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: Yale University Title: Rationalizing and Curve-Fitting Demand Data with Quasilinear Utilities Abstract: In the empirical and theoretical literature a consumer's utility function is often assumed to be quasilinear. In this paper we provide necessary and sufficient conditions for testing if the consumer acts as if she is maximizing a quasilinear utility function over her budget set. If the consumer's choices are inconsistent with maximizing a quasilinear utility function over her budget set, then we compute the "best" quasilinear rationalization of her choices. Classification-JEL: D11, D12 Keywords: Quasilinear utilities, Afriat inequalities, Curve-fitting Length: 11 pages Creation-Date: 200302 Revision-Date: 200407 Number: 1399R Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1399-r.pdf File-Format: application/pdf File-Size: 117 kb Handle: RePEc:cwl:cwldpp:1399R 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: Yale University Title: The Strong Law of Demand Abstract: We show that a demand function is derived from maximizing a quasilinear utility function subject to a budget constraint if and only if the demand function is cyclically monotone. On finite data sets consisting of pairs of market prices and consumption vectors, this result is equivalent to a solution of the Afriat inequalities where all the marginal utilities of income are equal. We explore the implications of these results for maximization of a random quasilinear utility function subject to a budget constraint and for representative agent general equilibrium models. The duality theory for cyclically monotone demand is developed using the Legendre-Fenchel transform. In this setting, a consumer's surplus is measured by the conjugate of her utility function. Classification-JEL: D11, D12, D51 Keywords: Permanent income hypothesis, Afriat's theorem, Law of demand, Consumer's surplus, Testable restrictions Length: 12 pages Creation-Date: 200302 Number: 1399 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1399.pdf File-Format: application/pdf File-Size: 168 kb Handle: RePEc:cwl:cwldpp:1399 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: The Elusive Empirical Shadow of Growth Convergence Abstract: Two groups of applied econometricians have figured prominently in empirical studies of growth convergence. In terms of a popular caricature, one group believes it has found a black hat of convergence (evidence for growth convergence) in the dark room of economic growth, even though the hat may not exist (the task may be futile). A second group believes it has found a black coat of divergence (evidence against growth convergence) even though this object also may not exist (empirical reality, including the nature of growth divergence, is ever more complex than the models used to characterize it). The present paper seeks to light a candle to see whether there is a hat, a coat or another object of identifiable clothing in the room of regional and multi-country economic growth. After our examination, we find that the candle power of applied econometrics is too low to clearly distinguish a black hat in the huge dark room of economic growth. However, in our theory model, we find an important new role for heterogeneity over time and across economies in the transitional dynamics of economic growth; and, in our empirical work, these transitional dynamics reveal an elusive shadow of the conditional convergence hat in both US regional and inter-country OECD growth patterns. Classification-JEL: C32, C33 Keywords: Convergence Parameter, Conditional Convergence, Economic Growth, Growth Convergence, Heterogeneity, Neoclassical Economics, Transition measures Length: 36 pages Creation-Date: 200302 Number: 1398 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1398.pdf File-Format: application/pdf File-Size: 531 kb Handle: RePEc:cwl:cwldpp:1398 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: Laws and Limits of Econometrics Abstract: We start by discussing some general weaknesses and limitations of the econometric approach. A template from sociology is used to formulate six laws that characterize mainstream activities of econometrics and the scientific limits of those activities, we discuss some proximity theorems that quantify by means of explicit bounds how close we can get to the generating mechanism of the data and the optimal forecasts of next period observations using a finite number of observations. The magnitude of the bound depends on the characteristics of the model and the trajectory of the observed data. The results show that trends are more elusive to model than stationary processes in the sense that the proximity bounds are larger. By contrast, the bounds are of smaller order for models that are unidentified or nearly unidentified, so that lack or near lack of identification may not be as fatal to the use of a model in practice as some recent results on inference suggest, we look at one possible future of econometrics that involves the use of advanced econometric methods interactively by way of a web browser. With these methods users may access a suite of econometric methods and data sets online. They may also upload data to remote servers and by simple web browser selections initiate the implementation of advanced econometric software algorithms, returning the results online and by file and graphics downloads. Classification-JEL: C100, C500, C870 Keywords: Activities and limitations of econometrics, automated modeling, nearly unidentified models, nonstationarity, online econometrics, policy analysis, prediction, quantitative bounds, trends, unit roots, weak instruments Note: CFP 1081. Length: 32 pages Creation-Date: 200302 Number: 1397 Publication-Status: Published in The Economic Journal (2003), 13(4&6): C26-C52 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1397.pdf File-Format: application/pdf File-Size: 530 kb Handle: RePEc:cwl:cwldpp:1397 Template-type: ReDIF-Paper 1.0 Author-Name: Samuel McCarthy Author-X-Name-First: Samuel Author-X-Name-Last: McCarthy Author-Workplace-Name: Yale 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: Jianfeng Yu Author-X-Name-First: Jianfeng Author-X-Name-Last: Yu Author-Email: jianfeng.yu@yale.edu Author-Workplace-Name: Yale University Title: Who Refers to Whom: A Study of Research References and the Relationship between Research Reports and Final Publication Abstract: The size and style of referencing for a large sample of 60 years of publications of the Cowles Foundation are examined. The influence of computerization is considered. Self-referencing is noted and some observations are made on the costs and distribution of research papers. Classification-JEL: A14, D89 Keywords: Referencing, Cost of publication Length: 23 pages Creation-Date: 200301 Number: 1396 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1396.pdf File-Format: application/pdf File-Size: 177 kb Handle: RePEc:cwl:cwldpp:1396 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: Rahul Deb Author-X-Name-First: Rahul Author-X-Name-Last: Deb Author-Workplace-Name: Dept. of Economics, Yale University Author-Name: Marten H. Wegkamp Author-X-Name-First: Marten H. Author-X-Name-Last: Wegkamp Author-Workplace-Name: Dept. of Statistics, Florida State University Title: Tests of Independence in Separable Econometric Models: Theory and Application Abstract: A common stochastic restriction in econometric models separable in the latent variables is the assumption of stochastic independence between the unobserved and observed exogenous variables. Both simple and composite tests of this assumption are derived from properties of independence empirical processes and the consistency of these tests is established. As an application, we simulate estimation of a random quasilinear utility function, where we apply our tests of independence. Classification-JEL: C01, C13, C14, C15, D12 Keywords: Cramer-von Mises distance, Empirical independence processes, Random utility models, Semiparametric econometric models, Specification test of independence Length: 27 pages Creation-Date: 200301 Revision-Date: 200712 Number: 1395RR Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1395-rr.pdf File-Format: application/pdf File-Size: 599 kb Handle: RePEc:cwl:cwldpp:1395RR 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: Rahul Deb Author-X-Name-First: Rahul Author-X-Name-Last: Deb Author-Workplace-Name: Dept. of Economics, Yale University Author-Name: Marten H. Wegkamp Author-X-Name-First: Marten H. Author-X-Name-Last: Wegkamp Author-Workplace-Name: Dept. of Statistics, Florida State University Title: Tests of Independence in Separable Econometric Models: Theory and Application Abstract: A common stochastic restriction in econometric models separable in the latent variables is the assumption of stochastic independence between the unobserved and observed exogenous variables. Both simple and composite tests of this assumption are derived from properties of independence empirical processes and the consistency of these tests is established. As an application, we simulate estimation of a random quasilinear utility function, where we apply our tests of independence. Classification-JEL: C12, C13, C14 Keywords: Cramer–von Mises distance, Empirical independence processes, Random utility models, Semiparametric econometric models, Specification test of independence Length: 26 pages Creation-Date: 200301 Revision-Date: 200610 Number: 1395R Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1395-r.pdf File-Format: application/pdf File-Size: 599 kb Handle: RePEc:cwl:cwldpp:1395R 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: Marten H. Wegkamp Author-X-Name-First: Marten H. Author-X-Name-Last: Wegkamp Author-Workplace-Name: Yale University Title: Tests of Independence in Separable Econometric Models Abstract: A common stochastic restriction in econometric models separable in the latent variables is the assumption of stochastic independence between the unobserved and observed exogenous variables. Both simple and composite tests of this assumption are derived from properties of independence empirical processes and the consistency of these tests is established. Classification-JEL: C12, C13, C14 Keywords: Cramer-von Mises distance, Empirical independence processes, Random utility models, Semiparametric econometric models, Specification test of independence Length: 19 pages Creation-Date: 200301 Number: 1395 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1395.pdf File-Format: application/pdf File-Size: 308 kb Handle: RePEc:cwl:cwldpp:1395 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: Takashi Ui Author-X-Name-First: Takashi Author-X-Name-Last: Ui Author-Workplace-Name: Yokohama National University Title: Generalized Potentials and Robust Sets of Equilibria Abstract: This paper introduces generalized potential functions of complete information games and studies the robustness of sets of equilibria to incomplete information. A set of equilibria of a complete information game is robust if every incomplete information game where payoffs are almost always given by the complete information game has an equilibrium which generates behavior close to some equilibrium in the set. This paper provides sufficient conditions for the robustness of sets of equilibria in terms of argmax sets of generalized potential functions and shows that the sufficient conditions generalize the existing sufficient conditions for the robustness of equilibria. Classification-JEL: C72, D82 Keywords: Incomplete information, Potential, Refinements, Robustness Length: 36 pages Creation-Date: 200301 Number: 1394 Publication-Status: Published in Journal of Economic Theory (2005), 124: 45-78 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1394.pdf File-Format: application/pdf File-Size: 384 kb Handle: RePEc:cwl:cwldpp:1394 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: Vision and Influence in Econometrics: John Denis Sargan Abstract: Denis Sargan's intellectual influence in econometrics is discussed and some of his visions for the future of econometrics are considered in this memorial article. One of Sargan's favorite topics in econometric theory was finite sample theory, including both exact theory and various types of asymptotic expansions. We provide some summary discussion of asymptotic expansions of the type that Sargan developed in this field and give explicit representations of Sargan's formula for the Edgeworth expansion in the case of an econometric estimator that can be written as a smooth function of sample moments whose distributions themselves have Edgeworth expansions. Classification-JEL: B23, C22, C30 Keywords: Academic bodhisattva, asymptotic expansion, bodhicitta, Edgeworth, finite sample theory, intellectual influence, vision Note: CFP 1054 Length: 19 pages Creation-Date: 200301 Number: 1393 Publication-Status: Published in Econometric Theory (2003), 19(3): 495-511 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1393.pdf File-Format: application/pdf File-Size: 210 kb Handle: RePEc:cwl:cwldpp:1393 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: University of Auckland Title: Jackknifing Bond Option Prices Abstract: In continuous time specifications, the prices of interest rate derivative securities depend crucially on the mean reversion parameter of the associated interest rate diffusion equation. This parameter is well known to be subject to estimation bias when standard methods like maximum likelihood (ML) are used. The estimation bias can be substantial even in very large samples and it translates into a bias in pricing bond options and other derivative securities that is important in practical work. The present paper proposes a very general method of bias reduction for pricing bond options that is based on Quenouille's (1956) jackknife. We show how the method can be applied directly to the options price itself as well as the coefficients in continuous time models. The method is implemented and evaluated here in the Cox, Ingersoll and Ross (1985) model, although it has much wider applicability. A Monte Carlo study shows that the proposed procedure achieves substantial bias reductions in pricing bond options with only mild increases in variance that do not compromise the overall gains in mean squared error. Our findings indicate that bias correction in estimation of the drift can be more important in pricing bond options than correct specification of the diffusion. Thus, even if ML or approximate ML can be used to estimate more complicated models, it still appears to be of equal or greater importance to correct for the effects on pricing bond options of bias in the estimation of the drift. An empirical application to U.S. interest rates highlights the differences between bond and option prices implied by the jackknife procedure and those implied by the standard approach. These differences are large and suggest that bias reduction in pricing options is important in practical applications. Classification-JEL: C13, C22, E43, G13 Keywords: Bias Reduction, Option Pricing, Bond Pricing, Term Structure of Interest Rate, Re-sampling, Estimation of Continuous Time Models Note: CFP 1119. Length: 51 pages Creation-Date: 200301 Number: 1392 Publication-Status: Published in Review of Financial Studies (2005), 18(2): 707-742 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1392.pdf File-Format: application/pdf File-Size: 365 kb Handle: RePEc:cwl:cwldpp:1392 Template-type: ReDIF-Paper 1.0 Author-Name: Victoria Zinde-Walsh Author-X-Name-First: Victoria Author-X-Name-Last: Zinde-Walsh Author-Workplace-Name: McGill University & CIREQ 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: Fractional Brownian Motion as a Differentiable Generalized Gaussian Process Abstract: Brownian motion can be characterized as a generalized random process and, as such, has a generalized derivative whose covariance functional is the delta function. In a similar fashion, fractional Brownian motion can be interpreted as a generalized random process and shown to possess a generalized derivative. The resulting process is a generalized Gaussian process with mean functional zero and covariance functional that can be interpreted as a fractional integral or fractional derivative of the delta-function. Classification-JEL: C32 Keywords: Brownian motion, fractional Brownian motion, fractional derivative, covariance functional, delta function, generalized derivative, generalized Gaussian process Note: CFP 1115. Length: 10 pages Creation-Date: 200301 Number: 1391 Publication-Status: Published in K. Athreya, M. Majumdar, M. Puri and E. Waymire, eds., Probability, Statistics and Their Applications: Papers in Honor of Rabi Bhattacharya, Vol. 41, Institute of Mathematical Statistics, 2003, pp. 285-292 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1391.pdf File-Format: application/pdf File-Size: 147 kb Handle: RePEc:cwl:cwldpp:1391 Template-type: ReDIF-Paper 1.0 Author-Name: Hyungsik Roger Moon Author-X-Name-First: Hyungsik Roger Author-X-Name-Last: Moon Author-Workplace-Name: University of Southern California 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 of Autoregressive Roots Near Unity with Panel Data Abstract: This paper investigates a generalized method of moments (GMM) approach to the estimation of autoregressive roots near unity with panel data and incidental deterministic trends. Such models arise in empirical econometric studies of firm size and in dynamic panel data modeling with weak instruments. The two moment conditions in the GMM approach are obtained by constructing bias corrections to the score functions under OLS and GLS detrending, respectively. It is shown that the moment condition under GLS detrending corresponds to taking the projected score on the Bhattacharya basis, linking the approach to recent work on projected score methods for models with infinite numbers of nuisance parameters (Waterman and Lindsay, 1998). Assuming that the localizing parameter takes a nonpositive value, we establish consistency of the GMM estimator and find its limiting distribution. A notable new finding is that the GMM estimator has convergence rate n/{1/6}, slower than /n, when the true localizing parameter is zero (i.e., when there is a panel unit root) and the deterministic trends in the panel are linear. These results, which rely on boundary point asymptotics, point to the continued difficulty of distinguishing unit roots from local alternatives, even when there is an infinity of additional data. Classification-JEL: C22, C23 Keywords: Bias, boundary point asymptotics, GMM estimation, local to unity, moment conditions, nuisance parameters, panel data, pooled regression, projected score Length: 62 pages Creation-Date: 200301 Number: 1390 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1390.pdf File-Format: application/pdf File-Size: 637 kb Handle: RePEc:cwl:cwldpp:1390 Template-type: ReDIF-Paper 1.0 Author-Name: Pradeep Dubey Author-X-Name-First: Pradeep Author-X-Name-Last: Dubey Author-Workplace-Name: SUNY at 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: Monetary Equilibrium with Missing Markets Abstract: We consider a two-period model with missing assets and missing market links, in which money plays a central role and is linked to every instrument in the economy. If there are enough missing market links relative to the ratio of outside to inside money, then monetary equilibrium (ME) exists and money has positive value. The nonexistence of GEI (of the underlying economy) shows up as a liquidity trap in terms of the ME. In sharp contrast to GEI, the ME are generally determinate not only in terms of real, but also financial, variables. Classification-JEL: D50, E40, E50, E58 Keywords: Bank, Money, Monetary equilibrium, Incomplete markets, Inside money, Outside money, Liquidity trap Note: CFP 1063. Length: 37 pages Creation-Date: 200301 Number: 1389 Publication-Status: Published in Journal of Mathematical Economics (2003), 39(5-6): 585-618 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1389.pdf File-Format: application/pdf File-Size: 436 kb Handle: RePEc:cwl:cwldpp:1389 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: Testing for a New Economy in the 1990s Abstract: This paper examines how much structural change there was in the U.S. economy in the last half of the 1990s. The results are consistent with the hypothesis that there was only one major structural change, namely the huge increase in stock prices relative to earnings. All other large changes can be explained by this change. There is no obvious reason for the large increase in stock prices relative to earnings. Increased productivity growth does not appear to be an answer since the data show that there was only a modest increase in long run productivity growth in the last half of the 1990s. Also, earnings growth and the share of earnings in the economy were not unusually large. Classification-JEL: E10, C52 Keywords: New economy, Stability tests Note: CFP 1194. Length: 25 pages Creation-Date: 200212 Revision-Date: 200303 Number: 1388 Publication-status: Published in Business Economics (January 2004), 39(1): 43-53 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1388.pdf File-Format: application/pdf File-Size: 158 kb Handle: RePEc:cwl:cwldpp:1388 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: The Economic Consequences of a War with Iraq Abstract: Much has been written about the national-security aspects of a potential conflict in Iraq, but there are no studies of the cost. A review of several past wars indicates that nations historically have consistently underestimated the cost of military conflicts. This study reviews the potential costs of a conflict including the postwar expenses that might be required for occupation, humanitarian assistance, reconstruction, nation-building, along with the implications for oil markets and macroeconomic activity. It considers two potential scenarios that span the potential outcomes, ranging from a short and relatively conflict-free case to protracted conflict with difficult and expensive postwar reconstruction and occupation. The estimates of the cost to the United States over the decade following hostilities range from $100 billion to $1.9 trillion. Classification-JEL: E6, H56, Q4 Keywords: Oil, Defense spending, War, Iraq Length: 51 pages Creation-Date: 2002-12 Number: 1387 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1387.pdf File-Format: application/pdf File-Size: 385 kb Handle: RePEc:cwl:cwldpp:1387 Template-type: ReDIF-Paper 1.0 Author-Name: Jeeman Jung Author-X-Name-First: Jeeman Author-X-Name-Last: Jung Author-Workplace-Name: Sangmyung University 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: One Simple Test of Samuelson's Dictum for the Stock Market Abstract: Samuelson [1998] offered the dictum that the stock market is "micro efficient" but "macro inefficient." That is, the efficient markets hypothesis works much better for individual stocks than it does for the aggregate stock market. In this paper, we present one simple test, based both on regressions and on a simple scatter diagram that vividly illustrates that there is some truth to Samuelson's dictum. The data comprise all U.S. firms on the CRSP tape that have survived since 1926. Classification-JEL: G14 Keywords: Market efficiency, Random walk, Dividend yield, Dividend price ratio, Present value, Excess volatility, Gordon model Note: CFP 1183. Length: 18 pages Creation-Date: 20021001 Publication-Status: Published in Economic Inquiry (2005), 43(2): 221-228 Number: 1386 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1386.pdf File-Format: application/pdf File-Size: 119 kb Handle: RePEc:cwl:cwldpp:1386 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: From Efficient Market Theory to Behavioral Finance Abstract: The efficient markets theory reached the height of its dominance in academic circles around the 1970s. Faith in this theory was eroded by a succession of discoveries of anomalies, many in the 1980s, and of evidence of excess volatility of returns. Finance literature in this decade and after suggests a more nuanced view of the value of the efficient markets theory, and, starting in the 1990s, a blossoming of research on behavioral finance. Some important developments in the 1990s and recently include feedback theories, models of the interaction of smart money with ordinary investors, and evidence on obstacles to smart money. Classification-JEL: G14 Keywords: Speculative markets, Rational expectations, Psychology, Anomalies, Excess volatility, Feedback, Smart money, Limits to arbitrage, Short sales Note: CFP 1055 Length: 43 pages Creation-Date: 20021001 Number: 1385 Publication-Status: Published in Journal of Economic Perspectives (Winter 2003), 17(1): 83-104 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1385.pdf File-Format: application/pdf File-Size: 153 kb Handle: RePEc:cwl:cwldpp:1385 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: Yixiao Sun Author-X-Name-First: Yixiao Author-X-Name-Last: Sun Author-Workplace-Name: UCLA, San Diego Title: Adaptive Local Polynomial Whittle Estimation of Long-range Dependence Abstract: The local Whittle (or Gaussian semiparametric) estimator of long range dependence, proposed by Kunsch (1987) and analyzed by Robinson (1995a), has a relatively slow rate of convergence and a finite sample bias that can be large. In this paper, we generalize the local Whittle estimator to circumvent these problems. Instead of approximating the short-run component of the spectrum, phi(lambda), by a constant in a shrinking neighborhood of frequency zero, we approximate its logarithm by a polynomial. This leads to a "local polynomial Whittle" (LPW) estimator. We specify a data-dependent adaptive procedure that adjusts the degree of the polynomial to the smoothness of phi(lambda) at zero and selects the bandwidth. The resulting "adaptive LPW" estimator is shown to achieve the optimal rate of convergence, which depends on the smoothness of phi(lambda) at zero, up to a logarithmic factor. Classification-JEL: C13, C14, C22 Keywords: Adaptive estimator, Asymptotic bias, Asymptotic normality, Bias reduction, Local polynomial, Long memory, Minimax rate, Optimal bandwidth, Whittle likelihood Note: CFP 1080. Length: 50 pages Creation-Date: 200210 Number: 1384 Publication-Status: Published in Econometrica (2004), 72(2): 569-614 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1384.pdf File-Format: application/pdf File-Size: 470 kb Handle: RePEc:cwl:cwldpp:1384 Template-type: ReDIF-Paper 1.0 Author-Name: Truman F. Bewley Author-X-Name-First: Truman F. Author-X-Name-Last: Bewley Author-Email: truman.bewley@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/bewley.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Fairness, Reciprocity, and Wage Rigidity Abstract: This paper contains a review of work on wage rigidity. The work includes field studies, and economic experiments, and psychological surveys. Economists have done the field studies and experiments, and management scientists and experimental psychologists have done the surveys. Classification-JEL: J30 Keywords: Wage rigidity, Morale, Fairness, Reciprocity Length: 36 pages Creation-Date: 20021001 Number: 1383 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1383.pdf File-Format: application/pdf File-Size: 121 kb Handle: RePEc:cwl:cwldpp:1383 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 Foundationn, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Risk Aversion and Stock Prices Abstract: This paper uses data on companies that have been in the S&P 500 index since 1957 to examine whether risk aversion has decreased since 1995. The evidence suggests that it has not. There is no evidence that more risky companies have had larger increases in their price-earnings ratios since 1995 than less risky companies. Classification-JEL: G12 Keywords: Risk aversion, Stock prices Length: 22 pages Creation-Date: 200209 Revision-Date: 200302 Number: 1382 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1382.pdf File-Format: application/pdf File-Size: 76 kb Handle: RePEc:cwl:cwldpp:1382 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: John F. Oster Author-X-Name-First: John F. Author-X-Name-Last: Oster Author-Workplace-Name: Choate Rosemary Hall Title: College Football Rankings and Market Efficiency Abstract: The results in this paper show that various college football ranking systems have useful independent information for predicting the outcomes of games. Optimal weights for the systems are estimated, and the use of these weights produces a predictive system that is more accurate than any of the individual systems. The results also provide a fairly precise estimate of the size of the home field advantage. These results may be of interest to the Bowl Championship Series in choosing which teams to play in the national championship game. The results also show, however, that none of the systems, including the optimal combination, contains any useful information that is not in the final Las Vegas point spread. It is argued in the paper that this is a fairly strong test of the efficiency of the college football betting market. Classification-JEL: C52 Keywords: Football rankings, Predictive information Length: 23 pages Creation-Date: 200209 Revision-Date: 200503 Number: 1381 Price: None Publication-Status: Published in Journal of Sports Economics, February 2007, 3-18 File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1381.pdf File-Format: application/pdf File-Size: 68 kb Handle: RePEc:cwl:cwldpp:1381 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 Fdn, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Michael Magill Author-X-Name-First: Michael Author-X-Name-Last: Magill Author-Workplace-Name: Univ of Southern California Author-Name: Martine Quinzii Author-X-Name-First: Martine Author-X-Name-Last: Quinzii Author-Workplace-Name: UCLA, Davis Title: Demography and the Long-run Predictability of the Stock Market Abstract: This paper was begun during a visit at the Cowles Foundation in Fall 2000 and revised during a visit in Fall 2002: Michael Magill and Martine Quinzii are grateful for the stimulating environment and the research support provided by the Cowles Foundation. We are also grateful to Bob Shiller for helpful discussions, and to participants at the Cowles Conference on Incomplete Markets at Yale University, the SITE Workshop at Stanford University, the Incomplete Markets Workshop at SUNY Stony Brook during the summer 2001, the Southwest Economic Conference at UCLA, and the Conference for the Advancement of Economic Theory at Rhodes in 2003 for helpful comments. Many thanks to Bill Brainard whose numerous insightful questions and comments greatly improved the final version of the paper. Unfortunately the authors are solely responsible for the remaining weaknesses. Classification-JEL: E21, E32, E43, E44, G12, J11 Keywords: Demography, Price earnings ratio, Returns, Efficient markets, Baby-boom, Savings Note: CFP 1099. Length: 55 pages Creation-Date: 200208 Revision-Date: 200407 Number: 1380R Publication-Status: Published in Brookings Papers on Economic Activity (2004), 1: 241-325 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1380-r.pdf File-Format: application/pdf File-Size: 593 kb Handle: RePEc:cwl:cwldpp:1380R 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 Fdn, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Michael Magill Author-X-Name-First: Michael Author-X-Name-Last: Magill Author-Workplace-Name: Univ of Southern California Author-Name: Martine Quinzii Author-X-Name-First: Martine Author-X-Name-Last: Quinzii Author-Workplace-Name: UCLA, Davis Title: Demography and the Long-run Predictability of the Stock Market Abstract: Stock market price/earnings ratios should be influenced by demography. Since demography is predictable, stock returns should be as well. We provide a simple stochastic OLG model with a cyclical structure that generates cyclical P/E ratios. We calibrate the model to roughly fit the cyclical features of historical P/E ratios. Classification-JEL: E21, E32, E43, E44, G12, J11 Keywords: Demography, Price earnings ratio, Returns, Efficient markets, Baby-boom, Savings Note: CFP 1099 Length: 32 pages Creation-Date: 200208 Number: 1380 Publication-Status: Published in Brookings Papers on Economic Activity, 1, 2004 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1380.pdf File-Format: application/pdf File-Size: 419 kb Handle: RePEc:cwl:cwldpp:1380 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: Ulrich Hege Author-X-Name-First: Ulrich Author-X-Name-Last: Hege Author-Workplace-Name: JEC School of Management Title: The Value of Benchmarking Abstract: We consider the provision of venture capital in a dynamic model with multiple research stages, where time and investment needed to meet each benchmark are unknown. The allocation of funds is subject moral hazard. The optimal contract provides for incentive payments linked to attaining the next benchmark, which must be increasing in the funding horizon of each stage. Benchmarking reduces agency costs, directly by shortening the agent's guaranteed funding horizon, and indirectly via an implicit incentive effect of information rents in future financing rounds. The ex ante need to provide incentives and the venture capitalist's desire to cut information rents ex post create a hold-up conflict, which can be overcome by providing all funds in every stage in a single up-front payment. Empirical patterns of the evolution of financing rounds and research intensity over the lifetime of a project are explained as optimal choices: the optimal capital allocated and the funding horizon are increasing from one stage to the next. This emphasizes the notion that early stages are the riskiest in an innovative venture. Classification-JEL: D83, D92, G24, G31 Keywords: Venture financing, Optimal stopping, Benchmarking, Stage financing, Abandonment option Length: 29 pages Creation-Date: 200208 Revision-Date: 200210 Number: 1379 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1379.pdf File-Format: application/pdf File-Size: 281 kb Handle: RePEc:cwl:cwldpp:1379 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: Offer Lieberman Author-X-Name-First: Offer Author-X-Name-Last: Lieberman Author-Workplace-Name: Technion-Israel Institute Title: Higher-order Improvements of the Parametric Bootstrap for Long-memory Gaussian Processes Abstract: This paper determines coverage probability errors of both delta method and parametric bootstrap confidence intervals (CIs) for the covariance parameters of stationary long-memory Gaussian time series. CIs for the long-memory parameter d_0 are included. The results establish that the bootstrap provides higher-order improvements over the delta method. Analogous results are given for tests. The CIs and tests are based on one or other of two approximate maximum likelihood estimators. The first estimator solves the first-order conditions with respect to the covariance parameters of a "plug-in" log-likelihood function that has the unknown mean replaced by the sample mean. The second estimator does likewise for a plug-in Whittle log-likelihood. The magnitudes of the coverage probability errors for one-sided bootstrap CIs for covariance parameters for long-memory time series are shown to be essentially the same as they are with iid data. This occurs even though the mean of the time series cannot be estimated at the usual n^{1/2} rate. Classification-JEL: C12, C13, C15 Keywords: Asymptotics, confidence intervals, delta method, Edgeworth expansion, Gaussian process, long memory, maximum likelihood estimator, parametric bootstrap, t statistic, Whittle likelihood Length: 42 pages Creation-Date: 200208 Number: 1378 Publication-Status: Published in Journal of Econometrics (2006), 133: 673-702 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1378.pdf File-Format: application/pdf File-Size: 451 kb Handle: RePEc:cwl:cwldpp:1378 Template-type: ReDIF-Paper 1.0 Author-Name: Morris, 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: Takashi Ui Author-X-Name-First: Takashi Author-X-Name-Last: Ui Author-Workplace-Name: Yokohama National University Title: Best Response Equivalence Abstract: Two games are best-response equivalent if they have the same best-response correspondence. We provide a characterization of when two games are best-response equivalent. The characterizations exploit a dual relationship between payoff differences and beliefs. Some "potential game" arguments (cf. Monderer and Shapley, 1996, Games. Econ. Behav. 14, 124-143) rely only on the property that potential games are best-response equivalent to identical interest games. Our results show that a large class of games are best-response equivalent to identical interest games, but are not potential games. Thus we show how some existing potential game arguments can be extended. Classification-JEL: C72 Keywords: Best response equivalence; Duality; Farkas' Lemma; Potential games Length: 31 pages Creation-Date: 200207 Number: 1377 Publication-Status: Published in Games and Economic Behavior (2004), 49: 260-287 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1377.pdf File-Format: application/pdf File-Size: 246 kb Handle: RePEc:cwl:cwldpp:1377 Template-type: ReDIF-Paper 1.0 Author-Name: George Hall Author-X-Name-First: George Author-X-Name-Last: Hall Author-Workplace-Name: Cowles Fdn, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: John Rust Author-X-Name-First: John Author-X-Name-Last: Rust Author-Workplace-Name: University of Maryland Title: Econometric Methods for Endogenously Sampled Time Series: The Case of Commodity Price Speculation in the Steel Market Abstract: This paper studies the econometric problems associated with estimation of a stochastic process that is endogenously sampled. Our interest is to infer the law of motion of a discrete-time stochastic process {p_t} that is observed only at a subset of times {t_1,...,t_n} that depend on the outcome of a probabilistic sampling rule that depends on the history of the process as well as other observed covariates x_t. We focus on a particular example where p_t denotes the daily wholesale price of a standardized steel product. However there are no formal exchanges or centralized markets where steel is traded and pt can be observed. Instead nearly all steel transaction prices are a result of private bilateral negotiations between buyers and sellers, typically intermediated by middlemen known as steel service centers. Even though there is no central record of daily transactions prices in the steel market, we do observe transaction prices for a particular firm -- a steel service center that purchases large quantities of steel in the wholesale market for subsequent resale in the retail market. The endogenous sampling problem arises from the fact that the firm only records p_t on the days that it purchases steel. We present a parametric analysis of this problem under the assumption that the timing of steel purchases is part of an optimal trading strategy that maximizes the firm's expected discounted trading profits. We derive a parametric partial information maximum likelihood (PIML) estimator that solves the endogenous sampling problem and efficiently estimates the unknown parameters of a Markov transition probability that determines the law of motion for the underlying {p_t} process. The PIML estimator also yields estimates of the structural parameters that determine the optimal trading rule. We also introduce an alternative consistent, less efficient, but computationally simpler simulated minimum distance (SMD) estimator that avoids high dimensional numerical integrations required by the PIML estimator. Using the SMD estimator, we provide estimates of a truncated lognormal AR(1) model of the wholesale price processes for particular types of steel plate. We use this to infer the share of the middleman's discounted profits that are due to markups paid by its retail customers, and the share due to price speculation. The latter measures the firm's success in forecasting steel prices and in timing its purchases in order to "buy low and sell high'." The more successful the firm is in speculation (i.e., in strategically timing its purchases), the more serious are the potential biases that would result from failing to account for the endogeneity of the sampling process. Classification-JEL: C13, C14, C15 Keywords: Endogenous sampling, Markov processes, Maximum likelihood, Simulation estimation Length: 57 pages Creation-Date: 200207 Number: 1376 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1376.pdf File-Format: application/pdf File-Size: 449 kb Handle: RePEc:cwl:cwldpp:1376 Template-type: ReDIF-Paper 1.0 Author-Name: Zhijie Xiao Author-X-Name-First: Zhijie Author-X-Name-Last: Xiao Author-Workplace-Name: Univ. Illinois, Urbana-Champaign Author-Name: Oliver Linton Author-X-Name-First: Oliver Author-X-Name-Last: Linto Author-Workplace-Name: LSE Author-Name: Raymond J. Carroll Author-X-Name-First: Raymond J. Author-X-Name-Last: Carroll Author-Workplace-Name: Texas A&M Univ. Author-Workplace-Homepage: Author-Name: E. Mammen Author-X-Name-First: E. Author-X-Name-Last: Mammen Author-Workplace-Name: Universitat Heidelberg Title: More Efficient Kernel Estimation in Nonparametric Regression with Autocorrelated Errors Abstract: We propose a modification of kernel time series regression estimators that improves efficiency when the innovation process is autocorrelated. The procedure is based on a pre-whitening transformation of the dependent variable that has to be estimated from the data. We establish the asymptotic distribution of our estimator under weak dependence conditions. It is shown that the proposed estimation procedure is more efficient than the conventional kernel method. We also provide simulation evidence to suggest that gains can be achieved in moderate sized samples. Keywords: Time series regression, Nonparametric regression, Kernel, Efficiency Length: 49 pages Creation-Date: 200206 Number: 1375 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1375.pdf File-Format: application/pdf File-Size: 960 kb Handle: RePEc:cwl:cwldpp:1375 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 Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Error Bounds and Asymptotic Expansions for Toeplitz Product Functionals of Unbounded Spectra Abstract: This paper establishes error orders for integral limit approximations to traces of powers to the pth order) of products of Toeplitz matrices. Such products arise frequently in the analysis of stationary time series and in the development of asymptotic expansions. The elements of the matrices are Fourier transforms of functions which we allow to be bounded, unbounded, or even to vanish on [-pi,pi], thereby including important cases such as the spectral functions of fractional processes. Error rates are also given in the case in which the matrix product involves inverse matrices. The rates are sharp up to an arbitrarily small epsilon > 0. The results improve on the o(1) rates obtained in earlier work for analogous products. For the p = 1 case, an explicit second order asymptotic expansion is found for a quadratic functional of the autocovariance sequences of stationary long memory time series. The order of magnitude of the second term in this expansion is shown to depend on the long memory parameters. It is demonstrated that the pole in the first order approximation is removed by the second order term, which provides a substantially improved approximation to the original functional. Classification-JEL: C22 Keywords: Asymptotic expansion, higher cumulants, long memory, singularity, spectral density, Toeplitz matrix Note: CFP 1141. Length: 22 pages Creation-Date: 200205 Number: 1374 Publication-Status: Published in Journal of Time Series Analysis (2004), 25(5): 733-753 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1374.pdf File-Format: application/pdf File-Size: 258 kb Handle: RePEc:cwl:cwldpp:1374 Template-type: ReDIF-Paper 1.0 Author-Name: Sainan Jin Author-X-Name-First: Sainan Author-X-Name-Last: Jin Author-Workplace-Name: Dept. 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 Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: The KPSS Test with Seasonal Dummies Abstract: It is shown that the KPSS test for stationarity may be applied without change to regressions with seasonal dummies. In particular, the limit distribution of the KPSS statistic is the same under both the null and alternative hypotheses whether or not seasonal dummies are used. Classification-JEL: C32 Keywords: KPSS test, Seasonal dummies, Stationarity test, Unit root Note: CFP 1132. Length: 6 pages Creation-Date: 200205 Number: 1373 Publication-Status: Published in Economics Letters (2002), 77(2): 239-243 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1373.pdf File-Format: application/pdf File-Size: 99 kb Handle: RePEc:cwl:cwldpp:1373 Template-type: ReDIF-Paper 1.0 Author-Name: Steven Berry Author-X-Name-First: Steven Author-X-Name-Last: Berry Author-Email: steven.berry@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/berry.htm Author-Workplace-Name: Cowles Foundation Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Oliver Linton Author-X-Name-First: Oliver Author-X-Name-Last: Linton Author-Workplace-Name: London School of Economics Author-Name: Ariel Pakes Author-X-Name-First: Ariel Author-X-Name-Last: Pakes Author-Workplace-Name: Harvard University Author-Workplace-Homepage: Title: Limit Theorems for Estimating the Parameters of Differentiated Product Demand Systems Abstract: We provide an asymptotic distribution theory for a class of Generalized Method of Moments estimators that arise in the study of differentiated product markets when the number of observations is associated with the number of products within a given market. We allow for three sources of error: the sampling error in estimating market shares, the simulation error in approximating the shares predicted by the model, and the underlying model error. The limiting distribution of the parameter estimator is normal provided the size of the consumer sample and the number of simulation draws grow at a large enough rate relative to the number of products. We specialise our distribution theory to the Berry, Levinsohn, and Pakes (1995) random coefficient logit model and a pure characteristic model. The required rates differ for these two frequently used demand models. A small Monte Carlo study shows that the difference in asymptotic properties of the two models are reflected in the models' small sample properties. These differences impact directly on the computational burden of the two models. Classification-JEL: C13, C15, C35, C43, L13 Keywords: Choice models, Method of moments, Random coefficients, Product differentiation Length: 51 pages Creation-Date: 200205 Number: 1372 Publication-Status: Published in Review of Economic Studies (2004), 71(3): 613-654 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1372.pdf File-Format: application/pdf File-Size: 458 kb Handle: RePEc:cwl:cwldpp:1372 Template-type: ReDIF-Paper 1.0 Author-Name: Dino Gerardi Author-X-Name-First: Dino Author-X-Name-Last: Gerardi Author-Email: dino.gerardi@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/gerardi.htm Author-Workplace-Name: Cowles Foundation Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Unmediated Communication in Games with Complete and Incomplete Information Abstract: In this paper we study the effects of adding unmediated communication to static, finite games of complete and incomplete information. We characterize S^{U}(G), the set of outcomes of a game G, that are induced by sequential equilibria of cheap talk extensions. A cheap talk extension of G is an extensive-form game in which players communicate before playing G. A reliable mediator is not available and players exchange private or public messages that do not affect directly their payoffs. We first show that if G is a game of complete information with five or more players and rational parameters, then S^{U}(G) coincides with the set of correlated equilibria of G. Next, we demonstrate that if G is a game of incomplete information with at least five players, rational parameters and full support (i.e. all profiles of types have positive probability), then S^{U}(G) is equal to the set of communication equilibria of G. Classification-JEL: C72 Keywords: Communication, Correlated equilibrium, Communication equilibrium, Sequential equilibrium, Mechanism design, Revelation principle Note: CFP 1083. Length: 73 pages Creation-Date: 200205 Number: 1371 Publication-Status: Published in Journal of Economic Theory (2004), 114" 104-131 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1371.pdf File-Format: application/pdf File-Size: 512 kb Handle: RePEc:cwl:cwldpp:1371 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 Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: The Block-block Bootstrap: Improved Asymptotic Refinements Abstract: The asymptotic refinements attributable to the block bootstrap for time series are not as large as those of the nonparametric iid bootstrap or the parametric bootstrap. One reason is that the independence between the blocks in the block bootstrap sample does not mimic the dependence structure of the original sample. This is the join-point problem. In this paper, we propose a method of solving this problem. The idea is not to alter the block bootstrap. Instead, we alter the original sample statistics to which the block bootstrap is applied. We introduce block statistics that possess join-point features that are similar to those of the block bootstrap versions of these statistics. We refer to the application of the block bootstrap to block statistics as the block-block bootstrap. The asymptotic refinements of the block-block bootstrap are shown to be greater than those obtained with the block bootstrap and close to those obtained with the nonparametric iid bootstrap and parametric bootstrap. Classification-JEL: C12, C13, C14 Keywords: Asymptotics, Block bootstrap, Block statistics, Edgeworth expansion, Extremum estimator, Generalized method of moments estimator, Maximum likelihood estimator, t statistic, Test of over-identifying restrictions Note: CFP 1091. Length: 36 pages Creation-Date: 200205 Number: 1370 Publication-Status: Published in Econometrica (May 2004), 72(3): 673-700 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1370.pdf File-Format: application/pdf File-Size: 318 kb Handle: RePEc:cwl:cwldpp:1370 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 Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: End-of-Sample Instability Tests Abstract: This paper considers tests for structural instability of short duration, such as at the end of the sample. The key feature of the testing problem is that the number, m, of observations in the period of potential change is relatively small -- possibly as small as one. The well-known F test of Chow (1960) for this problem only applies in a linear regression model with normally distributed iid errors and strictly exogenous regressors, even when the total number of observations, n + m, is large. We generalize the F test to cover regression models with much more general error processes, regressors that are not strictly exogenous, and estimation by instrumental variables as well as least squares. In addition, we extend the F test to nonlinear models estimated by generalized method of moments and maximum likelihood. Asymptotic critical values that are valid as n approaches infinity with m fixed are provided using a subsampling-like method. The results apply quite generally to processes that are strictly stationary and ergodic under the null hypothesis of no structural instability. Classification-JEL: C12, C52 Keywords: Instrumental variables estimator, Least squares estimator, Parameter change, Structural instability test, Structural change Note: CFP 1072. Length: 43 pages Creation-Date: 200205 Number: 1369 Publication-Status: Published in Econometrica (November 2003), 71(2): 1661-1694 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1369.pdf File-Format: application/pdf File-Size: 345 kb Handle: RePEc:cwl:cwldpp:1369 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 Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: The Mildest Recession: Outputs, Profits, and Stock Prices as the U.S. Emerges from the 2001 Recession Abstract: This essay examines the state of the United States economy as it emerges from the 2001 recession. A comparison of several central economic variables indicates that the 2001 recession was the mildest recession in the postwar period. In light of highly differentiated characteristics of recessions, the paper suggests that we differentiate among downturns by a five-category "recession severity scale," analogous to the Saffir-Simpson Hurricane Scale. According to this approach, the 2001 recession fits in the least severe box, a "category I recession," along with the 1963 and 1967 non-recessions. The paper next examines the behavior of profits in recent years and shows that financial finagling has infected the aggregate profits numbers. Finally, the study constructs a measure of the forward-looking return on equities and concludes that the prospective real yield on equities in early 2002 is at its low point of the last half-century. Classification-JEL: E3, E4 Keywords: Recession, Profits, Stock prices, Returns Length: 31 pages Creation-Date: 200205 Number: 1368 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1368.pdf File-Format: application/pdf File-Size: 188 kb Handle: RePEc:cwl:cwldpp:1368 Template-type: ReDIF-Paper 1.0 Author-Name: Katsumi Shimotsu Author-X-Name-First: Katsumi Author-X-Name-Last: Shimotsu Author-Workplace-Name: University of Essex 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 Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Exact Local Whittle Estimation of Fractional Integration Abstract: An exact form of the local Whittle likelihood is studied with the intent of developing a general purpose estimation procedure for the memory parameter (d) that does not rely on tapering or differencing prefilters. The resulting exact local Whittle estimator is shown to be consistent and to have the same N(0,1/4) limit distribution for all values of d if the optimization covers an interval of width less than 9/2 and the initial value of the process is known. Classification-JEL: C22 Keywords: Discrete Fourier transform, Fractional integration, Long memory, Nonstationarity, Semiparametric estimation, Whittle likelihood Length: 36 pages Creation-Date: 200208 Revision-Date: 200407 Number: 1367 Publication-Status: Published in The Annals of Statistics, 33(4): 1890-1933, 2005 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1367.pdf File-Format: application/pdf File-Size: 479 kb Handle: RePEc:cwl:cwldpp:1367 Template-type: ReDIF-Paper 1.0 Author-Name: Yixiao Sun Author-X-Name-First: Yixiao Author-X-Name-Last: Sun Author-Workplace-Name: Dept. 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 Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Nonlinear Log-Periodogram Regression for Perturbed Fractional Processes Abstract: This paper studies fractional processes that may be perturbed by weakly dependent time series. The model for a perturbed fractional process has a components framework in which there may be components of both long and short memory. All commonly used estimates of the long memory parameter (such as log periodogram (LP) regression) may be used in a components model where the data are affected by weakly dependent perturbations, but these estimates can suffer from serious downward bias. To circumvent this problem, the present paper proposes a new procedure that allows for the possible presence of additive perturbations in the data. The new estimator resembles the LP regression estimator but involves an additional (nonlinear) term in the regression that takes account of possible perturbation effects in the data. Under some smoothness assumptions at the origin, the bias of the new estimator is shown to disappear at a faster rate than that of the LP estimator, while its asymptotic variance is inflated only by a multiplicative constant. In consequence, the optimal rate of convergence to zero of the asymptotic MSE of the new estimator is faster than that of the LP estimator. Some simulation results demonstrate the viability and the bias-reducing feature of the new estimator relative to the LP estimator in finite samples. A test for the presence of perturbations in the data is given. Classification-JEL: C13, C14, C22, C51 Keywords: Asymptotic bias; Asymptotic normality; Bias reduction; Fractional components model; Perturbed fractional process; Rate of convergence; Testing perturbations Note: CFP 1077. Length: 40 pages Creation-Date: 200205 Number: 1366 Publication-Status: Published in Journal of Econometrics (2003), 115(2): 355-389 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1366.pdf File-Format: application/pdf File-Size: 530 kb Handle: RePEc:cwl:cwldpp:1366 Template-type: ReDIF-Paper 1.0 Author-Name: Ling Hu Author-X-Name-First: Ling Author-X-Name-Last: Hu Author-Workplace-Name: Dept. 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 Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Dynamics of the Federal Funds Target Rate: A Nonstationary Discrete Choice Approach Abstract: We apply a discrete choice approach to model the empirical behavior of the Federal Reserve in changing the federal funds target rate, the benchmark of short term market interest rates in the US. Our methods allow the explanatory variables to be nonstationary as well as stationary. This feature is particularly useful in the present application as many economic fundamentals that are monitored by the Fed and are believed to affect decisions to adjust interest rate targets display some nonstationarity over time. The empirical model is determined using the PIC criterion (Phillips and Ploberger, 1996; Phillips, 1996) as a model selection device. The chosen model successfully predicts the majority of the target rate changes during the time period considered (1985-2001) and helps to explain strings of similar intervention decisions by the Fed. Based on the model-implied optimal interest rate, our findings suggest that there a lag in the Fed's reaction to economic shocks and that the Fed is more conservative in raising interest rates than in lowering rates. Classification-JEL: C22, C25, E43, E52 Keywords: Extended arc sine laws, Federal funds target rate, Interest rate, Monetary policy, Nonstationary discrete choice Note: CFP 1112. Length: 35 pages Creation-Date: 200205 Number: 1365 Publication-Status: Published in Journal of Applied Econometrics (2004), 19(17): 851-867 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1365.pdf File-Format: application/pdf File-Size: 341 kb Handle: RePEc:cwl:cwldpp:1365 Template-type: ReDIF-Paper 1.0 Author-Name: Ling Hu Author-X-Name-First: Ling Author-X-Name-Last: Hu Author-Workplace-Name: Dept. 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 Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Nonstationary Discrete Choice Abstract: This paper develops an asymptotic theory for time series discrete choice models with explanatory variables generated as integrated processes and with multiple choices and threshold parameters determining the choices. The theory extends recent work by Park and Phillips (2000) on binary choice models. As in this earlier work, the maximum likelihood (ML) estimator is consistent and has a limit theory with multiple rates of convergence (n^{3/4} and n^{1/4}) and mixture normal distributions where the mixing variates depend on Brownian local time as well as Brownian motion. An extended arc sine limit law is given for the sample proportions of the various choices. The new limit law exhibits a wider range of potential behavior that depends on the values taken by the threshold parameters. Classification-JEL: C22, C25 Keywords: Brownian motion, Brownian local time, Discrete choice model, Dual convergence rates, Extended arc sine laws, Integrated time series, Maximum likelihood estimation, Threshold parameters Note: CFP 1103. Length: 37 pages Creation-Date: 200205 Number: 1364 Publication-Status: Published in Journal of Econometrics (2004), 120(1): 103-138 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1364.pdf File-Format: application/pdf File-Size: 377 kb Handle: RePEc:cwl:cwldpp:1364 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 Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Binbin Guo Author-X-Name-First: Binbin Author-X-Name-Last: Guo Author-Workplace-Name: UCLA, Santa Cruz Author-Workplace-Homepage: Author-Name: Zhijie Xiao Author-X-Name-First: Zhijie Author-X-Name-Last: Xiao Author-Workplace-Name: University of Illinois at Urbana-Champaign Title: Efficient Regression in Time Series Partial Linear Models Abstract: This paper studies efficient estimation of partial linear regression in time series models. In particular, it combines two topics that have attracted a good deal of attention in econometrics, viz. spectral regression and partial linear regression, and proposes an efficient frequency domain estimator for partial linear models with serially correlated residuals. A nonparametric treatment of regression errors is permitted so that it is not necessary to be explicit about the dynamic specification of the errors other than to assume stationarity. A new concept of weak dependence is introduced based on regularity conditions on the joint density. Under these and some other regularity conditions, it is shown that the spectral estimator is root-n-consistent, asymptotically normal, and asymptotically efficient. Classification-JEL: C14, C22, C13 Keywords: Efficient estimation, Partial linear regression, Spectral regression, Kernel estimation, Nonparametric, Semiparametric, Weak dependence Length: 46 pages Creation-Date: 200205 Number: 1363 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1363.pdf File-Format: application/pdf File-Size: 393 kb Handle: RePEc:cwl:cwldpp:1363 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 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: Dynamic Panel Estimation and Homogeneity Testing Under Cross Section Dependence Abstract: This paper deals with cross section dependence, homogeneity restrictions and small sample bias issues in dynamic panel regressions. To address the bias problem we develop a panel approach to median unbiased estimation that takes account of cross section dependence. The new estimators given here considerably reduce the effects of bias and gain precision from estimating cross section error correlation. The paper also develops an asymptotic theory for tests of coefficient homogeneity under cross section dependence, and proposes a modified Hausman test to test for the presence of homogeneous unit roots. An orthogonalization procedure is developed to remove cross section dependence and permit the use of conventional and meta unit root tests with panel data. Some simulations investigating the finite sample performance of the estimation and test procedures are reported. Classification-JEL: C32, C33 Keywords: Autoregression, Bias, Cross section dependence, Dynamic factors, Dynamic panel estimation, GLS estimation, Homogeneity tests, Median unbiased estimation, Modified Hausman tests, Median unbiased SUR estimation, Orthogonalization procedure, Panel unit root test Note: CFP 1136 Length: 56 pages Creation-Date: 200205 Number: 1362 Publication-Status: Published in Econometrics Journal (June 2003), 6(1): 217-259 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1362.pdf File-Format: application/pdf File-Size: 539 kb Handle: RePEc:cwl:cwldpp:1362 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-Workplace-Name: Cowles Foundation Author-Name: Offer Lieberman Author-X-Name-First: Offer Author-X-Name-Last: Lieberman Author-Workplace-Name: Technion-Israel Institute of Technology Title: Valid Edgeworth Expansions for the Whittle Maximum Likelihood Estimator for Stationary Long-memory Gaussian Time Series Abstract: In this paper, we prove the validity of an Edgeworth expansion to the distribution of the Whittle maximum likelihood estimator for stationary long-memory Gaussian models with unknown parameter theta in Theta subset R^{d_{theta}} . The error of the (s-2)-order expansion is shown to be o(n^{(s-2)/2}) -- the usual iid rate -- for a wide range of models, including the popular ARFIMA(p,d,q) models. The expansion is valid under mild assumptions on the behavior of spectral density and its derivatives in the neighborhood of the origin. As a by-product, we generalize a Theorem by Fox and Taqqu (1987) concerning the asymptotic behavior of Toeplitz matrices. Lieberman, Rousseau, and Zucker (2002) (LRZ) establish a valid Edgeworth expansion for the maximum likelihood estimator for stationary long-memory Gaussian models. For a significant class of models, their expansion is shown to have an error of o(n-1). The results given here improve upon those of LRZ in that the results provide an Edgeworth expansion for an asymptotically efficient estimator, as LRZ do, but the error of the expansion is shown to be o(n^{-(s-2)/2}), not o(n^{-1}), for a broad range of models. Classification-JEL: C10, C13 Keywords: ARFIMA, Edgeworth expansion, Long Memory, Whittle estimator Note: CFP 1162. Length: 25 pages Creation-Date: 200204 Number: 1361 Publication-Status: Published in Econometric Theory (2005), 21(4): 710-734 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1361.pdf File-Format: application/pdf File-Size: 252 kb Handle: RePEc:cwl:cwldpp:1361 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-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 Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: From Nash to Walras via Shapley-Shubik Abstract: We derive the existence of a Walras equilibrium directly from Nash's theorem on noncooperative games. No price player is involved, nor are generalized games. Instead we use a variant of the Shapley-Shubik trading-post game. Classification-JEL: C72, D40, D41 Keywords: Nash equilibrium, Walras equilibrium, Shapley-Shubik trading-posts game, Money Note: CFP 1065. Length: 11 pages Creation-Date: 200204 Number: 1360 Publication-Status: Published in Journal of Mathematical Economics (2003), 39: 391-400 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1360.pdf File-Format: application/pdf File-Size: 159 kb Handle: RePEc:cwl:cwldpp:1360 Template-type: ReDIF-Paper 1.0 Author-Name: Ted Juhl Author-X-Name-First: Ted Author-X-Name-Last: Juhl Author-Workplace-Name: University of Kansas Author-Name: Zhijie Xiao Author-X-Name-First: Zhijie Author-X-Name-Last: Xiao Author-Workplace-Name: University of Illinois at Urbana-Champaign Title: Partially Linear Models with Unit Roots Abstract: This paper studies the asymptotic properties of a nonstationary partially linear regression model. In particular, we allow for covariates to enter the unit root (or near unit root) model in a nonparametric fashion, so that our model is an extension of the semiparametric model analyzed in Robinson (1988). It is proven that the autoregressive parameter can be estimated at rate N even though part of the model is estimated nonparametrically. Unit root tests based on the semiparametric estimate of the autoregressive parameter have a limiting distribution which is a mixture of a standard normal and the Dickey-Fuller distribution. A Monte Carlo experiment is conducted to evaluate the performance of the tests for various linear and nonlinear specifications. Classification-JEL: C12, C14, C22 Keywords: Nonparametric, Prial Linear, Semiparametric, Unit root Length: 51 pages Creation-Date: 200204 Number: 1359 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1359.pdf File-Format: application/pdf File-Size: 532 kb Handle: RePEc:cwl:cwldpp:1359 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/~engel/ Author-Workplace-Name: Cowles Foundation 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 Author-Name: Alexander Galetovic Author-X-Name-First: Alexander Author-X-Name-Last: Galetovic Author-Workplace-Name: University of Chile Title: Competition In or For the Field: Which Is Better? Abstract: In many circumstances, a principal, who wants prices to be as low as possible, must contract with agents who would like to charge the monopoly price. This paper compares a Demsetz auction, which awards an exclusive contract to the agent bidding the lowest price (competition for the field) with having two agents provide the good under (imperfectly) competitive conditions (competition in the field). We obtain a simple sufficient condition showing unambiguously which option is best. The condition depends only on the shapes of the surplus function of the principal and the profit function of agents, and is independent of the particular duopoly game played ex post. We apply this condition to three canonical examples -- procurement, royalty contracts and dealerships and find that whenever marginal revenue for the final good is decreasing in the quantity sold, a Demsetz auction is best. Moreover, a planner who wants to maximize social surplus also prefers a Demsetz auction. Classification-JEL: D44, L12, L92 Keywords: Demsetz auction, Double marginalization, Franchising, Joint vs. separate auctions, Monopoly, Procurement, Dealerships, Royalty contracts Length: 17 pages Creation-Date: 200203 Number: 1358 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1358.pdf File-Format: application/pdf File-Size: 138 kb Handle: RePEc:cwl:cwldpp:1358 Template-type: ReDIF-Paper 1.0 Author-Name: James Tobin Author-X-Name-First: James Author-X-Name-Last: Tobin Author-Workplace-Name: Cowles Foundation Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Macroeconomic Strategy in Wartime Abstract: In 2001-02 the United States has been hit by two quite different shocks, terrorism and recession. As usual in time of war, national defense is the highest priority for use of the country's resources. Although the opportunities for international warfare are limited, the challenges to the homeland are virtually unlimited. The president's fiscal year 2003 budget includes $48 billion additional for the military and $38 billion additional for homeland defense. Given the gravity of the threat, it is hard to understand why new expenditures are not undertaken as soon as and as large as possible. This would also be timely for stimulus to the economy, more effective than tax cuts and other proposals - with the nation in peril, the country is ready to make sacrifices, not to enjoy further tax reductions. Pearl Harbor in December 1941 occurred with the economy not yet recovered from the Great Depression, with unemployment still 10 per cent. Expenditures for war were increased sharply and rapidly, and full employment was restored in 1943. Classification-JEL: E6 Keywords: Fiscal, War, Recession, Stimulus, Tax, Deficit Length: 5 pages Creation-Date: 200203 Number: 1357 Publication-Status: Published in Challenge Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1357.pdf File-Format: application/pdf File-Size: 19 kb Handle: RePEc:cwl:cwldpp:1357 Template-type: ReDIF-Paper 1.0 Author-Name: Oliver Linton Author-X-Name-First: Oliver Author-X-Name-Last: Linton Author-Workplace-Name: London School of Economics Author-Name: Esfandiar Maasoumi Author-X-Name-First: Esfandiar Author-X-Name-Last: Maasoumi Author-Workplace-Name: Southern Methodist University Author-Name: Whang, Yoon-Jae Author-X-Name-First: Yoon-Jae Author-X-Name-Last: Whang Author-Workplace-Name: Ewhra University Title: Consistent Testing for Stochastic Dominance: A Subsampling Approach Abstract: We propose a procedure for estimating the critical values of the Klecan, McFadden, and McFadden (1990) test for first and second order stochastic dominance in the general k-prospect case. Our method is based on subsampling bootstrap. We show that the resulting test is consistent. We allow for correlation amongst the prospects and for the observations to be autocorrelated over time. Importantly, the prospects may be the residuals from certain conditional models. Classification-JEL: C12, C14, C15, C52 Keywords: Bootstrap, Prospect theory, Stochastic dominance Length: 51 pages Creation-Date: 200202 Revision-Date: 200203 Number: 1356 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1356.pdf File-Format: application/pdf File-Size: 827 kb Handle: RePEc:cwl:cwldpp:1356 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 Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: The Health of Nations: The Contribution of Improved Health to Living Standards Abstract: Nations generally measure their economic performance using the yardstick of national output and income. It is not widely recognized, however, that conventional measures of national income and output exclude the value of improvements in the health status of the population. The present study develops a methodology and presents preliminary estimates of how standard economic measures would change if they adequately reflected improvements in health status. The study first discusses the theory of the measurement of national income, examines some of the shortcomings of traditional concepts, and proposes a new concept called 'health income' that can be used to incorporate improvements in health status. The study next discusses how the proposed measure fits into existing theories for measuring and valuing consumption and health status. The study applies the new concepts to data for the United States over the twentieth century and concludes that accounting for improvements in the health status would substantially increase the estimated improvement in economic welfare for the U.S. over the twentieth century. Classification-JEL: I1, N1, C82 Keywords: Health, income, growth Length: 56 pages Creation-Date: 200202 Number: 1355 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1355.pdf File-Format: application/pdf File-Size: 286 kb Handle: RePEc:cwl:cwldpp:1355 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/~engel/ Author-Workplace-Name: Cowles Foundation 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 Author-Name: Alexander Galetovic Author-X-Name-First: Alexander Author-X-Name-Last: Galetovic Author-Workplace-Name: University of Chile Title: Highway Franchising and Real Estate Values Abstract: It has become increasingly common to allocate highway franchises to the bidder that offers to charge the lowest toll. Often, building a highway increases the value of land held by a small group of developers, an effect that is more pronounced with lower tolls. We study the welfare implications of highway franchises that benefit large developers, focusing on the incentives developers have to internalize the effect of the toll they bid on the value of their land. We study how participation by developers in the auction affects equilibrium tolls and welfare. We find that large developers bid more aggressively than construction companies that own no land. As long as land ownership is sufficiently concentrated, allowing developers in the auction leads to lower tolls and higher welfare. Moreover, collusion among developers is socially desirable. We also analyze the case when the franchise holder can charge lower tolls to those buying her land ('toll discrimination'). Relative to uniform tolls, discrimination decreases welfare when land is highly concentrated, but increases welfare otherwise. Finally, we consider the welfare implications of subsidies and bonuses for proposing new highway projects. Classification-JEL: D44, H40, H54, R42, R48 Keywords: Demsetz auctions, highway concessions, private participation in infrastructure Length: 28 pages Creation-Date: 200202 Number: 1354 Publication-Status: Published in Reprinted in Journal of Urban Economics (2005), 57: 432-448 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1354.pdf File-Format: application/pdf File-Size: 161 kb Handle: RePEc:cwl:cwldpp:1354 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 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 Author-Name: Alexander Galetovic Author-X-Name-First: Alexander Author-X-Name-Last: Galetovic Author-Workplace-Name: University of Chile Title: How to Auction an Essential Facility When Underhand Integration Is Possible Abstract: Regulating seaports is difficult in general, even more so for the weak regulatory institutions common in developing countries. For this reason some countries have awarded these facilities via Demsetz auctions, to the port operator that bids the lowest cargo-handling fee. A major concern with Demsetz auctions in this context, is that the winning operator may integrate with a shipper and monopolize the shipping market, by worsening the service quality for competing shippers. The standard policy recommendation against service quality discrimination is to ban the seaport from operating in the shipping market. The effectiveness of such prohibitions is suspect, however, because they can be circumvented by an (illegal) underhand agreement between the port operator and the shipper. In this paper we show that a ban on integration increases welfare if it is combined with a (sufficiently high) floor on the cargo-handling fee that operators can bid in the auction. In the absence of such a floor, however, a Demsetz auction is worse than no regulation at all of the bottleneck monopoly. Our results apply beyond the port and shipping markets, to any essential facility that can monopolize a downstream market. The results only require that profits with underhand vertical integration agreements be less than with legal vertical integration. Classification-JEL: D44, L12, L92 Keywords: Auctions, ex ante vs. ex post rents, Demsetz auctions, hidden action, monopoly regulation, productive efficiency, vertical integration Length: 21 pages Creation-Date: 200202 Number: 1353 Publication-Status: Published in Journal of Industrial Economics (September 2004), 52(3): 427-455 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1353.pdf File-Format: application/pdf File-Size: 127 kb Handle: RePEc:cwl:cwldpp:1353 Template-type: ReDIF-Paper 1.0 Author-Name: Leeat Yariv Author-X-Name-First: Leeat Author-X-Name-Last: Yariv Title: I'll See It When I Believe It - A Simple Model of Cognitive Consistency Abstract: Psychological experiments demonstrate that people exhibit a taste for consistency. Individuals are inclined to interpret new evidence in ways that confirm their pre-existing beliefs. They also tend to change their beliefs to enhance the desirability of their past actions. I present a model that incorporates these effects into an agent's utility function and allows me to characterize when: (i) agents become under- and over-confident, (ii) agents exhibit excess stickiness in action choices, (iii) agents prefer less accurate signals, and (iv) agents are willing to pay in order to forgo signals altogether. Applications to political campaigns and investment decisions are explored. Classification-JEL: C90, D72, D83, D91, M30 Keywords: Belief utility, cognitive dissonance, confirmatory bias, overconfidence, selective exposure Length: 45 pages Creation-Date: 200202 Number: 1352 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1352.pdf File-Format: application/pdf File-Size: 348 kb Handle: RePEc:cwl:cwldpp:1352 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: Judith Rousseau Author-X-Name-First: Judith Author-X-Name-Last: Rousseau Author-Workplace-Name: Universite de Paris Author-Name: David M. Zucker Author-X-Name-First: David M. Author-X-Name-Last: Zucker Author-Workplace-Name: Hebrew University Title: Valid Asymptotic Expansions for the Maximum Likelihood Estimator of the Parameter of a Stationary, Gaussian, Strongly Dependent Process Abstract: We establish the validity of an Edgeworth expansion to the distribution of the maximum likelihood estimator of the parameter of a stationary, Gaussian, strongly dependent process. The result covers ARFIMA type models, including fractional Gaussian noise. The method of proof consists of three main ingredients: (i) verification of a suitably modified version of Durbin's (1980) general conditions for the validity of the Edgeworth expansion to the joint density of the log-likelihood derivatives; (ii) appeal to a simple result of Skovgaard (1986) to obtain from this an Edgeworth expansion for the joint distribution of the log-likelihood derivatives; (iii) appeal to and extension of arguments of Bhattacharya and Ghosh (1978) to accomplish the passage from the result on the log-likelihood derivatives to the result for the maximum likelihood estimators. We develop and make extensive use of a uniform version of Dahlhaus's (1989) Theorem~5.1 on products of Toeplitz matrices; the extension of Dahlhaus's result is of interest in its own right. A small numerical study of the efficacy of the Edgeworth expansion is presented for the case of fractional Gaussian noise. Classification-JEL: C10, C13 Keywords: Edgeworth expansions, long memory processes, ARFIMA models Length: 37 pages Creation-Date: 200201 Number: 1351 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1351.pdf File-Format: application/pdf File-Size: 282 kb Handle: RePEc:cwl:cwldpp:1351 Template-type: ReDIF-Paper 1.0 Author-Name: Zaifu Yang Author-X-Name-First: Zaifu Author-X-Name-Last: Yang Author-Workplace-Name: Yokahoma National University Title: An Optimal Fair Job Assignment Problem Abstract: We study the problem of how to allocate a set of indivisible objects like jobs or houses and an amount of money among a group of people as fairly and as efficiently as possible. A particular constraint for such an allocation is that every person should be assigned with the same number of objects in his or her bundle. The preferences of people depend on the bundle of objects and the quantity of money they take. We propose a solution to this problem, called a perfectly fair allocation. It is shown that every perfectly fair allocation is efficient and envy-free, income-fair and furthermore gives every person a maximal satisfaction. Then we establish a necessary and sufficient condition for the existence of a perfectly fair allocation. It is shown that there exists a perfectly fair allocation if and only if an associated linear program problem has a solution. As a result, we also provide a finite method of computing a perfectly fair allocation. Classification-JEL: D3, D31, D6, D61, D63, D7, D74 Keywords: Perfectly fair allocation, equity, efficiency, indivisibility, multi-person decision, discrete optimization Length: 19 pages Creation-Date: 200201 Number: 1350 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13b/d1350.pdf File-Format: application/pdf File-Size: 139 kb Handle: RePEc:cwl:cwldpp:1350 Template-type: ReDIF-Paper 1.0 Author-Name: F. Comte Author-X-Name-First: F. Author-X-Name-Last: Comte Author-Workplace-Name: University of Paris Author-Name: Offer Lieberman Author-X-Name-First: Offer Author-X-Name-Last: Lieberman Author-Workplace-Name: Technion-Israel Institute of Technology Title: Asymptotic Theory for Multivariate GARCH Processes Abstract: We provide in this paper asymptotic theory for the multivariate GARCH (p,q) process. Strong consistency of the quasi-maximum likelihood estimator (MLE) is established by appealing to conditions given in Jeantheau [19] in conjunction with a result given by Boussama [9] concerning the existence of a stationary and ergodic solution to the multivariate GARCH (p,q) process. We prove asymptotic normality of the quasi-MLE when the initial state is either stationary or fixed. Classification-JEL: C10, C13 Keywords: Asymptotic normality, BEKK, consistency, GARCH, Martingale CLT Length: 23 pages Creation-Date: 200112 Number: 1349 Publication-Status: Published in Journal of Multivariate Analysis, 2002 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1349.pdf File-Format: application/pdf File-Size: 236 kb Handle: RePEc:cwl:cwldpp:1349 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 Title: Penalised Maximum Likelihood Estimation for Fractional Guassian Processes Abstract: We apply and extend Firth's (1993) modified score estimator to deal with a class of stationary Gaussian long-memory processes. Our estimator removes the first order bias of the maximum likelihood estimator. A small simulation study reveals the reduction in the bias is considerable, while it does not inflate the corresponding mean squared error. Classification-JEL: C10, C13 Keywords: ARFIMA, Firth's formula, fractional differencing, approximate modification Length: 14 pages Creation-Date: 200112 Number: 1348 Publication-Status: Published in Biometrika, Vol. 88, No. 3, September 2001, pp. 888-904. Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1348.pdf File-Format: application/pdf File-Size: 143 kb Handle: RePEc:cwl:cwldpp:1348 Template-type: ReDIF-Paper 1.0 Author-Name: Ning Sun Author-X-Name-First: Ning Author-X-Name-Last: Sun Author-Workplace-Name: Akita Prefectural University Author-Name: Zaifu Yang Author-X-Name-First: Zaifu Author-X-Name-Last: Yang Author-Workplace-Name: Yokohama National University Title: On Fair Allocations and Indivisibilities Abstract: This paper studies the problem of how to distribute a set of indivisible objects with an amount M of money among a number of agents in a fair way. We allow any number of agents and objects. Objects can be desirable or undesirable and the amount of money can be negative as well. In case M is negative, it can be regarded as costs to be shared by the agents. The objects with the money will be completely distributed among the agents in a way that each agent gets a bundle with at most one object if there are more agents than objects, and gets a bundle with at least one object if objects are no less than agents. We prove via an advanced fixed point argument that under rather mild and intuitive conditions the set of envy-free and efficient allocations is nonempty. Furthermore we demonstrate that if the total amount of money varies in an interval [X,Y], then there exists a connected set of fair allocations whose end points are allocations with sums of money equal to X and Y, respectively. Welfare properties are also analyzed when the total amount of money is modeled as a continuous variable. Our proof is based on a substantial generalization of the classic lemma of Knaster, Kuratowski and Mazurkewicz (KKM) in combinatorial topology. Classification-JEL: D3, D31, D6, D61, D63, D7, D74 Keywords: Indivisibility, fairness, Pareto optimality, resource allocation, multiperson decision, KKM lemma Length: 23 pages Creation-Date: 200112 Number: 1347 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1347.pdf File-Format: application/pdf File-Size: 222 kb Handle: RePEc:cwl:cwldpp:1347 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: Yale University, Cowles Foundation Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Competitive Pooling: Rothschild-Stiglitz Reconsidered Abstract: We build a model of competitive pooling, which incorporates adverse selection and signalling into general equilibrium. Pools are characterized by their quantity limits on contributions. Households signal their reliability by choosing which pool to join. In equilibrium, pools with lower quantity limits sell for a higher price, even though each household's deliveries are the same at all pools. The Rothschild-Stiglitz model of insurance is included as a special case. We show that by recasting their hybrid oligopolistic-competitive story in our perfectly competitive framework, their separating equilibrium always exists (even when they say it doesn't) and is unique. Classification-JEL: D4, D5, D41, D52, D81, D82 Keywords: competitive pooling, insurance, adverse selection, signalling, refined equilibrium, separating equilibrium Note: CFP 1048 Length: 35 pages Creation-Date: 200112 Revision-Date: 200202 Number: 1346R2 Price: None Publication-Status: Published in Quarterly Journal of Economics (2002), 117(4): 1529-1570 File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1346-r2.pdf File-Format: application/pdf File-Size: 333 kb Handle: RePEc:cwl:cwldpp:1346R2 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: Yale University, Cowles Foundation Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Competitive Pooling: Rothschild-Stiglitz Reconsidered Abstract: We build a model of competitive pooling, which incorporates adverse selection and signalling into general equilibrium. Pools are characterized by their quantity limits on contributions. Households signal their reliability by choosing which pool to join. In equilibrium, pools with lower quantity limits sell for a higher price, even though each household's deliveries are the same at all pools. The Rothschild-Stiglitz model of insurance is included as a special case. We show that by recasting their hybrid oligopolistic-competitive story into our perfectly competitive framework, their separating equilibrium always exists (even when they say it doesn't) and is unique. Classification-JEL: D4, D5, D41, D52, D81, D82 Keywords: Competitive pooling, insurance, adverse selection, signalling, refined equilibrium, separating equilibrium Length: 34 pages Creation-Date: 200112 Number: 1346 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1346.pdf File-Format: application/pdf File-Size: 320 kb Handle: RePEc:cwl:cwldpp:1346 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: Yale University, Cowles Foundation Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Bootstrapping Macroeconometric Models Abstract: This paper outlines a bootstrapping approach to the estimation and analysis of macroeconometric models. It integrates for dynamic, nonlinear, simultaneous equation models the bootstrapping approach to evaluating estimators initiated by Efron (1979) and the stochastic simulation approach to evaluating models' properties initiated by Adelman and Adelman (1959). It also estimates for a particular model the gain in coverage accuracy from using bootstrap confidence intervals over asymptotic confidence intervals. Classification-JEL: C15 Keywords: Bootstrapping, stochastic simulation Note: CFP 1195. Length: 30 pages Creation-Date: 200112 Revision-Date: 200306 Number: 1345 Publication-Status: Published in Studies in Nonlinear Dynamics and Econometrics, Vol. 7, No. 4, Article 1 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1345.pdf File-Format: application/pdf File-Size: 94 kb Handle: RePEc:cwl:cwldpp:1345 Template-type: ReDIF-Paper 1.0 Author-Name: Leeat Yariv Author-X-Name-First: Leeat Author-X-Name-Last: Yariv Title: Believe and Let Believe: Axiomatic Foundations for Belief Dependent Utility Functionals Abstract: A large body of experimental data demonstrates that people's beliefs influence their well-being beyond the indirect effect through the actions taken. I present a model that incorporates beliefs into an agent's utility function. The paper provides axiomatic foundations for a special class of non-additive utility indices defined over infinite streams of beliefs and actions. I assume that: 1) there exists a (null) belief that does not have any effect on future preferences; 2) the agent has finite memory -- only finite histories have an effect on current preferences; and 3) if the agent knows she will not be getting any additional future information, she prefers today's beliefs to be consistent with her past choices. Preferences satisfying these assumptions admit a generalized discounted utility representation in which all terms depend on both actions and beliefs. Experimental testability of the proposed framework is also discussed. Classification-JEL: C91, D81, D91 Keywords: Axiomatic foundations, beliefs, time preference, utility Length: 20 pages Creation-Date: 200112 Number: 1344 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1344.pdf File-Format: application/pdf File-Size: 191 kb Handle: RePEc:cwl:cwldpp:1344 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: Yale University, Cowles Foundation Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Money and the Monetization of Credit Abstract: The relationship between money and credit is discussed in terms of network linkage. Fiat money is the only instrument with the universal recognition of its issuer. Near monies such as bank money and money substitutes such as gasoline credit cards can be classified in terms of their network links. This leads to a way of considering the velocity of money. Classification-JEL: E5, E4, C7 Keywords: Credit, fiat money, networks, trust, velocity Length: 22 pages Creation-Date: 200112 Number: 1343 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1343.pdf File-Format: application/pdf File-Size: 90 kb Handle: RePEc:cwl:cwldpp:1343 Template-type: ReDIF-Paper 1.0 Author-Name: Itzhak Gilboa Author-X-Name-First: Itzhak Author-X-Name-Last: Gilboa Author-Workplace-Name: Tel Aviv University Author-Name: David Schmeidler Author-X-Name-First: David Author-X-Name-Last: Schmeidler Author-Email: schmeid@post.tau.ac.il Author-Workplace-Name: Tel Aviv University Title: A Derivation of Expected Utility Maximization in the Context of a Game Abstract: A decision maker faces a decision problem, or a game against nature. For each probability distribution over the state of the world (nature's strategies), she has a weak order over her acts (pure strategies). We formulate conditions on these weak orders guaranteeing that they can be jointly represented by expected utility maximization with respect to an almost-unique state-dependent utility, that is, a matrix assigning real numbers to act-state pairs. As opposed to a utility function that is derived in another context, the utility matrix derived in the game will incorporate all psychological or sociological determinants of well-being that result from the very fact that the outcomes are obtained in a given game. Classification-JEL: D70 Keywords: Expected utility, ultimatum game Length: 23 pages Creation-Date: 200112 Number: 1342 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1342.pdf File-Format: application/pdf File-Size: 184 kb Handle: RePEc:cwl:cwldpp:1342 Template-type: ReDIF-Paper 1.0 Author-Name: Itzhak Gilboa Author-X-Name-First: Itzhak Author-X-Name-Last: Gilboa Author-Workplace-Name: Tel Aviv University Author-Name: David Schmeidler Author-X-Name-First: David Author-X-Name-Last: Schmeidler Author-Workplace-Name: Tel Aviv University Title: Subjective Distributions Abstract: A decision maker has to choose one of several random variables, with uncertainty known distributions. As a Bayesian she behaves as if she knew the distributions. In his paper we suggest an axiomatic derivation of these (subjective) distributions, which is much more economical than the derivations by de Finetti or Savage. They derive the whole joint distribution of all the available random variables. Classification-JEL: D70 Keywords: Subjective probabilities, expected utility Length: 13 pages Creation-Date: 200112 Number: 1341 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1341.pdf File-Format: application/pdf File-Size: 136 kb Handle: RePEc:cwl:cwldpp:1341 Template-type: ReDIF-Paper 1.0 Author-Name: Itzhak Gilboa Author-X-Name-First: Itzhak Author-X-Name-Last: Gilboa Author-Workplace-Name: Tel Aviv University Author-Name: David Schmeidler Author-X-Name-First: David Author-X-Name-Last: Schmeidler Author-Workplace-Name: Tel Aviv University Title: Cognitive Foundations of Probability Abstract: Prediction is based on past cases. We assume that a predictor can rank eventualities according to their plausibility given any memory that consists of repetitions of past cases. In a companion paper, we show that under mild consistency requirements, these rankings can be represented by numerical functions, such that the function corresponding to each eventuality is linear in the number of case repetitions. In this paper we extend the analysis to rankings of events. Our main result is that a cancellation condition a la de Finetti implies that these functions are additive with respect to union of disjoint sets. If the set of past cases coincides with the set of possible eventualities, natural conditions are equivalent to ranking events by their empirical frequencies. More generally, our results may describe how individuals form probabilistic beliefs given cases that are only partially pertinent to the prediction problem at hand, and how this subjective measure of pertinence can be derived from likelihood rankings. Classification-JEL: D80 Keywords: Bayesian prior, case-based decision theory, qualitative probabilities Length: 33 pages Creation-Date: 200112 Number: 1340 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1340.pdf File-Format: application/pdf File-Size: 233 kb Handle: RePEc:cwl:cwldpp:1340 Template-type: ReDIF-Paper 1.0 Author-Name: Itzhak Gilboa Author-X-Name-First: Itzhak Author-X-Name-Last: Gilboa Author-Workplace-Name: Tel Aviv University Author-Name: David Schmeidler Author-X-Name-First: David Author-X-Name-Last: Schmeidler Author-Workplace-Name: Tel Aviv University Title: Inductive Inference: An Axiomatic Approach Abstract: A predictor is asked to rank eventualities according to their plausibility, based on past cases. We assume that she can form a ranking given any memory that consists of finitely many past cases. Mild consistency requirements on these rankings imply that they have a numerical representation via a matrix assigning numbers to eventuality-case pairs, as follows. Given a memory, each eventuality is ranked according to the sum of the numbers in its row, over cases in memory. The number attached to an eventuality-case pair can be interpreted as the degree of support that the past case lends to the plausibility of the eventuality. Special instances of this result may be viewed as axiomatizing kernel methods for estimation of densities and for classification problems. Interpreting the same result for rankings of theories or hypotheses, rather than of specific eventualities, it is shown that one may ascribe to the predictor subjective conditional probabilities of cases given theories, such that her rankings of theories agree with rankings by the likelihood functions. Classification-JEL: D80 Keywords: Inductive inference, case-based reasoning,case-based decision theory, maximum likelihood Length: 45 pages Creation-Date: 200112 Number: 1339 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1339.pdf File-Format: application/pdf File-Size: 323 kb Handle: RePEc:cwl:cwldpp:1339 Template-type: ReDIF-Paper 1.0 Author-Name: Ivo Welch Author-X-Name-First: Ivo Author-X-Name-Last: Welch Author-Workplace-Name: Yale School of Management Author-Name: Bris, Arturo Author-Workplace-Name: Yale School of Management Title: The Optimal Concentration of Creditors Abstract: There are situations in which dispersed creditors (e.g., public creditors) have more difficulties and higher costs when collecting their claims in financial distress than concentrated creditors (e.g., banks). Under this assumption, our model predicts that measures of debt concentration relate [a] positively to creditors' chosen aggregate debt collection expenditures; [b] positively to management's chosen expenditures to avoid paying; [c] positively to total net litigation costs/waste in financial distress; and [d] positively to accomplished claim recovery by creditors (to which we present some preliminary favorable empirical evidence). Under additional assumptions, measures of debt concentration relate [e] positively to intrinsic firm quality; [f] positively to creditor monitoring and negatively to managerial waste; [g] positively to optimal continuation/discontinuation choices; [h] negatively to issuing marketing expenses. In a signaling model, when concentration alone is not a sufficient signal, firms choose the ultimately concentrated debt (i.e., a house bank) and have to pay a high interest. Classification-JEL: G2, G3 Keywords: Banking, Capital Structure Length: 43 pages Creation-Date: 200112 Revision-Date: 200201 Number: 1338 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1338.pdf File-Format: application/pdf File-Size: 253 kb Handle: RePEc:cwl:cwldpp:1338 Template-type: ReDIF-Paper 1.0 Author-Name: Steven Berry Author-X-Name-First: Steven Author-X-Name-Last: Berry Author-Email: steven.berry@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/berry.htm Author-Workplace-Name: Cowles Foundation Author-Workplace-Homepage: http://cowles.econ.yale.edu Author-Name: James Levinsohn Author-X-Name-First: James Author-X-Name-Last: Levinsohn Author-Workplace-Name: University of Michigan Author-Name: Ariel Pakes Author-X-Name-First: Ariel Author-X-Name-Last: Pakes Author-Workplace-Name: Harvard University Title: Differentiated Products Demand Systems from a Combination of Micro and Macro Data: The New Car Market Abstract: In this paper we provide an algorithm for estimating characteristic based demand models from alternative data sources, and apply it to new data on the market for passenger vehicles. We find that, provided care is taken in constructing the demand system and rich enough data are available, the characteristic based model can both rationalize existing results and provide realistic out of sample predictions. Classification-JEL: D43 Keywords: Product Differentiation, Autos, Demand Estimation Note: Length: 35 pages Creation-Date: 200111 Number: 1337 Publication-Status: Published in Journal of Political Economy (2004), 112(1): 68-104 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1337.pdf File-Format: application/pdf File-Size: 342 kb Handle: RePEc:cwl:cwldpp:1337 Template-type: ReDIF-Paper 1.0 Author-Name: David M. Frankel Author-X-Name-First: David M. Author-X-Name-Last: Frankel Author-Workplace-Name: Tel Aviv University Author-Name: Stephen Morris Author-X-Name-First: Stephen Author-X-Name-Last: Morris Author-Workplace-Name: Cowles Foundation Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Ady Pauzner Author-X-Name-First: Ady Author-X-Name-Last: Pauzner Author-Workplace-Name: Tel Aviv University Title: Equilibrium Selection in Global Games with Strategic Complementarities Abstract: We study games with strategic complementarities, arbitrary numbers of players and actions, and slightly noisy payoff signals. We prove limit uniqueness: as the signal noise vanishes, the game has a unique strategy profile that survives iterative dominance. This generalizes a result of Carlsson and van Damme (1993) for two player, two action games. Te surviving profile, however, may depend on fine details of the structure of the noise. We provide sufficient conditions on payoffs for there to be noise-independent selection. Classification-JEL: C72, D82 Keywords: Equilibrium Selection, Global Games, Strategic Complementarities, Supermodular Games Note: CFP 1075. Length: 62 pages Creation-Date: 200111 Number: 1336 Publication-Status: Published in Journal of Economic Theory (2003), 108(1): 1-44 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1336.pdf File-Format: application/pdf File-Size: 606 kb Handle: RePEc:cwl:cwldpp:1336 Template-type: ReDIF-Paper 1.0 Author-Name: Karl E. Case Author-X-Name-First: Karl E. Author-X-Name-Last: Case Author-Workplace-Name: Wellesley College Author-Name: John M. Quigley Author-X-Name-First: John M. Author-X-Name-Last: Quigley Author-Workplace-Name: University of California, Berkeley 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.econ.yale.edu/~shiller/ Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Comparing Wealth Effects: The Stock Market versus the Housing Market Abstract: We examine the link between increases in housing wealth, financial wealth, and consumer spending. We rely upon a panel of 14 countries observed annually for various periods during the past 25 years and a panel of U.S. states observed quarterly during the 1980s and 1990s. We impute the aggregate value of owner-occupied housing, the value of financial assets, and measures of aggregate consumption for each of the geographic units over time. We estimate regressions relating consumption to income and wealth measures, finding a statistically significant and rather large effect of housing wealth upon household consumption. Classification-JEL: E2, G1 Keywords: Consumption, nonfinancial wealth, housing market, real estate Note: CFP 1055. Length: 25 pages Creation-Date: 200110 Publication-Status: Published in Advances in Macroeconomics (2005) 5(1): 1–34 Number: 1335 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1335.pdf File-Format: application/pdf File-Size: 142 kb Handle: RePEc:cwl:cwldpp:1335 Template-type: ReDIF-Paper 1.0 Author-Name: Donald W.K. Andrews Author-X-Name-First: Dondald 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: Higher-order Improvements of the Parametric Bootstrap for Markov Processes Abstract: This paper provides bounds on the errors in coverage probabilities of maximum likelihood-based, percentile-t, parametric bootstrap confidence intervals for Markov time series processes. These bounds show that the parametric bootstrap for Markov time series provides higher-order improvements (over confidence intervals based on first order asymptotics) that are comparable to those obtained by the parametric and nonparametric bootstrap for iid data and are better than those obtained by the block bootstrap for time series. Additional results are given for Wald-based confidence regions. The paper also shows that k-step parametric bootstrap confidence intervals achieve the same higher-order improvements as the standard parametric bootstrap for Markov processes. The k-step bootstrap confidence intervals are computationally attractive. They circumvent the need to compute a nonlinear optimization for each simulated bootstrap sample. The latter is necessary to implement the standard parametric bootstrap when the maximum likelihood estimator solves a nonlinear optimization problem. Classification-JEL: C12, C13, C15 Keywords: Asymptotics, Edgeworth expansion, Gauss-Newton, k-step bootstrap, maximum likelihood estimator, Newton-Raphson, parametric bootstrap, t statistic Length: 51 pages Creation-Date: 200110 Number: 1334 Publication-Status: Published in D.W.K. Andrews and J.H. Stock, eds., Identification and Inference for Econometric Models: A Festschrift in Honor of Thomas J. Rothenberg, Cambridge University Press, 2005, pp. 171-215 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1334.pdf File-Format: application/pdf File-Size: 424 kb Handle: RePEc:cwl:cwldpp:1334 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: Geanakoplos, John 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: Inflationary Bias in a Simple Stochastic Economy Abstract: We construct explicit equilibria for strategic market games used to model an economy with fiat money, one nondurable commodity, countably many time- periods, and a continuum of agents. The total production of the commodity is a random variable that fluctuates from period to period. In each period, the agents receive equal endowments of the commodity, and sell them for cash in a market; their spending determines, endogenously, the price of the commodity. All agents have a common utility function, and seek to maximize their expected total discounted utility from consumption. Suppose an outside bank sets an interest rate rho for loans and deposits. If 1 + rho is the reciprocal of the discount factor, and if agents must bid for consumption in each period before knowing their income, then there is no inflation. However, there is an inflationary trend if agents know their income before bidding. We also consider a model with an active central bank, which is both accurately informed and flexible in its ability to change interest rates. This, however, may not be sufficient to control inflation. Classification-JEL: C7, C73, D81, E41, E58 Keywords: Inflation, strategic market games, control, interest rate, central bank, equilibrium Length: 25 pages Creation-Date: 200110 Number: 1333 Publication-Status: Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1333.pdf File-Format: application/pdf File-Size: 273 kb Handle: RePEc:cwl:cwldpp:1333 Template-type: ReDIF-Paper 1.0 Author-Name: Federico M. Bandi Author-X-Name-First: Federico M. Author-X-Name-Last: Bandi Author-Workplace-Name: GSB, University of Chicago 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: Fully Nonparametric Estimation of Scalar Diffusion Models Abstract: We propose a functional estimation procedure for homogeneous stochastic differential equations based on a discrete sample of observations and with minimal requirements on the data generating process. We show how to identify the drift and diffusion function in situations where one or the other function is considered a nuisance parameter. The asymptotic behavior of the estimators is examined as the observation frequency increases and as the time span lengthens (that is, we implement both infill and long span asymptotics). We prove consistency and convergence to mixtures of normal laws, where the mixing variates depend on the chronological local time of the underlying process, that is the time spent by the process in the vicinity of a spatial point. The estimation method and asymptotic results apply to both stationary and nonstationary processes. Classification-JEL: C14, C22 Keywords: Diffusion, Drift, Infill asymptotics, Kernel density, Local time, Long span asymptotics, Martingale, Nonparametric estimation, Semimartingale, Stochastic differential equation Note: CFP 1050. Length: 47 pages Creation-Date: 200109 Number: 1332 Publication-Status: Published in Econometrica (2003), 71(1): 241-283 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1332.pdf File-Format: application/pdf File-Size: 510 kb Handle: RePEc:cwl:cwldpp:1332 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: Joon Y. Park Author-X-Name-First: Joon Y. Author-X-Name-Last: Park Author-Workplace-Name: Seoul National University Author-Name: Yoosoon Chang Author-X-Name-First: Yoosoon Author-X-Name-Last: Chang Author-Workplace-Name: Rice University Title: Nonlinear Instrumental Variable Estimation of an Autoregression Abstract: Instrumental variable (IV) estimation methods that allow for certain nonlinear functions of the data as instruments are studied. The context of the discussion is the simple unit root model where certain advantages to the use of nonlinear instruments are revealed. In particular, certain classes of IV estimators and associated t-tests are shown to have simpler (standard) limit theory in contrast to the least squares estimator, providing an opportunity for the study of optimal estimation in certain IV classes and furnishing tests and confidence intervals that allow for unit root and stationary alternatives. The Cauchy estimator studied in recent work by So and Shin (1999) is shown to have such an optimality property in the class of certain IV procedures with bounded instruments. Classification-JEL: C22, C25 Keywords: Cauchy estimator, instrumental variable autoregression, nonlinear instruments, sojourn time, unit root Note: CFP 1087. Length: 30 pages Creation-Date: 200109 Number: 1331 Publication-Status: Published in Journal of Econometrics (2004), 118(1-2): 219-246 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1331.pdf File-Format: application/pdf File-Size: 488 kb Handle: RePEc:cwl:cwldpp:1331 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: Bootstrapping Spurious Regression Abstract: The bootstrap is shown to be inconsistent in spurious regression. The failure of the bootstrap is spectacular in that the bootstrap effectively turns a spurious regression into a cointegrating regression. In particular, the serial correlation coefficient of the residuals in the bootstrap regression does not converge to unity, so the bootstrap is not even first order consistent. The block bootstrap serial correlation coefficient does converge to unity and is therefore first order consistent, but has a slower rate of convergence and a different limit distribution from that of the sample data serial correlation coefficient. The analysis covers spurious regressions involving both deterministic trends and stochastic trends. The results reinforce earlier warnings about routine use of the bootstrap with dependent data. Classification-JEL: C22 Keywords: Asymptotic theory, Bootstrap, Brownian motion, Cointegration, LK representation, Nonstationarity, Residual diagnostics, Unit root Length: 43 pages Creation-Date: 200109 Number: 1330 Publication-Status: Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1330.pdf File-Format: application/pdf File-Size: 801 kb Handle: RePEc:cwl:cwldpp:1330 Template-type: ReDIF-Paper 1.0 Author-Name: Zhijie Xiao Author-X-Name-First: Zhijie Author-X-Name-Last: Xiao Author-Workplace-Name: University of Illinois at Urbana-Champaign 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 CUSUM Test for Cointegration Using Regression Residuals Abstract: We show that the conventional CUSUM test for structural change can be applied to cointegrating regression residuals leading to a consistent residual based test for the null hypothesis of cointegration. The proposed tests are semiparametric and utilize fully modified residuals to correct for endogeneity and serial correlation and to scale out nuisance parameters. The limit distribution of the test is derived under both the null and the alternative hypothesis. The tests are easy to use and are found to perform quite well in a Monte Carlo experiment. Classification-JEL: C22 Keywords: Bandwidth, CUSUM test, Fully modified regression, Null of cointegration, Residual based test, Semiparametric method Note: CFP 1046. Length: 21 pages Creation-Date: 200109 Number: 1329 Publication-Status: Published in Journal of Econometrics (2002), 108: 43-61 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1329.pdf File-Format: application/pdf File-Size: 206 kb Handle: RePEc:cwl:cwldpp:1329 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 Psychology & Economics, Yale University Title: Egalitarianism against the Veil of Ignorance Abstract: J. Rawls and R. Dworkin have each used veils of ignorance to justify equality (Rawls) or to compute what equality entails (Dworkin). J. Harsanyi has also derived a distributive ethic from a veil of ignorance argument, which, although not egalitarian, is believed by Harsanyi to be not excessively inegalitarian. Harsanyi's analysis does not determine a unique social choice function, but rather a family of such functions. Here, by appending more information to Harsanyi's environment, and an Axiom of Neutrality, I uniquely determine a social welfare function by extending Harsanyi's argument. I show that this function is strongly inegalitarian, in that it recommends resource transfers from disabled to able individuals. Some concluding remarks are offered against using the veil of ignorance in studying the distributive ethics. Classification-JEL: D63 Keywords: Harsanyi, Dworkin, Rawls Note: CFP 1129 Length: 27 pages Creation-Date: 200109 Number: 1328 Publication-Status: Published in The Journal of Philosophy (April 2002), 99(4): 167-222 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1328.pdf File-Format: application/pdf File-Size: 104 kb Handle: RePEc:cwl:cwldpp:1328 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. Psychology & Economics, Yale University Title: Value and Politics 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 Length: 30 pages Creation-Date: 200109 Number: 1327 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1327.pdf File-Format: application/pdf File-Size: 95 kb Handle: RePEc:cwl:cwldpp:1327 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 Psychology & Economics, Yale University Author-Homepage: http://pantheon.yale.edu/~jer39/ Author-Name: Roberto Veneziani Author-X-Name-First: Roberto Author-X-Name-Last: Veneziani Author-Workplace-Name: London School of Economics Title: What We Owe Our Children, They Their Children,... Abstract: Egalitarian theorists, since Rawls, have in the main advocated equalizing some objective measure of individual well-being, such as primary goods, functioning, or resources, rather than subjective welfare. This discussion, however, has assumed, implicitly, a static environment. By analyzing a society that survives for many generations, we demonstrate that equality of opportunity for some objective condition is incompatible with human development over time. We argue that this incompatibility can be resolved by equalizing opportunities for welfare. Thus, 'subjectivism' seems necessary if we are to hope for a society which can both equalize opportunities and support the development of human capacity over time. Classification-JEL: C61, D63, D9, H21 Keywords: Justice, development, dynamic programming, optimal taxation Note: CFP 1146. Length: 42 pages Creation-Date: 200109 Number: 1326 Publication-Status: Published in Journal of Public Economic Theory (2004), 6(5): 637-654 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1326.pdf File-Format: application/pdf File-Size: 375 kb Handle: RePEc:cwl:cwldpp:1326 Template-type: ReDIF-Paper 1.0 Author-Name: Ivo Welch Author-X-Name-First: Ivo Author-X-Name-Last: Welch Author-Workplace-Name: Yale School of Management Title: The Equity Premium Consensus Forecast Revisited Abstract: A seller wishes to sell an object to one of multiple bidders. The valuations of the bidders are privately known. We consider the joint design problem in which the seller can decide the accuracy by which bidders learn their valuation and to whom to sell at what price. We establish that optimal information structures in an optimal auction exhibit a number of properties: (i) information structures can be represented by monotone partitions, (ii) the cardinality of each partition is finite, (iii) the partitions are asymmetric across agents. These properties imply that the optimal selling strategy of a seller can be implemented by a sequence of exclusive take-it or leave-it offers. Classification-JEL: G00, G10, G30, F4 Keywords: Equity premium Length: 14 pages Creation-Date: 200109 Number: 1325 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1325.pdf File-Format: application/pdf File-Size: 136 kb Handle: RePEc:cwl:cwldpp:1325 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: The Progress of Computing Abstract: The present study analyzes computer performance over the last century and a half. Three results stand out. First, there has been a phenomenal increase in computer power over the twentieth century. Performance in constant dollars or in terms of labor units has improved since 1900 by a factor in the order of 1 trillion to 5 trillion, which represent compound growth rates of over 30 percent per year for a century. Second, there were relatively small improvements in efficiency (perhaps a factor of ten) in the century before World War II. Around World War II, however, there was a substantial acceleration in productivity, and the growth in computer power from 1940 to 2001 has averaged 55 percent per year. Third, this study develops estimates of the growth in computer power relying on performance rather than on input-based measures typically used by official statistical agencies. The price declines using performance-based measures are markedly higher than those reported in the official statistics. Classification-JEL: O3, O4, E31, N1 Keywords: Productivity, hedonic pricing, history of computing Length: 52 pages Creation-Date: 200109 Number: 1324 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1324.pdf File-Format: application/pdf File-Size: 358 kb Handle: RePEc:cwl:cwldpp:1324 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: Martin Pesendorfer Author-X-Name-First: Martin Author-X-Name-Last: Pesendorfer Title: Information Structures in Optimal Auctions Abstract: A seller wishes to sell an object to one of multiple bidders. The valuations of the bidders are privately known. We consider the joint design problem in which the seller can decide the accuracy by which bidders learn their valuation and to whom to sell at what price. We establish that optimal information structures in an optimal auction exhibit a number of properties: (i) information structures can be represented by monotone partitions, (ii) the cardinality of each partition is finite, (iii) the partitions are asymmetric across agents. These properties imply that the optimal selling strategy of a seller can be implemented by a sequence of exclusive take-it or leave-it offers. Classification-JEL: C72, D44, D82, D83 Keywords: Optimal Auction, Private Values, Information Structures, Partitions Note: CFP 1218. Length: 47 pages Creation-Date: 200109 Number: 1323 Publication-Status: Published in Journal of Economic Theory (2007), 137: 580-609 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1323.pdf File-Format: application/pdf File-Size: 488 kb Handle: RePEc:cwl:cwldpp:1323 Template-type: ReDIF-Paper 1.0 Author-Name: Michael Mandler Author-X-Name-First: Michael Author-X-Name-Last: Mandler Author-Workplace-Name: Royal Holloway College, University of London Title: Compromises Between Cardinality and Ordinality in Preference Theory and Social Choice Abstract: By taking sets of utility functions as a primitive description of agents, we define an ordering over assumptions on utility functions that gauges their implicit measurement requirements. Cardinal and ordinal assumptions constitute two types of measurement requirements, but several standard assumptions in economics lie between these extremes. We first apply the ordering to different theories for why consumer preferences should be convex and show that diminishing marginal utility, which for complete preferences implies convexity, is an example of a compromise between cardinality and ordinality. In contrast, the Arrow-Koopmans theory of convexity, although proposed as an ordinal theory, relies on utility functions that lie in the cardinal measurement class. In a second application, we show that diminishing marginal utility, rather than the standard stronger assumption of cardinality, also justifies utilitarian recommendations on redistribution and axiomatizes the Pigou-Dalton principle. We also show that transitivity and order-density (but not completeness) characterize the ordinal preferences that can be induced from sets of utility functions, present a general cardinality theorem for additively separable preferences, and provide sufficient conditions for orderings of assumptions on utility functions to be acyclic and transitive. Classification-JEL: D11, D63 Keywords: Cardinal utility, ordinal utility, measurement theory, utilitarianism Length: 39 pages Creation-Date: 200108 Number: 1322 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1322.pdf File-Format: application/pdf File-Size: 231 kb Handle: RePEc:cwl:cwldpp:1322 Template-type: ReDIF-Paper 1.0 Author-Name: George J. Hall Author-X-Name-First: George J. Author-X-Name-Last: Hall Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Exchange Rates and Casualties During the First World War Abstract: I estimate a single factor model of Swiss exchange rates during World War I for five of the primary belligerents: Britain, France, Italy, Germany, and Austria-Hungary. At the outbreak of the war these nations suspended convertibility of their currencies into gold with the promise that after the war each would restore convertibility at the old par. However, once convertibility was suspended, each currency became a state-contingent claim; after the war it would pay off at (or near) the old par if the country won or pay off significantly less than par (perhaps nothing) if the country lost. The single factor extracted from the five exchange rates appears to contain information on contemporaries' expectations about the war's outcome. Innovations to the single factor are correlated with time series on soldiers killed and wounded and soldiers taken prisoner. Classification-JEL: E40, N14, N24, F31 Keywords: First World War, factor models, principal component analysis Length: 37 pages Creation-Date: 200108 Number: 1321 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1321.pdf File-Format: application/pdf File-Size: 379 kb Handle: RePEc:cwl:cwldpp:1321 Template-type: ReDIF-Paper 1.0 Author-Name: Michael Mandler Author-X-Name-First: Michael Author-X-Name-Last: Mandler Author-Workplace-Name: Royal Holloway College, University of London Title: Accessible Pareto-Improvements: Using Market Information to Reform Inefficiencies Abstract: We study Pareto improvements whose implementation requires knowledge of only market prices and traded quantities, not utility and demand functions. Quantity stabilization gives agents the right to repeat the net trades they previously conducted, but requires policymakers to have records of those trades. While reasonable in some partial equilibrium contexts, such an assumption is implausible in general equilibrium. To diminish informational requirements further, we also consider price stabilization, which holds constant the relative prices that consumers face. Although price stabilizations do not achieve first-best efficiency, they lead to Pareto-improvements and production efficiency. Moreover, the production efficiency advantage persists under price stabilization but not under quantity stabilization when some firms are not profit-maximizers; this difference can be critical in transition policies for planned economies. In addition to planning, we consider several other applications of quantity and price stabilization, both partial equilibrium and general equilibrium: removal of rent controls, deregulation of a cross-subsidizing public utility, and the entry of an autarkic economy into world trade. Classification-JEL: D50, D60, H11, H21, P30, F10, R13, L50 Keywords: Pareto improvements, transition economies, rent control, deregulation Length: 39 pages Creation-Date: 200108 Number: 1320 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1320.pdf File-Format: application/pdf File-Size: 188 kb Handle: RePEc:cwl:cwldpp:1320 Template-type: ReDIF-Paper 1.0 Author-Name: Larry Blume Author-X-Name-First: Larry Author-X-Name-Last: Blume Author-Workplace-Name: Cornell University Author-Name: David Easley Author-X-Name-First: David Author-X-Name-Last: Easley Author-Workplace-Name: Cornell University Title: If You're So Smart, Why Aren't You Rich? Belief Selection in Complete and Incomplete Markets Abstract: This paper provides an analysis of the asymptotic properties of consumption allocations in a stochastic general equilibrium model with heterogeneous consumers. In particular we investigate the market selection hypothesis, that markets favor traders with more accurate beliefs. We show that in any Pareto optimal allocation whether each consumer vanishes or survives is determined entirely by discount factors and beliefs. Since equilibrium allocations in economies with complete markets are Pareto optimal, our results characterize the limit behavior of these economies. We show that, all else equal, the market selects for consumers who use Bayesian learning with the truth in the support of their prior and selects among Bayesians according to the size of the their parameter space. Finally, we show that in economies with incomplete markets these conclusions may not hold. Payoff functions can matter for long run survival, and the market selection hypothesis fails. Classification-JEL: D46, D51, D52, D81 Keywords: Market selection hypothesis, subjective beliefs, general equilibrium, incomplete markets, complete markets Length: 38 pages Creation-Date: 200108 Number: 1319 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1319.pdf File-Format: application/pdf File-Size: 263 kb Handle: RePEc:cwl:cwldpp:1319 Template-type: ReDIF-Paper 1.0 Author-Name: Ning Sun Author-X-Name-First: Ning Author-X-Name-Last: Sun Author-Workplace-Name: Yokohama National University Author-Name: Zaifu Yang Author-X-Name-First: Zaifu Author-X-Name-Last: Yang Author-Workplace-Name: Yokohama National University Title: Perfectly Fair Allocations with Indivisibilities Abstract: One set of n objects of type I, another set of n objects of type II, and an amount M of money is to be completely allocated among n agents in such a way that each agent gets one object of each type with some amount of money. We propose a new solution concept to this problem called a perfectly fair allocation. It is a refinement of the concept of fair allocation. An appealing and interesting property of this concept is that every perfectly fair allocation is Pareto optimal. It is also shown that a perfectly fair allocation is envy free and gives each agent what he likes best, and that a fair allocation need not be perfectly fair. Furthermore, we give a necessary and sufficient condition for the existence of a perfectly fair allocation. Precisely, we show that there exists a perfectly fair allocation if and only if the valuation matrix is an optimality preserved matrix. Optimality preserved matrices are a class of new and interesting matrices. An extension of the model is also discussed. Classification-JEL: D3, D31, D6, D61, D63, D7, D74 Keywords: Perfectly fair allocation, indivisibility, discrete optimization, multi-person decision, existence theorem, optimality preserved matrix Length: 17 pages Creation-Date: 200108 Number: 1318 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1318.pdf File-Format: application/pdf File-Size: 155 kb Handle: RePEc:cwl:cwldpp:1318 Template-type: ReDIF-Paper 1.0 Author-Name: Zaifu Yang Author-X-Name-First: Zaifu Author-X-Name-Last: Yang Author-Workplace-Name: Yokohama National University Title: A Practical Competitive Market Model for Indivisible Commo Abstract: A general and practical competitive market model for trading indivisible goods is introduced. There are a group of buyers and a group of sellers, and several indivisible goods. Each buyer is initially endowed with a sufficient amount of money and each seller is endowed with several units of each indivisible good. Each buyer has reservation values over bundles of indivisible goods above which he will not buy and each seller has reservation values over bundles of his own indivisible goods below which he will not sell. Buyers and sellers' preferences depend on the bundle of indivisible goods and the quantity of money they consume. All preferences are assumed to be quasi-linear in money and money is treated as a perfectly divisible good. It is shown in an extremely simple manner that the market has a Walrasian equilibrium if and only if an associated linear program problem has an optimal solution with its value equal to the potential market value. In addition, it is shown that the equilibrium prices of the goods and the profits of the agents are the optimal solutions of the linear program problem. Classification-JEL: C6, C62, C68, D4, D41, D46, D5, D50, D51 Keywords: Market, indivisibility, Walrasian equilibrium, linear program, potential market value Length: 9 pages Creation-Date: 200108 Number: 1317 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1317.pdf File-Format: application/pdf File-Size: 106 kb Handle: RePEc:cwl:cwldpp:1317 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: Liquidity, Default and Crashes: Endogenous Contracts in General Equilibrium Abstract: Introducing default and limited collateral into general equilibrium theory (GE) allows for a theory of endogenous contracts, including endogenous margin requirements on loans. This in turn allows GE to explain liquidity and liquidity crises in equilibrium. A formal definition of liquidity is presented. When new information raises the probability a fixed income asset may default, its drop in price may be much greater than its objective drop in value because the drop in value reduces the relative wealth of its natural buyers, who disproportiantely own the asset through leveraged purchases. When the information also shortens the horizon over which the asset might default, its price falls still further because the margin requirement for its purchase endogenously rises. There may be spillovers in which other assets also crash in price even though their probability of default did not change. Classification-JEL: D4, D5, D8, D41, D52, D81, D82 Keywords: Liquidity, default, collateral, crashes, general equilibrium, contracts, spillover, liquidity premium Note: CFP 1074. Length: 35 pages Creation-Date: 200108 Revision-Date: 200206 Number: 1316R2 Publication-Status: Published in M. Dewabtripont, L.P. Hansen, and S.J. Turnovsky, eds., Advances in Economics and Econometrics II, Cambridge University Press, 2003, pp. 170-205 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1316-r2.pdf File-Format: application/pdf File-Size: 356 kb Handle: RePEc:cwl:cwldpp:1316R2 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: Liquidity, Default and Crashes: Endogenous Contracts in General Equilibrium Abstract: The possibility of default limits available liquidity. If the potential default draws nearer, a liquidity crisis may ensue, causing a crash in asset prices, even if the probability of default barely changes, and even if no defaults subsequently materialize. Introducing default and limited collateral into general equilibrium theory (GE) allows for a theory of endogenous contracts, including endogenous margin requirements on loans. This in turn allows GE to explain liquidity and liquidity crises in equilibrium. A formal definition of liquidity is presented. When new information raises the probability and shortens the horizon over which a fixed income asset may default, its drop in price may be much greater than its objective drop in value for two reasons: the drop in value reduces the relative wealth of its natural buyers and also endogenously raises the margin required for its purchase. The liquidity premium rises, and there may be spillovers in which other assets crash in price even though their probability of default did not change. Classification-JEL: D4, D5, D8, D41, D52, D81, D82 Keywords: Liquidity, default, collateral, crashes, general equilibrium, contracts, spillover, liquidity premium Note: CFP 1074 Length: 35 pages Creation-Date: 200108 Number: 1316 Publication-Status: Published in Advances in Economics and Econometrics, Vol. II, edited by M. Dewabtripont, L.P. Hansen and S.J. Turnovsky, 2003 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1316.pdf File-Format: application/pdf File-Size: 203 kb Handle: RePEc:cwl:cwldpp:1316 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: Insurance Contracts Designed by Competitive Pooling Abstract: We build a model of competitive pooling and show how insurance contracts emerge in equilibrium, designed by the invisible hand of perfect competition. When pools are exclusive, we obtain a unique separating equilibrium. When pools are not exclusive but seniority is recognized, we obtain a different unique equilibrium: the pivotal primary-secondary equilibrium. Here reliable and unreliable households take out a common primary insurance up to its maximum limit, and then unreliable households take out further secondary insurance. Classification-JEL: D4, D5, D41, D52, D81, D82 Keywords: Competitive pooling, insurance contracts, adverse selection, signalling, seniority, equilibrium refinement Length: 38 pages Creation-Date: 200108 Number: 1315 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1315.pdf File-Format: application/pdf File-Size: 355 kb Handle: RePEc:cwl:cwldpp:1315 Template-type: ReDIF-Paper 1.0 Author-Name: Peter Diamond Author-X-Name-First: Peter Author-X-Name-Last: Diamond Author-Workplace-Name: MIT 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: Social Security Investment in Equities Abstract: This paper explores the general equilibrium impact of social security portfolio diversification into private securities, either through the trust fund or private accounts. The analysis depends critically on heterogeneities in saving, production, assets, and taxes. Limited diversification weakly increases interest rates, reduces the expected return on short-term investment (and the equity premium), decreases safe investment, increases risky investment and increases a suitably weighted social welfare function. However, the effects on aggregate investment, long-term capital values, and the utility of young savers hinges on assumptions about technology. Aggregate investment and long-term asset values can move in opposite directions. Classification-JEL: H55 Keywords: Social security, privatization, diversification Note: CFP 1070. Length: 30 pages Creation-Date: 200107 Revision-Date: 200208 Number: 1314R Publication-Status: Published in The American Economic Review (September 2003), 93(4): 1047-1074 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1314-r.pdf File-Format: application/pdf File-Size: 380 kb Handle: RePEc:cwl:cwldpp:1314R 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: Dimitri P. Tsomocos Author-X-Name-First: Dimitri P. Author-X-Name-Last: Tsomocos Author-Workplace-Name: Bank of England Title: International Finance in General Equilibrium Abstract: Our purpose in this paper is to unify international trade and finance in a single general equilibrium model. Our model is rich enough to include multiple commodities (including traded and nontraded goods), heterogeneous consumers in each country, multiple time periods, multiple credit markets, and multiple currencies. Yet our model is simple enough to be effectively computable. We explicitly calculate the financial and real effects of changes in tariffs, productivity, and preferences, as well as the effects of monetary and fiscal policy. We maintain agent optimization, rational expectations, and market clearing (i.e., perfect competition with flexible prices) throughout. But because of the important role money plays, and because of the heterogeneity of markets and agents, we find that fiscal and monetary policy both have real effects. The effects of policy on real income, long-term interest rates, and exchange rates are qualitatively identical to those suggested in Mundell-Fleming (without the small country hypothesis), although our equilibrating mechanisms are different. However, because the Mundell-Fleming model ignores expectations and relative price changes, our model predicts different effects on the flow of capital, the balance of trade, and real exchange rates in some circumstances. Classification-JEL: E5, E6, F1, F2, F3 Keywords: Currency, cash, fiscal policy, montary policy, money, trade Note: CFP 1082. Length: 50 pages Creation-Date: 200107 Number: 1313 Publication-Status: Published in Research in Economics (2002), 56: 85-142 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1313.pdf File-Format: application/pdf File-Size: 441 kb Handle: RePEc:cwl:cwldpp:1313 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: The CNBC Effect: Welfare Effects of Public Information Abstract: What are the welfare effects of enhanced dissemination of public information through the media and disclosures by market participants with high public visibility? For instance, is it always desirable to have frequent and timely publications of economic statistics by government agencies and the central bank? We examine the impact of public information in a setting where agents take actions appropriate to the underlying fundamentals, but they also have a coordination motive arising from a strategic complementarity in their actions. When the agents have no private information, greater provision of public information always increases welfare. However, when agents also have access to independent sources of information, the welfare effect of increased public disclosures is ambiguous. Classification-JEL: C7, E58, D8 Keywords: Transparency, disclosures, coordination, overreaction to public information Note: CFP 1066 Length: 35 pages Creation-Date: 200107 Number: 1312 Publication-Status: Published in American Economic Review (2002), 92(5): 1521-1534 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1312.pdf File-Format: application/pdf File-Size: 220 kb Handle: RePEc:cwl:cwldpp:1312 Template-type: ReDIF-Paper 1.0 Author-Name: Andrew Jeffrey Author-X-Name-First: Andrew Author-X-Name-Last: Jeffrey Author-Workplace-Name: Yale School of Management Author-Name: Linton, Oliver Linton Author-X-Name-First: Oliver Author-X-Name-Last: Linton Author-Workplace-Name: London School of Economics Author-Name: Thong Nguyen Author-X-Name-First: Thong Author-X-Name-Last: Nguyen Author-Workplace-Name: Bank of American Securities, San Francisco, CA 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: Nonparametric Estimation of a Multifactor Heath-Jarrow-Morton Model: An Integrated Approach Abstract: We develop a nonparametric estimator for the volatility structure of the zero coupon yield curve in the Heath-Jarrow-Morton framework. The estimator incorporates cross-sectional restrictions along the maturity dimension, and also allows for measurement errors, which arise from the estimation of the yield curve from noisy data. The estimates are implemented with daily CRSP bond data. Classification-JEL: C22 Keywords: Measurement error, multifactor model, nonparametric estimation, volatility structure Note: CFP 1143. Length: 47 pages Creation-Date: 200107 Number: 1311 Publication-Status: Published in Journal of Financial Econometrics (2004), 2(2): 251-289 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1311.pdf File-Format: application/pdf File-Size: 438 kb Handle: RePEc:cwl:cwldpp:1311 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: Regression with Slowly Varying Regressors Abstract: Slowly varying regressors are asymptotically collinear in linear regression. Usual regression formulae for asymptotic standard errors remain valid but rates of convergence are affected and the limit distribution of the regression coefficients is shown to be one dimensional. Some asymptotic representations of partial sums of slowly varying functions and central limit theorems with slowly varying weights are given that assist in the development of a regression theory. Multivariate regression and polynomial regression with slowly varying functions are considered and shown to be equivalent, up to standardization, to regression on a polynomial in a logarithmic trend. The theory involves second, third and higher order forms of slow variation. Some applications to trend regression are discussed. Classification-JEL: C22 Keywords: Asymptotic expansion, collinearity, Karamata representation, slow variation, smooth variation, trend regression Length: 45 pages Creation-Date: 200107 Number: 1310 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1310.pdf File-Format: application/pdf File-Size: 434 kb Handle: RePEc:cwl:cwldpp:1310 Template-type: ReDIF-Paper 1.0 Author-Name: Jun Yu Author-X-Name-First: Jun Author-X-Name-Last: Yu Author-Workplace-Name: University of Auckland 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: Gaussian Estimation of Continuous Time Models of the Short Term Interest Rate Abstract: This paper proposes a Gaussian estimator for nonlinear continuous time models of the short term interest rate. The approach is based on a stopping time argument that produces a normalizing transformation facilitating the use of a Gaussian likelihood. A Monte Carlo study shows that the finite sample performance of the proposed procedure offers an improvement over the discrete approximation method proposed by Nowman (1997). An empirical application to U.S. and British interest rates is given. Classification-JEL: C14, C22, G12 Keywords: Gaussian estimation, nonlinear diffusion, normalizing transformation Note: CFP 1124 Length: 22 pages Creation-Date: 200107 Number: 1309 Publication-Status: Published in Econometrics Journal (December 2001), 4(2): 211-225 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1309.pdf File-Format: application/pdf File-Size: 283 kb Handle: RePEc:cwl:cwldpp:1309 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: Second Order Expansions for the Distribution of the Maximum Likelihood Estimator of the Fractional Difference Parameter Abstract: The maximum likelihood estimator (MLE) of the fractional difference parameter in the Gaussian ARFIMA(0,d,0) model is well known to be asymptotically N(0,6/pi2). This paper develops a second order asymptotic expansion to the distribution of this statistic. The correction term for the density is shown to be independent of d, so that the MLE is second order pivotal for d. This feature of the MLE is unusual, at least in time series contexts. Simulations show that the normal approximation is poor and that the expansions make significant improvements in accuracy. Classification-JEL: C22 Keywords: ARFIMA, Edgeworth expansion, fractional differencing, pivotal statistic Length: 13 pages Creation-Date: 200107 Number: 1308 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1308.pdf File-Format: application/pdf File-Size: 339 kb Handle: RePEc:cwl:cwldpp:1308 Template-type: ReDIF-Paper 1.0 Author-Name: Antonio E. Bernardo Author-X-Name-First: Antonio Author-X-Name-Last: Bernardo Author-Workplace-Name: University of California, Los Angeles Author-Name: Ivo Welch Author-X-Name-First: Ivo Author-X-Name-Last: Welch Author-Workplace-Name: Yale School of Management Title: On the Evolution of Overconfidence and Entrepreneurs Abstract: This paper explains why seemingly irrational overconfident behavior can persist. Information aggregation is poor in groups in which most individuals herd. By ignoring the herd, the actions of overconfident individuals ("entrepreneurs") convey their private information. However, entrepreneurs make mistakes and thus die more frequently. The socially optimal proportion of entrepreneurs trades off the positive information externality against high attrition rates of entrepreneurs, and depends on the size of the group, on the degree of overconfidence, and on the accuracy of individuals' private information. The stationary distribution trades off the fitness of the group against the fitness of overconfident individuals. Classification-JEL: D7, L2 Keywords: Evolution, overconfidence, behavioral economics Length: 52 pages Creation-Date: 200106 Number: 1307 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1307.pdf File-Format: application/pdf File-Size: 271 kb Handle: RePEc:cwl:cwldpp:1307 Template-type: ReDIF-Paper 1.0 Author-Name: David Hirshleifer Author-X-Name-First: David Author-X-Name-Last: Hirshleifer Author-Workplace-Name: Ohio State University Author-Name: Ivo Welch Author-X-Name-First: Ivo Author-X-Name-Last: Welch Author-Workplace-Name: Yale School of Management Title: An Economic Approach to the Psychology of Change: Amnesia, Inertia, and Impulsiveness Abstract: This paper models how imperfect memory affects the optimal continuity of policies. We examine the choices of a player (individual or firm) who observes previous actions but cannot remember the rationale for these actions. In a stable environment, the player optimally responds to memory loss with excess inertia, defined as a higher probability of following old policies than would occur under full recall. In a volatile environment, the player can exhibit excess impulsiveness (i.e., be more prone to follow new information signals). The model provides a memory-loss explanation for some documented psychological biases, implies that inertia and organizational routines should be more important in stable environments than in volatile ones, and provides other empirical implications relating memory and environmental variables to the continuity of decisions. Classification-JEL: D7, L2, D8 Keywords: Memory, inertia, amnesia, behavioral economics Length: 45 pages Creation-Date: 200106 Number: 1306 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1306.pdf File-Format: application/pdf File-Size: 338 kb Handle: RePEc:cwl:cwldpp:1306 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: Signalling and Default: Rothschild-Stiglitz Reconsidered Abstract: In our previous paper we built a general equilibrium model of default and punishment in which equilibrium always exists and endogenously determines asset promises, penalties, and sales constraints. In this paper we interpret the endogenous sales constraints as equilibrium signals. By specializing the default penalties and imposing an exclusivity constraint on asset sales, we obtain a perfectly competitive version of the Rothschild-Stiglitz model of insurance. In our model their separating equilibrium always exists even when they say it doesn't. Classification-JEL: D4, D5, D8, D41, D52, D81, D82 Keywords: Default, incomplete markets, adverse selection, moral hazard, equilibrium refinement, signalling, endogenous assets Length: 29 pages Creation-Date: 200105 Number: 1305 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1305.pdf File-Format: application/pdf File-Size: 299 kb Handle: RePEc:cwl:cwldpp:1305 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: Yale University, Cowles Foundation Author-Workplace-Homepage: http://cowles.econ.yale.edu/ 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: Yale University, Cowles Foundation Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Default and Punishment in General Equilibrium Abstract: We extend the standard model of general equilibrium with incomplete markets to allow for default and punishment by thinking of assets as pools. The equilibrating variables include expected delivery rates, along with the usual prices of assets and commodities. By reinterpreting the variables, our model encompasses a broad range of adverse selection and signalling phenomena in a perfectly competitive, general equilibrium framework. Perfect competition eliminates the need for lenders to compute how the size of their loan or the price they quote might affect default rates. It also makes for a simple equilibrium refinement, which we propose in order to rule out irrational pessimism about deliveries of untraded assets. We show that refined equilibrium always exists in our model, and that default, in conjunction with refinement, opens the door to a theory of endogenous assets. The market chooses the promises, default penalties, and quantity constraints of actively traded assets. Classification-JEL: D4, D5, D8, D41, D52, D81, D82 Keywords: Default, incomplete markets, adverse selection, moral hazard, equilibrium refinement, endogenous assets Note: CFP 1108. Length: 38 pages Creation-Date: 200105 Revision-Date: 200403 Number: 1304R5 Publication-Status: Published in Econometrica (2005), 73(1): 1-37 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1304-r5.pdf File-Format: application/pdf File-Size: 435 kb Handle: RePEc:cwl:cwldpp:1304R5 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: Yale University, Cowles Foundation Author-Workplace-Homepage: http://cowles.econ.yale.edu/ 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: Yale University, Cowles Foundation Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Default and Punishment in General Equilibrium Abstract: We extend the standard model of general equilibrium with incomplete markets to allow for default and punishment. The equilibrating variables include expected delivery rates, along with the usual prices of assets and commodities. By reinterpreting the variables, our model encompasses a broad range of moral hazard, adverse selection, and signalling phenomena (including the Akerlof lemons model and Rothschild-Stiglitz insurance model) in a general equilibrium framework. We impose a condition on the expected delivery rates for untraded assets that is similar to the trembling hand refinements used in game theory. Despite earlier claims about the nonexistence of equilibrium with adverse selection, we show that equilibrium always exists, even with exclusivity constraints on asset sales, and transactions-liquidity costs or information-evaluation costs for asset trade. We show that more lenient punishment which encourages default may be Pareto improving because it allows for better risk spreading. We also show that default opens the door to a theory of endogenous assets. Classification-JEL: D4, D5, D8, D41, D52, D81, D82 Keywords: Default, incomplete markets, adverse selection, moral hazard, equilibrium refinement, endogenous assets Length: 48 pages Creation-Date: 200105 Number: 1304 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1304.pdf File-Format: application/pdf File-Size: 422 kb Handle: RePEc:cwl:cwldpp:1304 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.econ.yale.edu/~shiller/ Author-Workplace-Name: Yale University, Cowles Foundation Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Bubbles, Human Judgment, and Expert Opinion Abstract: Research in psychology and behavioral finance is surveyed for evidence to what extent experts such as professional investment managers or endowment trustees may behave in such a way as to help perpetuate speculative bubbles in financial markets. This paper discusses scholarly psychological literature on the representativeness heuristic, overconfidence, attentional anomalies, self-esteem, conformity pressures, salience and justification for insights into weaknesses in expert opinion. The role of the prudent person standard and the news media in influencing experts is considered. The relevance of the literature on testing of the efficient markets theory is discussed. Classification-JEL: G10 Keywords: Institutional investors, investment professionals, organizations, committees, stock market, speculative markets, behavioral finance, feedback, groupthink, representativeness, heuristic, conservatism, subjective probability, prudent person, standard, ERISA, news media, attention, efficient markets, conformity pressures, true uncertainty Length: 17 pages Creation-Date: 200105 Number: 1303 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1303.pdf File-Format: application/pdf File-Size: 51 kb Handle: RePEc:cwl:cwldpp:1303 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: Yale University, Cowles Foundation Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Valimaki Juuso Author-X-Name-First: Juuso Author-X-Name-Last: Valimaki Author-Workplace-Name: University of Southampton Title: Entry and Vertical Differentiation Abstract: This paper analyzes the entry of new products into vertically differentiated markets where an entrant and an incumbent compete in quantities. The value of the new product is initially uncertain and new information is generated through purchases in the market. We derive the (unique) Markov perfect equilibrium of the infinite horizon game under the strong long run average payoff criterion. The qualitative features of the optimal entry strategy are shown to depend exclusively on the relative ranking of established and new products based on current beliefs. Superior products are launched relatively slowly and at high initial prices whereas substitutes for existing products are launched aggressively at low initial prices. The robustness of these results with respect to different model specifications is discussed. Classification-JEL: C72, C73, D43, D83 Keywords: Entry, Duopoly, Quantity Competition, Vertical Differentiation, Bayesian Learning,Markov Perfect Equilibrium, Experimentation, Experience Goods Note: CFP 1056. Length: 41 pages Creation-Date: 200105 Number: 1302 Publication-Status: Published in Journal of Economic Theory (2002), 106(1): 91-125 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1302.pdf File-Format: application/pdf File-Size: 310 kb Handle: RePEc:cwl:cwldpp:1302 Template-type: ReDIF-Paper 1.0 Author-Name: James Tobin Author-X-Name-First: James Author-X-Name-Last: Tobin Author-Workplace-Name: Yale University, Cowles Foundation Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Fiscal Policy: Its Macroeconomics in Perspective Abstract: President George W. Bush is preparing a drastic permanent reduction in federal income and estate taxes. He cites as precedents tax cuts by Kennedy-Johnson 1962-64 and Reagan 1981. In those cases, however, the economy was operating well below full employment and needed a "demand-side" stimulus (even though Reagan advertised his tax reduction as "supply-side"). In 2001, however, the economy is very close to full employment, and if it needs a stimulus at all, it is a quick modest temporary one instead of the large permanent one proposed. And why can't monetary policy do the job of stabilization, as it did successfully in the 1990s? A policy mix that assigns short run demand stabilization to the central bank is for several reasons preferable to a tight-money-easy-fiscal mix. In the case of Reagan and Bush the younger, federal tax cuts are advocated on philosophical and ideological grounds, diminution of the size and scope of government. But formulation of the issue as government versus people is a misunderstanding of democracy and of the reciprocities between public and private sectors. Classification-JEL: E6 Keywords: Fiscal policy, tax reduction, monetary policy, interest rates, policy mix Length: 9 pages Creation-Date: 200105 Number: 1301 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1301.pdf File-Format: application/pdf File-Size: 29 kb Handle: RePEc:cwl:cwldpp:1301 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: Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: On Modeling the Effects of Inflation Shocks Abstract: A popular model in the literature postulates an interest rate rule, a NAIRU price equation, and an aggregate demand equation in which aggregate demand depends on the real interest rate. In this model a positive inflation shock with the nominal interest rate held constant is explosive because it increases aggregate demand (because the real interest rate is lower), which increases inflation through the price equation, which further increases aggregate demand, and so on. In order for the model to be stable, the nominal interest rate must rise more than inflation, which means that the coefficient on inflation in the interest rate rule must be greater than one. The results in this paper suggest, however, that an inflation shock with the nominal interest rate held constant has a negative effect on real output. There are three reasons. First, the data support the use of nominal rather than real interest rates in aggregate expenditure equations. Second, the evidence suggests that the percentage increase in nominal household wealth from a positive inflation shock is less than the percentage increase in the price level, which is contractionary because of the fall in real wealth. Third, there is evidence that wages lag prices, and so a positive inflation shock results in an initial fall in real wage rates and thus real labor income, which is contractionary. If these three features are true, they imply that a positive inflation shock has a negative effect on aggregate demand even if the nominal interest rate is held constant. Not only does the Fed not have to increase the nominal interest rate more than the increase in inflation for there to be a contraction, it does not have to increase the nominal rate at all! Classification-JEL: E1, E5 Keywords: Macroeconomics, monetary policy Length: 27 pages Creation-Date: 200104 Revision-Date: 200203 Number: 1300 Publication-Status: Published in Contributions to Macroeconomics, Vol. 2, Iss. 1, Article 3 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d13a/d1300.pdf File-Format: application/pdf File-Size: 83 kb Handle: RePEc:cwl:cwldpp:1300 Template-type: ReDIF-Paper 1.0 Author-Name: John Rust Author-X-Name-First: John Author-X-Name-Last: Rust 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://www.econ.yale.edu/ Title: Middle Men Versus Market Makers: A Theory of Competitive Exchange Abstract: What determines how trade in a commodity is divided between privately negotiated transactions via "middle men" (dealer/brokers) in a telephone or "dealer market" versus transactions via "market makers" (specialists) at publicly observable bid/ask prices? To address this question, we extend Spulber's (1996a) search model with buyers, sellers, and price setting dealers to include a fourth type of agent, market makers. The result is a model where market microstructure -- the division of trade between dealers and market makers -- is determined endogenously. In Spulber's model, dealers are the exclusive avenue of exchange, and prices are private in the sense that price quotes can only be obtained through direct contact (e.g. telephone calls) to individual dealers. In contrast a market maker can be conceptualized as operating an exchange that posts publicly observable bid and ask prices. In our model buyers and sellers can either trade with the market maker at the publicly posted bid/ask price or they can search for a better price in the dealer market. We show that the entry of a monopolist market maker can be profitable if it has a lower marginal cost of processing transactions than the least efficient middle man in the equilibrium without market makers. If this is the case the entry of a market maker segments the market; the highest valuation buyers and the lowest cost sellers trade with the market maker and the residual set of intermediate valuation buyers and sellers search for better prices in the dealer market. Dealers act as a "competitive fringe" that undercut the bid/ask spread charged by the monopolist market maker. However less efficient dealers are driven out of business. The remaining dealers are still profitable although the entry of a monopolist market maker significantly reduces their profits and bid-ask spreads. Thus, entry by a marker maker results in uniformly higher surpluses for buyers and sellers and higher trading volumes. When there is free entry into market making and market makers' marginal costs of processing transactions tend to zero, bid-ask spreads converge to zero and a fully efficient Walrasian equilibrium outcome emerges. Classification-JEL: D4, D5, D6, G2, L1 Keywords: Middle men, intermediation, market makers, search, market microstructure, bid-ask spread, Walrasian equilibrium Length: 48 pages Creation-Date: 200104 Number: 1299 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1299.pdf File-Format: application/pdf File-Size: 620 kb Handle: RePEc:cwl:cwldpp:1299 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: Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Estimates of the Effectiveness of Monetary Policy Abstract: This paper examines various interest rate rules, as well as policies derived by solving optimal control problems, for their ability to dampen economic fluctuations caused by random shocks. A tax rate rule is also considered. A multicountry econometric model is used for the experiments. The results differ sharply from those obtained using recent models in which the coefficient on inflation in the nominal interest rate rule must be greater than one in order for the economy to be stable. Classification-JEL: E52 Keywords: Monetary policy, interest rate rules Note: CFP 1155 Length: 29 pages Creation-Date: 200104 Revision-Date: 200306 Number: 1298 Publication-Status: Published in Journal of Money, Credit and Banking (August 2005), 645-660 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1298.pdf File-Format: application/pdf File-Size: 87 kb Handle: RePEc:cwl:cwldpp:1298 Template-type: ReDIF-Paper 1.0 Author-Name: Juan Dubra Author-X-Name-First: Juan Author-X-Name-Last: Dubra Author-Name: Echenique, Federico Author-Workplace-Name: UCLA, Berkeley, Universidad de la Republica Title: Monotone Preferences over Information Abstract: We consider preference relations over information that are monotone: more information is preferred to less. We prove that, if a preference relation on information about an uncountable set of states of nature is monotone, then it is not representable by a utility function. Classification-JEL: C70, D11, D80 Keywords: Value of information, Blackwell's theorem, representation theorems, monotone preferences Length: 13 pages Creation-Date: 200103 Number: 1297 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1297.pdf File-Format: application/pdf File-Size: 194 kb Handle: RePEc:cwl:cwldpp:1297 Template-type: ReDIF-Paper 1.0 Author-Name: Juan Dubra Author-X-Name-First: Juan Author-X-Name-Last: Dubra Author-Name: Federico Echenique Author-X-Name-First: Federico Author-X-Name-Last: Echenique Author-Workplace-Name: UCLA, Berkeley, Universidad de la Republica Title: Measurability Is Not about Information Abstract: We comment on the relation between models of information based on signals/partitions, and those based on sigma-algebras. We show that more informative signals need not generate finer sigma-algebras, hence that Blackwell's theorem fails if information is modeled as sigma-algebras. The reason is that the sigma-algebra generated by a partition does not contain all the events that can be known from the information provided by the signal. We also show that there is a non-conventional sigma-algebra that can be associated to a signal which does preserve its information content. Further, expectations and conditional expectations may depend on the choice of sigma-algebra that is associated to a signal. We provide a simple characterization of when the model is robust to changes in the sigma-algebras. Classification-JEL: C60, C70, G12 Keywords: Blackwell's theorem, measurability, models of information, partitions, information- preserving sigma-algebras Length: 11 pages Creation-Date: 200103 Number: 1296 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1296.pdf File-Format: application/pdf File-Size: 217 kb Handle: RePEc:cwl:cwldpp:1296 Template-type: ReDIF-Paper 1.0 Author-Name: John Y. Campbell Author-X-Name-First: John Y. Author-X-Name-Last: Campbell Author-Workplace-Name: Harvard University 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.econ.yale.edu/~shiller/ Author-Workplace-Name: Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Valuation Ratios and the Long-run Stock Market Outlook: An Update Abstract: The use of price-earnings ratios and dividend-price ratios as forecasting variables for the stock market is examined using aggregate annual US data 1871 to 2000 and aggregate quarterly data for twelve countries since 1970. Various simple efficient-markets models of financial markets imply that these ratios should be useful in forecasting future dividend growth, future earnings growth, or future productivity growth. We conclude that, overall, the ratios do poorly in forecasting any of these. Rather, the ratios appear to be useful primarily in forecasting future stock price changes, contrary to the simple efficient-markets models. This paper is an update of our earlier paper (1998), to take account of the remarkable behavior of the stock market in the closing years of the twentieth century. Classification-JEL: G12 Keywords: Stock market, price-earnings ratio, forecasts, expectations, dividend-price ratio, efficient markets, Standard & Poor's 500, present value, productivity Length: 31 pages Creation-Date: 200103 Number: 1295 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1295.pdf File-Format: application/pdf File-Size: 343 kb Handle: RePEc:cwl:cwldpp:1295 Template-type: ReDIF-Paper 1.0 Author-Name: Juan Dubra Author-X-Name-First: Juan Author-X-Name-Last: Dubra Author-Name: Fabio Maacheroni Author-X-Name-First: Fabio Author-X-Name-Last: Maacheroni Author-Workplace-Name: Universita Bocconi Author-Name: Efe A. Ok Author-X-Name-First: Efe A. Author-X-Name-Last: Ok Author-Workplace-Name: New York University Title: Expected Utility Theory without the Completeness Axiom Abstract: We study axiomatically the problem of obtaining an expected utility representation for a potentially incomplete preference relation over lotteries by means of a set of von Neumann-Morgenstern utility functions. It is shown that, when the prize space is a compact metric space, a preference relation admits such a multi-utility representation provided that it satisfies the standard axioms of expected utility theory. Moreover, the representing set of utilities is unique in a well-defined sense. Classification-JEL: D11, D81 Keywords: Expected utility, incomplete preferences Length: 12 pages Creation-Date: 200102 Number: 1294 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1294.pdf File-Format: application/pdf File-Size: 183 kb Handle: RePEc:cwl:cwldpp:1294 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: Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Yixiao Sun Author-X-Name-First: Yixiao Author-X-Name-Last: Sun Title: Local Polynomial Whittle Estimation of Long-range Dependence Abstract: The local Whittle (or Gaussian semiparametric) estimator of long range dependence, proposed by Kunsch (1987) and analyzed by Robinson (1995a), has a relatively slow rate of convergence and a finite sample bias that can be large. In this paper, we generalize the local Whittle estimator to circumvent those problems. Instead of approximating the short-run component of the spectrum, phi(lambda), by a constant in a shrinking neighborhood of frequency zero, we approximate its logarithm by a polynomial. This leads to a "local polynomial Whittle" (LPW) estimator. Following the work of Robinson (1995a), we establish the asymptotic bias, variance, mean-squared error (MSE), and normality of the LPW estimator. We determine the asymptotically MSE-optimal bandwidth, and specify a plug-in selection method for its practical implementation. When phi(lambda) is smooth enough near the origin, we find that the bias of the LPW estimator goes to zero at a faster rate than that of the local Whittle estimator, and its variance is only inflated by a multiplicative constant. In consequence, the rate of convergence of the LPW estimator is faster than that of the local Whittle estimator, given an appropriate choice of the bandwidth m. We show that the LPW estimator attains the optimal rate of convergence for a class of spectra containing those for which varphi(lambda) is smooth of order s > 1 near zero. When phi(lambda) is infinitely smooth near zero, the rate of convergence of the LPW estimator based on a polynomial of high degree is arbitrarily close to n^{-1/2}. Classification-JEL: C13, C14, C22 Keywords: Asymptotic bias, asymptotic normality, bias reduction, long memory, minimax rate, optimal bandwidth, Whittle likelihood Length: 36 pages Creation-Date: 200102 Number: 1293 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1293.pdf File-Format: application/pdf File-Size: 361 kb Handle: RePEc:cwl:cwldpp:1293 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: Yale University Author-Workplace-Homepage: http://www.econ.yale.edu/ Author-Name: Ulrich Hege Author-X-Name-First: Ulrich Author-X-Name-Last: Hege Author-Workplace-Name: ESSEC Business School, CEPR Title: The Financing of Innovation: Learning and Stopping Abstract: This paper considers the financing of a research project under uncertainty about the time of completion and the probability of eventual success. We distinguish between two financing modes, namely relationship financing, where the allocation decision of the entrepreneur is observable, and arm's length financing, where it is unobservable. We find that equilibrium funding stops altogether too early relative to the efficient stopping time in both financing modes. The rate at which funding is released becomes tighter over time under relationship financing, and looser under arm's length financing. The trade-off in the choice of financing modes is between lack of commitment with relationship financing and information rents with arm's length financing. Note: CFP 1176 Classification-JEL: D83, D92, G24, G31 Keywords: Innovation, venture capital, relationship financing, arm's length financing, learning, time-consistency, stopping, renegotiation-proofness Note: CFP 1176 Length: 50 pages Creation-Date: 200102 Revision-Date: 200410 Number: 1292R Price: None Publication-Status: Published in RAND Journal of Economics (Winter 2005), 70(3): 1107-1033 File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1292-r.pdf File-Format: application/pdf File-Size: 294 kb Handle: RePEc:cwl:cwldpp:1292R 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: Yale University Author-Workplace-Homepage: http://www.econ.yale.edu/ Author-Name: Ulrich Hege Author-X-Name-First: Ulrich Author-X-Name-Last: Hege Author-Workplace-Name: ESSEC Business School, CEPR Title: The Financing of Innovation: Learning and Stopping Abstract: This paper considers the financing of a research project under uncertainty about the time of completion and the probability of eventual success. The uncertainty about future success gradually diminishes with the arrival of addtional funding. The entrepreneur controls the funds and can divert them. We distinguish between relationship financing, meaning that the entrepreneur's allocation of the funds is observable, and arm's length financing, where it is unobservable. We find that equilibrium funding stops altogether too early relative to the efficient stopping time in both financing modes. We characterize the optimal contracts and equilibrium funding decisions. The financial constraints will typically become tighter over time under relationship finance, and looser under arm's length financing. The trade-off is that while relationship financing may require smaller information rents, arm's length financing amounts to an implicit commitment to a finite funding horizon. The lack of such a commitment under relationship financing implies that the sustainable release of funds eventually slows down. We obtain the surprising result that arm's length contracts are preferable in a Pareto sense. Classification-JEL: D83, D92, G24, G31 Keywords: Innovation, venture capital, relationship financing, arm's length financing, learning, time-consistency, stopping, renegotiation, Markov perfect equilibrium Length: 41 pages Creation-Date: 200102 Number: 1292 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1292.pdf File-Format: application/pdf File-Size: 372 kb Handle: RePEc:cwl:cwldpp:1292 Template-type: ReDIF-Paper 1.0 Author-Name: Estelle Cantillon Author-X-Name-First: Estelle Author-X-Name-Last: Cantillon Author-Workplace-Name: Harvard Business School, CEPR Title: Electoral Rules and the Emergence of New Issue Dimensions Abstract: Different electoral rules provide different incentives for parties competing for votes to adopt emerging issues. As a result, new societal issues will be integrated at different speeds into the political arena, and ultimately, into policy. In order to study this question formally, I propose an extension of the standard spatial model of political competition that allows for issue adoption and more generally, issue prioritizing at the platform level. The paper then compares the outcome of party competition under proportional and plurality rule. Entry is allowed and incumbent parties act as Stackelberg leaders vis-a-vis potential entrants. The analysis highlights the interaction between entry barriers and the type of emerging issue in determining when and how a new issue will be introduced. The theory explains both internal (that is, without entry by a new party) realignments of party systems along new dimensions and entry as part of the process of political realignment. Classification-JEL: D72, D78 Keywords: Comparison of electoral rules, new issue, electoral competition, entry, realignment, party system change Length: 37 pages Creation-Date: 200102 Number: 1291 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1291.pdf File-Format: application/pdf File-Size: 289 kb Handle: RePEc:cwl:cwldpp:1291 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: Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Alok Kumar Author-X-Name-First: Alok Author-X-Name-Last: Kumar Title: A Computational Analysis of the Core of a Trading Economy with Three Competitive Equilibria and a Finite Number of Traders Abstract: In this paper we examine the structure of the core of a trading economy with three competitive equilibria as the number of traders (N) is varied. We also examine the sensitivity of the multiplicity of equilibria and of the core to variations in individual initial endowments. Computational results show that the core first splits into two pieces at N = 5 and then splits a second time into three pieces at N = 12. Both of these splits occur not at a point but as a contiguous gap. As N is increased further, the core shrinks by N = 600 with essentially only the 3 competitive equilibria remaining. We find that the speed of convergence of the core toward the three competitive equilibria is not uniform. Initially, for small N, it is not of the order 1/N but when N is large, the convergence rate is approximately of the order 1/N. Small variations in the initial individual endowments along the price rays to the competitive equilibria make the respective competitive equilibrium (CE) unique and once a CE becomes unique, it remains so for all allocations on the price ray. Sensitivity analysis of the core reveals that in the large part of the endowment space where the competitive equilibrium is unique, the core either converges to the single CE or it splits into two segments, one of which converges to the CE and the other disappears. Classification-JEL: C62, C71 Keywords: Core, Multiple competitive equilibria, Speed of convergence, Sensitivity Analysis Note: CFP 1135. Length: 22 pages Creation-Date: 200102 Number: 1290 Publication-Status: Published in Games and Economic Behavior (2003), 42(2): 253-266 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1290.pdf File-Format: application/pdf File-Size: 630 kb Handle: RePEc:cwl:cwldpp:1290 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: Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: The Uses of Teaching Games in Game Theory Classes and Some Experimental Games Abstract: The results are presented from several experiments. They include the selection of points in the core, interpersonal comparisons of utility, and the reconsideration of Stone results on prominence in contrast with symmetry. Classification-JEL: C71, C72, C90 Keywords: Gaming, game theory, fair division, core Note: CFP 1133 Length: 15 pages Creation-Date: 200101 Number: 1289 Publication-Status: Published in Simulation and Gaming (June 2002), 33(2): 139-156 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1289.pdf File-Format: application/pdf File-Size: 74 kb Handle: RePEc:cwl:cwldpp:1289 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/~djb/ Author-Name: Marten H. Wegkamp Author-X-Name-First: Marten H. Author-X-Name-Last: Wegkamp Title: Weighted Minimum Mean-Square Distance from Independence Estimation Abstract: In this paper we introduce a family of semi-parametric estimators, suggested by Manski's minimum mean-square distance from independence estimator. We establish the strong consistency, asymptotic normality and consistency of bootstrap estimates of the sampling distribution and the asymptotic variance of these estimators. Classification-JEL: C14, C30 Keywords: Semiparametric estimation, simultaneous equations models, empirical processes, extremum estimators Note: CFP 1042 Length: 31 pages Creation-Date: 200102 Number: 1288 Publication-Status: Published in Econometrica (September 2002), 70(5): 2035-2051 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1288.pdf File-Format: application/pdf File-Size: 328 kb Handle: RePEc:cwl:cwldpp:1288 Template-type: ReDIF-Paper 1.0 Author-Name: Julien Barral Author-X-Name-First: Julien Author-X-Name-Last: Barral Author-Workplace-Name: Universite Montpellier-II Author-Name: Benoit B. Mandelbrot Author-X-Name-First: Benoit B. Author-X-Name-Last: Mandelbrot Author-Email: benoit.mandelbrot@yale.edu Author-Workplace-Name: Yale University Title: Multifractal Products of Cylindrical Rules Abstract: A new class of random multiplicative and statistically self-similar measures is defned on IR. It is the limit of measure-valued martingales constructed by multiplying random functions attached to the points of a statistically self-similar Poisson point process in a strip of the plane. Several fundamental problems are solved, including the non-degeneracy and the distribution of the limit measure, mu; the finiteness of the (positive and negative) moments of the total mass of mu restricted to bounded intervals. Compared to the familiar canonical multifractals generated by multiplicative cascades, the new measures and their multifractal analysis exhibit strikingly novel features which are discussed in detail. Keywords: Random measures, Multifractal analysis, Continuous time martingales, Statistically self-similar Poisson point processes Length: 26 pages Creation-Date: 200101 Number: 1287 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1287.pdf File-Format: application/pdf File-Size: 361 kb Handle: RePEc:cwl:cwldpp:1287 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: Yale University Author-Workplace-Homepage: http://www.econ.yale.edu/ Title: New Data and Output Concepts for Understanding Productivity Trends Abstract: The present study is the second is a series of three papers devoted to issues in the measurement of productivity and productivity growth. The contributions of the present paper are three. First, it introduces a new approach to measuring industrial productivity based on income-side data that are published by the Bureau of Economic Analysis (BEA). The data are internally consistent in that both inputs and outputs are income-side measures of value added, whereas the usual productivity measures combine expenditure-side output measures with income-side input measures. Second, because of interest in the "new economy," we have also constructed a set of new- economy accounts. For the purpose of this study, we define the new economy as machinery, electric equipment, telephone and telegraph, and software. Finally, because of concerns about poor deflation in the current output measures, this study constructs a new output concept called "well-measured output," which includes only those sectors for which output is relatively well measured. We present a brief summary of the behavior of the alternative measures. Classification-JEL: E3, D24, C82, O3 Keywords: Productivity, new economy, price measurement, well-measured output Length: 32 pages Creation-Date: 200011 Number: 1286 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1286.pdf File-Format: application/pdf File-Size: 107 kb Handle: RePEc:cwl:cwldpp:1286 Template-type: ReDIF-Paper 1.0 Author-Name: Estelle Cantillon Author-X-Name-First: Estelle Author-X-Name-Last: Cantillon Author-Workplace-Name: Cowles Foundation, Yale University Author-Name: Antonio Rangel Author-X-Name-First: Antonio Author-X-Name-Last: Rangel Author-Workplace-Name: Stanford, NBER, Instituto de Analisis Economico Title: A Graphical Analysis of Some Basic Results in Social Choice Abstract: We use a simple graphical approach to represent Social Welfare Functions that satisfy Independence of Irrelevant Alternatives and Anonymity. This approach allows us to provide simple and illustrative proofs of May's Theorem, of variants of classic impossibility results, and of a recent result on the robustness of Majority Rule due to Maskin (1995). In each case, geometry provides new insights on the working and interplay of the axioms, and suggests new results including a new characterization of the entire class of Majority Rule SWFs, a strengthening of May's Theorem, and a new version of Maskin's Theorem. Classification-JEL: D71 Keywords: Graphical analysis, cube, impossibility theorem, majority rule, anonymity, IIA Length: 23 pages Creation-Date: 200011 Number: 1285 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1285.pdf File-Format: application/pdf File-Size: 330 kb Handle: RePEc:cwl:cwldpp:1285 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: Yale University Author-Workplace-Homepage: http://www.econ.yale.edu/ Title: Productivity Growth and the New Economy Abstract: The present study is the third in a series of three papers devoted to issues in the measurement of productivity and productivity growth. The major findings are as follows. First, this study shows that the new data set used here, which develops data on total output, business sector output, and "well-measured" output, and relying on income-side data, provides a useful supplement to existing data sets. Second, there has clearly been a rebound in labor-productivity growth in recent years. All three sectoral definitions show a major acceleration in labor productivity in the last three years of the period (1996-98) relative to the 1978-95 period. The rebound was 1.2 percentage points for GDP, 1.8 percentage points for business sector, and 2.1 percentage points for well-measured output. Third, productivity growth in the new economy sectors has made a significant contribution to economy-wide productivity growth. For the business sector, of the 1.82 percentage point increase in labor-productivity growth in the last three years, 0.65 percentage point was due to the new-economy sectors. Finally, for all three output measures, there has been a substantial upturn in labor-productivity growth outside the new economy. After removing the direct effect of new economy sectors, the productivity acceleration was 0.54 percentage points for total GDP, 0.65 percentage points for business output, and 1.18 percentage points for well- measured output. It is clear that the productivity rebound is not narrowly focused in a few new-economy sectors. Classification-JEL: E3, D24, C82, O3 Keywords: Productivity, new economy, well-measured output Note: CFP 1064. Length: 42 pages Creation-Date: 200011 Number: 1284 Publication-Status: Published in Brookings Papers on Economic Activities (2002), 2: 211-265 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1284.pdf File-Format: application/pdf File-Size: 139 kb Handle: RePEc:cwl:cwldpp:1284 Template-type: ReDIF-Paper 1.0 Author-Name: Carmela E. Quintos Author-X-Name-First: Carmela E. Author-X-Name-Last: Quintos Author-Workplace-Name: New York University Author-Name: Zhenhong Fan Author-X-Name-First: Zhenhong Author-X-Name-Last: Fan Author-Workplace-Name: New York 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: Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Structural Change in Tail Behavior and the Asian Financial Crisis Abstract: This paper explores tests of the hypothesis that the tail thickness of a distribution is constant over time. Using Hill's conditional maximum likelihood estimator for the tail index of a distribution, tests of tail shape constancy are constructed that allow for an unknown breakpoint. The recursive test is shown to be inconsistent in one direction, and only a one-sided test is recommended. Specifically, the test can be used when the alternative hypothesis is that the tail index decreases over time. A rolling and sequential version of the test is consistent in both directions. The methods are illustrated on recent stock price data for Thailand, Malaysia and Indonesia. The period covers the recent Asian financial crisis and enables us to assess whether breakpoints in domestic asset return distributions are related to known changes in institutional arrangements in the foreign currency markets of these countries. Classification-JEL: C22, G15 Keywords: Extreme value theory, Hill estimator, Structural change, Tail index estimation Note: CFP 1030. Length: 38 pages Creation-Date: 200011 Number: 1283 Publication-Status: Published in Review of Economic Studies (2001), 68(3): 633-663 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1283.pdf File-Format: application/pdf File-Size: 400 kb Handle: RePEc:cwl:cwldpp:1283 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: Yale University Author-Workplace-Homepage: http://www.econ.yale.edu/ Title: Alternative Methods for Measuring Productivity Growth Abstract: The present study is a contribution to the theory of the measurement of productivity growth. First, it examines the welfare-theoretic basis for measuring productivity growth and shows that the ideal welfare-theoretic measure is a chain index of productivity growth rates of different sectors which uses current output weights. Second, it lays out a technique for decomposing productivity growth which separates aggregate productivity growth into three factors -- the pure productivity effect, the effect of changing shares, and the effect of different productivity levels. Finally, it shows how to apply the theoretically correct measure of productivity growth and indicates which of the three different components should be included in a welfare-oriented measure of productivity growth. The study concludes that none of the measures generally used to measure productivity growth is consistent with the theoretically correct measure. Classification-JEL: E3, O3, C82, D24 Keywords: Productivity, index numbers Length: 16 pages Creation-Date: 200011 Number: 1282 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1282.pdf File-Format: application/pdf File-Size: 51 kb Handle: RePEc:cwl:cwldpp:1282 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/ Title: Does Democracy Engender Justice? Abstract: Many suppose that democracy is an ethos which includes, inter alia, a degree of economic equality among citizens. In contrast, we conceive of democracy as ruthless political competition between groups of citizens, organized into parties. We inquire whether such competition, which we assume to be concerned with distributive matters, will engender economic equality in the long run. The society consists of an infinite sequence of generations, each comprised of adults and their children. Adults care about household consumption, and the future wages of their children, which are determined by educational policy. A given generation is characterized by the distribution of wages earned by its adults. Parties form and propose policies to redistribute income among households, and to invest in the education of children; the educational policy that is victorious determines the distribution of wages in the next generation of adults. A political equilibrium concept is proposed which determines two parties endogenously, and their proposed policies in political competition. One party wins the election (stochastically). This process determines a sequence of wage distributions across the generations, and we ask: Under what conditions does the wage distribution tend to one of equality? We show that, under a technological assumption that appears to hold empirically, there is no assurance that wage equality is eventually achieved, but if certain 'social norms' hold, which restrict the space of acceptable political policies, then equality is eventually achieved. We suggest, moreover, that the social norms in question will tend to hold, the more technologically developed the democracy is. Classification-JEL: D72, D63 Keywords: Political economy, dynamics, education, equality Note: CFP 1163. Length: 56 pages Creation-Date: 200109 Number: 1281R Publication-Status: Published in Economic Theory (2005), 25(1): 217-234 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1281-r.pdf File-Format: application/pdf File-Size: 235 Handle: RePEc:cwl:cwldpp:1281R Template-type: ReDIF-Paper 1.0 Author-Name: Pradeep Dubey Author-X-Name-First: Pradeep Author-X-Name-Last: Dubey Author-Workplace-Name: SUNY at Stony Brook Author-Name: Ori Haimanko Author-X-Name-First: Ori Author-X-Name-Last: Haimanko Author-Workplace-Name: CORE, Louvain-la Neuve, Belgium Title: Unilateral Deviation with Perfect Information Abstract: For extensive form games with perfect information, consider a learning process in which, at any iteration, each player unilaterally deviates to a best response to his current conjectures of others' strategies; and then updates his conjectures in accordance with the induced play of the game. We show that, for generic payoffs, the outcome of the game becomes stationary in finite time, and is consistent with Nash equilibrium. In general, if payoffs have ties or if players observe more of each others' strategies than is revealed by plays of the game, the same result holds provided a rationality constraint is imposed on unilateral deviations: no player changes his moves in subgames that he deems unreachable, unless he stands to improve his payoff there. Moreover, with this constraint, the sequence of strategies and conjectures also becomes stationary, and yields a self- confirming equilibrium. Classification-JEL: C72 Keywords: Extensive form games with perfect information, self-confirming and Nash equilibria, unilateral deviations, objective updates, convergence in finitely many steps Length: 15 pages Creation-Date: 200011 Number: 1280 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1280.pdf File-Format: application/pdf File-Size: 166 kb Handle: RePEc:cwl:cwldpp:1280 Template-type: ReDIF-Paper 1.0 Author-Name: Estelle Cantillon Author-X-Name-First: Estelle Author-X-Name-Last: Cantillon Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: The Effect of Bidders' Asymmetries on Expected Revenue in Auctions Abstract: Bidders' asymmetries are widespread in auction markets. Yet, their impact on behavior and, ultimately, revenue and profits is still not well understood. In this paper, I define a natural benchmark auction environment to which to compare any private value auction with asymmetrically distributed valuations. I show that the expected revenue from the benchmark auction always dominates that from the asymmetric auction, both in the first price auction and the second price auction. These results formalize and make transparent the idea that competition is reduced by bidders' asymmetries. The paper also contributes to a better understanding of competition and the nature of rents in auction markets. Anonymity of the allocation mechanism seems to be an important factor. Classification-JEL: D40, D44, L13 Keywords: Auctions, asymmetries, anonymous mechanisms, benchmark, reduced competition Length: 37 pages Creation-Date: 200010 Number: 1279 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1279.pdf File-Format: application/pdf File-Size: 350 kb Handle: RePEc:cwl:cwldpp:1279 Template-type: ReDIF-Paper 1.0 Author-Name: Aaron F. Schiff Author-X-Name-First: Aaron F. Author-X-Name-Last: Schiff Author-Workplace-Name: University 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://cowles.econ.yale.edu/faculty/phillips.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Forecasting New Zealand's Real GDP Abstract: Recent time series methods are applied to the problem of forecasting New Zealand's real GDP. Model selection is conducted within autoregressive (AR) and vector autoregressive (VAR) classes, allowing for evolution in the form of the models over time. The selections are performed using the Schwarz (1978) BIC and the Phillips-Ploberger (1996) PIC criteria. The forecasts generated by the data-determined AR models and an international VAR model are found to be competitive with forecasts from fixed format models and forecasts produced by the NZIER. Two illustrations of the methodology in conditional forecasting settings are performed with the VAR models. The first provides conditional predictions of New Zealand's real GDP when there is a future recession in the United States. The second gives conditional predictions of New Zealand's real GDP under a variety of profiles that allow for tightening in monetary conditions by the Reserve Bank. Classification-JEL: C11, C22, C32, C53 Keywords: Automated modeling, forecasting, PIC model selection, policy analysis, real GDP Note: CFP 1020. Length: 32 pages Creation-Date: 200010 Number: 1278 Publication-Status: Published in New Zealand Economic Papers (2000), 34(2): 159-182 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1278.pdf File-Format: application/pdf File-Size: 184 kb Handle: RePEc:cwl:cwldpp:1278 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: University of Southampton Title: Entry and Vertical Differentiation Abstract: This paper analyzes the entry of new products into vertically differentiated markets where an entrant and an incumbent compete in quantities. The value of the new product is initially uncertain and new information is generated through purchases in the market. We derive the (unique) Markov perfect equilibrium of the infinite horizon game under the strong long run average payoff criterion. The qualitative features of the optimal entry strategy are shown to depend exclusively on the relative ranking of established and new products based on current beliefs. Superior products are launched relatively slowly and at high initial prices whereas substitutes for existing products are launched aggressively at low initial prices. The robustness of these results with respect to different model specifications is discussed. Classification-JEL: C72, C73, D43, D83 Keywords: Entry, Duopoly, Quantity Competition, Vertical Differentiation, Bayesian Learning, Markov Perfect Equilibrium, Experimentation, Experience Goods Length: 45 pages Creation-Date: 200010 Number: 1277 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1277.pdf File-Format: application/pdf File-Size: 269 kb Handle: RePEc:cwl:cwldpp:1277 Template-type: ReDIF-Paper 1.0 Author-Name: Leandro Arozamena Author-X-Name-First: Leandro Author-X-Name-Last: Arozamena Author-Workplace-Name: University of San Andres, Argentina Author-Name: Estelle Cantillon Author-X-Name-First: Estelle Author-X-Name-Last: Cantillon Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Investment Incentives in Procurement Auctions Abstract: We investigate firms' incentives for cost reduction in the first price sealed bid auction, a format largely used for procurement. A central feature of the model is that we allow firms to be heterogeneous. Though private value first price auctions are not games with monotonic best responses, we find that for comparative statics purposes they behave like these games. In particular, firms will tend to underinvest in cost reduction because they anticipate fiercer head-on competition. Using the second price auction as a benchmark, we also find that the first price auction will elicit less investment from market participants. Moreover, both auction formats tend to favor investment by the current market leader and are therefore likely to reinforce asymmetries among market participants. Classification-JEL: C72, D44, L13 Keywords: Asymmetric auctions, endogenous distributions, investment incentives Length: 41 pages Creation-Date: 200009 Number: 1276 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1276.pdf File-Format: application/pdf File-Size: 351 kb Handle: RePEc:cwl:cwldpp:1276 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: Global Games: Theory and Applications Abstract: Global games are games of incomplete information whose type space is determined by the players each observing a noisy signal of the underlying state. With strategic complementarities, global games often have a unique, dominance solvable equilibrium, allowing analysis of a number of economic models of coordination failure. For symmetric binary action global games, equilibrium strategies in the limit (as noise becomes negligible) are simple to characterize in terms of 'diffuse' beliefs over the actions of others. We describe a number of economic applications that fall in this category. We also explore the distinctive roles of public and private information in this setting, review results for general global games, discuss the relationship between global games and a literature on higher order beliefs in game theory and describe the relationship to local interaction games and dynamic games with payoff shocks. Classification-JEL: C72, D82 Keywords: Common knowledge, coordination, currency crises, global games, higher order beliefs, unique equilibrium Note: CFP 1097. Length: 67 pages Creation-Date: 200009 Revision-Date: 200108 Number: 1275R Publication-Status: Published in M. Dewatripont, L. Hansen and S. Turnovsky, eds., Advanced in Economics and Econometrics, Vol. 1, Cambridge University Press, 2003, pp. 57-114 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1275-r.pdf File-Format: application/pdf File-Size: 462 kb Handle: RePEc:cwl:cwldpp:1275R 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: Global Games: Theory and Applications Abstract: Global games are games of incomplete information whose type space is determined by the players each observing a noisy signal of the underlying state. With strategic complementarities, global games often have a unique, dominance solvable equilibrium, allowing analysis of a number of economic models of coordination failure. For symmetric binary action global games, equilibrium strategies in the limit (as noise becomes negligible) are simple to characterize in terms of 'diffuse' beliefs over the actions of others. We describe a number of economic applications that fall in this category. We also explore the distinctive roles of public and private information in this setting, review results for general global games, discuss the relationship between global games and a literature on higher order beliefs in game theory and describe the relationship to local interaction and dynamic games with payoff shocks. Classification-JEL: C72, D82 Keywords: Global games, common knowledge, unique equilibrium, currency crises, bank runs and liquidity Note: CFP 1097. Length: 67 pages Creation-Date: 200009 Number: 1275 Publication-Status: Published in M. Dewatripont, L. Hansen and S. Turnovsky, Advanced in Economics and Econometrics, Vol. 1, 2003 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1275.pdf File-Format: application/pdf File-Size: 462 kb Handle: RePEc:cwl:cwldpp:1275 Template-type: ReDIF-Paper 1.0 Author-Name: Hyungsik Roger Moon Author-X-Name-First: Hyungsik Roger Author-X-Name-Last: Moon Author-Workplace-Name: University of Southern California 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 of Autoregressive Roots Near Unity with Panel Data Abstract: This paper investigates a generalized method of moments (GMM) approach to the estimation of autoregressive roots near unity with panel data. The two moment conditions studied are obtained by constructing bias corrections to the score functions under OLS and GLS detrending, respectively. It is shown that the moment condition under GLS detrending corresponds to taking the projected score on the Bhattacharya basis, linking the approach to recent work on projected score methods for models with infinite numbers of nuisance parameters (Waterman and Lindsay, 1998). Assuming that the localizing parameter makes a nonpositive value, we establish consistency of the GMM estimator and find its limiting distribution. A notable new finding is that the GMM estimator has convergence rate n^{1/6}, slower than root{n}, when the true localizing parameter is zero (i.e., when there is a panel unit root) and the deterministic trends in the panel are linear. These results, which rely on boundary point asymptotics, point to the continued difficulty of distinguishing unit roots from local alternatives, even when there is an infinity of additional data. Classification-JEL: C22, C23 Keywords: Bias, boundary point asymptotics, GMM estimation, local to unity, moment conditions, nuisance parameters, panel data, pooled regression, projected score Note: CFP 1085. Length: 54 pages Creation-Date: 200009 Number: 1274 Publication-Status: Published in Econometrica (March 2004), 72(2): 467-522 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1274.pdf File-Format: application/pdf File-Size: 469 kb Handle: RePEc:cwl:cwldpp:1274 Template-type: ReDIF-Paper 1.0 Author-Name: Giancarlo Corsetti Author-X-Name-First: Giancarlo Author-X-Name-Last: Corsetti Author-Workplace-Name: Bologna and Yale University Author-Name: Amil Dasgupta Author-X-Name-First: Amil Author-X-Name-Last: Dasgupta 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: Shin, Hyun Author-Workplace-Name: Oxford University Title: Does One Soros Make a Difference? A Theory of Currency Crises with Large and Small Traders Abstract: Do large investors increase the vulnerability of a country to speculative attacks in the foreign exchange markets? To address this issue, we build a model of currency crises where a single large investor and a continuum of small investors independently decide whether to attack a currency based on their private information about fundamentals. Even abstracting from signalling, the presence of the large investor does make all other traders more aggressive in their selling. Relative to the case in which there is no large investors, small investors attack the currency when fundamentals are stronger. Yet, the difference can be small, or null, depending on the relative precision of private information of the small and large investors. Adding signalling makes the influence of the large trader on small traders' behaviour much stronger. Classification-JEL: F31, D82 Keywords: Currency attack, unique equilibrium, speculation Note: CFP 1088. Length: 31 pages Creation-Date: 200008 Number: 1273 Publication-Status: Published in Review of Economic Studies (2004), 71(1): 87-113 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1273.pdf File-Format: application/pdf File-Size: 249 kb Handle: RePEc:cwl:cwldpp:1273 Template-Type: ReDIF-Paper 1.0 Author-Name: William C. Brainard Author-X-Name-First: William C. Author-X-Name-Last: Brainard Author-Email: william.brainard@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/brainard.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ 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/ Title: How to Compute Equilibrium Prices in 1891 Abstract: Irving Fisher's Ph.D. thesis, submitted to Yale University in 1891, contains a fully articulated general equilibrium model presented with the broad scope and formal mathematical clarity associated with Walras and his successors. In addition, Fisher presents a remarkable hydraulic apparatus for calculating equilibrium prices and the resulting distribution of society's endowments among the agents in the economy. In this paper we provide an analytical description of Fisher's apparatus, and report the results of simulating the mechanical/hydraulic "machine," illustrating the ability of the apparatus to "compute" equilibrium prices and also to find multiple equilibria. Classification-JEL: D58, C63, C68, B13, B31 Keywords: Fisher, general equilibrium, hydraulic apparatus, equilibrium prices, computable general equilibrium, algorithms Length: 21 pages Creation-Date: 200008 Number: 1272 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1272.pdf File-Format: application/pdf File-Size: 345 kb Handle: RePEc:cwl:cwldpp:1272 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: Faulty Communication Abstract: The electronic mail game of Rubinstein (1989) showed that a lack of common knowledge generated by faulty communication can make coordinated action impossible. This paper shows how this conclusion is robust to having a more realistic timing structure of messages, more than two players who meet publicly but not as a plenary group, and may be robust to strategic decisions about whether to communicate. Classification-JEL: C72, D8 Keywords: Electronic mail, common knowledge, coordination Note: CFP 1126 Length: 22 pages Creation-Date: 200008 Revision-Date: 200108 Number: 1271R Publication-Status: Published in Advances in Theoretical Economics (2001), 1(1): 1-23 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1271-r.pdf File-Format: application/pdf File-Size: 206 kb Handle: RePEc:cwl:cwldpp:1271R Template-Type: ReDIF-Paper 1.0 Author-Name: Morris, Stephen 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: Faulty Communication Abstract: The electronic mail game of Rubinstein (1989) showed that a lack of common knowledge generated by faulty communication can make coordinated action impossible. This paper shows how this conclusion is robust to having a more realistic timing structure of messages, more than two players who meet publicly but not as a plenary group, and strategic decisions about whether to communicate. The electronic mail game of Rubinstein (1989) showed that a lack of common knowledge generated by faulty communication can make coordinated action impossible. This paper shows how this conclusion is robust to having a more realistic timing structure of messages, more than two players who meet publicly but not as a plenary group, and strategic decisions about whether to communicate. Classification-JEL: C72, D8 Keywords: Electronic mail, common knowledge, coordination Length: 27 pages Creation-Date: 200008 Number: 1271 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1271.pdf File-Format: application/pdf File-Size: 80 kb Handle: RePEc:cwl:cwldpp:1271 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/ Title: Optimal Inventory Policies When Sales Are Discretionary Abstract: Inventory models customarily assume that demand is fully satisfied if sufficient stock is available. We analyze the form of the optimal inventory policy if the inventory manager can choose to meet a fraction of the demand. Under classical conditions we show that the optimal policy is again of the (S,s) form. The analysis makes use of a novel property of K-concave functions. Classification-JEL: C12, C13 Keywords: Inventory theory, optimal ordering policies, (S,s) policies, K-concavity Note: CFP 1104. Length: 10 pages Creation-Date: 200008 Number: 1270 Publication-Status: Published in International Journal of Production Economics (January 2005), 93-94: 111-119 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1270.pdf File-Format: application/pdf File-Size: 136 kb Handle: RePEc:cwl:cwldpp:1270 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: Equivalence of the Higher-order Asymptotic Efficiency of k-step and Extremum Statistics Abstract: It is well known that a one-step scoring estimator that starts from any N^{1/2}-consistent estimator has the same first-order asymptotic efficiency as the maximum likelihood estimator. This paper extends this result to k-step estimators and test statistics for k >= 1, higher-order asymptotic efficiency, and general extremum estimators and test statistics. The paper shows that a k-step estimator has the same higher-order asymptotic efficiency, to any given order, as the extremum estimator towards which it is stepping, provided (i) k is sufficiently large, (ii) some smoothness and moment conditions hold, and (iii) a condition on the initial estimator holds. For example, for the Newton-Raphson k-step estimator, we obtain asymptotic equivalence to integer order s provided 2^{k} >= s + 1. Thus, for k = 1, 2, and 3, one obtains asymptotic equivalence to first, third, and seventh orders respectively. This means that the maximum differences between the probabilities that the (N^{1/2}-normalized) k-step and extremum estimators lie in any convex set are o(1), o(N^{-3/2}), and o(N^{-3}) respectively. Keywords: Asymptotics, Edgeworth expansion, extremum estimator, Gauss-Newton, higher-order efficiency, Newton-Raphson. Classification-JEL: C12, C13 Keywords: Inventory theory, optimal ordering policies, (S,s) policies, K-concavity Note: CFP 1044. Length: 42 pages Creation-Date: 200007 Number: 1269 Publication-Status: Published in Econometric Theory (2002), 18: 1040-1085 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1269.pdf File-Format: application/pdf File-Size: 375 kb Handle: RePEc:cwl:cwldpp:1269 Template-Type: ReDIF-Paper 1.0 Author-Name: Saku Aura Author-X-Name-First: Saku Author-X-Name-Last: Aura Author-Name: Peter Diamond Author-X-Name-Peter Author-X-Name-Last: Diamond 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: Savings and Portfolio Choice in a Two-Period Two-Asset Model Abstract: We extend Arrow's analysis of portfolio choice in a one-period model to savings and portfolio choice in a two-period model. Note: CFP 1078 Length: 9 pages Number: 1268 Publication-Status: Published in The American Economic Review (2002): 92(4): 1185-1191 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1268.pdf File-Format: application/pdf File-Size: 119 kb Handle: RePEc:cwl:cwldpp:1268 Template-Type: ReDIF-Paper 1.0 Author-Name: Katsumi Shimotsu Author-X-Name-First: Katsumi Author-X-Name-Last: Shimotsu 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: Pooled Log Periodogram Regression Abstract: Estimation of the memory parameter in time series with long range dependence is considered. A pooled log periodogram regression estimator is proposed that utilizes a set of mL periodogram ordinates with L approaching infinity rather than m ordinates used in the conventional log periodogram estimator. Consistency and asymptotic normality of the pooled regression estimator are established. The pooled estimator is shown to have smaller variance but larger bias than the conventional log periodogram estimator. Finite sample performance is assessed in simulations, and the methods are illustrated in an empirical application with inflation and stock returns. Classification-JEL: C22 Keywords: Discrete Fourier transform, log periodogram regression, long memory parameter, pooling frequency bands, semiparametric estimation Note: CFP 1041 Length: 46 pages Creation-Date: 200007 Number: 1267 Publication-Status: Published in Journal of Time Series Analysis (2002), 23(1): 57-93 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1267.pdf File-Format: application/pdf File-Size: 523 kb Handle: RePEc:cwl:cwldpp:1267 Template-Type: ReDIF-Paper 1.0 Author-Name: Katsumi Shimotsu Author-X-Name-First: Katsumi Author-X-Name-Last: Shimotsu 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: Local Whittle Estimation in Nonstationary and Unit Root Cases Abstract: Asymptotic properties of the local Whittle estimator in the nonstationary case (d > 1/2) are explored. For 1/2 < d < 1, the estimator is shown to be consistent, and its limit distribution and the rate of convergence depend on the value of d. For d = 1, the limit distribution is mixed normal. For d > 1 and when the process has a linear trend, the estimator is shown to be inconsistent and to converge in probability to unity. Classification-JEL: C22 Keywords: Discrete Fourier transform, fractional Brownian motion, fractional integration, long memory, nonstationarity, semiparametric estimation, trend, Whittle likelihood, unit root Note: CFP 1098 Length: 33 pages Creation-Date: 200007 Revision-Date: 200309 Number: 1266 Publication-Status: Published in The Annals of Statistics (2004), 34(2): 656-692 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1266.pdf File-Format: application/pdf File-Size: 382 kb Handle: RePEc:cwl:cwldpp:1266 Template-Type: ReDIF-Paper 1.0 Author-Name: Katsumi Shimotsu Author-X-Name-First: Katsumi Author-X-Name-Last: Shimotsu 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: Modified Local Whittle Estimation of the Memory Parameter in the Nonstationary Case Abstract: Semiparametric estimation of the memory parameter is studied in models of fractional integration in the nonstationary case, and some new representation theory for the discrete Fourier transform of a fractional process is used to assist in the analysis. A limit theory is developed for an estimator of the memory parameter that covers a range of values of d commonly encountered in applied work with economic data. The new estimator is called the modified local Whittle estimator and employs a version of the Whittle likelihood based on frequencies adjacent to the origin and modified to take into account the form of the data generating mechanism in the frequency domain. The modified local Whittle estimator is shown to be consistent for 0 < d <2 and is asymptotically normally distributed with variance 1/4 for 1/2 < d < 7/4. The approach allows for likelihood-based inference about d in a context that includes nonstationary data, is agnostic about short memory components and permits the construction of valid confidence regions for d that extend into the nonstationary region. Classification-JEL: C22 Keywords: Discrete Fourier transform, fractional Brownian motion, fractional integration, long memory, nonstationarity, semiparametric estimation, Whittle likelihood Length: 54 pages Creation-Date: 200007 Number: 1265 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1265.pdf File-Format: application/pdf File-Size: 445 kb Handle: RePEc:cwl:cwldpp:1265 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: Trending Time Series and Macroeconomic Activity: Some Present and Future Challenges Abstract: Some challenges for econometric research on trending time are discussed in relation to some perceived needs of macroeconomics and macroeconomic policy making. Classification-JEL: C32, C53, E10 Keywords: Breaks, growth, policy intervention, production, trend mechanisms, unit roots Note: CFP 914. Length: 7 pages Creation-Date: 200007 Number: 1264 Publication-Status: Published in Journal of Econometrics (2001), 100(1): 21-26 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1264.pdf File-Format: application/pdf File-Size: 67 kb Handle: RePEc:cwl:cwldpp:1264 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: Patrik Guggenberger Author-X-Name-First: Patrik Author-X-Name-Last: Guggenberger Title: A Bias-Reduced Log-Periodogram Regression Estimator for the Long-Memory Parameter Abstract: The widely used log-periodogram regression estimator of the long-memory parameter d proposed by Geweke and Porter-Hudak (1983) (GPH) has been criticized because of its finite-sample bias, see Agiakloglou, Newbold, and Wohar (1993). In this paper, we propose a simple bias-reduced log-periodogram regression estimator, {d hat}r, that eliminates the first- and higher-order biases of the GPH estimator. The bias-reduced estimator is the same as the GPH estimator except that one includes frequencies to the power 2k for k = 1,...,r, for some positive integer r, as additional regressors in the pseudo-regression model that yields the GPH estimator. The reduction in bias is obtained using assumptions on the spectrum only in a neighborhood of the zero frequency, which is consistent with the semiparametric nature of the long-memory model under consideration. Following the work of Robinson (1995b) and Hurvich, Deo, and Brodsky (1998), we establish the asymptotic bias, variance, and mean-squared error (MSE) of {d hat}r, determine the MSE optimal choice of the number of frequencies, m to include in the regression, and establish the asymptotic normality of {d hat}r. These results show that the bias of {d hat}r goes to zero at a faster rate than that of the GPH estimator when the normalized spectrum at zero is sufficiently smooth, but that its variance only is increased by a multiplicative constant. In consequence, the optimal rate of convergence to zero of the MSE of {d hat}dr is faster than that of the GPH estimator. We establish the optimal rate of convergence of a minimax risk criterion for estimators of d when the normalized spectral density is in a class that includes those that are smooth of order s > 1 at zero. We show that the bias-reduced estimator {d hat}r attains this rate when r > (s-2)/2 and m is chosen appropriately. For s > 2, the GPH estimator does not attain this rate. The proof of these results uses results of Giraitis, Robinson, and Samarov (1997). Some Monte Carlo simulation results for stationary Gaussian ARFIMA(1,d,1) models show that the bias-reduced estimators perform well relative to the standard log-periodogram estimator. Classification-JEL: C13, C14, C22 Keywords: Asymptotic bias, asymptotic normality, bias reduction, frequency domain, long-range dependence, optimal rate, rate of convergence, strongly dependent time series Length: 38 pages Creation-Date: 200006 Number: 1263 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1263.pdf File-Format: application/pdf File-Size: kb Handle: RePEc:cwl:cwldpp:1263 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 Title: A Stochastic Overlapping Generations Economy with Inheritance Abstract: An overlapping generations model of an exchange economy is considered, with individuals having a finite expected life-span. Conditions concerning birth, death, inheritance and bequests are fully specified. Under such conditions, the existence of stationary Markov equilibrium is established in some generality, and several explicitly solvable examples are treated in detail. Classification-JEL: C72, C73, D80 Keywords: Overlapping generations, inheritance, stochastic process, life span Note: CFP 1049. Length 26 pages Creation-Date: 200006 Number: 1262 Publication-Status: Published in Journal of Economics (2002), 77(3): 207-240 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1262.pdf File-Format: application/pdf File-Size: 230 kb Handle: RePEc:cwl:cwldpp:1262 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 Title: Information and the Existence of Stationary Markovian Equilibrium Abstract: We describe conditions for the existence of a stationary Markovian equilibrium when total production or total endowment is a random variable. Apart from regularity assumptions, there are two crucial conditions: (i) low information -- agents are ignorant of both total endowment and their own endowments when they make decisions in a given period, and (ii) proportional endowments -- the endowment of each agent is in proportion, possibly a random proportion, to the total endowment. When these conditions hold, there is a stationary equilibrium. When they do not hold, such equilibrium need not exist. Classification-JEL: C72, C73, D80 Keywords: Information, stochastic process, money, and disequilibrium Length: 12 pages Creation-Date: 200006 Number: 1261 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1261.pdf File-Format: application/pdf File-Size: 170 kb Handle: RePEc:cwl:cwldpp:1261 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 Title: Rethinking Multiple Equilibria in Macroeconomic Modelling Abstract: Are beliefs as indeterminate as suggested by models with multiple equilibria? Multiplicity of equilibria arise largely as the unintended consequence of two modelling assumptions -- the fundamentals are assumed to be common knowledge, and economic agents know others' actions in equilibrium. Both are questionable. When others' actions are not known with certainty, such as when actions rely on noisy signals, self-fulfilling beliefs lead to a unique outcome determined by the fundamentals and the knowledges that others are rational. This paper illustrates this approach in the context of a model of bank runs and other similar applications. Such an approach places comparative statics and policy analyses on a firmer footing. It also suggests that public information has a disproportionately larger impact on the outcome than private information. Keywords: Multiple equilibria, macroeconomics, common knowledge Length: 26 pages Creation-Date: 200006 Number: 1260 Publication-Status: Published in NBER Macroeconomics Annual 2000, MIT Press, 2001, pp. 139-161 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1260.pdf File-Format: application/pdf File-Size: 233 kb Handle: RePEc:cwl:cwldpp:1260 Template-type: ReDIF-Paper 1.0 Author-Name: Peter Diamond Author-X-Name-First: Peter Author-X-Name-Last: Diamond Author-Workplace-Name: MIT 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: Social Security Investment in Equities in an Economy with Short-Term Production and Land Abstract: This paper explores the general equilibrium impact of social security portfolio diversification into private securities, either through the trust fund or via private accounts. The analysis depends critically on heterogeneity in saving, in production, in assets, and in taxes. Under fairly general assumptions we show that limited diversification increases a neutral social welfare function, increases interest rates, reduces the expected return on short-term equity (and thus the equity premium), decreases safe investment and increases risky investment. However, the effect on aggregate investment, long-term capital values, and the utility of young savers hinges on delicate assumptions about technology. Aggregate investment and long-term asset values often move in the opposite direction. Thus social security diversification might reduce long-term equity value while it increases aggregate investment. Classification-JEL: D50, D60, D91, G11, G28, H55 Keywords: Private accounts, trust fund, diversification, heterogeneity, overlapping generations Length: 42 pages Creation-Date: 200006 Number: 1259 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1259.pdf File-Format: application/pdf File-Size: 391 kb Handle: RePEc:cwl:cwldpp:1259 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, Calibrated, and Optimal Interest Rate Rules Abstract: Estimated, calibrated, and optimal interest rate rules are examined for their ability to dampen economic fluctuations caused by random shocks. A tax rate rule is also considered. The results show that the estimated interest rate rule used in the paper is stable for the period beginning in 1954 except for the early Volcker period, although more observations, especially high inflation ones, are needed before much confidence can be placed on the results. The models used for the stabilization results are large scale structural macroeconometric models, and some of the results differ from those based on small models. For example, rules with inflation coefficients less than one are not destabilizing, and rules with large inflation coefficients, such as the Taylor rule, achieve a small reduction in inflation variability at a cost of a large increase in interest rate variability. Classification-JEL: E5 Keywords: Interest rate rules, optimal control Length: 40 pages Creation-Date: 200005 Number: 1258 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1258.pdf File-Format: application/pdf File-Size: 101 kb Handle: RePEc:cwl:cwldpp:1258 Template-type: ReDIF-Paper 1.0 Author-Name: Pradeep Dubey Author-X-Name-First: Pradeep Author-X-Name-Last: Dubey Author-Workplace-Name: SUNY at 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: Inside and Outside Money, Gains to Trade, and IS-LM Abstract: We build a one-period general equilibrium model with money. Equilibrium exists, and fiat money has positive value, as long as the ratio of outside money to inside money is less than the gains to trade available at autarky. We show that the nominal effects of government fiscal and monetary policy can be completely described by a diagram identical in form to the IS-LM curves introduced by Hicks to describe Keynes' general theory. IS-LM analysis is thus not incompatible with full market clearing, multiple commodities, and heterogeneous households. We show that as the government deficit approaches a finite threshold, hyperinflation sets in (prices converge to infinity and real trade collapses). If the government surplus is too large, the economy enters a liquidity trap in which nominal GNP sinks and monetary policy is ineffectual. Classification-JEL: D50, E40, E50, E58 Keywords: Central bank, gains to trade, inside money, IS-LM, outside money Note: CFP 1052. Length: 52 pages Creation-Date: 200005 Revision-Date: 200106 Number: 1257R Publication-Status: Published in Economic Theory (2003), 21(2-3): 347-397 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1257-r.pdf File-Format: application/pdf File-Size: 471 kb Handle: RePEc:cwl:cwldpp:1257R Template-type: ReDIF-Paper 1.0 Author-Name: Pradeep Dubey Author-X-Name-First: Pradeep Author-X-Name-Last: Dubey Author-Workplace-Name: SUNY at 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: Inside and Outside Money, Gains to Trade, and IS-LM Abstract: We build a one-period general equilibrium model with money. Equilibrium exists, and fiat money has positive value, as long as the ratio of outside money to inside money is less than the gains to trade available at autarky. We show that the nominal effects of government fiscal and monetary policy can be completely described by a diagram identical in form to the IS-LM curves introduced by Hicks to describe Keynes' general theory. IS-LM analysis is thus not incompatible with full market clearing, multiple commodities, and heterogeneous households. We show that as the government deficit approaches a finite threshold, hyperinflation sets in (prices converge to infinity and real trade collapses). If the government surplus is too large, the economy enters a liquidity trap in which nominal GNP sinks and monetary policy is ineffectual. Classification-JEL: D50, E40, E50, E58 Keywords: Bank, gains to trade, inside money, IS-LM, outside money Note: CFP 1052 Length: 52 pages Creation-Date: 200005 Number: 1257 Publication-Status: Published in Economic Theory, 21, 2003 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1257.pdf File-Format: application/pdf File-Size: 450 kb Handle: RePEc:cwl:cwldpp:1257 Template-type: ReDIF-Paper 1.0 Author-Name: Benoit B. Mandelbrot Author-X-Name-First: Benoit B. Author-X-Name-Last: Mandelbrot Author-Email: benoit.mandelbrot@yale.edu Author-Workplace-Name: Dept. of Mathematics, Yale University Title: Cartoons of the Variation of Financial Prices and of Brownian Motions in Multifractal Time Abstract: This article describes a versatile family of functions increasingly roughened by successive interpolations. They provide models of the variation of financial prices. More importantly, they are helpful "cartoons" of Brownian motions in multifractal time, BMMT, which are better models described in the next article. Ordinary Brownian motion and two models the author proposed in the 1960s correspond to special cartoons. More general cartoons are richer in structure but (by choice) remain parsimonious and easily computed. Their outputs reproduce the main features of financial prices: continually varying volatility, discontinuity or concentration, and other events far outside the mildly behaving Brownian "norm." Length: 47 pages Creation-Date: 200005 Number: 1256 Price: None Handle: RePEc:cwl:cwldpp:1256 Template-type: ReDIF-Paper 1.0 Author-Name: Pradeep Dubey Author-X-Name-First: Pradeep Author-X-Name-Last: Dubey Author-Workplace-Name: SUNY at Stony Brook Author-Name: Chien-wei Wu Author-X-Name-First: Chien-wei Author-X-Name-Last: Wu Author-Workplace-Name: SUNY at Stony Brook Title: Competitive Prizes: When Less Scrutiny Induces More Effort Abstract: We consider a principal who is keen to induce his agents to work at their maximal effort levels. To this end, he samples n days at random out of the T days on which they work, and awards a prize of B dollars to the most productive agent. The principal's policy (B,n) induces a strategic game Gamma(B,n) between the agents. We show that to implement maximal effort levels weakly (or, strongly) as a strategic equilibrium (or, as dominant strategies) in Gamma(B,n), at the least cost B to himself, the principal must choose a small sample size n. Thus less scrutiny by the principal induces more effort from the agents. The need for reduced scrutiny becomes more pronounced when agents have information of the history of past plays in the game. There is an inverse relation between information and optimal sample size. As agents acquire more information (about each other), the principal -- so to speak -- must "undo" this by reducing his information (about them) and choosing the sample size n even smaller. Classification-JEL: C720, D820, J410 Keywords: Competitive prizes, extensive form games, information patterns, strategic equilibria, optimal sample sizes Length: 41 pages Creation-Date: 200005 Number: 1255 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1255.pdf File-Format: application/pdf File-Size: 388 kb Handle: RePEc:cwl:cwldpp:1255 Template-type: ReDIF-Paper 1.0 Author-Name: Pradeep Dubey Author-X-Name-First: Pradeep Author-X-Name-Last: Dubey Author-Workplace-Name: SUNY at Stony Brook Author-Name: Ori Haimanko Author-X-Name-First: Ori Author-X-Name-Last: Haimanko Title: Optimal Scrutiny in Multi-Period Promotion Tournaments Abstract: Consider a principal who hires heterogeneous agents to work for him over T periods, without prior knowledge of their respective skills, and intends to promote one of them at the end. In each period the agents choose effort levels and produce random outputs, independently of each other, and are fully informed of the past history of outputs. The principal's major objective is to maximize the total expected output, but he may also put some weight on detecting the higher-skilled agent for promotion. To this end, he randomly samples n out of the T periods and awards the promotion to the agent who produces more on the sample. This determines an extensive form game Gamma (T,n), which we analyze for its subgame perfect equilibria in behavioral strategies. We show that the principal will do best to always choose a small sample size n. More precisely, if eta(T) is the maximal optimal sample size, then eta(T)/T approaches 0 as T approaches infinity. Classification-JEL: C72, D82, J41 Keywords: Multi-period promotion tournaments, extensive form games, subgame perfect equilibria, undominated sample sizes Length: 26 pages Creation-Date: 200004 Number: 1254 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1254.pdf File-Format: application/pdf File-Size: 229 kb Handle: RePEc:cwl:cwldpp:1254 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 Abstract: Fiat money(1) is a creation of both the state and society. Its value is supported by expectations which are conditioned by the dynamics of trust in government, the socio-economic structure and by outside events such as wars, plagues or political unrest. The micro-management of a dynamic economy is not far removed in difficulty from the micro-management of the weather. However, money and the financial institutions and instruments of a modern economy provide the means to influence expectations and bound behavior.(2) Paper money emerges as a virtual commodity. The dynamics of the economy permits it to serve as an imaginary gold.Although it is an abstraction, it is meaningful to talk about its quantity. Closely related to but basically different from fiat money is credit.(3) Credit, unlike fiat money is not a virtual commodity but a two party contract. The fact that it is a two party contract set in a dynamic context implies that there are chances that the economy may reach a state where a debtor is unable to meet his or her obligations. When this happens the laws and customs of the society must provide default, bankruptcy and reorganization rules. These rules are usually denominated in terms of fiat and socio-economic penalties such as the confiscation of assets, garnishing of salary or time in debtors' prison. Thus the value of paper gold is determined in two ways by the dynamics of the system. First by acceptance in trade, based on the expectation that it will remain valuable and second by its role in the discharge of debts where failure to repay has unpleasant consequences. When taxes are present a third valuation appears in the penalties for failure to pay taxes. The control of the fiat money supply together with rules on the granting of credit and the bankruptcy, default and reorganization rules,in essence, provide lower and upper bounds for the price level in the economy. They also determine the innovation rate of the economy. An innovation may be regarded as an economic mutation; the less costly failure is, the more likely an innovation will be risked. The rates of interest for loans combined with the harshness of the bankruptcy and reorganization laws help to determine the rate of innovation in a society. Government controls only one among many interest rates. A host of institutional details involving risk and transactions cost determine the others. The velocity of both money and credit may vary. Even though velocity may vary, human decision-making takes a finite amount of time. This implies that velocity will remain bounded. Beyond some speed of circulation expectations will degenerate and the economy will break down. In order to appreciate the intrinsic dynamics of a high information and communication mass economy at least three agents must be distinguished. They are the highly visible government; other largely visible legal persons, such as banks and corporations and real persons. Their differences are characterized by their relative power and the size of their communication networks. The contrast between a market economy and a state economy is not a clean contrast. The distinctions are on a continuum. Among modern democratic market economies the size of the government sector is roughly anywhere from 15% to 50% of the economy. Thus the control description of virtually any modern economy is of one extremely large and visible player; at most a few hundred large corporate entities of reasonably high visibility and a mass of small agents known by and in direct communication with only a few others. The reconciliation of a dynamics oriented macro-economics with an equilibrium oriented micro-economics lies in the understanding that the economy is embedded in the polity and society. The institutions, customs and laws are the carriers of process and provide bounds to process. They limit the dynamics.The role of macroeconomic policy is to bound the dynamics of an evolving society. Individual behavior is local and necessarily myopic. Myopic local optimization is consistent with global evolution. An elementary understanding of history and the decision and game theory proliferation of strategies is enough to indicate that the search for a unique or even stationary economic dynamics is an essay in futility.In contrast the search for the correct carriers and bounds on process is feasible.The monetary structure provides the sufficient loose coupling to permit mass independent behavior to take place even somewhat chaotically within institutional bounds.(4) 1. I use the term fiat or abstract paper money interchangeably to stand for a government supplied means of payment of no intrinsic worth. 2. Phrasing this somewhat more technically they provide the bounds on the state space. A state space is the set of all feasible states which can be achieved by the system. 3. Credit such as bank credit from a well known bank may be referred to as "inside money" in the sense that it is a contract between two legal persons in the economy other than the government. Yet the bank credit, because of the visibility and reputation of the bank, may serve as a substitute in transactions for fiat money. 4. Technically the institutions and the monetary and financial structure fully define the state space, but do not describe the dynamics. There is a robust collection of local individual rules of behavior which are all sufficient to provide the dynamic support of expectations that money will be accepted as having value. The control system may be sufficient to guide or at least limit the overall macroeconomic behavior without necessarily providing for a precise or unique dynamics. Money is the only financial instrument without an offsetting instrument. This nonsymmetry appears to be critical in the introduction of time into the model of the economy. Classification-JEL: C73, D52, D84, E17, E40, E42, E50 Keywords: Money, macro-economics, strategic market games, general disequilibrium, bankruptcy Note: CFP 1024. Length: 21 pages Creation-Date: 200004 Number: 1253 Publication-Status: Published in World Economics (2001), 2(1): 95-120 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1253.pdf File-Format: application/pdf File-Size: 77 kb Handle: RePEc:cwl:cwldpp:1253 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-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Homepage: http://cowles.econ.yale.edu/faculty/brown.htm Author-Name: Marten H. Wegkamp Author-X-Name-First: Marten H. Author-X-Name-Last: Wegkamp Title: Asymptotics in Minimum Distance from Independence Estimation Abstract: In this paper we introduce a family of minimum distance from independence estimators, suggested by Manski's minimum mean square from independence estimator. We establish strong consistency, asymptotic normality and consistency of resampling estimates of the distribution and variance of these estimators. For Manski's estimator we derive both strong consistency and asymptotic normality. Classification-JEL: C13, C30, C51 Keywords: Donsker class, empirical processes, extremum estimator, nonlinear simultaneous equations models, resampling estimators Length: 21 pages Creation-Date: 200004 Number: 1252 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1252.pdf File-Format: application/pdf File-Size: 222 kb Handle: RePEc:cwl:cwldpp:1252 Template-type: ReDIF-Paper 1.0 Author-Name: Yoosoon Chang Author-X-Name-First: Yoosoon Author-X-Name-Last: Chang Author-Workplace-Name: Dept. Economics, Rice University Title: Bootstrap Unit Root Tests in Panels with Cross-Sectional Dependency Abstract: We apply bootstrap methodology to unit root tests for dependent panels with N cross-sectional units and T time series observations. More specifically, we let each panel be driven by a general linear process which may be different across cross-sectional units, and approximate it by a finite order autoregressive integrated process of order increasing with T. As we allow the dependency among the innovations generating the individual panels, we construct our unit root tests from the estimation of the system of the entire N panels. The limit distributions of the tests are derived by passing T to infinity, with N fixed. We then apply the bootstrap method to the approximated autoregressions to obtain the critical values for the panel unit root tests, and establish the asymptotic validity of such bootstrap panel unit root tests under general conditions. The proposed bootstrap tests are indeed quite general covering a wide class of panel models. They in particular allow for very general dynamic structures which may vary across individual units, and more importantly for the presence of arbitrary cross-sectional dependency. The finite sample performance of the bootstrap tests is examined via simulations, and compared to that of the t-bar statistics by Im, Pesaran and Shin (1997), which is one of the commonly used unit root tests for panel data. We find that our bootstrap panel unit root tests perform well relative to the t-bar statistics, especially when N is small. Classification-JEL: C12, C15, C32, C33 Keywords: Panels with cross-sectional dependency, unit root tests, sieve bootstrap, AR approximation Length: 40 pages Creation-Date: 200003 Number: 1251 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1251.pdf File-Format: application/pdf File-Size: 612 kb Handle: RePEc:cwl:cwldpp:1251 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: Moshe Y. Buchinsky Author-X-Name-First: Moshe Y. Author-X-Name-Last: Buchinsky Author-Workplace-Name: Dept. Economcis, Brown University Title: On the Number of Bootstrap Repetitions for BC_a Confidence Intervals Abstract: This paper considers the problem of choosing the number bootstrap repetitions B to use with the BC_{a} bootstrap confidence intervals introduced by Efron (1987). Because the simulated random variables are ancillary, we seek a choice of B that yields a confidence interval that is close to the ideal bootstrap confidence interval for which B = infinity. We specifiy a three-step method of choosing B that ensures that the lower and upper lengths of the confidence interval deviate from those of the ideal bootstrap confidence interval by at most a small percentage with high probability. Length: 22 pages Creation-Date: 200002 Number: 1250 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12b/d1250.pdf File-Format: application/pdf File-Size: 261 kb Handle: RePEc:cwl:cwldpp:1250 Template-type: ReDIF-Paper 1.0 Author-Name: Hamid Sabourian Author-X-Name-First: Hamid Author-X-Name-Last: Sabourian Author-Workplace-Name: King's College, Cambridge, UK Title: Bargaining and Markets: Complexity and the Walrasian Outcome Abstract: Rubinstein and Wolinsky (1990b) consider a simple decentralized market in which agents either meet randomly or choose their partners volunatarily and bargain over the terms on which they are willing to trade. Intuition suggests that if there are no transaction costs, the outcome of this matching and bargaining game should be the unique competitive equilibrium. This does not happen. In fact, Rubinstein and Wolinsky show that any price can be sustained as a sequential equilibrium of this game. In this paper, I consider Rubinstein and Wolinsky's model and show that if the complexity costs of implementing strategies enter players' preferences (lexicographically), together with the standard payoff in the game, then the only equilibrium that survives is the unique competitive outcome. This will be done both for the random matching and for the voluntary matching models. Thus the paper demonstrates that complexity costs might have a role in providing a justification for the competitive outcome. Classification-JEL: C72, C78, D5 Keywords: Bargaining, matching, complexity, automata, bounded rationality, competitive outcome, Walrasian equilibrium Length: 42 pages Creation-Date: 200001 Number: 1249 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1249.pdf File-Format: application/pdf File-Size: 366 kb Handle: RePEc:cwl:cwldpp:1249 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 Vaimaki Author-X-Name-First: Juuso Author-X-Name-Last: Vaimaki Author-Workplace-Name: Northwestern Univ. and Univ. Southampton Title: Information Acquisition and Efficient Mechanism Design Abstract: We consider a general mechanism design setting where each agent can acquire (covert) information before participating in the mechanism. The central question is whether a mechanism exists which provides the efficient incentives for information acquisition ex-ante and implements the efficient allocation conditional on the private information ex-post. It is shown that in every private value environment the Vickrey-Groves-Clark mechanism guarantees both ex-ante as well as ex-post efficiency. In contract, with common values, ex-ante and ex-post efficiency cannot be reconciled in general. Sufficient conditions in terms of sub- and supermodularity are provided when (all) ex-post efficient mechanisms lead to private under- or over-acquisition of information Note: CFP 1038. Length: 49 pages Creation-Date: 200002 Number: 1248 Publication-Status: Published in Econometrica (May 2002), 70(3): 1007-1033 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1248.pdf File-Format: application/pdf File-Size: 336 kb Handle: RePEc:cwl:cwldpp:1248 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/ 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: Default in a General Equilibrium Model with Incomplete Markets Abstract: We extend the standard model of general equilibrium with incomplete markets (GEI) to allow for default. The equilibrating variables include aggregate default levels, as well as prices of assets and commodities. Default can be either strategic, or due to ill-fortune. It can be caused by events directly affecting the borrower, or indirectly as part of a chain reaction in which a borrower cannot repay because he himself has not been repaid. Each asset is defined by its promises A, the penalties lambda for default, and the limitations Q on its sale. The model is thus named GE(A,lambda,Q). Each asset is regarded as a pool of promises. Different sellers will often exercise their default options differently, while each buyer of an asset receives the same pro rata share of all deliveries. This model of assets represents for example the securitized mortgage market and the securitized credit card market. Given any collection of assets, we prove that equilibrium exists under conditions similar to those necessary to guarantee the existence of GEI equilibrium. We argue that default is thus reasonably modeled as an equilibrium phenomenon. Moreover, we show that more lenient lambda which encourage default may be Pareto improving because they allow for better risk spreading. Our definition of equilibrium includes a condition on expected deliveries for untraded assets that is similar to the trembling hand refinements used in game theory. Using this condition, we argue that the possibility of default is an important factor in explaining which assets are traded in equilibrium. Asset promises, default penalties, and quantity constraints can all be thought of as determined endogenously by the forces of supply and demand. Our model encompasses a broad range of moral hazard, adverse selection, and signalling phenomena (including the Akerlof lemons model and Rothschild-Stiglitz insurance model) in a general equilibrium framework. Many authors (including Akerlof , Rothschild and Stiglitz) have suggested that equilibrium may not exist in the presence of adverse selection. But our existence theorem shows that it must. The problem is the inefficiency of the resulting equilibrium, not its nonexistence. The power of perfect competition simplifies many of the complications attending the finite player, game theoretic analyses of the same topics. The Modigliani-Miller theorem typically fails to hold when there is the possibility that the firm or one of its investors might default. Keywords: Default, incomplete markets, adverse selection, moral hazard, equilibrium refinement, endogenous assets Length: 68 pages Creation-Date: 200001 Number: 1247 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1247.pdf File-Format: application/pdf File-Size: 554 kb Handle: RePEc:cwl:cwldpp:1247 Template-type: ReDIF-Paper 1.0 Author-Name: Hyungsik R. Moon Author-X-Name-First: Hyungsik R. Author-X-Name-Last: Moon Author-Workplace-Name: Dept. Economics, UCLA, Santa Barbara 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: Maximum Likelihood Estimation in Panels with Incidental Trends Abstract: It is shown that the maximum likelihood estimator of a local to unity parameter can be consistently estimated with panel data when the cross section observations are independent. Consistency applies when there are no deterministic trends or when there is a homogeneous deterministic trend in the panel model. When there are heterogeneous deterministic trends the panel MLE of the local to unity parameter is inconsistent. This outcome provides a new instance of inconsistent ML estimation in dynamic panels, and, unlike earlier results of this type, applies when both T approaches infinity and N approaches infinity. Classification-JEL: C32, C33 Keywords: Deterministic trends, dynamic panels, incidental parameters, inconsistent maximum likelihood estimator, local to unity, nonstationary panel data Note: CFP 999. Length: 30 pages Creation-Date: 199912 Number: 1246 Publication-Status: Published in Oxford Bulletin of Economics and Statistics, Special Issue (1999), 61: 711-747 File-URL: http://cowles.econ.yale.edu/P/cp/p09b/p0999.pdf File-Format: application/pdf File-Size: 701 kb Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1246.pdf File-Format: application/pdf File-Size: 370 kb Handle: RePEc:cwl:cwldpp:1246 Template-type: ReDIF-Paper 1.0 Author-Name: Yoosoon Chang Author-X-Name-First: Yoosoon Author-X-Name-Last: Chang Author-Workplace-Name: Dept. Economics, Rice University Author-Name: Joon Y. Park Author-X-Name-First: Joon Y. Author-X-Name-Last: Park Author-Workplace-Name: School of Economics, Seoul National 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: Nonlinear Econometric Models with Cointegrated and Deterministically Trending Regressors Abstract: This paper develops an asymptotic theory for a general class of nonlinear nonstationary regressions, extending earlier work by Phillips and Hansen (1990) on linear cointegrating regressions. The model considered accommodates a linear time trend and stationary regressors, as well as multiple I(1) regressors. We establish consistency and derive the limit distribution of the nonlinear least squares estimator. The estimator is consistent under fairly general conditions but the convergence rate and the limiting distribution are critically dependent upon the type of the regression function. For integrable regression functions, the parameter estimates converge at a reduced n^{1/4} rate and have mixed normal limit distributions. On the other hand, if the regression functions are homogeneous at infinity, the convergence rates are determined by the degree of the asymptotic homogeneity and the limit distributions are non-Gaussian. It is shown that nonlinear least squares generally yields inefficient estimators and invalid tests, just as in linear nonstationary regressions. The paper proposes a methodology to overcome such difficulties. The approach is simple to implement, produces efficient estimates and leads to tests that are asymptotically chi-square. It is implemented in empirical applications in much the same way as the fully modified estimator of Phillips and Hansen. Keywords: Nonlinear regressions, integrated time series, nonlinear least squares, Brownian motion, Brownian local time Note: CFP 1032. Length: 43 pages Creation-Date: 199912 Number: 1245 Publication-Status: Published in Econometrics Journal (2001), 4(1): 1-36 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1245.pdf File-Format: application/pdf File-Size: 570 kb Handle: RePEc:cwl:cwldpp:1245 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: Unit Root Log Periodogram Regression Abstract: Log periodogram (LP) regression is shown to be consistent and to have a mixed normal limit distribution when the memory parameter d = 1. Gaussian errors are not required. Tests of d = 1 based on LP regression are consistent against d < 1 alternatives but inconsistent against d > 1 alternatives. A test based on a modified LP regression that is consistent in both directions is provided. Classification-JEL: C22 Keywords: Discrete Fourier transform, fractional Brownian motion, fractional integration, log periodogram regression, long memory parameter, nonstationarity, semiparametric estimation and testing, unit root Note: CFP 1197. Length: 22 pages Creation-Date: 199912 Number: 1244 Publication-Status: Published in Journal of Econometrics (2007), 138(1): 104-124 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1244.pdf File-Format: application/pdf File-Size: 233 kb Handle: RePEc:cwl:cwldpp:1244 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: Discrete Fourier Transforms of Fractional Processes Abstract: Discrete Fourier transforms (dft's) of fractional processes are studied and an exact representation of the dft is given in terms of the component data. The new representation gives the frequency domain form of the model for a fractional process, and is particularly useful in analyzing the asymptotic behavior of the dft and periodogram in the nonstationary case when the memory parameter d >= 1/2. Various asymptotic approximations are suggested. It is shown that smoothed periodogram spectral estimates remain consistent for frequencies away from the origin in the nonstationary case provided the memory parameter d < 1. When d = 1, the spectral estimates are inconsistent and converge weakly to random variates. Applications of the theory to log periodogram regression and local Whittle estimation of the memory parameter are discussed and some modified versions of these procedures are suggested. Classification-JEL: C22 Keywords: Discrete Fourier transform, fractional Brownian motion; fractional integration; nonstationarity, operator decomposition, semiparametric estimation, Whittle likelihood Length: 59 pages Creation-Date: 199912 Number: 1243 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1243.pdf File-Format: application/pdf File-Size: 471 kb Handle: RePEc:cwl:cwldpp:1243 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: Political Correctness Abstract: An informed advisor wishes to convey her valuable information to an uninformed decision maker with identical preferences. Thus she has a current incentive to truthfully reveal her information. But if the decision maker thinks the advisor might be biased in favor of one decision, and the advisor does not wish to be thought to be biased, the advisor has a reputational incentive to lie. If the advisor is sufficiently concerned about her reputation, no information is conveyed in equilibrium. In a repeated version of this game, the advisor will care (instrumentally) about her reputation simply because she wants her valuable and unbiased advice to have an impact on future decisions. Note: CFP 1017. Length: 28 pages Creation-Date: 199912 Number: 1242 Publication-Status: Published in Journal of Political Economy (2001), 109(21): 231-265 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1242.pdf File-Format: application/pdf File-Size: 289 kb Handle: RePEc:cwl:cwldpp:1242 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: Nuffield College, Oxford University Title: Coordination Risk and the Price of Debt Abstract: Creditors of a distressed borrower face a coordination problem. Even if the fundamentals are sound, fear of premature foreclosure by others may lead to pre-emptive action, undermining the project. Recognition of this problem lies behind corporate bankruptcy provisions across the world, and it has been identified as a culprit in international financial crises, but has received scant attention from the literature on debt pricing. Without common knowledge of fundamentals, the incidence of failure is uniquely determined provided that private information is precise enough. This affords a way to price the coordination failure. Comparative statics on the unique equilibrium provides several insights on the role of information and the incidence of inefficient liquidation. Keywords: Common knowledge, debt pricing, credit risk, default Note: CFP 1128. Length: 28 pages Creation-Date: 199912 Revision-Date: 200202 Number: 1241R Publication-Status: Published in European Economic Review (2004), 48(1): 133-153 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1241-r.pdf File-Format: application/pdf File-Size: 206 kb Handle: RePEc:cwl:cwldpp:1241R 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: Nuffield College, Oxford University Title: Coordination Risk and the Price of Debt Abstract: Creditors of a distressed borrower face a coordination problem. Even if the fundamentals are sound, fear of premature foreclosure by others may lead to pre-emptive action, undermining the project. Recognition of this problem lies behind corporate bankruptcy provisions across the world, and it has been identified as a culprit in international financial crises, but has received scant attention from the literature on debt pricing. The apparent multiplicity of equilibria is a barrier to development of this issue in asset pricing, but this multiplicity is only apparent. Without common knowledge of fundamentals, the incidence of failure is uniquely determined provided that private information is precise enough. This affords a way to price the coordination failure. There are two further conclusions. First, coordination is more difficult to sustain when fundamentals deteriorate. Thus, when fundamentals deteriorate, the onset of crisis can be very swift. Second, "transparency" -- in the sense of greater provision of information to the market -- does not generally mitigate the coordination problem. Transparency is not a panacea. Length: 28 pages Creation-Date: 199912 Number: 1241 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1241.pdf File-Format: application/pdf File-Size: 540 kb Handle: RePEc:cwl:cwldpp:1241 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 Vaimaki Author-X-Name-First: Juuso Author-X-Name-Last: Vaimaki Author-Workplace-Name: Northwestern Univ. and Univ. Southampton Title: Stationary Multi Choice Bandit Problems Abstract: This note shows that the optimal choice of k simultaneous experiments in a stationary multi-armed bandit problem can be characterized in terms of the Gittins index of each arm. The index characterization remains equally valid after the introduction of switching costs. Classification-JEL: D81, D83 Keywords: multi-armed bandits, Gittins index, Stationary bandits, Job search Note: CFP 1022. Length: 20 pages Creation-Date: 199910 Number: 1240 Publication-Status: Published in Journal of Economic Dynamics and Control (2001), 25(1): 1585-1594 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1240.pdf File-Format: application/pdf File-Size: 134 kb Handle: RePEc:cwl:cwldpp:1240 Template-type: ReDIF-Paper 1.0 Author-Name: Stefano G. Athanasoulis Author-X-Name-First: Stefano G. Author-X-Name-Last: Athanasoulis Author-Workplace-Name: Yale University Author-Workplace-Homepage: http://www.econ.yale.edu/ 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: World Income Components: Measuring and Exploiting Risk-Sharing Opportunities Abstract: We provide a method for decomposing the variance of changes in incomes in the world into components, world income components (WICs), in such a way as to indicate the most important risk-sharing opportunities among people of the world. We develop a constant absolute risk premium model, an intertemporal general equilibrium model of the world that facilitates consideration of optimal contract design. We show that for a contract designer maximizing a social welfare function, the optimal risk-management contracts maximize the equilibrium world real interest rate. That is the contract designer achieves the risk-optimal interest rate. We show that these WIC securities are defined in terms of eigenvectors of a transformed variance matrix of income changes. The method is applied with a variance matrix estimated using Penn World Table data on the G-7 countries, 1950-92. Keywords: Constant Absolute Risk Premium, risk-optimal interest rate, three-level income model, WIC securities, contract design, macro markets, hedging Note: CFP 1029. Length: 43 pages Creation-Date: 199910 Number: 1239 Publication-Status: Published in The American Economic Review (2001), 91(4): 1031-1054 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1239.pdf File-Format: application/pdf File-Size: 293 kb Handle: RePEc:cwl:cwldpp:1239 Template-type: ReDIF-Paper 1.0 Author-Name: Benoit Mandelbrot Author-X-Name-First: Benoit Author-X-Name-Last: Mandelbrot Author-Email: benoit.mandelbrot@yale.edu Author-Homepage: http://www.math.yale.edu/mandelbrot/ Author-Workplace-Name: Dept. of Mathematics, Yale Title: Survey of Multifractality in Finance Note: CFP Length: 26 pages Creation-Date: 199910 Number: 1238 Publication-Status: Published in C. Jablon, ed., Scientific Bridges for 2000 and Beyond, Paris: Academie des Science, 1999, pp. 131-148 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1238.pdf File-Format: application/pdf File-Size: 652 kb Handle: RePEc:cwl:cwldpp:1238 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: Northwestern Univ. and Univ. Southampton Title: Strategic Buyers and Privately Observed Prices Abstract: A model of repeated price competition with large buyers is analyzed. The sellers are allowed to offer different prices to different buyers and the buyers act strategically. The set of subgame perfect Equilibria is investigated under public and private monitoring. With public monitoring the equilibrium set with large buyers expands relative to the standard model where each buyer is small and behaves myopically. With private monitoring, where prices are not observable to the competing sellers, the set of equilibrium payoffs shrinks. In the finitely repeated game with private monitoring, all sales are made by the efficient seller. In the infinitely repeated game this result is preserved as long as the sellers condition their prices on the public history. In contrast to the finite horizon game, the set of pure strategy equilibria expands if the sellers are allowed to condition their own past prices. Comparisons are drawn to Markovian equilibria of similar dynamic games. Classification-JEL: C72, D43 Keywords: Repeated games, private monitoring, collusion Note: CFP 1079. Length: 20 pages Creation-Date: 199910 Number: 1237 Publication-Status: Published in Journal of Economic Theory (2002), 105: 469-482 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1237.pdf File-Format: application/pdf File-Size: 162 kb Handle: RePEc:cwl:cwldpp:1237 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, Univ. 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/ Title: Repeated Games with Almost-Public Monitoring Abstract: In repeated games with imperfect public monitoring, players can use public signals to coordinate their behavior perfectly, and thus support cooperative outcomes with the threat of punishments. But with even a small amount of private monitoring, players' private histories may lead them to have sufficiently different views of the world that such coordination on punishments is no longer possible (we describe a simple strategy profile that is a perfect public equilibrium of a repeated prisoner's dilemma with imperfect public monitoring, and yet is not an equilibrium for arbitrarily close games with private monitoring). If a perfect public equilibrium has players' behavior conditioned only on finite histories, then it induces an equilibrium in all close-by games with private monitoring. This implies a folk theorem for repeated games with almost-public almost-perfect monitoring. Note: CFP 1034. Length: 52 pages Creation-Date: 199910 Number: 1236 Publication-Status: Published in Journal of Economic Theory (2002), 102(1): 189-228 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1236.pdf File-Format: application/pdf File-Size: 489 kb Handle: RePEc:cwl:cwldpp:1236 Template-type: ReDIF-Paper 1.0 Author-Name: Garey Ramey Author-X-Name-First: Garey Author-X-Name-Last: Ramey Author-Workplace-Name: Dept. Economics, UCLA, San Diego Author-Name: Joel Watson Author-X-Name-First: Joel Author-X-Name-Last: Watson Title: Contractual Intermediaries Abstract: This paper analyzes the role of third party intermediaries, such as courts and arbitrators, in contract enforcement. In our model, intermediaries compel contracted transfers and resolve disputes when requested to do so by the contracting agents. When the verifiability of information is limited, successful enforcement requires that dispute resolution costs be sufficiently great. Optimal enforcement systems economize on dispute resolution and information costs, and may involve establishment of specific systems tailored to particular groups. We show further that the "holdup problem" may be resolved via an appropriately designed dispute resolution system. Length: 38 pages Creation-Date: 199909 Number: 1235 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1235.pdf File-Format: application/pdf File-Size: 354 kb Handle: RePEc:cwl:cwldpp:1235 Template-type: ReDIF-Paper 1.0 Author-Name: James Tobin Author-X-Name-First: James Author-X-Name-Last: Tobin Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: On Minsky's Agenda for Reform Length: 3 pages Creation-Date: 1999 Number: 1234 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1234.pdf File-Format: application/pdf File-Size: 12 kb Handle: RePEc:cwl:cwldpp:1234 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: Biao Lu Author-X-Name-First: Biao Author-X-Name-Last: Lu Author-Workplace-Name: Dept. Finance, Univ. Michigan Business School Title: Consistent Model and Moment Selection Criteria for GMM Estimation with Applications to Dynamic Panel Data Models Abstract: This paper develops consistent model and moment selection criteria for GMM estimation. The criteria select the correct model specification and all correct moment conditions asymptotically. The selection criteria resemble the widely used likelihood-based selection criteria BIC, HQIC, and AIC. (The latter is not consistent.) The GMM selection criteria are based on the J statistic for testing over-identifying restrictions. Bonus terms reward the use of fewer parameters for a given number of moment conditions and the use of more moment conditions for a given number of parameters. The paper applies the model and moment selection criteria to dynamic panel data models with unobserved individual effects. The paper shows how to apply the selection criteria to select the lag length for lagged dependent variables, to detect the number and locations of structural breaks, to determine the exogeneity of regressors, and/or to determine the existence of correlation between some regressors and the individual effect. To illustrate the finite sample performance of the selection criteria and their impact on parameter estimation, the paper reports the results of a Monte Carlo experiment on a dynamic panel data model. Classification-JEL: C12, C13, C52 Keywords: Akaike information criterion, Bayesian information criterion, consistent selection procedure, generalized method of moments estimator, instrumental variables estimator, model selection, moment selection, panel data model, test of over-identifying restrictions Note: CFP 1015. Length: 47 pages Creation-Date: 199908 Number: 1233 Publication-Status: Published in Journal of Econometrics (2001), 101(1): 123-164 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1233.pdf File-Format: application/pdf File-Size: 358 kb Handle: RePEc:cwl:cwldpp:1233 Template-type: ReDIF-Paper 1.0 Author-Name: Rachel E. Kranton Author-X-Name-First: Rachel E. Author-X-Name-Last: Kranton Author-Workplace-Name: Dept. Economics, Univ. Maryland Author-Name: Deborah F. Minehart Author-X-Name-First: Deborah F. Author-X-Name-Last: Minehart Author-Workplace-Name: Dept. Economics, Boston Univ. Title: Competition for Goods in Buyer-Seller Networks Abstract: The organization of supply relations varies across industries. This paper builds a theoretical framework to compare three alternative supply structures: vertical integration, networks, and markets. The analysis considers the relationship between uncertainty in demand for specific inputs, investment costs, and industrial structure. It shows that network structures are more likely when productive assets are expensive and firms experience large idiosyncratic shocks in demand. The analysis is supported by existing evidence and provides empirical predictions as to the shape of different industries. Classification-JEL: C70, D20, D40, L10, L20 Keywords: Bipartite graphs, outside options, link externalities Length: 38 pages Creation-Date: 1999 Number: 1232 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1232.pdf File-Format: application/pdf File-Size: 556 kb Handle: RePEc:cwl:cwldpp:1232 Template-type: ReDIF-Paper 1.0 Author-Name: Rachel E. Kranton Author-X-Name-First: Rachel E. Author-X-Name-Last: Kranton Author-Workplace-Name: Dept. Economics, Univ. Maryland Author-Name: Deborah F. Minehart Author-X-Name-First: Deborah F. Author-X-Name-Last: Minehart Author-Workplace-Name: Dept. Economics, Boston University Title: Vertical Integration: Networks, and Markets Abstract: The organization of supply relations varies across industries. This paper builds a theoretical framework to compare three alternative supply structures: vertical integration, networks, and markets. The analysis considers the relationship between uncertainty in demand for specific inputs, investment costs, and industrial structure. It shows that network structures are more likely when productive assets are expensive and firms experience large idiosyncratic shocks in demand. The analysis is supported by existing evidence and provides empirical predictions as to the shape of different industries. Classification-JEL: D20, D40, D82, L10, L22 Keywords: Vertical supply, industrial structure, demand uncertainty Length: 43 pages Creation-Date: 1999 Number: 1231 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1231.pdf File-Format: application/pdf File-Size: 537 kb Handle: RePEc:cwl:cwldpp:1231 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-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Higher-Order Improvements of a Computationally Attractive-Step Bootstrap for Extremum Estimators Abstract: This paper establishes the higher-order equivalence of the k-step bootstrap, introduced recently by Davidson and MacKinnon (1999a), and the standard bootstrap. The k-step bootstrap is a very attractive alternative computationally to the standard bootstrap for statistics based on nonlinear extremum estimators, such as generalized method of moment and maximum likelihood estimators. The paper also extends results of Hall and Horowitz (1996) to provide new results regarding the higher-order improvements of the standard bootstrap and the k-step bootstrap for extremum estimators (compared to procedures based on first-order asymptotics). The results of the paper apply to Newton-Raphson (NR), default NR, line-search NR, and Gauss-Newton k-step bootstrap procedures. The results apply to the nonparametric iid bootstrap, non-overlapping and overlapping block bootstraps, and restricted and unrestricted parametric bootstraps. The results cover symmetric and equal-tailed two-sided t tests and confidence intervals, one-sided t tests and confidence intervals, Wald tests and confidence regions, and J tests of over-identifying restrictions. Classification-JEL: C12, C13, C15 Keywords: Asymptotics, block bootstrap, Edgeworth expansion, extremum estimator, Gauss-Newton, generalized method of moments estimator, k-step bootstrap, maximum likelihood estimator, Newton-Raphson, parametric bootstrap, t statistic, test of over-identifying Note: CFP 1031. Length: 66 pages Creation-Date: 199907 Revision-Date: 200101 Number: 1230R Publication-Status: Published in Econometrica (January 2002), 70(1): 70(1): 119-162 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1230-r.pdf File-Format: application/pdf File-Size: 615 kb Handle: RePEc:cwl:cwldpp:1230R 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: Higher-Order Improvements of a Computationally Attractive-Step Bootstrap for Extremum Estimators Abstract: This paper establishes the higher-order equivalence of the k-step bootstrap, introduced recently by Davidson and MacKinnon (1999a), and the standard bootstrap. The k-step bootstrap is a very attractive alternative computationally to the standard bootstrap for statistics based on nonlinear extremum estimators, such as generalized method of moment and maximum likelihood estimators. The paper also extends results of Hall and Horowitz (1996) to provide new results regarding the higher-order improvements of the standard bootstrap and the k-step bootstrap for extremum estimators (compared to procedures based on first-order asymptotics). The results of the paper apply to Newton-Raphson (NR), default NR, line-search NR, and Gauss-Newton k-step bootstrap procedures. The results apply to the nonparametric iid bootstrap, non-overlapping and overlapping block bootstraps, and restricted and unrestricted parametric bootstraps. The results cover symmetric and equal-tailed two-sided t tests and confidence intervals, one-sided t tests and confidence intervals, Wald tests and confidence regions, and J tests of over-identifying restrictions. The optimal block length for the accuracy of tests and confidence intervals is shown to be proportional to N^{1/4} for both non-overlapping and overlapping block bootstraps in the context considered. In addition, the paper provides some results that establish the equivalence of the higher-order efficiency of non-bootstrap k-step statistics and extremum statistics. These results extend results of Pfanzagl (1974), Robinson (1988), and others. Keywords: Asymptotics, block bootstrap, Edgeworth expansion, extremum estimator, Gauss-Newton, generalized method of moments estimator, higher-order efficiency, k-step bootstrap, maximum likelihood estimator, Newton-Raphson, parametric bootstrap, t statistic, test of over-identifying restrictions Length: 74 pages Creation-Date: 199907 Number: 1230 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1230.pdf File-Format: application/pdf File-Size: 617 kb Handle: RePEc:cwl:cwldpp:1230 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: Testing When a Parameter Is on the Boundary of the Maintained Hypothesis Abstract: This paper considers testing problems where several of the standard regularity conditions fail to hold. We consider the case where (i) parameter vectors in the null hypothesis may lie on the boundary of the maintained hypothesis and (ii) there may be a nuisance parameter that appears under the alternative hypothesis, but not under the null. The paper establishes the asymptotic null and local alternative distributions of quasi-likelihood ratio, rescaled quasi-likelihood ratio, Wald, and score tests in this case. The results apply to tests based on a wide variety of extremum estimators and apply to a wide variety of models. Examples treated in the paper are: (1) tests of the null hypothesis of no conditional heteroskedasticity in a GARCH(1, 1) regression model and (2) tests of the null hypothesis that some random coefficients have variances equal to zero in a random coefficients regression model with (possibly) correlated random coefficients. Keywords: Asymptotic distribution, boundary, conditional heteroskedasticity, extremum estimator, GARCH model, inequality restrictions, likelihood ratio test, local power, maximum likelihood estimator, parameter restrictions, random coefficients regression, quasi-maximum likelihood estimator, quasi-likelihood ratio test, restricted estimator, score test, Wald test Note: CFP 1021. Length: 50 pages Creation-Date: 199907 Number: 1229 Publication-Status: Published in Econometrics (2001), 69(3): 683-734 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1229.pdf File-Format: application/pdf File-Size: 478 kb Handle: RePEc:cwl:cwldpp:1229 Template-type: ReDIF-Paper 1.0 Author-Name: George J. Hall Author-X-Name-First: George J. Author-X-Name-Last: Hall Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: John Rust Author-X-Name-First: John Author-X-Name-Last: Rust Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: An Empirical Model of Inventory Investment by Durable Commodity Intermediaries Abstract: This paper introduces a new detailed data set of high-frequency observations on inventory investment by a U.S. steel wholesaler. Our analysis of these data leads to six main conclusions: orders and sales are made infrequently; orders are more volatile than sales; order sizes vary considerably; there is substantial high-frequency variation in the firm's sales prices; inventory/sales ratios are unstable; and there are occasional stockouts. We model the firm generically as a durable commodity intermediary that engages in commodity price speculation. We demonstrate that the firm's inventory investment behavior at the product level is well approximated by an optimal trading strategy from the solution to a nonlinear dynamic programming problem with two continuous state variables and one continuous control variable that is subject to frequently binding inequality constraints. We show that the optimal trading strategy is a generalized (S,s) rule. That is, whenever the firm's inventory level q falls below the order threshold s(p) the firm places an order of size S(p) - q in order to attain a target inventory level S(p) satisfying S(p) >= s(p), where p is the current spot price at which the firm can purchase unlimited amounts of the commodity after incurring a fixed order cost K. We show that the (S,s) bands are decreasing functions of p, capturing the basic intuition of commodity price speculation, namely, that it is optimal for the firm to hold higher inventories when the spot price is low than when it is high in order to profit from "buying low and selling high." We simulate a calibrated version of this model and show that the simulated data exhibit the key features of inventory investment we observe in the data. Classification-JEL: D21, E22 Keywords: Commodities, inventories, dynamic programming Length: 45 pages Creation-Date: 199906 Number: 1228 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1228.pdf File-Format: application/pdf File-Size: 661 kb Handle: RePEc:cwl:cwldpp:1228 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: Dept. Risk, Ins., & Healthcare Mgt, Temple U. 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: Toward a Theory of Reinsurance and Retrocession Abstract: There is a natural tradeoff between the benefits of increasing the number of competitors in an insurance market and the drawback to the weakening of the law of large numbers due to the diminishing of average reserves. In this investigation we consider the possibility for optimal layers of reinsurance and retrocession in the design of the insurance industry. A general question which may be asked of all financial institutions is what factors limit the number of layers of paper which can be constructed? Classification-JEL: C22, C72 Keywords: Reinsurance, retrocession, strategic market game Length: 47 pages Creation-Date: 199906 Number: 1227 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1227.pdf File-Format: application/pdf File-Size: 315 kb Handle: RePEc:cwl:cwldpp:1227 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: Northwestern Univ. and Univ. Southampton Title: Entry and Innovation in Vertically Differentiated Markets Abstract: This paper analyzes the optimal entry into experience goods markets with vertically differentiated buyers. We consider the case where the value of the new product is imperfectly known, but common to all buyers (common values) as well as the case where the quality is different across buyers (private values). We distinguish between new products that are improvements to existing products and new products that are substitutes. Different types of products have qualitatively distinct diffusion paths. Improvements are introduced slowly relative to the full information case, while substitutes are introduced more aggressively. The slow entry strategy is associated with increasing supply and decreasing prices over time. The reverse pattern holds for an aggressive entry strategy The incentives to innovate display a similar distinction. A firm with a currently inferior product opts for a large but risky innovation, whereas a currently superior producer chooses a smaller but certain innovation. Classification-JEL: D81, D83 Keywords: Experience goods, vertical differentiation, entry, innovation Length: 51 pages Creation-Date: 199906 Number: 1226 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1226.pdf File-Format: application/pdf File-Size: 327 kb Handle: RePEc:cwl:cwldpp:1226 Template-type: ReDIF-Paper 1.0 Author-Name: Garey Ramey Author-X-Name-First: Garey Author-X-Name-Last: Ramey Author-Workplace-Name: Dept. Economics, UCLA, San Diego Author-Name: Joel Watson Author-X-Name-First: Joel Author-X-Name-Last: Watson Title: Conditioning Institutions and Renegotiation Abstract: We propose a theory of contracting in long-term relationships, emphasizing the role of social institutions in conditioning players' joint selection of Equilibria. Players adopt a social conditioning system in order to place boundaries on their recurrent negotiation and thereby sustain a desirable joint selection of equilibrium. Social conventions have value because players cannot freely reinterpret the labels attached to histories, in contrast to labels that the players might assign internally. We present examples of social conventions that are useful for sustaining cooperative interaction. Our model combines an explicit bargaining technology with a renegotiation concept, coherent equilibrium, that builds on internal consistency. Coherent equilibria exist in general and, for an important class of games, induce unique outcomes. Length: 39 pages Creation-Date: 199905 Number: 1225 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1225.pdf File-Format: application/pdf File-Size: 355 kb Handle: RePEc:cwl:cwldpp:1225 Template-type: ReDIF-Paper 1.0 Author-Name: Hyungsik R. Moon Author-X-Name-First: Hyungsik R. Author-X-Name-Last: Moon Author-Workplace-Name: Dept. Economics, UCLA, Santa Barbara 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: Estimation of Autoregressive Roots Near Unity Using Panel Data Abstract: Time series data are often well modelled by using the device of an autoregressive root that is local to unity. Unfortunately, the localizing parameter (c) is not consistently estimable using existing time series econometric techniques and the lack of a consistent estimator complicates inference. This paper develops procedures for the estimation of a common localizing parameter using panel data. Pooling information across individuals in a panel aids the identification and estimation of the localising parameter and leads to consistent estimation in simple panel models. However, in the important case of models with concomitant deterministic trends, it is shown that pooled panel estimators of the localising parameter are asymptotically biased. Some techniques are developed to overcome this difficulty and consistent estimators of c in the region c < 0 are developed for panel models with deterministic and stochastic trends. A limit distribution theory is also established and test statistics are constructed for exploring interesting hypotheses, like the equivalence of local to unity parameters across subgroups of the population. The methods are applied to the empirically important problem of the efficient extraction of deterministic trends. They are also shown to deliver consistent estimates of distancing parameters in nonstationary panel models where the initial conditions are in the distant past. Classification-JEL: C22, C23 Keywords: Bias, local to unity, panel data, pooled regression, subgroup testing Note: CFP 1018. Length: 63 pages Creation-Date: 199906 Number: 1224 Publication-Status: Published in Econometric Theory (2000), 16(6): 927-997 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1224.pdf File-Format: application/pdf File-Size: 513 kb Handle: RePEc:cwl:cwldpp:1224 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: Joon Y. Park Author-X-Name-First: Joon Y. Author-X-Name-Last: Park Author-Workplace-Name: School of Economics, Seoul National Univ. Title: Nonstationary Binary Choice Abstract: This paper develops an asymptotic theory for time series binary choice models with nonstationary explanatory variables generated as integrated processes. Both logit and probit models are covered. The maximum likelihood (ML) estimator is consistent but a new phenomenon arises in its limit distribution theory. The estimator consists of a mixture of two components, one of which is parallel to and the other orthogonal to the direction of the true parameter vector, with the latter being the principal component. The ML estimator is shown to converge at a rate of n^{3/4} along its principal component but has the slower rate of n^{1/4} convergence in all other directions. This is the first instance known to the authors of multiple convergence rates in models where the regressors have the same (full rank) stochastic order and where the parameters appear in linear forms of these regressors. It is a consequence of the fact that the estimating equations involve nonlinear integrable transformations of linear forms of integrated processes as well as polynomials in these processes, and the asymptotic behavior of these elements are quite different. The limit distribution of the ML estimator is derived and is shown to be a mixture of two mixed normal distributions with mixing variates that are dependent upon Brownian local time as well as Brownian motion. It is further shown that the sample proportion of binary choices follows an arc sine law and therefore spends most of its time in the neighbourhood of zero or unity. The result has implications for policy decision making that involves binary choices and where the decisions depend on economic fundamentals that involve stochastic trends. Our limit theory shows that, in such conditions, policy is likely to manifest streams of little intervention or intensive intervention. Classification-JEL: C22, C25 Keywords: Binary choice model, Brownian motion, Brownian local time, dual convergence rates, Integrated time series, maximum likelihood estimation Note: CFP 1003. Length: 35 pages Creation-Date: 199906 Number: 1223 Publication-Status: Published in Econometrica (September 2000), 68(5): 1249-1280 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1223.pdf File-Format: application/pdf File-Size: 522 kb Handle: RePEc:cwl:cwldpp:1223 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: Hyungsik R. Moon Author-X-Name-First: Hyungsik R. Author-X-Name-Last: Moon Author-Workplace-Name: Dept. Economics, UCLA, Santa Barbara Title: Linear Regression Limit Theory for Nonstationary Panel Data Abstract: This paper develops a regression limit theory for nonstationary panel data with large numbers of cross section (n) and time series (T) observations. The limit theory allows for both sequential limits, wherein T -> infinity followed by n -> infinity, and joint limits where T, n -> infinity simultaneously; and the relationship between these multidimensional limits is explored. The panel structures considered allow for no time series cointegration, heterogeneous cointegration, homogeneous cointegration, and near-homogeneous cointegration. The paper explores the existence of long-run average relations between integrated panel vectors when there is no individual time series cointegration and when there is heterogeneous cointegration. These relations are parametrized in terms of the matrix regression coefficient of the long-run average covariance matrix. In the case of homogeneous and near homogeneous cointegrating panels, a panel fully modified regression estimator is developed and studied. The limit theory enables us to test hypotheses about the long run average parameters both within and between subgroups of the full population. Note: CFP 986. Length: 77 pages Creation-Date: 199906 Number: 1222 Publication-Status: Published in Econometrica (September 1999), 67(5): 1057-1111 File-URL: http://cowles.econ.yale.edu/P/cp/p09b/p0986.pdf File-Format: application/pdf File-Size: 353 kb Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1222.pdf File-Format: application/pdf File-Size: 632 kb Handle: RePEc:cwl:cwldpp:1222 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: Hyungsik R. Moon Author-X-Name-First: Hyungsik R. Author-X-Name-Last: Moon Author-Workplace-Name: Dept. Economics, UCLA, Santa Barbara Title: Nonstationary Panel Data Analysis: An Overview of Some Recent Developments Abstract: This paper overviews some recent developments in panel data asymptotics, concentrating on the nonstationary panel case and gives a new result for models with individual effects. Underlying recent theory are asymptotics for multi-indexed processes in which both indexes may pass to infinity. We review some of the new limit theory that has been developed, show how it can be applied and give a new interpretation of individual effects in nonstationary panel data. Fundamental to the interpretation of much of the asymptotics is the concept of a panel regression coefficient which measures the long run average relation across a section of the panel. This concept is analogous to the statistical interpretation of the coefficient in a classical regression relation. A variety of nonstationary panel data models are discussed and the paper reviews the asymptotic properties of estimators in these various models. Some recent developments in panel unit root tests and stationary dynamic panel regression models are also reviewed. Note: CFP 1009. Length: 24 pages Creation-Date: 199906 Number: 1221 Publication-Status: Published in Econometric Reviews (2000), 19(3): 263-286 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1221.pdf File-Format: application/pdf File-Size: 246 kb Handle: RePEc:cwl:cwldpp:1221 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: Werner Ploberger Author-X-Name-First: Werner Author-X-Name-Last: Ploberger Author-Workplace-Name: Univ. Rochester Title: Empirical Limits for Time Series Econometric Models Abstract: This paper seeks to characterize empirically achievable limits for time series econometric modeling. The approach involves the concept of minimal information loss in time series regression and the paper shows how to derive bounds that delimit the proximity of empirical measures to the true probability measure in models that are of econometric interest. The approach utilizes generally valid asymptotic expressions for Bayesian data densities and works from joint measures over the sample space and parameter space. A theorem due to Rissanen is modified so that it applies directly to probabilities about the relative likelihood (rather than averages), a new way of proving results of the Rissanen type is demonstrated, and the Rissanen theory is extended to nonstationary time series with unit roots, near unit roots and cointegration of unknown order. The corresponding bound for the minimal information loss in empirical work is shown not to be a constant, in general, but to be proportional to the logarithm of the determinant of the (possibility stochastic) Fisher-information matrix. In fact, the bound that determines proximity to the DGP is generally path dependent, and it depends specifically on the type as well as the number of regressors. Time trends are more costly than stochastic trends, which, in turn, are more costly than stationary regressors in achieving proximity to the true density. The conclusion is that, in a very real sense, the 'true' DGP is more elusive when there is nonstationarity in the data. Some implications of these results for prediction and for the achieving proximity to the optimal predictor are explored. Classification-JEL: C22 Keywords: Proximity bounds, data generating process, empirical measures, Fisher information, minimal information loss, Lebesgue measure, optimal predictor, path dependence, trends, unit roots Note: CFP 1062. Length: 42 pages Creation-Date: 199905 Number: 1220 Publication-Status: Published in Econometrica (March 2003), 71(2): 627-673 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1220.pdf File-Format: application/pdf File-Size: 371 kb Handle: RePEc:cwl:cwldpp:1220 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: Descriptive Econometrics for Nonstationary Time Series with Empirical Illustrations Abstract: Recent work by the author on methods of spatial density analysis for time series data with stochastic trends is reviewed and extended. The methods are illustrated in some empirical applications and simulations. The empirical applications include macroeconomic data on inflation, financial data on exchange rates and political opinion poll data. It is shown how the methods can be used to measure empirical hazard rates for inflation and deflation. Empirical estimates based on historical US data over the last 60 years indicate that the predominant inflation risks are at low levels (2-6%) and low two-digit levels (10-12%), and that there is also a significant risk of deflation around the -1% level. Classification-JEL: C22 Keywords: Descriptive statistics, hazard rate, kernel estimate, soujourn time, spatial density, spatial moments, unit root nonstationarity Note: CFP 1023. Length: 26 pages Creation-Date: 199906 Number: 1219 Publication-Status: Published in of Applied Econometrics (2001), 16(3): 389-413 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1219.pdf File-Format: application/pdf File-Size: 566 kb Handle: RePEc:cwl:cwldpp:1219 Template-type: ReDIF-Paper 1.0 Author-Name: James E. Rauch Author-X-Name-First: James E. Author-X-Name-Last: Rauch Author-Workplace-Name: UCLA, San Diego & NBER Author-Name: Joel Watson Author-X-Name-First: Joel Author-X-Name-Last: Watson Author-Workplace-Name: Dept. Economics, UCLA, San Diego Title: Starting Small in an Unfamiliar Environment Abstract: Motivated by a characteristic way in which firms in developed countries make their decisions regarding cooperation with potential partners from less developed countries, we design a simple model of a DC firm's search for an LDC partner/supplier and the subsequent relationship between the two parties. Matched firms can "start small" with a trial order or pilot project of variable size in order to gain information about the ability of the LDC firm to successfully carry out a large project. We derive results relating whether and how the parties start small to the characteristics of the large project and to the matching environment. Among other results, we show how risk and search cost are associated with the propensity to start small and we establish a connection between starting small and the expected longevity of successful partnerships. We also address methods of contract enforcement and demonstrate the relationship between starting small and monitoring. Length: 35 pages Creation-Date: 199905 Number: 1218 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1218.pdf File-Format: application/pdf File-Size: 141 kb Handle: RePEc:cwl:cwldpp:1218 Template-type: ReDIF-Paper 1.0 Author-Name: Joel Watson Author-X-Name-First: Joel Author-X-Name-Last: Watson Author-Workplace-Name: Dept. Economics, UCLA, San Diego Title: Starting Small and Commitment Abstract: I study a model of a long-term partnership with two-sided incomplete information. The partners jointly determine the stakes of their relationship and individually decide whether to cooperate with or betray each other over time. I characterize the extremal -- interim incentive efficient equilibria. In these equilibria, the partners generally "start small," with the level of interaction growing over time. The types of players separate quickly. Further, cooperation between "good" types is viable regardless of how pessimistic the players are about each other initially. The quick nature of separation in an extremal equilibrium contrasts with the outcome selected by a strong renegotiation criterion (as studied in Watson [11]). Classification-JEL: C72, C73, D74 Length: 23 pages Creation-Date: 199905 Number: 1217 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1217.pdf File-Format: application/pdf File-Size: 252 kb Handle: RePEc:cwl:cwldpp:1217 Template-type: ReDIF-Paper 1.0 Author-Name: Wouter J. den Haan Author-X-Name-First: Wouter J. Author-X-Name-Last: den Haan Author-Workplace-Name: Dept. Economics, UCLA, San Diego Author-Name: Garey Ramey Author-X-Name-First: Garey Author-X-Name-Last: Ramey Author-Workplace-Name: Dept. Economics, UCLA, San Diego Author-Name: Joel Watson Author-X-Name-First: Joel Author-X-Name-Last: Watson Author-Workplace-Name: Dept. Economics, UCLA, San Diego Title: Contract-Theoretic Approaches to Wages and Displacement Abstract: This paper develops a theoretical framework for analyzing contracting imperfections in long-term employment relationships. We focus chiefly on limited enforceability and limited worker liquidity. Inefficient severance of employment relationships, payment of efficiency wages, the relative responses of wages and employment to business cycle shocks, and the propagation of these shocks are linked to the nature of contracting imperfections. Length: 27 pages Creation-Date: 199904 Number: 1216 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1216.pdf File-Format: application/pdf File-Size: 200 kb Handle: RePEc:cwl:cwldpp:1216 Template-type: ReDIF-Paper 1.0 Author-Name: Wouter J. den Haan Author-X-Name-First: Wouter J. Author-X-Name-Last: den Haan Author-Workplace-Name: Dept. Economics, UCLA, San Diego Author-Name: Garey Ramey Author-X-Name-First: Garey Author-X-Name-Last: Ramey Author-Workplace-Name: Dept. Economics, UCLA, San Diego Author-Name: Joel Watson Author-X-Name-First: Joel Author-X-Name-Last: Watson Title: Liquidity Flows and Fragility of Business Enterprises Abstract: This paper considers the efficiency of financial intermediation and the propagation of business cycle shocks in a model of long-term relationships between entrepreneurs and lenders, where lenders may be constrained in their short-run access to liquidity. When liquidity is low, relationships are subject to breakups that lead to loss of joint surplus. Liquidity outflows cause damage to financial structure by breaking up relationships, and damage persists due to frictions in the formation of new relationships. Feedbacks between aggregate investment and the structure of intermediation greatly magnify the effects of shocks. For large shocks, financial collapse may become inescapable in the absence of external intervention. Length: 50 pages Creation-Date: 199904 Number: 1215 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1215.pdf File-Format: application/pdf File-Size: 359 kb Handle: RePEc:cwl:cwldpp:1215 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: Northwestern Univ. and Univ. Southampton Title: Experimentation in Markets Abstract: We present a model of entry and exit with Bayesian learning and price competition. A new product of initially unknown quality is introduced in the market, and purchases of the product yield information on its true quality. We assume that the performance of the new product is publicly observable. As agents learn from the experiments of others, informational externalities arise. We determine the Markov Perfect Equilibrium prices and allocations. In a single market, the combination of the informational externalities among the buyers and the strategic pricing by the sellers results in excessive experimentation. If the new product is launched in many distinct markets, the path of sales converges to the efficient path in the limit as the number of markets grows. Classification-JEL: C72, C73, D43, D83, L13, L15 Keywords: Learning, experimentation, informational externalities, dynamic oligopoly, Markov perfect equilibrium Length: 36 pages Creation-Date: 199904 Number: 1214 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1214.pdf File-Format: application/pdf File-Size: 300 kb Handle: RePEc:cwl:cwldpp:1214 Template-type: ReDIF-Paper 1.0 Author-Name: Ronald Fagin Author-X-Name-First: Ronald Author-X-Name-Last: Fagin Author-Workplace-Name: IBM Almaden Research Center 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: Joseph Y. Halpern Author-X-Name-First: Joseph Y. Author-X-Name-Last: Halpern Author-Workplace-Name: Compter Sci. Dept., Cornell Univ. Author-Name: Moshe Y. Vardi Author-X-Name-First: Moshe Y. Author-X-Name-Last: Vardi Author-Workplace-Name: Dept. Computer Sci., Rice Univ. Title: The Hierarchical Approach to Modeling Knowledge and Common Knowledge Abstract: One approach to representing knowledge or belief of agents, used by economists and computer scientists, involves an infinite hierarchy of beliefs. Such a hierarchy consists of an agent's beliefs about the state of the world, his beliefs about other agents' beliefs about the world, his beliefs about other agents' beliefs about other agents' beliefs about the world, and so on. (Economists have typically modeled belief in terms of a probability distribution on the uncertainty space. In contrast, computer scientists have modeled belief in terms of a set of worlds, intuitively, the ones the agent considers possible.) We consider the question of when a countably infinite hierarchy completely describes the uncertainty of the agents. We provide various necessary and sufficient conditions for this property. It turns out that the probability-based approach can be viewed as satisfying one of these conditions, which explains why a countable hierarchy suffices in this case. These conditions also show that whether a countable hierarchy suffices may depend on the "richness" of the states in the underlying state space. We also consider the question of whether a countable hierarchy suffices for "interesting" sets of events, and show that the answer depends on the definition of "interesting." Note: CFP 984. Length: 31 pages Creation-Date: 199904 Number: 1213 Publication-Status: Published in International Journal of Game Theory (August 1999), 28(3): 331-365 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1213.pdf File-Format: application/pdf File-Size: 348 kb Handle: RePEc:cwl:cwldpp:1213 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: Measuring Bubble Expectations and Investor Confidence Abstract: This paper presents evidence on attitude changes among investors in the US stock market. Two basic attitudes are explored: bubble expectations and investor confidence. Semiannual time-series indicators of these attitudes are presented for US stock market institutional investors based on questionnaire survey results 1989-1998, from surveys that I have derived in collaboration with Fumiko Kon-Ya and Yoshiro Tsutsui. Five different time-series indicators whether there is among investors an expectation of a speculative bubble, an unstable situation with expectations for increase in the short run only, are produced. Four different time-series indicators whether there is an expectation of a negative speculative bubble are presented. Four different time-series indicators of investor confidence, that nothing can go wrong, are produced. Time-series variation for these indicators is significant, and cross correlations are generally positive. A bubble expectations index, a negative-bubble expectations index, and an investor confidence index are derived from these indicators. Behavior of the indicators and indexes through time is examined, and the indexes are compared with other economic variables. A notable finding is a degree of high-frequency fluctuation, semester to semester, in the indexes. Note: CFP 1004. Length: 25 pages Creation-Date: 199903 Number: 1212 Publication-Status: Published in Journal of Psychology and Financial Markets (2000), 1(1): 49-60 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1212.pdf File-Format: application/pdf File-Size: 73 kb Handle: RePEc:cwl:cwldpp:1212 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: Skiadas Costis Author-X-Name-First: Skiades Author-X-Name-Last: Costis Title: Rationalizable Trade Abstract: We formulate necessary and sufficient conditions for interim rationalizable trade between two players. Note: CFP 1123. Length: 14 pages Creation-Date: 199903 Number: 1211 Publication-Status: Published in Games and Economic Behavior (2000), 31: 311-323 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1211.pdf File-Format: application/pdf File-Size: 157 kb Handle: RePEc:cwl:cwldpp:1211 Template-type: ReDIF-Paper 1.0 Author-Name: P. Jean-Jacques Herings Author-X-Name-First: P. Jean-Jacques Author-X-Name-Last: Herings Author-Workplace-Name: Dept. Econometrics & Center, Tilburg Univ. Author-Name: Heracles M. Polemarchakis Author-X-Name-First: Heracles M. Author-X-Name-Last: Polemarchakis Author-Workplace-Name: CORE, Universite Catholique de Louvain Title: Pareto Improving Price Regulation When the Asset Market Is Incomplete Abstract: When the asset market is incomplete, competitive equilibria are constrained suboptimal, which provides a scope for pareto improving interventions. Price regulation can be such a pareto improving policy, even when the welfare effects of rationing are taken into account. An appealing aspect of price regulation is that it that it operates anonymously on market variables. Fix-price equilibria exist under weak assumptions. Such equilibria permit a competitive analysis of an economy with an incomplete asset market that is out of equilibrium. Arbitrage opportunities may arise: with three or more assets actively traded, an individual may hold an arbitrage portfolio at equilibrium. The local existence of fix-price equilibrium for prices that are almost competitive may fail for robust examples. Under necessary and sufficient conditions for the local existence of fix-price equilibria, Pareto improving price regulation is generically possible. Classification-JEL: D45, D52, D60 Keywords: Incomplete asset market, fix-price equilibria, Pareto improvement Length: 42 pages Creation-Date: 199902 Number: 1210 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1210.pdf File-Format: application/pdf File-Size: 418 kb Handle: RePEc:cwl:cwldpp:1210 Template-type: ReDIF-Paper 1.0 Author-Name: Truman F. Bewley Author-X-Name-First: Truman F. Author-X-Name-Last: Bewley Author-Email: truman.bewley@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/bewley.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Work Motivation Length: 20 pages Creation-Date: 199902 Number: 1209 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1209.pdf File-Format: application/pdf File-Size: 77 kb Handle: RePEc:cwl:cwldpp:1209 Template-type: ReDIF-Paper 1.0 Author-Name: Simon Grant Author-X-Name-First: Simon Author-X-Name-Last: Grant Author-Workplace-Name: Australian National University Author-Name: Atsushi Kajii Author-X-Name-First: Atsushi Author-X-Name-Last: Kajii Author-Workplace-Name: Inst. of Policy & Planning Sciences, Univ. Tsukuba 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: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Preference for Information and Dynamic Consistency Abstract: We provide necessary and sufficient conditions for a dynamically consistent agent always to prefer more informative signals (in single-agent problems). These conditions do not imply recursivity, reduction or independence. We provide a simple definition of dynamically consistent behavior, and we discuss whether an intrinsic information lover (say, an anxious person) is likely to be dynamically consistent. Classification-JEL: D80, D83 Keywords: Information, non-expected utility, dynamic consistency, randomization, anxiety Length: 18 pages Creation-Date: 199901 Number: 1208 Publication-Status: Published in Theory and Decision (2000), 48: 263-286 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1208.pdf File-Format: application/pdf File-Size: 234 kb Handle: RePEc:cwl:cwldpp:1208 Template-type: ReDIF-Paper 1.0 Author-Name: Simon Grant Author-X-Name-First: Simon Author-X-Name-Last: Grant Author-Workplace-Name: Australian National University Author-Name: Atsushi Kajii Author-X-Name-First: Atsushi Author-X-Name-Last: Kajii Author-Workplace-Name: Inst. of Policy & Planning Sciences, Univ. Tsukuba 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: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Decomposable Choice Under Uncertainty Abstract: Savage motivated his Sure Thing Principle by arguing that, whenever an act would be preferred if an event obtains and preferred if that event did not obtain, then it should be preferred overall. The idea that it should be possible to decompose and recompose decision problems in this way has normative appeal. We show, however, that it does not require the full separability across events implicit in Savage's axiom. We formulate a weaker axiom that suffices for decomposability, and show that this implies an implicit additive representation. Our decomposability property makes local necessary conditions for optimality, globally sufficient. Thus, it is useful in computing optimal acts. It also enables Nash behavior in games of incomplete information to be decentralized to the agent-normal form. None of these results rely on probabilistic sophistication; indeed, our axiom is consistent with the Ellsberg paradox. If we assume probabilistic sophistication, however, then the axiom holds if and only if the agent's induced preferences over lotteries satisfy betweenness. Classification-JEL: D80, D81 Keywords: Sure-thing principle, decomposability, uncertainty, computation, dynamic programming solvability, agent-normal form games, non-expected utility, betweenness Note: CFP 998. Length: 33 pages Creation-Date: 199901 Number: 1207 Publication-Status: Published in Journal of Economic Theory (2000), 92(2): 169-197 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1207.pdf File-Format: application/pdf File-Size: 347 kb Handle: RePEc:cwl:cwldpp:1207 Template-type: ReDIF-Paper 1.0 Author-Name: 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: Juuso Valimaki Author-X-Name-First: Juuso Author-X-Name-Last: Valimaki Author-Workplace-Name: Northwestern Univ. and Univ. Southampton Title: Dynamic Common Agency Abstract: We consider a general model of dynamic common agency with symmetric information. We focus on Markov perfect equilibria and characterize the equilibrium set for a refinement of the Markov perfect equilibria. Particular attention is given to the existence of a marginal contribution equilibrium where each principal receives her contribution to the coalition of agent and remaining principals. The structure of the intertemporal payoffs is analyzed in terms of the flow marginal contribution. As a byproduct, new results for the static common agency game are obtained. The general characterization results are then applied to two dynamic bidding games for a common agent: (i) multi-task allocation and (ii) job matching under uncertainty. Classification-JEL: D81, D83 Keywords: Common agency, dynamic bidding, marginal contribution, markov perfect equilibrium, coalition-proof equilibrium, job matching, multi-task allocation Note: CFP 1073. Length: 61 pages Creation-Date: 199812 Number: 1206 Publication-Status: Published in Journal of Economic Theory (2003), 111(1): 23-48 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1206.pdf File-Format: application/pdf File-Size: 404 kb Handle: RePEc:cwl:cwldpp:1206 Template-type: ReDIF-Paper 1.0 Author-Name: Oliver Linton Author-X-Name-First: Oliver Author-X-Name-Last: Linton Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: E. Mammen Author-X-Name-First: E. Author-X-Name-Last: Mammen Author-Workplace-Name: Ruprecht-Karls-Universitat Heidelberg Author-Name: J. Nielsen Author-X-Name-First: J. Author-X-Name-Last: Nielsen Author-Name: C. Tanggaard Author-X-Name-First: C. Author-X-Name-Last: Tanggaard Author-Workplace-Name: The Aarhus School of Business Title: Estimating Yield Curves by Kernel Smoothing Methods Abstract: We introduce a new method for the estimation of discount functions, yield curves and forward curves for coupon bonds. Our approach is nonparametric and does not assume a particular functional form for the discount function although we do show how to impose various important restrictions in the estimation. Our method is based on kernel smoothing and is defined as the minimum of some localized population moment condition. The solution to the sample problem is not explicit and our estimation procedure is iterative, rather like the backfitting method of estimating additive nonparametric models. We establish the asymptotic normality of our methods using the asymptotic representation of our estimator as an infinite series with declining coefficients. The rate of convergence is standard for one dimensional nonparametric regression. Keywords: Coupon bonds; forward curve; Hilbert space; local linear; nonparametric regression; yield curve Length: 50 pages Creation-Date: 199812 Number: 1205 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1205.pdf File-Format: application/pdf File-Size: 382 kb Handle: RePEc:cwl:cwldpp:1205 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: Nuffield College, Oxford Univ. Title: A Theory of the Onset of Currency Attacks Abstract: The swiftness and devastating impact of recent financial crises have taken many market participants by surprise, and pose challenges for economists seeking a theory of the onset of a crisis. We propose such a theory based on two features. The actions of diverse economic actors which undermine the currency are mutually reinforcing, while the fragmented nature of the media create small disparities in their information. In such circumstances, the beliefs of market participants can be tracked in the same way as the economic fundamentals, and an attack is triggered when the economic fundamentals deteriorate sufficiently to fall below the minimum level of market confidence necessary to support the currency. We give a characterization of such a minimum level of confidence. Classification-JEL: F31, D82 Keywords: Currency crisis, common knowledge Length: 25 pages Creation-Date: 199812 Number: 1204 Publication-Status: Published in Agenor, Miller, Vines and Weber, eds., Asian Financial Crisis: Causes, Contagion and Consequences, Cambridge University Press, 1999 File-URL: http://cowles.econ.yale.edu/P/cp/p09b/p0969.pdf File-Format: application/pdf File-Size: 489 kb Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1204.pdf File-Format: application/pdf File-Size: 196 kb Handle: RePEc:cwl:cwldpp:1204 Template-type: ReDIF-Paper 1.0 Author-Name: Sandeep Baliga Author-X-Name-First: Sandeep Author-X-Name-Last: Baliga Author-Workplace-Name: Northwestern 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: Cheap Talk and Co-ordination with Payoff Uncertainty Abstract: Two players seek to co-ordinate their behavior in an incomplete information setting. We show that if each player's preferences over his opponent's action is independent of his own action or type, then cheap talk cannot expand the set of equilibrium outcomes. Note: CFP 1043. Length: 19 pages Creation-Date: 199812 Number: 1203 Publication-Status: Published in Journal of Economic Theory (2002), 105(2): 450-468 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1203.pdf File-Format: application/pdf File-Size: 236 kb Handle: RePEc:cwl:cwldpp:1203 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: Fiat Money and the Efficient Financing of the Float, Production and Consumption. Part I: The Float Abstract: The basic distinction in the optimization conditions between the general equilibrium model of a T period exchange economy and a strategic market game process model is between a set of equations homogeneous of order zero and a set of nonhomogeneous equations. The latter have an amount M of outside or fiat money added to the system. If there is an outside bank willing to lend or accept deposits at an interest rate rho > 0 at the end of time T the initial amount of money M will have been consumed in interest payments to the outside bank. The price level is fully determined and in an economy where all assets are traded, the float is financed efficiently, otherwise there is a price wedge between buying and selling prices. Keywords: Fiat money, float, strategic market games Length: 13 pages Creation-Date: 199811 Number: 1202 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1202.pdf File-Format: application/pdf File-Size: 145 kb Handle: RePEc:cwl:cwldpp:1202 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/ Author-Name: Joseph G. Boyer Author-X-Name-First: Joseph G. Author-X-Name-Last: Boyer Title: Requiem for Kyoto: An Economic Analysis of the Kyoto Protocol Abstract: This paper uses the newly developed RICE-98 model to analyze the economics of the Kyoto Protocol. It analyzes versions of the Kyoto Protocol that have different approaches to trading emissions rights and compares these with efficient approaches. The major conclusions are: (a) the global cost of the Kyoto Protocol is $716 billion in present value, (b) the United States bears almost two-thirds of the global cost; and (c) the benefit-cost ratio of the Kyoto Protocol is 1/7. Additionally, the emissions strategy is highly cost-ineffective, with the global temperature reduction achieved at a cost almost 8 times the cost of a strategy which is cost-effective in terms of "where" and "when" efficiency. Length: 50 pages Creation-Date: 199811 Number: 1201 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1201.pdf File-Format: application/pdf File-Size: 1249 kb Handle: RePEc:cwl:cwldpp:1201 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: The Health of Nations: Irving Fisher and the Contribution of Improved Longevity to Living Standards Abstract: Among Irving Fisher's many contributions to economics, one that is little noted and barely remembered is his emphasis on the economic importance of health. For the most part, his concern was in promoting healthy life styles. In addition, he made an early (perhaps the earliest) estimate of the impact of mortality and morbidity on national output. Length: 33 pages Creation-Date: 199810 Number: 1200 Publication-Status: Published in American Journal of Sociology and Economics (January 2005), 64(1): 367-392 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d12a/d1200.pdf File-Format: application/pdf File-Size: 933 kb Handle: RePEc:cwl:cwldpp:1200 Template-type: ReDIF-Paper 1.0 Author-Name: Giuseppe Moscarini Author-X-Name-First: Giuseppe Author-X-Name-Last: Moscarini Author-Email: giuseppe.moscarini@yale.edu Author-Workplace-Name: Dept. of Economics, Yale University Author-Workplace-Homepage: http://www.econ.yale.edu/faculty1/moscarini.htm Author-Name: Marco Ottaviani Author-X-Name-First: Marco Author-X-Name-Last: Ottaviani Author-Workplace-Name: University College London Title: Price Competition for an Informed Buyer Abstract: We investigate the outcomes of simultaneous price competition in the presence of private information on the demand side. Each of two sellers offers a different variety of a good to a buyer endowed with a private binary signal on their relative quality. We analyze how the unique equilibrium of the game changes as a function of the (common) prior belief on the relative quality of the goods and the precision of the private information of the buyer. Competition is fierce, and the buyer enjoys high rents, when the prior belief is biased in favor of one good and private signals are not very informative: the ex ante superior seller cannot resist the temptation to clear the market, and triggers an aggressive response by the competitor. When instead the distribution of ex post valuations is highly spread, due to a vague prior belief and strong signals, the sellers become local monopolists and extract high rents from the buyer. We provide a full characterization of the mixed-strategy equilibrium which arises when the two goods are mildly differentiated ex post. Overall, the market-clearing temptation effect destroys the monotonicity and convexity of the equilibrium profit of a seller in the prior belief. As a consequence, a competing seller does not necessarily benefit from revelation of public information, sometimes even if biased in its favor. This paper analyzes the behavior of posterior distributions under the Jeffreys prior in a simultaneous equations model. The case under study is that of a general limited information setup with n + 1 endogenous variables. The Jeffreys prior is shown to give rise to a marginal posterior density which has Cauchy-like tails similar to that exhibited by the exact finite sample distribution of the corresponding LIML estimator. A stronger correspondence is established in the special case of a just-identified orthonormal canonical model, where the posterior density under the Jeffreys prior is shown to have the same functional form as the density of the finite sample distribution of the LIML estimator. The work here generalizes that of Chao and Phillips (1997), which gives analogous results for the special case of two endogenous variables. Classification-JEL: D43, D44, D82, L15 Keywords: Cauchy tails, exact finite sample distributions, Jeffreys prior, just identification, limited information, posterior density, simultaneous equations model Length: 37 pages Creation-Date: 199810 Number: 1199 Publication-Status: Published in Journal of Economic Theory (December 2001), 101(2): 457-493 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11b/d1199.pdf File-Format: application/pdf File-Size: 1655 kb Handle: RePEc:cwl:cwldpp:1199 Template-type: ReDIF-Paper 1.0 Author-Name: John C. Chao Author-X-Name-First: John C. Author-X-Name-Last: Chao Author-Workplace-Name: Dept. Economics, Univ. Maryland 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: Jeffreys Prior Analysis of the Simultaneous Equations Model in the Case with n+1 Endogenous Variables Abstract: This paper analyzes the behavior of posterior distributions under the Jeffreys prior in a simultaneous equations model. The case under study is that of a general limited information setup with n + 1 endogenous variables. The Jeffreys prior is shown to give rise to a marginal posterior density which has Cauchy-like tails similar to that exhibited by the exact finite sample distribution of the corresponding LIML estimator. A stronger correspondence is established in the special case of a just-identified orthonormal canonical model, where the posterior density under the Jeffreys prior is shown to have the same functional form as the density of the finite sample distribution of the LIML estimator. The work here generalizes that of Chao and Phillips (1997), which gives analogous results for the special case of two endogenous variables. Classification-JEL: C11 Keywords: Cauchy tails, exact finite sample distributions, Jeffreys prior, just identification, limited information, posterior density, simultaneous equations model Note: CFP 1107. Length: 32 pages Creation-Date: 199810 Number: 1198 Publication-Status: Published in Journal of Econometrics (2002) 111(2): 251-283 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11b/d1198.pdf File-Format: application/pdf File-Size: 279 kb Handle: RePEc:cwl:cwldpp:1198 Template-type: ReDIF-Paper 1.0 Author-Name: Werner Ploberger Author-X-Name-First: Werner Author-X-Name-Last: Ploberger Author-Workplace-Name: University of Rochester 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: Rissanen's Theorem and Econometric Time Series Abstract: In a typical empirical modeling context, the data generating process (DGP) of a time series is assumed to be known up to a finite-dimensional parameter. In such cases, Rissanen's (1986) theorem provides a lower bound for the empirically achievable distance between all possible data-based models and the true DGP. This distance depends only on the dimension of the parameter space. The present paper examines the empirical relevance of this notion to econometric time series and discusses a new version of the theorem that allows for nonstationary DGP's. Nonstationarity is relevant in many economic applications and it is shown that the form of nonstationarity affects, and indeed increases, the empirically achievable distance to the true DGP. Classification-JEL: C22 Keywords: Complexity; data generating process; Fisher information; model selection; optimal prediction; parsimony; trends Note: CFP 1037. Length: 14 pages Creation-Date: 199810 Number: 1197 Publication-Status: Published in Arnold Zellner, Hugo A. Keuzenkamp and Michael McAleer, eds., Simplicity, Inference and Modelling, Cambridge University Press, 2001, pp. 165-180 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11b/d1197.pdf File-Format: application/pdf File-Size: 167 kb Handle: RePEc:cwl:cwldpp:1197 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: New Unit Root Asymptotics in the Presence of Deterministic Trends Abstract: Recent work by the author (1998) has shown that stochastic trends can be validly represented in empirical regressions in terms of deterministic functions of time. These representations offer an alternative mechanism for modelling stochastic trends. It is shown here that the alternate representations affect the asymptotics of all commonly used unit root tests in the presence of trends. In particular, the critical values of unit root tests diverge when the number of deterministic regressors K approaches infinity as the sample size n approaches infinity. In such circumstances, use of conventional critical values based on fixed K will lead to rejection of the null of a unit root in favour of trend stationarity with probability one when the null is true. The results can be interpreted as saying that serious attempts to model trends by deterministic functions will always be successful and that these functions can validly represent stochastically trending data even when lagged variables are present in the regressor set, thereby undermining conventional unit root tests. Classification-JEL: C22 Keywords: Deterministic trends, divergent critical values, large K asymptotics, test failure, unit root distributions Note: CFP 1059. Length: 25 pages Creation-Date: 199810 Number: 1196 Publication-Status: Published in Journal of Econometrics (2002), 111(2): 323-353 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11b/d1196.pdf File-Format: application/pdf File-Size: 223 kb Handle: RePEc:cwl:cwldpp:1196 Template-type: ReDIF-Paper 1.0 Author-Name: Franklin Allen Author-X-Name-First: Franklin Author-X-Name-Last: Allen Author-Workplace-Name: 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/ Title: Finance Applications of Game Theory Abstract: Traditional finance theory based on the assumptions of symmetric information and perfect and competitive markets has provided many important insights. These include the Modigliani and Miller Theorems, the CAPM, the Efficient Markets Hypothesis and continuous time finance. However, many empirical phenomena are difficult to reconcile with this traditional framework. Game theoretic techniques have allowed insights into a number of these. Many puzzles remain. This paper argues that recent advances in game theory concerned with higher order beliefs, informational cascades and heterogeneous prior beliefs have the potential to provide insights into some of these remaining puzzles. Length: 45 pages Creation-Date: 199809 Number: 1195 Publication-Status: Published in Advances in Business Applications of Game Theory, ed. by Chatterjee and Samuelson, Kluwer Academic Press, 2001 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11b/d1195.pdf File-Format: application/pdf File-Size: 98 kb Handle: RePEc:cwl:cwldpp:1195 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: Olivia S. Mitchell Author-X-Name-First: Olivia S. Author-X-Name-Last: Mitchell Author-Workplace-Name: Wharton School, Univ. Pennsylvania Author-Name: Stephen P. Zeldes Author-X-Name-First: Stephen P. Author-X-Name-Last: Zeldes Author-Workplace-Name: Columbia University Title: Would a Privatized Social Security System Really Pay a Higher Rate of Return? Abstract: Many advocates of social security privatization argue that rates of return under a defined contribution individual account system would be much higher for all than they are under the current social security system. This claim is false. The mistake comes from ignoring accrued benefits already promised based on past payroll taxes, and from underestimating the riskiness of stock investments. Confusion arises because three distinct reforms are muddled. By privatization we mean creating individual accounts (which could, for example, be invested exclusively in bonds). By diversification we mean investing in stocks, and perhaps other assets, as well as bonds; diversification might be undertaken either by individuals in their private social security accounts, or by the social security trust fund. By prefunding we mean closing the gap between social security benefits promised to date and the assets on hand to pay for them. Any one of these reforms could be implemented without the other two. If the system were completely privatized, with no prefunding or diversification, the social security system would need to raise taxes and/or issue new debt in order to pay benefits already accrued. If the burden were spread evenly across all future generations via a constant proportional tax, the added taxes would completely eliminate any rate of return advantage on the individual accounts. We estimate that the required new taxes would amount to about 3 percent of payroll, or about a quarter of all social security contributions, in perpetuity. Unlike privatization, prefunding would raise rates of return for later generations, but at the cost of lower returns for today's workers. For households able to invest in the stock market on their own, diversification would not raise rates of return, correctly adjusted to recognize risk. Households that are constrained from holding stock, due to lack of wealth outside of social security or to fixed costs from holding stocks, would gain higher risk-adjusted returns and would benefit from diversification. If this group is large, diversification would raise stock values, thus helping current stockholders, but it would lower future stock returns, thus hurting young unconstrained households. Overall, since the number of truly constrained household is probably not that large, privatization and diversification would have a much smaller effect on returns than reformers typically claim. Note: CFP 1002. Length: 28 pages Creation-Date: 199808 Number: 1194 Publication-Status: Published in R. Douglas Arnond, Michael J. Graetz and Alicia H. Munnell, eds., Framing the Social Security Debate: Values, Politics and Economics, National Academy of Social Insurance, Washington, 1998, pp. 137-157 File-URL: http://cowles.econ.yale.edu/P/cp/p10a/p1002.pdf File-Format: application/pdf File-Size: 647 kb Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11b/d1194.pdf File-Format: application/pdf File-Size: 179 kb Handle: RePEc:cwl:cwldpp:1194 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: Olivia S. Mitchell Author-X-Name-First: Olivia S. Author-X-Name-Last: Mitchell Author-Workplace-Name: Wharton School, Univ. Pennsylvania Author-Name: Stephen P. Zeldes Author-X-Name-First: Stephen P. Author-X-Name-Last: Zeldes Author-Workplace-Name: Columbia University Title: Social Security Money's Worth Abstract: This paper describes how three money's worth measures -- the benefit-to-tax ratio, the internal rate of return, and the net present value -- are calculated and used in analyses of social security reforms, including systems with privately managed individual accounts invested in equities. Declining returns from the U.S. social security system prove to be the inevitable result of having instituted an unfunded (pay-as-you-go) retirement system that delivered $7.9 trillion of net transfers (in 1997 present value dollars) to people born before 1917, and will deliver another $1.8 trillion to people born between 1918 and 1937. But young and future workers cannot necessarily do better by investing their payroll taxes in capital markets. If the old system were closed down, massive unfunded liabilities of $9-10 trillion would still have to be paid unless already accrued benefits were cut. Alternative methods of calculating these accrued benefits yield somewhat different numbers: the straight line calculation is $800 billion less than the constant benefit calculation we propose as the benchmark. Using this benchmark in a world with no uncertainty, we show that privatization without prefunding would not increase returns at all, net of the new taxes needed to pay for unfunded liabilities. These new taxes would amount to 3.6 percent of payroll, or about 29 percent of social security contributions. Prefunding implemented by reducing accrued benefits or by raising taxes, would eventually increase money's worth for later generations, but at the cost of lower money's worth for today's workers and/or retirees. Computing money's worth when there is uncertainty is much more difficult unless four conditions hold, namely optimization, time homogeneity, stable prices, and spanning. Under these conditions, the diversification of social security investments into stocks and out of bonds has no effect whatsoever on money's worth when it is properly adjusted for risk: a dollar of stock is worth no more than a dollar of bonds. When spanning fails, diversification can raise welfare for constrained households, but the exact money's worth must depend on specific assumptions about household attitudes toward risk. Calculations like those of the Social Security Advisory Council that attribute over $2.85 of net present value gain to each $1 shifted from bonds to stocks completely overlook the disutility of risk. By contrast, we estimate that a 2 percent of payroll equity fund carved out of social security would increase net present value by about 59 cents per dollar of bonds switched into equities, instead of $2.85. When the likely reductions in income and longevity insurance are factored in, the net advantage of privatization and diversification is substantially less than popularly perceived. Note: CFP 1005. Length: 49 pages Creation-Date: 199808 Number: 1193 Publication-Status: Published in O. Mitchell, R. Myers and H. Young, eds., Prospects for Social Security Reform, University of Pennsylvania Press, 1999, pp. 79-151 File-URL: http://cowles.econ.yale.edu/P/cp/p10a/p1005.pdf File-Format: application/pdf File-Size: 2279 kb Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11b/d1193.pdf File-Format: application/pdf File-Size: 326 kb Handle: RePEc:cwl:cwldpp:1193 Template-type: ReDIF-Paper 1.0 Author-Name: Zhijie Xiao Author-X-Name-First: Zhijie Author-X-Name-Last: Xiao Author-Workplace-Name: Univ. Illinois at Urbana-Champaign 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: Higher Order Approximations for Wald Statistics in Cointegrating Regressions Abstract: Asymptotic expansions are developed for Wald test statistics in cointegrating regression models. These expansions provide an opportunity to reduce size distortion in testing by suitable bandwidth selection, and automated rules for doing so are calculated. Band spectral regression methods and tests are also considered. In such cases, it is shown how the effects of nonstationarity that dominate low frequency limit behaviour also carry over to high frequency asymptotics, with consequential effects on bandwidth rules. Note: CFP 968. Length: 43 pages Creation-Date: 199808 Number: 1192 Publication-Status: Published in Journal of Econometrics, 86, 1998 File-URL: http://cowles.econ.yale.edu/P/cp/p09b/p0968.pdf File-Format: application/pdf File-Size: 759 kb Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11b/d1192.pdf File-Format: application/pdf File-Size: 282 kb Handle: RePEc:cwl:cwldpp:1192 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: Hyungsik R. Moon Author-X-Name-First: Hyungsik R. Author-X-Name-Last: Moon Author-Workplace-Name: Dept. Econ, UCLA, Santa Barbara Author-Name: Zhijie Xiao Author-X-Name-First: Zhijie Author-X-Name-Last: Xiao Author-Workplace-Name: Univ. Illinois at Urbana-Champaign Title: How to Estimate Autoregressive Roots Near Unity Abstract: A new model of near integration is formulated in which the local to unity parameter is identifiable and consistently estimable with time series data. The properties of the model are investigated, new functional laws for near integrated time series are obtained, and consistent estimators of the localizing parameter are constructed. The model provides a more complete interface between I(0) and I(1) models than the traditional local to unity model and leads to autoregressive coefficient estimates with rates of convergence that vary continuously between the O(/n) rate of stationary autoregression, the O(n) rate of unit root regression and the power rate of explosive autoregression. Models with deterministic trends are also considered, least squares trend regression is shown to be efficient, and consistent estimates of the localising parameter are obtained for this case as well. Conventional unit root tests are shown to be consistent against local alternatives in the new class. Note: CFP 1028. Length: 39 pages Creation-Date: 199808 Number: 1191 Publication-Status: Published in Econometric Theory (2001), 17(1): 29-59 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11b/d1191.pdf File-Format: application/pdf File-Size: 343 kb Handle: RePEc:cwl:cwldpp:1191 Template-type: ReDIF-Paper 1.0 Author-Name: Joon Y. Park Author-X-Name-First: Joon Y. Author-X-Name-Last: Park Author-Workplace-Name: School of Economics, Seoul National 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: Nonlinear Regressions with Integrated Time Series Abstract: An asymptotic theory is developed for nonlinear regression with integrated processes. The models allow for nonlinear effects from unit root time series and therefore deal with the case of parametric nonlinear cointegration. The theory covers integrable, asymptotically homogeneous and explosive functions. Sufficient conditions for weak consistency are given and a limit distribution theory is provided. In general, the limit theory is mixed normal with mixing variates that depend on the sojourn time of the limiting Brownian motion of the integrated process. The rates of convergence depend on the properties of the nonlinear regression function, and are shown to be as slow as n^{1/4} for integrable functions, to be generally polynomial in n^{1/2} for homogeneous functions, and to be path dependent in the case of explosive functions. Classification-JEL: C22 Keywords: Functionals of Brownian motion, Brownian motion, integrated process, local time, mixed normal limit theory, nonlinear transformations, nonparametric density estimation, occupation time, nonlinear regression Note: CFP 1016. Length: 63 pages Creation-Date: 199808 Number: 1190 Publication-Status: Published in Econometrica (2001), 69(1): 117-161 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11b/d1190.pdf File-Format: application/pdf File-Size: 469 kb Handle: RePEc:cwl:cwldpp:1190 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: Zhijie Xiao Author-X-Name-First: Zhijie Author-X-Name-Last: Xiao Author-Workplace-Name: Univ. Illinois at Urbana-Champaign Title: A Primer on Unit Root Testing Abstract: The immense literature and diversity of unit root tests can at times be confusing even to the specialist and presents a truly daunting prospect to the uninitiated. In consequence, much empirical work still makes use of the simplest testing procedures because it is unclear from the literature and from recent reviews which tests if any are superior. This paper presents a survey of unit root theory with an emphasis on testing principles and recent developments. The general framework adopted makes it possible to consider tests of stochastic trends against trend stationarity and trend breaks of a general type. The main tests are listed, and asymptotic distributions are given in a simple form that emphasizes commonalities in the theory. Some simulation results are reported, and an extensive list of references and an annotated bibliography are provided. Classification-JEL: C22 Keywords: Autoregressive unit root, Brownian motion, functional central limit theorem, integrated process, LM principle; model selection, moving average unit root, nonstationarity, quasi-differencing, stationarity, stochastic trend Note: CFP 972. Length: 51 pages Creation-Date: 199808 Number: 1189 Publication-Status: Published in Journal of Economic Surveys (1998), 12(5): 423-469 File-URL: http://cowles.econ.yale.edu/P/cp/p09b/p0972.pdf File-Format: application/pdf File-Size: 1533 kb Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11b/d1189.pdf File-Format: application/pdf File-Size: 400 kb Handle: RePEc:cwl:cwldpp:1189 Template-type: ReDIF-Paper 1.0 Author-Name: James Tobin Author-X-Name-First: James Author-X-Name-Last: Tobin Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Financial Globalization: Can National Currencies Survive? Abstract: Fixed exchange rate, pegs to hard currencies that can be adjusted, are fragile, the more so the more mobile are capital funds across currencies and national markets. Once market participants doubt, for whatever reason, the ability of a developing or emerging economy's central bank to meet its commitment to redeem it currency in hard currency at the promised rate, they will race to claim the country's external reserves. Vulnerability to crises becomes greater as financial markets become less regulated and more internationally open. To escape currency crises, a country may lock its money to that of a reserve-currency country, as by a "currency board." This may, if an only if reserves are ample and all other economic objectives are subordinated, maintain the peg and hold down inflation. But it sacrifices monetary autonomy and seignorage, leading in effect and perhaps literally to substitution of the reserve currency for the local currency as unit of account and means of payment. When crises hit, the IMF and other lenders give highest priority to restoration of credibility and confidence in the currency under attack. They require the victim country to take drastic restrictive monetary and fiscal measures, whether or not irresponsibility in these policies brought on the crisis. Since these measures damage the economy, businesses, and banks, they may not restore confidence. Lenders of last resort are essential and should concentrate above all on replenishing liquidity. The adjustable-peg system has outlived its usefulness. For most countries it is better to let exchange rates float in markets, like those of the big three currencies, dollar, yen, and deutsche mark (or euro). Even so, unimpeded inflows and outflows of liquid funds result in unwelcome exchange rate movements. Protection against them, by taxes or special reserve requirements, are desirable, and need not curtail useful capital flows. Banks and businesses need to be prevented from incurring net short term debt positions in hard currency. Equity and direct fixed capital are the desirable vehicles for developmental capital movements. Note: See CFP 985 Length: 15 pages Creation-Date: 199807 Number: 1188 Publication-Status: Published, Annual World Bank Conference of Development Economics, 1999, pp. 63-75 File-URL: http://cowles.econ.yale.edu/P/cp/p09b/p0985.pdf File-Format: application/pdf File-Size: 505 kb Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11b/d1188.pdf File-Format: application/pdf File-Size: 45 kb Handle: RePEc:cwl:cwldpp:1188 Template-type: ReDIF-Paper 1.0 Author-Name: James Tobin Author-X-Name-First: James Author-X-Name-Last: Tobin Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Monetary Policy: Recent Theory and Practice Abstract: The paper reviews the major developments of the last three decades: the rise and fall of monetarism as theory and as targeting of intermediate monetary aggregates; targeting of nominal GDP in order to escape volatility of velocity of money; the abandonment of intermediate targets as superfluous; the use of money-market interest rates as operating procedure, except in the U.S.; their replacement by reserve aggregates in 1970-82; inflation stability and price level stability as policy objectives, often exclusive of other macroeconomic goals; the U.S. Federal Reserve as aiming successfully at both low inflation and low unemployment, goals mandated by law; the rules-discretion debate; the necessity for rules conditional on economic states and the impossibility of anticipating all circumstances, thus the inevitability of discretion but in the spirit of rules; John Taylor's algebraic rule for the Federal Reserve, relating Federal Funds rate to inflation and unemployment deviation from goals. Note: CFP 975. Length: 7 pages Creation-Date: 199807 Number: 1187 Publication-Status: Published in Helmut Wagner, ed., Current Issues in Monetary Economics, 1998, pp. 14-21 File-URL: http://cowles.econ.yale.edu/P/cp/p09b/p0975.pdf File-Format: application/pdf File-Size: 275 kb Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11b/d1187.pdf File-Format: application/pdf File-Size: 31 kb Handle: RePEc:cwl:cwldpp:1187 Template-type: ReDIF-Paper 1.0 Author-Name: Arthur Lewbel Author-X-Name-First: Arthur Author-X-Name-Last: Lewbel Author-Workplace-Name: Brandeis University Author-Name: Linton, Oliver Linton Author-X-Name-First: Oliver Author-X-Name-Last: Linton Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Nonparametric Censored Regression Abstract: The nonparametric censored regression model is y = max[c, m(x) + e], where both the regression function m(x) and the distribution of the error e are unknown, but the fixed censoring point c is known. This paper provides a simple consistent estimator of the derivative of m(x) with respect to each element of x. The convergence rate of this estimator is the same as for the derivatives of an uncensored nonparametric regression. We then estimate the regression function itself by solving the associated partial differential equation system. We show that our estimator of m(x) achieves the same rate of convergence as the usual estimators in uncensored nonparametric regression. We also provide root n estimates of weighted average derivatives of m(x), which equal the coefficients in any linear or partly linear specification for m(x). Classification-JEL: C14, C24, C13 Keywords: Semiparametric, nonparametric, censored regression, Tobit, latent variable Length: 24 pages Creation-Date: 199807 Number: 1186 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11b/d1186.pdf File-Format: application/pdf File-Size: 252 kb Handle: RePEc:cwl:cwldpp:1186 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: Social Security and Institutions for Intergenerational, Intragenerational and International Risk Sharing Abstract: Social security system old age insurance systems are devices for the sharing of income risks of elderly people with others. Risks can be shared intergenerationally (with the young of the same country), intragenerationally (with other elderly of the same country) or internationally (with foreigners). Barriers to individuals themselves sharing their risks intergenerationally, intragenerationally or internationally are described. Optimal design of government-sponsored social security systems is considered in light of these barriers. Alternative benefits and contributions formulas for pay-as-you-go social security systems are defined and compared with existing and proposed formulas in terms of their ability to fulfill the government's role in promoting risk sharing. Benefits for each retired person may be tied to that person's lifetime income without causing (as with the US benefits formula today) aggregate benefits for all elderly today to be tied to their past aggregate income. Classification-JEL: H55 Keywords: Old age insurance, pensions, risk management, hedging, theory, elderly, investments, pay-as-you-go, Social Security Trust Fund, overlapping generations model Note: CFP 993. Length: 38 pages Creation-Date: 199807 Number: 1185 Publication-Status: Published in Carnegie-Rochester Conference Series on Public Policy (1999), 50: 165-204 File-URL: http://cowles.econ.yale.edu/P/cp/p09b/p0993.pdf File-Format: application/pdf File-Size: 1433 kb Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11b/d1185.pdf File-Format: application/pdf File-Size: 131 kb Handle: RePEc:cwl:cwldpp:1185 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: Game Theory, Complexity and Simplicity. Part III: Critique and Prospective Abstract: A discussion of some of the problems in the utilization of game theoretic solution concepts is given. It is suggested that a considerable broadening of solution concepts is called for to take into account sufficient context. Mass agent simulations appear to offer promise for some economic and societal problems. Note: CFP 967. Length: 26 pages Creation-Date: 199806 Number: 1184 Publication-Status: Published in Complexity (1998), 3(5): 34-46 File-URL: http://cowles.econ.yale.edu/P/cp/p09b/p0967.pdf File-Format: application/pdf File-Size: 871 kb Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11b/d1184.pdf File-Format: application/pdf File-Size: 201 kb Handle: RePEc:cwl:cwldpp:1184 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: 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 Title: A Strategic Market Game with Active Bankruptcy Abstract: We construct stationary Markov equilibria for an economy with fiat money, one non-durable commodity, countably-many time periods, and a continuum of agents. The total production of commodity remains constant, but individual agents' endowments fluctuate in a random fashion, from period to period. In order to hedge against these random fluctuations, agents find it useful to hold fiat money which they can borrow or deposit at appropriate rates of interest; such activity may take place either at a central bank (which fixes interest rates judiciously) or through a money-market (in which interest rates are determined endogenously). We carry out an equilibrium analysis, based on a careful study of Dynamic Programming equations and on properties of the Invariant Measures for associated optimally-controlled Markov chains. This analysis yields the stationary distribution of wealth across agents, as well as the stationary price (for the commodity) and interest rates (for the borrowing and lending of fiat money). A distinctive feature of our analysis is the incorporation of bankruptcy, both as a real possibility in an individual agent's optimization problem, as well as a determinant of interest rates through appropriate balance equations. These allow a central bank (respectively, a money-market) to announce (respectively, to determine endogenously) interest rates in a way that conserves the total money-supply and controls inflation. General results are provided for the existence of such stationary equilibria, and several explicitly solvable examples are treated in detail. Note: CFP 1008. Length: 42 pages Creation-Date: 199806 Number: 1183 Publication-Status: Published in Journal of Mathematical Economics (2000), 34(3): 359-396 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11b/d1183.pdf File-Format: application/pdf File-Size: 338 kb Handle: RePEc:cwl:cwldpp:1183 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: Joon Y. Park Author-X-Name-First: Joon Y. Author-X-Name-Last: Park Author-Workplace-Name: School of Economics, Seoul National University Title: Asymptotics for Nonlinear Transformations of Integrated Time Series Abstract: An asymptotic theory for stochastic processes generated from nonlinear transformations of nonstationary integrated time series is developed. Various nonlinear functions of integrated series such as ARIMA time series are studied, and the asymptotic distributions of sample moments of such functions are obtained and analyzed. The transformations considered in the paper include a variety of functions that are used in practical nonlinear statistical analysis. It is shown that their asymptotic theory is quite different from that of integrated processes and stationary time series. When the transformation function is exponentially explosive, for instance, the convergence rate of sample functions is path-dependent. In particular, the convergence rate depends not only on the size of the sample, but also on the realized sample path. Some brief applications of these asymptotics are given to illustrate the effects of nonlinearly transformed integrated processes on regression. The methods developed in the paper are useful in a project of greater scope concerned with the development of a general theory of nonlinear regression for nonstationary time series. Keywords: Additive functionals of Brownian motion, Brownian motion, integrated process, local time, nonlinear transformation, occupation time, regression asymptotics Note: CFP 980. Length: 27 pages Creation-Date: 199806 Number: 1182 Publication-Status: Published in Econometric Theory (1999), 15: 260-298 File-URL: http://cowles.econ.yale.edu/P/cp/p09b/p0980.pdf File-Format: application/pdf File-Size: 610 kb Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11b/d1182.pdf File-Format: application/pdf File-Size: 340 kb Handle: RePEc:cwl:cwldpp:1182 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: Joon Y. Park Author-X-Name-First: Joon Y. Author-X-Name-Last: Park Author-Workplace-Name: School of Economics, Seoul National University Title: Nonstationary Density Estimation and Kernel Autoregression Abstract: An asymptotic theory is developed for the kernel density estimate of a random walk and the kernel regression estimator of a nonstationary first order autoregression. The kernel density estimator provides a consistent estimate of the local time spent by the random walk in the spatial vicinity of a point that is determined in part by the argument of the density and in part by initial conditions. The kernel regression estimator is shown to be consistent and to have a mixed normal limit theory. The limit distribution has a mixing variate that is given by the reciprocal of the local time of a standard Brownian motion. The permissible range for the bandwidth parameter h_{n} includes rates which may increase as well as decrease with the sample size n, in contrast to the case of a stationary autoregression. However, the convergence rate of the kernel regression estimator is at most n^{1/4}, and this is slower than that of a stationary kernel autoregression, in contrast to the parametric case. In spite of these differences in the limit theory and the rates of convergence between the stationary and nonstationary cases, it is shown that the usual formulae for confidence intervals for the regression function still apply when h_{n} -> 0. Keywords: Brownian sheet, kernel regression, local time, martingale embedding, mixture normal, nonstationary density, occupation time, quadratic variation, unit root autoregression Length: 27 pages Creation-Date: 199806 Number: 1181 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11b/d1181.pdf File-Format: application/pdf File-Size: 387 kb Handle: RePEc:cwl:cwldpp:1181 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: Econometric Analysis of Fisher's Equation Abstract: Fisher's equation for the determination of the real rate of interest is studied from a fresh econometric perspective. Some new methods of data description for nonstationary time series are introduced. The methods provide a nonparametric mechanism for modelling the spatial densities of a time series that displays random wandering characteristics, like interest rates and inflation. Hazard rate functionals are also constructed, an asymptotic theory is given and the techniques are illustrated in some empirical applications to real interest rates for the US. The paper ends by calculating Gaussian semiparametric estimates of long range dependence in US real interest rates, using a new asymptotic theory that covers the nonstationary case. The empirical results indicate that the real rate of interest in the US is (fractionally) nonstationary over 1934-1997 and over the more recent subperiods 1961-1985 and 1961-1997. Unit root nonstationarity and short memory stationarity are both strongly rejected for all these periods. Keywords: Fractional integration; hazard rate; long range dependence; real rate of interest; semiparametric estimation; sojourn time; spatial density Length: 38 pages Creation-Date: 199806 Number: 1180 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11b/d1180.pdf File-Format: application/pdf File-Size: 400 kb Handle: RePEc:cwl:cwldpp:1180 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: Designing Indexed Units of Account Abstract: An indexed unit of account is a unit of measurement defined using an index such as a consumer price index so that prices, wages or deferred payments defined in terms of these units will automatically adjust to changing economic conditions. Evidence on money illusion and sticky prices, and evidence from countries (notably Chile) that have created indexed units of account, suggests that creating such indexed units is an important policy option for governments in countries with unstable prices or incomes. Choices for governments designing indexed units of account are discussed. Governments may choose to encourage the use of the units only for large long-deferred non-wage payments, or they may choose to go to the opposite extreme of encouraging the use of the units for defining all prices, wages and payments. A general equilibrium model is given that shows the dynamics of prices when all prices are expressed in the units. Governments may choose to link units to a consumer price index or to a per capita income index, and there may be advantages to creating both kinds of units simultaneously. Downward rigidity of real wages might be reduced if wages are denominated in base-income-indexed units of account, where base income is defined so that the growth rate in money value of the unit is biased down relative to actual per capita income growth. Examples of the units for United States are displayed and discussed. Could add description of simulation, if that is added. Keywords: Indexation, escalator clause, cost of living allowance (COLA), monetized indexed units of account, base income, money illusion, sticky prices, fairness, unidad de fomento, Chile Length: 23 pages Creation-Date: 199805 Number: 1179 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11b/d1179.pdf File-Format: application/pdf File-Size: 105 kb Handle: RePEc:cwl:cwldpp:1179 Template-type: ReDIF-Paper 1.0 Author-Name: Simon Grant Author-X-Name-First: Simon Author-X-Name-Last: Grant Author-Workplace-Name: Australian National University Author-Name: Atsushi Kajii Author-X-Name-First: Atsushi Author-X-Name-Last: Kajii Author-Workplace-Name: University of Tsukuba 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: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: On the Skiadas 'Conditional Preference Approach' to Choice Under Uncertainty Abstract: We compare the Skiadas approach with the standard Savage framework of choice under uncertainty. At first glance, properties of Skiadas "conditional preferences" such as coherence and disappointment seem analogous to similarly motivated notions of decomposability and disappointment aversion defined on Savage "ex ante preferences." We show, however, that coherence per se places almost no restriction on the structure of ex ante preferences. Coherence is an `external' restriction across preferences whereas notions of decomposability in the Savage framework are 'internal' to the particular preference relation. Similarly, standard notions of disappointment aversion refer to 'within act' disappointments. Skiadas's notion of disappointment aversion for families of conditional preference relations neither implies nor is implied by standard notions of disappointment aversion for ex ante preferences. Classification-JEL: D81 Keywords: Skiadas, decomposable choice, disappointment aversion, coherent preferences Length: 12 pages Creation-Date: 199805 Number: 1178 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11b/d1178.pdf File-Format: application/pdf File-Size: 622 kb Handle: RePEc:cwl:cwldpp:1178 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/ Author-Name: Allan N. Weiss Author-X-Name-First: Allan N. Author-X-Name-Last: Weiss Title: Moral Hazard in Home Equity Conversion Abstract: Home equity conversion as presently constituted or proposed usually does not deal well with the potential problem of moral hazard. Once homeowners know that the risk of poor market performance of their homes is borne by investors, they have an incentive to neglect to take steps to maintain the homes' values. They may thus create serious future losses for the investors. A calibrated model for assessing this moral hazard risk is presented that is suitable for a number of home equity conversion forms: 1) reverse mortgages, 2) home equity insurance, 3) shared appreciation mortgages, 4) housing partnerships, 5) shared equity mortgages and 6) sale of remainder interest. Modifications of these forms involving real estate price indices are proposed that might deal better with the problem of moral hazard. Keywords: Reverse mortgages, home equity insurance, shared appreciation mortgages, housing partnerships, shared equity mortgages, sale of remainder interest, moral hazard, real estate price indices, home maintenance, home improvements Note: CFP 1014. Length: 29 pages Creation-Date: 199805 Number: 1177 Publication-Status: Published in Real Estate Economics (2000), 28(1): 1-31 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11b/d1177.pdf File-Format: application/pdf File-Size: 154 kb Handle: RePEc:cwl:cwldpp:1177 Template-type: ReDIF-Paper 1.0 Author-Name: Giuseppe Moscarini Author-X-Name-First: Giuseppe Author-X-Name-Last: Moscarini Author-Email: giuseppe.moscarini@yale.edu Author-Workplace-Name: Department of Economics, Yale University Author-Workplace-Homepage: http://www.econ.yale.edu/faculty1/moscarini.htm Author-Name: Lones Smith Author-X-Name-First: Lones Author-X-Name-Last: Smith Author-Workplace-Name: Department of Economics, MIT Title: Wald Revisited: The Optimal Level of Experimentation Abstract: This paper revisits Wald's (1947) sequential experimentation paradigm, now assuming that an impatient decision maker can run variable-size experiments each period at some increasing and strictly convex cost before finally choosing an irreversible action. We translate this natural discrete time experimentation story into a tractable control of variance for a continuous time diffusion. Here we robustly characterize the optimal experimentation level: It is rising in the confidence about the project outcome, and for not very convex cost functions, the random process of experimentation levels has a positive drift over time. We also explore several parametric shifts unique to our framework. Among them, we discover what is arguably an 'anti-folk' result: Where the experimentation level is positive, it is often higher for a more impatient decision maker. This paper more generally suggests that a long-sought economic paradigm that delivers a sensible law of demand for information is our dynamic one namely, allowing the decision maker an eternal repurchase (resample) option. Classification-JEL: C11, C12, C44, C61, D81, D83 Keywords: Learning, experimentation, sequential analysis, R&D Length: 37 pages Creation-Date: 199805 Number: 1176 Publication-Status: Published in Econometrica (November 2001), 69(6): 1629-1644 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11b/d1176.pdf File-Format: application/pdf File-Size: 2368 kb Handle: RePEc:cwl:cwldpp:1176 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: Rosa L. Matzkin Author-X-Name-First: Rosa L. Author-X-Name-Last: Matzkin Author-Workplace-Name: Northwestern University Title: Estimation of Nonparametric Functions in Simultaneous Equations Models, with an Application to Consumer Demand Abstract: We present a method for consistently estimating nonparametric functions and distributions in simultaneous equations models. This method is used to identify and estimate a random utility model of consumer demand. Our identification conditions for this particular model extend the results of Houthakker (1950), Uzawa (1971) and Mas-Colell (1977), where a deterministic utility function is uniquely recovered from its deterministic demand function. Length: 18 pages Creation-Date: 199803 Number: 1175 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11b/d1175.pdf File-Format: application/pdf File-Size: 181 kb Handle: RePEc:cwl:cwldpp:1175 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: Some Simple Games for Teaching and Research. Part 1: Cooperative Games Abstract: Over many years some simple cooperative games have been considered in lectures on game theory. The games were selected in order to provide insight into various normative theories of solution to n-person games. It is suggested that the results indicate that when solutions have outcomes in common, predictability is higher than when they are apart. The core is attractive but less so when it is heavily nonsymmetric. Length: 17 pages Creation-Date: 199803 Number: 1174 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11b/d1174.pdf File-Format: application/pdf File-Size: 49 kb Handle: RePEc:cwl:cwldpp:1174 Template-type: ReDIF-Paper 1.0 Author-Name: P. Jean-Jacques Herings Author-X-Name-First: P. Jean-Jacques Author-X-Name-Last: Herings Author-Workplace-Name: Dept. Econometrics & Center, Tilburg Univ. Author-Name: Vincent J. Vannetelbosch Author-X-Name-First: Vincent J. Author-X-Name-Last: Vannetelbosch Author-Workplace-Name: IEP, Basque Country University Title: The Equivalence of the Dekel-Fudenberg Iterative Procedure and Weakly Perfect Rationalizability Abstract: Two approaches have been proposed in the literature to refine the rationalizability solution concept: either assuming that players make small errors when playing their strategies, or assuming that there is a small amount of payoff uncertainty. We show that both approaches lead to the same refinement if errors are made according to the concept of weakly perfect rationalizability, and there is payoff uncertainty as in Dekel and Fudenberg [Journal of Economic Theory 52 (1990), 243-267]. For both cases, the strategies that survive are obtained by starting with one round of elimination of weakly dominated strategies followed by many rounds of elimination of strictly dominated strategies. Classification-JEL: C72 Keywords: Rationalizability, refinements Length: 11 pages Creation-Date: 199803 Number: 1173 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11b/d1173.pdf File-Format: application/pdf File-Size: 166 kb Handle: RePEc:cwl:cwldpp:1173 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: Human Behavior and the Efficiency of the Financial System Abstract: Recent literature in empirical finance is surveyed in its relation to underlying behavioral principles, principles which come primarily from psychology, sociology and anthropology. The behavioral principles discussed are: prospect theory, regret and cognitive dissonance, anchoring, mental compartments, overconfidence, over- and under-reaction, representativeness heuristic, the disjunction effect, gambling behavior and speculation, perceived irrelevance of history, magical thinking, quasi-magical thinking, attention anomalies, the availability heuristic, culture and social contagion, and global culture. Note: CFP 1025. Length: 34 pages Creation-Date: 199802 Number: 1172 Publication-Status: Published in J.B. Taylor and M. Woodford, eds., Handbook of Macroeconomics, Vol. 1C, Part 6, 1999, pp. 1306-1340 File-URL: http://cowles.econ.yale.edu/P/cp/p10a/p1025.pdf File-Format: application/pdf File-Size: 1756 kb Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11b/d1172.pdf File-Format: application/pdf File-Size: 122 kb Handle: RePEc:cwl:cwldpp:1172 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: Indexed Units of Account: Theory and Assessment of Historical Experience Abstract: An indexed unit of account is a money analogue, used to express prices; the unit's purchasing power is defined by an index. Indexed units of account are not true money in that they are not used as a medium of exchange. The first successful indexed unit of account, the Unidad de Fomento (UF) has been used in Chile since 1967, and has been copied in Colombia, Ecuador, Mexico, and Uruguay. The reasons for creating such units are discussed from the standpoint of monetary theory. The experience with such units in Chile is discussed. It is argued that important practical problems in implementing indexation are solved by creating such indexed units of account. The author advocates creating such units in other countries, even countries with relatively low rates of inflation such as the United States, and argues that an alternative definition of the units, relating the units to measures of income, may also be advantageous. Ideally, such indexed units of account might someday be "monetized," i.e., institutions such as debit cards may be devised to allow the units to be used for all transactions, so that the role of conventional money might be reduced to clearing-house functions only. Keywords: Unidad de Fomento, money of account, ghost money, imaginary money, indexation, monetary theory, escalator clause, cost of living allowance, inflation, consumer price index, personal income, wage, salary, social security, pension, overlapping generations, Chile Length: 28 pages Creation-Date: 199802 Number: 1171 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11b/d1171.pdf File-Format: application/pdf File-Size: 88 kb Handle: RePEc:cwl:cwldpp:1171 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: Chris Shannon Author-X-Name-First: Chris Author-X-Name-Last: Shannon Author-Workplace-Name: UCLA, Berkeley Title: Uniqueness, Stability, and Comparative Statics in Rationalizable Walrasian Markets Abstract: This paper studies the extent to which qualitative features of Walrasian equilibria are refutable given a finite data set. In particular, we consider the hypothesis that the observed data are Walrasian equilibria in which each price vector is locally stable under tatonnement. Our main result shows that a finite set of observations of prices, individual incomes and aggregate consumption vectors is rationalizable in an economy with smooth characteristics if and only if it is rationalizable in an economy in which each observed price vector is locally unique and stable under tatonnement. Moreover, the equilibrium correspondence is locally monotone in a neighborhood of each observed equilibrium in these economies. Thus the hypotheses that equilibria are locally stable under tatonnement, equilibrium prices are locally unique and equilibrium comparative statics are locally monotone are not refutable with a finite data set. Length: 15 pages Creation-Date: 199802 Number: 1170 Publication-Status: Published in Econometrics (2000), 68(6): 1529-1539 and 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/d11b/d1170.pdf File-Format: application/pdf File-Size: 164 kb Handle: RePEc:cwl:cwldpp:1170 Template-type: ReDIF-Paper 1.0 Author-Name: George J. Hall Author-X-Name-First: George J. Author-X-Name-Last: Hall Author-Workplace-Name: Dept. of Economics, Yale University Author-Workplace-Homepage: http://www.econ.yale.edu/ Title: Non-Convex Costs and Capital Utilization: A Study of Production Scheduling at Automobile Assembly Plants Abstract: This paper studies how managers at automobile assembly plants organize production across time. Detailed data from eleven single-source automobile assembly plants display considerable cross-plant heterogeneity. At plants which make low- and medium-selling vehicles the capital stock often sits idle, production is more variable than sales, and week-long shutdowns are often used to vary output. In contrast, at plants which make high-selling vehicles, the capital stock rarely sits idle, production is about as variable as sales, and over time -- bit week-long shutdowns -- is most frequently used to vary output. To explain this difference in production scheduling, I formulate and solve a dynamic programming model of a plant manager. The solution to the dynamic program predicts that when sales are low, non-convexities at the plant level induce the manager to bunch production at points of low average cost; thus, the manager uses less than full capital utilization on average and makes production more volatile than sales. When sales are high, the plant operates in a convex region of the cost curve. Hence the manager employs high levels of capital utilization and makes production less volatile than sales. Length: 38 pages Creation-Date: 199712 Number: 1169 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11b/d1169.pdf File-Format: application/pdf File-Size: 459 kb Handle: RePEc:cwl:cwldpp:1169 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 the Information Content and Money Making Ability of Forecasts from Exchange Rate Equations Abstract: This paper evaluates a particular set of equations for the dollar/yen and dollar/mark exchange rates. The forecasts from the equations dominate both forecasts from the random walk model and forecasts using the forward rate. The results also suggest that money may be able to be made in the forward markets using the equations. Length: 35 pages Creation-Date: 199712 Number: 1168 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11b/d1168.pdf File-Format: application/pdf File-Size: 163 kb Handle: RePEc:cwl:cwldpp:1168 Template-type: ReDIF-Paper 1.0 Author-Name: Truman F. Bewley Author-X-Name-First: Truman F. Author-X-Name-Last: Bewley Author-Email: truman.bewley@yale.edu Author-Homepage: http://cowles.econ.yale.edu/faculty/bewley.htm Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Why Not Cut Pay? Abstract: Over 300 business people, labor leaders, business consultants, and counselors of unemployed people were interviewed during the recession of the early 1990's in order to learn why wages and salaries were declining in only a few firms. Employers believed that cutting pay would hurt employee morale, leading to lower productivity and current or future difficulties with hiring and retention. There were few indications that unemployed people had excessive wage expectations. On the contrary, many unemployed were too flexible and found themselves rejected by firms as overqualified. Note: CFP 963. Length: 40 pages Creation-Date: 199711 Number: 1167 Publication-Status: Published in European Economic Review (1998), 42: 459-490 File-URL: http://cowles.econ.yale.edu/P/cp/p09b/p0963.pdf File-Format: application/pdf File-Size: 1093 kb Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11b/d1167.pdf File-Format: application/pdf File-Size: 1829 kb Handle: RePEc:cwl:cwldpp:1167 Template-type: ReDIF-Paper 1.0 Author-Name: Adlai Fisher Author-X-Name-First: Adlai Author-X-Name-Last: Fisher Author-Name: Laurent Calvet Author-X-Name-First: Laurent Author-X-Name-Last: Calvet Author-Name: Benoit Mandelbrot Author-X-Name-First: Benoit Author-X-Name-Last: Mandelbrot Author-Workplace-Name: Yale Univ. & IBM T.J. Watson Research Center Title: Multifractality of Deutschemark/US Dollar Exchange Rates Abstract: This paper presents the first empirical investigation of the Multifractal Model of Asset Returns ("MMAR"). The MMAR, developed in Mandelbrot, Fisher, and Calvet (1997), is an alternative to ARCH-type representations for modelling temporal heterogeneity in financial returns. Typically, researchers introduce temporal heterogeneity through time-varying conditional second moments in a discrete time framework. Multifractality introduces a new source of heterogeneity through time-varying local regularity in the price path. The concept of local Holder exponent describes local regularity. Multifractal processes bridge the gap between locally Gaussian (Ito) diffusions and jump-diffusions by allowing a multiplicity of Holder exponents. This paper investigates multifractality in Deutschemark/US Dollar currency exchange rates. After finding evidence of multifractal scaling, we show how to estimate the multifractal spectrum via the Legendre transform. The scaling laws found in the data are replicated in simulations. Further simulation experiments test whether alternative representations, such as FIGARCH, are likely to replicate the multifractal signature of the Deutschemark/US Dollar data. On the basis of this evidence, the MMAR hypothesis appears more likely. Overall, the MMAR is quite successful in uncovering a previously unseen empirical regularity. Additionally, the model generates realistic sample paths, and opens the door to new theoretical and applied approaches to asset pricing and risk valuation. We conclude by advocating further empirical study of multifractality in financial data, along with more intensive study of estimation techniques and inference procedures. Keywords: Multifractal model of asset returns, multifractal process, compound stochastic process, trading time, time deformation, scaling laws, multiscaling, self-similarity, self-affinity Length: 40 pages Creation-Date: 199709 Number: 1166 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11b/d1166.pdf File-Format: application/pdf File-Size: 1208 kb Handle: RePEc:cwl:cwldpp:1166 Template-type: ReDIF-Paper 1.0 Author-Name: Laurent Calvet Author-X-Name-First: Laurent Author-X-Name-Last: Calvet Author-Name: Adlai Fisher Author-X-Name-First: Adlai Author-X-Name-Last: Fisher Author-Name: Benoit Mandelbrot Author-X-Name-First: Benoit Author-X-Name-Last: Mandelbrot Author-Workplace-Name: Yale Univ. & IBM T.J. Watson Research Center Title: Large Deviations and the Distribution of Price Changes Abstract: The Multifractal Model of Asset Returns ("MMAR," see Mandelbrot, Fisher, and Calvet, 1997) proposes a class of multifractal processes for the modelling of financial returns. In that paper, multifractal processes are defined by a scaling law for moments of the processes' increments over finite time intervals. In the present paper, we discuss the local behavior of multifractal processes. We employ local Holder exponents, a fundamental concept in real analysis that describes the local scaling properties of a realized path at any point in time. In contrast with the standard models of continuous time finance, multifractal processes contain a multiplicity of local Holder exponents within any finite time interval. We characterize the distribution of Holder exponents by the multifractal spectrum of the process. For a broad class of multifractal processes, this distribution can be obtained by an application of Cramer's Large Deviation Theory. In an alternative interpretation, the multifractal spectrum describes the fractal dimension of the set of points having a given local Holder exponent. Finally, we show how to obtain processes with varied spectra. This allows the applied researcher to relate an empirical estimate of the multifractal spectrum back to a particular construction of the Stochastic process. Keywords: Multifractal model of asset returns, multifractal spectrum, compound stochastic process, subordinated stochastic process, time deformation, scaling laws, self-similarity, self-affinity Length: 30 pages Creation-Date: 199709 Number: 1165 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11b/d1165.pdf File-Format: application/pdf File-Size: 293 kb Handle: RePEc:cwl:cwldpp:1165 Template-type: ReDIF-Paper 1.0 Author-Name: Benoit Mandelbrot Author-X-Name-First: Benoit Author-X-Name-Last: Mandelbrot Author-Workplace-Name: Yale Univ. & IBM T.J. Watson Research Center Author-Name: Adlai Fisher Author-X-Name-First: Adlai Author-X-Name-Last: Fisher Author-Name: Laurent Calvet Author-X-Name-First: Laurent Author-X-Name-Last: Calvet Title: A Multifractal Model of Asset Returns Abstract: This paper presents the multifractal model of asset returns ("MMAR"), based upon the pioneering research into multifractal measures by Mandelbrot (1972, 1974). The multifractal model incorporates two elements of Mandelbrot's past research that are now well-known in finance. First, the MMAR contains long-tails, as in Mandelbrot (1963), which focused on Levy-stable distributions. In contrast to Mandelbrot (1963), this model does not necessarily imply infinite variance. Second. the model contains long-dependence, the characteristic feature of fractional Brownian Motion (FBM), introduced by Mandelbrot and van Ness (1968). In contrast to FBM, the multifractal model displays long dependence in the absolute value of price increments, while price increments themselves can be uncorrelated. As such, the MMAR is an alternative to ARCH-type representations that have been the focus of empirical research on the distribution of prices for the past fifteen years. The distinguishing feature of the multifractal model is multi-scaling of the return distribution's moments under time-rescalings. We define multiscaling, show how to generate processes with this property, and discuss how these processes differ from the standard processes of continuous-time finance. The multifractal model implies certain empirical regularities, which are investigated in a companion paper. Keywords: Multifractal model of asset returns, compund stochastic process, subordinated stochastic process, time deformation, trading time, scaling laws, multiscaling, self-similarity, self-affinity Length: 33 pages Creation-Date: 199709 Number: 1164 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11b/d1164.pdf File-Format: application/pdf File-Size: 1343 kb Handle: RePEc:cwl:cwldpp:1164 Template-type: ReDIF-Paper 1.0 Author-Name: Dean Corbae Author-X-Name-First: Dean Author-X-Name-Last: Corbae Author-Workplace-Name: University of Iowa Author-Name: Sam Ouliaris Author-X-Name-First: Sam Author-X-Name-Last: Ouliaris Author-Workplace-Name: National University of Singapore 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: Band Spectral Regression with Trending Data Abstract: Band spectral regression with deterministic and stochastic trends is considered. It is shown that conventional trend removal by regression in the time domain prior to band spectral regression leads to biased and inconsistent estimates of the parameters in a model with frequency dependent coefficients. Time domain and frequency domain procedures for dealing with this problem are examined. Trend removal in the frequency domain produces unbiased estimates and is recommended. An asymptotic theory is developed and the two cases of stationary data and cointegrated nonstationary data are compared. Efficient band spectral regression estimators and associated inferential methods are provided for models with deterministic and stochastic trends. Some supporting Monte Carlo evidence is presented. An empirical application to the present value model of stock prices is discussed. After removing trends in the frequency domain, we show that, while stock prices and dividends have significant coherence at low frequencies, transitory fluctuations in dividends (i.e., less than 3 years) do not have significant coherence with stock price movements. Classification-JEL: C32, G12 Keywords: Band spectral regression, deterministic and stochastic trends, nonstationary time series, integrated process, present value model of stock prices Note: CFDP 1039. Length: 46 pages Creation-Date: 199709 Number: 1163 Publication-Status: Published in Econometrica (May 2002), 70(3): 57-93 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11b/d1163.pdf File-Format: application/pdf File-Size: 391 kb Handle: RePEc:cwl:cwldpp:1163 Template-type: ReDIF-Paper 1.0 Author-Name: In Choi Author-X-Name-First: In Author-X-Name-Last: Choi Author-Workplace-Name: Kookmin University, Korea 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: Regressions for Partially Identified, Cointegrated Simultaneous Equations Abstract: This paper studies regressions for partially identified equations in simultaneous equations models (SEMs) where all the variables are I(l) and cointegrating relations are present. Asymptotic properties of OLS and 2SLS estimators under partial identification are derived. The results show that the identifiability condition is important for consistency of estimates in nonstationary SEMs as it is for stationary SEMS. Also, OLS and 2SLS estimators are shown to have different rates of convergence and divergence under partial identification, though they have the same rates of convergence and divergence for the two polar cases of full identification and total lack of identifiability. Even in the case of full identification. however, the OLS and 2SLS estimators have different distributions in the limit. Fully modified OLS regression and leads-and-lags regression methods are also studied. The results show that these two estimators have nuisance parameters in the limit under general assumptions on the regression errors and are not suitable for structural inference. The paper proposes 2SLS versions of these two nonstationary regression estimators that have mixture normal distributions in the limit under general assumptions on the regression errors, that are more efficient than the unmodified estimators, and that are suited to statistical inference using asymptotic chi-squared distributions. Some simulation results are also reported. Length: 33 pages Creation-Date: 199709 Number: 1162 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11b/d1162.pdf File-Format: application/pdf File-Size: 295 kb Handle: RePEc:cwl:cwldpp:1162 Template-type: ReDIF-Paper 1.0 Author-Name: Zhijie Xiao Author-X-Name-First: Zhijie Author-X-Name-Last: Xiao Author-Workplace-Name: Univ. Illinois at Urbana-Champaign 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: An ADF Coefficient Test for a Unit Root in ARMA Models of Unknown Order with Empirical Applications to the U.S. Economy Abstract: This paper proposes an ADF coefficient test for detecting the presence of a unit root in ARMA models of unknown order. Our approach is fully parametric. When the time series has an unknown deterministic trend, we propose a modified version of the ADF coefficient test based on quasi-differencing in the construction of the detrending regression as in Elliot, Rothenberg and Stock (1996). The limit distributions of these test statistics are derived. Empirical applications of these tests for common macroeconomic time series in the US economy are reported and compared with the usual ADF t-test. Note: CFP 1105. Length: 18 pages Creation-Date: 199709 Number: 1161 Publication-Status: Published in Econometrics Journal (1988), 1(2): 27-43 File-URL: http://cowles.econ.yale.edu/P/cp/p11a/p1105.pdf File-Format: application/pdf File-Size: 519 kb Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11b/d1161.pdf File-Format: application/pdf File-Size: 738 kb Handle: RePEc:cwl:cwldpp:1161 Template-type: ReDIF-Paper 1.0 Author-Name: Oliver Linton Author-X-Name-First: Oliver Author-X-Name-Last: Linton Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: E. Mammen Author-X-Name-First: E. Author-X-Name-Last: Mammen Author-Workplace-Name: Ruprecht-Karls-Universitat Heidelberg Author-Name: J. Nielsen Author-X-Name-First: J. Author-X-Name-Last: Nielsen Author-Workplace-Name: PFA Pension Title: The Existence and Asymptotic Properties of a Backfitting Projection Algorithm Under Weak Conditions Abstract: We derive the asymptotic distribution of a new backfitting procedure for estimating the closest additive approximation to a nonparametric regression function. The procedure employs a recent projection interpretation of popular kernel estimators provided by Mammen et al. (1997), and the asymptotic theory of our estimators is derived using the theory of additive projections reviewed in Bickel et al. (1995). Our procedure achieves the same bias and variance as the oracle estimator based on knowing the other components, and in this sense improves on the method analyzed in Opsomer and Ruppert (1997). We provide 'high level' conditions independent of the sampling scheme. We then verify that these conditions are satisfied in a time series autoregression under weak conditions. Keywords: Additive models, alternating projections, backfitting, kernel smoothing, local polynomials, nonparametric regression Length: 39 pages Creation-Date: 199709 Number: 1160 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11b/d1160.pdf File-Format: application/pdf File-Size: 302 kb Handle: RePEc:cwl:cwldpp:1160 Template-type: ReDIF-Paper 1.0 Author-Name: James Tobin Author-X-Name-First: James Author-X-Name-Last: Tobin Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: The Experiment in Applied Econometrics Length: 9 pages Creation-Date: 199708 Number: 1159 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11b/d1159.pdf File-Format: application/pdf File-Size: 347 kb Handle: RePEc:cwl:cwldpp:1159 Template-type: ReDIF-Paper 1.0 Author-Name: Boaz Moselle Author-X-Name-First: Boaz Author-X-Name-Last: Moselle Author-Workplace-Name: Northwestern 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: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: A Model of a Predatory State Abstract: We provide a model of a primitive state whose rulers extort taxes for their own ends. This 'predatory' state can result in lower levels of both output and popular welfare than either organized banditry or anarchy. The predatory state may provide public goods, such as protection or irrigation, and hence may superficially resemble a contractual state. But, the ability to provide such goods can actually reduce popular welfare after allowing for tax changes. We compare the revenues raised by taxation with those from banditry to get an idea when primitive states are likely to emerge. We then consider interactions between bandits and the state. 'Corrupt' side-deals are bad for output and popular welfare, but good for revenue. Even in the absence of such collusion, the existence of a 'mafia' and of the state can be good for each other. Competition between organized crime and the state, however, typically reduces popular welfare and pushes the volume of banditry close to its anarchy level. Finally, we extend the basic model to allow the populace to form expectations of tax set by a long-lived king. Our relatively pessimistic conclusions about predatory states extend to this dynamic setting. Note: CFP 1019. Length: 45 pages Creation-Date: 199708 Number: 1158 Publication-Status: Published in Journal of Law, Economics and Organization (2001), 17(1): 1-33 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11b/d1158.pdf File-Format: application/pdf File-Size: 2767 kb Handle: RePEc:cwl:cwldpp:1158 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: A Simple Counterexample to the Bootstrap Abstract: The bootstrap of the maximum likelihood estimator of the mean of a sample of iid normal random variables with mean mu and variance one is not asymptotically correct to first order when the mean is restricted to be nonnegative. The problem occurs when the true value of the mean mu equals zero. This counterexample to the bootstrap generalizes to a wide variety of estimation problems in which the true parameter may be on the boundary of the parameter space. We provide some alternatives to the bootstrap that are asymptotically correct to first order. We consider two types of bootstrap percentile confidence intervals in the above example. We find that they both have asymptotic coverage probability that exceeds the nominal asymptotic level when the true value of the mean it equals zero. Length: 8 pages Creation-Date: 199708 Number: 1157 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11b/d1157.pdf File-Format: application/pdf File-Size: 142 kb Handle: RePEc:cwl:cwldpp:1157 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 Title: A Stochastic Infinite-Horizon Economy with Secured Lending, or Unsecured Lending and Bankruptcy Abstract: Modeling problems for a monetary economy are discussed and some examples are presented in the context of an infinite-horizon economy with one or two types of traders, who use fiat money to buy a single perishable consumption good. Three instances are considered, all with transactions in fiat money. The first model has no borrowing or lending. The second model permits both borrowing and lending, but all loans are secured. The third model has borrowing and unsecured lending, and takes into account the presence of debtors who are unable to honor their debts and go bankrupt. Borrowing and depositing take place through an outside bank, although in some circumstances a money market could be used instead. Conditions for different forms of lending are discussed. This is a survey of three technical papers, where the mathematical models are developed in detail and the proofs are supplied. Length: 33 pages Creation-Date: 199708 Number: 1156 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11b/d1156.pdf File-Format: application/pdf File-Size: 274 kb Handle: RePEc:cwl:cwldpp:1156 Template-type: ReDIF-Paper 1.0 Author-Name: John C. Chao Author-X-Name-First: John C. Author-X-Name-Last: Chao Author-Workplace-Name: University of Maryland 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: Model Selection in Partially Nonstationary Vector Autoregressive Processes with Reduced Rank Structure Abstract: The current practice for determining the number of cointegrating vectors, or the cointegrating rank, in a vector autoregression (VAR) requires the investigator to perform a sequence of cointegration tests. However, as was shown in Johansen (1992), this type of sequential procedure does not lead to consistent estimation of the cointegrating rank. Moreover, these methods take as given the correct specification of the lag order of the VAR, though in actual applications the true lag length is rarely known, Simulation studies by Toda and Phillips (1994) and Chao (1993), on the other hand, have shown that test performance of these procedures can be adversely affected by lag misspecification. This paper addresses these issues by extending the analysis of Phillips and Ploberger (1996) on the Posterior Information Criterion (PIC) to a partially nonstationary vector autoregressive process with reduced rank structure. This extension allows lag length and cointegrating rank to be jointly selected by the criterion, and it leads to the consistent estimation of both. In addition, we also evaluate the finite sample performance of PIC relative to existing model selection procedures, BIC and AIC, through a Monte Carlo study. Results here show PIC to perform at least as well and sometimes better than the other two methods in all the cases examined. Classification-JEL: C32 Keywords: Cointegrating rank, information criterion, order selection, PIC, reduced rank regression, vector autoregression Note: CFP 992. Length: 47 pages Creation-Date: 199707 Number: 1155 Publication-Status: Published in Journal of Econometrics, 91, 1999 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11b/d1155.pdf File-Format: application/pdf File-Size: 1812 kb Handle: RePEc:cwl:cwldpp:1155 Template-type: ReDIF-Paper 1.0 Author-Name: Stefano G. Athanasoulis Author-X-Name-First: Stefano G. Author-X-Name-Last: Athanasoulis Author-Workplace-Name: Dept. of Economics, Yale University Author-Workplace-Homepage: http://www.econ.yale.edu/ 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 Significance of the Market Portfolio Abstract: The market portfolio (world portfolio) is in one sense a least important portfolio to provide to investors; there is always a better portfolio for social planners to make available to them. In a J-agent one-period stochastic endowment economy, where preferences are quadratic, the market portfolio is never spanned by the optimal markets a social planner would create. With identical preferences, the market portfolio is orthogonal to all J - 1 portfolios which achieve a first best solution. These conclusions rely on the assumption that the social planner has perfect information about agents' utilities. We also show that as the contract designer's information about agents' utilities becomes more imperfect, the optimal contracts approach contracts that weight individual endowments in proportion to elements of eigenvectors of the variance matrix of endowments. If there is a substantial market component to endowments than a social planner, for reasons of robustness and simplicity, may conclude that creating a contract to allow trading the market portfolio would be a significant innovation. Note: CFP 997. Length: 32 pages Creation-Date: 199706 Number: 1154 Publication-Status: Published in The Review of Financial Studies (Summer 2000), 13(2): 301-329 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11b/d1154.pdf File-Format: application/pdf File-Size: 253 kb Handle: RePEc:cwl:cwldpp:1154 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: Estimation When a Parameter Is on a Boundary: Theory and Applications Abstract: This paper establishes the asymptotic distribution of extremum estimators when the true parameter lies on the boundary of the parameter space. The boundary may be linear, curved, and/or kinked. The asymptotic distribution is a function of a multivariate normal distribution in models without stochastic trends and a function of a multivariate Brownian motion in models with stochastic trends. The results apply to a wide variety of estimators and models. Examples treated explicitly in the paper are: (1) quasi-ML estimation of a random coefficients regression model with some coefficient variances equal to zero, (2) LS estimation of a regression model with nonlinear equality and/or inequality restrictions on the parameters and iid regressors, (3) LS estimation of an augmented Dickey-Fuller regression with unit root and time trend parameters on the boundary of the parameter space, (4) method of simulated moments estimation of a multinomial discrete response model with some random coefficient variances equal to zero, some random effect variances equal to zero, or some measurement error variances equal to zero, (5) quasi-ML estimation of a GARCH(1,q*) or IGARCH(1,q*) model with some GARCH MA parameters equal to zero, (6) semiparametric LS estimation of a partially linear regression model with nonlinear equality and/or inequality restrictions on the parameters, and (7) LS estimation of a regression model with nonlinear equality and/or inequality restrictions on the parameters and integrated regressors. Classification-JEL: C13 Keywords: Asymptotic distribution, boundary, equality restrictions, extremum estimator, GARCH(1,q*) model, generalized method of moments estimator, inequality restrictions, integrated regressors, least squares estimator, maximum likelihood estimator, locally asymptotically mixed normal, locally asymptotically normal, method of simulated moments estimator, nonlinear equality and inequality restrictions, parameter restrictions, partially linear model, random coefficients regression, quasi-maximum likelihood estimator, restricted estimator, semiparametric estimator, stochastic trends, unit root model Note: CFP 988. Length: 92 pages Creation-Date: 199706 Number: 1153 Publication-Status: Published in Econometrica (November 1999), 67(6): 1341-1383 File-URL: http://cowles.econ.yale.edu/P/cp/p09b/p0988.pdf File-Format: application/pdf File-Size: 1186 kb Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11b/d1153.pdf File-Format: application/pdf File-Size: 734 kb Handle: RePEc:cwl:cwldpp:1153 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: Beyond the CPI: An Augmented Cost of Living Index (ACOLI) Abstract: This note examines the question of calculating an augmented cost of living index (ACOLI). The ACOLI is the appropriate deflator to apply to pretax market incomes when calculating economic well-being. Well-being includes, not only conventional consumer purchases, but also goods and services provided by employers, by mandated social regulations, and by tax-financed public goods. Because such augmented consumption is often provided in ways that raise prices but not market incomes, deflating with conventional price indexes may understate real income growth. An application of the ACOLI approach to the United States during the 1960-1994 period indicates that the conventional consumer price index has grown about 15 percent faster than the ACOLI. This correction would reduce the augmented cost of living by 0.40 percent per year over the last 35 years. Length: 15 pages Creation-Date: 199705 Number: 1152 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11b/d1152.pdf File-Format: application/pdf File-Size: 712 kb Handle: RePEc:cwl:cwldpp:1152 Template-type: ReDIF-Paper 1.0 Author-Name: Oliver Linton Author-X-Name-First: Oliver Author-X-Name-Last: Linton Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Second-Order Approximation for Semiparametric Instrumental Variable Estimators and Test Statistics Abstract: We construct second-order asymptotic expansions to the first four cumulants of a kernel-based version of the nonlinear semiparametric instrumental variable estimator considered in Newey (1990) as well as a Wald statistic derived from it. The expansions are valid to order n^{-2 epsilon}, in distribution for some 0 < epsilon < 1/2, where depends on the smoothness and dimensionality of the data distribution. We use the expansions to define optimal bandwidth selection methods for both estimation and testing problems and apply our methods to simulated data. Keywords: Bandwidth choice, instrumental variable, kernel estimation, second order, semiparametric Length: 34 pages Creation-Date: 199705 Number: 1151 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11b/d1151.pdf File-Format: application/pdf File-Size: 240 kb Handle: RePEc:cwl:cwldpp:1151 Template-type: ReDIF-Paper 1.0 Author-Name: James Tobin Author-X-Name-First: James Author-X-Name-Last: Tobin Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Supply Constraints on Employment and Output: NAIRU Versus Natural Rate Abstract: NAIRU and NATURAL RATE are not synonymous. NAIRU is a macro outcome of an economy with many labor markets in diverse states of excess demand and excess supply. NAIRU represents an overall balance between the inflation-increasing pressures from excess-demand markets and the inflation-decreasing pressures from excess-supply markets. The natural rate, as described by Friedman, is a feature of Walrasian market-clearing general equilibrium. While the NAIRU fits into a Keynesian model, the natural rate is an aspect of a New Classical model. The determinants of the two are theoretically different, and so are their implications for policy. The NAIRU varies from time to time as the relationships between unemployment, vacancies, and wage changes vary, and as the dispersion of excess demands and supplies across markets changes. In this decade, these developments appear to be reducing the NAIRU, in contrast to the unfavorable circumstances of the 1970s. Length: 25 pages Creation-Date: 199704 Number: 1150 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11b/d1150.pdf File-Format: application/pdf File-Size: 957 kb Handle: RePEc:cwl:cwldpp:1150 Template-type: ReDIF-Paper 1.0 Author-Name: James Tobin Author-X-Name-First: James Author-X-Name-Last: Tobin Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Can We Grow Faster? Abstract: It is essential to distinguish between limits on national output and limits on its rate of growth. In the short run if output is below potential, demand stimulus can temporarily increase output and employment, with growth rates that cannot be sustained once the economy reaches full employment, potential output. This barrier is commonly called the NAIRU. The paper discusses the possibility that the economy can reach lower unemployment rates than previously thought, without increasing inflation. As to raising the sustainable rate of growth of potential output, the paper discusses skeptically various proposals: fiscal austerity, tax cuts, downsizing government. Many proposals can at best raise the level of output, not its sustainable growth; many can do neither; some are perverse. Government policies to raise national saving, private and public investment in tangible and human capital, science and technology are the best hopes, but the payoffs are likely to be slow. Length: 25 pages Creation-Date: 199704 Number: 1149 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11a/d1149.pdf File-Format: application/pdf File-Size: 923 kb Handle: RePEc:cwl:cwldpp:1149 Template-type: ReDIF-Paper 1.0 Author-Name: Yanqin Fan Author-X-Name-First: Yanqin Author-X-Name-Last: Fan Author-Workplace-Name: University of Windsor Author-Name: Oliver Linton Author-X-Name-First: Oliver Author-X-Name-Last: Linton Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Some Higher Order Theory for a Consistent Nonparametric Model Specification Test Abstract: We provide second order theory for a smoothing-based model specification test. We derive the asymptotic cumulants and justify an Edgeworth distributional approximation valid to order close to n^{-1}. This is used to define size-corrected critical values whose null rejection frequency improves on the normal critical values. Our simulations confirm the efficacy of this method in moderate sized samples. Keywords: Consistent test, Edgeworth expansion, kernel estimation, nonlinear regression Length: 39 pages Creation-Date: 199702 Number: 1148 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11a/d1148.pdf File-Format: application/pdf File-Size: 294 kb Handle: RePEc:cwl:cwldpp:1148 Template-type: ReDIF-Paper 1.0 Author-Name: A. De Waegenaere Author-X-Name-First: A. Author-X-Name-Last: De Waegenaere Author-Workplace-Name: Tilburg University Author-Name: Heracles M. Polemarchakis Author-X-Name-First: Heracles M. Author-X-Name-Last: Polemarchakis Author-Workplace-Name: CORE, Universite Catholique de Louvain Author-Name: L. Ventura Author-X-Name-First: L. Author-X-Name-Last: Ventura Author-Workplace-Name: Universita G. D'Annunzio Title: Asset Markets and Investment Decisions Abstract: In an incomplete asset market, firms assign values to investment plans by projecting their payoffs on the span of the payoffs of marketed assets; equivalently, firms employ the Capital Asset Pricing Model. This is a criterion that does not require firms to possess information, such as the marginal valuation of revenue across date -- events by shareholders, which is not observable; rather, it is based on information revealed by the prices and payoffs of marketed assets. Under standard assumptions, competitive equilibria exist. But, competitive equilibrium allocations need not satisfy a condition of constrained Pareto optimality that recognizes the incompleteness of the asset market; and, even in the absence of nominal assets, competitive equilibrium allocations are generically indeterminate -- they are determinate if firm consider the commodity payoffs of shares. Classification-JEL: D46, D50, D52 Keywords: Assets, profit, investment Length: 25 pages Creation-Date: 199702 Number: 1147 Publication-Status: Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11a/d1147.pdf File-Format: application/pdf File-Size: 1070 kb Handle: RePEc:cwl:cwldpp:1147 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: Consistent Moment Selection Procedures for Generalized Method of Moments Estimation Abstract: This paper considers a generalized method of moments (GMM) estimation problem in which one has a vector of moment conditions, some of which are correct and some incorrect. The paper introduces several procedures for consistently selecting the correct moment conditions. The procedures also can consistently determine whether there is a sufficient number of correct moment conditions to identify the unknown parameters of interest. The paper specifies moment selection criteria that are GMM analogues of the widely used BIC and AIC model selection criteria. (The latter is not consistent.) The paper also considers downward and upward testing procedures. All of the moment selection procedures discussed in the paper are based on the minimized values of the GMM criterion function for different vectors of moment conditions. The procedures are applicable in time series and cross-sectional contexts. Application of the results of the paper to instrumental variables estimation problems yields consistent procedures for selecting instrumental variables. Classification-JEL: C12, C13, C52 Keywords: Akaike information criterion, Bayesian information criterion, consistent selectionprocedure, downward testing procedure, generalized method of moments estimator,instrumental variables estimator, model selection, moment selection, test of over-identifyingrestrictions, upward testing procedure Note: CFP 979. Length: 23 pages Creation-Date: 199711 Number: 1146R Publication-Status: Published in Econometrica (May 1999), 67(3): 543-564 File-URL: http://cowles.econ.yale.edu/P/cp/p09b/p0979.pdf File-Format: application/pdf File-Size: 690 kb Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11a/d1146-r.pdf File-Format: application/pdf File-Size: 342 kb Handle: RePEc:cwl:cwldpp:1146R 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: Expanding the Scope of Individual Risk Management: Moral Hazard and Other Behavioral Considerations Abstract: There is a large potential for improving individual risk management through new risk management contracts and associated new index-settled derivatives. However, there are some difficult problems in designing contracts so that they will be used effectively. Individuals have idiosyncratic individual risks that can be hedged only at some real resource cost due to moral hazard. Individuals seem to exhibit behavior indicative of lack of appreciation of the principles of risk management. These problems are discussed, and some potential new risk management contracts that would make improvements in the management of major income risks are proposed. Length: 17 pages Creation-Date: 199701 Number: 1145 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11a/d1145.pdf File-Format: application/pdf File-Size: 65 kb Handle: RePEc:cwl:cwldpp:1145 Template-type: ReDIF-Paper 1.0 Author-Name: Ariel Pakes Author-X-Name-First: Ariel Author-X-Name-Last: Pakes Author-Workplace-Name: Economic Growth Center, Yale University Author-Workplace-Homepage: http://aida.econ.yale.edu/~egcenter/ Author-Name: Paul McGuire Author-X-Name-First: Paul Author-X-Name-Last: McGuire Author-Email: paul.mcguire@yale.edu Author-Workplace-Name: Economic Growth Center, Yale University Author-Workplace-Homepage: http://aida.econ.yale.edu/~egcenter/ Title: Stochastic Algorithms for Dynamic Models: Markov Perfect Equilibrium, and the 'Curse' of Dimensionality Abstract: This paper provides an algorithm for computing policies for dynamic economic models whose state vectors evolve as ergodic Markov processes. The algorithm can be described as a simple learning process (one that agents might actually use). It has two features which break the relationship between its computational requirements and the dimension of the model's state space. First the integral over future states needed to determine policies is never calculated; rather it is estimated by a simple average of past outcomes. Second, the algorithm never computes policies at all points. Iterations are defined by a location and only policies at that location are computed. Random draws from the distribution determined by those policies determine the next location. This selection only repeatedly hits the recurrent class of points, a subset of the feasible set whose cardinality is not directly tied to the dimension of the state space. Our motivating example is Markov Perfect Equilibria (a leading model of industry dynamics; see Maskin and Tirole, 1988). Though estimators for the primitive parameters of these models are often available, computational problems have made it difficult to use them in applied analysis. We provide numerical results which show that our algorithm can be several orders of magnitude faster than standard algorithms in this case; opening up new possibilities for applied work. Length: 32 pages Creation-Date: 199701 Number: 1144 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11a/d1144.pdf File-Format: application/pdf File-Size: 392 kb Handle: RePEc:cwl:cwldpp:1144 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: Promises Promises Abstract: In the classical general equilibrium model, agents keep all their promises, every good is traded, and competition prevents any agent from earning superior returns on investments in financial markets. In this paper I introduce the age-old problem of broken promises into the general equilibrium model, and I find that a new market dynamic emerges. Given the legal system and institutions, market forces of supply and demand will establish the collateral levels which are required to secure promises. Since physical collateral will typically be scarce, these collateral levels will be set so low that there is bound to be some default. Many kinds of promises will not be traded, because that also economizes on collateral. Scarce collateral thus creates a mechanism for determining endogenously which assets will be traded, thereby helping to resolve a long standing puzzle in general equilibrium theory. Finally, I shall show that under suitable conditions, in rational expectations equilibrium, some investors will be able to earn higher than normal returns on their investments. The legal system, in conjunction with the market, will be under constant pressure to expand the potential sources of collateral. This will lead to market innovation. I illustrate the theoretical points in this paper with some of my experiences on Wall Street as director of fixed income research at the firm of Kidder Peabody. Note: CFP 1057. Length: 32 pages Creation-Date: 199612 Number: 1143 Publication-Status: Published in W.B. Arthur, S.N. Durlauf and D.A. Lane, eds., The Economy as an Evolving Complex System II, Addison-Wesley, 1997, pp. 285-320 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11a/d1143.pdf File-Format: application/pdf File-Size: 378 kb Handle: RePEc:cwl:cwldpp:1143 Template-type: ReDIF-Paper 1.0 Author-Name: Jeremy I. Bulow Author-X-Name-First: Jeremy I. Author-X-Name-Last: Bulow Author-Workplace-Name: Yale University & Stanford Business School Author-Name: Paul Klemperer Author-X-Name-First: Paul Author-X-Name-Last: Klemperer Author-Workplace-Name: Nuffield College, Oxford University Title: The Generalized War of Attrition Abstract: We generalize the War of Attrition model to allow for N + K firms competing for N prizes. Two special cases are of particular interest. First, if firms continue to pay their full costs after dropping out (as in a standard-setting context), each firm's exit time is independent both of K and of the actions of other players. Second, in the limit in which firms pay no costs after dropping out (as in a natural-oligopoly problem), the field is immediately reduced to N + 1 firms. Furthermore, we have perfect sorting, so it is always the K - 1 lowest-value players who drop out in zero time, even though each player's value is private information to the player. We apply our model to politics, explaining the length of time it takes to collect a winning coalition to pass a bill. Classification-JEL: D43, D44, L13, O30 Keywords: War of attrition, auctions, standards, natural monopoly, oligopoly, "twoness," strategic independence," political decision making Length: 24 pages Creation-Date: 199612 Number: 1142 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11a/d1142.pdf File-Format: application/pdf File-Size: 1096 kb Handle: RePEc:cwl:cwldpp:1142 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: Moshe Buchinsky Author-X-Name-First: Moshe Author-X-Name-Last: Buchinksy Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Workplace-Name: Department of Economics, Brown University Title: On the Number of Bootstrap Repetitions for Bootstrap Standard Errors, Confidence Intervals, and Tests Abstract: This paper considers the problem of choosing the number of bootstrap repetitions B for bootstrap standard errors, confidence intervals, and tests. For each of these problems, the paper provides a three-step method for choosing B to achieve a desired level of accuracy. Accuracy is measured by the percentage deviation of the bootstrap standard error estimate, confidence interval endpoint(s), test's critical value, or test's p-value based on B bootstrap simulations from the corresponding ideal bootstrap quantities for which B = infinity. Monte Carlo simulations show that the proposed methods work quite well. The results apply quite generally to parametric, semiparametric, and nonparametric models with independent and dependent data. The results apply to the standard nonparametric iid bootstrap, moving block bootstraps for time series data, parametric and semiparametric bootstraps, and bootstraps for regression models based on bootstrapping residuals. Classification-JEL: C12, C13, C14, C15 Keywords: Bootstrap, bootstrap repetitions, coefficient of excess kurtosis, confidence interval, density estimation, hypothesis test, p-value, quantile, simulation, standard error estimate Note: CFP 1069. Length: 52 pages Creation-Date: 199708 Number: 1141R Publication-Status: Published in Econometric Theory (2002), 18: 962-984 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11a/d1141-r.pdf File-Format: application/pdf File-Size: 2762 kb Handle: RePEc:cwl:cwldpp:1141R Template-type: ReDIF-Paper 1.0 Author-Name: Oliver Linton Author-X-Name-First: Oliver Author-X-Name-Last: Linton Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Author-Name: Pedro Gozalo Author-X-Name-First: Pedro Author-X-Name-Last: Gozalo Author-Workplace-Name: Brown University Title: Conditional Independence Restrictions: Testing and Estimation Abstract: We propose a nonparametric empirical distribution function based test of an hypothesis of conditional independence between variables of interest. This hypothesis is of interest both for model specification purposes, parametric and semiparametric, and for non-model based testing of economic hypotheses. We allow for both discrete variables and estimated parameters. The asymptotic null distribution of the test statistic is a functional of a Gaussian process. A bootstrap procedure is proposed for calculating the critical values. Our test has power against alternatives at distance n^{-1/2} from the null; this result holding independently of dimension. Monte Carlo simulations provide evidence on size and power. Finally, we invert the test statistic to provide a method for estimating the parameters identified through the conditional independence restriction. They are asymptotically normal at rate root-n. Classification-JEL: C12, C14, C15, C52 Keywords: Conditional independence, empirical distribution, independence, nonparametric, smooth bootstrap, test Length: 47 pages Creation-Date: 199611 Number: 1140 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11a/d1140.pdf File-Format: application/pdf File-Size: 342 kb Handle: RePEc:cwl:cwldpp:1140 Template-type: ReDIF-Paper 1.0 Author-Name: M. Ali Khan Author-X-Name-First: M. Ali Author-X-Name-Last: Khan Author-Workplace-Name: Johns Hopkins University Author-Name: Yeneng Sun Author-X-Name-First: Yeneng Author-X-Name-Last: Sun Author-Workplace-Name: Cowles Foundation & Nat. University of Singapore Title: Hyperfinite Asset Pricing Theory Abstract: We present a model of a financial market which unifies the capital-asset-pricing model (CAPM) of Sharpe-Lintner, and the arbitrage pricing theory (APT) of Ross. The model is based on a recent theory of hyperfinite processes, and it uncovers asset pricing phenomena which cannot be treated by classical methods, and whose asymptotic counterparts are not already, or even readily, apparent in the setting of a large but finite number of assets. In the model, an asset's unexpected return can be decomposed into a systematic and an unsystematic part, as in the APT, and the systematic part further decomposed leads to a pricing formula expressed in terms of a beta that is based on a specific index portfolio identifying essential risk, and constructed from factors and factor loadings that are endogenously extracted from the process of asset returns. Furthermore, the valuation formulas of the two individual theories imply, and are implied by, the pervasive economic principle of no arbitrage. Explicit formulas for the characterization, as well as conditions for the existence, of important portfolios are furnished. The hyperfinite factor model possesses an optimality property which justifies the use of a relatively small number of factors to describe the relevant correlational structures. The asymptotic implementability of the idealized limit model is illustrated by an interpretation of selected results for the large but finite setting. Length: 60 pages Creation-Date: 199611 Number: 1139 Publication-Status: Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11a/d1139.pdf File-Format: application/pdf File-Size: 3019 kb Handle: RePEc:cwl:cwldpp:1139 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: Northwestern Univ. and Univ. Southampton Title: Market Diffusion with Two-Sided Learning Abstract: The diffusion of a new product of uncertain value is analyzed in a duopolistic market in continuous time. The two sides of the market, buyers and sellers, learn the true value of the new product over time as a result of experimentation. Buyers have heterogeneous preferences over the products and sellers compete in prices. The pricing policies and market shares of the sellers in the unique Markov perfect equilibrium are obtained explicitly. The dynamics of the equilibrium market shares display excessive sales of the new product relative to the social optimum in early stages and too low sales later on. The dynamic resolution of uncertainty implies ex post differentiation and hence both sellers value information positively. As information is generated only by experiments with the new product, this relaxes the price competition in the dynamic setting. Finally, the diffusion path of a successful product is shown to be S-shaped. Classification-JEL: C73, D43, D83 Keywords: Dynamic duopoly, learning, market shares, diffusion Length: 43 pages Creation-Date: 199611 Number: 1138 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11a/d1138.pdf File-Format: application/pdf File-Size: 1529 kb Handle: RePEc:cwl:cwldpp:1138 Template-type: ReDIF-Paper 1.0 Author-Name: John C. Chao Author-X-Name-First: John C. Author-X-Name-Last: Chao Author-Workplace-Name: University of Maryland 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: Bayesian Posterior Distributions in Limited Information Analysis of the Simultaneous Equations Model Using the Jeffreys Prior Abstract: This paper studies the use of the Jeffreys' prior in Bayesian analysis of the simultaneous equations model (SEM). Exact representations are obtained for the posterior density of the structural coefficient beta in canonical SEM's with two endogenous variables. For the general case with m endogenous variables and an unknown covariance matrix, the Laplace approximation is used to derive an analytic formula for the same posterior density. Both the exact and the approximate formulas we derive are found to exhibit Cauchy-like tails analogous to comparable results in the classical literature on LIML estimation. Moreover, in the special case of a two-equation, just-identified SEM in canonical form, the posterior density of beta is shown to have the same infinite series representation as the density of the finite sample distribution of the corresponding LIML estimator. This paper also examines the occurrence of a nonintegrable asymptotic cusp in the posterior distribution of the reduced form parameter Phi, first documented in Kleibergen and van Dijk (1994). This phenomenon is explained in terms of the jacobian of the mapping from the structural model to the reduced form. This interpretation assists in understanding the success of the Jeffreys' prior in resolving this problem. Note: CFP 970. Length: 36 pages Creation-Date: 199611 Number: 1137 Publication-Status: Published in Journal of Econometrics (1998), 87(1): 49-86 File-URL: http://cowles.econ.yale.edu/P/cp/p09b/p0970.pdf File-Format: application/pdf File-Size: 223 kb Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11a/d1137.pdf File-Format: application/pdf File-Size: 1485 kb Handle: RePEc:cwl:cwldpp:1137 Template-type: ReDIF-Paper 1.0 Author-Name: Heracles M. Polemarchakis Author-X-Name-First: Heracles M. Author-X-Name-Last: Polemarchakis Author-Workplace-Name: CORE, Universite Catholique de Louvain Author-Name: P. Siconolfi Author-X-Name-First: P. Author-X-Name-Last: Siconolfi Author-Workplace-Name: Columbia University Title: Prices, Asset Markets and Indeterminacy Abstract: Competitive equilibrium allocations are indeterminate when the net trades in commodities are constrained, while the asset market is incomplete. Classification-JEL: D50, D52 Keywords: Incomplete asset market, trading constraints, indeterminacy Note: CFP 970. Length: 18 pages Creation-Date: 199611 Number: 1136 File-URL: http://cowles.econ.yale.edu/P/cd/d11a/d1136.pdf File-Format: application/pdf File-Size: 654 kb Handle: RePEc:cwl:cwldpp:1136 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: Spurious Regression Unmasked Abstract: This paper argues that trending time series can admit valid regression representations even when the dependent variable and the regressors are statistically independent, i.e., in situations that are presently characterized in the literature as "spurious regressions." Our theory is directed mainly at the two classic examples of regressions of stochastic trends on time polynomials and regressions among independent random walks. But it has more general applicability and, we think, wider implications. Contrary to established wisdom, our theory justifies regressions of this type as valid models for the data. The radical conclusion that emerges from this study is that there are no spurious regressions for trending time series, just alternative valid representations of the limiting dependent variable process in terms of other stochastic processes and deterministic functions of time. We find statistical inference in such cases to be valid, not spurious, a conclusion that is in direct contrast to universal thinking about this subject since Yule (1926) first wrote about nonsense correlations. Length: 38 pages Creation-Date: 199610 Number: 1135 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11a/d1135.pdf File-Format: application/pdf File-Size: 1557 kb Handle: RePEc:cwl:cwldpp:1135 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: Chin Chin Lee Author-X-Name-First: Chin Chin Author-X-Name-Last: Lee Author-Workplace-Name: London School of Economics Title: Efficiency Gains from Quasi-Differencing Under Nonstationarity Abstract: A famous theorem on trend removal by OLS regression (usually attributed to Grenander and Rosenblatt, 1957) gave conditions for the asymptotic equivalence of GLS and OLS in deterministic trend extraction. When a time series has trend components that are stochastically nonstationary, this asymptotic equivalence no longer holds. We consider models with integrated and near-integrated error processes where this asymptotic equivalence breaks down. In such models, the advantages of GLS can be achieved through quasi-differencing and we give an asymptotic theory of the relative gains that occur in deterministic trend extraction in such cases. Some differences between models with and without intercepts are explored. Note: CFP 936. Length: 14 pages Creation-Date: 199609 Number: 1134 Publication-Status: Published in P.M. Robinson and M. Rosenblatt, eds., Athens Conference on Applied Probability and Time Series, Vol. II, 1996, pp. 300-314 File-URL: http://cowles.econ.yale.edu/P/cp/p09a/p0936.pdf File-Format: application/pdf File-Size: 467 kb Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11a/d1134.pdf File-Format: application/pdf File-Size: 160 kb Handle: RePEc:cwl:cwldpp:1134 Template-type: ReDIF-Paper 1.0 Author-Name: S. Ghosal Author-X-Name-First: S. Author-X-Name-Last: Ghosal Author-Workplace-Name: University of London Author-Name: Heracles M. Polemarchakis Author-X-Name-First: Heracles M. Author-X-Name-Last: Polemarchakis Author-Workplace-Name: CORE, Universite Catholique de Louvain Title: Exchange and Optimality Abstract: A feasible social state is irreducible if and only if, for any non-trivial partition of individuals with two groups, there exists another feasible social state at which every individual in the first group is equally well-off and someone strictly better-off. Competitive equilibria decentralize irreducible Pareto optimal social states. Classification-JEL: C70, C72, D60, D62 Keywords: Social states, optimality, exchange Note: Length: 18 pages Creation-Date: 199609 Number: 1133 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11a/d1133.pdf File-Format: application/pdf File-Size: 677 kb Handle: RePEc:cwl:cwldpp:1133 Template-type: ReDIF-Paper 1.0 Author-Name: P. Bak Author-X-Name-First: P. Author-X-Name-Last: Bak Author-Workplace-Name: Brookhaven National Laboratory Author-Name: M. Paczuski Author-X-Name-First: M. Author-X-Name-Last: Paczuski Author-Workplace-Name: Brookhaven National Laboratory 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: Price Variations in a Stock Market with Many Agents Abstract: Large variations in stock prices happen with sufficient frequency to raise doubts about existing models, which all fail to account for non-Gaussian statistics. We construct simple models of a stock market, and argue that the large variations may be due to a crowd effect, where agents imitate each other's behavior. The variations over different time scales can be related to each other in a systematic way, similar to the Levy stable distribution proposed by Mandelbrot to describe real market indices. In the simplest, least realistic case, exact results for the statistics of the variations are derived by mapping onto a model of diffusing and annihilating particles, which has been solved by quantum field theory methods. When the agents imitate each other and respond to recent market volatility, different scaling behavior is obtained. In this case the statistics of price variations is consistent with empirical observations. The interplay between "rational" traders whose behavior is derived from fundamental analysis of the stock, including dividends, and "noise traders," whose behavior is governed solely by studying the market dynamics, is investigated. When the relative number of rational traders is small, "bubbles" often occur, where the market price moves outside the range justified by fundamental market analysis. When the number of rational traders is large, the market price is generally locked within the price range they define. Length: 43 pages Creation-Date: 199609 Number: 1132 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11a/d1132.pdf File-Format: application/pdf File-Size: 2707 kb Handle: RePEc:cwl:cwldpp:1132 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 Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: Nash and Walras Equilibrium Abstract: The existence of Nash and Walras equilibrium is proved via Brouwer's Fixed Point Theorem, without recourse to Kakutani's Fixed Point Theorem for correspondences. The domain of the Walras fixed point map is confined to the price simplex, even when there is production and weakly quasi-convex preferences. The key idea is to replace optimization with "satisficing improvement," i.e., to replace the Maximum Principle with the "Satisficing Principle." Classification-JEL: C6, C62 Keywords: Equilibrium, Nash, Walras, Brouwer, Kakutani Note: CFP 1058 Length: 20 pages Creation-Date: 199610 Revision-Date: 200202 Number: 1131R3 Publication-Status: Published in Economic Theory (2003), 21(2/3): 585-603 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11a/d1131-r3.pdf File-Format: application/pdf File-Size: 246 kb Handle: RePEc:cwl:cwldpp:1131R3 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: Ewha University & Yale University Author-Name: Oliver Linton Author-X-Name-First: Oliver Author-X-Name-Last: Linton Author-Workplace-Name: Cowles Foundation, Yale University Author-Workplace-Homepage: http://cowles.econ.yale.edu/ Title: The Asymptotic Distribution of Nonparametric Estimates of the Lyapunov Exponent for Stochastic Time Series Abstract: This paper derives the asymptotic distribution of a smoothing-based estimator of the Lyapunov exponent for a stochastic time series under two general scenarios. In the first case, we are able to establish root-T consistency and asymptotic normality, while in the second case, which is more relevant for chaotic processes, we are only able to establish asymptotic normality at a slower rate of convergence. We provide consistent confidence intervals for both cases. We apply our procedures to simulated data. Classification-JEL: C13, C14, C22 Keywords: Chaos, kernel, nonlinear dynamics, nonparametric regression, semiparametric Length: 47 pages Creation-Date: 199710 Number: 1130R Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11a/d1130-r.pdf File-Format: application/pdf File-Size: 374 kb Handle: RePEc:cwl:cwldpp:1130R 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 Inflation Costs Had European Unemployment Been Reduced in the 1980s by Macro Prices Abstract: This paper uses a multicountry econometric model to estimate what the inflation costs would have been if macropolicies had reduced European unemployment in the 1982:1-1990:4 period. A "non-NAIRU" framework is proposed for thinking about these costs. Length: 30 pages Creation-Date: 199608 Number: 1129 Price: None File-URL: http://cowles.econ.yale.edu/P/cd/d11a/d1129.pdf File-Format: application/pdf File-Size: 148 kb Handle: RePEc:cwl:cwldpp:1129 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 Hangman's Paradox and Newcomb's Paradox as Psychological Games Abstract: We present a (hopefully) fresh interpretation of the Hangman's Paradox and Newcomb's Paradox by casting the puzzles in the language of modern game theory, instead of in the realm of epistemology. Game theory moves the analysis away from the formal logic of the puzzles toward more practical problems, such as: On what day would the executioner hang the prisoner if he wanted to surprise him as much as possible? How should a surprise test be administered? We argue that both the Hangman's Paradox and Newcomb's Paradox are analogous to a well-known phenomenon in game theory, that giving a player an additional attractive (even dominant) strategy may make him worse off. In the Hangman's Paradox, the executioner is determined to surprise the prisoner as much as possible, yet he cannot surprise him at all because he cannot commit in advance to a random schedule. The possibility of chang