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Full-Text Articles in Social and Behavioral Sciences
A Positive Theory Of Income Taxation Where Politicians Focus Upon Swing And Core Voters, John E. Roemer
A Positive Theory Of Income Taxation Where Politicians Focus Upon Swing And Core Voters, John E. Roemer
Cowles Foundation Discussion Papers
We construct an equilibrium model of party competition, in which parties are especially concerned with their core and swing voters, concerns which American political scientists have focused upon in their attempts to understand party behavior in general elections. Parties compete on a large policy space of possible income-tax policies. An element in this infinite-dimensional space is a function which maps pre-fisc income into post-fisc income. The only restrictions are that the function be continuous, and satisfy exogenously specified upper and lower bounds on its derivative, where it is differentiable. Only a fraction of each voter type will vote for each …
Do Local Economic Development Programs Work? Evidence From The Federal Empowerment Zone Program, Matias Busso, Patrick Kline
Do Local Economic Development Programs Work? Evidence From The Federal Empowerment Zone Program, Matias Busso, Patrick Kline
Cowles Foundation Discussion Papers
This paper evaluates the impact of Round I of the federal urban Empowerment Zone (EZ) program on neighborhood level labor and housing market outcomes over the period 1994-2000. Using four decades of Census data in conjunction with information on the proposed boundaries of rejected EZs, we find that neighborhoods receiving EZ designation experienced substantial improvements in labor market conditions and moderate increases in rents relative to rejected and future zones. These effects were accompanied by small changes in the demographic composition of the neighborhoods, though evidence from disaggregate Census tabulations suggests that these changes account for little of the observed …
Communication And Learning, Luca Anderlini, Dino Gerardi, Roger Lagunoff
Communication And Learning, Luca Anderlini, Dino Gerardi, Roger Lagunoff
Cowles Foundation Discussion Papers
We study the intergenerational accumulation of knowledge in an infinite-horizon model of communication. Each in a sequence of players receives an informative but imperfect signal of the once-and-for-all realization of an unobserved state. The state affects all players’ preferences over present and future decisions. Each player observes his own signal but does not directly observe the realized signals or actions of his predecessors. Instead, he must rely on cheap-talk messages from the previous players to fathom the past. Each player is therefore both a receiver of information with respect to his decision, and a sender with respect to all future …
Efficient Estimation Of Semiparametric Conditional Moment Models With Possibly Nonsmooth Residuals, Xiaohong Chen, Demian Pouzo
Efficient Estimation Of Semiparametric Conditional Moment Models With Possibly Nonsmooth Residuals, Xiaohong Chen, Demian Pouzo
Cowles Foundation Discussion Papers
This paper considers semiparametric efficient estimation of conditional moment models with possibly nonsmooth residuals in unknown parametric components ( theta ) and unknown functions ( h ) of endogenous variables. We show that: (1) the penalized sieve minimum distance (PSMD) estimator ( theta\hat,h\hat ) can simultaneously achieve root- n asymptotic normality of theta\hat and nonparametric optimal convergence rate of h\hat , allowing for noncompact function parameter spaces; (2) a simple weighted bootstrap procedure consistently estimates the limiting distribution of the PSMD theta\hat ; (3) the semiparametric efficiency bound formula of Ai and Chen (2003) remains valid for conditional models with …
Efficient Estimation Of Semiparametric Conditional Moment Models With Possibly Nonsmooth Residuals, Xiaohong Chen, Demian Pouzo
Efficient Estimation Of Semiparametric Conditional Moment Models With Possibly Nonsmooth Residuals, Xiaohong Chen, Demian Pouzo
Cowles Foundation Discussion Papers
For semi/nonparametric conditional moment models containing unknown parametric components (theta) and unknown functions of endogenous variables (h), Newey and Powell (2003) and Ai and Chen (2003) propose sieve minimum distance (SMD) estimation of (theta, h) and derive the large sample properties. This paper greatly extends their results by establishing the followings: (1) The penalized SMD (PSMD) estimator (hat{theta}, hat{h}) can simultaneously achieve root- n asymptotic normality of theta hat and nonparametric optimal convergence rate of hat{h}, allowing for models with possibly nonsmooth residuals and/or noncompact infinite dimensional parameter spaces. (2) A simple weighted bootstrap procedure can consistently estimate the limiting …
Optimal Resource Extraction Contracts Under Threat Of Expropriation, Eduardo Engel, Ronald Fischer
Optimal Resource Extraction Contracts Under Threat Of Expropriation, Eduardo Engel, Ronald Fischer
Cowles Foundation Discussion Papers
The government contracts with a foreign firm to extract a natural resource that requires an upfront investment and which faces price uncertainty. In states where profits are high, there is a likelihood of expropriation, which generates a social cost that increases with the expropriated value. In this environment, the planner’s optimal contract avoids states with high probability of expropriation. The contract can be implemented via a competitive auction with reasonable informational requirements. The bidding variable is a cap on the present value of discounted revenues, and the firm with the lowest bid wins the contract. The basic framework is extended …
Estimating Term Structure Equations Using Macroeconomic Variables, Ray C. Fair
Estimating Term Structure Equations Using Macroeconomic Variables, Ray C. Fair
Cowles Foundation Discussion Papers
This paper begins with the expectations theory of the term structure of interest rates with constant term premia and then postulates how expectations of future short term interest rates are formed. Expectations depend in part on predictions from a set of VAR equations and in part on the current and two lagged values of the short term interest rate. The results suggest that there is relevant independent information in both the VAR equations’ predictions and the current and two lagged values of the short rate. The model fits the long term interest rate data well, including the 2004-2006 period, which …
Estimating Exchange Rate Equations Using Estimated Expectations, Ray C. Fair
Estimating Exchange Rate Equations Using Estimated Expectations, Ray C. Fair
Cowles Foundation Discussion Papers
This paper takes a somewhat different approach from the recent literature in estimating exchange rate equations. It assumes uncovered interest rate parity and models how expectations are formed. Agents are assumed to base their expectations of future interest rates and prices, which are needed in the determination of the exchange rate, on predictions from a ten equation VAR model. The overall model is estimated by FIML under model consistent expectations. The model generally does better than the random walk model, and its properties are consistent with observed effects on exchange rates from surprise interest rate and price announcements. Also, the …
Affective Decision Making: A Behavioral Theory Of Choice, Anat Bracha, Donald J. Brown
Affective Decision Making: A Behavioral Theory Of Choice, Anat Bracha, Donald J. Brown
Cowles Foundation Discussion Papers
Affective decision-making is a strategic model of choice under risk and uncertainty where we posit two cognitive processes — the “rational” and the “emotional” process. Observed choice is the result of equilibirum in this intrapersonal game. As an example, we present applications of affective decision-making in insurance markets, where the risk perceptions of consumers are endogenous. We then derive the axiomatic foundation of affective decision making, and show that, although beliefs are endogenous, not every pattern of behavior is possible under affective decision making.
Affective Decision Making: A Behavioral Theory Of Choice, Anat Bracha, Donald J. Brown
Affective Decision Making: A Behavioral Theory Of Choice, Anat Bracha, Donald J. Brown
Cowles Foundation Discussion Papers
Affective decision-making (ADM) is a refutable and predictive theory of individual choice under risk and uncertainty. It generalizes expected utility theory by positing the existence of two cognitive processes — the “rational” and the “emotional” process. Observed choice is the result of their simultaneous interaction. We present a model of affective choice in insurance markets, where risk perceptions are endogenous.
Low Interest Rates And High Asset Prices: An Interpretation In Terms Of Changing Popular Models, Robert J. Shiller
Low Interest Rates And High Asset Prices: An Interpretation In Terms Of Changing Popular Models, Robert J. Shiller
Cowles Foundation Discussion Papers
There has been a widespread perception in the past few years that long-term asset prices are generally high because monetary authorities have effectively kept long-term interest rates, which the market uses to discount cash flows, low. This perception is not accurate. Long-term interest rates have not been especially low. What has changed to produce high asset prices appears instead to be changes in popular economic models that people actually rely on when valuing assets. The public has mostly forgotten the concept of “real interest rate.” Money illusion appears to be an important factor to consider.
Inference For Parameters Defined By Moment Inequalities Using Generalized Moment Selection, Donald W.K. Andrews, Patrik Guggenberger
Inference For Parameters Defined By Moment Inequalities Using Generalized Moment Selection, Donald W.K. Andrews, Patrik Guggenberger
Cowles Foundation Discussion Papers
The topic of this paper is inference in models in which parameters are defined by moment inequalities and/or equalities. The parameters may or may not be identified. This paper introduces a new class of confidence sets and tests based on generalized moment selection (GMS). GMS procedures are shown to have correct asymptotic size in a uniform sense and are shown not to be asymptotically conservative. The power of GMS tests is compared to that of subsampling, m out of n bootstrap, and “plug-in asymptotic” (PA) tests. The latter three procedures are the only general procedures in the literature that have …
Pricing Without Priors, Dirk Bergemann, Karl Schlag
Pricing Without Priors, Dirk Bergemann, Karl Schlag
Cowles Foundation Discussion Papers
We consider the problem of pricing a single object when the seller has only minimal information about the true valuation of the buyer. Specifically, the seller only knows the support of the possible valuations and has no further distributional information. The seller is solving this choice problem under uncertainty by minimizing her regret. The pricing policy hedges against uncertainty by randomizing over a range of prices. The support of the pricing policy is bounded away from zero. Buyers with low valuations cannot generate substantial regret and are priced out of the market. We generalize the pricing policy without priors to …
On Rate Optimality For Ill-Posed Inverse Problems In Econometrics, Xiaohong Chen, Markus Reiss
On Rate Optimality For Ill-Posed Inverse Problems In Econometrics, Xiaohong Chen, Markus Reiss
Cowles Foundation Discussion Papers
In this paper, we clarify the relations between the existing sets of regularity conditions for convergence rates of nonparametric indirect regression (NPIR) and nonparametric instrumental variables (NPIV) regression models. We establish minimax risk lower bounds in mean integrated squared error loss for the NPIR and the NPIV models under two basic regularity conditions that allow for both mildly ill-posed and severely ill-posed cases. We show that both a simple projection estimator for the NPIR model, and a sieve minimum distance estimator for the NPIV model, can achieve the minimax risk lower bounds, and are rate-optimal uniformly over a large class …
Belief Free Incomplete Information Games, Dirk Bergemann, Stephen Morris
Belief Free Incomplete Information Games, Dirk Bergemann, Stephen Morris
Cowles Foundation Discussion Papers
We consider the following belief free solution concepts for games with incomplete information: (i) incomplete information rationalizability, (ii) incomplete information correlated equilibrium and (iii) ex post equilibrium. We present epistemic foundations for these solution concepts and establish relationships between them. The properties of these solution concepts are further developed in supermodular games and potential games.
Collective Reputation, Professional Regulation And Franchising, Robert Evans, Timothy W. Guinnane
Collective Reputation, Professional Regulation And Franchising, Robert Evans, Timothy W. Guinnane
Cowles Foundation Discussion Papers
Collective reputation and its associated free-rider problem have been invoked to justify state licensing of professions and to explain the incidence of franchising. We examine the conditions under which it is possible to create a Pareto-improving collective reputation among groups of heterogeneous producers. If the regulator or franchisor cannot credibly commit to high quality then a common reputation can be created only if the groups are not too different and if marginal cost is declining. High cost groups benefit most from forming a common regime.
The Role Of The Common Prior In Robust Implementation, Dirk Bergemann, Stephen Morris
The Role Of The Common Prior In Robust Implementation, Dirk Bergemann, Stephen Morris
Cowles Foundation Discussion Papers
We consider the role of the common prior for robust implementation in an environment with interdependent values. Specifically, we investigate a model of public good provision which allows for negative and positive informational externalities. In the corresponding direct mechanism, the agents’ reporting strategies are strategic complements with negative informational externalities and strategic substitutes with positive informational externalities. We derive the necessary and sufficient conditions for robust implementation in common prior type spaces and contrast this with our earlier results without the common prior. In the case of strategic complements the necessary and sufficient conditions for robust implementation do not depend …
Understanding Recent Trends In House Prices And Home Ownership, Robert J. Shiller
Understanding Recent Trends In House Prices And Home Ownership, Robert J. Shiller
Cowles Foundation Discussion Papers
This paper looks at a broad array of evidence concerning the recent boom in home prices, and considers what this means for future home prices and the economy. It does not appear possible to explain the boom in terms of fundamentals such as rents or construction costs. A psychological theory, that represents the boom as taking place because of a feedback mechanism or social epidemic that encourages a view of housing as an important investment opportunity, fits the evidence better. Three case studies of past booms are considered for comparison: the US housing boom of 1950, the US farmland boom …
An Economy With Personal Currency: Theory And Experimental Evidence, Martin Angerer, Juergen Huber, Martin Shubik, Shyam Sunder
An Economy With Personal Currency: Theory And Experimental Evidence, Martin Angerer, Juergen Huber, Martin Shubik, Shyam Sunder
Cowles Foundation Discussion Papers
Is personal currency issued by participants sufficient to operate an economy efficiently, with no outside or government money? Sahi and Yao (1989) and Sorin (1996) constructed a strategic market game to prove that this is possible. We conduct an experimental game in which each agent issues her personal IOUs, and a costless efficient clearinghouse adjusts the exchange rates among them so the markets always clear. The results suggest that if the information system and clearing are so good as to preclude moral hazard, any form of information asymmetry, and need for trust, the economy operates efficiently at any price level …
Three Minimal Market Institutions With Human And Algorithmic Agents: Theory And Experimental Evidence, Juergen Huber, Martin Shubik, Shyam Sunder
Three Minimal Market Institutions With Human And Algorithmic Agents: Theory And Experimental Evidence, Juergen Huber, Martin Shubik, Shyam Sunder
Cowles Foundation Discussion Papers
We define and examine the performance of three minimal strategic market games (sell-all, buy-sell, and double auction) in laboratory relative to the predictions of theory. Unlike open or partial equilibrium settings of most other experiments, these closed exchange economies have limited amounts of cash to facilitate transactions and include feedback. General equilibrium theory, since it abstracts away from market mechanisms and has no role for money or credit, makes no predictions about how the paths of convergence to the competitive equilibrium may differ across alternative mechanisms. Introduction of markets and money as carriers of process creates the possibility of motion. …
Three Minimal Market Institutions With Human And Algorithmic Agents: Theory And Experimental Evidence, Juergen Huber, Martin Shubik, Shyam Sunder
Three Minimal Market Institutions With Human And Algorithmic Agents: Theory And Experimental Evidence, Juergen Huber, Martin Shubik, Shyam Sunder
Cowles Foundation Discussion Papers
We define and examine three minimal market games (sell-all, buy-sell, and double auction) in the laboratory relative to the predictions of theory. These closed exchange economies have some cash to facilitate transactions, and include feedback. The experiment reveals that (1) the competitive general equilibrium (CGE) and non-cooperative (NCE) models are reasonable anchors to locate most but not all the observed outcomes of the three market mechanisms; (2) outcomes tend to get closer to CGE predictions as the number of players increases; (3) prices and allocations in double auctions deviate persistently from CGE predictions; (4) the outcome paths across the three …
Reputation Effects And Equilibrium Degeneracy In Continuous-Time Games, Eduardo Faingold, Yuliy Sannikov
Reputation Effects And Equilibrium Degeneracy In Continuous-Time Games, Eduardo Faingold, Yuliy Sannikov
Cowles Foundation Discussion Papers
We study a class of continuous-time reputation games between a large player and a population of small players in which the actions of the large player are imperfectly observable. The large player is either a normal type, who behaves strategically, or a behavioral type, who is committed to playing a certain strategy. We provide a complete characterization of the set of sequential equilibrium payoffs of the large player using an ordinary differential equation. In addition, we identify a sufficient condition for the sequential equilibrium to be unique and Markovian in the small players’ posterior belief. An implication of our characterization …
Probabilistic Sophistication And Stochastic Monotonicity In The Savage Framework, Simon Grant, Hatice Ozsoy, Ben Polak
Probabilistic Sophistication And Stochastic Monotonicity In The Savage Framework, Simon Grant, Hatice Ozsoy, Ben Polak
Cowles Foundation Discussion Papers
Machina and Schmeidler (1992) show that probabilistic sophistication can be obtained in a Savage setting without imposing expected utility by dropping Savage’s axiom P2 (sure-thing principle) and strengthening his axiom P4 (weak comparative probability). Their stronger axiom, however, embodies a degree of separability analogous to P2. In this note, we obtain probabilistic sophistication using Savage’s original axiom P4 and a weaker analog of Savage’s P2.
Alfred Marshall's Cardinal Theory Of Value: The Strong Law Of Demand, Donald J. Brown, Caterina Calsamiglia
Alfred Marshall's Cardinal Theory Of Value: The Strong Law Of Demand, Donald J. Brown, Caterina Calsamiglia
Cowles Foundation Discussion Papers
We show that all the fundamental properties of competitive equilibrium in Marshall’s cardinal theory of value, as presented in Note XXI of the mathematical appendix to his Principles of Economics (1890), derive from the Strong Law of Demand. That is, existence, uniqueness, optimality, and global stability of equilibrium prices with respect to tatonnement price adjustment follow from the cyclical monotonicity of the market demand function in the Marshallian general equilibrium model.
Dynamic Marginal Contribution Mechanism, Dirk Bergemann, Juuso Välimäki
Dynamic Marginal Contribution Mechanism, Dirk Bergemann, Juuso Välimäki
Cowles Foundation Discussion Papers
We consider truthful implementation of the socially efficient allocation in a dynamic private value environment in which agents receive private information over time. We propose a suitable generalization of the Vickrey-Clarke-Groves mechanism, based on the marginal contribution of each agent. In the marginal contribution mechanism, the ex post incentive and ex post participations constraints are satisfied for all agents after all histories. It is the unique mechanism satisfying ex post incentive, ex post participation and efficient exit conditions. We develop the marginal contribution mechanism in detail for a sequential auction of a single object in which each bidders learn over …
United States Courts And The Optimal Deterrence Of International Cartels: A Welfarist Perspective On Empagran, Alan O. Sykes
United States Courts And The Optimal Deterrence Of International Cartels: A Welfarist Perspective On Empagran, Alan O. Sykes
Cowles Foundation Discussion Papers
E. Hoffmann-La Roche Ltd. v. Empagran S.A. concerned a private antitrust suit for damages against a global vitamins cartel. The central issue in the litigation was whether foreign plaintiffs injured by the cartel’s conduct abroad could bring suit in U.S. court, an issue that was ultimately resolved in the negative. We take a welfarist perspective on this issue and inquire whether optimal deterrence requires U.S. courts to take subject matter jurisdiction under U.S. law for claims such as those in Empagran. Our analysis considers, in particular, the arguments of various economist amici in favor of jurisdiction and arguments of the …
Marshall's Theory Of Value And The Strong Law Of Demand, Caterina Calsamiglia
Marshall's Theory Of Value And The Strong Law Of Demand, Caterina Calsamiglia
Cowles Foundation Discussion Papers
We show that all the fundamental properties of competitive equilibrium in Marshall’s theory of value, as presented in Note XXI of the mathematical appendix to his Principles of Economics (1890), derive from the Strong Law of Demand. This is, existence, uniqueness, optimality, global stability of equilibrium prices with respect to tantonnement price adjustment and refutability follow from the cyclical monotonicity of the market demand function in the Marshallian general equilibrium model.
The Basic Public Finance Of Public-Private Partnerships, Eduardo Engel, Ronald Fischer, Alexander Galetovic
The Basic Public Finance Of Public-Private Partnerships, Eduardo Engel, Ronald Fischer, Alexander Galetovic
Cowles Foundation Discussion Papers
Public-private partnerships (PPPs) have been justified because they release public funds or save on distortionary taxes. However, the resources saved by a government that does not finance the upfront investment are offset by giving up future revenue flows to the concessionaire. If a PPP can be justified on efficiency grounds, the PPP contract that optimally balances demand risk, userfee distortions and the opportunity cost of public funds has a minimum revenue guarantee and a revenue cap. The optimal contract can be implemented via a competitive auction with reasonable informational requirements. The optimal revenue guarantees, revenue sharing agreements and auction mechanisms …
Validity Of Subsampling And ‘Plug-In Asymptotic’ Inference For Parameters Defined By Moment Inequalities, Donald W.K. Andrews, Patrik Guggenberger
Validity Of Subsampling And ‘Plug-In Asymptotic’ Inference For Parameters Defined By Moment Inequalities, Donald W.K. Andrews, Patrik Guggenberger
Cowles Foundation Discussion Papers
This paper considers inference for parameters defined by moment inequalities and equalities. The parameters need not be identified. For a specified class of test statistics, this paper establishes the uniform asymptotic validity of subsampling, m out of n bootstrap, and “plug-in asymptotic” tests and confidence intervals for such parameters. Establishing uniform asymptotic validity is crucial in moment inequality problems because the test statistics of interest have discontinuities in their pointwise asymptotic distributions. The size results are quite general because they hold without specifying the particular form of the moment conditions — only 2 + δ moments finite are required. The …
Information Acquisition In Interdependent Value Auctions, Dirk Bergemann, Xianwen Shi, Juuso Välimäki
Information Acquisition In Interdependent Value Auctions, Dirk Bergemann, Xianwen Shi, Juuso Välimäki
Cowles Foundation Discussion Papers
We consider an auction environment with interdependent values. Each bidder can learn her payoff type through costly information acquisition. We contrast the socially optimal decision to acquire information with the equilibrium solution in which each agent has to privately bear the cost of information acquisition. In the context of the generalized Vickrey-Clarke-Groves mechanism, we establish that the equilibrium level exceeds the socially optimal level of information with positive interdependence. The individual decisions to acquire information are strategic substitutes. The difference between the equilibrium and the efficient level of information acquisition is increasing in the interdependence of the bidders’ valuations and …