulations reveal that the estimator has little bias even in very small samples. The approach is applied to panel unit root testing. Classification-JEL: C22, C23 Keywords: Asymptotic normality, Asymptotic power envelope, Moment conditions, Panel unit roots, Point optimal test, Unit root tests, Weak instruments Length: 45 pages Creation-Date: 200701 Number: 1599 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1599.pdf File-Format: application/pdf File-Size: 343 kb Handle: RePEc:cwl:cwldpp:1599 Template-type: ReDIF-Paper 1.0 Author-Name: Peter C.B. Phillips Author-X-Name-First: Peter C.B. Author-X-Name-Last: Phillips Author-Email: peter.phillips@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/phillips.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Jun Yu Author-X-Name-First: Jun Author-X-Name-Last: Yu Author-Workplace-Name: Singapore Management University Title: Information Loss in Volatility Measurement with Flat Price Trading Abstract: A model of price determination is proposed that incorporates flat trading features into an efficient price process. The model involves the superposition of a Brownian semimartingale process for the efficient price and a Bernoulli process that determines the extent of flat price trading. A limit theory for the conventional realized volatility (RV) measure of integrated volatility is developed. The results show that RV is still consistent but has an inflated asymptotic variance that depends on the probability of flat trading. Estimated quarticity is similarly affected, so that both the feasible central limit theorem and the inferential framework suggested in Barndorff-Nielson and Shephard (2002) remain valid under flat price trading. Classification-JEL: C15, G12 Keywords: Bernoulli process, Brownian semimartingale, Flat trading, Quarticity function, Realized volatility Length: 27 pages Creation-Date: 200701 Number: 1598 File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1598.pdf File-Format: application/pdf File-Size: 280 kb Handle: RePEc:cwl:cwldpp:1598 Template-type: ReDIF-Paper 1.0 Author-Name: Peter C.B. Phillips Author-X-Name-First: Peter C.B. Author-X-Name-Last: Phillips Author-Email: peter.phillips@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/phillips.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Jun Yu Author-X-Name-First: Jun Author-X-Name-Last: Yu Author-Workplace-Name: Singapore Management University Title: Maximum Likelihood and Gaussian Estimation of Continuous Time Models in Finance Abstract: This paper overviews maximum likelihood and Gaussian methods of estimating continuous time models used in finance. Since the exact likelihood can be constructed only in special cases, much attention has been devoted to the development of methods designed to approximate the likelihood. These approaches range from crude Euler-type approximations and higher order stochastic Taylor series expansions to more complex polynomial-based expansions and infill approximations to the likelihood based on a continuous time data record. The methods are discussed, their properties are outlined and their relative finite sample performance compared in a simulation experiment with the nonlinear CIR diffusion model, which is popular in empirical finance. Bias correction methods are also considered and particular attention is given to jackknife and indirect inference estimators. The latter retains the good asymptotic properties of ML estimation while removing finite sample bias. This method demonstrates superior performance in finite samples. Classification-JEL: C22, C32 Keywords: Maximum likelihood, Transition density, Discrete sampling, Continuous record, Realized volatility, Bias reduction, Jackknife, Indirect inference Length: 34 pages Creation-Date: 200701 Number: 1597 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1597.pdf File-Format: application/pdf File-Size: 239 kb Handle: RePEc:cwl:cwldpp:1597 Template-type: ReDIF-Paper 1.0 Author-Name: Peter C.B. Phillips Author-X-Name-First: Peter C.B. Author-X-Name-Last: Phillips Author-Email: peter.phillips@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/phillips.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Jun Yu Author-X-Name-First: Jun Author-X-Name-Last: Yu Author-Workplace-Name: Singapore Management University Title: Simulation-based Estimation of Contingent-claims Prices Abstract: A new methodology is proposed to estimate theoretical prices of financial contingent-claims whose values are dependent on some other underlying financial assets. In the literature the preferred choice of estimator is usually maximum likelihood (ML). ML has strong asymptotic justification but is not necessarily the best method in finite samples. The present paper proposes instead a simulation-based method that improves the finite sample performance of the ML estimator while maintaining its good asymptotic properties. The methods are implemented and evaluated here in the Black-Scholes option pricing model and in the Vasicek bond pricing model, but have wider applicability. Monte Carlo studies show that the proposed procedures achieve bias reductions over ML estimation in pricing contingent claims. The bias reductions are sometimes accompanied by reductions in variance, leading to significant overall gains in mean squared estimation error. Empirical applications to US treasury bills highlight the differences between the bond prices implied by the simulation-based approach and those delivered by ML. Some consequences for the statistical testing of contingent-claim pricing models are discussed. Classification-JEL: C15, G12 Keywords: Bias reduction, Bond pricing, Indirect inference, Option pricing, Simulation-based estimation Length: 30 pages Creation-Date: 200701 Number: 1596 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1596.pdf File-Format: application/pdf File-Size: 276 kb Handle: RePEc:cwl:cwldpp:1596 Template-type: ReDIF-Paper 1.0 Author-Name: Peter C.B. Phillips Author-X-Name-First: Peter C.B. Author-X-Name-Last: Phillips Author-Email: peter.phillips@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/phillips.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Donggyu Sul Author-X-Name-First: Donggyu Author-X-Name-Last: Sul Author-Workplace-Name: University of Auckland Title: Transition Modeling and Econometric Convergence Tests Abstract: A new panel data model is proposed to represent the behavior of economies in transition allowing for a wide range of possible time paths and individual heterogeneity. The model has both common and individual specific components and is formulated as a nonlinear time varying factor model. When applied to a micro panel, the decomposition provides flexibility in idiosyncratic behavior over time and across section, while retaining some commonality across the panel by means of an unknown common growth component. This commonality means that when the heterogeneous time varying idiosyncratic components converge over time to a constant, a form of panel convergence holds, analogous to the concept of conditional sigma convergence. The paper provides a framework of asymptotic representations for the factor components which enables the development of econometric procedures of estimation and testing. In particular, a simple regression based convergence test is developed, whose asymptotic properties are analyzed under both null and local alternatives, and a new method of clustering panels into club convergence groups is constructed. These econometric methods are applied to analyze convergence in cost of living indices among 19 US. metropolitan cities. Classification-JEL: C33, F21, G12 Keywords: Club convergence, Relative convergence, Common factor, Convergence, log t regression test, Panel data, Transition Note: CFP 1216. Length: 75 pages Creation-Date: 200701 Number: 1595 Publication-Status: Published in Econometrica (2007), 75(6): 1771-1855 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1595.pdf File-Format: application/pdf File-Size: 730 kb Handle: RePEc:cwl:cwldpp:1595 Template-type: ReDIF-Paper 1.0 Author-Name: Qiying Wang Author-X-Name-First: Qiying Author-X-Name-Last: Wang Author-Workplace-Name: School of Mathematics and Statistics, University of Sydney Author-Name: Peter C.B. Phillips Author-X-Name-First: Peter C.B. Author-X-Name-Last: Phillips Author-Email: peter.phillips@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/phillips.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/faculty/phillips.htm Title: Asymptotic Theory for Local Time Density Estimation and Nonparametric Cointegrating Regression Abstract: We provide a new asymptotic theory for local time density estimation for a general class of functionals of integrated time series. This result provides a convenient basis for developing an asymptotic theory for nonparametric cointegrating regression and autoregression. Our treatment directly involves the density function of the processes under consideration and avoids Fourier integral representations and Markov process theory which have been used in earlier research on this type of problem. The approach provides results of wide applicability to important practical cases and involves rather simple derivations that should make the limit theory more accessible and useable in econometric applications. Our main result is applied to offer an alternative development of the asymptotic theory for non-parametric estimation of a non-linear cointegrating regression involving non-stationary time series. In place of the framework of null recurrent Markov chains as developed in recent work of Karlsen, Myklebust and Tjostheim (2007), the direct local time density argument used here more closely resembles conventional nonparametric arguments, making the conditions simpler and more easily verified. Classification-JEL: C14, C22 Keywords: Brownian Local time, Cointegration, Integrated process, Local time density estimation, Nonlinear functionals, Nonparametric regression, Unit root Length: 26 pages Creation-Date: 200612 Number: 1594 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1594.pdf File-Format: application/pdf File-Size: 243 kb Handle: RePEc:cwl:cwldpp:1594 Template-type: ReDIF-Paper 1.0 Author-Name: Martin Shubik Author-X-Name-First: Martin Author-X-Name-Last: Shubik Author-Email: martin.shubik@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/shubik.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: A Note on Fairness, Power, Property, and Behind the Veil Abstract: An Axiomatization for Power and for Equity differ only in the addition of a Behind the Veil Axiom. Classification-JEL: C71, D63 Keywords: Value, Behind the veil, Power, Equity, Ownership Note: CFP 1230. Length: 2 pages Creation-Date: 200611 Number: 1593 Publication-Status: Published in Economics Letters (January 2008), 98: 29-30 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1593.pdf File-Format: application/pdf File-Size: 87 kb Handle: RePEc:cwl:cwldpp:1593 Template-type: ReDIF-Paper 1.0 Author-Name: Pradeep Dubey Author-X-Name-First: Pradeep Author-X-Name-Last: Dubey Author-Workplace-Name: Center for Game Theory in Economics, Stony Brook Author-Name: Rahul Garg Author-X-Name-First: Rahul Author-X-Name-Last: Garg Author-Workplace-Name: IBM India Research Lab, New Delhi Title: Games of Connectivity Abstract: We consider a communications network in which users transmit beneficial information to each other at a cost. We pinpoint conditions under which the induced cooperative game is supermodular (convex). Our analysis is in a lattice-theoretic framework, which is at once simple and able to encompass a wide variety of seemingly disparate models. Classification-JEL: C71, D82, L96 Keywords: Information lattice, Multicast/unicast transmission, Cooperative games, Shapley value, Convex/supermodular games Length: 17 pages Creation-Date: 200611 Number: 1592 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1592.pdf File-Format: application/pdf File-Size: 242 kb Handle: RePEc:cwl:cwldpp:1592 Template-type: ReDIF-Paper 1.0 Author-Name: Pradeep Dubey Author-X-Name-First: Pradeep Author-X-Name-Last: Dubey Author-Workplace-Name: Center for Game Theory in Economics, Stony Brook Author-Name: Rahul Garg Author-X-Name-First: Rahul Author-X-Name-Last: Garg Author-Workplace-Name: IBM India Research Lab Author-Name: Bernard De Meyer Author-X-Name-First: Bernard Author-X-Name-Last: De Meyer Author-Workplace-Name: PSE, Universite Paris Title: Competing for Customers in a Social Network Abstract: There are many situations in which a customer's proclivity to buy the product of any firm depends not only on the classical attributes of the product such as its price and quality, but also on who else is buying the same product. We model these situations as games in which firms compete for customers located in a "social network." Nash Equilibrium (NE) in pure strategies exist in general. In the quasi-linear version of the model, NE turn out to be unique and can be precisely characterized. If there are no a priori biases between customers and firms, then there is a cut-off level above which high cost firms are blockaded at an NE, while the rest compete uniformly throughout the network. We also explore the relation between the connectivity of a customer and the money firms spend on him. This relation becomes particularly transparent when externalities are dominant: NE can be characterized in terms of the invariant measures on the recurrent classes of the Markov chain underlying the social network. Finally we consider convex (instead of linear) cost functions for the firms. Here NE need not be unique as we show via an example. But uniqueness is restored if there is enough competition between firms or if their valuations of clients are anonymous. Classification-JEL: A14, C72, D11, D21, L1, L2 Keywords: Social network, Game theory, Nash equilibrium, Competition game on a social network Length: 23 pages Creation-Date: 200611 Number: 1591 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1591.pdf File-Format: application/pdf File-Size: 337 kb Handle: RePEc:cwl:cwldpp:1591 Template-type: ReDIF-Paper 1.0 Author-Name: Xiaohong Chen Author-X-Name-First: Xiaohong Author-X-Name-Last: Chen Author-Workplace-Name: New York University Author-Name: Yingyao Hu Author-X-Name-First: Yingyao Author-X-Name-Last: Hu Author-Workplace-Name: University of Texas at Austin Title: Identification and Inference of Nonlinear Models Using Two Samples with Arbitrary Measurement Errors Abstract: This paper considers identification and inference of a general latent nonlinear model using two samples, where a covariate contains arbitrary measurement errors in both samples, and neither sample contains an accurate measurement of the corresponding true variable. The primary sample consists of some dependent variables, some error-free covariates and an error-ridden covariate, where the measurement error has unknown distribution and could be arbitrarily correlated with the latent true values. The auxiliary sample consists of another noisy measurement of the mismeasured covariate and some error-free covariates. We first show that a general latent nonlinear model is nonparametrically identified using the two samples when both could have nonclassical errors, with no requirement of instrumental variables nor independence between the two samples. When the two samples are independent and the latent nonlinear model is parameterized, we propose sieve quasi maximum likelihood estimation (MLE) for the parameter of interest, and establish its root-n consistency and asymptotic normality under possible misspecification, and its semiparametric efficiency under correct specification. We also provide a sieve likelihood ratio model selection test to compare two possibly misspecified parametric latent models. A small Monte Carlo simulation and an empirical example are presented. Classification-JEL: C01, C14 Keywords: Data combination, Nonlinear errors-in-variables model, Nonclassical measurement error, Nonparametric identification, Misspecified parametric latent model, Sieve likelihood estimation and inference Length: 58 pages Creation-Date: 200611 Number: 1590 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1590.pdf File-Format: application/pdf File-Size: 356 kb Handle: RePEc:cwl:cwldpp:1590 Template-type: ReDIF-Paper 1.0 Author-Name: Yutian Chen Author-X-Name-First: Yutian Author-X-Name-Last: Chen Author-Workplace-Name: Dept. of Economics, SUNY-Stony Brook Author-Name: Pradeep Dubey Author-X-Name-First: Pradeep Author-X-Name-Last: Dubey Author-Workplace-Name: Dept. of Economics, SUNY-Stony Brook Author-Name: Debapriya Sen Author-X-Name-First: Debapriya Author-X-Name-Last: Sen Author-Workplace-Name: Dept. of Economics, SUNY-Stony Brook Title: Outsourcing Induced by Strategic Competition Abstract: We show that intermediate goods can be sourced to firms on the "outside" (that do not compete in the final product market), even when there are no economies of scale or cost advantages for these firms. What drives the phenomenon is that "inside" firms, by accepting such orders, incur the disadvantage of becoming Stackelberg followers in the ensuing competition to sell the final product. Thus they have incentive to quote high provider prices to ward off future competitors, driving the latter to source outside. Classification-JEL: D41, L11, L13 Keywords: Intermediate goods, Outsourcing, Cournot duopoly, Stackelberg duopoly Length: 21 pages Creation-Date: 200611 Number: 1589 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1589.pdf File-Format: application/pdf File-Size: 263 kb Handle: RePEc:cwl:cwldpp:1589 Template-type: ReDIF-Paper 1.0 Author-Name: M. Keith Chen Author-X-Name-First: M. Keith Author-X-Name-Last: Chen Author-Email: keith.chen@yale.edu Author-Homepage: http://www.som.yale.edu/faculty/keith.chen/ Author-Workplace-Name: Yale School of Management, Yale University Author-Name: Barry J. Nalebuff Author-X-Name-First: Barry J. Author-X-Name-Last: Nalebuff Author-Email: barry.nalebuff@yale.edu Author-Homepage: http://mayet.som.yale.edu/coopetition/ Author-Workplace-Name: Yale School of Management, Yale University Title: One-Way Essential Complements Abstract: While competition between firms producing substitutes is well understood, less is known about rivalry between complementors. We study the interaction between firms in markets with one-way essential complements. One good is essential to the use of the other but not vice versa, as arises with an operating system and applications. Our interest is in the division of surplus between the two goods and the related incentive for firms to create complements to an essential good. Formally, we study a two-good model where consumers value A alone, but can only enjoy B if they also purchase A. When one firm sells A and another sells B, the firm that sells B earns a majority of the value it creates. However, if the A firm were to buy the B firm, it would optimally charge zero for B, provided marginal costs are zero and the average value of B is small relative to A. Hence, absent strong antitrust or intellectual property protections, the A firm can leverage its monopoly into B costlessly by producing a competing version of B and giving it away. For example, Microsoft provided Internet Explorer as a free substitute for Netscape; in our model, this maximizes Microsoft's joint monopoly profits. Furthermore, Microsoft has no incentive to raise prices, even if all browser competition exits. This may seem surprising since it runs counter to the traditional gains from price discrimination and versioning. We also show that a essential monopolist has no incentive to degrade rival complementary products, which suggests that a monopoly internet service provider will offer net neutrality. There are other means for the essential A monopolist to capture surplus from B. We consider the incentive to add a surcharge (or subsidy) to the price of B, or to act as a Stackelberg leader. We find a small gain from pricing first, but much greater profits from adding a surcharge to the price of B. The potential for A to capture B's surplus highlights the challenges facing a firm whose product depends on an essential good. Classification-JEL: C7, D42, D43, K21, L11, L12, L13, L41, M21 Keywords: Bundling, Complements, Monopoly leverage, Net neutrality, Price discrimination, Tying, Versioning Length: 39 pages Creation-Date: 200611 Number: 1588 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1588.pdf File-Format: application/pdf File-Size: 335 kb Handle: RePEc:cwl:cwldpp:1588 Template-type: ReDIF-Paper 1.0 Author-Name: Chang Sik Kim Author-X-Name-First: Chang Sik Author-X-Name-Last: Kim Author-Workplace-Name: Dept. of Economics, Ewha Women's University Author-Name: Peter C.B. Phillips Author-X-Name-First: Peter C.B. Author-X-Name-Last: Phillips Author-Email: peter.phillips@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/phillips.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Log Periodogram Regression: The Nonstationary Case Abstract: Estimation of the memory parameter (d) is considered for models of nonstationary fractionally integrated time series with d > (1/2). It is shown that the log periodogram regression estimator of d is inconsistent when 1 < d < 2 and is consistent when (1/2) < d = 1. For d > 1, the estimator is shown to converge in probability to unity. Classification-JEL: C22 Keywords: Discrete Fourier transform, Fractional Brownian motion, Fractional integration, Inconsistency, Log periodogram regression, Long memory parameter, Nonstationarity, Semiparametric estimation Length: 29 pages Creation-Date: 200610 Number: 1587 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1587.pdf File-Format: application/pdf File-Size: 300 kb Handle: RePEc:cwl:cwldpp:1587 Template-type: ReDIF-Paper 1.0 Author-Name: Offer Lieberman Author-X-Name-First: Offer Author-X-Name-Last: Lieberman Author-Workplace-Name: Technion-Israel Institute of Technology Author-Name: Peter C.B. Phillips Author-X-Name-First: Peter C.B. Author-X-Name-Last: Phillips Author-Email: peter.phillips@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/phillips.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: A Complete Asymptotic Series for the Autocovariance Function of a Long Memory Process Abstract: An infinite-order asymptotic expansion is given for the autocovariance function of a general stationary long-memory process with memory parameter d in (-1/2,1/2). The class of spectral densities considered includes as a special case the stationary and invertible ARFIMA(p,d,q) model. The leading term of the expansion is of the order O(1/k^{1-2d}), where k is the autocovariance order, consistent with the well known power law decay for such processes, and is shown to be accurate to an error of O(1/k^{3-2d}). The derivation uses Erdélyi's (1956) expansion for Fourier-type integrals when there are critical points at the boundaries of the range of integration - here the frequencies {0,2}. Numerical evaluations show that the expansion is accurate even for small k in cases where the autocovariance sequence decays monotonically, and in other cases for moderate to large k. The approximations are easy to compute across a variety of parameter values and models. Classification-JEL: C13, C22 Keywords: Autocovariance, Asymptotic expansion, Critical point, Fourier integral, Long memory Length: 22 pages Creation-Date: 200610 Number: 1586 Publication-Status: Published in Journal of Econometrics (2008), 147: 99-103 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1586.pdf File-Format: application/pdf File-Size: 211 kb Handle: RePEc:cwl:cwldpp:1586 Template-type: ReDIF-Paper 1.0 Author-Name: Ke-Li Xu Author-X-Name-First: Ke-Li Author-X-Name-Last: Xu Author-Workplace-Name: Dept. of Economics, Yale University Author-Name: Peter C.B. Phillips Author-X-Name-First: Peter C.B. Author-X-Name-Last: Phillips Author-Email: peter.phillips@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/phillips.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Adaptive Estimation of Autoregressive Models with Time-Varying Variances Abstract: Stable autoregressive models of known finite order are considered with martingale differences errors scaled by an unknown nonparametric time-varying function generating heterogeneity. An important special case involves structural change in the error variance, but in most practical cases the pattern of variance change over time is unknown and may involve shifts at unknown discrete points in time, continuous evolution or combinations of the two. This paper develops kernel-based estimators of the residual variances and associated adaptive least squares (ALS) estimators of the autoregressive coefficients. These are shown to be asymptotically efficient, having the same limit distribution as the infeasible generalized least squares (GLS). Comparisons of the efficient procedure and ordinary least squares (OLS) reveal that least squares can be extremely inefficient in some cases while nearly optimal in others. Simulations show that, when least squares work well, the adaptive estimators perform comparably well, whereas when least squares work poorly, major efficiency gains are achieved by the new estimators. Classification-JEL: C14, C22 Keywords: Adaptive estimation, Autoregression, Heterogeneity, Weighted regression Length: 30 pages Creation-Date: 200610 Revision-Date: 200611 Number: 1585R Publication-Status: Published in Journal of Econometrics (2008), 142: 265-280 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1585-r.pdf File-Format: application/pdf File-Size: 309 kb Handle: RePEc:cwl:cwldpp:1585R Template-type: ReDIF-Paper 1.0 Author-Name: Ke-Li Xu Author-X-Name-First: Ke-Li Author-X-Name-Last: Xu Author-Workplace-Name: Dept. of Economics, Yale University Author-Name: Peter C.B. Phillips Author-X-Name-First: Peter C.B. Author-X-Name-Last: Phillips Author-Email: peter.phillips@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/phillips.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Adaptive Estimation of Autoregressive Models with Time-Varying Variances Abstract: Stable autoregressive models of known finite order are considered with martingale differences errors scaled by an unknown nonparametric time-varying function generating heterogeneity. An important special case involves structural change in the error variance, but in most practical cases the pattern of variance change over time is unknown and may involve shifts at unknown discrete points in time, continuous evolution or combinations of the two. This paper develops kernel-based estimators of the residual variances and associated adaptive least squares (ALS) estimators of the autoregressive coefficients. These are shown to be asymptotically efficient, having the same limit distribution as the infeasible generalized least squares (GLS). Comparisons of the efficient procedure and the ordinary least squares (OLS) reveal that least squares can be extremely inefficient in some cases while nearly optimal in others. Simulations show that, when least squares work well, the adaptive estimators perform comparably well, whereas when least squares work poorly, major efficiency gains are achieved by the new estimators. Classification-JEL: C14, C22 Keywords: Adaptive estimation, Autoregression, Heterogeneity, Weighted regression Length: 32 pages Creation-Date: 200610 Number: 1585 Publication-Status: Published in Journal of Econometrics (2008), 142: 265-280 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1585.pdf File-Format: application/pdf File-Size: 310 kb Handle: RePEc:cwl:cwldpp:1585 Template-type: ReDIF-Paper 1.0 Author-Name: Dirk Bergemann Author-X-Name-First: Dirk Author-X-Name-Last: Bergemann Author-Email: dirk.bergemann@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/bergemann.htm Author-Workplace-Name: Dept. of Economics, Yale University Author-Workplace-Homepage: http://www.econ.yale.edu/ Author-Name: Juuso Valimaki Author-X-Name-First: Juuso Author-X-Name-Last: Valimaki Author-Workplace-Name: Helsinki School of Economics and University of Southampton Title: Efficient Dynamic Auctions Abstract: We consider the truthful implementation of the socially efficient allocation in a dynamic private value environment in which agents receive private information over time. We show that a suitable generalization of the Vickrey-Clark-Groves mechanism, based on the marginal contribution of each agent, leads to truthtelling in every period. A leading example of a dynamic allocation model is the sequential auction of a single good in which the current winner of the object receives additional information about her valuation. We show that a modified sequential second price auction in which only the current winner makes a positive payment leads to truthtelling. In general allocation problems, the marginal contribution mechanism continues to induce truthtelling in every period but may now include positive transfers for many agents. Classification-JEL: C72, C73, D43, D83 Keywords: Vickrey Auction, Marginal Contribution, Dynamic Allocation Index, Multi-Armed Bandit, Bayesian Learning, Experimentation, Matching Length: 16 pages Creation-Date: 200610 Revision-Date: Number: 1584 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1584.pdf File-Format: application/pdf File-Size: 161 kb Handle: RePEc:cwl:cwldpp:1584 Template-type: ReDIF-Paper 1.0 Author-Name: John E. Roemer Author-X-Name-First: John E. Author-X-Name-Last: Roemer Author-Email: john.roemer@yale.edu Author-Homepage: http://pantheon.yale.edu/~jer39/ Author-Workplace-Name: Dept. of Political Science and Economics, Yale University Author-Workplace-Homepage: http://www.econ.yale.edu/ Title: Economic Development as Opportunity Equalization Abstract: The justification of using GNP per capita as a measure of economic development is utilitarian ethics plus an assumption that no needs are more urgent than others. Here, we advocate a measure of economic development based on the degree to which the society in question has equalized opportunities for the acquisition of income. In highly developed economies, inequality of opportunity accounts for less than 10% of total inequality, while in developing economies, it accounts for over 30%. Classification-JEL: O16, D63 Keywords: Equality of opportunity, Economic development Length: 25 pages Creation-Date: 200609 Number: 1583 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1583.pdf File-Format: application/pdf File-Size: 395 kb Handle: RePEc:cwl:cwldpp:1583 Template-type: ReDIF-Paper 1.0 Author-Name: John E. Roemer Author-X-Name-First: John E. Author-X-Name-Last: Roemer Author-Email: john.roemer@yale.edu Author-Homepage: http://pantheon.yale.edu/~jer39/ Author-Workplace-Name: Dept. of Political Science and Economics, Yale University Author-Workplace-Homepage: http://www.econ.yale.edu/ Title: Kantian Allocations Abstract: Several authors in the economics literature have referred to Kantian behavior, informally, as a kind of cooperation. We model this notion precisely, and define two kinds of Kantian allocation. An set of strategies by players is Kantian if, informally, no player would advocate that all players change their strategies in the 'same kind of way.' We prove existence and Pareto efficiency of Kantian allocations. The proportional solution in a production economy with a common access technology emerges as a special case. We study whether Kantian behavior can 'resolve' the prisoners' dilemma and the voting paradox. It turns out that Kant's categorical imperative only implies cooperation (solidaristic behavior) conditional upon the rewards to cooperation being sufficiently great, perhaps a sobering thought for philosophical Kantians who believe that Kant's categorical imperative implies a strong kind of solidarity. Classification-JEL: C71, D63 Keywords: Cooperative solution, Proportional solution, Voting paradox, Prisoners' dilemma, Kant, Categorical imperative Length: 26 pages Creation-Date: 200609 Number: 1582 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1582.pdf File-Format: application/pdf File-Size: 176 kb Handle: RePEc:cwl:cwldpp:1582 Template-type: ReDIF-Paper 1.0 Author-Name: Philippe De Donder Author-X-Name-First: Philippe Author-X-Name-Last: De Donder Author-Workplace-Name: University of Toulouse Author-Name: John E. Roemer Author-X-Name-First: John E. Author-X-Name-Last: Roemer Author-Email: john.roemer@yale.edu Author-Homepage: http://pantheon.yale.edu/~jer39/ Author-Workplace-Name: Department of Economics, Yale University Author-Workplace-Homepage: http://www.econ.yale.edu/ Title: Mised Oligopoly Equilibria When Firms' Objectives Are Endogenous Abstract: We study a vertically differentiated market where two firms simultaneously choose the quality and price of the good they sell and where consumers also care for the average quality of the goods supplied. Firms are composed of two factions whose objectives differ: one is maximizing profit while the other maximizes revenues. The equilibrium concept we model, called Firm Unanimity Nash Equilibrium (FUNE), corresponds to Nash equilibria between firms when there is efficient bargaining between the two factions inside both firms. One conceptual advantage of FUNE is that oligopolistic equilibria exist in pure strategies, even though the strategy space (price, quality) is multi-dimensional. We first show that such equilibria are inefficient, with both firms underproviding quality. We then assume that the government takes a participation in one firm, which introduces a third faction, bent on welfare maximization, in that firm. We study the characteristics of equilibria as a function of the extent of government’s participation. Our main results are twofold. First, government’s participation in the firm providing the low quality good decreases efficiency while participation in the firm providing the high quality good increases efficiency. Second, the optimal degree of government’s participation in the high-quality firm increases with how much consumers care for average equality. Classification-JEL: D21, D43, D62, H82 Keywords: Mixed oligopoly, Vertical differentiation, Factions, Party-unanimity, Nash equilibrium Length: 28 pages Creation-Date: 200609 Number: 1581 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1581.pdf File-Format: application/pdf File-Size: 329 kb Handle: RePEc:cwl:cwldpp:1581 Template-type: ReDIF-Paper 1.0 Author-Name: Gerald D. Jaynes Author-X-Name-First: Gerald D. Author-X-Name-Last: Jaynes Author-Email: gerald.jaynes@yale.edu Author-Homepage: http://www.econ.yale.edu/faculty1/jaynes.htm Author-Workplace-Name: Department of Economics, Yale University Author-Workplace-Homepage: http://www.econ.yale.edu/ Title: Competitive Screening and Market Segmentation Abstract: We characterize competitive equilibrium in markets (financial etc.) where price taking Bayesian decision makers screen to accept or reject applicants. Unlike signaling models, equilibrium fails to resolve imperfect information. In classical statistics terminology, some qualified applicants are rejected (type I error) and some unqualified applicants are accepted (type II error). We report three new results: i. optimal firm behavior is deduced to be a Bayesian variant of the Neyman-Pearson theorem; ii. competitive equilibrium entails screening if and only if (net of screening costs) the cost of type II errors exceed the cost of type I errors, i.e. contrary to signaling (where buyers identify more qualified applicants who self screen to differentiate themselves e.g. Stiglitz 1975), price taking firms screen to avoid lower quality sellers; iii. equilibrium groups the least attractive applicants into a single high risk assignment pool. Depending on costs of screening, the unique equilibrium may involve complete pooling (all applicants trade at one price) or partial separation (there are m separate pools with successive pools supported by a single (rising) price and a subset of agents of different screen levels trading at that price). A screening equilibrium has and the mth secondary market entails no screening, as the most adversely selected agents are assigned to the high risk pool. Screening induces market segmentation. Invariably secondary markets contain individuals who with better or different screening mechanisms could be accepted in the primary market. What roles traits such as ethnicity, gender, and race might assume in such decision making is relegated to subsequent research to explore the statistical theory of discrimination. Classification-JEL: D8 Keywords: Screening, Bayesian decision makers, Pooling, Neyman-Pearson Theorem Length: 29 pages Creation-Date: 200609 Number: 1580 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1580.pdf File-Format: application/pdf File-Size: 176 kb Handle: RePEc:cwl:cwldpp:1580 Template-type: ReDIF-Paper 1.0 Author-Name: Ray C. Fair Author-X-Name-First: Ray C. Author-X-Name-Last: Fair Author-Email: ray.fair@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/fair.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Interpreting the Predictive Uncertainty of Elections Abstract: This paper provides an interpretation of the uncertainty that exists at the beginning of the day of an election as to who will win. It is based on the theory that there are a number of possible conditions of nature that can exist on election day, of which one is drawn. Political betting markets like Intrade provide a way of trying to estimate this uncertainty. It is argued that polling standard errors do not provide estimates of this type of uncertainty. They instead estimate sample-size uncertainty, which can be driven close to zero with a large enough sample. This paper also introduces a ranking assumption concerning dependencies across U.S. states, which puts restrictions on the possible conditions of nature than can exist on election day. The joint hypothesis that the last-day Intrade ranking is correct and the ranking assumption is correct predicts the exact outcomes of the 2004 presidential election and the 2006 Senate election. Although not a test of the ranking assumption, there is evidence that the Intrade traders used the ranking assumption to price contracts in the 2004 presidential election. This was not the case, however, in the 2006 Senate election. Finally, it is shown if the ranking assumption is correct, the two political parties should spend all their money on a few states, which seems consistent with their actual behavior in 2004. Classification-JEL: C10 Keywords: Election polls, Predictive uncertainty Length: 29 pages Creation-Date: 200609 Revision-Date: 200705 Number: 1579 Publication-Status: Published in The Journal of Politics (2009) Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1579.pdf File-Format: application/pdf File-Size: 258 kb Handle: RePEc:cwl:cwldpp:1579 Template-type: ReDIF-Paper 1.0 Author-Name: Simon Grant Author-X-Name-First: Simon Author-X-Name-Last: Grant Author-Workplace-Name: Dept. of Economics, Rice University Author-Name: Atsushi Kajii Author-X-Name-First: Atsushi Author-X-Name-Last: Kajii Author-Workplace-Name: Institute of Economic Research, Kyoto University Author-Name: Ben Polak Author-X-Name-First: Ben Author-X-Name-Last: Polak Author-Email: benjamin.polak@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/polak.htm Author-Workplace-Name: Dept. of Economics and School of Management, Yale University Author-Workplace-Homepage: http://www.econ.yale.edu/ Author-Name: Zvi Safra Author-X-Name-First: Zvi Author-X-Name-Last: Safra Author-Workplace-Name: Tel Aviv University and College of Management Title: Generalized Utilitarianism and Harsanyi’s Partial Observer Theorem Abstract: We provide an axiomatization of generalized utilitarian social welfare functions in the context of Harsanyi's impartial observer theorem. To do this, we reformulate Harsanyi's problem such that lotteries over identity (accidents of birth) and lotteries over outcomes (life chances) are independent. We show how to accommodate (first) Diamond's critique concerning fairness and (second) Pattanaik's critique concerning differing attitudes toward risk. In each case, we show what separates them from Harsanyi by showing what extra axioms return us to Harsanyi. Thus we provide two new axiomatizations of Harsanyi's utilitarianism. Classification-JEL: D63, D71 Keywords: Generalized utilitarianism, Impartial observer, Social welfare function, Fairness, Ex ante egalitarianism Length: 59 pages Creation-Date: 200609 Number: 1578 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1578.pdf File-Format: application/pdf File-Size: 371 kb Handle: RePEc:cwl:cwldpp:1578 Template-type: ReDIF-Paper 1.0 Author-Name: Ray C. Fair Author-X-Name-First: Ray C. Author-X-Name-Last: Fair Author-Email: ray.fair@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/fair.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/faculty/fair.htm Title: A Comparison of Five Federal Reserve Chairmen: Was Greenspan the Best? Abstract: This paper examines the performances of the past five Federal Reserve chairmen using optimal control techniques and a macroeconometric model. Each chairman is evaluated in two ways. The first way is comparing the actual performance of the economy under his term relative to what the performance would have been had he behaved optimally. Comparing chairmen only on the basis of the actual performance of the economy is not appropriate because it does not control for different exogenous-variable values and shocks that the Fed has no control over. This comparison is done for a wide range of loss functions. It does not assume that the chairman necessarily behaved by minimizing a loss function; it just compares his actual behavior to what he could have done had he minimized a particular loss function. The second way, on the other hand, assumes that each chairman minimized a loss function, and it chooses for each chairman which of the various loss functions tried comes closest to matching the actual values of the control variable to the optimal values. A summary evaluation of each chairman is presented in Section 6. Classification-JEL: E52 Keywords: Fed chairmen, Optimal control, Economic performance Note: CFP 1213 Length: 36 pages Creation-Date: 200609 Revision-Date: 200703 Number: 1577 Publication-Status: Published in The B.E. Journal of Macroeconomics, Vol. 1, Issue 1 (Contributions), Article 12 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1577.pdf File-Format: application/pdf File-Size: 275 kb Handle: RePEc:cwl:cwldpp:1577 Template-type: ReDIF-Paper 1.0 Author-Name: J. D. Geanakoplos Author-X-Name-First: J. D. Author-X-Name-Last: Geanakoplos Author-Email: john.geanakoplos@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/geanakoplos.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: H. M. Polemarchakis Author-X-Name-First: H. M. Author-X-Name-Last: Polemarchakis Author-Workplace-Name: Economics, University of Warwick Title: Pareto Improving Taxes Abstract: We show that in almost every economy with separable externalities, every competitive equilibrium can be Pareto improved by a package of anonymous commodity taxes that cause prices to adjust and markets to reclear at different levels of individual consumption. The argument can be extended to economies with strategic interactions, incomplete asset markets or asymmetric information. This constrained suboptimality of competitive allocations might provide a rationale for economic policy in economies with externalities. Classification-JEL: D50, D60, D62, D82 Keywords: Commodity taxes, Constrained suboptimality Note: CFP 1235. Length: 27 pages Creation-Date: 200608 Number: 1576 Publication-Status: Published in Journal of Mathematical Economics (2008), 44: 682-696 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1576.pdf File-Format: application/pdf File-Size: 253 kb Handle: RePEc:cwl:cwldpp:1576 Template-type: ReDIF-Paper 1.0 Author-Name: Martin W. Cripps Author-X-Name-First: Martin W. Author-X-Name-Last: Cripps Author-Workplace-Name: University College and Washington University, St. Louis Author-Name: Jeffrey C. Ely Author-X-Name-First: Jeffrey C. Author-X-Name-Last: Ely Author-Workplace-Name: Northwestern University Author-Name: George J. Mailath Author-X-Name-First: George J. Author-X-Name-Last: Mailath Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Larry Samuelson Author-X-Name-First: Larry Author-X-Name-Last: Samuelson Author-Workplace-Name: University of Wisconsin Title: Common Learning Abstract: Consider two agents who learn the value of an unknown parameter by observing a sequence of private signals. The signals are independent and identically distributed across time but not necessarily across agents. We show that that when each agent's signal space is finite, the agents will commonly learn its value, i.e., that the true value of the parameter will become approximate common-knowledge. In contrast, if the agents' observations come from a countably infinite signal space, then this contraction mapping property fails. We show by example that common learning can fail in this case. Classification-JEL: D82, D83 Keywords: Common learning, Common belief, Private signals, Private beliefs Note: CFP 1257. Length: 33 pages Creation-Date: 200608 Revision-Date: 200706 Number: 1575R Publication-Status: Published in Econometrics (2008), 76(4): 909-933 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1575-r.pdf File-Format: application/pdf File-Size: 266 kb Handle: RePEc:cwl:cwldpp:1575R Template-type: ReDIF-Paper 1.0 Author-Name: Martin W. Cripps Author-X-Name-First: Martin W. Author-X-Name-Last: Cripps Author-Workplace-Name: University College and Washington University, St. Louis Author-Name: Jeffrey C. Ely Author-X-Name-First: Jeffrey C. Author-X-Name-Last: Ely Author-Workplace-Name: Northwestern University Author-Name: George J. Mailath Author-X-Name-First: George J. Author-X-Name-Last: Mailath Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Larry Samuelson Author-X-Name-First: Larry Author-X-Name-Last: Samuelson Author-Workplace-Name: University of Wisconsin Title: Common Learning Abstract: Consider two agents who learn the value of an unknown parameter by observing a sequence of private signals. The signals are independent and identically distributed across time but not necessarily agents. Does it follow that the agents will commonly learn its value, i.e., that the true value of the parameter will become (approximate) common-knowledge? We show that the answer is affirmative when each agent's signal space is finite and show by example that common learning can fail when observations come from a countably infinite signal space. Classification-JEL: D82, D83 Keywords: Common learning, Common belief, Private signals, Private beliefs Length: 34 pages Creation-Date: 200608 Number: 1575 Publication-Status: Published in Econometrics (2008), 76(4): 909-933 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1575.pdf File-Format: application/pdf File-Size: 221 kb Handle: RePEc:cwl:cwldpp:1575 Template-type: ReDIF-Paper 1.0 Author-Name: Pradeep Dubey Author-X-Name-First: Pradeep Author-X-Name-Last: Dubey Author-Workplace-Name: Dept. of Economics, Stony Brook Author-Name: John Geanakoplos Author-X-Name-First: John Author-X-Name-Last: Geanakoplos Author-Email: john.geanakoplos@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/geanakoplos.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Money and Production, and Liquidity Trap Abstract: We prove the existence of monetary equilibrium in a finite horizon economy with production. We also show that if agents expect the monetary authority to significantly decrease the supply of bank money available for short term loans in the future, then the economy will fall into a liquidity trap today. Classification-JEL: D50, D51, D52, D58, D60, E12, E31, E32, E41, E42, E43, E44, E50, E51, E52, E58, E63 Keywords: Central bank, Inside money, Outside money, Incomplete assets, Production, Monetary equilibrium, Liquidity, Liquidity trap Note: CFP 1200 Length: 26 pages Creation-Date: 200607 Number: 1574 Publication-Status: Published in International Journal of Economic Theory (2006), 2(3/4): 295-317 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1574.pdf File-Format: application/pdf File-Size: 307 kb Handle: RePEc:cwl:cwldpp:1574 Template-type: ReDIF-Paper 1.0 Author-Name: George J. Mailath Author-X-Name-First: George J. Author-X-Name-Last: Mailath Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Georg Noldeke Author-X-Name-First: Georg Author-X-Name-Last: Noldeke Author-Workplace-Name: Universitat Bonn Title: Extreme Adverse Selection, Competitive Pricing, and Market Breakdown Abstract: Extreme adverse selection arises when private information has unbounded support, and market breakdown occurs when no trade is the only equilibrium outcome. We study extreme adverse selection via the limit behavior of a financial market as the support of private information converges to an unbounded support. A necessary and sufficient condition for market breakdown is obtained. If the condition fails, then there exists competitive market behavior that converges to positive levels of trade whenever it is first best to have trade. When the condition fails, no feasible (competitive or not) market behavior converges to positive levels of trade. Classification-JEL: D40, D82, D83, G12, G14 Keywords: Adverse selection, Market breakdown, Separation, Competitive pricing Length: 46 pages Creation-Date: 200607 Number: 1573 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1573.pdf File-Format: application/pdf File-Size: 386 kb Handle: RePEc:cwl:cwldpp:1573 Template-type: ReDIF-Paper 1.0 Author-Name: Martin Shubik Author-X-Name-First: Martin Author-X-Name-Last: Shubik Author-Email: martin.shubik@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/shubik.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: The Theory of Money and Financial Institutions: A Summary of a Game Theoretic Approach Abstract: A game theoretic approach to the theory of money and financial institution is given utilizing both the strategic and coalitional forms for describing the economy. The economy is first modeled as a strategic market game, then the strategic form is used to calculate several cooperative forms that differ from each other in their utilization of money and credit and their treatment of threats. It is shown that there are natural upper and lower bounds to the monetary needs of an economy, but even in the extreme structures the concept of "enough money" can be defined usefully, and for large economies the games obtained from the lower and upper bounds have cores that approach the same limit that is an efficient price system. The role of disequilibrium is then discussed. Classification-JEL: C71, C72, E40 Keywords: Money, Prices, Core, Threat, Market game, Strategic market game Length: 21 pages Creation-Date: 200607 Number: 1572 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1572.pdf File-Format: application/pdf File-Size: 182 kb Handle: RePEc:cwl:cwldpp:1572 Template-type: ReDIF-Paper 1.0 Author-Name: V. Bhaskar Author-X-Name-First: V. Author-X-Name-Last: Bhaskar Author-Workplace-Name: University College London Author-Name: George J. Mailath Author-X-Name-First: George J. Author-X-Name-Last: Mailath Author-Email: george.mailath@yale.edu Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Stephen Morris Author-X-Name-First: Stephen Author-X-Name-Last: Morris Author-Workplace-Name: Princeton University Title: Purification in the Infinitely-Repeated Prisoners' Dilemma Abstract: This paper investigates the Harsanyi (1973)-purifiability of mixed strategies in the repeated prisoners' dilemma with perfect monitoring. We perturb the game so that in each period, a player receives a private payoff shock which is independently and identically distributed across players and periods. We focus on the purifiability of a class of one-period memory mixed strategy equilibria used by Ely and Valimaki (2002) in their study of the repeated prisoners' dilemma with private monitoring. We find that all such strategy profiles are not the limit of one-period memory equilibrium strategy profiles of the perturbed game, for almost all noise distributions. However, if we allow infinite memory strategies in the perturbed game, then any completely-mixed equilibrium is purifiable. Classification-JEL: C72, C73 Keywords: Purification, belief-free equilibria, repeated games Length: 16 pages Creation-Date: 200607 Number: 1571 Publication-Status: Published in Review of Economic Dynamics (2008), 11: 515-528 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1571.pdf File-Format: application/pdf File-Size: 280 kb Handle: RePEc:cwl:cwldpp:1571 Template-type: ReDIF-Paper 1.0 Author-Name: Ray C. Fair Author-X-Name-First: Ray C. Author-X-Name-Last: Fair Author-Email: ray.fair@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/fair.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Evaluating Inflation Targeting Using a Macroeconometric Model Abstract: This paper uses a structurally estimated macroeconometric model, denoted the MC model, to evaluate inflation targeting in the United States. Various interest rate rules are tried with differing weights on inflation and output, and various optimal control problems are solved using differing weights on inflation and output targets. Price-level targeting is also considered. The results show that 1) there are output costs to inflation targeting, especially for price shocks, 2) price-level targeting is dominated by inflation targeting, 3) the estimated interest rate rule of the Fed (in Table 4) is consistent with the Fed placing equal weights on inflation and unemployment in a loss function, 4) the estimated interest rate rule does a fairly good job at lowering variability, and 5) considerable economic variability is left after the Fed has done its best. Overall, the results suggest that the Fed should continue to behave as it has in the past. Classification-JEL: E52 Keywords: Inflation targeting, Interest rate rules, Optimal control Note: CFP 1570. Length: 51 pages Creation-Date: 200606 Revision-Date: 200703 Number: 1570 Publication-Status: Published in The Open-Access, Open-Assessment E-Journal (2007-8) Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1570.pdf File-Format: application/pdf File-Size: 306 kb Handle: RePEc:cwl:cwldpp:1570 Template-type: ReDIF-Paper 1.0 Author-Name: Yuichi Kitamura Author-X-Name-First: Yuichi Author-X-Name-Last: Kitamura Author-Email: yuichi.kitamura@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/kitamura.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Empirical Likelihood Methods in Econometrics: Theory and Practice Abstract: Recent developments in empirical likelihood (EL) methods are reviewed. First, to put the method in perspective, two interpretations of empirical likelihood are presented, one as a nonparametric maximum likelihood estimation method (NPMLE) and the other as a generalized minimum contrast estimator (GMC). The latter interpretation provides a clear connection between EL, GMM, GEL and other related estimators. Second, EL is shown to have various advantages over other methods. The theory of large deviations demonstrates that EL emerges naturally in achieving asymptotic optimality both for estimation and testing. Interestingly, higher order asymptotic analysis also suggests that EL is generally a preferred method. Third, extensions of EL are discussed in various settings, including estimation of conditional moment restriction models, nonparametric specification testing and time series models. Finally, practical issues in applying EL to real data, such as computational algorithms for EL, are discussed. Numerical examples to illustrate the efficacy of the method are presented. Classification-JEL: C14 Keywords: Convex analysis, Empirical distribution, GNP-optimality, Large deviation principle, Moment restriction models, Nonparametric test, NPMLE, Semiparametric efficiency, Weak dependence Length: 66 pages Creation-Date: 200606 Number: 1569 Publication-Status: Published in Richard Blundell, W.K. Newey, and T. Persson, eds., Advances in Economics and Econometrics: Theory and Applications, Ninth World Congress, vol. 3, Cambridge University Press, 2007, Ch. 7 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1569.pdf File-Format: application/pdf File-Size: 556 kb Handle: RePEc:cwl:cwldpp:1569 Template-type: ReDIF-Paper 1.0 Author-Name: Dirk Bergemann Author-X-Name-First: Dirk Author-X-Name-Last: Bergemann Author-Email: dirk.bergemann@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/bergemann.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Deran Ozmen Author-X-Name-First: Deran Author-X-Name-Last: Ozmen Author-Workplace-Name: Yale University Title: Efficient Recommender Systems Abstract: We study the efficient allocation of buyers in the presence of recommender systems. A recommender system affects the market in two ways: (i) it creates value by reducing product uncertainty for the customers and hence (ii) its recommendations can be offered as add-ons, which generates informational externalities. We investigate the impact of these factors on the efficient allocation of buyers across different products. We find that the efficient allocation requires that the seller with the recommender system has full market share. If the recommender system is sufficiently effective in reducing uncertainty, it is optimal to have some products to be purchased by a larger group of people than others. The large group consists of customers with flexible tastes. Classification-JEL: D42, D83, D85 Keywords: Recommender system, Collaborative filtering, Add-ons, Pricing, Information externality Note: 1196. Length: 4 pages Creation-Date: 200606 Number: 1568 Publication-Status: Published in Proceedings of the 8th IEEE International Conference on E-Commerce Technology and the 3rd IEEE International Conference on Enterprise Computing, and E-Services Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1568.pdf File-Format: application/pdf File-Size: 128 kb Handle: RePEc:cwl:cwldpp:1568 Template-type: ReDIF-Paper 1.0 Author-Name: Eduardo Engel Author-X-Name-First: Eduardo Author-X-Name-Last: Engel Author-Email: eduardo.engel@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/engel.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Ronald Fischer Author-X-Name-First: Ronald Author-X-Name-Last: Fischer Author-Workplace-Name: University of Chile - Center of Applied Economics (CEA) Author-Name: Alexander Galetovic Author-X-Name-First: Alexander Author-X-Name-Last: Galetovic Author-Workplace-Name: Universidad de los Andes Title: Renegotiation without Holdup: Anticipating Spending and Infrastructure Concessions Abstract: Infrastructure concessions are frequently renegotiated after investments are sunk, resulting in better contractual terms for the franchise holders. This paper offers a political economy explanation for renegotiations that occur with no apparent holdup. We argue that they are used by political incumbents to anticipate infrastructure spending and thereby increase the probability of winning the upcoming election. Contract renegotiations allow administrations to replicate the effects of issuing debt. Yet debt issues are incorporated in the budget, must be approved by Congress and are therefore subject to the opposition's review. By contrast, under current accounting standards the obligations created by renegotiations circumvent the budgetary process in most countries. Hence, renegotiations allow incumbents to spend more without being subject to Congressional oversight. Classification-JEL: H21, L51, L91 Keywords: Build-operate-and-transfer (BOT), Concessions, Renegotiation, Public-private partnerships Length: 17 pages Creation-Date: 200606 Number: 1567 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1567.pdf File-Format: application/pdf File-Size: 172 kb Handle: RePEc:cwl:cwldpp:1567 Template-type: ReDIF-Paper 1.0 Author-Name: Ruediger Bachmann Author-X-Name-First: Ruediger Author-X-Name-Last: Bachmann Author-Workplace-Name: Yale University Author-Name: Ricardo J. Caballero Author-X-Name-First: Ricardo J. Author-X-Name-Last: Caballero Author-Workplace-Name: MIT Author-Name: Eduardo Engel Author-X-Name-First: Eduardo Author-X-Name-Last: Engel Author-Email: eduardo.engel@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/engel.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Aggregate Implications of Lumpy Investment: New Evidence and a DSGE Model Abstract: The sensitivity of U.S. aggregate investment to shocks is procyclical: the initial response increases by approximately 50% from the trough to the peak of the business cycle. This feature of the data follows naturally froma DSGE model with lumpy microeconomic capital adjustment. Beyond explaining this specific time variation, our model and evidence provide a counterexample to the claim that microeconomic investment lumpiness is inconsequential for macroeconomic analysis. Classification-JEL: E10, E22, E30, E32, E62 Keywords: Ss model, RBC model, Time-varying impulse response function, History dependence, Conditional heteroscedasticity, Aggregate shocks, Sectoral shocks, Idiosyncratic shocks, Adjustment costs Length: 50 pages Creation-Date: 200806 Number: 1566R Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1566-r.pdf File-Format: application/pdf File-Size: 308 kb Handle: RePEc:cwl:cwldpp:1566-r Template-type: ReDIF-Paper 1.0 Author-Name: Ruediger Bachmann Author-X-Name-First: Ruediger Author-X-Name-Last: Bachmann Author-Workplace-Name: Yale University Author-Name: Ricardo J. Caballero Author-X-Name-First: Ricardo J. Author-X-Name-Last: Caballero Author-Workplace-Name: MIT Author-Name: Eduardo Engel Author-X-Name-First: Eduardo Author-X-Name-Last: Engel Author-Email: eduardo.engel@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/engel.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Lumpy Investment in Dynamic General Equilibrium Abstract: Microeconomic lumpiness matters for macroeconomics. According to our DSGE model, it explains roughly 60% of the smoothing in the investment response to aggregate shocks. The remaining 40% is explained by general equilibrium forces. The central role played by micro frictions for aggregate dynamics results in important history dependence in business cycles. In particular, booms feed into themselves. The longer an expansion, the larger the response of investment to an additional positive shock. Conversely, a slowdown after a boom can lead to a long lasting investment slump, which is unresponsive to policy stimuli. Such dynamics are consistent with US investment patterns over the last decade. More broadly, over the 1960-2000 sample, the initial response of investment to a productivity shock with responses in the top quartile is 60% higher than the average response in the bottom quartile. Furthermore, the reduction in the relative importance of general equilibrium forces for aggregate investment dynamics also facilitates matching conventional RBC moments for consumption and employment. Classification-JEL: E10, E22, E30, E32, E62 Keywords: Ss model, RBC model, Time-varying impulse response function, Aggregate shocks, Sectoral shocks, Idiosyncratic shocks, Adjustment costs, History dependence, Moment matching Length: 52 pages Creation-Date: 200606 Number: 1566 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1566.pdf File-Format: application/pdf File-Size: 338 kb Handle: RePEc:cwl:cwldpp:1566 Template-type: ReDIF-Paper 1.0 Author-Name: Jussi Keppo Author-X-Name-First: Jussi Author-X-Name-Last: Keppo Author-Workplace-Name: IOE Department, University of Michigan Author-Name: Lones Smith Author-X-Name-First: Lones Author-X-Name-Last: Smith Author-Workplace-Name: Economics Department, University of Michigan Author-Name: Dmitry Davydov Author-X-Name-First: Dmitry Author-X-Name-Last: Davydov Author-Workplace-Name: Equities Division, Goldman Sachs Title: Optimal Electoral Timing: Exercise Wisely and You May Live Longer Abstract: In many democratic countries, the timing of elections is flexible. We explore this potentially valuable option using insights from option pricing in finance. The paper offers three main contributions on this problem. First, we derive a rationally-based mean-reverting political support process for the parties, assuming that politically heterogeneous voters continuously learn over time about evolving party fortunes. We solve for the long-run density for this process and derive the polling process from it by adding polling noise. Second, we explore optimal timing using the political support process. The incumbent sees its poll support, and must call an election within five years of the last election to maximize its expected total time in office. This resembles the optimal exercise rule for an American financial option. This option is recursive, and the waiting and stopping values subtly interact. We prove the existence of the optimal exercise rule in this setting, and show that the expected longevity is a convex-thenconcave function of the political support. Our model is tractable enough that we can analytically derive how the exercise rule responds to parametric shifts. We calibrate our model to the Labour-Tory rivalry in the U.K., with polling data from 1943-2005 and the 16 elections after 1945. Excluding three elections essentially forced by weak governments, our maximizing story quite well explains when the elections were called, and beats simple linear regressions. We also measure the value of election options, finding that over the long run they should more than double the expected time in power of a fixed term electoral cycle. Classification-JEL: D83, D72, G1 Keywords: American option, European option, Brownian motion, Electoral timing Length: 37 pages Creation-Date: 200605 Number: 1565 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1565.pdf File-Format: application/pdf File-Size: 343 kb Handle: RePEc:cwl:cwldpp:1565 Template-type: ReDIF-Paper 1.0 Author-Name: Donald W.K. Andrews Author-X-Name-First: Donald W. K. Author-X-Name-Last: Andrews Author-Email: donald.andrews@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/andrews.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Gustavo Soares Author-X-Name-First: Gustavo Author-X-Name-Last: Soares Author-Workplace-Name: Department of Economics, Yale University Author-Workplace-Homepage: http://www.econ.yale.edu/ Title: Rank Tests for Instrumental Variables Regression with Weak Instruments Abstract: This paper considers tests in an instrumental variables (IVs) regression model with IVs that may be weak. Tests that have near-optimal asymptotic power properties with Gaussian errors for weak and strong IVs have been determined in Andrews, Moreira, and Stock (2006a). In this paper, we seek tests that have near-optimal asymptotic power with Gaussian errors and improved power with non-Gaussian errors relative to existing tests. Tests with such properties are obtained by introducing rank tests that are analogous to the conditional likelihood ratio test of Moreira (2003). We also introduce a rank test that is analogous to the Lagrange multiplier test of Kleibergen (2002) and Moreira (2001). Classification-JEL: C12, C30 Keywords: Asymptotically similar tests, Conditional likelihood ratio test, Instrumental variables regression, Lagrange multiplier test, Power of test, Rank tests, Thick-tailed distribution, Weak instruments Note: CFP 1250. Length: 51 pages Creation-Date: 200603 Number: 1564 Publication-Status: Published in Econometric Theory (2007), 23(6): 1033-1082 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1564.pdf File-Format: application/pdf File-Size: 501 kb Handle: RePEc:cwl:cwldpp:1564 Template-type: ReDIF-Paper 1.0 Author-Name: Dirk Bergemann Author-X-Name-First: Dirk Author-X-Name-Last: Bergemann Author-Email: dirk.bergemann@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/bergemann.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Deran Ozmen Author-X-Name-First: Deran Author-X-Name-Last: Ozmen Author-Workplace-Name: Boston Consulting Group Title: Optimal Pricing with Recommender Systems Abstract: We study optimal pricing in the presence of recommender systems. A recommender system affects the market in two ways: (i) it creates value by reducing product uncertainty for the customers and hence (ii) its recommendations can be offered as add-ons which generate informational externalities. The quality of the recommendation add-on is endogenously determined by sales. We investigate the impact of these factors on the optimal pricing by a seller with a recommender system against a competitive fringe without such a system. If the recommender system is sufficiently effective in reducing uncertainty, then the seller prices otherwise symmetric products differently to have some products experienced more aggressively. Moreover, the seller segments the market so that customers with more inflexible tastes pay higher prices to get better recommendations. Note: CFP 1177 Classification-JEL: D42, D83, D85 Keywords: Recommender system, Collaborative filtering, Add-ons, Pricing, Information externality Note: CFP 1177. Length: 12 pages Creation-Date: 200603 Number: 1563 Price: None Publication-Status: Published in Proceedings of the 7th ACM Conference on Electronic Commerce, Ann Arbor, MI, 2006, pp. 43-51 File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1563.pdf File-Format: application/pdf File-Size: 232 kb Handle: RePEc:cwl:cwldpp:1563 Template-type: ReDIF-Paper 1.0 Author-Name: Susan Athey Author-X-Name-First: Susan Author-X-Name-Last: Athey Author-Workplace-Name: Dept. of Economics, Stanford University Author-Name: Philip A. Haile Author-X-Name-First: Philip A. Author-X-Name-Last: Haile Author-Email: philip.haile@yale.edu Author-Homepage: http://www.econ.yale.edu/faculty1/haile.htm Author-Workplace-Name: Dept. of Economics and Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Empirical Models of Auctions Abstract: Many important economic questions arising in auctions can be answered only with knowledge of the underlying primitive distributions governing bidder demand and information. An active literature has developed aiming to estimate these primitives by exploiting restrictions from economic theory as part of the econometric model used to interpret auction data. We review some highlights of this recent literature, focusing on identification and empirical applications. We describe three insights that underlie much of the recent methodological progress in this area and discuss some of the ways these insights have been extended to richer models allowing more convincing empirical applications. We discuss several recent empirical studies using these methods to address a range of important economic questions. Classification-JEL: C5, L1, D4 Keywords: Auctions, Identification, Estimation, Testing Note: CFP 1229. Length: 48 pages Creation-Date: 200603 Number: 1562 Publication-Status: Published in Richard Blundell, Whitney Newey, and Torsten Persson, eds., Advances in Economics and Econometrics, Theory and Applications: Ninth World Congress, Vol. II, Cambridge University Press, 2006, pp. 1-45 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1562.pdf File-Format: application/pdf File-Size: 498 kb Handle: RePEc:cwl:cwldpp:1562 Template-type: ReDIF-Paper 1.0 Author-Name: Bergemann, Dirk Author-X-Name-First: Dirk Author-X-Name-Last: Bergemann Author-Email: dirk.bergemann@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/bergemann.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Stephen Morris Author-X-Name-First: Stephen Author-X-Name-Last: Morris Author-Workplace-Name: Dept. of Economics, Princeton University Title: Robust Implementation in Direct Mechanisms Abstract: A social choice function is robustly implementable if there is a mechanism under which the process of iteratively eliminating strictly dominated messages leads to outcomes that agree with the social choice function for all beliefs at every type profile. In an interdependent value envi­ronment with single crossing preferences, we identify a contraction property on the preferences which together with strict ex post incentive compatibility is sufficient to guarantee robust imple­mentation in the direct mechanism. Strict ex post incentive compatibility and the contraction property are also necessary for robust implementation in any mechanism, including indirect ones. The contraction property requires that the interdependence is not too large. In a linear signal model, the contraction property is equivalent to an interdependence matrix having all eigenvalues smaller than one. Classification-JEL: Keywords: Mechanism design, Implementation, Robustness, Common knowledge, Interim equilibrium, Iterative deletion, Direct mechanism Length: 39 pages Creation-Date: 200603 Revision-Date: 200901 Number: 1561RR Publication-Status: Published in Review of Economic Studies (2009), 76: 1175-1204 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1561-rr.pdf File-Format: application/pdf File-Size: 278 kb Handle: RePEc:cwl:cwldpp:1561RR Template-type: ReDIF-Paper 1.0 Author-Name: Dirk Bergemann Author-X-Name-First: Dirk Author-X-Name-Last: Bergemann Author-Email: dirk.bergemann@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/bergemann.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Stephen Morris Author-X-Name-First: Stephen Author-X-Name-Last: Morris Author-Workplace-Name: Dept. of Economics, Princeton University Title: Robust Implementation: The Case of Direct Mechanisms" Abstract: A social choice function is robustly implementable if there is a mechanism under which the process of iteratively eliminating strictly dominated messages leads to outcomes that agree with the social choice at every type profile. In an interdependent value environment with single crossing preferences, we identify a strict contraction property on the preferences which together with strict ex post incentive compatibility is sufficient to guarantee robust implementation in the direct mechanism. Strict EPIC and the contraction property are also necessary for robust implementation in any mechanism. The contraction property essentially requires that the interdependence is not too large. In a linear signal model, the contraction property is equivalent to an interdependence matrix having an eigenvalue less than one. Classification-JEL: C79, D82 Keywords: Mechanism design, Implementation, Robustness, Common knowledge, Interim equilibrium, Iterative deletion, Direct mechanism Length: 39 pages Creation-Date: 200605 Revision-Date: 200705 Number: 1561R Publication-Status: Published in Review of Economic Studies (2009), 76: 1175-1204 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1561-r.pdf File-Format: application/pdf File-Size: 276 kb Handle: RePEc:cwl:cwldpp:1561R Template-type: ReDIF-Paper 1.0 Author-Name: Dirk Bergemann Author-X-Name-First: Dirk Author-X-Name-Last: Bergemann Author-Email: dirk.bergemann@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/bergemann.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Stephen Morris Author-X-Name-First: Stephen Author-X-Name-Last: Morris Author-Workplace-Name: Dept. of Economics, Princeton University Title: Robust Implementation: The Case of Direct Mechanisms Abstract: A social choice function is robustly implementable if there is a mechanism under which the process of iteratively eliminating strictly dominated messages leads to outcomes that agree with the social choice at every type profile. In an interdependent value environment, we identify a strict contraction property on the preferences which together with strict ex post incentive compatibility and the strict single crossing property is sufficient to guarantee robust implementation in the direct mechanism. The contraction property essentially requires that the interdependence is not too large. In a linear signal model, the contraction property is equivalent to an interdependence matrix having an eigenvalue less than one. The contraction property is also necessary for robust implementation in any mechanism. Classification-JEL: C79, D82 Keywords: Mechanism Design, Implementation, Robustness, Common Knowledge, Interim Equilibrium, Iterative Deletion, Direct Mechanism Length: 36 pages Creation-Date: 200603 Number: 1561 Publication-Status: Published in Review of Economic Studies (2009), 76: 1175-1204 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1561.pdf File-Format: application/pdf File-Size: 342 kb Handle: RePEc:cwl:cwldpp:1561 Template-type: ReDIF-Paper 1.0 Author-Name: Barry O'Neill Author-X-Name-First: Barry Author-X-Name-Last: O'Neill Author-Workplace-Name: University of California, Los Angeles Title: Nuclear Weapons and National Prestige Abstract: Leaders and historians see prestige as important, but international relations theorists have neglected the concept, in part for lack of a clear definition. It is proposed that a party "holds prestige" when group members generally believe that the party has a certain desirable quality, and this situation gives the party perceived power in the group. The definition gains support from a survey of international affairs writings on the sources of prestige. Prestige is strategically important when a party wants support from others who would rather join the side that more of the others are joining. Some general ways of acquiring prestige are discussed. Compared to achieving social progress, building and testing nuclear weapons is better at bearing prestige because it has distinct borders separating success and failure, because it is salient and because it involves the symbolism of power. In some cases when prestige is a factor, one can better demonstrate one’s ability to perform an accomplishment by refraining from doing it. The analysis yields suggestions for reducing nuclear proliferation. Classification-JEL: C72, D82, H56 Keywords: prestige, nuclear weapons, common knowledge, signaling, countersignaling, global games, symbolism Length: 43 pages Creation-Date: 200602 Number: 1560 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1561.pdf File-Format: application/pdf File-Size: 517 kb Handle: RePEc:cwl:cwldpp:1560 Template-type: ReDIF-Paper 1.0 Author-Name: Barry O'Neill Author-X-Name-First: Barry Author-X-Name-Last: O'Neill Author-Workplace-Name: University of California, Los Angeles Author-Name: Bezalel Peleg Author-X-Name-First: Bezalel Author-X-Name-Last: Peleg Author-Workplace-Name: Hebrew University of Jerusalem Title: Lexicographic Composition of Simple Games Abstract: A two-house legislature can often be modelled as a proper simple game whose outcome depends on whether a coalition wins, blocks or loses in two smaller proper simple games. It is shown that there are exactly five ways to combine the smaller games into a larger one. This paper focuses on one of the rules, lexicographic composition, where a coalition wins G_1 => G_2 when it either wins in G_1, or blocks in G_1 and wins in G_2. It is the most decisive of the five. A lexicographically decomposable game is one that can be represented in this way using components whose player sets partition the whole set. Games with veto players are not decomposable, and anonymous games are decomposable if and only if they are decisive and have two or more players. If a player's benefit is assessed by any semi-value, then for two isomorphic games a player is better off from having a role in the first game than having the same role in the second. Lexicographic decomposability is sometimes compatible with equality of roles. A relaxation of it is suggested for its practical benefits. Classification-JEL: C71, D71 Keywords: simple games, voting, game composition, game decomposition, semi-value, decisiveness, fairness Length: 24 pages Creation-Date: 200602 Number: 1559 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1559.pdf File-Format: application/pdf File-Size: 380 kb Handle: RePEc:cwl:cwldpp:1559 Template-type: ReDIF-Paper 1.0 Author-Name: P. Jeganathan Author-X-Name-First: P. Author-X-Name-Last: Jeganathan Author-Workplace-Name: Indian Statistical Institute Title: Limit Theorems for Functionals of Sums That Converge to Fractional Stable Motions Abstract: Too technical to post here. Please see paper. Classification-JEL: C13, C22 Length: 67 pages Creation-Date: 200602 Revision-Date: 200603 Number: 1558 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1558.pdf File-Format: application/pdf File-Size: 392 kb Handle: RePEc:cwl:cwldpp:1558 Template-type: ReDIF-Paper 1.0 Author-Name: David J. Cooper Author-X-Name-First: David J. Author-X-Name-Last: Cooper Author-Workplace-Name: Dept. of Economics, Weatherhead School of Management, Case Wester Reserve University Author-Name: Hanming Fang Author-X-Name-First: Hanming Author-X-Name-Last: Fang Author-Workplace-Name: Dept. of Economics and Cowles Foundation, Yale University Author-Workplace-Homepage:http://www.econ.yale.edu/ Title: Understanding Overbidding in Second Price Auctions: An Experimental Study Abstract: This paper presents results from a series of second price private value auction (SPA) experiments in which bidders are either given for free, or are allowed to purchase, noisy signals about their opponents' value. Even though theoretically such information about opponents' value has no strategic use in the SPA, it provides us with a convenient instrument to change bidders' perception about the "strength" (i.e., the value) of their opponent. We argue that the empirical relationship between the incidence and magnitude of overbidding and bidders' perception of the strength of their opponent provides the key to understand whether overbidding in second price auctions are driven by "spite" motives or by the "joy of winning." The experimental data show that bidders are much more likely to overbid, though less likely to submit large overbid, when they perceive their rivals to have similar values as their own. We argue that this empirical relationship is more consistent with a modified "joy of winning" hypothesis than with the "spite" hypothesis. However, neither of the non-standard preference explanations are able to fully explain all aspects of the experimental data, and we argue for the important role of bounded rationality. We also find that bidder heterogeneity plays an important role in explaining their bidding behavior. Classification-JEL: C91, C72 Keywords: Overbidding, Second price auctions, Spite, Joy of winning, Bounded rationality Length: 51 pages Creation-Date: 200601 Number: 1557 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1557.pdf File-Format: application/pdf File-Size: 574 kb Handle: RePEc:cwl:cwldpp:1557 Template-type: ReDIF-Paper 1.0 Author-Name: Hector Chade Author-X-Name-First: Hector Author-X-Name-Last: Chade Author-Workplace-Name: Dept. of Economics, Arizona State University Author-Name: Lones Smith Author-X-Name-First: Lones Author-X-Name-Last: Smith Author-Workplace-Name: Dept. of Economics, University of Michigan Title: Simultaneous Search Abstract: We introduce and solve a new class of "downward-recursive" static portfolio choice problems. An individual simultaneously chooses among ranked stochastic options, and each choice is costly. In the motivational application, just one may be exercised from those that succeed. This often emerges in practice, such as when a student applies to many colleges. We show that a greedy algorithm finds the optimal set. The optimal choices are "less aggressive" than the sequentially optimal ones, but "more aggressive" than the best singletons. The optimal set in general contains gaps. We provide a comparative static on the chosen set. Classification-JEL: C61, D83, J64 Keywords: college application, submodular optimization, greedy algorithm, directed search Length: 16 pages Creation-Date: 200601 Number: 1556 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1556.pdf File-Format: application/pdf File-Size: 239 kb Handle: RePEc:cwl:cwldpp:1556 Template-type: ReDIF-Paper 1.0 Author-Name: Hector Chade Author-X-Name-First: Hector Author-X-Name-Last: Chade Author-Workplace-Name: Dept. of Economics, Arizona State University Author-Name: Pavlo Prokopovych Author-X-Name-First: Pavlo Author-X-Name-Last: Prokopovch Author-Workplace-Name: EERC Author-Name: Lones Smith Author-X-Name-First: Lones Author-X-Name-Last: Smith Author-Workplace-Name: Dept. of Economics, University of Michigan Title: Repeated Games with Present-Biased Preferences Abstract: We study infinitely repeated games with observable actions, where players have present-biased (so-called beta-delta) preferences. We give a two-step procedure to characterize Strotz-Pollak equilibrium payoffs: compute the continuation payoff set using recursive techniques, and then use this set to characterize the equilibrium payoff set U(beta,delta). While Strotz-Pollak equilibrium and subgame perfection differ here, the generated paths and payoffs nonetheless coincide. We then explore the cost of the present-time bias. Fixing the total present value of 1 util flow, lower beta or higher delta shrinks the payoff set. Surprisingly, unless the minimax outcome is a Nash equilibrium of the stage game, the equilibrium payoff set U(beta,delta) is not separately monotonic in beta or delta. While U(beta,delta) is contained in payoff set of a standard repeated game with smaller discount factor, the present-time bias precludes any lower bound on U(beta,delta) that would easily generalize the beta=1 folk-theorem. Classification-JEL: C73 Keywords: beta-delta preferences, repeated games, dynamic programming, Strotz-Pollak equilibrium Length: 24 pages Creation-Date: 200601 Number: 1555 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1555.pdf File-Format: application/pdf File-Size: 262 kb Handle: RePEc:cwl:cwldpp:1555 Template-type: ReDIF-Paper 1.0 Author-Name: Andreas Park Author-X-Name-First: Andreas Author-X-Name-Last: Park Author-Workplace-Name: Economics Dept., University of Toronto Author-Name: Lones Smith Author-X-Name-First: Lones Author-X-Name-Last: Smith Author-Workplace-Name: Dept. of Economics, University of Michigan Title: Caller Number Five: Timing Games that Morph from One Form to Another Abstract: There are two varieties of timing games in economics: In a war of attrition, more predecessors helps; in a pre-emption game, more predecessors hurts. In this paper, we introduce and explore a spanning class with rank-order payoffs that subsumes both as special cases. In this environment with unobserved actions and complete information, there are endogenously-timed phase transition moments. We identify equilibria with a rich enough structure to capture a wide array of economic and social timing phenomena -- shifting between phases of smooth and explosive entry. We introduce a tractable general theory of this class of timing games based on potential functions. This not only yields existence by construction, but also affords rapid characterization results. We then flesh out the simple economics of phase transitions: Anticipation of later timing games influences current play -- swelling pre-emptive atoms and truncating wars of attrition. We also bound the number of phase transitions as well as the number of symmetric Nash equilibria. Finally, we compute the payoff and duration of each equilibrium, which we uniformly bound. We contrast all results with those of the standard war of attrition. Classification-JEL: C73 Keywords: timing game, war of attrition, pre-emption game, potential function, Nash equilibrium Length: 21 pages Creation-Date: 200601 Number: 1554 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1554.pdf File-Format: application/pdf File-Size: 291 kb Handle: RePEc:cwl:cwldpp:1554 Template-type: ReDIF-Paper 1.0 Author-Name: Axel Anderson Author-X-Name-First: Axel Author-X-Name-Last: Anderson Author-Workplace-Name: Economics Department, Georgetown University Author-Name: Lones Smith Author-X-Name-First: Lones Author-X-Name-Last: Smith Author-Workplace-Name: Dept. of Economics, University of Michigan Title: Assortative Matching and Reputation Abstract: Consider Becker's classic 1963 matching model, with unobserved fixed types and stochastic publicly observed output. If types are complementary, then matching is assortative in the known Bayesian posteriors (the 'reputations'). We discover a robust failure of Becker's result in the simplest dynamic two type version of this world. Assortative matching is generally neither efficient nor an equilibrium for high discount factors. In a labor theoretic rationale, we show that assortative matching fails around the highest (lowest) reputation agents for 'low-skill (high-skill) concealing' technologies. We then find that as the number of production outcomes grows, almost all technologies are of either form. Our theory implies the dynamic result that high-skill matches eventually break up. It also reveals that the induced information rents create discontinuities in the wage profile. This in turn produces life-cycle effects: young workers are paid less than their static marginal product, and old workers more. Classification-JEL: C78, J41 Keywords: assortative matching, incomplete information, wages, Bayesian posterior, value function Length: 40 pages Creation-Date: 200601 Number: 1553 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1553.pdf File-Format: application/pdf File-Size: 367 kb Handle: RePEc:cwl:cwldpp:1553 Template-type: ReDIF-Paper 1.0 Author-Name: Lones Smith Author-X-Name-First: Lones Author-X-Name-Last: Smith Author-Workplace-Name: Dept. of Economics, University of Michigan Author-Name: Peter Norman Sorensen Author-X-Name-First: Peter Norman Author-X-Name-Last: Sorensen Author-Email: peter.norman.sorensen@econ.ku.dk Author-Workplace-Name: Department of Economics, University of Copenhagen Title: Informational Herding and Optimal Experimentation Abstract: We show that far from capturing a formally new phenomenon, informational herding is really a special case of single-person experimentation -- and 'bad herds' the typical failure of complete learning. We then analyze the analogous team equilibrium, where individuals maximize the present discounted welfare of posterity. To do so, we generalize Gittins indices to our non-bandit learning problem, and thereby characterize when contrarian behaviour arises: (i) While herds are still constrained efficient, they arise for a strictly smaller belief set. (ii) A log-concave log-likelihood ratio density robustly ensures that individuals should lean more against their myopic preference for an action the more popular it becomes. Classification-JEL: D83 Keywords: Bayesian learning, value function, herding, experimentation, log concavity, Gittins index, team equilibrium Length: 39 pages Creation-Date: 200601 Number: 1552 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1552.pdf File-Format: application/pdf File-Size: 363 kb Handle: RePEc:cwl:cwldpp:1552 Template-type: ReDIF-Paper 1.0 Author-Name: Dirk Bergemann Author-X-Name-First: Dirk Author-X-Name-Last: Bergemann Author-Email: dirk.bergemann@yale.edu Author-Homepage: http://cowles.econ.yale.edu/ Author-Workplace-Name: Department of Economics, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/faculty/bergemann.htm Author-Name: Juuso Valimaki Author-X-Name-First: Juuso Author-X-Name-Last: Valimaki Author-Workplace-Name: Department of Economics, Helsinki School of Economics and University of Southampton Title: Bandit Problems Abstract: We survey the literature on multi-armed bandit models and their applications in economics. The multi-armed bandit problem is a statistical decision model of an agent trying to optimize his decisions while improving his information at the same time. This classic problem has received much attention in economics as it concisely models the trade-off between exploration (trying out each arm to find the best one) and exploitation (playing the arm believed to give the best payoff). Classification-JEL: C72, C73, D43, D83 Keywords: One-Armed Bandit, Multi-Armed Bandit, Bayesian Learning, Experimentation, Index Policy, Matching, Experience Goods Length: 15 pages Creation-Date: 200601 Number: 1551 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1551.pdf File-Format: application/pdf File-Size: 160 kb Handle: RePEc:cwl:cwldpp:1551 Template-type: ReDIF-Paper 1.0 Author-Name: Christian Gourieroux Author-X-Name-First: Christian Author-X-Name-Last: Gourieroux Author-Workplace-Name: CREST-INSEE Author-Name: Peter C. B. Phillips Author-X-Name-First: Peter C. B. Author-X-Name-Last: Phillips Author-Email: peter.phillips@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/phillips.htm Author-Workplace-Name: Cowles Foundation, Yale University; University of Auckland & University of York Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Jun Yu Author-X-Name-First: Jun Author-X-Name-Last: Yu Author-Workplace-Name: School of Economics and Social Science, Singapore Management University Title: Indirect Inference for Dynamic Panel Models Abstract: It is well-known that maximum likelihood (ML) estimation of the autoregressive parameter of a dynamic panel data model with fixed effects is inconsistent under fixed time series sample size (T) and large cross section sample size (N) asymptotics. The estimation bias is particularly relevant in practical applications when T is small and the autoregressive parameter is close to unity. The present paper proposes a general, computationally inexpensive method of bias reduction that is based on indirect inference (Gouriéroux et al., 1993), shows unbiasedness and analyzes efficiency. The method is implemented in a simple linear dynamic panel model, but has wider applicability and can, for instance, be easily extended to more complicated frameworks such as nonlinear models. Monte Carlo studies show that the proposed procedure achieves substantial bias reductions with only mild increases in variance, thereby substantially reducing root mean square errors. The method is compared with certain consistent estimators and bias-corrected ML estimators previously proposed in the literature and is shown to have superior .nite sample properties to GMM and the bias-corrected ML of Hahn and Kuersteiner (2002). Finite sample performance is compared with that of a recent estimator proposed by Han and Phillips (2005). Classification-JEL: C33 Keywords: Autoregression, Bias reduction, Dynamic panel, Fixed effects, Indirect inference Length: 20 pages Creation-Date: 200601 Number: 1550 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15b/d1550.pdf File-Format: application/pdf File-Size: 173 kb Handle: RePEc:cwl:cwldpp:1550 Template-type: ReDIF-Paper 1.0 Author-Name: Offer Lieberman Author-X-Name-First: Offer Author-X-Name-Last: Lieberman Author-Workplace-Name: Technion-Israel Institute of Technology Author-Name: Peter C. B. Phillips Author-X-Name-First: Peter C. B. Author-X-Name-Last: Phillips Author-Email: peter.phillips@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/phillips.htm Author-Workplace-Name: Cowles Foundation, Yale University; University of Auckland & University of York Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Refined Inference on Long Memory in Realized Volatility Abstract: There is an emerging consensus in empirical finance that realized volatility series typically display long range dependence with a memory parameter (d) around 0.4 (Andersen et. al. (2001), Martens et al. (2004)). The present paper provides some analytical explanations for this evidence and shows how recent results in Lieberman and Phillips (2004a, 2004b) can be used to refine statistical inference about d with little computational effort. In contrast to standard asymptotic normal theory now used in the literature which has an O(n-1/2) error rate on error rejection probabilities, the asymptotic approximation used here has an error rate of o(n-1/2). The new formula is independent of unknown parameters, is simple to calculate and highly user-friendly. The method is applied to test whether the reported long memory parameter estimates of Andersen et. al. (2001) and Martens et. al. (2004) differ significantly from the lower boundary (d = 0.5) of nonstationary long memory. Classification-JEL: C13, C22 Keywords: ARFIMA; Edgeworth expansion; Fourier integral expansion; Fractional differencing; Improved inference; Long memory; Pivotal statistic; Realized volatility; Singularity Note: CFP 1248. Length: 15 pages Creation-Date: 200601 Number: 1549 Publication-Status: Published in Econometric Reviews (2008), 27(1-3): 254-267 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1549.pdf File-Format: application/pdf File-Size: 216 kb Handle: RePEc:cwl:cwldpp:1549 Template-type: ReDIF-Paper 1.0 Author-Name: Nicholas Z. Muller Author-X-Name-First: Nicholas Z. Author-X-Name-Last: Muller Author-Workplace-Name: School of Forestry and Environmental Studies, Yale University Author-Name: Peter C. B. Phillips Author-X-Name-First: Peter C. B. Author-X-Name-Last: Phillips Author-Email: peter.phillips@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/phillips.htm Author-Workplace-Name: Cowles Foundation, Yale University; University of Auckland & University of York Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Sinusoidal Modeling Applied to Spatially Variant Tropospheric Ozone Air Pollution Abstract: This paper demonstrates how parsimonious models of sinusoidal functions can be used to fit spatially variant time series in which there is considerable variation of a periodic type. A typical shortcoming of such tools relates to the difficulty in capturing idiosyncratic variation in periodic models. The strategy developed here addresses this deficiency. While previous work has sought to overcome the shortcoming by augmenting sinusoids with other techniques, the present approach employs station-specific sinusoids to supplement a common regional component, which succeeds in capturing local idiosyncratic behavior in a parsimonious manner. The experiments conducted herein reveal that a semi-parametric approach enables such models to fit spatially varying time series with periodic behavior in a remarkably tight fashion. The methods are applied to a panel data set consisting of hourly air pollution measurements. The augmented sinusoidal models produce an excellent fit to these data at three different levels of spatial detail. Classification-JEL: C22, C23 Keywords: Air Pollution, Idiosyncratic component, Regional variation, Semiparametric model, Sinusoidal function, Spatial-temporal data, Tropospheric Ozone Length: 24 pages Creation-Date: 200601 Number: 1548 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1548.pdf File-Format: application/pdf File-Size: 685 kb Handle: RePEc:cwl:cwldpp:1548 Template-type: ReDIF-Paper 1.0 Author-Name: Peter C. B. Phillips Author-X-Name-First: Peter C. B. Author-X-Name-Last: Phillips Author-Email: peter.phillips@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/phillips.htm Author-Workplace-Name: Cowles Foundation, Yale University; University of Auckland & University of York Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Optimal Estimation of Cointegrated Systems with Irrelevant Instruments Abstract: It has been know since Phillips and Hansen (1990) that cointegrated systems can be consistently estimated using stochastic trend instruments that are independent of the system variables. A similar phenomenon occurs with deterministically trending instruments. The present work shows that such “irrelevant” deterministic trend instruments may be systematically used to produce asymptotically efficient estimates of a cointegrated system. The approach is convenient in practice, involves only linear instrumental variables estimation, and is a straightforward one step procedure with no loss of degrees of freedom in estimation. Simulations reveal that the procedure works well in practice, having little finite sample bias and less finite sample dispersion than other popular cointegrating regression procedures such as reduced rank VAR regression, fully modified least squares, and dynamic OLS. The procedure is shown to be a form of maximum likelihood estimation where the likelihood is constructed for data projected onto the trending instruments. This “trend likelihood”” is related to the notion of the local Whittle likelihood but avoids frequency domain issues altogether. Correspondingly, the approach developed here has many potential applications beyond conventional cointegrating regression, such as the estimation of long memory and fractional cointegrating relationships. Classification-JEL: C22 Keywords: Asymptotic efficiency, Cointegrated system, Instrumental variables, Irrelevant instrument, Karhunen-Loeve representation, Long memory, Optimal estimation, Orthonormal basis, Trend basis, Trend likelihood Length: 44 pages Creation-Date: 200601 Number: 1547 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1547.pdf File-Format: application/pdf File-Size: 577 kb Handle: RePEc:cwl:cwldpp:1547 Template-type: ReDIF-Paper 1.0 Author-Name: Peter C. B. Phillips Author-X-Name-First: Peter C. B. Author-X-Name-Last: Phillips Author-Email: peter.phillips@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/phillips.htm Author-Workplace-Name: Cowles Foundation, Yale University; University of Auckland & University of York Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Chirok Han Author-X-Name-First: Chirok Author-X-Name-Last: Han Author-Workplace-Name: Victoria University of Wellington Title: Gaussian Inference in AR(1) Time Series with or without a Unit Root Abstract: This note introduces a simple first-difference-based approach to estimation and inference for the AR(1) model. The estimates have virtually no finite sample bias, are not sensitive to initial conditions, and the approach has the unusual advantage that a Gaussian central limit theory applies and is continuous as the autoregressive coefficient passes through unity with a uniform vn rate of convergence. En route, a useful CLT for sample covariances of linear processes is given, following Phillips and Solo (1992). The approach also has useful extensions to dynamic panels. Classification-JEL: C22 Keywords: Autoregression, Differencing, Gaussian limit, Mildly explosive processes, Uniformity, Unit root Note: CFP 1243 Length: 16 pages Creation-Date: 200601 Number: 1546 Publication-Status: Published in Econometric Theory (June 2008), 24(3): 631-650 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1546.pdf File-Format: application/pdf File-Size: 221 kb Handle: RePEc:cwl:cwldpp:1546 Template-type: ReDIF-Paper 1.0 Author-Name: Yixiao Sun Author-X-Name-First: Yixiao Author-X-Name-Last: Sun Author-Workplace-Name: Department of Economics, University of California, San Dieg Author-Name: Peter C. B. Phillips Author-X-Name-First: Peter C. B. Author-X-Name-Last: Phillips Author-Email: peter.phillips@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/phillips.htm Author-Workplace-Name: Cowles Foundation, Yale University; University of Auckland & University of York Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Sainan Jin Author-X-Name-First: Sainan Author-X-Name-Last: Jin Author-Workplace-Name: Guanghua School of Management, Peking University Title: Optimal Bandwidth Selection in Heteroskedasticity-Autocorrelation Robust Testing Abstract: In time series regressions with nonparametrically autocorrelated errors, it is now standard empirical practice to use kernel-based robust standard errors that involve some smoothing function over the sample autocorrelations. The underlying smoothing parameter b, which can be defined as the ratio of the bandwidth (or truncation lag) to the sample size, is a tuning parameter that plays a key role in determining the asymptotic properties of the standard errors and associated semiparametric tests. Small-b asymptotics involve standard limit theory such as standard normal or chi-squared limits, whereas fixed-b asymptotics typically lead to nonstandard limit distributions involving Brownian bridge functionals. The present paper shows that the nonstandard fixed-b limit distributions of such nonparametrically studentized tests provide more accurate approximations to the finite sample distributions than the standard small-b limit distribution. In particular, using asymptotic expansions of both the finite sample distribution and the nonstandard limit distribution, we confirm that the second-order corrected critical value based on the expansion of the nonstandard limiting distribution is also second-order correct under the standard small-b asymptotics. We further show that, for typical economic time series, the optimal bandwidth that minimizes a weighted average of type I and type II errors is larger by an order of magnitude than the bandwidth that minimizes the asymptotic mean squared error of the corresponding long-run variance estimator. A plug-in procedure for implementing this optimal bandwidth is suggested and simulations confirm that the new plug-in procedure works well in finite samples. Classification-JEL: C13; C14; C22; C51 Keywords: Asymptotic expansion, Bandwidth choice, Kernel method, Long-run variance, Loss function, Nonstandard asymptotics, Robust standard error, Type I and Type II errors Length: 51 pages Creation-Date: 200601 Number: 1545 Publication-Status: Published in Econometrica (2008), 76(1): 175-194 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1546.pdf File-Format: application/pdf File-Size: 685 kb Handle: RePEc:cwl:cwldpp:1545 Template-type: ReDIF-Paper 1.0 Author-Name: Pradeep Dubey Author-X-Name-First: Pradeep Author-X-Name-Last: Dubey Author-Name: John Geanakoplos Author-X-Name-First: John Author-X-Name-Last: Geanakoplos Author-Email: john.geanakoplos@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/geanakoplos.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Grading in Games of Status: Marking Exams and Setting Wages Abstract: We introduce grading into games of status. Each player chooses effort, producing a stochastic output or score. Utilities depend on the ranking of all the scores. By clustering scores into grades, the ranking is coarsened, and the incentives to work are changed. We first apply games of status to grading exams. Our main conclusion is that if students care primarily about their status (relative rank) in class, they are often best motivated to work not by revealing their exact numerical exam scores (100,99,...,1), but instead by clumping them into coarse categories (A,B,C). When student abilities are disparate, the optimal grading scheme is always coarse. Furthermore, it awards fewer A's than there are alpha-quality students, creating small elites. When students are homogeneous, we characterize optimal grading schemes in terms of the stochastic dominance between student performances (when they shirk or work) on subintervals of scores, showing again why coarse grading may be advantageous. In both the disparate case and the homogeneous case, we prove that absolute grading is better than grading on a curve, provided student scores are independent. We next bring games of money and status to bear on the optimal wage schedule: workers can be motivated not merely by the purchasing power of wages, but also by the status higher wages confer. How should the employer combine both incentive devices to generate an optimal pay schedule? When workers' abilities are disparate, the optimal wage schedule creates different grades than we found with status incentives alone. The very top type should be motivated solely by money, with enormous salaries going to a tiny elite. Furthermore, if the population of workers diminishes as we go up the ability ladder and their disutility for work does not fall as fast, then the optimal wage schedule exhibits increasing wage differentials, despite the linearity in production. When workers are homogeneous, the same status grades are optimal as we found with status incentives alone. A bonus is paid only to scores in the top status grade. Classification-JEL: C70, I20, I30 Keywords: Status, Grading, Incentives, Education, Exams, Wages Length: 44 pages Creation-Date: 200512 Revision-Date: 200512 Number: 1544 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1544-r.pdf File-Format: application/pdf File-Size: 511 kb Handle: RePEc:cwl:cwldpp:1544R Template-type: ReDIF-Paper 1.0 Author-Name: Pradeep Dubey Author-X-Name-First: Pradeep Author-X-Name-Last: Dubey Author-Name: John Geanakoplos Author-X-Name-First: John Author-X-Name-Last: Geanakoplos Author-Email: john.geanakoplos@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/geanakoplos.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Grading in Games of Status: Marking Exams and Setting Wages Abstract: We introduce grading into games of status. Each player chooses effort, producing a stochastic output or score. Utilities depend on the ranking of all the scores. By clustering scores into grades, the ranking is coarsened, and the incentives to work are changed. We first apply games of status to grading exams. Our main conclusion is that if students care primarily about their status (relative rank) in class, they are often best motivated to work not by revealing their exact numerical exam scores (100,99,...,1), but instead by clumping them into coarse categories (A,B,C). When student abilities are disparate, the optimal grading scheme is always coarse. Furthermore, it awards fewer A's than there are alpha-quality students, creating small elites. When students are homogeneous, we characterize optimal grading schemes in terms of the stochastic dominance between student performances (when they shirk or work) on subintervals of scores, showing again why coarse grading may be advantageous. In both the disparate case and the homogeneous case, we prove that absolute grading is better than grading on a curve, provided student scores are independent. We next bring games of money and status to bear on the optimal wage schedule: workers can be motivated not merely by the purchasing power of wages, but also by the status higher wages confer. How should the employer combine both incentive devices to generate an optimal pay schedule? When workers' abilities are disparate, the optimal wage schedule creates different grades than we found with status incentives alone. The very top type should be motivated solely by money, with enormous salaries going to a tiny elite. Furthermore, if the population of workers diminishes as we go up the ability ladder and their disutility for work does not fall as fast, then the optimal wage schedule exhibits increasing wage differentials, despite the linearity in production. When workers are homogeneous, the same status grades are optimal as we found with status incentives alone. A bonus is paid only to scores in the top status grade. Classification-JEL: C70, I20, I30 Keywords: Status, Grading, Incentives, Education, Exams, Wages Length: 48 pages Creation-Date: 200512 Number: 1544 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1544.pdf File-Format: application/pdf File-Size: 567 kb Handle: RePEc:cwl:cwldpp:1544 Template-type: ReDIF-Paper 1.0 Author-Name: Adam Copeland Author-X-Name-First: Adam Author-X-Name-Last: Copeland Author-Workplace-Name: Bureau of Economic Analysis Author-Name: George Hall Author-X-Name-First: George Author-X-Name-Last: Hall Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: The Response of Prices, Sales, and Output to Temporary Changes in Demand Abstract: We determine empirically how the Big Three automakers accommodate shocks to demand. They have the capability to change prices, alter labor inputs through temporary layoffs and overtime, or adjust inventories. These adjustments are interrelated, non-convex, and dynamic in nature. Combining weekly plant-level data on production schedules and output with monthly data on sales and transaction prices, we estimate a dynamic profit-maximization model of the firm. Using impulse response functions, we demonstrate that when an automaker is hit with a demand shock sales respond immediately, prices respond gradually, and production responds only after a delay. The size of the immediate sales response is linear in the size of the shock, but the delayed production response is non-convex in the size of the shock. For sufficiently large shocks the cumulative production response over the product cycle is an order of magnitude larger than the cumulative price response. We examine two recent demand shocks: the Ford Explorer/Firestone tire recall of 2000, and the September 11, 2001 terrorist attacks. Classification-JEL: D21, D42, E22, E23, L11, L62 Keywords: automobile pricing, inventories, revenue management, indirect inference Length: 40 pages Creation-Date: 200512 Number: 1543 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1543.pdf File-Format: application/pdf File-Size: 248 kb Handle: RePEc:cwl:cwldpp:1543 Template-type: ReDIF-Paper 1.0 Author-Name: Dino Gerardi Author-X-Name-First: Dino Author-X-Name-Last: Gerardi Author-Email: donato.gerardi@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/gerardi.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Roger B. Myerson Author-X-Name-First: Roger B. Author-X-Name-Last: Myerson Author-Workplace-Name: Dept. of Economics, University of Chicago Title: Sequential Equilibria in Bayesian Games with Communication Abstract: We study the effects of communication in Bayesian games when the players are sequentially rational but some combinations of types have zero probability. Not all communication equilibria can be implemented as sequential equilibria. We define the set of strong sequential equilibria (SSCE) and characterize it. SSCE differs from the concept of sequential communication equilibrium (SCE) defined by Myerson (1986) in that SCE allows the possibility of trembles by the mediator. We show that these two concepts coincide when there are three or more players, but the set of SSCE may be strictly smaller than the set of SCE for two-player games. Classification-JEL: C72, D82 Keywords: Bayesian games, Communication, Communication equilibrium, Sequential communication equilibrium Note: CFP 1237. Length: 39 pages Creation-Date: 200512 Number: 1542 Publication-Status: Published in Games and Economic Behavior (2007), 60: 104-134 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1542.pdf File-Format: application/pdf File-Size: 318 kb Handle: RePEc:cwl:cwldpp:1542 Template-type: ReDIF-Paper 1.0 Author-Name: Seung Hyun Hong Author-X-Name-First: Seung Hyun Author-X-Name-Last: Hong Author-Workplace-Name: Dept. of Economics, Concordia University Author-Name: Peter C. B. Phillips Author-X-Name-First: Peter C. B. Author-X-Name-Last: Phillips Author-Email: peter.phillips@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/phillips.htm Author-Workplace-Name: Cowles Foundation, Yale University; University of Auckland & University of York Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Testing Linearity in Cointegrating Relations with an Application to Purchasing Power Parity Abstract: This paper develops a linearity test that can be applied to cointegrating relations. We consider the widely used RESET specification test and show that when this test is applied to nonstationary time series its asymptotic distribution involves a mixture of noncentral chi^2 distributions, which leads to severe size distortions in conventional testing based on the central chi^2. Nonstationarity is shown to introduce two bias terms in the limit distribution, which are the source of the size distortion in testing. Appropriate corrections for this asymptotic bias leads to a modified version of the RESET test which has a central chi^2 limit distribution under linearity. The modified test has power not only against nonlinear cointegration but also against the absence of cointegration. Simulation results reveal that the modified test has good size infinite samples and reasonable power against many nonlinear models as well as models with no cointegration, confirming the analytic results. In an empirical illustration, the linear purchasing power parity (PPP) specification is tested using US, Japan, and Canada monthly data after Bretton Woods. While commonly used ADF and PP cointegration tests give mixed results on the presence of linear cointegration in the series, the modified test rejects the null of linear PPP cointegration. Classification-JEL: C12, C22 Keywords: Nonlinear cointegration, Specification test, RESET test, Noncentral chi^2 distribution Length: 44 pages Creation-Date: 200512 Number: 1541 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1541.pdf File-Format: application/pdf File-Size: 446 kb Handle: RePEc:cwl:cwldpp:1541 Template-type: ReDIF-Paper 1.0 Author-Name: Peter C. B. Phillips Author-X-Name-First: Peter C. B. Author-X-Name-Last: Phillips Author-Email: peter.phillips@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/phillips.htm Author-Workplace-Name: Cowles Foundation, Yale University; University of Auckland & University of York Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: A Remark on Bimodality and Weak Instrumentation in Structural Equation Estimation Abstract: In a simple model composed of a structural equation and identity, the finite sample distribution of the IV/LIML estimator is always bimodal and this is most apparent when the concentration parameter is small. Weak instrumentation is the energy that feeds the secondary mode and the coefficient in the structural identity provides a point of compression in the density that gives rise to it. The IV limit distribution can be normal, bimodal, or inverse normal depending on the behavior of the concentration parameter and the weakness of the instruments. The limit distribution of the OLS estimator is normal in all cases and has a much faster rate of convergence under very weak instrumentation. The IV estimator is therefore more resistant to the attractive effect of the identity than OLS. Some of these limit results differ from conventional weak instrument asymptotics, including convergence to a constant in very weak instrument cases and limit distributions that are inverse normal. Note: CFP 1171. Classification-JEL: C30 Keywords: Attraction, Bimodality, Concentration parameter, Identity, Inverse normal, Point of compression, Structural Equation, Weak instrumentation Note: CFP 1171. Length: 14 pages Creation-Date: 200512 Number: 1540 Publication-Status: Published in Econometric Theory (2006), 22(5): 947-960 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1540.pdf File-Format: application/pdf File-Size: 508 kb Handle: RePEc:cwl:cwldpp:1540 Template-type: ReDIF-Paper 1.0 Author-Name: Cheng-Zhong Qin Author-X-Name-First: Cheng-Zhong Author-X-Name-Last: Qin Author-Workplace-Name: Dept. of Economics, UC Santa Barbara Author-Name: Martin Shubik Author-X-Name-First: Martin Author-X-Name-Last: Shubik Author-Email: martin.shubik@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/shubik.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: A Credit Mechanism for Selecting a Unique Competitive Equilibrium Abstract: We show by an iterated process of price normalization that there generically exists a price-normalizing bundle that determines a credit money, such that the enlargement of the general-equilibrium structure to allow for default subject to an appropriate credit limit and default penalty for each trader results in a construction of a simple mechanism for a credit using society to select a unique competitive equilibrium (CE). With some additional conditions, a common credit money can be applied such that any CE can be a unique selection by the credit mechanism with the appropriate credit limit and default penalties for the traders. This will include a CE with the "minimal cash flow" property. Such CEs are special for the reason that they minimize the need for a "substitute-for-trust" (i.e., money) in trade. Classification-JEL: D5, C72, E4 Keywords: Competitive equilibrium, Credit mechanism, Marginal utility of income, IOU, Default penalty, Welfare economics Length: 21 pages Creation-Date: 200510 Revision-Date: 200611 Number: 1539 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1539.pdf File-Format: application/pdf File-Size: 267 kb Handle: RePEc:cwl:cwldpp:1539 Template-type: ReDIF-Paper 1.0 Author-Name: Sainan Jin Author-X-Name-First: Sainan Author-X-Name-Last: Jin Author-Workplace-Name: Guanghua School of Management, Peking University Author-Name: Peter C.B. Phillips Author-X-Name-First: Peter C.B. Author-X-Name-Last: Phillips Author-Email: peter.phillips@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/phillips.htm Author-Workplace-Name: Cowles Foundation, Yale University, University of Auckland and University of York Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Yixiao Sun Author-X-Name-First: Yixiao Author-X-Name-Last: Sun Author-Workplace-Name: Dept. of Economics, University of California, San Diego Title: A New Approach to Robust Inference in Cointegration Abstract: A new approach to robust testing in cointegrated systems is proposed using nonparametric HAC estimators without truncation. While such HAC estimates are inconsistent, they still produce asymptotically pivotal tests and, as in conventional regression settings, can improve testing and inference. The present contribution makes use of steep origin kernels which are obtained by exponentiating traditional quadratic kernels. Simulations indicate that tests based on these methods have improved size properties relative to conventional tests and better power properties than other tests that use Bartlett or other traditional kernels with no truncation. Classification-JEL: C12; C14; C22 Keywords: Cointegration, HAC estimation, long-run covariance matrix, robust inference, steep origin kernel, fully modified estimation Note: CFP 1203. Length: 15 pages Creation-Date: 200510 Number: 1538 Publication-Status: Published in Economics Letters (May 2006), 91(2): 300-306 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1538.pdf File-Format: application/pdf File-Size: 211 kb Handle: RePEc:cwl:cwldpp:1538 Template-type: ReDIF-Paper 1.0 Author-Name: Pradeep K. Dubey Author-X-Name-First: Pradeep K. Author-X-Name-Last: Dubey Author-Workplace-Name: Center for Game Theory, Department of Economics, SUNY at Stony Brook, Stony Brook, NY 11794, Cowles Foundation for Research in Economics, Yale University Author-Name: John Geanakoplos Author-X-Name-First: John Author-X-Name-Last: Geanakoplos Author-Email: john.geanakoplos@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/geanakoplos.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Ori Haimanko Author-X-Name-First: Ori Author-X-Name-Last: Haimanko Author-Workplace-Name: Department of Economics, Ben-Gurion University of the Negev Title: Prizes versus Wages with Envy and Pride Abstract: We show that if agents are risk neutral, prizes outperform wages when there is sufficient pride and envy relative to the noisiness of performance. If agents are risk averse, prizes are a necessary supplement to wages (as bonuses). Classification-JEL: C72, D01, D23, L14 Keywords: Envy, Pride, Wages, Prizes, Bonus Length: 25 pages Creation-Date: 200510 Number: 1537 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1537.pdf File-Format: application/pdf File-Size: 335 kb Handle: RePEc:cwl:cwldpp:1537 Template-type: ReDIF-Paper 1.0 Author-Name: Ray C. Fair Author-X-Name-First: Ray C. Author-X-Name-Last: Fair Author-Email: ray.fair@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/fair.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Estimated Age Effects in Baseball Abstract: Age effects in baseball are estimated in this paper using a nonlinear fixed-effects regression. The sample consists of all players who have played 10 or more "full-time" years in the major leagues between 1921 and 2004. Quadratic improvement is assumed up to a peak-performance age, which is estimated, and then quadratic decline after that, where the two quadratics need not be the same. Each player has his own constant term. The results show that aging effects are larger for pitchers than for batters and larger for baseball than for track and field, running, and swimming events and for chess. There is some evidence that decline rates in baseball have decreased slightly in the more recent period, but they are still generally larger than those for the other events. There are 18 batters out of the sample of 441 whose performances in the second half of their careers noticeably exceed what the model predicts they should have been. All but 3 of these players played from 1990 on. The estimates from the fixed-effects regressions can also be used to rank players. This ranking differs from the ranking using lifetime averages because it adjusts for the different ages at which players played. It is in effect an age-adjusted ranking. Classification-JEL: C2, J00 Keywords: Aging, Baseball performance Note: CFP 1255. Length: 46 pages Creation-Date: 200510 Revision-Date: 200703 Number: 1536 Publication-Status: Published in Journal of Quantitative Analysis in Sports (2008), 4(1): Article 1 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1536.pdf File-Format: application/pdf File-Size: 320 kb Handle: RePEc:cwl:cwldpp:1536 Template-type: ReDIF-Paper 1.0 Author-Name: Alexandre Marino Author-X-Name-First: Alexandre Author-X-Name-Last: Marino Author-Workplace-Name: CERMSEM Author-Name: Bernard De Meyer Author-X-Name-First: Bernard Author-X-Name-Last: De Meyer Author-Workplace-Name: CERMSEM Title: Continuous versus Discrete Market Games Abstract: De Meyer and Moussa Saley [4] provide an endogenous justification for the appearance of Brownian Motion in Finance by modeling the strategic interaction between two asymmetrically informed market makers with a zero-sum repeated game with one-sided information. The crucial point of this justification is the appearance of the normal distribution in the asymptotic behavior of Vn(P)//n. In De Meyer and Moussa Saley’s model [4], agents can fix a price in a continuous space. In the real world however, the market compels the agents to post prices in a discrete set. The previous remark raises the following question: Does the normal density still appear in the asymptotic of Vn//n for the discrete market game? The main topic of this paper is to prove that for all discretization of the price set, Vn(P)//n converges uniformly to 0. Despite of this fact, we do not reject De Meyer, Moussa analysis: when the size of the discretization step is small as compared to n-1/2, the continuous market game is a good approximation of the discrete one. Keywords: Insider trading, game of incomplete information, Brownian Motion Length: 20 pages Creation-Date: 200509 Number: 1535 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1535.pdf File-Format: application/pdf File-Size: 272 kb Handle: RePEc:cwl:cwldpp:1535 Template-type: ReDIF-Paper 1.0 Author-Name: Pradeep Dubey Author-X-Name-First: Pradeep Author-X-Name-Last: Dubey Author-Workplace-Name: Center for Game Theory, Dept. of Economics, SUNY at Stony Brook and Cowles Foundation, Yale University Author-Name: Dieter Sondermann Author-X-Name-First: Dieter Author-X-Name-Last: Sondermann Author-Workplace-Name: Department of Economics, University of Bonn, Bonn Title: Perfect Competition in a Bilateral Monopoly (In honor of Martin Shubik) Abstract: We show that if limit orders are required to vary smoothly, then strategic (Nash) equilibria of the double auction mechanism yield competitive (Walras) allocations. It is not necessary to have competitors on any side of any market: smooth trading is a substitute for price wars. In particular, Nash equilibria are Walrasian even in a bilateral monopoly. Classification-JEL: C72, D41, D42, D44, D61 Keywords: Limit orders, double auction, Nash equilibria, Walras equilibria, perfect competition, bilateral monopoly, mechanism design Length: 24 pages Creation-Date: 200509 Number: 1534 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1534.pdf File-Format: application/pdf File-Size: 235 kb Handle: RePEc:cwl:cwldpp:1534 Template-type: ReDIF-Paper 1.0 Author-Name: Taisuke Otsu Author-X-Name-First: Taisuke Author-X-Name-Last: Otsu Author-Email: taisuke.otsu@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/otsu.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Yoon-Jae Whang Author-X-Name-First: Yoon-Jae Author-X-Name-Last: Whang Author-Workplace-Name: School of Economics, Seoul National University Title: Testing for Non-nested Conditional Moment Retrictions via Conditional Empirical Likelihood Abstract: We propose non-nested tests for competing conditional moment resctriction models using a method of empirical likelihood. Our tests are based on the method of conditional empirical likelihood developed by Kitamura, Tripathi and Ahn (2004) and Zhang and Gijbels (2003). By using the conditional implied probabilities, we develop three non-nested tests: the moment encompassing, Cox-type, and effcient score encompassing tests. Compared to the existing non-nested tests which mainly focus on testing unconditional moment restrictions, our approach directly tests conditional moment restrictions which imply the infinite number of unconditional moment restrictions. We derive the null distributions and power properties of the proposed tests. Simulation experiments show that our tests have reasonable finite sample properties. Classification-JEL: C12, C13, C14, C22 Keywords: Empirical likelihood; Non-nested tests; Encompassing tests; Cox-type tests; Conditional moment restrictions Length: 34 pages Creation-Date: 200509 Number: 1533 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1533.pdf File-Format: application/pdf File-Size: 400 kb File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1533.pdf Handle: RePEc:cwl:cwldpp:1533 Template-type: ReDIF-Paper 1.0 Author-Name: Dirk Bergemann Author-X-Name-First: Dirk Author-X-Name-Last: Bergemann Author-Email: dirk.bergemann@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/bergemann.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Juuso Valimaki Author-X-Name-First: Juuso Author-X-Name-Last: Valimaki Author-Workplace-Name: Dept. of Economics, Helsinki School of Economics, University of Southampton Title: Information in Mechanism Design Abstract: We survey the recent literature on the role of information in mechanism design. First, we discuss an emerging literature on the role of endogenous payoff and strategic information for the design and the efficiency of the mechanism. We specifically consider information management in the form of acquisition of new information or disclosure of existing information. Second, we argue that in the presence of endogenous information, the robustness of the mechanism to the type space and higher order beliefs becomes a natural desideratum. We discuss recent approaches to robust mechanism design and robust implementation. Classification-JEL: C79, D82 Keywords: Mechanism Design, Information Acquisition, Ex Post Equilibrium, Robust Mechanism Design, Interdependent Values, Information Management Note: CFP 1208 Length: 42 pages Creation-Date: 200508 Revision-Date: 200601 Number: 1532R Publication-Status: Published in Blundell, Newey and Persson, eds., Proceedings of the 9th World Congress of the Econometric Society, Cambridge University Press, 2006, pp. 186-221 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1532-r.pdf File-Format: application/pdf File-Size: 294 kb Handle: RePEc:cwl:cwldpp:1532R Template-type: ReDIF-Paper 1.0 Author-Name: Dirk Bergemann Author-X-Name-First: Dirk Author-X-Name-Last: Bergemann Author-Email: dirk.bergemann@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/bergemann.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Juuso Valimaki Author-X-Name-First: Juuso Author-X-Name-Last: Valimaki Author-Workplace-Name: Dept. of Economics, Helsinki School of Economics, University of Southampton Title: Information in Mechanism Design Abstract: We survey the recent literature on the role of information for mechanism design. We specifically consider the role of endogeneity of and robustness to private information in mechanism design. We view information acquisition of and robustness to private information as two distinct but related aspects of information management important in many design settings. We review the existing literature and point out directions for additional future work. Classification-JEL: C79, D82 Keywords: Mechanism Design, Information Acquisition, Ex Post Equilibrium, Robust Mechanism Design, Interdependent Values, Information Management Length: 51 pages Creation-Date: 200508 Number: 1532 Publication-Status: Published in Blundell, Newey and Persson, eds., Proceedings of the 9th World Congress of the Econometric Society, 2006, pp. 186-221 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1532.pdf File-Format: application/pdf File-Size: 320 kb Handle: RePEc:cwl:cwldpp:1532 Template-type: ReDIF-Paper 1.0 Author-Name: Enriqueta Aragones Author-X-Name-First: Enriqueta Author-X-Name-Last: Aragones Author-Workplace-Name: Institut d’Analisi Economica, C.S.I.C. Author-Name: Itzhak Gilboa Author-X-Name-First: Itzhak Author-X-Name-Last: Gilboa Author-Workplace-Name: Tel-Aviv University and Cowles Foundation, Yale University Author-Name: Andrew Weiss Author-X-Name-First: Andrew Author-X-Name-Last: Weiss Author-Email: aweiss@bu.edu Author-Workplace-Name: Department of Economics, Boston University Title: Making Statements and Approval Voting Abstract: We assume that people have a need to make statements, and construct a model in which this need is the sole determinant of voting behavior. In this model, an individual selects a ballot that makes as close a statement as possible to her ideal point, where abstaining from voting is a possible (null) statement. We show that in such a model, a political system that adopts approval voting may be expected to enjoy a significantly higher rate of participation in elections than a comparable system with plurality rule. Classification-JEL: D72 Keywords: Approval voting, Abstention, Statements Length:16 pages Creation-Date: 200508 Number: 1531 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1531.pdf File-Format: application/pdf File-Size: 192 kb Handle: RePEc:cwl:cwldpp:1531 Template-type: ReDIF-Paper 1.0 Author-Name: Donald W.K. Andrews Author-X-Name-First: Donald W.K. Author-X-Name-Last: Andrews Author-Email: donald.andrews@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/andrews.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu Author-Name: James H. Stock Author-X-Name-First: James H. Author-X-Name-Last: Stock Author-Workplace-Name: Dept. of Economics, Harvard University Title: Inference with Weak Instruments Abstract: This paper reviews recent developments in methods for dealing with weak instruments (IVs) in IV regression models. The focus is more on tests (and confidence intervals derived from tests) than estimators. The paper also presents new testing results under "many weak IV asymptotics," which are relevant when the number of IVs is large and the coefficients on the IVs are relatively small. Asymptotic power envelopes for invariant tests are established. Power comparisons of the conditional likelihood ratio (CLR), Anderson-Rubin, and Lagrange multiplier tests are made. Numerical results show that the CLR test is on the asymptotic power envelope. This holds no matter what the relative magnitude of the IV strength to the number of IVs. Classification-JEL: C12, C30 Keywords: Conditional likelihood ratio test, instrumental variables, many instrumental variables, power envelope, weak instruments Note: CFP 1249. Length: 68 pages Creation-Date: 200508 Number: 1530 Publication-Status: Published in R. Blundell, W.K. Newey, and T. Persson, eds., Advances in Economics and Econometrics, Theory and Applications: Ninth World Congress of the Econometric Society, Vol. III, Cambridge University Press, 2007, Ch. 6 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1530.pdf File-Format: application/pdf File-Size: 831 kb Handle: RePEc:cwl:cwldpp:1530 Template-type: ReDIF-Paper 1.0 Author-Name: Ray C. Fair Author-X-Name-First: Ray C. Author-X-Name-Last: Fair Author-Email: ray.fair@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/fair.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Danielle Catambay Author-X-Name-First: Danielle Author-X-Name-Last: Catambay Title: Branch Rickey’s Equation Fifty Years Later Abstract: This paper analyzes Branch Rickey's 1954 equation in a regression context. The results for 1934--1953 are consistent with Rickey's conclusions, and the equation holds up well when extended 51 years. Two of Rickey's main points were that on base percentage dominates batting average and that offense and defense are equally important, and these, along with the entire equation, are generally supported by the results. Rickey does seem to have been ahead of his time. Classification-JEL: C2 Keywords: Branch Rickey’s Equation, On-Base Percentage Length: 14 pages Creation-Date: 200507 Revision-Date: 200701 Number: 1529 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1529.pdf File-Format: application/pdf File-Size: 182 kb Handle: RePEc:cwl:cwldpp:1529 Template-type: ReDIF-Paper 1.0 Author-Name: Yoon-Ho Alex Lee Author-X-Name-First: Yoon-Ho Alex Author-X-Name-Last: Lee Author-Name: Donald J. Brown Author-X-Name-First: Donald J. Author-X-Name-Last: Brown Author-Email: donald.brown@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/brown.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Competition, Consumer Welfare, and the Social Cost of Monopoly Abstract: Conventional deadweight loss measures of the social cost of monopoly ignore, among other things, the social cost of inducing competition and thus cannot accurately capture the loss in social welfare. In this Article, we suggest an alternative method of measuring the social cost of monopoly. Using elements of general equilibrium theory, we propose a social cost metric where the benchmark is the Pareto optimal state of the economy that uses the least amount of resources, consistent with consumers' utility levels in the monopolized state. If the primary goal of antitrust policy is the enhancement of consumer welfare, then the proper benchmark is Pareto optimality, not simply competitive markets. We discuss the implications of our approach for antitrust law as well as how our methodology can be used in practice for allegations of monopoly power given a history of price-demand observations. Classification-JEL: D42, D58, D61, L12, L41 Keywords: Monopoly power, Antitrust economics, Applied general equilibrium Length: 19 pages Creation-Date: 200507 Number: 1528 Publication-Status: Published in Issues in Competition Law and Policy, Vol. 1, Ch. 17, 2008 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1528.pdf File-Format: application/pdf File-Size: 272 kb Handle: RePEc:cwl:cwldpp:1528 Template-type: ReDIF-Paper 1.0 Author-Name: Dirk Bergemann Author-X-Name-First: Dirk Author-X-Name-Last: Bergemann Author-Email: dirk.bergemann@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/bergemann.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Karl Schlag Author-X-Name-First: Karl Author-X-Name-Last: Schlag Author-Workplace-Name: Department of Economics, Universitat Pompeu Fabra Title: Robust Monopoly Pricing Abstract: We consider a robust version of the classic problem of optimal monopoly pricing with incomplete information. In the robust version, the seller faces model uncertainty and only knows that the true demand distribution is in the neighborhood of a given model distribution. We characterize the optimal pricing policy under two distinct, but related, decision criteria with multiple priors: (i) maximin expected utility and (ii) minimax expected regret. The resulting optimal pricing policy under either criterion yields a robust policy to the model uncertainty. While the classic monopoly policy and the maximin criterion yield a single deterministic price, minimax regret always prescribes a random pricing policy, or equivalently, a multi-item menu policy. Distinct implications of how a monopolist responds to an increase in uncertainty emerge under the two criteria. Classification-JEL: C79, D82 Keywords: Monopoly, Optimal pricing, Robustness, Multiple priors, Regret Length: 43 pages Creation-Date: 200507 Revision-Date: 200809 Number: 1527RR Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1527-rr.pdf File-Format: application/pdf File-Size: 332 kb Handle: RePEc:cwl:cwldpp:1527RR Template-type: ReDIF-Paper 1.0 Author-Name: Dirk Bergemann Author-X-Name-First: Dirk Author-X-Name-Last: Bergemann Author-Email: dirk.bergemann@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/bergemann.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Karl Schlag Author-X-Name-First: Karl Author-X-Name-Last: Schlag Title: Robust Monopoly Pricing Abstract: We consider a robust version of the classic problem of optimal monopoly pricing with incomplete information. In the robust version of the problem the seller only knows that demand will be in a neighborhood of a given model distribution. We characterize the optimal pricing policy under two distinct, but related, decision criteria with multiple priors: (i) maximin expected utility and (ii) minimax expected regret. While the classic monopoly policy and the maximin criterion yield a single deterministic price, minimax regret always prescribes a random pricing policy, or equivalently, a multi-item menu policy. The resulting optimal pricing policy under either criterion is robust to the model uncertainty. Finally we derive distinct implications of how a monopolist responds to an increase in ambiguity under each criterion. Classification-JEL: C79, D82 Keywords: Monopoly, Optimal pricing, Robustness, Multiple priors, Regret Length: 36 pages Creation-Date: 200507 Revision-Date: 200704 Number: 1527R Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1527-r.pdf File-Format: application/pdf File-Size: 346 kb Handle: RePEc:cwl:cwldpp:1527R Template-type: ReDIF-Paper 1.0 Author-Name: Anat Bracha Author-X-Name-First: Anat Author-X-Name-Last: Bracha Author-Name: Jeremy Gray Author-X-Name-First: Jeremy Author-X-Name-Last: Gray Author-Email: jeremy.gray@yale.edu Author-Workplace-Name: Dept. of Psychology, Yale University Author-Workplace-Homepage: http://www.yale.edu/psychology/FacInfo/Gray.html Author-Name: Rustam Ibragimov Author-X-Name-First: Rustam Author-X-Name-Last: Ibragimov Author-Name: Boaz Nadler Author-X-Name-First: Boaz Author-X-Name-Last: Nadler Author-Email: boaz.nadler@yale.edu Author-Workplace-Name: Dept. of Mathematics, Yale University Author-Name: Dmitry Shapiro Author-X-Name-First: Dmitry Author-X-Name-Last: Shapiro Author-Name: Glena Ames Author-X-Name-First: Glena Author-X-Name-Last: Ames Author-Email: glena.ames@yale.edu Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Donald J. Brown Author-X-Name-First: Donald J. Author-X-Name-Last: Brown Author-Email: donald.brown@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/brown.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Randomized Sign Test for Dependent Observations on Discrete Choice under Risk Abstract: This paper proposes nonparametric statistical procedures for analyzing discrete choice models of affective decision making. We make two contributions to the literature on behavioral economics. Namely, we propose a procedure for eliciting the existence of a Nash equilibrium in an intrapersonal, potential game as well as randomized sign tests for dependent observations on game-theoretic models of affective decision making. This methodology is illustrated in the context of a hypothetical experiment -- the Casino Game. Classification-JEL: C12, C32, C35, C72, C91, D11, D81 Keywords: Behavioral economics, Affective decision making, Intrapersonal potential games, Randomized sign tests, Dependent observations, Adapted sequences, Martingale-difference sequences Length: 51 pages Creation-Date: 200506 Number: 1526 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1526.pdf File-Format: application/pdf File-Size: 417 kb Handle: RePEc:cwl:cwldpp:1526 Template-type: ReDIF-Paper 1.0 Author-Name: Ray C. Fair Author-X-Name-First: Ray C. Author-X-Name-Last: Fair Author-Email: ray.fair@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/fair.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Natural Concepts in Macroeconomics Abstract: Ragnar Frisch proposed in 1936 a procedure for estimating natural variable values by modifying what are now called structural macroeconometric models. This paper shows that Frisch’s procedure can be used to illuminate natural concepts using today’s models. The procedure also forces one to be precise regarding the assumptions used in moving from a short-run model to a medium-run or long-run model. Classification-JEL: E00 Keywords: Natural concepts, Equilibrium Length: 41 pages Creation-Date: 200506 Number: 1525 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1525.pdf File-Format: application/pdf File-Size: 121 kb Handle: RePEc:cwl:cwldpp:1525 Template-type: ReDIF-Paper 1.0 Author-Name: M. Keith Chen Author-X-Name-First: Keith M. Author-X-Name-Last: Chen Author-Email: keith.chen@yale.edu Author-Homepage: http://www.som.yale.edu/faculty/keith.chen/ Author-Workplace-Name: School of Management, Yale University Author-Name: Venkat Lakshminarayanan Author-X-Name-First: Venkat Author-X-Name-Last: Lakshminarayanan Author-Name: Laurie Santos Author-X-Name-First: Laurie Author-X-Name-Last: Santos Title: The Evolution of Our Preferences: Evidence from Capuchin-Monkey Trading Behavior Abstract: Behavioral economics has demonstrated systematic decision-making biases in both lab and field data. But are these biases learned or innate? We investigate this question using experiments on a novel set of subjects — capuchin monkeys. By introducing a fiat currency and trade to a capuchin colony, we are able to recover their preferences over a wide range of goods and risky choices. We show that standard price theory does a remarkably good job of describing capuchin purchasing behavior; capuchin monkeys react rationally to both price and wealth shocks. However, when capuchins are faced with more complex choices including risky gambles, they display many of the hallmark biases of human behavior, including reference-dependent choices and loss-aversion. Given that capuchins demonstrate little to no social learning and lack experience with abstract gambles, these results suggest that certain biases such as loss-aversion are an innate function of how our brains code experiences, rather than learned behavior or the result of misapplied heuristics. Classification-JEL: C91, C99, D12, D46, D80, D81 Keywords: Prospect theory, Loss aversion, Reference dependence, Evolution, Neuroeconomics, Capuchin monkeys, Monkey business Length: 26 pages Creation-Date: 200506 Number: 1524 Publication-Status: Published in Journal of Political Economy (2006), 114(3): 517-537 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1524.pdf File-Format: application/pdf File-Size: 310 kb Handle: RePEc:cwl:cwldpp:1524 Template-type: ReDIF-Paper 1.0 Author-Name: Peter C.B. Phillips Author-X-Name-First: Peter C.B. Author-X-Name-Last: Phillips Author-Email: peter.phillips@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/phillips.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Jun Yu Author-X-Name-First: Jun Author-X-Name-Last: Yu Title: A Two-Stage Realized Volatility Approach to the Estimation for Diffusion Processes from Discrete Observations Abstract: This paper motivates and introduces a two-stage method for estimating diffusion processes based on discretely sampled observations. In the first stage we make use of the feasible central limit theory for realized volatility, as recently developed in Barndorff-Nielsen and Shephard (2002), to provide a regression model for estimating the parameters in the diffusion function. In the second stage the in-fill likelihood function is derived by means of the Girsanov theorem and then used to estimate the parameters in the drift function. Consistency and asymptotic distribution theory for these estimates are established in various contexts. The finite sample performance of the proposed method is compared with that of the approximate maximum likelihood method of Ait-Sahalia (2002). Classification-JEL: C13, C22, E43, G13 Keywords: Maximum likelihood, Girsnov theorem, Discrete sampling, Continuous record, Realized volatility Length: 27 pages Creation-Date: 200506 Revision-Date: Number: 1523 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1523.pdf File-Format: application/pdf File-Size: 218 kb Handle: RePEc:cwl:cwldpp:1523 Template-type: ReDIF-Paper 1.0 Author-Name: Federico M. Bandi Author-X-Name-First: Federico M. Author-X-Name-Last: Bandi Author-Name: Peter C.B. Phillips Author-X-Name-First: Peter C.B. Author-X-Name-Last: Phillips Author-Email: peter.phillips@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/phillips.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: A Simple Approach to the Parametric Estimation of Potentially Nonstationary Diffusions Abstract: A simple and robust approach is proposed for the parametric estimation of scalar homogeneous stochastic differential equations. We specify a parametric class of diffusions and estimate the parameters of interest by minimizing criteria based on the integrated squared difference between kernel estimates of the drift and diffusion functions and their parametric counterparts. The procedure does not require simulations or approximations to the true transition density and has the simplicity of standard nonlinear least-squares methods in discrete-time. A complete asymptotic theory for the parametric estimates is developed. The limit theory relies on infill and long span asymptotics and is robust to deviations from stationarity, requiring only recurrence. Classification-JEL: C14, C22 Keywords: Diffusion, Drift, Local time, Parametric estimation, Semimartingale, Stochastic differential equation Note: CFP 1205. Length: 49 pages Creation-Date: 200506 Number: 1522 Publication-Status: Published in Journal of Econometrics (April 2007), 137(2): 354-395 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1522.pdf File-Format: application/pdf File-Size: 395 kb Handle: RePEc:cwl:cwldpp:1522 Template-type: ReDIF-Paper 1.0 Author-Name: Michael R. Powers Author-X-Name-First: Michael R. Author-X-Name-Last: Powers Author-Workplace-Name: Temple University Author-Name: Martin Shubik Author-X-Name-First: Martin Author-X-Name-Last: Shubik Author-Email: martin.shubik@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/shubik.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: A Note on a "Square-Root Rule" for Reinsurance Abstract: In previous work, the current authors derived a mathematical expression for the optimal (or "saturation") number of reinsurers for a given number of primary insurers (see Powers and Shubik, 2001). In the current paper, we show analytically that, for large numbers of primary insurers, this mathematical expression provides a "square-root rule"; i.e., the optimal number of reinsurers in a market is given asymptotically by the square root of the total number of primary insurers. We note further that an analogous “fourth-root rule” applies to markets for retrocession (the reinsurance of reinsurance). Classification-JEL: C72, G22 Keywords: Primary insurance, Reinsurance, Market size, Square-root rule Length: 8 pages Creation-Date: 200506 Number: 1521 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1521.pdf File-Format: application/pdf File-Size: 226 kb Handle: RePEc:cwl:cwldpp:1521 Template-type: ReDIF-Paper 1.0 Author-Name: J. Doyne Farmer Author-X-Name-First: J. Doyne Author-X-Name-Last: Farmer Author-Name: Martin Shubik Author-X-Name-First: Martin Author-X-Name-Last: Shubik Author-Email: martin.shubik@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/shubik.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Eric Smith Author-X-Name-First: Eric Author-X-Name-Last: Smith Title: Economics: the next physical science? Abstract: We review an emerging body of work by physicists addressing questions of economic organization and function. We suggest that, beyond simply employing models familiar from physics to economic observables, remarkable regularities in economic data may suggest parts of social order that can usefully be incorporated into, and in turn can broaden, the conceptual structure of physics. Classification-JEL: B49, C00, G00 Keywords: Economic theory, Physics, Econo-physics Note: CFP 1160. Length: 9 pages Creation-Date: 200506 Number: 1520 Publication-Status: Published in Physics Today (September 2005), 37-42 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1520.pdf File-Format: application/pdf File-Size: 239 kb Handle: RePEc:cwl:cwldpp:1520 Template-type: ReDIF-Paper 1.0 Author-Name: Dirk Bergemann Author-X-Name-First: Dirk Author-X-Name-Last: Bergemann Author-Email: dirk.bergemann@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/bergemann.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Stephen Morris Author-X-Name-First: Stephen Author-X-Name-Last: Morris Title: Robust Implementation: The Role of Large Type Spaces Abstract: A social choice function is robustly implemented if every equilibrium on every type space achieves outcomes consistent with a social choice function. We identify a robust monotonicity condition that is necessary and (with mild extra assumptions) sufficient for robust implementation. Robust monotonicity is strictly stronger than both Maskin monotonicity (necessary and almost sufficient for complete information implementation) and ex post monotonicity (necessary and almost sufficient for ex post implementation). It is equivalent to Bayesian monotonicity on all type spaces. It requires that there not be too much interdependence of types. We characterize robust monotonicity for some interesting economic environments. We identify conditions where, if robust implementation is possible, it is possible in a direct mechanism. We identify conditions where, if robust implementation is not possible, virtual robust implementation is not possible either. Classification-JEL: C79, D82 Keywords: Mechanism Design, Implementation, Robustness, Common Knowledge, Interim Equilibrium, Iterative Deletion, Dominant Strategies Length: 59 pages Creation-Date: 200506 Number: 1519 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1519.pdf File-Format: application/pdf File-Size: 350 kb Handle: RePEc:cwl:cwldpp:1519 Template-type: ReDIF-Paper 1.0 Author-Name: Donald J. Brown Author-X-Name-First: Donald J. Author-X-Name-Last: Brown Author-Email: donald.brown@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/brown.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Rustam Ibragimov Author-X-Name-First: Rustam Author-X-Name-Last: Ibragimov Author-Workplace-Name: Dept. of Economics, Yale University Author-Workplace-Homepage: http://www.econ.yale.edu/ Title: Sign Tests for Dependent Observations and Bounds for Path-Dependent Options Abstract: The present paper introduces new sign tests for testing for conditionally symmetric martingale-difference assumptions as well as for testing that conditional distributions of two (arbitrary) martingale-difference sequences are the same. Our analysis is based on the results that demonstrate that randomization over zero values of three-valued random variables in a conditionally symmetric martingale-difference sequence produces a stream of i.i.d. symmetric Bernoulli random variables and thus reduces the problem of estimating the critical values of the tests to computing the quantiles or moments of Binomial or normal distributions. The same is the case for randomization over ties in sign tests for equality of conditional distributions of two martingale-difference sequences. The paper also provides sharp bounds on the expected payoffs and fair prices of European call options and a wide range of path-dependent contingent claims in the trinomial financial market model in which, as is well-known, calculation of derivative prices on the base of no-arbitrage arguments is impossible. These applications show, in particular, that the expected payoff of a European call option in the trinomial model with log-returns forming a martingale-difference sequence is bounded from above by the expected payoff of a call option written on a stock with i.i.d. symmetric two-valued log-returns and, thus, reduce the problem of derivative pricing in the trinomial model with dependence to the i.i.d. binomial case. Furthermore, we show that the expected payoff of a European call option in the multiperiod trinomial option pricing model is dominated by the expected payoff of a call option in the two-period model with a log-normal asset price. These results thus allow one to reduce the problem of pricing options in the trinomial model to the case of two periods and the standard assumption of normal log-returns. We also obtain bounds on the possible fair prices of call options in the (incomplete) trinomial model in terms of the parameters of the asset's distribution. Sharp bounds completely similar to those for European call options also hold for many other contingent claims in the trinomial option pricing model, including those with an arbitrary convex increasing function as well as path-dependent ones, in particular, Asian options written on averages of the underlying asset's prices. Classification-JEL: C12, C14, G12, G14 Keywords: Sign tests, dependence, martingale-difference, Bernoulli random variables, conservative tests, exact tests, option bounds, trinomial model, binomial model, semiparametric estimates, fair prices, expected payoffs, path-dependent contingent claims, efficient market hypothesis Length: 31 pages Creation-Date: 200506 Number: 1518 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1518.pdf File-Format: application/pdf File-Size: 308 kb Handle: RePEc:cwl:cwldpp:1518 Template-type: ReDIF-Paper 1.0 Author-Name: Peter C.B. Phillips Author-X-Name-First: Peter C.B. Author-X-Name-Last: Phillips Author-Email: peter.phillips@yale.edu Author-Homepage: http://cowles.econ.yale.edu/korora/phillips/index.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Tassos Magadalinos Author-X-Name-First: Tassos Author-X-Name-Last: Magadalinos Author-Workplace-Name: Dept. of Mathematics, University of York Title: Limit Theory for Moderate Deviations from a Unit Root under Weak Dependence Abstract: An asymptotic theory is given for autoregressive time series with weakly dependent innovations and a root of the form rho_{n} = 1+c/n^{alpha}, involving moderate deviations from unity when alpha in (0,1) and c in R are constant parameters. The limit theory combines a functional law to a diffusion on D[0,infinity) and a central limit theorem. For c > 0, the limit theory of the first order serial correlation coefficient is Cauchy and is invariant to both the distribution and the dependence structure of the innovations. To our knowledge, this is the first invariance principle of its kind for explosive processes. The rate of convergence is found to be n^{alpha}rho_{n}^{n}, which bridges asymptotic rate results for conventional local to unity cases (n) and explosive autoregressions ((1 + c)^{n}). For c < 0, we provide results for alpha in (0,1) that give an n^{(1+alpha)/2} rate of convergence and lead to asymptotic normality for the first order serial correlation, bridging the /n and n convergence rates for the stationary and conventional local to unity cases. Weakly dependent errors are shown to induce a bias in the limit distribution, analogous to that of the local to unity case. Linkages to the limit theory in the stationary and explosive cases are established. Classification-JEL: C22 Keywords: Central limit theory; Diffusion; Explosive autoregression, Local to unity; Moderate deviations, Unit root distribution, Weak dependence Note: CFP 1202. Length: 46 pages Creation-Date: 200506 Number: 1517 Publication-Status: Published in G. D. A. Phillips and E. Tzavalis, eds., The Refinement of Econometric Estimation and Test Procedures: Finite Sample and Asymptotic Analysis. Cambridge University, 2007, pp.123-162 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1517.pdf File-Format: application/pdf File-Size: 435 kb Handle: RePEc:cwl:cwldpp:1517 Template-type: ReDIF-Paper 1.0 Author-Name: Peter C.B. Phillips Author-X-Name-First: Peter C.B. Author-X-Name-Last: Phillips Author-Email: peter.phillips@yale.edu Author-Homepage: http://cowles.econ.yale.edu/korora/phillips/index.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Sainan Jin Author-X-Name-First: Sainan Author-X-Name-Last: Jin Author-Workplace-Name: Guanghua School of Management, Peking University Author-Name: Ling Hu Author-X-Name-First: Ling Author-X-Name-Last: Hu Author-Workplace-Name: Dept. of Economics, Ohio State University Title: Nonstationary Discrete Choice: A Corrigendum and Addendum Abstract: We correct the limit theory presented in an earlier paper by Hu and Phillips (Journal of Econometrics, 2004) for nonstationary time series discrete choice models with multiple choices and thresholds. The new limit theory shows that, in contrast to the binary choice model with nonstationary regressors and a zero threshold where there are dual rates of convergence (n^{1/4} and n^{3/4}), all parameters including the thresholds converge at the rate n^{3/4}. The presence of non-zero thresholds therefore materially affects rates of convergence. Dual rates of convergence reappear when stationary variables are present in the system. Some simulation evidence is provided, showing how the magnitude of the thresholds affects finite sample performance. A new finding is that predicted probabilities and marginal effect estimates have finite sample distributions that manifest a pile-up, or increasing density, towards the limits of the domain of definition. Classification-JEL: C23, C25 Keywords: Brownian motion, Brownian local time, Discrete choices, Integrated processes, Pile-up problem, Threshold parameters Note: CFP 1214. Length: 53 pages Creation-Date: 200506 Number: 1516 Publication-Status: Published in Journal of Econometrics (2007), 141(2): 115-130 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1516.pdf File-Format: application/pdf File-Size: 736 kb Handle: RePEc:cwl:cwldpp:1516 Template-type: ReDIF-Paper 1.0 Author-Name: Chirok Han Author-X-Name-First: Chirok Author-X-Name-Last: Han Author-Workplace-Name: Victoria University of Wellington Author-Name: Peter C.B. Phillips Author-X-Name-First: Peter C.B. Author-X-Name-Last: Phillips Author-Email: peter.phillips@yale.edu Author-Homepage: http://cowles.econ.yale.edu/korora/phillips/index.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: GMM with Many Moment Conditions Abstract: This paper provides a first order asymptotic theory for generalized method of moments (GMM) estimators when the number of moment conditions is allowed to increase with the sample size and the moment conditions may be weak. Examples in which these asymptotics are relevant include instrumental variable (IV) estimation with many (possibly weak or uninformed) instruments and some panel data models covering moderate time spans and with correspondingly large numbers of instruments. Under certain regularity conditions, the GMM estimators are shown to converge in probability but not necessarily to the true parameter, and conditions for consistent GMM estimation are given. A general framework for the GMM limit distribution theory is developed based on epiconvergence methods. Some illustrations are provided, including consistent GMM estimation of a panel model with time varying individual effects, consistent LIML estimation as a continuously updated GMM estimator, and consistent IV structural estimation using large numbers of weak or irrelevant instruments. Some simulations are reported. Classification-JEL: C22, C23 Keywords: Epiconvergence, GMM, Irrelevant instruments, IV, Large numbers of instruments, LIML estimation, Panel models, Pseudo true value, Signal, Signal Variability, Weak instrumentation Note: CFP 1165 Length: 45 pages Creation-Date: 200506 Number: 1515 Publication-Status: Published in Econometrica (January 2006), 74(1): 147-192 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1515.pdf File-Format: application/pdf File-Size: 571 kb Handle: RePEc:cwl:cwldpp:1515 Template-type: ReDIF-Paper 1.0 Author-Name: Peter C.B. Phillips Author-X-Name-First: Peter C.B. Author-X-Name-Last: Phillips Author-Email: peter.phillips@yale.edu Author-Homepage: http://cowles.econ.yale.edu/korora/phillips/index.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Donggyu Sul Author-X-Name-First: Donggyu Author-X-Name-Last: Sul Author-Workplace-Name: Dept. of Economics, University of Auckland Title: Economic Transition and Growth Abstract: Some extensions of neoclassical growth models are discussed that allow for cross section heterogeneity among economies and evolution in rates of technological progress over time. The models offer a spectrum of transitional behavior among economies that includes convergence to a common steady state path as well as various forms of transitional divergence and convergence. Mechanisms for modeling such transitions and measuring them econometrically are developed in the paper. A new regression test of convergence is proposed, its asymptotic properties are derived and some simulations of its finite sample properties are reported. Transition curves for individual economies and subgroups of economies are estimated in a series of empirical applications of the methods to regional US data, OECD data and Penn World Table data. Classification-JEL: O30, O40, C33 Keywords: Economic growth, Growth convergence, Heterogeneity, Neoclassical growth, Relative transition, Transition curve, Transitional divergence Length: 59 pages Creation-Date: 200506 Number: 1514 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1514.pdf File-Format: application/pdf File-Size: 413 kb Handle: RePEc:cwl:cwldpp:1514 Template-type: ReDIF-Paper 1.0 Author-Name: Peter C.B. Phillips Author-X-Name-First: Peter C.B. Author-X-Name-Last: Phillips Author-Email: peter.phillips@yale.edu Author-Homepage: http://cowles.econ.yale.edu/korora/phillips/index.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Yixiao Sun Author-X-Name-First: Yixiao Author-X-Name-Last: Sun Author-Workplace-Name: Dept. Economics, UCLA, San Diego Author-Name: Sainan Jin Author-X-Name-First: Sainan Author-X-Name-Last: Jun Author-Workplace-Name: Guanghua School of Management, Peking University Title: Improved HAR Inference Abstract: Employing power kernels suggested in earlier work by the authors (2003), this paper shows how to re.ne methods of robust inference on the mean in a time series that rely on families of untruncated kernel estimates of the long-run parameters. The new methods improve the size properties of heteroskedastic and autocorrelation robust (HAR) tests in comparison with conventional methods that employ consistent HAC estimates, and they raise test power in comparison with other tests that are based on untruncated kernel estimates. Large power parameter (rho) asymptotic expansions of the nonstandard limit theory are developed in terms of the usual limiting chi-squared distribution, and corresponding large sample size and large rho asymptotic expansions of the finite sample distribution of Wald tests are developed to justify the new approach. Exact finite sample distributions are given using operational techniques. The paper further shows that the optimal rho that minimizes a weighted sum of type I and II errors has an expansion rate of at most O(T^{1/2}) and can even be O(1) for certain loss functions, and is therefore slower than the O(T^{2/3}) rate which minimizes the asymptotic mean squared error of the corresponding long run variance estimator. A new plug-in procedure for implementing the optimal rho is suggested. Simulations show that the new plug-in procedure works well in finite samples. Classification-JEL: C13, C14, C22, C51 Keywords: Asymptotic expansion, consistent HAC estimation, data-determined kernel estimation, exact distribution, HAR inference, large rho asymptotics, long run variance, loss function, power parameter, sharp origin kernel Length: 51 pages Creation-Date: 200506 Number: 1513 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1513.pdf File-Format: application/pdf File-Size: 478 kb Handle: RePEc:cwl:cwldpp:1513 Template-type: ReDIF-Paper 1.0 Author-Name: John E. Roemer Author-X-Name-First: John E. Author-X-Name-Last: Roemer Author-Email: john.roemer@yale.ed Author-Homepage: http://pantheon.yale.edu/~jer39/ Author-Workplace-Name: Dept. of Political Science, Yale University Author-Workplace-Homepage: http://www.yale.edu/polisci/ Title: Intergenerational Justice and Sustainability under the Leximin Ethic Abstract: We model an intergenerational society, with a representative agent at each date, who must deplete a renewable resource, from which he derives utility, to produce consumption goods. We adopt the intergenerational lexicographic minimum as the social welfare function. Initially, technological progress is assumed to exist exogenously. We study the technological requirements for the leximin solution to support non-decreasing welfare over time, and a non-decreasing level of the natural resource. Three utility functions are studied. With a CES utility function, possessing less substitutability than the Cobb-Douglas, the leximin solution involves increasing utilities over time and an increasing size of the natural resource, if the rate of transformation of the resource into the consumption good is greater than a computed bound. Finally we study a model with endogenous technical progress. Classification-JEL: D63, D90 Keywords: Leximin, Sustainability, Technical change Length: 37 pages Creation-Date: 200505 Number: 1512 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1512.pdf File-Format: application/pdf File-Size: 177 kb Handle: RePEc:cwl:cwldpp:1512 Template-type: ReDIF-Paper 1.0 Author-Name: Hanming Fang Author-X-Name-First: Hanming Author-X-Name-Last: Fang Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://www.econ.yale.edu/ Author-Name: Peter Norman Author-X-Name-First: Peter Author-X-Name-Last: Norman Author-Workplace-Name: University of British Columbia Title: Overcoming Participation Constraints Abstract: This paper shows that linking a sufficiently large number of independent but unrelated social decisions can achieve approximate efficiency. We provide regularity conditions under which a Groves mechanism amended with a veto game implements an efficient outcome with probability arbitrarily close to one, and satisfies interim participation, incentive and resource constraints. Classification-JEL: D61, D82, H41 Keywords: Linking, Participation Constraints, Groves Mechanisms, Veto Power Length: 51 pages Creation-Date: 200505 Revision-Date: 200604 Number: 1511R Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1511-r.pdf File-Format: application/pdf File-Size: 547 kb Handle: RePEc:cwl:cwldpp:1511R Template-type: ReDIF-Paper 1.0 Author-Name: Hanming Fang Author-X-Name-First: Hanming Author-X-Name-Last: Fang Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://www.econ.yale.edu/ Author-Name: Peter Norman Author-X-Name-First: Peter Author-X-Name-Last: Norman Author-Workplace-Name: University of British Columbia Title: Overcoming Participation Constraints Abstract: In incomplete information environments with transferable utility, efficient outcomes are generally implementable unless interim or ex post participation constraints are imposed on the problem. In this paper we show that linking a sufficiently large number of independent but possibly unrelated social decisions, a slightly perturbed Groves mechanism can implement an efficient outcome with probability arbitrarily close to one, while respecting all participation, incentive and balanced budget constraints. Classification-JEL: D61, D82, H41 Keywords: Linking, Participation constraints, Perturbed groves mechanism Length: 26 pages Creation-Date: 200505 Number: 1511 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1512.pdf File-Format: application/pdf File-Size: 354 kb Handle: RePEc:cwl:cwldpp:1511 Template-type: ReDIF-Paper 1.0 Author-Name: Eric Smith Author-X-Name-First: Eric Author-X-Name-Last: Smith Author-Workplace-Name: Sante Fe Institute Author-Name: Martin Shubik Author-X-Name-First: Martin Author-X-Name-Last: Shubik Author-Email: martin.shubik@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/shubik.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Commodity Money and the Valuation of Trade Abstract: In a previous essay we modeled the enforcement of contract, and through it the provision of money and markets, as a production function within the society, the scale of which is optimized endogenously by labor allocation away from primary production of goods. Government and a central bank provided fiat money and enforced repayment of loans, giving fiat a predictable value in trade, and also rationalizing the allocation of labor to government service, in return for a fiat salary. Here, for comparison, we consider the same trade problem without government or fiat money, using instead a durable good (gold) as a commodity money between the time it is produced and the time it is removed by manufacture to yield utilitarian services. We compare the monetary value of the two money systems themselves, by introducing a natural money-metric social welfare function. Because labor allocation both to production and potentially to government of the economy is endogenous, the only constraint in the society is its population, so that the natural money-metric is labor. Money systems, whether fiat or commodity, are valued in units of the labor that would produce an equivalent utility gain among competitive equilibria, if it were added to the primary production capacity of the society. Classification-JEL: C7, D5, H5, K42 Keywords: Bureaucracy, Contract enforcement, Taxes, Money Length: 18 pages Creation-Date: 200504 Number: 1510 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1510.pdf File-Format: application/pdf File-Size: 172 kb Handle: RePEc:cwl:cwldpp:1510 Template-type: ReDIF-Paper 1.0 Author-Name: Martin Shubik Author-X-Name-First: Martin Author-X-Name-Last: Shubik Author-Email: martin.shubik@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/shubik.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Eric Smith Author-X-Name-First: Eric Author-X-Name-Last: Smith Author-Workplace-Name: Sante Fe Institute Title: Fiat Money and the Natural Scale of Government Abstract: The competitive market structure of a decentralized economy is converted into a self-policing system treating the bureaucracy and enforcement of the legal system endogenously. In particular we consider money systems as constructs to make agents' economic strategies predictable from knowledge of their preferences and endowments, and thus to support coordinated resource production and distribution from independent decision making. Diverse rule systems can accomplish this, and we construct minimal strategic market games representing government-issued fiat money and ideal commodity money as two cases. We endogenize the provision of money and rules for its use as productive activities within the society, and consider the problem of transition from generalist to specialist production of subsistence goods as one requiring economic coordination under the support of a money system to be solved. The scarce resource in a society is labor limited by its ability to coordinate (specifically, calling for the expenditure of time and effort on communication, computation, and control), which must be diverted from primary production either to maintain coordinated group activity, or to provide the institutional services supporting decentralized trade. Social optima are solutions in which the reduced costs of individual decision making against rules (relative to maintenance of coalitions) are larger than the costs of the institutions providing the rules, and in which the costs of the institutions are less than the gains from the trade they enable to take place. Classification-JEL: C7, D5, H5, K42 Keywords: Bureaucracy, Contract enforcement, Taxes, Money Length: 34 pages Creation-Date: 200504 Number: 1509 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1509.pdf File-Format: application/pdf File-Size: 268 kb Handle: RePEc:cwl:cwldpp:1509 Template-type: ReDIF-Paper 1.0 Author-Name: Donald J. Brown Author-X-Name-First: Donald J. Author-X-Name-Last: Brown Author-Email: donald.brown@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/brown.htm Author-Workplace-Name: Department of Economics, Yale University Author-Workplace-Homepage: http://www.econ.yale.edu/ Author-Name: Ravi Kannan Author-X-Name-First: Ravi Author-X-Name-Last: Kannan Author-Email: ravindran.kannan@yale.edu Author-Workplace-Name: Computer Science, Yale University Title: Two Algorithms for Solving the Walrasian Equilibrium Inequalities Abstract: We propose two algorithms for deciding if the Walrasian equilibrium inequalities are solvable. These algorithms may serve as nonparametric tests for multiple calibration of applied general equilibrium models or they can be used to compute counterfactual equilibria in applied general equilibrium models defined by the Walrasian equilibrium inequalities. Classification-JEL: C63, C68, D51, D58 Keywords: Applied general equilibrium analysis, Walrasian equilibrium inequalities, Calibration Length: 9 pages Creation-Date: 200504 Revision-Date: 200610 Number: 1508R Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1508-r.pdf File-Format: application/pdf File-Size: 160 kb Handle: RePEc:cwl:cwldpp:1508R Template-type: ReDIF-Paper 1.0 Author-Name: Donald J. Brown Author-X-Name-First: Donald J. Author-X-Name-Last: Brown Author-Email: donald.brown@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/brown.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Ravi Kannan Author-X-Name-First: Ravi Author-X-Name-Last: Kannan Author-Email: ravindran.kannan@yale.edu Author-Workplace-Name: Computer Science, Yale University Title: Decision Methods for Solving Systems of Walrasian Inequalities Abstract: We propose two algorithms for deciding if systems of Walrasian inequalities are solvable. These algorithms may serve as nonparametric tests for multiple calibration of applied general equilibrium models or they can be used to compute counterfactual equilibria in applied general equilibrium models defined by systems of Walrasian inequalities. Classification-JEL: C63, C68, D51, D58 Keywords: Applied general equilibrium analysis, Walrasian inequalities, Calibration Length: 9 pages Creation-Date: 200504 Number: 1508 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1508.pdf File-Format: application/pdf File-Size: 13- kb Handle: RePEc:cwl:cwldpp:1508 Template-type: ReDIF-Paper 1.0 Author-Name: Donald J. Brown Author-X-Name-First: Donald J. Author-X-Name-Last: Brown Author-Email: donald.brown@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/brown.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Caterina Calsamiglia Author-X-Name-First: Caterina Author-X-Name-Last: Calsamiglia Author-Workplace-Name: Dept. of Economics, Yale University Author-Workplace-Homepage: http://www.econ.yale.edu/ Title: The Nonparametric Approach to Applied Welfare Analysis Abstract: Changes in total surplus and deadweight loss are traditional measures of economic welfare. We propose necessary and sufficient conditions for rationalizing consumer demand data with a quasilinear utility function. Under these conditions, consumer surplus is a valid measure of consumer welfare. For nonmarketed goods, we propose necessary and sufficient conditions on market data for efficient production , i.e., production at minimum cost. Under these conditions we derive a cost function for the nonmarketed good, where producer surplus is the area above the marginal cost curve. Classification-JEL: D11, D12, D21, D60 Keywords: Welfare economics, Quasilinear utilities, Nonmarketed goods, Afriat inequalities Length: 14 pages Creation-Date: 200504 Number: 1507 Publication-Status: Published in D.J. Brown and F. Kubler, eds., Computational Aspects of General Equilibrium Theory: Refutable Theories of Value, Springer-Verlag, 2008 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1507.pdf File-Format: application/pdf File-Size: 119 kb Handle: RePEc:cwl:cwldpp:1507 Template-type: ReDIF-Paper 1.0 Author-Name: Mark A. Carlson Author-X-Name-First: Mark A. Author-X-Name-Last: Carolson Author-Workplace-Name: Board of Governors, Federal Reserve Author-Name: Galina B. Hale Author-X-Name-First: Galina B. Author-X-Name-Last: Hale Author-Workplace-Name: Dept. of Economics, Yale University Author-Workplace-Homepage: http://www.econ.yale.edu/ Title: Courage to Capital? A Model of the Effects of Rating Agencies on Sovereign Debt Role-over Abstract: We propose a model of rating agencies that is an application of global game theory in which heterogeneous investors act strategically. The model allows us to explore the impact of the introduction of a rating agency on financial markets. Our model suggests that the addition of the rating agency affects the probability of default and the magnitude of the response of capital flows to changes in fundamentals in a non–trivial way, and that introducing a rating agency can bring multiple equilibria to a market that otherwise would have the unique equilibrium. Classification-JEL: F34, G14, G15 Keywords: Credit rating, Rating agency, Sovereign debt, Global game Length: 24 pages Creation-Date: 200504 Number: 1506 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1506.pdf File-Format: application/pdf File-Size: 314 kb Handle: RePEc:cwl:cwldpp:1506 Template-type: ReDIF-Paper 1.0 Author-Name: Dirk Bergemann Author-X-Name-First: Dirk Author-X-Name-Last: Bergemann Author-Email: dirk.bergemann@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/bergemann.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Thomas Eisenbach Author-X-Name-First: Thomas Author-X-Name-Last: Eisenbach Author-Email: thomas.eisenbach@lrz.uni-meunchen.de Author-Workplace-Name: Dept. of Economics, University of Munich Author-Name: Joan Feigenbaum Author-X-Name-First: Joan Author-X-Name-Last: Feigenbaum Author-Email: joan.feigenbaum@yale.edu Author-Workplace-Name: Dept. of Computer Science, Yale University Author-Name: Scott Shenker Author-X-Name-First: Scott Author-X-Name-Last: Shenker Author-Workplace-Name: ICSI and Dept. of Electrical Engineering and Computer Science, University of California, Berkeley Title: Flexibility as an Instrument in Digital Rights Management Abstract: We consider the optimal design of flexible use in a digital-rights-management policy. The basic model considers a single distributor of digital goods and a continuum of consumers. Each consumer can acquire the digital good either as a licensed product or an unlicensed copy. The availability of (or access to) unlicensed copies is increasing both in the number of licensed copies and in the flexibility accorded to licensed copies. We thus analyze the optimal design of flexibility in the presence of unlicensed distribution channels (the "greynet"). We augment the basic model by introducing a “secure platform” that is required to use the digital good. We compare the optimal design of flexibility in the presence of a platform to the one without a platform. Finally, we analyze the equilibrium provision when platform and content are complimentary goods but are distributed and priced by different sellers. Classification-JEL: C79, D42, L15 Keywords: Digital Rights Management, Platform, Flexibility, Piracy Length: 19 pages Creation-Date: 200504 Number: 1505 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1505.pdf File-Format: application/pdf File-Size: 173 kb Handle: RePEc:cwl:cwldpp:1505 Template-type: ReDIF-Paper 1.0 Author-Name: Robert J. Shiller Author-X-Name-First: Robert J. Author-X-Name-Last: Shiller Author-Email: robert.shiller@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/shiller.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: The Life-Cycle Personal Accounts Proposal for Social Security: An Evaluation Abstract: The life-cycle accounts proposal for Social Security reform has been justified by its proponents using a number of different arguments, but these arguments generally involve the assumption of a high likelihood of good returns on the accounts. A simulation is undertaken to estimate the probability distribution of returns in the accounts based on long-term historical experience. U.S. stock market, bond market and money market data 1871-2004 are used for the analysis. Assuming that future returns behave like historical data, it is found that a baseline personal account portfolio after offset will be negative 32% of the time on the retirement date. The median internal rate of return in this case is 3.4 percent, just above the amount necessary for holders of the accounts to break even. However, the U.S. stock market has been unusually successful historically by world standards. It would be better if we adjust the historical data to reduce the assumed average stock market return for the simulation. When this is done so that the return matches the median stock market return of 15 countries 1900-2000 as reported by Dimson et al. [2002], the baseline personal account is found to be negative 71% of the time on the date of retirement and the median internal rate of return is 2.6 percent. Classification-JEL: H55 Keywords: Private accounts, Lifetime portfolio selection, portfolio choice, pensions, old age insurance, social insurance, stock market, returns, historical simulation, thrift savings plan Length: 34 pages Creation-Date: 200504 Number: 1504 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1504.pdf File-Format: application/pdf File-Size: 111 kb Handle: RePEc:cwl:cwldpp:1504 Template-type: ReDIF-Paper 1.0 Author-Name: Dino Gerardi Author-X-Name-First: Dino Author-X-Name-Last: Gerardi Author-Email: donato.gerardi@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/gerardi.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Richard McLean Author-X-Name-First: Richard Author-X-Name-Last: McLean Author-Workplace-Name: Rutgers University Author-Name: Andrew Postlewaite Author-X-Name-First: Andrew Author-X-Name-Last: Postlewaite Author-Workplace-Name: University of Pennsylvania Title: Aggregation of Expert Opinions Abstract: Conflicts of interest arise between a decision maker and agents who have information pertinent to the problem because of differences in their preferences over outcomes. We show how the decision maker can extract the information by distorting the decisions that will be taken, and show that only slight distortions will be necessary when agents are "informationally small." We further show that as the number of informed agents becomes large the necessary distortion goes to zero. We argue that the particular mechanisms analyzed are substantially less demanding informationally than those typically employed in implementation and virtual implementation. In particular, the equilibria we analyze are "conditionally" dominant strategy in a precise sense. Further, the mechanisms are immune to manipulation by small groups of agents. Classification-JEL: C72, D78, D82 Keywords: Information Aggregation, Mechanism Design, Incomplete Information Note: CFP 1239. Length: 40 pages Creation-Date: 200504 Number: 1503 Publication-Status: Published in Games and Economic Behavior (March 2009), 65(2): 339-371 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1503.pdf File-Format: application/pdf File-Size: 384 kb Handle: RePEc:cwl:cwldpp:1503 Template-type: ReDIF-Paper 1.0 Author-Name: Dirk Bergemann Author-X-Name-First: Dirk Author-X-Name-Last: Bergemann Author-Email: dirk.bergemann@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/bergemann.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Stephen Morris Author-X-Name-First: Stephen Author-X-Name-Last: Morris Title: Ex Post Implementation Abstract: We analyze the problem of fully implementing a social choice set in ex post equilibrium. Weidentify an ex post monotonicity condition that is necessary and -- in economic environments -- sufficient for full implementation in ex post equilibrium. We also identify an ex post monotonicityno veto condition that is sufficient. Ex post monotonicity is satisfied in all single crossing environments with strict ex post incentive constraints. In many economically significant environments, ex post implementation can be achieved in the direct mechanism. We show by means of two classic examples that ex post monotonicity does not imply nor is it implied by Maskin monotonicity (necessary and almost sufficient for complete information implementation). The single unit auction with interdependent valuations is shown to satisfy ex post monotonicity but not Maskin monotonicity. Ex post implementation in the direct mechanism is also possible in this case. We describe an example where the Pareto correspondence fails ex post monotonicity but Maskin monotonicity is satisfied. Classification-JEL: C79, D82 Keywords: Ex post equilibrium, Implementation, Single crossing, Interdependent values Note: CFP 1226. Length: 62 pages Creation-Date: 200504 Number: 1502 Publication-Status: Published in Games and Economic Behavior (2008), 63: 527-566 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1502.pdf File-Format: application/pdf File-Size: 375 kb Handle: RePEc:cwl:cwldpp:1502 Template-type: ReDIF-Paper 1.0 Author-Name: Donald W.K. Andrews Author-X-Name-First: Donald W.K. Author-X-Name-Last: Andrews Author-Email: donald.andrews@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/andrews.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Vadim Marmer Author-X-Name-First: Vadim Author-X-Name-Last: Marmer Author-Email: vadim.marmer@yale.edu Title: Exactly Distribution-free Inference in Instrumental Variables Regression with Possibly Weak Instruments Abstract: This paper introduces a rank-based test for the instrumental variables regression model that dominates the Anderson-Rubin test in terms of finite sample size and asymptotic power in certain circumstances. The test has correct size for any distribution of the errors with weak or strong instruments. The test has noticeably higher power than the Anderson-Rubin test when the error distribution has thick tails and comparable power otherwise. Like the Anderson-Rubin test, the rank tests considered here perform best, relative to other available tests, in exactly-identified models. Classification-JEL: C13, C30 Keywords: Aligned ranks, Anderson-Rubin statistic, categorical covariates, exact size, normal scores, rank test, weak instruments, Wilcoxon scores Note: CFP 1253. Length: 29 pages Creation-Date: 200503 Number: 1501 Publication-Status: Published in Journal of Econometrics (2008), 42(1): 183-200 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1501.pdf File-Format: application/pdf File-Size: 323 kb Handle: RePEc:cwl:cwldpp:1501 Template-type: ReDIF-Paper 1.0 Author-Name: Hannes Leeb Author-X-Name-First: Hannes Author-X-Name-Last: Leeb Author-Email: hannes.leeb@yale.edu Author-Workplace-Name: Dept. of Statistics, Yale University Author-Name: Benedikt M. Poetscher Author-X-Name-First: Benedikt M. Author-X-Name-Last: Poetscher Author-Workplace-Name: Dept. of Statistics, University of Vienna Title: Sparse Estimators and the Oracle Property, or the Return of Hodges' Estimator Abstract: We point out some pitfalls related to the concept of an oracle property as used in Fan and Li (2001, 2002, 2004) which are reminiscent of the well-known pitfalls related to Hodges’ estimator. The oracle property is often a consequence of sparsity of an estimator. We show that any estimator satisfying a sparsity property has maximal risk that converges to the supremum of the loss function; in particular, the maximal risk diverges to infinity when ever the loss function is unbounded. For ease of presentation the result is set in the framework of a linear regression model, but generalizes far beyond that setting. In a Monte Carlo study we also assess the extent of the problem infinite samples for the smoothly clipped absolute deviation (SCAD) estimator introduced in Fan and Li (2001). We find that this estimator can perform rather poorly infinite samples and that its worst-case performance relative to maximum likelihood deteriorates with increasing sample size when the estimator is tuned to sparsity. Classification-JEL: C20, C51 Keywords: Oracle property, Sparsity, Penalized maximum likelihood, Penalized least squares, Hodges’ estimator, SCAD, Lasso, Bridge estimator, Hard-thresholding, Maximal risk, Maximal absolute bias, Non-uniform limits Length: 18 pages Creation-Date: 200502 Revision-Date: 200704 Number: 1500 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d15a/d1500.pdf File-Format: application/pdf File-Size: 238 kb Handle: RePEc:cwl:cwldpp:1500 Template-type: ReDIF-Paper 1.0 Author-Name: Robert J. Shiller Author-X-Name-First: Robert J. Author-X-Name-Last: Shiller Author-Email: robert.shiller@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/shiller.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Behavioral Economics and Institutional Innovation Abstract: Behavioral economics has played a fundamental role historically in innovation in economic institutions, even long before behavioral economics was recognized as a discipline. Examples from history, notably that of the invention of workers’ compensation, illustrate this point. Though scholarly discussion develops over decades, actual innovation tends to occur episodically, particularly at times of economic crisis. Fortunately, some of the major professional societies, the Verein fur Sozialpolitik, the American Economic Association and their successors, have managed to keep a broad discourse going, involving a variety of research methods including some that may be described today as behavioral economics, thereby maintaining an environment friendly to institutional innovation. Further, the broad expansion of behavioral economics that is going on today can be expected to yield even more such important institutional innovations. Classification-JEL: B41 Keywords: Economic innovation, Invention, Psychological economics, Institutional economics, Social insurance, Workers’ compensation, American Economic Association, Germany, Verein fur Sozialpolitik Note: CFP 1150. Length: 24 pages Creation-Date: 200501 Number: 1499 Publication-Status: Published in Southern Economic Journal (2005), 72(2): 269-283 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1499.pdf File-Format: application/pdf File-Size: 59 kb Handle: RePEc:cwl:cwldpp:1499 Template-type: ReDIF-Paper 1.0 Author-Name: Jussi Keppo Author-X-Name-First: Jussi Author-X-Name-Last: Keppo Author-Email: keppo@umich.edu Author-Workplace-Name: University of Michigan Author-Name: Giuseppe Moscarini Author-X-Name-First: Giuseppe Author-X-Name-Last: Moscarini Author-Email: giuseppe.moscarini@yale.edu Author-Homepage: http://www.econ.yale.edu/faculty1/moscarini.htm Author-Workplace-Name: Dept. of Economics, Yale University Author-Workplace-Homepage: http://www.econ.yale.edu/ Author-Name: Lones Smith Author-X-Name-First: Lones Author-X-Name-Last: Smith Author-Workplace-Name: University of Michigan Title: The Demand for Information: More Heat than Light Abstract: This paper produces a comprehensive theory of the value of Bayesian information and its static demand. Our key insight is to assume 'natural units' corresponding to the sample size of conditionally i.i.d. signals -- focusing on the smooth nearby model of the precision of an observation of a Brownian motion with uncertain drift. In a two state world, this produces the heat equation from physics, and leads to a tractable theory. We derive explicit formulas that harmonize the known small and large sample properties of information, and reveal some fundamental properties of demand: (a) Value 'non-concavity': The marginal value of information is initially zero; (b) The marginal value is convex/rising, concave/peaking, then convex/falling; (c) 'Lumpiness': As prices rise, demand suddenly chokes off (drops to 0); (d) The minimum information costs on average exceed 2.5% of the payoff stakes; (e) Information demand is hill-shaped in beliefs, highest when most uncertain; (f) Information demand is initially elastic at interior beliefs; (g) Demand elasticity is globally falling in price, and approaches 0 as prices vanish; and (h) The marginal value vanishes exponentially fast in price, yielding log demand. Our results are exact for the Brownian case, and approximately true for weak discrete informative signals. We prove this with a new Bayesian approximation result. Classification-JEL: D81, D83 Keywords: Value of information, Non-concavity, Heat equation, Demand, Bayesian analysis Note: CFP 1258. Length: 36 pages Creation-Date: 200501 Number: 1498 Publication-Status: Published in Journal of Economic Theory (January 2008), 138(1): 21-50 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1498.pdf File-Format: application/pdf File-Size: 438 kb Handle: RePEc:cwl:cwldpp:1498 Template-type: ReDIF-Paper 1.0 Author-Name: Ray C. Fair Author-X-Name-First: Ray C. Author-X-Name-Last: Fair Author-Email: ray.fair@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/fair.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Policy Effects in the Post Boom U.S. Economy Abstract: The paper analyzes the question why the U.S. economy in the 2000:4-2004:3 period was sluggish in light of the large expansionary fiscal and monetary policies that took place. The answer does not appear to be that there were large structural changes in the economy or systematic bad shocks. This paper tests for such changes and shocks, and the results are generally negative. Instead, the main culprits seem to be large negative effects from declines in the stock market and exports. Although not tested in this paper, some of the decline in exports may be the result of the stock market decline, in which case most of the explanation is simply the stock market decline itself. Classification-JEL: E00 Keywords: Fiscal policy, Monetary policy Note: CFP 1193 Length: 35 pages Creation-Date: 200501 Number: 1497 Price: None Publication-status: Published in Topics in Macroeconomics (2005), 5(1): Article 19 File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1497.pdf File-Format: application/pdf File-Size: 230 kb Handle: RePEc:cwl:cwldpp:1497 Template-type: ReDIF-Paper 1.0 Author-Name: Ray C. Fair Author-X-Name-First: Ray C. Author-X-Name-Last: Fair Author-Email: ray.fair@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/fair.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Predicting Electoral College Victory Probabilities from State Probability Data Abstract: A method is proposed in this paper for predicting Electoral College victory probabilities from state probability data. A "ranking" assumption about dependencies across states is made that greatly simplifies the analysis. The method issued to analyze state probability data from the Intrade political betting market. The Intrade prices of various contracts are quite close to what would be expected under the ranking assumption. Under the joint hypothesis that the Intrade price ranking is correct and the ranking assumption is correct, President Bush should not have won any state ranked below a state that he lost. He did not win any such state. The ranking assumption is also consistent with the fact that the two parties spent essentially nothing in most states in 2004. Classification-JEL: C10 Keywords: Electoral College victory probabilities, political betting markets Length: 20 pages Creation-Date: 200411 Number: 1496 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1496.pdf File-Format: application/pdf File-Size: 58 kb Handle: RePEc:cwl:cwldpp:1496 Template-type: ReDIF-Paper 1.0 Author-Name: Ray C. Fair Author-X-Name-First: Ray C. Author-X-Name-Last: Fair Author-Email: ray.fair@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/fair.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Estimated Age Effects in Athletic Events and Chess Abstract: Rates of decline are estimated using record bests by age for chess and for various track and field, road running, and swimming events. Using a fairly flexible functional form, the estimates show linear percent decline between age 35 and about age 70 and then quadratic decline after that. Chess shows much less decline than the physical activities. Rates of decline are generally larger for the longer distances, and for swimming they are larger for women than for men. An advantage of using best-performance records to estimate rates of decline is that the records are generally based on very large samples. In addition, the age range is large. In this study the age range is 35 to 100 for swimming, 35 to 98 for track and field and running, and 35 to 94 for chess. The estimates also do not suffer from traditional forms of selection bias. Classification-JEL: J14, C20, I10 Keywords: Aging, Biological capacity Note: CFP 1212. Length: 27 pages Creation-Date: 200411 Revision-Date: 200602 Number: 1495 Publication-Status: Published in Experimental Aging Research (2007), 33(1): 37-57 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1495.pdf File-Format: application/pdf File-Size: 113 kb Handle: RePEc:cwl:cwldpp:1495 Template-type: ReDIF-Paper 1.0 Author-Name: William D. Nordhaus Author-X-Name-First: William D. Author-X-Name-Last: Nordhaus Author-Email: william.nordhaus@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/nordhaus.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Retrospective on the Postwar Productivity Slowdown Abstract: The present study reviews the "productivity slowdown" of the 1970s and 1980s. The study also develops a new data set -- industrial data available back to 1948 -- as well as a new set of tools for decomposing changes in productivity growth. The major result of this study is that the productivity slowdown of the 1970s has survived three decades of scrutiny, conceptual refinements, and data revisions. The slowdown was primarily centered in those sectors that were most energy-intensive, were hardest hit by the energy shocks of the 1970s, and therefore had large output declines. In a sense, the energy shocks were the earthquake, and the industries with the largest slowdown were near the epicenter of the tectonic shifts in the economy. Classification-JEL: Keywords: Productivity, Economic growth Note: N1, O4, O47 Length: 30 pages Creation-Date: 200411 Number: 1494 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1494.pdf File-Format: application/pdf File-Size: 146 kb Handle: RePEc:cwl:cwldpp:1494 Template-type: ReDIF-Paper 1.0 Author-Name: Gabrielle Gayer Author-X-Name-First: Gabrielle Author-X-Name-Last: Gayer Author-Workplace-Name: Tel Aviv University Author-Workplace-Homepage: http://www.tau.ac.il/ Author-Name: Itzhak Gilboa Author-X-Name-First: Itzhak Author-X-Name-Last: Gilboa Author-Workplace-Name: School of Economics, Tel Aviv University Author-Workplace-Homepage: http://www.tau.ac.il/ Author-Name: Offer Lieberman Author-X-Name-First: Offer Author-X-Name-Last: Lieberman Author-Workplace-Name: Technion-Israel Institute of Technology Author-Workplace-Homepage: http://iew3.technion.ac.il/ Title: Rule-Based and Case-Based Reasoning in Housing Prices Abstract: People reason about real-estate prices both in terms of general rules and in terms of analogies to similar cases. We propose to empirically test which mode of reasoning fits the data better. To this end, we develop the statistical techniques required for the estimation of the case-based model. It is hypothesized that case-based reasoning will have relatively more explanatory power in databases of rental apartments, whereas rule-based reasoning will have a relative advantage in sales data. We motivate this hypothesis on theoretical grounds, and find empirical support for it by comparing the two statistical techniques (rule-based and case-based) on two databases (rentals and sales). Classification-JEL: C1, C8, D8, R1 Keywords: Housing, similarity, regression, case-based reasoning, rule-based reasoning Length: 29 pages Creation-Date: 200411 Number: 1493 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1493.pdf File-Format: application/pdf File-Size: 224 kb Handle: RePEc:cwl:cwldpp:1493 Template-type: ReDIF-Paper 1.0 Author-Name: Antoine Billot Author-X-Name-First: Antoine Author-X-Name-Last: Billot Author-Workplace-Name: Universite de Paris II Author-Name: Itzhak Gilboa Author-X-Name-First: Itzhak Author-X-Name-Last: Gilboa Author-Workplace-Name: School of Economics, Tel Aviv University Author-Workplace-Homepage: http://www.tau.ac.il/ Author-Name: David Schmeidler Author-X-Name-First: David Author-X-Name-Last: Schmeidler Author-Workplace-Name: School of Mathematical Sciences, Tel Aviv Univ. Author-Workplace-Homepage: http://www.math.tau.ac.il/ Author-Name: Dov Samet Author-X-Name-First: Dov Author-X-Name-Last: Samet Author-Workplace-Name: Tel Aviv University Author-Workplace-Homepage: http://www.tau.ac.il/ Title: Probabilities as Similarity-Weighted Frequencies Abstract: A decision maker is asked to express her beliefs by assigning probabilities to certain possible states. We focus on the relationship between her database and her beliefs. We show that, if beliefs given a union of two databases are a convex combination of beliefs given each of the databases, the belief formation process follows a simple formula: beliefs are a similarity-weighted average of the beliefs induced by each past case. Classification-JEL: C8, D8 Keywords: Similarity, Probability Length: 20 pages Creation-Date: 200411 Number: 1492 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1492.pdf File-Format: application/pdf File-Size: 226 kb Handle: RePEc:cwl:cwldpp:1492 Template-type: ReDIF-Paper 1.0 Author-Name: Enriqueta Aragones Author-X-Name-First: Enriqueta Author-X-Name-Last: Aragones Author-Workplace-Name: Institute d'Analisi Economica, CSIC Author-Name: Itzhak Gilboa Author-X-Name-First: Itzhak Author-X-Name-Last: Gilboa Author-Workplace-Name: School of Economics, Tel Aviv University Author-Workplace-Homepage: http://www.tau.ac.il/ Author-Name: Andrew Postlewaite Author-X-Name-First: Andrew Author-X-Name-Last: Postlewaite Author-Workplace-Name: Economics, University of Pennsylvania Author-Workplace-Homepage: http://www.ssc.upenn.edu/ Author-Name: David Schmeidler Author-X-Name-First: David Author-X-Name-Last: Schmeidler Author-Workplace-Name: School of Mathematical Sciences, Tel Aviv Univ. Author-Workplace-Homepage: http://www.math.tau.ac.il/ Title: Fact-Free Learning Abstract: People may be surprised by noticing certain regularities that hold in existing knowledge they have had for some time. That is, they may learn without getting new factual information. We argue that this can be partly explained by computational complexity. We show that, given a database, finding a small set of variables that obtain a certain value of R^2 is computationally hard, in the sense that this term is used in computer science. We discuss some of the implications of this result and of fact-free learning in general. Classification-JEL: C8, D8 Keywords: Computational complexity, Linear regression, Rule-based reasoning Length: 34 pages Creation-Date: 200411 Number: 1491 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1491.pdf File-Format: application/pdf File-Size: 289 kb Handle: RePEc:cwl:cwldpp:1491 Template-type: ReDIF-Paper 1.0 Author-Name: Luca Anderlini Author-X-Name-First: Luca Author-X-Name-Last: Anderlini Author-Workplace-Name: Economics, Georgetown University Author-Workplace-Homepage: http://www.georgetown.edu/ Author-Name: Dino Gerardi Author-X-Name-First: Dino Author-X-Name-Last: Gerardi Author-Email: donato.gerardi@yale.edu Author-Homepage: http://www.econ.yale.edu/~dg278/ Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Roger Lagunoff Author-X-Name-First: Roger Author-X-Name-Last: Lagunoff Author-Workplace-Name: Economics, Georgetown University Author-Workplace-Homepage: http://www.georgetown.edu/ Title: The Folk Theorem in Dynastic Repeated Games Abstract: A canonical interpretation of an infinitely repeated game is that of a "dynastic" repeated game: a stage game repeatedly played by successive generations of finitely-lived players with dynastic preferences. These two models are in fact equivalent when the past history of play is observable to all players. In our model all players live one period and do not observe the history of play that takes place before their birth, but instead receive a private message from their immediate predecessors. Under very mild conditions, when players are sufficiently patient, all feasible payoff vectors (including those below the minmax) can be sustained as a Sequential Equilibrium of the dynastic repeated game with private communication. The result applies to any stage game for which the standard Folk Theorem yields a payoff set with a non-empty interior. Our results stem from the fact that, in equilibrium, a player may be unable to communicate effectively relevant information to his successor in the same dynasty. This, in turn implies that following some histories of play the players’ equilibrium beliefs may violate "Inter-Generational Agreement." Classification-JEL: C72, C73, D82 Keywords: Dynastic repeated games, Private communication, Folk theorem Note: CFP 1239. Length: 77 pages Creation-Date: 200410 Number: 1490 Publication-Status: Published in Economic Theory (December 2008), 37(3): 357-394 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1490.pdf File-Format: application/pdf File-Size: 675 kb Handle: RePEc:cwl:cwldpp:1490 Template-type: ReDIF-Paper 1.0 Author-Name: Guiseppe Moscarini Author-X-Name-First: Guiseppe Author-X-Name-Last: Moscarini Author-Email: guiseppe.moscarini@yale.edu Author-Homepage: http://www.econ.yale.edu/faculty1/moscarini.htm Author-Workplace-Name: Economics, Yale University Author-Workplace-Homepage: http://www.econ.yale.edu/ Author-Name: Francesco Squintani Author-X-Name-First: Francesco Author-X-Name-Last: Squintani Author-Workplace-Name: University College London Title: Competitive Experimentation with Private Information Abstract: We study a winner-take-all R&D race where firms are privately informed about the uncertain arrival rate of the invention. Due to the interdependent-value nature of the problem, the equilibrium displays a strong herding effect that distinguishes our framework from war-of-attrition models. Nonetheless, equilibrium expenditure in R&D is sub-optimal when the planner is sufficiently impatient. Pessimistic firms prematurely exit the race, so that the expected discounted amount of R&D activity is inefficiently low. This result stands in contrast to the overinvestment in research that is typical of winner-take-all R&D races without private information. We conclude that secrecy in R&D inefficiently slows down the pace of innovation. Classification-JEL: D24, D43, D44, D82, D83 Keywords: R&D, experimentation, innovation, private information, herding Length: 44 pages Creation-Date: 200410 Number: 1489 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1489.pdf File-Format: application/pdf File-Size: 489 kb Handle: RePEc:cwl:cwldpp:1489 Template-type: ReDIF-Paper 1.0 Author-Name: John E. Roemer Author-X-Name-First: John E. Author-X-Name-Last: Roemer Author-Email: john.roemer@yale.ed Author-Homepage: http://pantheon.yale.edu/~jer39/ Author-Workplace-Name: Dept. of Political Science, Yale University Author-Workplace-Homepage: http://www.yale.edu/polisci/ Title: Modeling Party Competition in General Elections Abstract: We survey critically the brief history of modeling party competition in general elections, beginning with the Hotelling-Downs model with a unidimensional policy space, and the Wittman model with endogenous parties, to the multi-dimensional citizen-candidate and PUNE models. Some applications of the newer models are discussed. Classification-JEL: D72 Keywords: Downs, Hotelling, Wittman, PUNE, Citizen-candidate Note: CFP 1192. Length: 37 pages Creation-Date: 200410 Number: 1488 Publication-Status: Published in B. Weingast and D. Wittman, eds., Oxford Handbook of Political Economy, 2006, pp. 1010-1030 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1488.pdf File-Format: application/pdf File-Size: 109 kb Handle: RePEc:cwl:cwldpp:1488 Template-type: ReDIF-Paper 1.0 Author-Name: John E. Roemer Author-X-Name-First: John E. Author-X-Name-Last: Roemer Author-Email: john.roemer@yale.ed Author-Homepage: http://pantheon.yale.edu/~jer39/ Author-Workplace-Name: Dept. of Political Science, Yale University Author-Workplace-Homepage: http://www.yale.edu/polisci/ Title: Distribution and Politics: A Brief History and Prospect Abstract: A brief, historical review of the study of the interdependency between politics and economic distribution is offered. While the impact of economic interests on politics has been acknowledged for thousands of years, and the impact of politics on distribution for hundreds, it is only in the last thirty years that formal models of the interdependency between economic distribution and politics have been formulated. A general model of political-economic equilibrium is proposed, in which political competition and economic distribution jointly determine each other. Several examples are given. The author proposes that political economy, conceived of as studying this process of joint determination, is in its infancy. Classification-JEL: D72 Keywords: Political-economic equilibrium Note: CFP 1154. Length: 35 pages Creation-Date: 200410 Number: 1487 Publication-Status: Published in Social Choice and Welfare (2005), 25: 507-525 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1487.pdf File-Format: application/pdf File-Size: 104 kb Handle: RePEc:cwl:cwldpp:1487 Template-type: ReDIF-Paper 1.0 Author-Name: Itzhak Gilboa Author-X-Name-First: Itzhak Author-X-Name-Last: Gilboa Author-Workplace-Name: School of Economics, Tel Aviv University Author-Workplace-Homepage: http://www.tau.ac.il/~igilboa/ Author-Name: Offer Lieberman Author-X-Name-First: Offer Author-X-Name-Last: Lieberman Author-Workplace-Name: Technion-Israel Institute of Technology Author-Workplace-Homepage: http://iew3.technion.ac.il/ Author-Name: David Schmeidler Author-X-Name-First: David Author-X-Name-Last: Schmeidler Author-Workplace-Name: School of Mathematical Sciences, Tel Aviv Univ. Author-Workplace-Homepage: http://www.math.tau.ac.il/ Title: Empirical Similarity Abstract: An agent is asked to assess a real-valued variable Y_{p} based on certain characteristics X_{p} = (X_{p}^{1},...,X_{p}^{m}), and on a database consisting (X_{i}^{1},...,X_{i}^{m},Y_{i}) for i = 1,...,n. A possible approach to combine past observations of X and Y with the current values of X to generate an assessment of Y is similarity-weighted averaging. It suggests that the predicted value of Y, Y_{p}^{s}, be the weighted average of all previously observed values Y_{i}, where the weight of Y_{i}, for every i =1,...,n, is the similarity between the vector X_{p}^{1},...,X_{p}^{m}, associated with Y_{p}, and the previously observed vector, X_{i}^{1},...,X_{i}^{m}. We axiomatize this rule. We assume that, given every database, a predictor has a ranking over possible values, and we show that certain reasonable conditions on these rankings imply that they are determined by the proximity to a similarity-weighted average for a certain similarity function. The axiomatization does not suggest a particular similarity function, or even a particular functional form of this function. We therefore proceed to suggest that the similarity function be estimated from past observations. We develop tools of statistical inference for parametric estimation of the similarity function, for the case of a continuous as well as a discrete variable. Finally, we discuss the relationship of the proposed method to other methods of estimation and prediction. Classification-JEL: C1, C8, D8 Keywords: Similarity, estimation Length: 38 pages Creation-Date: 200409 Number: 1486 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1486.pdf File-Format: application/pdf File-Size: 340 kb Handle: RePEc:cwl:cwldpp:1486 Template-type: ReDIF-Paper 1.0 Author-Name: Antoine Billot Author-X-Name-First: Antoine Author-X-Name-Last: Billot Author-Workplace-Name: Universite de Paris II Author-Name: Itzhak Gilboa Author-X-Name-First: Itzhak Author-X-Name-Last: Gilboa Author-Workplace-Name: School of Economics, Tel Aviv Univ. Author-Workplace-Homepage: http://www.tau.ac.il/ Author-Name: David Schmeidler Author-X-Name-First: David Author-X-Name-Last: Schmeidler Author-Workplace-Name: School of Mathematical Sciences, Tel Aviv Univ. Author-Workplace-Homepage: http://www.math.tau.ac.il/ Title: Axiomatization of an Exponential Similarity Function Abstract: An agent is asked to assess a real-valued variable y based on certain characteristics x=(x^{1},...,x^{m}), and on a database consisting of n observations of (x^{1},...,x^{m},y). A possible approach to combine past observations of x and y with the current values of x to generate an assessment of y is similarity-weighted averaging. It suggests that the predicted value of y, y_{n+1}^{s}, be the weighted average of all previously observed values y_{i}, where the weight of y_{i} is the similarity between the vector x_{n+1}^{1},...,x_{n+1}^{m}, associated with y_{n+1}, and the previously observed vector, x_{i}^{1},...,x_{i}^{m}. This paper axiomatizes, in terms of the prediction y_{n+1}, a similarity function that is a (decreasing) exponential in a norm of the difference between the two vectors compared. Classification-JEL: C8, D8 Keywords: Similarity, exponential Length: 10 pages Creation-Date: 200409 Number: 1485 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1485.pdf File-Format: application/pdf File-Size: 144 kb Handle: RePEc:cwl:cwldpp:1485 Template-type: ReDIF-Paper 1.0 Author-Name: Itzhak Gilboa Author-X-Name-First: Itzhak Author-X-Name-Last: Gilboa Author-Workplace-Name: School of Economics, Tel Aviv University Author-Workplace-Homepage: http://www.tau.ac.il/ Author-Name: Andrew Postlewaite Author-X-Name-First: Andrew Author-X-Name-Last: Postlewaite Author-Workplace-Name: Economics, University of Pennsylvania Author-Workplace-Homepage: http://www.ssc.upenn.edu/ Author-Name: David Schmeidler Author-X-Name-First: David Author-X-Name-Last: Schmeidler Author-Workplace-Name: School of Mathematical Sciences, Tel Aviv Univ. Author-Workplace-Homepage: http://www.math.tau.ac.il/ Title: Rationality of Belief. Or: Why Bayesianism is Neither Necessary nor Sufficient for Rationality Abstract: Economic theory reduces the concept of rationality to internal consistency. The practice of economics, however, distinguishes between rational and irrational beliefs. There is therefore an interest in a theory of rational beliefs, and of the process by which beliefs are generated and justified. We argue that the Bayesian approach is unsatisfactory for this purpose, for several reasons. First, the Bayesian approach begins with a prior, and models only a very limited form of learning, namely, Bayesian updating. Thus, it is inherently incapable of describing the formation of prior beliefs. Second, there are many situations in which there is not sufficient information for an individual to generate a Bayesian prior. Third, this lack of information is even more acute when we address the beliefs that can be attributed to a society. We hold that one needs to explore other approaches to the representation of information and of beliefs, which may be helpful in describing the formation of Bayesian as well as non-Bayesian beliefs. Classification-JEL: B4, D8 Keywords: Bayesianism, rationality, savage axioms Length: 20 pages Creation-Date: 200409 Number: 1484 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1484.pdf File-Format: application/pdf File-Size: 207 kb Handle: RePEc:cwl:cwldpp:1484 Template-type: ReDIF-Paper 1.0 Author-Name: Hanming Fang Author-X-Name-First: Hanming Author-X-Name-Last: Fang Author-Workplace-Name: Dept. of Economics, Yale University Author-Workplace-Homepage: http://www.econ.yale.edu/ Author-Name: Glenn C. Loury Author-X-Name-First: Glenn C. Author-X-Name-Last: Loury Author-Workplace-Name: Dept. of Economics, Boston University Author-Workplace-Homepage: http://www.bu.edu/ Title: Toward An Economic Theory of Dysfunctional Identity Abstract: We advance a novel choice-theoretic model of "identity" based on the notions of categories and narratives. Identity is conceived as a matter of "reflexive perception" -- how people understand themselves. Choosing an identity is equivalent to making a generalization about one's past that highlights the most salient aspects of experience. When many individuals make a common choice in this regard, they embrace a collective identity which is dysfunctional if it is Pareto dominated by an alternative self-classificatory schema. Using a simple multi-stage risk sharing game, we explore conditions under which dysfunctional collective identities might be expected to emerge. Classification-JEL: Z1, Z13 Keywords: Identity; Dysfunctional Collective Identity Length: 48 pages Creation-Date: 200409 Number: 1483 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1483.pdf File-Format: application/pdf File-Size: 617 kb Handle: RePEc:cwl:cwldpp:1483 Template-type: ReDIF-Paper 1.0 Author-Name: C. Lanier Benkard Author-X-Name-First: C. Lanier Author-X-Name-Last: Benkard Author-Workplace-Name: GBS, Stanford University Author-Workplace-Homepage: http://www.stanford.edu/ Author-Name: Steven Berry Author-X-Name-First: Steven Author-X-Name-Last: Berry Author-Email: steven.berry@yale.edu Author-Homepage: http://www.econ.yale.edu/~steveb/ Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: On the Nonparametric Identification of Nonlinear Simultaneous Equations Models: comment on B. Brown (1983) and Roehrig (1988) Abstract: This note revisits the identification theorems of B. Brown (1983) and Roehrig (1988). We describe an error in the proofs of the main identification theorems in these papers, and provide an important counterexample to the theorems on the identification of the reduced form. Specifically, contrary to the theorems, the reduced form of a nonseparable simultaneous equations model is not identified even under the assumptions of those papers. We conclude the note with a conjecture that it may be possible to use classical exclusion restrictions to recover some of the key implications of the theorems. Classification-JEL: C14, C31 Keywords: Simultaneous equations, Non-separable errors Length: 13 pages Number: 1482 Publication-Status: Published in Econometrica (2006), 74(5): 1429-1440 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1482.pdf File-Format: application/pdf File-Size: 160 kb Handle: RePEc:cwl:cwldpp:1482 Template-type: ReDIF-Paper 1.0 Author-Name: Attila Ambrus Author-X-Name-First: Attila Author-X-Name-Last: Ambrus Author-Workplace-Name: Dept. Economics, Harvard University Author-Name: Rossella Argenziano Author-X-Name-First: Rossela Author-X-Name-Last: Argenziano Author-Workplace-Name: Dept. Economics, Yale University Author-Workplace-Homepage: http://www.econ.yale.edu/ Title: Network Markets and Consumers Coordination Abstract: This paper assumes that groups of consumers in network markets can coordinate their choices when it is in their best interest to do so, and when coordination does not require communication. It is shown that multiple asymmetric networks can coexist in equilibrium if consumers have heterogeneous reservation values. A monopolist provider might choose to operate multiple networks to price differentiate consumers on both sides of the market. Competing network providers might operate networks such that one of them targets high reservation value consumers on one side of the market, while the other targets high reservation value consumers on the other side. Firms can obtain positive profits in price competition. In these asymmetric equilibria product differentiation is endogenized by the network choices of consumers. Heterogeneity of consumers is necessary for the existence of this type of equilibrium. Classification-JEL: D43, D62, L11, L14 Keywords: Coalitional agreements, coordination, network externalities, optimal pricing, platform competition, price discrimination, two-sided markets Length: 45 pages Creation-Date: 200409 Number: 1481 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1481.pdf File-Format: application/pdf File-Size: 402 kb Handle: RePEc:cwl:cwldpp:1481 Template-type: ReDIF-Paper 1.0 Author-Name: Ricardo J. Caballero Author-X-Name-First: Ricardo J. Author-X-Name-Last: Caballero Author-Email: caball@mit.edu Author-Workplace-Name: Dept. Economics, MIT Author-Workplace-Homepage: http://web.mit.edu/ Author-Name: Kevin N. Cowan Author-X-Name-First: Kevin N. Author-X-Name-Last: Cowan Author-Workplace-Name: Inter-American Development Bank Author-Name: Eduardo M.R.A. Engel Author-X-Name-First: Eduardo M.R.A. Author-X-Name-Last: Engel Author-Email: eduardo.engel@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/engel.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Alejandro Micco Author-X-Name-First: Alejandro Author-X-Name-Last: Micco Author-Workplace-Name: Inter-American Development Bank Title: Effective Labor Regulation and Microeconomic Flexibility Abstract: Microeconomic flexibility is at the core of economic growth in modern market economies because it facilitates the process of creative-destruction. The main reason why this process is not infinitely fast, is the presence of adjustment costs, some of them technological, others institutional. Chief among the latter is labor market regulation. While few economists object to the hypothesis that labor market regulation hinders the process of creative-destruction, its empirical support is limited. In this paper we revisit this hypothesis, using a new sectoral panel for 60 countries and a methodology suitable for such a panel. We find that job security regulation clearly hampers the creative-destruction process, especially in countries where regulations are likely to be enforced. Moving from the 20th to the 80th percentile in job security, in countries with strong rule of law, cuts the annual speed of adjustment to shocks by a third while shaving off about one percent from annual productivity growth. The same movement has negligible effects in countries with weak rule of law. Classification-JEL: E24, J23, J63, J64, K00 Keywords: Microeconomics rigidities, Creative-destruction, Job security regulation, Adjustment costs, Rule of law, Productivity growth Length: 32 pages Creation-Date: 200409 Revision-Date: 200610 Number: 1480 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1480.pdf File-Format: application/pdf File-Size: 240 kb Handle: RePEc:cwl:cwldpp:1480 Template-type: ReDIF-Paper 1.0 Author-Name: George J. Mailath Author-X-Name-First: George J. Author-X-Name-Last: Mailath Author-Workplace-Name: Dept. Economics, University of Pennsylvania Author-Workplace-Homepage: http://www.sas.upenn.edu/ Author-Name: Stephen Morris Author-X-Name-First: Stephen Author-X-Name-Last: Morris Title: Coordination Failure in Repeated Games with Almost-Public Monitoring Abstract: Some private-monitoring games, that is, games with no public histories, can have histories that are almost public. These games are the natural result of perturbing public-monitoring games towards private monitoring. We explore the extent to which it is possible to coordinate continuation play in such games. It is always possible to coordinate continuation play by requiring behavior to have bounded recall (i.e., there is a bound L such that in any period, the last L signals are sufficient to determine behavior). We show that, in games with general almost-public private monitoring, this is essentially the only behavior that can coordinate continuation play. Classification-JEL: C72, C73, D82 Keywords: Repeated games, Private monitoring, Almost-public monitoring, Coordination, Bounded recall Length: 35 pages Creation-Date: 200409 Revision-Date: 200503 Number: 1479R Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1479-r.pdf File-Format: application/pdf File-Size: 289 kb Handle: RePEc:cwl:cwldpp:1479R Template-type: ReDIF-Paper 1.0 Author-Name: George J. Mailath Author-X-Name-First: George J. Author-X-Name-Last: Mailath Author-Homepage: http://www.ssc.upenn.edu/~gmailath/ Author-Workplace-Name: Dept. Economics, University of Pennsylvania Author-Workplace-Homepage: http://www.sas.upenn.edu/ Author-Name: Stephen Morris Author-X-Name-First: Stephen Author-X-Name-Last: Morris Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Coordination Failure in Repeated Games with Almost-Public Monitoring Abstract: Some private-monitoring games, that is, games with no public histories, can have histories that are almost public. These games are the natural result of perturbing public-monitoring games towards private monitoring. We explore the extent to which it is possible to coordinate continuation play in such games. It is always possible to coordinate continuation play by requiring behavior to have bounded recall (i.e., there is a bound L such that in any period, the last L signals are sufficient to determine behavior). We show that, in games with general almost-public private monitoring, this is essentially the only behavior that can coordinate continuation play. Classification-JEL: C72, C73, D82 Keywords: Repeated games, Private monitoring, Almost-public monitoring, Coordination, Bounded recall Length: 37 pages Creation-Date: 200409 Number: 1479 Publication-Status: Published in Theoretical Economics (2006), 1: 311-340 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1479.pdf File-Format: application/pdf File-Size: 378 kb Handle: RePEc:cwl:cwldpp:1479 Template-type: ReDIF-Paper 1.0 Author-Name: John E. Roemer Author-X-Name-First: John E. Author-X-Name-Last: Roemer Author-Email: john.roemer@yale.ed Author-Homepage: http://pantheon.yale.edu/~jer39/ Author-Workplace-Name: Dept. of Political Science, Yale University Author-Workplace-Homepage: http://www.yale.edu/polisci/ Author-Name: Karen Van der Straeten Author-X-Name-First: Karen Author-X-Name-Last: Van der Straeten Author-Workplace-Name: CNRS, Ecole Polytechnique Paris Title: Xenophobia and Distribution in France: A Politico-economic Analysis Abstract: Anti-immigrant feeling (xenophobia) among voters has been proposed as a key factor explaining why, in the 2002 French national election, Jean Le Pen’s National Front Party won second place. Here, we study the effect of anti-immigrant sentiments among voters on the equilibrium position of political parties on the economic issue, which we take to be the size of the public sector. We model political competition among three parties (Left, Right, and Extreme Right) on a two-dimensional policy space (public sector size, immigration issue) using the PUNE model. We calibrate the model to French data for the election years 1988 and 2002, and show that politics have changed significantly over this period, from being centered primarily on economic issues to being centered on non-economic issues such as the immigration and security/law and order. We estimate that in 2002, the effect of voter xenophobia was to reduce the voters’ choice of public-sector size between 7% and 51% of one standard deviation of the population’s distribution of public-sector size ideal points, from what it would have been, absent xenophobia. Classification-JEL: D72 Keywords: Xenophobia, Racism, Distribution, Political equilibrium Note: CFP 1164. Length: 75 pages Creation-Date: 200408 Number: 1478 Publication-Status: Published in Journal of Economics (2005), 86(2): 95-114 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1478.pdf File-Format: application/pdf File-Size: 279 kb Handle: RePEc:cwl:cwldpp:1478 Template-type: ReDIF-Paper 1.0 Author-Name: Juan Moreno-Ternero Author-X-Name-First: Juan Author-X-Name-Last: Moreno-Ternero Author-Name: John E. Roemer Author-X-Name-First: John E. Author-X-Name-Last: Roemer Author-Email: john.roemer@yale.edu Author-Homepage: http://pantheon.yale.edu/~jer39/ Author-Workplace-Name: Dept. of Political Science, Yale University Author-Workplace-Homepage: http://www.yale.edu/polisci/ Title: Impartiality and Priority. Part 1: The Veil of Ignorance Abstract: The veil of ignorance has been used often as a tool for recommending what justice requires with respect to the distribution of wealth. We complete Harsanyi’s model of the veil of ignorance by appending information permitting interpersonal comparability of welfare. We show that the veil-of-ignorance conception of John Harsanyi, so completed, and Ronald Dworkin’s, when modeled formally, recommend wealth allocations in conflict with the prominently espoused view that priority should be given to the worse off with respect to wealth allocation. Classification-JEL: D63, D71 Keywords: Impartiality, Priority, Veil of ignorance Note: CFP 1185. Length: 29 pages Creation-Date: 200408 Revision-Date: 200505 Publication-Status: Published in Econometrica (2006), 27(5): 311-325 Number: 1477A Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1477-a.pdf File-Format: application/pdf File-Size: 273 kb Handle: RePEc:cwl:cwldpp:1477A Template-type: ReDIF-Paper 1.0 Author-Name: Juan Moreno-Ternero Author-X-Name-First: Juan Author-X-Name-Last: Moreno-Ternero Author-Name: John E. Roemer Author-X-Name-First: John E. Author-X-Name-Last: Roemer Author-Email: john.roemer@yale.edu Author-Homepage: http://pantheon.yale.edu/~jer39/ Author-Workplace-Name: Dept. of Political Science, Yale University Author-Workplace-Homepage: http://www.yale.edu/polisci/ Title: Impartiality and Priority. Part 2: A Characterization with Solidarity Abstract: The ethic of 'priority' is a compromise between the extremely compensatory ethic of 'welfare equality' and the needs-blind ethic of ‘income equality’. We propose an axiom of priority, and characterize resource allocation rules that are impartial, prioritarian, and solidaristic. They comprise a class of rules which equalize across individuals some index of resources and welfare. Consequently, we provide an ethical rationalization for the many applications in which such indices have been used (e.g., the 'human development index,' 'index of primary goods,' etc.). Classification-JEL: D63, D71 Keywords: Impartiality, Solidarity, Priority, Allocation rules, Characterization result Note: CFP 1185. Length: 24 pages Creation-Date: 200408 Revision-Date: 200505 Publication-Status: Published in Econometrica (2006), 27(5): 311-325 Number: 1477B Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1477-b.pdf File-Format: application/pdf File-Size: 274 kb Handle: RePEc:cwl:cwldpp:1477B Template-type: ReDIF-Paper 1.0 Author-Name: Donald W.K. Andrews Author-X-Name-First: Donald W.K. Author-X-Name-Last: Andrews Author-Email: donald.andrews@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/andrews.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Marcelo J. Moreira Author-X-Name-First: Marcelo J. Author-X-Name-Last: Moreira Author-Workplace-Name: Harvard University Author-Workplace-Homepage: http://www.economics.harvard.edu/ Author-Name: James H. Stock Author-X-Name-First: James H. Author-X-Name-Last: Stock Author-Workplace-Name: Harvard University Author-Workplace-Homepage: http://www.economics.harvard.edu/ Title: Optimal Invariant Similar Tests for Instrumental Variables Regression Abstract: This paper considers tests of the parameter on endogenous variables in an instrumental variables regression model. The focus is on determining tests that have some optimal power properties. We start by considering a model with normally distributed errors and known error covariance matrix. We consider tests that are similar and satisfy a natural rotational invariance condition. We determine tests that maximize weighted average power (WAP) for arbitrary weight functions among invariant similar tests. Such tests include point optimal (PO) invariant similar tests. The results yield the power envelope for invariant similar tests. This allows one to assess and compare the power properties of existing tests, such as the Anderson-Rubin, Lagrange multiplier (LM), and conditional likelihood ratio (CLR) tests, and new optimal WAP and PO invariant similar tests. We find that the CLR test is quite close to being uniformly most powerful invariant among a class of two-sided tests. A new unconditional test, P*, also is found to have this property. For one-sided alternatives, no test achieves the invariant power envelope, but a new test -- the one-sided CLR test -- is found to be fairly close. The finite sample results of the paper are extended to the case of unknown error covariance matrix and possibly non-normal errors via weak instrument asymptotics. Strong instrument asymptotic results also are provided because we seek tests that perform well under both weak and strong instruments. Classification-JEL: C12, C30 Keywords: Instrumental variables regression, invariant tests, optimal tests, similar tests, weak instruments, weighted average power Note: CFP 1168. Length: 83 pages Creation-Date: 200408 Number: 1476 Publication-Status: Published in Econometrica (May 2006), 74(3): 715-752 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1476.pdf File-Format: application/pdf File-Size: 1040 kb Handle: RePEc:cwl:cwldpp:1476 Template-type: ReDIF-Paper 1.0 Author-Name: Liudas Giraitis Author-X-Name-First: Liudas Author-X-Name-Last: Giraitis Author-Workplace-Name: University of York, UK Author-Workplace-Homepage: http://www.york.ac.uk/ Author-Name: Peter C.B. Phillips Author-X-Name-First: Peter C.B. Author-X-Name-Last: Phillips Author-Email: peter.phillips@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/phillips.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Uniform Limit Theory for Stationary Autoregression Abstract: First order autoregression is shown to satisfy a limit theory which is uniform over stationary values of the autoregressive coefficient rho = rho_{n} in [0,1) provided (1 - rho_{n})n approaches infinity. This extends existing Gaussian limit theory by allowing for values of stationary rho that include neighbourhoods of unity provided they are wider than O(n^{1}), even by a slowly varying factor. Rates of convergence depend on rho and are at least squareroot of squareroot of n but less than n. Only second moments are assumed, as in the case of stationary autoregression with fixed rho. Classification-JEL: C22 Keywords: Autoregression, Gaussian limit theory, local to unity, uniform limit Note: CFP 1166 Length: 9 pages Creation-Date: 200407 Number: 1475 Publication-Status: Published in Journal of Time Series Analysis (2006), 27(1): 51-60 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1475.pdf File-Format: application/pdf File-Size: 152 kb Handle: RePEc:cwl:cwldpp:1475 Template-type: ReDIF-Paper 1.0 Author-Name: Offer Lieberman Author-X-Name-First: Offer Author-X-Name-Last: Lieberman Author-Workplace-Name: Technion-Israel Institute of Technology Author-Workplace-Homepage: http://iew3.technion.ac.il/ Author-Name: Peter C.B. Phillips Author-X-Name-First: Peter C.B. Author-X-Name-Last: Phillips Author-Email: peter.phillips@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/phillips.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Expansions for Approximate Maximum Likelihood Estimators of the Fractional Difference Parameter Abstract: This paper derives second-order expansions for the distributions of the Whittle and profile plug-in maximum likelihood estimators of the fractional difference parameter in the ARFIMA(0,d,0) with unknown mean and variance. Both estimators are shown to be second-order pivotal. This extends earlier findings of Lieberman and Phillips (2001), who derived expansions for the Gaussian maximum likelihood estimator under the assumption that the mean and variance are known. One implication of the results is that the parametric bootstrap upper one-sided confidence interval provides an o(n^{-1}ln n) improvement over the delta method. For statistics that are not second-order pivotal, the improvement is generally only of the order o(n^{-1/2}ln n). Classification-JEL: C13, C22 Keywords: Bootstrap; Edgeworth expansion; Fractional differencing; Pivotal statistic Note: CFP 1157. Length: 19 pages Creation-Date: 200407 Number: 1474 Publication-Status: Published in Econometrics Journal (2005), 8: 367-379 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1474.pdf File-Format: application/pdf File-Size: 215 kb Handle: RePEc:cwl:cwldpp:1474 Template-type: ReDIF-Paper 1.0 Author-Name: Rustam Ibragimov Author-X-Name-First: Rustam Author-X-Name-Last: Ibragimov Author-Workplace-Name: Department of Economics, Yale University Author-Workplace-Homepage: http://www.econ.yale.edu/ Author-Name: Peter C.B. Phillips Author-X-Name-First: Peter C.B. Author-X-Name-Last: Phillips Author-Email: peter.phillips@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/phillips.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Regression Asymptotics Using Martingale Convergence Methods Abstract: Weak convergence of partial sums and multilinear forms in independent random variables and linear processes to stochastic integrals now plays a major role in nonstationary time series and has been central to the development of unit root econometrics. The present paper develops a new and conceptually simple method for obtaining such forms of convergence. The method relies on the fact that the econometric quantities of interest involve discrete time martingales or semimartingales and shows how in the limit these quantities become continuous martingales and semimartingales. The limit theory itself uses very general convergence results for semimartingales that were obtained in work by Jacod and Shiryaev (2003). The theory that is developed here is applicable in a wide range of econometric models and many examples are given. One notable outcome of the new approach is that it provides a unified treatment of the asymptotics for stationary autoregression and autoregression with roots at or near unity, as both these cases are subsumed within the martingale convergence approach and different rates of convergence are accommodated in a natural way. The approach is also useful in developing asymptotics for certain nonlinear functions of integrated processes, which are now receiving attention in econometric applications, and some new results in this area are presented. The paper is partly of pedagogical interest and the conceptual simplicity of the methods is appealing. Since this is the first time the methods have been used in econometrics, the exposition is presented in some detail with illustrations of new derivations of some well-known existing results, as well as some new asymptotic results and the unification of the limit theory for autoregression. Classification-JEL: C13, C14, C32 Keywords: Semimartingale, martingale, convergence, stochastic integrals, bilinear forms, multilinear forms, U-statistics, unit root, stationarity, Brownian motion, invariance principle, unification Note: CFP 1245. Length:42 pages Creation-Date: 200407 Number: 1473 Publication-Status: Published in Econometric Theory (August 2008), 24(4): 888-947 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1473.pdf File-Format: application/pdf File-Size: 552 kb Handle: RePEc:cwl:cwldpp:1473 Template-type: ReDIF-Paper 1.0 Author-Name: Peter C.B. Phillips Author-X-Name-First: Peter C.B. Author-X-Name-Last: Phillips Author-Email: peter.phillips@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/phillips.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Challenges of Trending Time Series Econometrics Abstract: We discuss some challenges presented by trending data in time series econometrics. To the empirical economist there is little guidance from theory about the source of trend behavior and even less guidance about practical formulations. Moreover, recent proximity theorems reveal that trends are more elusive to model empirically than stationary processes, with the upshot that optimal forecasts are also harder to estimate when the data involve trends. These limitations are implicitly acknowledged in much practical modeling and forecasting work, where adaptive methods are often used to help keep models on track as trends evolve. The paper discusses these broader issues and limitations of econometrics and o.ers some thoughts on new practical possibilities for data analysis in the absence of good theory models for trends. In particular, a new concept of coordinate cointegration is introduced and some new econometric methodology is suggested for analyzing trends and comovement and for producing forecasts in a general way that is agnostic about the specific nature of the trend process. Some simulation exercises are conducted and some long historical series on prices and yields on long securities are used to illustrate the methods. Classification-JEL: C100, C500, C870 Keywords: Coordinate instrumental variables, coordinate reduced rank regression, coordinate trend functions, limitations of econometrics, nonstationarity, trend Note: CFP 1151. Length: 20 pages Creation-Date: 200407 Number: 1472 Publication-Status: Published in Mathematics and Computers in Simulation (2005), 68: 401-416 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1472.pdf File-Format: application/pdf File-Size: 271 kb Handle: RePEc:cwl:cwldpp:1472 Template-type: ReDIF-Paper 1.0 Author-Name: Peter C.B. Phillips Author-X-Name-First: Peter C.B. Author-X-Name-Last: Phillips Author-Email: peter.phillips@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/phillips.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Tassos Magdalinos Author-X-Name-First: Tassos Author-X-Name-Last: Magdalinos Author-Workplace-Name: University of York Author-Workplace-Homepage: http://www.york.ac.uk/ Title: Limit Theory for Moderate Deviations from a Unit Root Abstract: An asymptotic theory is given for autoregressive time series with a root of the form rho_{n} = 1+c/n^{alpha}, which represents moderate deviations from unity when alpha in (0,1). The limit theory is obtained using a combination of a functional law to a diffusion on D[0,infinity) and a central limit law to a scalar normal variate. For c < 0, the results provide a n^{(1+alpha)/2} rate of convergence and asymptotic normality for the first order serial correlation, partially bridging the square root of n and n convergence rates for the stationary (alpha = 0) and conventional (alpha = 1) local to unity cases. For c > 0, the serial correlation coefficient is shown to have a n^{alpha}rho_{n}^{n} convergence rate and a Cauchy limit distribution without assuming Gaussian errors, so an invariance principle applies when rho_{n} > 1. This result links moderate deviation asymptotics to earlier results on the explosive autoregression proved under Gaussian errors for alpha = 0, where the convergence rate of the serial correlation coefficient is (1 + c)^{n} and no invariance principle applies. Classification-JEL: C22 Keywords: Central limit theory; Diffusion, Explosive autoregression, Local to unity, Moderate deviations, Unit root distribution Length: 27 pages Creation-Date: 200407 Number: 1471 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1471.pdf File-Format: application/pdf File-Size: 291 kb Handle: RePEc:cwl:cwldpp:1471 Template-type: ReDIF-Paper 1.0 Author-Name: Peter C.B. Phillips Author-X-Name-First: Peter C.B. Author-X-Name-Last: Phillips Author-Email: peter.phillips@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/phillips.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: HAC Estimation by Automated Regression Abstract: A simple regression approach to HAC and LRV estimation is suggested. The method exploits the fact that the quantities of interest relate to only one point of the spectrum (the origin). The new estimator is simply the explained sum of squares in a linear regression whose regressors are a set of trend basis functions. Positive definiteness in the estimate is therefore automatically enforced and the technique can be implemented with standard regression packages. No kernel choice is needed in practical implementation but basis functions need to be chosen and a smoothing parameter corresponding to the number of basis functions needs to be selected. An automated approach to making this selection based on optimizing the asymptotic mean squared error is derived. The limit theory of the new estimator shows that its properties, including the convergence rate, are comparable to those of conventional HAC estimates constructed from quadratic kernels. Classification-JEL: C22 Keywords: Asymptotic mean squared error, automation, bias, HAC estimation, long run variance, trend regression, trigonometric polynomial Note: CFP 1158 Length: 24 pages Creation-Date: 200407 Number: 1470 Publication-Status: Published in Econometric Theory (2005), 21(1): 116-147 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1470.pdf File-Format: application/pdf File-Size: 276 kb Handle: RePEc:cwl:cwldpp:1470 Template-type: ReDIF-Paper 1.0 Author-Name: Peter C.B. Phillips Author-X-Name-First: Peter C.B. Author-X-Name-Last: Phillips Author-Email: peter.phillips@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/phillips.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Automated Discovery in Econometrics Abstract: Our subject is the notion of automated discovery in econometrics. Advances in computer power, electronic communication, and data collection processes have all changed the way econometrics is conducted. These advances have helped to elevate the status of empirical research within the economics profession in recent years and they now open up new possibilities for empirical econometric practice. Of particular significance is the ability to build econometric models in an automated way according to an algorithm of decision rules that allow for (what we call here) heteroskedastic and autocorrelation robust (HAR) inference. Computerized search algorithms may be implemented to seek out suitable models, thousands of regressions and model evaluations may be performed in seconds, statistical inference may be automated according to the properties of the data, and policy decisions can be made and adjusted in real time with the arrival of new data. We discuss some aspects and implications of these exciting, emergent trends in econometrics. Classification-JEL: C32, C100, C500, C870 Keywords: Automation, discovery, HAC estimation, HAR inference, model building, online econometrics, policy analysis, prediction, trends Note: CFP 1149. Length: 21 pages Creation-Date: 200407 Number: 1469 Publication-Status: Published in Econometric Theory (2005), 21(1) :3-20 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1469.pdf File-Format: application/pdf File-Size: 191 kb Handle: RePEc:cwl:cwldpp:1469 Template-type: ReDIF-Paper 1.0 Author-Name: Ana Fostel Author-X-Name-First: Ana Author-X-Name-Last: Fostel Author-Workplace-Name: Dept. of Economics, George Washington University Author-Name: John Geanakoplos Author-X-Name-First: John Author-X-Name-Last: Geanakoplos Author-Email: john.geanakoplos@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/geanakoplos.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Collateral Restrictions and Liquidity Under-Supply: A Simple Model Abstract: We show that very little is needed to create liquidity under-supply in equilibrium. Credit constraints on demand by themselves can cause an under-supply of liquidity, without the uncertainty, intermediation, asymmetric information or complicated international financial framework used in other models in the literature. We show that the under-supply is a non-monotone function of the demand distortion that causes it, a result that may have interesting implications for emerging markets economies. Finally, when we make the credit constraint endogenous, the inefficiency can be large due to the presence of a multiplier. Classification-JEL: D51, E44, F30, G15 Keywords: Liquidity under-supply, Credit constraint, Non-monotonicity, Multiplier, Collateral equilibrium Note: CFP 1236. Length: 31 pages Creation-Date: 200406 Revision-Date: 200608 Number: 1468R Publication-Status: Published in Economic Theory (2008), 35: 441-467 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1468-r.pdf File-Format: application/pdf File-Size: 588 kb Handle: RePEc:cwl:cwldpp:1468R Template-type: ReDIF-Paper 1.0 Author-Name: Ana Fostel Author-X-Name-First: Ana Author-X-Name-Last: Fostel Author-Workplace-Name: Department of Economics, Yale University Author-Workplace-Homepage: http://www.econ.yale.edu/ Author-Name: John Geanakoplos Author-X-Name-First: John Author-X-Name-Last: Geanakoplos Author-Email: john.geanakoplos@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/geanakoplos.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Non-Monotone Liquidity Under-Supply Abstract: We define liquidity as the flexibility to move goods (money) from one project (investment) to another. We show that credit constraints on demand by themselves can cause an under-supply of liquidity, without the uncertainty, intermediation, asymmetric information or complicated international financial framework used in other models in the literature. In this respect liquidity is like a commodity: according to our offsetting distortions principle, a distortion in the demand for any good can often be understood as an inefficiency of supply. We show that the liquidity under-supply is a non-monotone function of the credit constraint. This result is also a particular case of a more general principle applying to any commodity with supply alternatives: second best supply inefficiency is non-monotone in the demand distortion. Defining liquidity as flexibility ensures that there will be alternatives, and thus non monotonicity. If we interpret the credit constraints as the degree of financial development in the economy, our second proposition suggests that when financial markets are very undeveloped, as in some emerging markets, financial innovation may paradoxically make government intervention (taxation) more necessary. Finally, we think about the magnitude of the under-supply in the context of a specific demand distortion. We model the credit constraint by assuming that borrowers will default unless their promises are covered by collateral. Further, we assume that only an exogenous proportion beta of a durable good can serve as collateral. This parameter will represent the degree of financial development of the economy. We show that when the price of the collateral is endogenous, the magnitude of the under supply can be much larger. Any policy intervention that affects the interest rate in equilibrium will have two effects on the borrowing constraint: a direct effect, also present in the case when the credit constraint is exogenous, and an indirect effect through the price of the collateral. We explore our findings by solving and simulating a particular case in which utilities for the consumption good and collateral are quadratic. Classification-JEL: D51, E44, F30, G15 Keywords: Liquidity under-supply, Credit constraint, Non-monotonicity, Multiplier, Collateral equilibrium Length: 28 pages Creation-Date: 200407 Number: 1468 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1468.pdf File-Format: application/pdf File-Size: 302 kb Handle: RePEc:cwl:cwldpp:1468 Template-type: ReDIF-Paper 1.0 Author-Name: Pradeep Dubey Author-X-Name-First: Pradeep Author-X-Name-Last: Dubey Author-Workplace-Name: NYU, Stony Brook Author-Workplace-Homepage: http://sunysb.edu/ Author-Name: John Geanakoplos Author-X-Name-First: John Author-X-Name-Last: Geanakoplos Author-Email: john.geanakoplos@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/geanakoplos.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Grading Exams: 100, 99, ..., 1 or A, B, C? Incentives in Games of Status Abstract: We show that if students care primarily about their status (relative rank) in class, they are best motivated to work not by revealing their exact numerical exam scores (100,99,...,1), but instead by clumping them in broad categories (A,B,C). If their abilities are disparate, the optimal grading scheme awards fewer A's than there are alpha-quality students, creating small elites. If their abilities are common knowledge, then it is better to grade them on an absolute scale (100 to 90 is an A, etc.) rather than on a curve (top 15% is an A, etc.). We develop criteria for optimal grading schemes in terms of the stochastic dominance between student performances. Classification-JEL: C70, I20, I30 Keywords: Status, Incentives, Education, Grading, Wages Length: 34 pages Creation-Date: 200407 Number: 1467 Publication-Status: Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1467.pdf File-Format: application/pdf File-Size: 365 kb Handle: RePEc:cwl:cwldpp:1467 Template-type: ReDIF-Paper 1.0 Author-Name: Donald J. Brown Author-X-Name-First: Donald J. Author-X-Name-Last: Brown Author-Email: donald.brown@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/brown.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: G.A. Wood Author-X-Name-First: G.A. Author-X-Name-Last: Wood Title: Competition, Consumer Welfare and Monopoly Power Abstract: An applied general equilibrium analysis of monopoly power is proposed as an alternative to the partial equilibrium analyses of monopoly pricing current in antitrust economics. This analysis introduces a new notion of market equilibrium where firms with monopoly power are cost-minimizing price-takers in competitive factor markets and make supracompetitive profits in equilibrium, i.e., the monopoly price exceeds the marginal cost of production. We assume that the primary goals of antitrust policy are the promotion of competition and the enhancement of consumer welfare. To that end, we use Debreu's coefficient of resource utilization to determine the counterfactual competitive price levels in monopolized markets and then impute the economic costs of monopolization. Classification-JEL: D42, D58, D61, L12, L41 Keywords: Monopoly power, Antitrust economics, Applied general equilibrium analysis Length: 14 pages Creation-Date: 200405 Revision-Date: 200408 Number: 1466R Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1466-r.pdf File-Format: application/pdf File-Size: 151 kb Handle: RePEc:cwl:cwldpp:1466R Template-type: ReDIF-Paper 1.0 Author-Name: Donald J. Brown Author-X-Name-First: Donald J. Author-X-Name-Last: Brown Author-Email: donald.brown@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/brown.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: G.A. Wood Author-X-Name-First: G.A. Author-X-Name-Last: Wood Title: The Social Cost of Monopoly Power Abstract: A general equilibrium analysis of monopoly power is proposed as an alternative to the partial equilibrium analyses of monopolization common to most antitrust texts. This analysis introduces the notion of a cost minimizing market equilibrium. The empirical implications of this equilibrium concept for antitrust policy is derived in terms of a family of equilibrium inequalities over market data from observations on a market economy with competitive factor markets. The social cost of monopoly power is measured using Debreu's coefficient of resource utilization. That is, we propose Pareto optimality as the ultimate objective of antitrust policy. Classification-JEL: D42, D58, D61, L12, L41 Keywords: Monopoly power, Antitrust economics, Applied general equilibrium analysis Length: 24 pages Creation-Date: 200405 Number: 1466 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1466.pdf File-Format: application/pdf File-Size: 284 kb Handle: RePEc:cwl:cwldpp:1466 Template-type: ReDIF-Paper 1.0 Author-Name: Hanming Fang Author-X-Name-First: Hanming Author-X-Name-Last: Fang Author-Workplace-Name: Department of Economics, Yale University Author-Workplace-Homepage: http://www.econ.yale.edu/ Author-Name: Dan Silverman Author-X-Name-First: Dan Author-X-Name-Last: Silverman Author-Workplace-Name: University of Michigan Title: Time-inconsistency and Welfare Program Participation: Evidence from the NLSY Abstract: We empirically implement a dynamic structural model of labor supply and welfare program participation for agents with potentially time-inconsistent preferences. Using panel data on the choices of single women with children from the NLSY 1979, we provide estimates of the degree of time-inconsistency, and of its influence on the welfare take-up decision. With these estimates, we conduct counterfactual experiments to quantify the utility loss stemming from the inability to commit to future decisions, and the potential utility gains from commitment mechanisms such as welfare time limits and work requirements. Classification-JEL: J22, I38 Keywords: Time inconsistent preferences, Welfare reform, Labor supply Length:49 pages Creation-Date: 200406 Number: 1465 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1465.pdf File-Format: application/pdf File-Size: 724 kb Handle: RePEc:cwl:cwldpp:1465 Template-type: ReDIF-Paper 1.0 Author-Name: Shamena Anwar Author-X-Name-First: Shamena Author-X-Name-Last: Anwar Author-Workplace-Name: Department of Economics, YaleUniversity Author-Workplace-Homepage: http://www.econ.yale.edu/ Author-Name: Hanming Fang Author-X-Name-First: Hanming Author-X-Name-Last: Fang Author-Workplace-Name: Department of Economics, Yale University Author-Workplace-Homepage: http://www.econ.yale.edu/ Title: An Alternative Test of Racial Prejudice in Motor Vehicle Searches: Theory and Evidence Abstract: We exploit a simple but realistic model of trooper behavior to design empirical tests that address the following two questions. Are police monolithic in their search behavior? Is racial profiling in motor vehicle searches motivated by troopers' desire for effective policing (statistical discrimination) or by their racial prejudice (racism)? Our tests require data sets with race information about both the motorists and troopers. When applied to vehicle stop and search data from Florida, our tests can soundly reject the null hypothesis that troopers of different races are monolithic in their search behavior, but fail to reject the null hypothesis that none of the racial groups of troopers are racially prejudiced. Classification-JEL: J7 Keywords: Statistical Discrimination, Racial Prejudice, Racial Profiling Length: 36 pages Creation-Date: 200407 Number: 1464 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1464.pdf File-Format: application/pdf File-Size: 768 kb Handle: RePEc:cwl:cwldpp:1464 Template-type: ReDIF-Paper 1.0 Author-Name: Dirk Bergemann Author-X-Name-First: Dirk Author-X-Name-Last: Bergemann Author-Email: dirk.bergemann@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/bergemann.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Juuso Valimaki Author-X-Name-First: Juuso Author-X-Name-Last: Valimaki Author-Workplace-Name: Department of Economics, University of Southampton Title: Monopoly Pricing of Experience Goods Abstract: We develop a dynamic model of experience goods pricing with independent private valuations. We show that the optimal paths of sales and prices can be described in terms of a simple dichotomy. In a mass market, prices are declining over time. In a niche market, the optimal prices are initially low followed by higher prices that extract surplus from the buyers with a high willingness to pay. We consider extensions of the model to integrate elements of social rather than private learning and turnover among buyers. Classification-JEL: D81, D83 Keywords: Monopoly, dynamic pricing, learning, experience goods, continuous time, Markov perfect equilibrium Note: CFP 1175 Length: 46 pages Creation-Date: 200406 Revision-Date: 200505 Number: 1463R Publication-Status: Published in Journal of Political Economy (2006), 114(4): 713-743 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1463-r.pdf File-Format: application/pdf File-Size: 229 kb Handle: RePEc:cwl:cwldpp:1463 Template-type: ReDIF-Paper 1.0 Author-Name: Woojin Lee Author-X-Name-First: Woojin Author-X-Name-Last: Lee Author-Workplace-Name: University of Massachusetts Author-Name: John E. Roemer Author-X-Name-First: John E. Author-X-Name-Last: Roemer Author-Email: john.roemer@yale.edu Author-Homepage: http://pantheon.yale.edu/~jer39/ Author-Workplace-Name: Dept. Political Science, Yale University Author-Workplace-Homepage: http://www.yale.edu/polisci/ Classification-JEL: D3, D7, H2 Title: Racism and Redistribution in the United States: A Solution to the Problem of American Exceptionalism Abstract: The two main political parties in the United States put forth policies on redistribution and on issues pertaining directly to race. We argue that redistributive politics in America can be fully understood only by taking account of the interconnection between these issues, and the effects of political competition upon the multi-dimensional party platforms. We identify two mechanisms through which racism among American voters decreases the degree of redistribution that would otherwise obtain. Many authors have suggested that voter racism decreases the degree of redistribution due to an anti-solidarity effect: that (some) voters oppose government transfer payments to minorities whom they view as undeserving. We point to a second effect as well: that some voters who desire redistribution nevertheless vote for the anti-redistributive party (the Republicans) because that party's position on the race issue is more consonant with their own, and this, too, decreases the degree of redistribution. We call this the policy bundle effect. The effect of voter racism on redistribution is the sum of these two effects. We propose a formal model of multi-dimensional political competition that enables us to estimate the magnitude of these two effects, and estimate the model for the period 1976-1992. We numerically compute that during this period voter racism reduced the income tax rate by 11-18 percentage points; the total effect decomposes about equally into the two sub-effects. We also find that the Democratic vote share is 5-38 percentage points lower than it would have been, absent racism. Keywords: racism, distribution,endogenous parties, party unanimity Nash equilibrium, anti-solidarity effect Note: CFP 1190. Length: 83 pages Creation-Date: 200406 Number: 1462 Publication-Status: Published in Journal of Public Economics (2006), 90: 1027-1052 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1462.pdf File-Format: application/pdf File-Size: 1187 kb Handle: RePEc:cwl:cwldpp:1462 Template-type: ReDIF-Paper 1.0 Author-Name: Robert J. Shiller Author-X-Name-First: Robert J. Author-X-Name-Last: Shiller Author-Email: robert.shiller@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/shiller.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Radical Financial Innovation Abstract: Radical financial innovation is the development of new institutions and methods that permit risk management to be extended far beyond its former realm, covering important new classes of risks. This paper compares past such innovation with potential future innovation, looking at the process that produced past success and the possibilities for future financial innovation. Classification-JEL: G10 Keywords: risk management, institutions, incomplete markets, livelihood insurance, behavioral finance, livelihood risks, home equity insurance, country risks Length: 28 pages Creation-Date: 200404 Number: 1461 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1461.pdf File-Format: application/pdf File-Size: 71 kb Handle: RePEc:cwl:cwldpp:1461 Template-type: ReDIF-Paper 1.0 Author-Name: Thomas Quint Author-X-Name-First: Thomas Author-X-Name-Last: Quint Author-Workplace-Name: University of Nevada at Reno Author-Name: Martin Shubik Author-X-Name-First: Martin Author-X-Name-Last: Shubik Author-Email: martin.shubik@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/shubik.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Gold, Fiat and Credit. An Elementary Discussion of Commodity Money, Fiat Money and Credit, Part II Abstract: In this paper we present a series of models, all within the context of a simple two-good economy, which bring out the distinctions between the different types of money and financial institutions. The models emphasize the physical properties of the economic goods, moneys, and trading systems. In Part 1 of the paper, we covered models in which the money is a consumable storable; here in Part 2 we consider economies using durable money, fiat money, or credit. Under this framework we are able to successfully contrast the role of private money lenders, banks, bilateral credit systems, and credit clearinghouses. We are also able to model the importance of the bankruptcy or default penalty in supporting the use of fiat. Classification-JEL: C72, C91, D52, D84, E41, E43, E51, E58, G21, K12, L12, N20, P10 Keywords: Barley, gold, fiat and credit, evolution of money Length: 47 pages Creation-Date: 200404 Number: 1460 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1460.pdf File-Format: application/pdf File-Size: 430 kb Handle: RePEc:cwl:cwldpp:1460 Template-type: ReDIF-Paper 1.0 Author-Name: Robert J. Shiller Author-X-Name-First: Robert J. Author-X-Name-Last: Shiller Author-Email: robert.shiller@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/shiller.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Household Reaction to Changes in Housing Wealth Abstract: It is widely claimed that housing wealth, as well as stock prices, have an impact on consumption and hence on aggregate economic activity. This paper presents a broad overview of the issues that arise in evaluating this claim in the context of recent research in behavioral economics. Particular attention is paid to a model of the response of consumption to wealth components produced by Christopher Carroll [2004]. Classification-JEL: E21 Keywords: Wealth effect, home prices, stock prices, consumption, saving, life cycle theory, interest rates, inflation, bubble Length: 18 pages Creation-Date: 200404 Number: 1459 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1459.pdf File-Format: application/pdf File-Size: 57 kb Handle: RePEc:cwl:cwldpp:1459 Template-type: ReDIF-Paper 1.0 Author-Name: Herbert E. Scarf Author-X-Name-First: Herbert E. Author-X-Name-Last: Scarf Author-Email: herbert.scarf@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/scarf.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Kevin M. Woods Author-X-Name-First: Kevin M. Author-X-Name-Last: Woods Author-Workplace-Name: University of Michigan Author-Workplace-Homepage: http://www.umich.edu/ Title: Neighborhood Complexes and Generating Functions for Affine Semigroups Abstract: Given a_{1}; a_{2},...a_{n} in Z^{d}, we examine the set, G, of all nonnegative integer combinations of these ai. In particular, we examine the generating function f(z) = Sum_{b in G}z^{b}. We prove that one can write this generating function as a rational function using the neighborhood complex (sometimes called the complex of maximal lattice-free bodies or the Scarf complex) on a particular lattice in Z^{n}. In the generic case, this follows from algebraic results of D. Bayer and B. Sturmfels. Here we prove it geometrically in all cases, and we examine a generalization involving the neighborhood complex on an arbitrary lattice. Classification-JEL: C61 Keywords: Integer programming, Complex of maximal lattice free bodies, Generating functions Note: CFP 1169. Length: 24 pages Creation-Date: 200404 Number: 1458 Publication-Status: Published in Discrete and Computational Geometry (2006), 35: 385-403 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1458.pdf File-Format: application/pdf File-Size: 229 kb Handle: RePEc:cwl:cwldpp:1458 Template-type: ReDIF-Paper 1.0 Author-Name: William D. Nordhaus Author-X-Name-First: William D. Author-X-Name-Last: Nordhaus Author-Email: william.nordhaus@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/nordhaus.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Schumpeterian Profits in the American Economy: Theory and Measurement Abstract: The present study examines the importance of Schumpeterian profits in the United States economy. Schumpeterian profits are defined as those profits that arise when firms are able to appropriate the returns from innovative activity. We first show the underlying equations for Schumpeterian profits. We then estimate the value of these profits for the non-farm business economy. We conclude that only a miniscule fraction of the social returns from technological advances over the 1948-2001 period was captured by producers, indicating that most of the benefits of technological change are passed on to consumers rather than captured by producers. Classification-JEL: O30, O31, O4 Keywords: Schumpeter, profits, innovation Length: 27 pages Creation-Date: 200404 Number: 1457 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1457.pdf File-Format: application/pdf File-Size: 276 kb Handle: RePEc:cwl:cwldpp:1457 Template-type: ReDIF-Paper 1.0 Author-Name: Ricardo J. Caballero Author-X-Name-First: Ricardo J. Author-X-Name-Last: Caballero Author-Workplace-Name: MIT Author-Workplace-Homepage: http://web.mit.edu/ Author-Name: Eduardo M.R.A. Engel Author-X-Name-First: Eduardo M.R.A. Author-X-Name-Last: Engel Author-Email: eduardo.engel@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/engel.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Three Strikes and You're Out: Reply to Cooper and Willis Abstract: Cooper and Willis (2003) is the latest in a sequence of criticisms of our methodology for estimating aggregate nonlinearities when microeconomic adjustment is lumpy. Their case is based on "reproducing" our main findings using artificial data generated by a model where microeconomic agents face quadratic adjustment costs. That is, they supposedly find our results where they should not be found. The three claims on which they base their case are incorrect. Their mistakes range from misinterpreting their own simulation results to failing to understand the context in which our procedures should be applied. They also claim that our approach assumes that employment decisions depend on the gap between the target and current level of unemployment. This is incorrect as well, since the 'gap approach' has been derived formally from at least as sophisticated microeconomic models as the one they present. On a more positive note, the correct interpretation of Cooper and Willis's results shows that our procedures are surprisingly robust to significant departures from the assumptions made in our original derivations. Classification-JEL: E2, J2, J6 Keywords: Adjustment hazard, aggregate nonlinearities, lumpy adjustment, observed and unobserved gaps, quadratic adjustment Length: 13 pages Creation-Date: 200403 Number: 1456 Publication-Status: Published in American Economic Review (September 2004), 94(4): 1238-1244 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1456.pdf File-Format: application/pdf File-Size: 59 kb Handle: RePEc:cwl:cwldpp:1456 Template-Type: ReDIF-Paper 1.0 Author-Name: Thomas Quint Author-X-Name-First: Thomas Author-X-Name-Last: Quint Author-Workplace-Name: University of Nevada, Reno Author-Name: Martin Shubik Author-X-Name-First: Martin Author-X-Name-Last: Shubik Author-Email: martin.shubik@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/shubik.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: A Consumable Money. An Elementary Discussion of Commodity Money, Fiat Money and Credit: Part I Abstract: In this paper we present a series of models, all within the context of a simple two-good economy, which bring out the distinctions among the different types of money and financial institutions. The models emphasize the physical properties of the economic goods, moneys, and trading systems. Part 1 covers models in which the money is a consumable storable; the economies in Part 2 use durable money, fiat money, or credit. Under this framework we are able to successfully contrast the role of private money lenders, banks, bilateral credit systems, and credit clearinghouses. We are also able to model the importance of the bankruptcy or default penalty in supporting the use of fiat. Classification-JEL: C72, C91, D52, D84, E41, E43, E51, E58, G21, K12, L12, N20, P10 Keywords: Barley, Gold, Fiat and credit, Evolution of money Length: 38 pages Creation-Date: 200403 Number: 1455 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1455.pdf File-Format: application/pdf File-Size: 329 kb Handle: RePEc:cwl:cwldpp:1455 Template-Type: ReDIF-Paper 1.0 Author-Name: Oliver Linton Author-X-Name-First: Oliver Author-X-Name-Last: Linton Author-Email: lintono@lse.ac.uk Author-Homepage: http://econ.lse.ac.uk/staff/olinton/ Author-Workplace-Name: London School of Economics Author-Workplace-Homepage: http://www.lse.ac.uk/ Author-Name: Yoon-Jae Whang Author-X-Name-First: Yoon-Jae Author-X-Name-Last: Whang Author-Workplace-Name: Korea University Author-Workplace-Homepage: http://www.korea.ac.kr/ Title: A Quantilogram Approach to Evaluating Directional Predictability Abstract: In this note we propose a simple method of measuring directional predictability and testing for the hypothesis that a given time series has no directional predictability. The test is based on the correlogram of quantile hits. We provide the distribution theory needed to conduct inference, propose some model free upper bound critical values, and apply our methods to stock index return data. The empirical results suggests some directional predictability in returns especially in mid range quantiles like 5%-10%. Classification-JEL: C12, C13, C14, C22 Keywords: Correlogram; Dependence; Efficient Markets; Quantiles Length: 23 pages Creation-Date: 200403 Number: 1454 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1454.pdf File-Format: application/pdf File-Size: 1586 kb Handle: RePEc:cwl:cwldpp:1454 Template-Type: ReDIF-Paper 1.0 Author-Name: Yoon-Jae Whang Author-X-Name-First: Yoon-Jae Author-X-Name-Last: Whang Author-Workplace-Name: Korea University Author-Workplace-Homepage: http://www.korea.ac.kr/ Title: Smoothed Empirical Likelihood Methods for Quantile Regression Models Abstract: This paper considers an empirical likelihood method to estimate the parameters of the quantile regression (QR) models and to construct confidence regions that are accurate in finite samples. To achieve the higher-order refinements, we smooth the estimating equations for the empirical likelihood. We show that the smoothed empirical likelihood (SEL) estimator is first-order asymptotically equivalent to the standard QR estimator and establish that confidence regions based on the smoothed empirical likelihood ratio have coverage errors of order n^{-1} and may be Bartlett-corrected to produce regions with an error of order n^{-2}, where n denotes the sample size. We further extend these results to censored quantile regression models. Our results are extensions of the previous results of Chen and Hall (1993) to the regression contexts. Monte Carlo experiments suggest that the smoothed empirical likelihood confidence regions may be more accurate in small samples than the confidence regions that can be constructed from the smoothed bootstrap method recently suggested by Horowitz (1998). Classification-JEL: C12, C13, C15 Keywords: Bartlett correction, Bootstrap, Edgeworth expansion, Empirical likelihood, Quantile regression model, Censored quantile regression model Length: 44 pages Creation-Date: 200403 Number: 1453 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1453.pdf File-Format: application/pdf File-Size: 699 kb Handle: RePEc:cwl:cwldpp:1453 Template-Type: ReDIF-Paper 1.0 Author-Name: Dietmar Bauer Author-X-Name-First: Dietmar Author-X-Name-Last: Bauer Author-Workplace-Name: TU Wien Title: Using Subspace Methods for Estimating ARMA Models for Multivariate Time Series with Conditionally Heteroskedastic Innovations Abstract: This paper deals with the estimation of linear dynamic models of the ARMA type for the conditional mean for time series with conditionally heteroskedastic innovation process widely used in modelling financial time series. Estimation is performed using subspace methods which are known to have computational advantages as compared to prediction error methods based on criterion minimization. These advantages are especially strong for high dimensional time series. The subspace methods are shown to provide consistent estimators. Moreover asymptotic equivalence to prediction error estimators in terms of the asymptotic variance is proved. Also order estimation techniques are proposed and analyzed. The estimators are not efficient as they do not model the conditional variance. Nevertheless, they can be used to obtain consistent estimators of the innovations. In a second step these estimated residuals can be used in order to levitate the problem of specifying the variance model in particular in the multi-output case. This is demonstrated in an ARCH setting, where it is proved that the estimated innovations can be used in place of the true innovations for testing in a linear least squares context in order to specify the structure of the ARCH model without changing the asymptotic distribution. Classification-JEL: C13, C32 Keywords: Multivariate models, conditional heteroskedasticity, ARMA systems, subspace methods Length: 33 pages Creation-Date: 200402 Number: 1452 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1452.pdf File-Format: application/pdf File-Size: 351 kb Handle: RePEc:cwl:cwldpp:1452 Template-Type: ReDIF-Paper 1.0 Author-Name: V. Bhaskar Author-X-Name-First: V. Author-X-Name-Last: Bhaskar Author-Workplace-Name: University of Essex Author-Workplace-Homepage: http://www.essex.ac.uk/ Author-Name: George J. Mailath Author-X-Name-First: George J. Author-X-Name-Last: Mailath Author-Workplace-Name: University of Pennsylvania Author-Workplace-Homepage: http://www.upenn.edu/ Author-Name: Stephen Morris Author-X-Name-First: Stephen Author-X-Name-Last: Morris Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Purification in the Infinitely-Repeated Prisoners' Dilemma Abstract: This paper investigates the Harsanyi-purifiability of mixed strategies in the repeated prisoners' dilemma with perfect monitoring. We perturb the game so that in each period, a player receives a private payoff shock which is independently and identically distributed across players and periods. We focus on the purifiability of a class of one-period memory mixed strategy equilibria used by Ely and Valimaki in their study of the repeated prisoners' dilemma with private monitoring. We find that the strategy profile is purifiable by perturbed-game finite-memory strategies if and only if it is strongly symmetric, in the sense that after every history, both players play the same mixed action. Thus "most" strategy profiles are not purifiable by finite memory strategies. However, if we allow infinite memory strategies in the perturbed game, then any completely-mixed equilibrium is purifiable. Classification-JEL: C72 Keywords: Purification, Repeated Games, Belief-Free Equilibria, Imperfect Monitoring Length: 19 pages Creation-Date: 200402 Number: 1451 Publication-Status: Published in Review of Economic Dynamics (2008), 11: 515-528 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1451.pdf File-Format: application/pdf File-Size: 223 kb Handle: RePEc:cwl:cwldpp:1451 Template-Type: ReDIF-Paper 1.0 Author-Name: M. Keith Chen Author-X-Name-First: M. Keith Author-X-Name-Last: Chen Author-Email: keith.chen@yale.edu Author-Homepage: http://www.som.yale.edu/faculty/keith.chen/ Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Jesse M. Shapiro Author-X-Name-First: Jesse M. Author-X-Name-Last: Shapiro Author-Workplace-Name: Harvard University Author-Workplace-Homepage: http://www.economics.harvard.edu/ Title: Does Prison Harden Inmates? A Discontinuity-based Approach Abstract: Some two million Americans are currently incarcerated, with roughly six hundred thousand to be released this year. Despite this, little is known about the effects of confinement conditions on the post-release lives of inmates. Focusing on post-release criminal activity, we identify the causal effect of prison conditions on recidivism rates by exploiting a discontinuity in the assignment of federal prisoners to security levels. We find that harsher prison conditions are associated with significantly more post-release crime. Classification-JEL: K14, K42, J24, H4 Keywords: Crime, Prison, Recidivism, Social Capital, Peer Effects, Regression Discontinuity Length: 32 pages Creation-Date: 200311 Number: 1450 Publication-Status: Published in American Law and Economics Review (June 2007) Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14b/d1450.pdf File-Format: application/pdf File-Size: 257 kb Handle: RePEc:cwl:cwldpp:1450 Template-Type: ReDIF-Paper 1.0 Author-Name: John Geanakoplos Author-X-Name-First: John Author-X-Name-Last: Geanakoplos Author-Email: john.geanakoplos@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/geanakoplos.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Felix Kubler Author-X-Name-First: Felix Author-X-Name-Last: Kubler Author-Workplace-Name: Stanford University Author-Workplace-Homepage: http://www.stanford.edu/ Title: Dollar Denominated Debt and Optimal Security Design Abstract: During a crisis, developing countries regret having issued dollar denominated debt because they have to pay more when they have less. Ex ante, however, they may be worse off issuing local currency debt because the equilibrium interest rate might rise, making it more expensive for them to borrow. Many authors have assumed that lenders and borrowers have contrary goals, and that local currency (peso) debt is better for the borrower (Bolivia), and dollar debt is better for the lender (America). We show that if each country is represented by a single consumer with quadratic utilities, in perfect competition, then both will agree ex ante on whether dollar debt or peso debt is better. (In fact all assets can be Pareto ranked). But we show that it might well be dollar debt that Pareto dominates. In particular, if the lender is sufficiently risk averse and the borrower sufficiently impatient, and the lender's endowment is sufficiently riskless, then dollar debt Pareto dominates peso debt. However, if there are persistent gains to risk sharing between the countries, then peso debt Pareto dominates dollar debt. In the special case where utilities are linear in the first period and quadratic in the second period, we can completely characterize the Pareto ranking of any asset by a formula depending only on marginal utilities at autarky. In the more general case where utilities are linear in the first period and have positive third derivative in the second period, we show that when persistent gains to risk sharing hold, America must gain from Peso debt but Bolivia might lose. Thus the presumption that peso debt is more favorable to Bolivia than to America is false. Our framework of optimal security design can be used to demonstrate one rationale for credit controls. If the purchasing power of a dollar overseas varies with the quantity of debt issued, then both America and Bolivia can gain from capital controls, because a tax that reduces the quantity of Bolivian debt might make the real dollar payoffs in Bolivia more `peso-like', and therefore under persistent gains to risk pooling, better for America and Bolivia. Classification-JEL: D61, F31, F34, G10, G12 Keywords: Dollar debt, Currency, Indexed bonds, Security design, Capital controls Length: 30 pages Creation-Date: 200312 Number: 1449 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1449.pdf File-Format: application/pdf File-Size: 302 kb Handle: RePEc:cwl:cwldpp:1449 Template-Type: ReDIF-Paper 1.0 Author-Name: Thomas Quint Author-X-Name-First: Thomas Author-X-Name-Last: Quint Author-Workplace-Name: University of Nevada, Reno Title: Absenteeism, Substitutes, and Complements and the Banzhaf Index Abstract: We consider the voting-with-absenteeism game of Quint-Shubik (2003). In that paper we defined a power index for such games, called the absentee index. Our analysis was based on the theory of the Shapley-Shubik power index (SSPI) for simple games. In this paper we do an analogous analysis, based on the Banzhaf index instead of the SSPI. The result is a new index, called the absentee Banzhaf index. We provide an axiomatization and multilinear extension formula for this index. Finally, we re-explore Myerson's (1977, 1980) "balanced contributions" property, and the concept of substitutes and complements for simple games (Quint-Shubik 2003), again basing our analysis on the Banzhaf index instead of the SSPI. Classification-JEL: C7, C71, D72 Keywords: Simple game, Shapley-Shubik power index, Banzhaf index, Absenteeism, Multilinear extension, Balanced contributions, Substitute, Complement Length: 16 pages Creation-Date: 200312 Number: 1448 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1448.pdf File-Format: application/pdf File-Size: 196 kb Handle: RePEc:cwl:cwldpp:1448 Template-Type: ReDIF-Paper 1.0 Author-Name: Thomas Quint Author-X-Name-First: Thomas Author-X-Name-Last: Quint Author-Workplace-Name: University of Nevada, Reno Author-Name: Martin Shubik Author-X-Name-First: Martin Author-X-Name-Last: Shubik Author-Email: martin.shubik@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/shubik.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Absenteeism, Substitutes, and Complements in Simple Games Abstract: A voting with absenteeism game is defined as a pair (G;r) where G is an n-player (monotonic) simple game and r is an n-vector for which r_i is the probability that player i attends a vote. We define a power index for such games, called the absentee index. We axiomatize the absentee index and provide a multilinear extension formula for it. Using this analysis we re-derive Myerson's (1977, 1980) ibalanced contributionsi property for the Shapley-Shubik power index. In fact, we derive a formula which quantitatively gives the amount of the ibalanced contributionsi in terms of the coefficients of the multilinear extension of the game. Finally, we define the notion of substitutes and complements in simple games. We compare these concepts with the familiar concepts of dummy player, veto player, and master player. Classification-JEL: C7, C71, D72 Keywords: Simple game, Shapley-Shubik power index, Absenteeism, Multilinear extension, Balanced contributions, Substitute, Complement Length: 18 pages Creation-Date: 200312 Number: 1447 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1447.pdf File-Format: application/pdf File-Size: 229 kb Handle: RePEc:cwl:cwldpp:1447 Template-type: ReDIF-Paper 1.0 Author-Name: Dilip Abreu Author-X-Name-First: Dilip Author-X-Name-Last: Abreu Author-Email: dabrei@princeton.edu Author-Workplace-Name: Princeton University Author-Workplace-Homepage: http://www.princeton.edu/main/ Author-Name: David Pearce Title: A Behavioral Model of Bargaining with Endogenous Types Abstract: We enrich a simple two-person bargaining model by introducing "behavioral types" who concede more slowly than does the average person in the economy. The presence of behavioral types profoundly influences the choices of optimizing types. In equilibrium, concessions are calculated to induce "reciprocity": a substantial concession by player i is followed by a period in which j is much more likely to make a concession than usual. This favors concessions by i that are neither very small nor large enough to end the bargaining immediately. A key difference from the traditional method of perturbing a game is that the actions of our behavioral types are not specified in absolute terms, but relative to the norm in the population. Thus their behavior is determined endogenously as part of a social equilibrium. Classification-JEL: C7 Keywords: Bargaining, reputation, endogenous type Length: 59 pages Creation-Date: 200311 Number: 1446 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1446.pdf File-Format: application/pdf File-Size: 764 kb Handle: RePEc:cwl:cwldpp:1446 Template-type: ReDIF-Paper 1.0 Author-Name: Philip A. Haile Author-X-Name-First: Philip A. Author-X-Name-Last: Haile Author-Email: philip.haile@yale.edu Author-Homepage: http://www.econ.yale.edu/faculty1/haile.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Han Hong Author-X-Name-First: Han Author-X-Name-Last: Hong Author-Workplace-Name: Duke University Author-Workplace-Homepage: http://www.duke.edu/ Author-Name: Matthew Shum Author-X-Name-First: Matthew Author-X-Name-Last: Shum Author-Workplace-Name: Johns Hopkins University Author-Workplace-Homepage: http://www.econ.jhu.edu/ Title: Nonparametric Tests for Common Values in First-Price Sealed-Bid Auctions Abstract: We develop tests for common values at first-price sealed-bid auctions. Our tests are nonparametric, require observations only of the bids submitted at each auction, and are based on the fact that the "winner's curse" arises only in common values auctions. The tests build on recently developed methods for using observed bids to estimate each bidderis conditional expectation of the value of winning the auction. Equilibrium behavior implies that in a private values auction these expectations are invariant to the number of opponents each bidder faces, while with common values they are decreasing in the number of opponents. This distinction forms the basis of our tests. We consider both exogenous and endogenous variation in the number of bidders. Monte Carlo experiments show that our tests can perform well in samples of moderate sizes. We apply our tests to two different types of U.S. Forest Service timber auctions. For unit-price ("scaled") sales often argued to fit a private values model, our tests consistently fail to find evidence of common values. For "lumpsum" sales, where a priori arguments for common values appear stronger, our tests yield mixed evidence against the private values hypothesis. Classification-JEL: D4, D8, L1, C1, Q2 Keywords: First-price auctions, Common values, Private values, Nonparametric testing, Winner's curse, Stochastic dominance, Endogenous participation, Timber auctions Length: 57 pages Creation-Date: 200311 Number: 1445 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1445.pdf File-Format: application/pdf File-Size: 1079 kb Handle: RePEc:cwl:cwldpp:1445 Template-type: ReDIF-Paper 1.0 Author-Name: Hannes Leeb Author-X-Name-First: Hannes Author-X-Name-Last: Leeb Author-Email: hannes.leeb@yale.edu Author-Workplace-Name: Department of Statistics, Yale University Author-Workplace-Homepage: http://www.stat.yale.edu/ Author-Name: Benedikt M. Potscher Author-X-Name-First: Benedikt M. Author-X-Name-Last: Potscher Author-Workplace-Name: Departmemt. of Statistics, University of Vienna Title: Can One Estimate the Conditional Distribution of Post-Model-Selection Estimators? Abstract: We consider the problem of estimating the conditional distribution of a post-model-selection estimator where the conditioning is on the selected model. The notion of a post-model-selection estimator here refers to the combined procedure resulting from first selecting a model (e.g., by a model selection criterion like AIC or by a hypothesis testing procedure) and second estimating the parameters in the selected model (e.g., by least-squares or maximum likelihood), all based on the same data set. We show that it is impossible to estimate this distribution with reasonable accuracy even asymptotically. In particular, we show that no estimator for this distribution can be uniformly consistent (not even locally). This follows as a corollary to (local) minimax lower bounds on the performance of estimators for this distribution. Similar impossibility results are also obtained for the conditional distribution of linear functions (e.g., predictors) of the post-model-selection estimator. Classification-JEL: C21, C50 Keywords: Inference after model selection, Post-model-selection estimator, Pre-test estimator, Selection of regressors, Akaikeis information criterion AIC, Model uncertainty, Consistency, Uniform consistency, Lower risk bound Length: 33 pages Creation-Date: 200311 Number: 1444 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1444.pdf File-Format: application/pdf File-Size: 616 kb Handle: RePEc:cwl:cwldpp:1444 Template-type: ReDIF-Paper 1.0 Author-Name: Martin Shubik Author-X-Name-First: Martin Author-X-Name-Last: Shubik Author-Email: martin.shubik@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/shubik.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: A Double Auction Market: Teaching, Experiment and Theory Abstract: A simultaneous double auction market with bid and offer cards was utilized in classes on the theory and history of money and financial institutions and occasionally in classes on the theory of games. The prime purpose in using this game was to teach the students how to construct process models of economic phenomena. The second purpose was to consider the properties of the double auction market. The third purpose was to interpret the experimental results an link them to theory. Classification-JEL: C7, D44, C92, G1 Keywords: Double auctions, Experimental games, Allocation games, Noncooperative equilibria Note: CFP 1147. Length: 21 pages Creation-Date: 200310 Number: 1443 Publication-Status: Published in Simulation and Gaming (June 2005), 36(2): 166-182 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1443.pdf File-Format: application/pdf File-Size: 178 kb Handle: RePEc:cwl:cwldpp:1443 Template-type: ReDIF-Paper 1.0 Author-Name: Robert J. Shiller Author-X-Name-First: Robert J. Author-X-Name-Last: Shiller Author-Email: robert.shiller@yale.edu Author-Homepage: http://aida.wss.yale.edu/~shiller/ Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: The Invention of Inflation-Indexed Bonds in Early America Abstract: The world is first known inflation-indexed bonds were issued by the Commonwealth of Massachusetts in 1780 during the Revolutionary War. These bonds were invented to deal with severe wartime inflation and with angry discontent among soldiers in the U.S. Army with the decline in purchasing power of their pay. Although the bonds were successful, the concept of indexed bonds was abandoned after the immediate extreme inflationary environment passed, and largely forgotten until the twentieth century. In 1780, the bonds were viewed as at best only an irregular expedient, since there was no formulated economic theory to justify indexation. Classification-JEL: E31 Keywords: Indexation, Inflation History, Inflation-Indexed Securities, Inflation-Protected Securities, Index-linked gilts, Tabular Standard, United States, Massachusetts Length: 20 pages Creation-Date: 200310 Number: 1442 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1442.pdf File-Format: application/pdf File-Size: 231 kb Handle: RePEc:cwl:cwldpp:1442 Template-type: ReDIF-Paper 1.0 Author-Name: Hanming Fang Author-X-Name-First: Hanming Author-X-Name-Last: Fang Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://www.econ.yale.edu/ Author-Name: Peter Norman Author-X-Name-First: Peter Author-X-Name-Last: Norman Author-Workplace-Name: University of British Columbia Title: Optimal Provision of Multiple Excludable Public Goods Abstract: This paper studies the optimal provision mechanism for multiple excludable public goods when agents' valuations are private information. For a parametric class of problems with binary valuations, we characterize the optimal mechanism, and show that it involves bundling. Bundling alleviates the free riding problem in large economies in two ways: first, it can increase the asymptotic provision probability of socially efficient public goods from zero to one; second, it decreases the extent of use exclusions. Classification-JEL: H41 Keywords: Public Goods Provision, Bundling, Exclusion Length: 44 pages Creation-Date: 200310 Revision-Date: 200604 Number: 1441R Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1441-r.pdf File-Format: application/pdf File-Size: 382 kb Handle: RePEc:cwl:cwldpp:1441R Template-type: ReDIF-Paper 1.0 Author-Name: Hanming Fang Author-X-Name-First: Hanming Author-X-Name-Last: Fang Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Peter Norman Author-Workplace-Name: University of Wisconsin-Madison Title: An Efficiency Rationale for Bundling of Public Goods Abstract: This paper studies the role of bundling in the efficient provision of excludable public goods. We show that bundling in the provision of unrelated public goods can enhance social welfare. With a large number of goods and agents, first best can be approximated with pure bundling. For a parametric class of problems with binary valuations, we characterize the optimal mechanism, and show that bundling alleviates the free riding problem in large economies and decreases the extent of use exclusions. Both results are related to the idea that bundling makes it possible to reduce the incidence of exclusions because the variance in the relevant valuations decreases. Classification-JEL: H41 Keywords: Public goods provision, Bundling, Exclusion Length: 52 pages Creation-Date: 200310 Number: 1441 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1441.pdf File-Format: application/pdf File-Size: 678 kb Handle: RePEc:cwl:cwldpp:1441 Template-type: ReDIF-Paper 1.0 Author-Name: Hanming Fang Author-X-Name-First: Hanming Author-X-Name-Last: Fang Author-Workplace-Name: Cowles Foundation, Yale University Author-Name: Peter Norman Author-X-Name-First: Peter Author-X-Name-Last: Norman Author-Workplace-Name: University of Wisconsin-Madison Title: To Bundle or Not to Bundle Abstract: Commodity bundling is studied in an environment where the dispersion of valuations unambiguously decreases when two or more goods are sold as a bundle only. Bundling is more likely to dominate separately selling the goods if marginal costs are low relative to the average valuation, or if the distribution of valuations is very peaked around the mean. Classification-JEL: L11, L12 Keywords: Monopolistic pricing, Bundling, Peakedness Length: 12 pages Creation-Date: 200310 Number: 1440 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1440.pdf File-Format: application/pdf File-Size: 268 kb Handle: RePEc:cwl:cwldpp:1440 Template-type: ReDIF-Paper 1.0 Author-Name: Martin Shubik Author-X-Name-First: Martin Author-X-Name-Last: Shubik Author-Email: martin.shubik@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/shubik.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: The Edgeworth, Cournot and Walrasian Cores of an Economy Abstract: Three variations of the core of a market game representing an exchange economy are considered and compared. The possibility for utilizing the Walrasian core to reflect certain monetary phenomena is noted. Classification-JEL: C71, D5 Keywords: Market games, Strategic market game, Exchange economy, Core, Characteristic function Length: 10 pages Creation-Date: 200310 Number: 1439 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1439.pdf File-Format: application/pdf File-Size: 122 kb Handle: RePEc:cwl:cwldpp:1439 Template-type: ReDIF-Paper 1.0 Author-Name: Peter C.B. Phillips Author-X-Name-First: Peter C.B. Author-X-Name-Last: Phillips Author-Email: peter.phillips@yale.edu Author-Homepage: http://korora.econ.yale.edu/phillips/ Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Donggyu Sul Author-X-Name-First: Donggyu Author-X-Name-Last: Sul Author-Workplace-Name: Dept. Economics, Univ. of Auckland Title: Bias in Dynamic Panel Estimation with Fixed Effects, Incidental Trends and Cross Section Dependence Abstract: Explicit asymptotic bias formulae are given for dynamic panel regression estimators as the cross section sample size N approaching infinity. The results extend earlier work by Nickell (1981) and later authors in several directions that are relevant for practical work, including models with unit roots, deterministic trends, predetermined and exogenous regressors, and errors that may be cross sectionally dependent. The asymptotic bias is found to be so large when incidental linear trends are fitted and the time series sample size is small that it changes the sign of the autoregressive coe.cient. Another finding of interest is that, when there is cross section error dependence, the probability limit of the dynamic panel regression estimator is a random variable rather than a constant, which helps to explain the substantial variability observed in dynamic panel estimates when there is cross section dependence even in situations where N is very large. Some proposals for bias correction are suggested and finite sample performance is analyzed in simulations. Classification-JEL: C33 Keywords: Autoregression, Bias, Cross section dependence, Dynamic factors, Dynamic panel estimation, Incidental trends, Panel unit root Note: CFP 1204. Length: 35 pages Creation-Date: 200309 Revision-Date: 200406 Number: 1438 Publication-Status: Published in Journal of Econometrics (March 2007), 137(1): 162-188 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1438.pdf File-Format: application/pdf File-Size: 690 kb Handle: RePEc:cwl:cwldpp:1438 Template-type: ReDIF-Paper 1.0 Author-Name: Peter C.B. Phillips Author-X-Name-First: Peter C.B. Author-X-Name-Last: Phillips Author-Email: peter.phillips@yale.edu Author-Homepage: http://korora.econ.yale.edu/phillips/ Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Yixiao Sun Author-X-Name-First: Yixiao Author-X-Name-Last: Sun Author-Workplace-Name: Dept. Economics, UCLA San Diego Author-Name: Sainan Jin Author-X-Name-First: Sainan Author-X-Name-Last: Jin Author-Workplace-Name: Yale University Title: Long Run Variance Estimation Using Steep Origin Kernels without Truncation Abstract: A new class of kernel estimates is proposed for long run variance (LRV) and heteroskedastic autocorrelation consistent (HAC) estimation. The kernels are called steep origin kernels and are related to a class of sharp origin kernels explored by the authors (2003) in other work. They are constructed by exponentiating a mother kernel (a conventional lag kernel that is smooth at the origin) and they can be used without truncation or bandwidth parameters. When the exponent is passed to infinity with the sample size, these kernels produce consistent LRV/HAC estimates. The new estimates are shown to have limit normal distributions, and formulae for the asymptotic bias and variance are derived. With steep origin kernel estimation, bandwidth selection is replaced by exponent selection and data-based selection is possible. Rules for exponent selection based on minimum mean squared error (MSE) criteria are developed. Optimal rates for steep origin kernels that are based on exponentiating quadratic kernels are shown to be faster than those based on exponentiating the Bartlett kernel, which produces the sharp origin kernel. It is further shown that, unlike conventional kernel estimation where an optimal choice of kernel is possible in terms of MSE criteria (Priestley, 1962; Andrews, 1991), steep origin kernels are asymptotically MSE equivalent, so that choice of mother kernel does not matter asymptotically. The approach is extended to spectral estimation at frequencies omega <_ 0. Some simulation evidence is reported detailing the finite sample performance of steep kernel methods in LRV/HAC estimation and robust regression testing in comparison with sharp kernel and conventional (truncated) kernel methods. Classification-JEL: C22 Keywords: Exponentiated kernel, Lag kernel, Long run variance, Optimal exponent, Spectral window, Spectrum Note: CFP 1178 Length: 47 pages Creation-Date: 200309 Number: 1437 Publication-Status: Published in Journal of Statistical Planning and Inference (2007), 137: 985-1023 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1437.pdf File-Format: application/pdf File-Size: 466 kb Handle: RePEc:cwl:cwldpp:1437 Template-type: ReDIF-Paper 1.0 Author-Name: Donggyu Sul Author-X-Name-First: Donggyu Author-X-Name-Last: Sul Author-Workplace-Name: Dept. Economics, Univ. of Aukland Author-Name: Peter C.B. Phillips Author-X-Name-First: Peter C.B. Author-X-Name-Last: Phillips Author-Email: peter.phillips@yale.edu Author-Homepage: http://korora.econ.yale.edu/phillips/ Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Choi, Chi-Young Author-X-Name-First: Chi-Young Author-X-Name-Last: Choi Author-Workplace-Name: Dept. Economics, Univ. of New Hampshire Title: Prewhitening Bias in HAC Estimation Abstract: HAC estimation commonly involves the use of prewhitening filters based on simple autoregressive models. In such applications, small sample bias in the estimation of autoregressive coefficients is transmitted to the recoloring filter, leading to HAC variance estimates that can be badly biased. The present paper provides an analysis of these issues using asymptotic expansions and simulations. The approach we recommend involves the use of recursive demeaning procedures that mitigate the effects of small sample autoregressive bias. Moreover, a commonly-used restriction rule on the prewhitening estimates (that first order autoregressive coefficient estimates, or largest eigenvalues, greater than 0.97 be replaced by 0.97) adversely interfers with the power of unit root and KPSS tests. We provide a new boundary condition rule that improves the size and power properties of these tests. Some illustrations are given of the effects of these adjustments on the size and power of KPSS testing. Using prewhitened HAC estimates and the new boundary condition rule, the KPSS test is consistent, in contrast to KPSS testing that uses conventional prewhitened HAC estimates (Lee, 1996). Classification-JEL: C32 Keywords: Autoregression, Bias, HAC estimator, KPSS testing, Long run variance, Prewhitening, Recursive demeaning Note: CFP 1161. Length: 28 pages Creation-Date: 200309 Number: 1436 Publication-Status: Published in Oxford Bulletin of Economics and Statistics (2005), 67(4): 517-546 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1436.pdf File-Format: application/pdf File-Size: 363 kb Handle: RePEc:cwl:cwldpp:1436 Template-type: ReDIF-Paper 1.0 Author-Name: Hyungsik Roger Moon Author-X-Name-First: Hyungsik Rober Author-X-Name-Last: Moon Author-Workplace-Name: Dept. Economics, Univ. of Southern California Author-Name: Benoit Perron Author-X-Name-First: Benoit Author-X-Name-Last: Perron Author-Workplace-Name: Dept. Economic Sciences, Univ. of Montreal Author-Name: Peter C.B. Phillips Author-X-Name-First: Peter C.B. Author-X-Name-Last: Phillips Author-Email: peter.phillips@yale.edu Author-Homepage: http://korora.econ.yale.edu/phillips/ Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Incidental Trends and the Power of Panel Unit Root Tests Abstract: The asymptotic local powers of various panel unit root tests are investigated. The power envelope is obtained under homogeneous and heterogeneous alternatives. It is compared with asymptotic power functions of the pooled t-test, the Ploberger-Phillips (2002) test, and a point optimal test in neighborhoods of unity that are of order n^{1/4}T{-1} and n^{1/2}T^{-1}, depending on whether or not incidental trends are extracted from the panel data. In the latter case, when the alternative hypothesis is homogeneous across individuals, it is shown that the point optimal test and Ploberger-Phillips test both achieve the power envelope and are uniformly most powerful, in contrast to point optimal unit root tests for time series. Some simulations examining the finite sample performance of the tests are reported. Classification-JEL: C22, C23 Keywords: Asymptotic power envelope, Common point optimal test, Heterogeneous alternatives, Incidental trends, Local to unity, Power function, Panel unit root test Note: CFP 1215. Length: 43 pages Creation-Date: 200309 Number: 1435 Publication-Status: Published in Journal of Econometrics (December 2007), 141(2): 416-459 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1435.pdf File-Format: application/pdf File-Size: 387 kb Handle: RePEc:cwl:cwldpp:1435 Template-type: ReDIF-Paper 1.0 Author-Name: Stephen Morris Author-X-Name-First: Stephen Author-X-Name-Last: Morris Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Hyun Song Shin Author-X-Name-First: Hyun Song Author-X-Name-Last: Shin Author-Workplace-Name: London School of Economics Title: Liquidity Black Holes Abstract: Traders with short horizons and privately known trading limits interact in a market for a risky asset. Risk-averse, long horizon traders supply a downward sloping residual demand curve that face the short-horizon traders. When the price falls close to the trading limits of the short horizon traders, selling of the risky asset by any trader increases the incentives for others to sell. Sales become mutually reinforcing among the short term traders, and payoffs analogous to a bank run are generated. A "liquidity black hole" is the analogue of the run outcome in a bank run model. Short horizon traders sell because others sell. Using global game techniques, this paper solves for the unique trigger point at which the liquidity black hole comes into existence. Empirical implications include the sharp V-shaped pattern in prices around the time of the liquidity black hole. Classification-JEL: C7, G12 Keywords: Liquidity, Asset pricing, Global games Note: CFP 1114. Length: 26 pages Creation-Date: 200309 Number: 1434 Publication-Status: Published in Review of Finance (2004), 8(1): 1-18 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1434.pdf File-Format: application/pdf File-Size: 221 kb Handle: RePEc:cwl:cwldpp:1434 Template-type: ReDIF-Paper 1.0 Author-Name: Bernardo Guimaraes Author-X-Name-First: Bernardo Author-X-Name-Last: Guimaraes Author-Workplace-Name: Dept. of Economics, Yale University Author-Name: Stephen Morris Author-X-Name-First: Stephen Author-X-Name-Last: Morris Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Risk and Wealth in a Model of Self-fulfilling Currency Crises Abstract: Market participants' risk attitudes, wealth and portfolio composition influence their positions in a pegged foreign currency and, therefore, may have important effects on the sustainability of currency pegs. We analyze such effects in a global game model of currency crises with continuous action choices. The model, solved in closed form, generates a rich set of theoretical predictions consistent with many popular and academic (unmodelled) speculations about the onset and timing of currency crises. The results extend linearly to a heterogeneous agent population. Classification-JEL: F3, D8 Keywords: Currency crisis, Global games, Risk aversion, Wealth, Portfolio Length: 31 pages Creation-Date: 200309 Revision-Date: 200410 Number: 1433R Publication-Status: Published in Journal of Monetary Economics (2007), 54: 2205-2230 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1433-r.pdf File-Format: application/pdf File-Size: 422 kb Handle: RePEc:cwl:cwldpp:1433R Template-type: ReDIF-Paper 1.0 Author-Name: Bernardo Guimaraes Author-X-Name-First: Bernardo Author-X-Name-Last: Guimaraes Author-Workplace-Name: Dept. of Economics, Yale University Author-Name: Stephen Morris Author-X-Name-First: Stephen Author-X-Name-Last: Morris Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Risk and Wealth in a Model of Self-fulfilling Currency Crises Abstract: We analyze the effect of risk aversion, wealth and portfolios on the behavior of investors in a global game model of currency crises with continuous action choices. The model generates a rich set of striking theoretical predictions. For example, risk aversion makes currency crises significantly less likely; increased wealth makes crises more likely; and foreign direct investment (illiquid investments in the target currency) make crises more likely. Our results extend linearly to a heterogeneous agent population. Classification-JEL: F3, D8 Keywords: Currency crisis, Sunspots, Global games, Risk aversion, Wealth, Portfolio Length: 28 pages Creation-Date: 200309 Number: 1433 Publication-Status: Published in Journal of Monetary Economics (2007), 54: 2205-2230 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1433.pdf File-Format: application/pdf File-Size: 412 kb Handle: RePEc:cwl:cwldpp:1433 Template-type: ReDIF-Paper 1.0 Author-Name: Philip A. Haile Author-X-Name-First: Philip A. Author-X-Name-Last: Haile Author-Email: philip.haile@yale.edu Author-Homepage: http://www.econ.yale.edu/faculty1/haile.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://www.econ.yale.edu/ Author-Name: Ali Hortacsu Author-X-Name-First: Ali Author-X-Name-Last: Hortascu Author-Workplace-Name: University of Chicago and NBER Author-Name: Grigory Kosenok Author-X-Name-First: Grigory Author-X-Name-Last: Kosenok Author-Workplace-Name: New Economic School, Nakhimovsky Prospekt Title: On the Empirical Content of Quantal Response Equilibrium Abstract: The quantal response equilibrium (QRE) notion of McKelvey and Palfrey (1995) has recently attracted considerable attention, due in part to its widely documented ability to rationalize observed behavior in games played by experimental subjects. However, even with strong a priori restrictions on unobservables, QRE imposes no falsifiable restrictions: it can rationalize any distribution of behavior in any normal form game. After demonstrating this, we discuss several approaches to testing QRE under additional maintained assumptions. Classification-JEL: C7, C9 Keywords: Quantal response equilibrium, Falsifiability, Testable restrictions, Regular quantal response equilibrium, Rank-cumulative probabilities, Block-Marschak polynomials Note: CFP 1227. Length: 26 pages Creation-Date: 082003 Revision-Date: 082006 Number: 1432R Publication-Status: Published in American Economic Review (2008), 98(1): 180-200 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1432-r.pdf File-Format: application/pdf File-Size: 353 kb Handle: RePEc:cwl:cwldpp:1432R Template-type: ReDIF-Paper 1.0 Author-Name: Philip A. Haile Author-X-Name-First: Philip A. Author-X-Name-Last: Haile Author-Email: philip.haile@yale.edu Author-Homepage: http://www.econ.yale.edu/faculty1/haile.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Ali Hortacsu Author-X-Name-First: Ali Author-X-Name-Last: Hortacsu Author-Workplace-Name: University of Chicago Author-Name: Grigory Kosenok Author-X-Name-First: Grigory Author-X-Name-Last: Kosenok Author-Workplace-Name: New Economics School, Moscow Title: On the Empirical Content of Quantal Response Equilibrium Abstract: The quantal response equilibrium (QRE) notion of McKelvey and Palfrey (1995) has recently attracted considerable attention, due largely to its widely documented ability to rationalize observed behavior in games played by experimental subjects. We show that this ability to fit the data, as typically measured in this literature, is uninformative. Without a priori distributional assumptions, a QRE can match any distribution of behavior by each player in any normal form game. We discuss approaches that might be taken to provide valid empirical evaluation of the QRE and discuss its potential value as an approximating empirical structure. Classification-JEL: C52, C7, C9 Keywords: Quantal response equilibrium, Testable restrictions, Comparative statics Length: 22 pages Creation-Date: 200308 Number: 1432 Publication-Status: Published in American Economic Review (2008), 98(1): 180-200 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1432.pdf File-Format: application/pdf File-Size: 349 kb Handle: RePEc:cwl:cwldpp:1432 Template-type: ReDIF-Paper 1.0 Author-Name: Herbert E. Scarf Author-X-Name-First: Herbert E. Author-X-Name-Last: Scarf Author-Email: herbert.scarf@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/scarf.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Wilson, Charles A. Wilson Author-X-Name-First: Charles A. Author-X-Name-Last: Wilson Author-Workplace-Name: New York University Title: Uniqueness of Equilibrium in the Multi-Country Ricardo Model Abstract: We present two arguments, one based on index theory, demonstrating that the multi-country Ricardo model has a unique competitive equilibrium if the aggregate demand functions exhibit gross substitutability. The result is somewhat surprising because the assumption of gross substitutability is sufficient for uniqueness in a model of exchange but not, in general, when production is included in the model. Classification-JEL: D51, F11 Keywords: Ricardo model, Gross substitutes, Uniqueness Length: 24 pages Creation-Date: 200307 Number: 1431 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1431.pdf File-Format: application/pdf File-Size: 97 kb Handle: RePEc:cwl:cwldpp:1431 Template-type: ReDIF-Paper 1.0 Author-Name: Ricardo J. Caballero Author-X-Name-First: Ricardo J. Author-X-Name-Last: Caballero Author-Workplace-Name: MIT Author-Name: Eduardo M.R.A. Engel Author-X-Name-First: Eduardo M.R.A. Author-X-Name-Last: Engel Author-Email: eduardo.engel@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/engel.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Adjustment Is Much Slower Than You Think Abstract: In most instances, the dynamic response of monetary and other policies to shocks is infrequent and lumpy. The same holds for the microeconomic response of some of the most important economic variables, such as investment, labor demand, and prices. We show that the standard practice of estimating the speed of adjustment of such variables with partial-adjustment ARMA procedures substantially overestimates this speed. For example, for the target federal funds rate, we find that the actual response to shocks is less than half as fast as the estimated response. For investment, labor demand and prices, the speed of adjustment inferred from aggregates of a small number of agents is likely to be close to instantaneous. While aggregating across microeconomic units reduces the bias (the limit of which is illustrated by Rotemberg's widely used linear aggregate characterization of Calvo's model of sticky prices), in some instances convergence is extremely slow. For example, even after aggregating investment across all establishments in U.S. manufacturing, the estimate of its speed of adjustment to shocks is biased upward by more than 80 percent. While the bias is not as extreme for labor demand and prices, it still remains significant at high levels of aggregation. Because the bias rises with disaggregation, findings of microeconomic adjustment that is substantially faster than aggregate adjustment are generally suspect. Classification-JEL: C22, C43, D2, E2, E5 Keywords: Speed of adjustment, Discrete adjustment, Lumpy adjustment, Aggregation, Calvo model, ARMA process, Partial adjustment, Expected response time, Monetary policy, Investment, Labor demand, Sticky prices, Idiosyncratic shocks, Impulse response function, Wold representation, Time-to-build Length: 30 pages Creation-Date: 200307 Number: 1430 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1430.pdf File-Format: application/pdf File-Size: 188 kb Handle: RePEc:cwl:cwldpp:1430 Template-type: ReDIF-Paper 1.0 Author-Name: John Geanakoplos Author-X-Name-First: John Author-X-Name-Last: Geanakoplos Author-Email: john.geanakoplos@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/geanakoplos.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: The Ideal Inflation Indexed Bond and Irving Fisher's Impatience Theory of Interest in an Overlapping Generations World Abstract: Irving Fisher long advocated inflation indexed bonds. I prove in the context of a multicommodity CAPM world that the best welfare improving bond pays the minimum money needed to achieve the same utility, and not the minimum needed to buy an ideal commodity bundle. Irving Fisher also developed and advocated the impatience theory of interest. But in OLG economies, the rate of interest is determined by population growth, not impatience. I reconcile this contradiction by proving that in stationary OLG economies with land, the interest rate at the unique steady state does depend on impatience. Indeed, the proposition that greater impatience creates higher interest rates holds more generally in OLG with land than in Fisher's two-period model. Classification-JEL: B22, B23, B31, D11, D52, D91, E31, E43, G12 Keywords: Impatience, Theory of interest, Inflation indexed bond, Konus index, Capital asset pricing, Efficiency, Overlapping generations, Land Note: CFP 1111. Length: 40 pages Creation-Date: 200307 Number: 1429 Publication-Status: Published in American Journal of Economics and Sociology (2005), 64(1): 257-306 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1429.pdf File-Format: application/pdf File-Size: 356 kb Handle: RePEc:cwl:cwldpp:1429 Template-type: ReDIF-Paper 1.0 Author-Name: Donald W.K. Andrews Author-X-Name-First: Donald W.K. Author-X-Name-Last: Andrews Author-Email: donald.andrews@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/andrews.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Cross-section Regression with Common Shocks Abstract: This paper considers regression models for cross-section data that exhibit cross-section dependence due to common shocks, such as macroeconomic shocks. The paper analyzes the properties of least squares (LS) and instrumental variables (IV) estimators in this context. The results of the paper allow for any form of cross-section dependence and heterogeneity across population units. The probability limits of the LS and IV estimators are determined and necessary and sufficient conditions are given for consistency. The asymptotic distributions of the estimators are found to be mixed normal after re-centering and scaling. t, Wald, and F statistics are found to have asymptotic standard normal, chi^2, and scaled chi^2 distributions, respectively, under the null hypothesis when the conditions required for consistency of the parameter under test hold. But, the absolute values of t statistics and Wald and F statistics are found to diverge to infinity under the null hypothesis when these conditions fail. Confidence intervals exhibit similarly dichotomous behavior. Hence, common shocks are found to be innocuous in some circumstances, but quite problematic in others. Models with factor structures for errors, regressors, and IV's are considered. Using the general results, conditions are determined under which consistency of the LS and IV estimators holds and fails in models with factor structures. The results are extended to cover heterogeneous and functional factor structures in which common factors have different impacts on different population units. Extensions to generalized method of moments estimators are discussed. Classification-JEL: C10, C12, C13 Keywords: Asymptotics, Common shocks, Dependence, Exchangeability, Factor model, Inconsistency, regression Note: CFP 1153. Length: 43 pages Creation-Date: 200306 Number: 1428 Publication-Status: Published in Econometrics (September 2005), 73(5): 1551-1585 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1428.pdf File-Format: application/pdf File-Size: 377 kb Handle: RePEc:cwl:cwldpp:1428 Template-type: ReDIF-Paper 1.0 Author-Name: Pradeep Dubey Author-X-Name-First: Pradeep Author-X-Name-Last: Dubey Author-Workplace-Name: SUNY, Stony Brook Author-Name: John Geanakoplos Author-X-Name-First: John Author-X-Name-Last: Geanakoplos Author-Email: john.geanakoplos@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/geanakoplos.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Real Determinacy with Nominal Assets Abstract: We build a finite horizon model with inside and outside money, in which interest rates, price levels and commodity allocations are determinate, even though asset markets are incomplete and asset deliveries are purely nominal. Classification-JEL: D50, E40, E50, E58 Keywords: Central bank, Inside money, Outside money, Incomplete assets, Monetary equilibrium, Real determinacy Note: CFP 1999. Length: 29 pages Creation-Date: 200306 Revision-Date: 200411 Number: 1427R Publication-Status: Published in Economic Theory (2006), 27(1): 79-106 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1427-r.pdf File-Format: application/pdf File-Size: 353 kb Handle: RePEc:cwl:cwldpp:1427R Template-type: ReDIF-Paper 1.0 Author-Name: Pradeep Dubey Author-X-Name-First: Pradeep Author-X-Name-Last: Dubey Author-Workplace-Name: SUNY, Stony Brook Author-Name: John Geanakoplos Author-X-Name-First: John Author-X-Name-Last: Geanakoplos Author-Email: john.geanakoplos@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/geanakoplos.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Real Determinacy with Nominal Assets Abstract: We build a finite horizon model with inside and outside money, in which interest rates, price levels and commodity allocations are determinate, even though asset markets are incomplete and asset deliveries are purely nominal. Classification-JEL: D50, E40, E50, E58 Keywords: Central bank, Inside money, Outside money, Incomplete assets, Monetary equilibrium, Real determinacy Length: 31 pages Creation-Date: 200306 Number: 1427 Publication-Status: Published in Economic Theory (2006), 27(1): 79-106 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1427.pdf File-Format: application/pdf File-Size: 335 kb Handle: RePEc:cwl:cwldpp:1427 Template-type: ReDIF-Paper 1.0 Author-Name: Donald J. Brown Author-X-Name-First: Donald J. Author-X-Name-Last: Brown Author-Email: donald.brown@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/brown.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Ravi Kannan Author-X-Name-First: Ravi Author-X-Name-Last: Kannan Author-Email: rannan@cs.yale.edu Author-Workplace-Name: Computer Science, Yale University Title: The Computation of Counterfactual Equilibria in Homothetic Walrasian Economies Abstract: We propose a nonparametric test for multiple calibration of numerical general equilibrium models, and we present an effective algorithm for computing counterfactual equilibria in homothetic Walrasian economies, where counterfactual equilibria are solutions to the Walrasian inequalities. Classification-JEL: C63, C68, D51, D58 Keywords: Applied general equilibrium analysis, Walrasian inequalities, Calibration Length: 13 pages Creation-Date: 200306 Revision-Date: 200405 Number: 1426R Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1426-r.pdf File-Format: application/pdf File-Size: 153 kb Handle: RePEc:cwl:cwldpp:1426R Template-type: ReDIF-Paper 1.0 Author-Name: Donald J. Brown Author-X-Name-First: Donald J. Author-X-Name-Last: Brown Author-Email: donald.brown@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/brown.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Ravi Kannan Author-X-Name-First: Ravi Author-X-Name-Last: Kannan Author-Email: rannan@cs.yale.edu Author-Workplace-Name: Computer Science, Yale University Title: Indeterminacy, Nonparametric Calibration and Counterfactual Equilibria Abstract: We propose a nonparametric approach to multiple calibration of numerical general equilibrium models, where counterfactual equilibria are solutions to the Walrasian inequalities. We present efficient approximation schemes for deciding the solvability of Walrasian inequalities. Classification-JEL: C62, C63, D51, D58 Keywords: Applied general equilibrium analysis, Walrasian inequalities, O-minimal structures, Monte Carlo algorithms Length: 16 pages Creation-Date: 200306 Number: 1426 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1426.pdf File-Format: application/pdf File-Size: 197 kb Handle: RePEc:cwl:cwldpp:1426 Template-type: ReDIF-Paper 1.0 Author-Name: Bernard Franck Author-X-Name-First: Bernard Author-X-Name-Last: Franck Author-Workplace-Name: University of Caen Author-Name: Robert Owen Author-X-Name-First: Robert Author-X-Name-Last: Owen Author-Workplace-Name: University of Nantes Title: Fundamental R&D Spillovers and the Internationalization of a FirmÌs Research Activities Abstract: A conceptual framework is proposed for analyzing how differences in national R&D stocks can impact on a firmÌs decision to internationalize its R&D activities. A central finding is that the integration of product markets can generate an added incentive to undertake R&D abroad. A three-stage analysis of a non-cooperative game is proposed, which entails cost-reducing process innovation in an international model of duopoly. Each firmÌs technological efficiency depends not only on its investment in applied R&D, but also on its absorption of domestic and foreign fundamental R&D, as well as the extent to which the latter are substitutes or complements. In a first stage, a firmÌs absorption of foreign fundamental R&D can be impacted by a decision to localize R&D activities abroad. The interrelation between this decision and initial production costs is also explored. Classification-JEL: F15, F23, O3 Keywords: Fundamental R&D, spillovers, international location, economic integration Length: 53 pages Creation-Date: 200306 Number: 1425 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1425.pdf File-Format: application/pdf File-Size: 197 kb Handle: RePEc:cwl:cwldpp:1425 Template-type: ReDIF-Paper 1.0 Author-Name: Ioannis Karatzas Author-X-Name-First: Ioannis Author-X-Name-Last: Karatzas Author-Workplace-Name: Columbia University Author-Name: Martin Shubik Author-X-Name-First: Martin Author-X-Name-Last: Shubik Author-Email: martin.shubik@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/shubik.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: William D. Sudderth Author-X-Name-First: William D. Author-X-Name-Last: Sudderth Author-Workplace-Name: University of Minnesota Author-Name: John Geanakoplos Author-X-Name-First: John Author-X-Name-Last: Geanakoplos Author-Email: john.geanakoplos@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/geanakoplos.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: The Harmonic Fisher Equation and the Inflationary Bias of Real Uncertainty Abstract: The classical Fisher equation asserts that in a nonstochastic economy, the inflation rate must equal the difference between the nominal and real interest rates. We extend this equation to a representative agent economy with real uncertainty in which the central bank sets the nominal rate of interest. The Fisher equation still holds, but with the rate of inflation replaced by the harmonic mean of the growth rate of money. Except for logarithmic utility, we show that on almost every path the long-run rate of inflation is strictly higher than it would be in the nonstochastic world obtained by replacing output with expected output in every period. If the central bank sets the nominal interest rate equal to the discount rate of the representative agent, then the long-run rate of inflation is positive (and the same) on almost every path. By contrast, the classical Fisher equation asserts that inflation should then be zero. In fact, no constant interest rate will stabilize prices, even if the economy is stationary with bounded i.d.d. shocks. The central bank must actively manage interest rates if it wants to keep prices bounded forever. However, not even an active central bank can keep prices exactly constant. Classification-JEL: C7, C73, D81, E41, E58 Keywords: Inflation, equilibrium, Control, Interest rate, Central bank, Harmonic Fisher equation Length: 27 pages Creation-Date: 200306 Number: 1424 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1424.pdf File-Format: application/pdf File-Size: 340 kb Handle: RePEc:cwl:cwldpp:1424 Template-type: ReDIF-Paper 1.0 Author-Name: Hanming Fang Author-X-Name-First: Hanming Author-X-Name-Last: Fang Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Stephen Morris Author-X-Name-First: Stephen Author-X-Name-Last: Morris Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Multidimensional Private Value Auctions Abstract: We consider parametric examples of two-bidder private value auctions in which each bidder observes her own private valuation as well as noisy signals about her opponentÌs private valuation. In such multidimensional private value auction environments, we show that the revenue equivalence between the first and second price auctions breaks down and there is no definite revenue ranking; while the second price auction is always efficient allocatively, the first price auction may be inefficient and the inefficiency may increase as the signal becomes more informative; equilibria may fail to exist for the first price auction. We also show that auction mechanisms provide different incentives for bidders to acquire costly information about opponents' valuation. Classification-JEL: C70, D44, D82 Keywords: Multidimensional Auctions, Revenue Equivalence, Allocative Efficiency, Information Acquisition Length: 40 pages Creation-Date: 200305 Number: 1423 Publication-Status: Published in Journal of Economic Theory (2006), 126: 1-30 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1423.pdf File-Format: application/pdf File-Size: 512 kb Handle: RePEc:cwl:cwldpp:1423 Template-type: ReDIF-Paper 1.0 Author-Name: Hanming Fang Author-X-Name-First: Hanming Author-X-Name-Last: Fang Author-Workplace-Name: Cowles Foundation Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Giuseppe Moscarini Author-X-Name-First: Giuseppe Author-X-Name-Last: Moscarini Author-Email: giuseppe.moscarini@yale.edu Title: Morale Hazard Abstract: We interpret workers' confidence in their own skills as their morale, and investigate the implication of worker overconfidence on the firm's optimal wage-setting policies. In our model, wage contracts both provide incentives and affect worker morale, by revealing private information of the firm about worker skills. We provide conditions for the non-differentiation wage policy to be profit-maximizing. In numerical examples, worker overconfidence is a necessary condition for the firm to prefer no wage differentiation, so as to preserve some workers' morale; the non-differentiation wage policy itself breeds more worker overconfidence; finally, wage compression is more likely when aggregate productivity is low. Classification-JEL: J31, D82 Keywords: Overconfidence, Worker morale, Wage-setting policies Length: 36 pages Creation-Date: 200305 Number: 1422 Publication-Status: Published in Journal of Monetary Economics (May 2005), 52(4): 749-777 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1422.pdf File-Format: application/pdf File-Size: 465 kb Handle: RePEc:cwl:cwldpp:1422 Template-type: ReDIF-Paper 1.0 Author-Name: Dirk Bergemann Author-X-Name-First: Dirk Author-X-Name-Last: Bergemann Author-Email: dirk.bergemann@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/bergemann.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Stephen Morris Author-X-Name-First: Stephen Author-X-Name-Last: Morris Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Robust Mechanism Design Abstract: The mechanism design literature assumes too much common knowledge of the environment among the players and planner. We relax this assumption by studying implementation on richer type spaces. We ask when ex post implementation is equivalent to interim (or Bayesian) implementation for all possible type spaces. The equivalence holds in the case of separable environments; examples of separable environments arise (1) when the planner is implementing a social choice function (not correspondence); and (2) in a quasilinear environment with no restrictions on transfers. The equivalence fails in general, including in some quasilinear environments with budget balance. In private value environments, ex post implementation is equivalent to dominant strategies implementation. The private value versions of our results offer new insights into the relation between dominant strategy implementation and Bayesian implementation. Classification-JEL: C79, C82 Keywords: Mechanism design, Common knowledge, Universal type space, Interim equilibrium, Ex-post equilibrium, Dominant strategies Length: 46 pages Creation-Date: 200305 Revision-Date: 200404 Number: 1421R Publication-Status: Published in Econometrica (2005), 73(6): 1771-1813 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1421-r.pdf File-Format: application/pdf File-Size: 288 kb Handle: RePEc:cwl:cwldpp:1421R Template-type: ReDIF-Paper 1.0 Author-Name: Dirk Bergemann Author-X-Name-First: Dirk Author-X-Name-Last: Bergemann Author-Email: dirk.bergemann@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/bergemann.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Stephen Morris Author-X-Name-First: Stephen Author-X-Name-Last: Morris Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Robust Mechanism Design Abstract: The mechanism design literature assumes too much common knowledge of the environment among the players and planner. We relax this assumption by studying implementation on richer type spaces, with more higher order uncertainty. We study the "ex post equivalence" question: when is interim implementation on all possible type spaces equivalent to requiring ex post implementation on the space of payoff types? We show that ex post equivalence holds when the social choice correspondence is a function and in simple quasi-linear environments. When ex post equivalence holds, we identify how large the type space must be to obtain the equivalence. We also show that ex post equivalence fails in general, including in quasi-linear environments with budget balance. For quasi-linear environments, we provide an exact characterization of when interim implementation is possible in rich type spaces. In this environment, the planner can fully extract playersÌ belief types, so the incentive constraints reduce to conditions distinguishing types with the same beliefs about othersÌ types but different payoff types. Classification-JEL: C79, C82 Keywords: Mechanism design, Common knowledge, Universal type space, Interim equilibrium, Ex-post equilibrium, Dominant strategies Length: 56 pages Creation-Date: 200305 Number: 1421 Publication-Status: Published in Econometrica (2005), 73(6): 1771-1813 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1421.pdf File-Format: application/pdf File-Size: 475 kb Handle: RePEc:cwl:cwldpp:1421 Template-type: ReDIF-Paper 1.0 Author-Name: Martin Shubik Author-X-Name-First: Martin Author-X-Name-Last: Shubik Author-Email: martin.shubik@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/shubik.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Eric Smith Author-X-Name-First: Eric Author-X-Name-Last: Smith Author-Workplace-Name: Santa Fe Institute Title: Strategic Freedom, Constraint, and Symmetry in One-period Markets with Cash and Credit Payment Abstract: In order to explain in a systematic way why certain combinations of market, financial, and legal structures may be intrinsic to certain capabilities to exchange real goods, we introduce criteria for abstracting the qualitative functions of markets. The criteria involve the number of strategic freedoms the combined institutions, considered as formalized strategic games, present to traders, the constraints they impose, and the symmetry with which those constraints are applied to the traders. We pay particular attention to what is required to make these "strategic market games" well-defined, and to make various solutions computable by the agents within the bounds on information and control they are assumed to have. As an application of these criteria, we present a complete taxonomy of the minimal one-period exchange economies with symmetric information and inside money. A natural hierarchy of market forms is observed to emerge, in which institutionally simpler markets are often found to be more suitable to fewer and less-diversified traders, while the institutionally richer markets only become functional as the size and diversity of their users gets large. Classification-JEL: C7, G10, G20, L10, D40, D50 Keywords: Strategic market games, Clearinghouses, Credit evaluation, Default Length: 26 pages Creation-Date: 200305 Number: 1420 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1420.pdf File-Format: application/pdf File-Size: 357 kb Handle: RePEc:cwl:cwldpp:1420 Template-type: ReDIF-Paper 1.0 Author-Name: Martin Shubik Author-X-Name-First: Martin Author-X-Name-Last: Shubik Author-Email: martin.shubik@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/shubik.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Eric Smith Author-X-Name-First: Eric Author-X-Name-Last: Smith Author-Workplace-Name: Santa Fe Institute Title: Structure, Clearinghouses and Symmetry Abstract: We introduce and justify a taxonomy for the structure of markets and minimal institutions which appear in constructing minimally complex trading structures to perform the functions of price formation, settlement and payments. Each structure is presented as a playable strategic market game and is examined for its efficiency, the number of degrees of freedom and the symmetry properties of the structure. Classification-JEL: C7, G10, G20, L10, D40, D50 Keywords: Strategic market games, Clearinghouses, Credit evaluation, Default Length: 24 pages Creation-Date: 200305 Number: 1419 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1419.pdf File-Format: application/pdf File-Size: 302 kb Handle: RePEc:cwl:cwldpp:1419 Template-type: ReDIF-Paper 1.0 Author-Name: John Chao Author-X-Name-First: John Author-X-Name-Last: Chao Author-Workplace-Name: University of Maryland Author-Name: Norman R. Swanson Author-X-Name-First: Norman R. Author-X-Name-Last: Swanson Author-Workplace-Name: Rutgers University Title: Alternative Approximations of the Bias and MSE of the IV Estimator under Weak Identification with an Application to Bias Correction Abstract: We provide analytical formulae for the asymptotic bias (ABIAS) and mean squared error (AMSE) of the IV estimator, and obtain approximations thereof based on an asymptotic scheme which essentially requires the expectation of the first stage F-statistic to converge to a finite (possibly small) positive limit as the number of instruments approaches infinity. The approximations so obtained are shown, via regression analysis, to yield good approximations for ABIAS and AMSE functions, and the AMSE approximation is shown to perform well relative to the approximation of Donald and Newey (2001). Additionally, the manner in which our framework generalizes that of Richardson and Wu (1971) is discussed. One consequence of the asymptotic framework adopted here is that consistent estimators for the ABIAS and AMSE can be obtained. As a result, we are able to construct a number of bias corrected OLS and IV estimators, which we show to be consistent under a sequential asymptotic scheme. These bias-corrected estimators are also robust, in the sense that they remain consistent in a conventional asymptotic setup, where the model is fully identified. A small Monte Carlo experiment documents the relative performance of our bias adjusted estimators versus standard IV, OLS, LIML estimators, and it is shown that our estimators have lower bias than LIML for various levels of endogeneity and instrument relevance. Classification-JEL: C13, C31 Keywords: Confluent hypergeometric function, Laplace approximation, Local-to-zero asymptotics, Weak instruments Length: 23 pages Creation-Date: 200305 Number: 1418 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1418.pdf File-Format: application/pdf File-Size: 382 kb Handle: RePEc:cwl:cwldpp:1418 Template-type: ReDIF-Paper 1.0 Author-Name: Chao, John Chao Author-X-Name-First: John Author-X-Name-Last: Chao Author-Workplace-Name: University of Maryland Author-Name: Norman R. Swanson Author-X-Name-First: Norman R. Author-X-Name-Last: Swanson Author-Workplace-Name: Rutgers University Title: Consistent Estimation with a Large Number of Weak Instruments Abstract: This paper conducts a general analysis of the conditions under which consistent estimation can be achieved in instrumental variables regression when the available instruments are weak in the local-to-zero sense. More precisely, the approach adopted in this paper combines key features of the local-to-zero framework of Staiger and Stock (1997) and the many-instrument framework of Morimune (1983) and Bekker (1994) and generalizes both of these frameworks in the following ways. First, we consider a general local-to-zero framework which allows for an arbitrary degree of instrument weakness by modeling the first-stage coefficients as shrinking toward zero at an unspecified rate, say b_{n}^{-1}. Our local-to-zero setup, in fact, reduces to that of Staiger and Stock (1997) in the case where b_{n} = sqrt{n}. In addition, we examine a broad class of single-equation estimators which extends the well-known k-class to include, amongst others, the Jackknife Instrumental Variables Estimator (JIVE) of Angrist, Imbens, and Krueger (1999). Analysis of estimators within this extended class based on a pathwise asymptotic scheme, where the number of instruments K_{n} is allowed to grow as a function of the sample size, reveals that consistent estimation depends importantly on the relative magnitudes of rn, the growth rate of the concentration parameter, and K_{n}. In particular, it is shown that members of the extended class which satisfy certain general conditions, such as LIML and JIVE, are consistent provided that sqrt{K_{n}n/r_{n}} -> 0, as n -> infinity. On the other hand, the two-stage least squares (2SLS) estimator is shown not to satisfy the needed conditions and is found to be consistent only if K_{n}/r_{n} -> 0, as n -> infinity. A main point of our paper is that the use of many instruments may be beneficial from a point estimation standpoint in empirical applications where the available instruments are weak but abundant, as it provides an extra source, by which the concentration parameter can grow, thus, allowing consistent estimation to be achievable, in certain cases, even in the presence of weak instruments. Our results, thus, add to the findings of Staiger and Stock (1997) who study a local-to-zero framework where K_{n} is held fixed and the concentration parameter does not diverge as sample size grows; in consequence, no single-equation estimator is found to be consistent under their setup. Classification-JEL: C13, C31 Keywords: Instrumental variables, k-class estimator, Local-to-zero framework, Pathwise asymptotics, Weak instruments Length: 36 pages Creation-Date: 200305 Number: 1417 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1417.pdf File-Format: application/pdf File-Size: 487 kb Handle: RePEc:cwl:cwldpp:1417 Template-type: ReDIF-Paper 1.0 Author-Name: Thomas Quint Author-X-Name-First: Thomas Author-X-Name-Last: Quint Author-Workplace-Name: University of Nevada, Reno Author-Name: Jun Wake Author-X-Name-First: Jun Author-X-Name-Last: Wake Author-Workplace-Name: Gakashuin University Title: On Houseswapping, the Strict Core, Segmentation, and Linear Programming Abstract: We consider the n-player houseswapping game of Shapley-Scarf (1974), with indifferences in preferences allowed. It is well-known that the strict core of such a game may be empty, single-valued, or multivalued. We define a condition on such games called "segmentability", which means that the set of players can be partitioned into a "top trading segmentation." It generalizes GaleÌs well-known idea of the partition of players into "top trading cycles" (which is used to find the unique strict core allocation in the model with no indifference). We prove that a game has a nonempty strict core if and only if it is segmentable. We then use this result to devise an O(n3) algorithm which takes as input any houseswapping game, and returns either a strict core allocation or a report that the strict core is empty. Finally, we are also able to construct a linear inequality system whose feasible regionÌs extreme points precisely correspond to the allocations of the strict core. This last result parallels the results of Vande Vate (1989) and Rothblum (1991) for the marriage game of Gale and Shapley (1962). Classification-JEL: C71, C78, C60 Keywords: Shapley-Scarf economy, Strict core, Linear inequality system, Extreme points Length: 28 pages Creation-Date: 200305 Number: 1416 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1416.pdf File-Format: application/pdf File-Size: 287 kb Handle: RePEc:cwl:cwldpp:1416 Template-type: ReDIF-Paper 1.0 Author-Name: Anna Fostel Author-X-Name-First: Anna Author-X-Name-Last: Fostel Author-Workplace-Name: Department of Economics, Yale University Author-Name: Herbert E. Scarf Author-X-Name-First: Herbert E. Author-X-Name-Last: Scarf Author-Email: herbert.scarf@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/scarf.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu Author-Name: Michael J. Todd Author-X-Name-First: Michael J. Author-X-Name-Last: Todd Author-Workplace-Name: Cornell University Title: Two New Proofs of Afriat's Theorem Abstract: We provide two new, simple proofs of Afriat's celebrated theorem stating that a finite set of price-quantity observations is consistent with utility maximization if, and only if, the observations satisfy a variation of the Strong Axiom of Revealed Preference known as the Generalized Axiom of Revealed Preference. Classification-JEL: D11, D60 Keywords: Afriat's theorem, SARP, GARP Note: CFP 1145. Length: 10 pages Creation-Date: 200305 Number: 1415 Publication-Status: Published in Economic Theory (2004), 24(1): 211-219 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1415.pdf File-Format: application/pdf File-Size: 149 kb Handle: RePEc:cwl:cwldpp:1415 Template-type: ReDIF-Paper 1.0 Author-Name: Thomas Quint Author-X-Name-First: Thomas Author-X-Name-Last: Quint Author-Email: quint@unr.edu Author-Workplace-Name: University of Nevada, Reno Author-Name: Martin Shubik Author-X-Name-First: Martin Author-X-Name-Last: Shubik Author-Email: martin.shubik@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/shubik.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu Title: On Local and Network Games Abstract: The knowledge constraints and transactions costs imposed by geographical distance, network connections and time conspire to justify local behavior as a good approximation for global rationality. We consider a class of games to illustrate this relationship and raise some questions as to what constitutes a satisfactory solution concept. Classification-JEL: C72, D43, D89, M39 Keywords: Local games, Network games, Advertising Length: 23 pages Creation-Date: 200305 Number: 1414 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1414.pdf File-Format: application/pdf File-Size: 288 kb Handle: RePEc:cwl:cwldpp:1414 Template-type: ReDIF-Paper 1.0 Author-Name: Michael R. Powers Author-X-Name-First: Michael R. Author-X-Name-Last: Powers Author-Workplace-Name: Temple University Author-Name: David M. Schizer Author-X-Name-First: David M. Author-X-Name-Last: Schizer Author-Workplace-Name: Columbia University Author-Name: Martin Shubik Author-X-Name-First: Martin Author-X-Name-Last: Shubik Author-Email: martin.shubik@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/shubik.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu Title: Market Bubbles and Wasteful Avoidance: Tax and Regulatory Constraints on Short Sales Abstract: Although short sales make an important contribution to financial markets, this transaction faces legal constraints that do not govern long positions. In evaluating these constraints, other commentators, who are virtually all economists, have not focused rigorously enough on the precise contours of current law. Some short sale constraints are mischaracterized, while others are omitted entirely. Likewise, the existing literature neglects many strategies in which well advised investors circumvent these constraints; this avoidance may reduce the impact of short sale constraints on market prices, but may contribute to social waste in other ways. To fill these gaps in the literature, this paper offers a careful look at current law and draws three conclusions. First, short sales play a valuable role in the financial markets; while there may be plausible reasons to regulate short sales-- most notably, concerns about market manipulation and panics -- current law is very poorly tailored to these goals. Second, investor self-help can ease some of the harm from this poor tailoring, but at a cost. Third, relatively straightforward reforms can eliminate the need for self-help while accommodating legitimate regulatory goals. In making these points, we focus primarily on a burden that other commentators have neglected: profits from short sales generally are ineligible for the reduced tax rate on long-term capital gains, even if the short sale is in place for more than one year. Classification-JEL: D43, G12, K23, K34 Keywords: Short sales, Momentum traders, Value investors Note: CFP 1142. Length: 54 pages Creation-Date: 200304 Number: 1413 Publication-Status: Published in Tax Law Review (2004), 57: 233-274 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1413.pdf File-Format: application/pdf File-Size: 396 kb Handle: RePEc:cwl:cwldpp:1413 Template-type: ReDIF-Paper 1.0 Author-Name: Dirk Bergemann Author-X-Name-First: Dirk Author-X-Name-Last: Bergemann Author-Email: dirk.bergemann@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/bergemann.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu Author-Name: Juuso Valimaki Author-X-Name-First: Juuso Author-X-Name-Last: Valimaki Title: Dynamic Price Competition Abstract: We consider the model of price competition for a single buyer among many sellers in a dynamic environment. The surplus from each trade is allowed to depend on the path of previous purchases, and as a result, the model captures phenomena such as learning by doing and habit formation in consumption characterize Markovian equilibria for finite and infinite horizon versions of the model and show that the stationary infinite horizon version of the model possesses an equilibrium where all the sellers receive an equilibrium payoff equal to their marginal contribution to the social welfare. Note: CFP 1174 Classification-JEL: D81, D83 Keywords: Dynamic competition, Marginal contribution, Markov perfect equilibrium, Common agency Note: CFP 1174. Length: 45 pages Creation-Date: 200304 Number: 1412 Publication-Status: Published in Journal of Economic Theory (2006), 127: 232-263 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1412.pdf File-Format: application/pdf File-Size: 322 kb Handle: RePEc:cwl:cwldpp:1412 Template-type: ReDIF-Paper 1.0 Author-Name: Dino Gerardi Author-X-Name-First: Dino Author-X-Name-Last: Gerardi Author-Email: donato.gerardi@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/gerardi.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu Author-Name: Leeat Yariv Author-X-Name-First: Leeat Author-X-Name-Last: Yariv Author-Workplace-Name: CalTec Title: Information Acquisition in Committees Abstract: The goal of this paper is to illustrate the significance of information acquisition in mechanism design. We provide a stark example of a mechanism design problem in a collective choice environment with information acquisition. We concentrate on committees that are comprised of agents sharing a common goal and having a joint task. Members of the committee decide whether to acquire costly information or not at the outset and are then asked to report their private information. The designer can choose the size of the committee, as well as the procedure by which it selects the collective choice, i.e., the correspondence between agents’ reports and distributions over collective choices. We show that the ex-ante optimal device may be ex-post inefficient, i.e., lead to suboptimal aggregation of information from a statistical point of view. For particular classes of parameters, we describe the full structure of the optimal mechanisms. Classification-JEL: D71, D72, D78 Keywords: Collective choice, Mechanism design, Information acquisition Note: CFP 1238. Length: 53 pages Creation-Date: 200705 Number: 1411R Publication-Status: Published in Games and Economic Behavior (2008), 62: 436-459 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1411-r.pdf File-Format: application/pdf File-Size: 460 kb Handle: RePEc:cwl:cwldpp:1411R Template-type: ReDIF-Paper 1.0 Author-Name: Dino Gerardi Author-X-Name-First: Dino Author-X-Name-Last: Gerardi Author-Email: donato.gerardi@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/gerardi.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu Author-Name: Leeat Yariv Author-X-Name-First: Leeat Author-X-Name-Last: Yariv Author-Workplace-Name: University of California at Los Angeles Title: Committee Design in the Presence of Communication Abstract: The goal of this paper is to introduce communication in a collective choice environment with information acquisition. We concentrate on decision panels that are comprised of agents sharing a common goal and having a joint task. Members of the panel decide whether to acquire costly information or not, preceding the communication stage. We take a mechanism design approach and consider a designer who can choose the size of the decision panel, the procedure by which it selects the collective choice, and the communication protocol by which its members abide prior to casting their individual action choices. We characterize the solution of this extended design problem. We find that the optimal communication protocol in such an environment balances a tradeoff between inducing players to acquire information and extracting the maximal amount of information from them. In particular, the optimal device may lead to suboptimal aggregation of information from a statistical point of view. Furthermore, groups producing the optimal collective decisions are bounded in size. Comparative statics results shed light on the regularities the design solution exhibits. For example, the expected utility of all agents decreases with the cost of private information and increases with its accuracy, but the optimal panel size is not monotonic in the signals' accuracy. Classification-JEL: D71, D72, D78 Keywords: Communication, Collective Choice, Mechanism Design, Strategic Voting, Information Acquisition Length: 42 pages Creation-Date: 200303 Number: 1411 Publication-Status: Published in Games and Economic Behavior "Information Acquisition in Committee," forthcoming Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1411.pdf File-Format: application/pdf File-Size: 414 kb Handle: RePEc:cwl:cwldpp:1411 Template-type: ReDIF-Paper 1.0 Author-Name: John E. Roemer Author-X-Name-First: John E. Author-X-Name-Last: Roemer Author-Email: john.roemer@yale.edu Author-Homepage: http://pantheon.yale.edu/~jer39/ Author-Workplace-Name: Dept. Political Science, Yale University Author-Workplace-Homepage: http://www.yale.edu/polisci/ Title: Indeterminacy of Citizen-Candidate Equilibrium Abstract: In a citizen candidate equilibrium, there are n candidates each of whom announces a policy in a policy space of dimension d. Thus the policy equilibrium lives in a space of dimension nd. We show, in a canonical example, that the equilibrium manifold is generically of dimension nd. In particular, the set of equilibria contains an open set in T^n . Classification-JEL: D72 Keywords: Citizen-candidate equilibrium, Political equilibrium Length: 9 pages Creation-Date: 200303 Number: 1410 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1410.pdf File-Format: application/pdf File-Size: 69 kb Handle: RePEc:cwl:cwldpp:1410 Template-type: ReDIF-Paper 1.0 Author-Name: John E. Roemer Author-X-Name-First: John E. Author-X-Name-Last: Roemer Author-Email: john.roemer@yale.edu Author-Homepage: http://pantheon.yale.edu/~jer39/ Author-Workplace-Name: Dept. Political Science, Yale University Author-Workplace-Homepage: http://www.yale.edu/polisci/ Title: Political Equilibrium With Private or/and Public Campaign Finance: A Comparison Of Institutions Abstract: We propose a theory of party competition (two parties, single-issue) where citizens acquire party membership by contributing money to a party, and where a member?s influence on the policy taken by her party is proportional to her campaign contribution. The polity consists of informed and uninformed voters: only informed voters join parties, and the party campaign chest, the sum of its received contributions, is used to advertise and reach uninformed voters. Parties compete with each other strategically with respect to policy choice and advertising. We propose a definition of political equilibrium, in which party membership, citizen contributions, and parties? policies are simultaneously determined, for each of four financing institutions, running a gamut between a purely private, unconstrained system, to a public system in which all citizens have equal financial input. We compare the representation and welfare properties of these four institutions. Classification-JEL: D72 Keywords: Political equilibrium, Campaign finance, Representation Length: 60 pages Creation-Date: 200303 Number: 1409 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1409.pdf File-Format: application/pdf File-Size: 244 kb Handle: RePEc:cwl:cwldpp:1409 Template-type: ReDIF-Paper 1.0 Author-Name: John E. Roemer Author-X-Name-First: John E. Author-X-Name-Last: Roemer Author-Email: john.roemer@yale.edu Author-Homepage: http://pantheon.yale.edu/~jer39/ Author-Workplace-Name: Dept. Political Science, Yale University Author-Workplace-Homepage: http://www.yale.edu/polisci/ Title: Eclectic Distributional Ethics Abstract: Utilitarians, egalitarians, prioritarians, and sufficientarians each provide examples of situations demonstrating, often compellingly, that a sensible ethical observer must adopt their view and reject the others. We argue, to the contrary, that an attractive ethic is eclectic, in the sense of coinciding with these apparently different views in different regions of the space of social states. Classification-JEL: D63 Keywords: Distributive justice, Ethics, Axiomatic social choice Note: CFP 1140. Length: 26 pages Creation-Date: 200303 Number: 1408 Publication-Status: Published in Politics, Philosophy and Economics (2004), 3(3): 267-281 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1408.pdf File-Format: application/pdf File-Size: 174 kb Handle: RePEc:cwl:cwldpp:1408 Template-type: ReDIF-Paper 1.0 Author-Name: Peter C.B. Phillips Author-X-Name-First: Peter C.B. Author-X-Name-Last: Phillips Author-Email: peter.phillips@yale.edu Author-Homepage: http://korora.econ.yale.edu/phillips/ Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Yixiao Sun Author-X-Name-First: Yixiao Author-X-Name-Last: Sun Author-Workplace-Name: University of California, San Diego Author-Name: Sainan Jin Author-X-Name-First: Sainan Author-X-Name-Last: Jin Author-Workplace-Name: Department of Economics, Yale University Title: Consistent HAC Estimation and Robust Regression Testing Using Sharp Origin Kernels with No Truncation Abstract: A new family of kernels is suggested for use in heteroskedasticity and autocorrelation consistent (HAC) and long run variance (LRV) estimation and robust regression testing. The kernels are constructed by taking powers of the Bartlett kernel and are intended to be used with no truncation (or bandwidth) parameter. As the power parameter (rho) increases, the kernels become very sharp at the origin and increasingly downweight values away fro the origin, thereby achieving effects similar to a bandwidth parameter. Sharp origin kernels can be used in regression testing in much the same way as conventional kernels with no truncation, as suggested in the work of Kiefer and Vogelsang (2002a, 2002b). A unified representation of HAC limit theory for untruncated kernels is provided using a new proof based on Mercer's theorem that allows for kernels which may or may not be differentiable at the origin. This new representation helps to explain earlier findings like the dominance of the Bartlett kernel over quadratic kernels in test power and yields new findings about the asymptotic properties of tests with sharp origin kernels. Analysis and simulations indicate that sharp origin kernels lead to tests with improved size properties relative to conventional tests and better power properties than other tests using Bartlett and other conventional kernels without truncation. If rho is passed to infinity with the sample size (T), the new kernels provide consistent HAC and LRV estimates as well as continued robust regression testing. Optimal choice of rho based on minimizing the asymptotic mean squared error of estimation is considered, leading to a rate of convergence of the kernel estimate of T^{1/3}, analogous to that of a conventional truncated Bartlett kernel estimate with an optimal choice of bandwidth. A data-based version of the consistent sharp origin kernel is obtained which is easily implementable in practical work. Within this new framework, untruncated kernel estimation can be regarded as a form of conventional kernel estimation in which the usual bandwidth parameter is replaced by a power parameter that serves to control the degree of downweighting. Simulations show that in regression testing with the sharp origin kernel, the power properties are better than those with simple untruncated kernels (where rho = 1) and at least as good as those with truncated kernels. Size is generally more accurate with sharp origin kernels than truncated kernels. In practice a simple fixed choice of the exponent parameter around rho = 16 for the sharp origin kernel produces favorable results for both size and power in regression testing with sample sizes that are typical in econometric applications. Classification-JEL: C13, C14, C22, C51 Keywords: Consistent HAC estimation, Data determined kernel estimation, Long run variance, Mercer?s theorem, Power parameter, Sharp origin kernel Length: 50 pages Creation-Date: 200303 Number: 1407 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1407.pdf File-Format: application/pdf File-Size: 544 kb Handle: RePEc:cwl:cwldpp:1407 Template-type: ReDIF-Paper 1.0 Author-Name: Franklin Allen Author-X-Name-First: Franklin Author-X-Name-Last: Allen Author-Workplace-Name: Wharton School, University of Pennsylvania Author-Name: Stephen Morris Author-X-Name-First: Stephen Author-X-Name-Last: Morris Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Hyun Song Shin Author-X-Name-First: Hyun Song Author-X-Name-Last: Shin Author-Workplace-Name: London School of Economics Title: Beauty Contests, Bubbles and Iterated Expectations in Asset Markets Abstract: In a financial market where traders are risk averse and short lived, and prices are noisy, asset prices today depend on the average expectation today of tomorrow's price. Thus (iterating this relationship) the date 1 price equals the date 1 average expectation of the date 2 average expectation of the date 3 price. This will not in general equal the date 1 average expectation of the date 3 price. We show how this failure of the law of iterated expectations for average belief can help understand the role of higher order beliefs in a fully rational asset pricing model and explain over-reaction to (noisy) public information. Classification-JEL: E4, G12 Keywords: Beauty Contests, Bubbles and iterated expectations in Asset Markets Length: 37 pages Creation-Date: 200303 Number: 1406 Publication-Status: Published in Review of Financial Studies (2006), 19: 719-752 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1406.pdf File-Format: application/pdf File-Size: 326 kb Handle: RePEc:cwl:cwldpp:1406 Template-type: ReDIF-Paper 1.0 Author-Name: Jeffrey D. Amado Author-X-Name-First: Jeffrey D. Author-X-Name-Last: Amado Author-Workplace-Name: Bank for International Settlements Author-Name: Stephen Morris Author-X-Name-First: Stephen Author-X-Name-Last: Morris Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Hyun Song Shin Author-X-Name-First: Hyun Song Author-X-Name-Last: Shin Author-Workplace-Name: London School of Economics Title: Communication and Monetary Policy Abstract: One role of monetary policy is to coordinate expectations in the economy and greater transparency of monetary policy may lead to greater coordination. But if transparent Classification-JEL: C7, E5 Keywords: Communication, Monetary policy, Transparency, Common knowledge Note: CFP 1127 Length: 21 pages Creation-Date: 200303 Number: 1405 Publication-Status: Published in Oxford Review of Economic Policy (2002), 18(4): 495-503 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1405.pdf File-Format: application/pdf File-Size: 192 kb Handle: RePEc:cwl:cwldpp:1405 Template-type: ReDIF-Paper 1.0 Author-Name: Donald W.K. Andrews Author-X-Name-First: Donald W.K. Author-X-Name-Last: Andrews Author-Email: donald.andrews@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/andrews.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Jae-Young Kim Author-X-Name-First: Jae-Young Author-X-Name-Last: Kim Author-Email: jykim@albany.edu Author-Workplace-Name: SUNY - Albany Title: End-of-Sample Cointegration Breakdown Tests Abstract: This paper introduces tests for cointegration breakdown that may occur over a relatively short time period, such as at the end of the sample. The breakdown may be due to a shift in the cointegrating vector or due to a shift in the errors from being I(0) to being I(1). Tests are introduced based on the post-breakdown sum of squared residuals and the post-breakdown sum of squared reverse partial sums of residuals. Critical values are provided using a parametric subsampling method. The regressors in the model are taken to be arbitrary linear combinations of deterministic, stationary, and integrated random variables. The tests are asymptotically valid when the number of observations in the breakdown period, m, is fixed and finite as the total sample size, T+m, goes to infinity. The tests are asymptotically valid under weak conditions. Simulation results indicate that the tests work well in the scenarios considered. Use of the tests is illustrated by testing for interest rate parity breakdown during the Asian financial crisis of 1997. Classification-JEL: C12, C52 Keywords: Cointegration, Least squares estimator, Model breakdown, Parameter change test, Structural change Length: 55 pages Creation-Date: 200303 Number: 1404 Publication-Status: Published in Journal of Business and Economic Statistics (2006), 24: 379-394 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1404.pdf File-Format: application/pdf File-Size: 544 kb Handle: RePEc:cwl:cwldpp:1404 Template-type: ReDIF-Paper 1.0 Author-Name: Galina Hale Author-X-Name-First: Galina Author-X-Name-Last: Hale Author-Workplace-Name: Yale University Author-Workplace-Homepage: http://www.econ.yale.edu Title: Bonds or Loans? The Effect of Macroeconomic Fundamentals Abstract: The costs of debt crises are not invariant to the foreign debt instrument composition: bank loans or bonds. The lending boom of the 1990s witnessed considerable variation over time and across countries in the debt instrument used by emerging market (EM) borrowers. This paper tests how macroeconomic fundamentals affect the composition of international debt instruments used by EM borrowers. Analysis of micro-level data using ordered probability model shows that macroeconomic fundamentals explain a significant share of variation in the ratio of bonds to loans for private borrowers, but not for the sovereigns. Classification-JEL: F34 Keywords: Emerging markets, Foreign debt, Debt composition, Country risk Length: 53 pages Creation-Date: 200302 Revision-Date: 200509 Number: 1403 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1403.pdf File-Format: application/pdf File-Size: 262 kb Handle: RePEc:cwl:cwldpp:1403 Template-type: ReDIF-Paper 1.0 Author-Name: Stephen Morris Author-X-Name-First: Stephen Author-X-Name-Last: Morris Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Hyun Song Shin Author-X-Name-First: Hyun Song Author-X-Name-Last: Shin Author-Workplace-Name: London School of Economics Title: Heterogeneity and Uniqueness in Interaction Games Abstract: Incomplete information games, local interaction games and random matching games are all special cases of a general class of interaction games (Morris (1997)). In this paper, we use this equivalence to present a unified treatment of arguments generating uniqueness in games with strategic complementarities by introducing heterogeneity in these different settings. We also report on the relation between local and global heterogeneity, on the role of strategic multipliers and on purification in the three types of interaction game. Classification-JEL: C72, D8 Keywords: Heterogeneity, Uniqueness, Global games Length: 44 pages Creation-Date: 200302 Number: 1402 Publication-Status: Published in The Economy as an Evolving Complex System III, ed. by L. Blume and S. Durlauf, Oxford University Press, 2005, pp. 207-242 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1402.pdf File-Format: application/pdf File-Size: 359 kb Handle: RePEc:cwl:cwldpp:1402 Template-type: ReDIF-Paper 1.0 Author-Name: Stephen Morris Author-X-Name-First: Stephen Author-X-Name-Last: Morris Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Coordination, Communication and Common Knowledge: A Retrospective on Electronic Mail Game Abstract: Common knowledge plays an important role in coordination problems and coordination problems are central to many areas of economic policy. In this paper, I review some common knowledge puzzles culminating in the electronic mail game. These puzzles may seem distant from practical concerns. However, I then argue why insights derived from this literature are useful in interpreting empirical evidence of how people coordinate under uncertainty and in understanding the role of communication in coordinating behaviour. Classification-JEL: C72, D8 Keywords: Common knowledge, Coordination, Communication Note: CFP 1060. Length: 23 pages Creation-Date: 200302 Number: 1401 Publication-Status: Published in Oxford Review of Economic Policy, 18(4), 2002 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1401.pdf File-Format: application/pdf File-Size: 204 kb Handle: RePEc:cwl:cwldpp:1401 Template-type: ReDIF-Paper 1.0 Author-Name: Stephen Morris Author-X-Name-First: Stephen Author-X-Name-Last: Morris Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Hyun Song Shin Author-X-Name-First: Hyun Song Author-X-Name-Last: Shin Author-Workplace-Name: London School of Economics Title: Catalytic Finance: When Does It Work? Abstract: In a simple model of currency crises caused by creditor coordination failure, we show that bailouts that reduce ex post inefficiency will sometimes create ex ante moral hazard but will sometimes enhance the incentives for governments to take preventative actions. This model helps us understand a debate about the role of the IMF in catalyzing lending to developing countries. Classification-JEL: C7, D82, F33 Keywords: Moral hazard, Financial crisis, International financial architecture, Global games Length: 21 pages Creation-Date: 200302 Number: 1400 Publication-Status: Published in Journal of International Economics (2006), 70: 161-177 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d14a/d1400.pdf File-Format: application/pdf File-Size: 182 kb Handle: RePEc:cwl:cwldpp:1400