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- Mechanism design (33)
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Articles 1621 - 1650 of 2768
Full-Text Articles in Social and Behavioral Sciences
Three Brief Proofs Of Arrow's Impossibility Theorem, John Geanakoplos
Three Brief Proofs Of Arrow's Impossibility Theorem, John Geanakoplos
Cowles Foundation Discussion Papers
Arrow’s original proof of his impossibility theorem proceeded in two steps: showing the existence of a decisive voter, and then showing that a decisive voter is a dictator. Barbera replaced the decisive voter with the weaker notion of a pivotal voter, thereby shortening the first step, but complicating the second step. I give three brief proofs, all of which turn on replacing the decisive/pivotal voter with an extremely pivotal voter (a voter who by unilaterally changing his vote can move some alternative from the bottom of the social ranking to the top), thereby simplifying both steps in Arrow’s proof. My …
Testing The Standard View Of The Long-Run Unemployment-Inflation Relationship, Ray C. Fair
Testing The Standard View Of The Long-Run Unemployment-Inflation Relationship, Ray C. Fair
Cowles Foundation Discussion Papers
The results in this paper, based on estimating and testing price equations for 30 countries, do not support the standard view of the long-run relationship between unemployment and inflation. They overwhelmingly reject the dynamics implied by the standard view. Wage equations are also estimated and tested. The paper also attempts to estimate the functional form of the relationship between measures of demand pressure and price and wage levels, but no strong conclusions emerge.
Market Experimentation And Pricing, Dirk Bergemann, Juuso Välimäki
Market Experimentation And Pricing, Dirk Bergemann, Juuso Välimäki
Cowles Foundation Discussion Papers
We present a continuous-time model of Bayesian learning in a duopolistic market. Initially the value of one product offered is unknown to the market. The market participants learn more about the true value of the product as experimentation occurs over time. Firms set prices to induce experimentation with their product. The aggregate outcomes are public information. As agents learn from the experiments of others, informational externalities arise. Surprisingly, the informational externality leads to too much learning. Buyers do not consider the impact of their experimentation on other buyers while the sellers internalize the gains from experiments conducted by the buyers. …
Three Brief Proofs Of Arrow's Impossibility Theorem, John Geanakoplos
Three Brief Proofs Of Arrow's Impossibility Theorem, John Geanakoplos
Cowles Foundation Discussion Papers
Arrow’s original proof of his impossibility theorem proceeded in two steps: showing the existence of a decisive voter, and then showing that a decisive voter is a dictator. Barbera replaced the decisive voter with the weaker notion of a pivotal voter, thereby shortening the first step, but complicating the second step. I give three brief proofs, all of which turn on replacing the decisive/pivotal voter with an extremely pivotal voter (a voter who by unilaterally changing his vote can move some alternative from the bottom of the social ranking to the top), thereby simplifying both steps in Arrow’s proof. My …
Semiparametric Estimation Of A Sample Selection Model, Donald W.K. Andrews, Marcia A. Schafgans
Semiparametric Estimation Of A Sample Selection Model, Donald W.K. Andrews, Marcia A. Schafgans
Cowles Foundation Discussion Papers
This paper provides a consistent and asymptotically normal estimator for the intercept of a semiparametrically estimated sample selection model. The estimator uses a decreasingly small fraction of all observations as the sample size goes to infinity, as in Heckman (1990). In the semiparametrics literature, estimation of the intercept typically has been subsumed in the nonparametric sample selection bias correction term. The estimation of the intercept, however, is important from an economic perspective. For instance, it permits one to determine the “wage gap” between unionized and nonunionized workers, decompose the wage differential between different socioeconomic groups (e.g., male-female and black-white), and …
A Stopping Rule For The Computation Of Generalized Method Of Moments Estimators, Donald W.K. Andrews
A Stopping Rule For The Computation Of Generalized Method Of Moments Estimators, Donald W.K. Andrews
Cowles Foundation Discussion Papers
To obtain consistency and asymptotic normality, a generalized method of moments (GMM) estimator typically is defined to be an approximate global minimizer of a GMM criterion function. To compute such an estimator, however, can be problematic because of the difficulty of global optimization. In consequence, practitioners usually ignore the problem and take the GMM estimator to be the result of a local optimization algorithm. This yields an estimator that is not necessarily consistent and asymptotically normal. The use of a local optimization algorithm also can run into the problem of instability due to flats or ridges in the criterion function, …
Three Brief Proofs Of Arrow's Impossibility Theorem, John Geanakoplos
Three Brief Proofs Of Arrow's Impossibility Theorem, John Geanakoplos
Cowles Foundation Discussion Papers
Arrow’s original proof of his impossibility theorem proceeded in two steps: showing the existence of a decisive voter, and then showing that a decisive voter is a dictator. Barbera replaced the decisive voter with the weaker notion of a pivotal voter, thereby shortening the first step, but complicating the second step. I give three brief proofs, all of which turn on replacing the decisive/pivotal voter with an extremely pivotal voter (a voter who by unilaterally changing his vote can move some alternative from the bottom of the social ranking to the top), thereby simplifying both steps in Arrow’s proof. My …
Two Brief Proofs Of Arrow's Impossibility Theorem, John Geanakoplos
Two Brief Proofs Of Arrow's Impossibility Theorem, John Geanakoplos
Cowles Foundation Discussion Papers
The first proof shows that Arrow’s axioms guarantee neutrality: every social choice must be made in exactly the same way, which quickly leads to dictatorship. The second proof clarifies the last step, and also confirms the intimate connection between Arrow’s Impossibility Theorem and the Condorcet triple. The second proof shows that a doubly pivotal agent must be a dictator; the Condorcet triple guarantees the existence of a doubly pivotal agent. Neutrality guarantees the existence of a (symmetrically) doubly pivotal agent.
Explaining The Labor Force Participation Of Women 20-24, Ray C. Fair, Diane J. Macunovich
Explaining The Labor Force Participation Of Women 20-24, Ray C. Fair, Diane J. Macunovich
Cowles Foundation Discussion Papers
Between about the mid 1960s and the late 1970s there was a remarkable rise in the labor force participation of women and then a leveling off that has persisted through the mid 1990s. This paper attempts to explain the labor force participation of women 20-24 over this period. A “relative income” variable is constructed based on Easterlin’s (1980) relative income hypothesis, and this is found to be an important explanatory variable. Easterlin’s “cohort wage” hypothesis is also used in the analysis. The basic equation estimated does very well in various tests that were performed on it, and it appears to …
What Is The Value Of Scientific Knowledge? An Application To Global Warming Using The Price Model, William D. Nordhaus, David Popp
What Is The Value Of Scientific Knowledge? An Application To Global Warming Using The Price Model, William D. Nordhaus, David Popp
Cowles Foundation Discussion Papers
Governments must cope with the enormous uncertainties about both future climate change as well as the costs and benefits of slowing climate change. This study analyses the value of improved information about a variety of geophysical and economic processes. The value of information is estimated using the “PRICE model” which is a probabilistic extension of earlier models of the economics of global warming. The study uses five different approaches to estimating the value of information about all uncertain parameters and about individual parameters. It is estimated that the value of early information is between $1.5 and $2 billion for each …
Why Do People Dislike Inflation?, Robert J. Shiller
Why Do People Dislike Inflation?, Robert J. Shiller
Cowles Foundation Discussion Papers
A questionnaire survey was conducted to explore how people think about inflation, and what real problems they see it as causing. With results from 677 people, comparisons were made among people in the U.S., Germany, and Brazil, between young and old, and between economists and non-economists. Among non-economists in all countries, the largest concern with inflation appears to be that it lowers people’s standard of living. Non-economists appear often to believe in a sort of sticky-wage model, by which wages do not respond to inflationary shocks, shocks which are themselves perceived as caused by certain people or institutions acting badly. …
An Asymptotic Expansion In The Garch(1,1) Model, Oliver B. Linton
An Asymptotic Expansion In The Garch(1,1) Model, Oliver B. Linton
Cowles Foundation Discussion Papers
We develop order T -1 asymptotic expansions for the quasi-maximum likelihood estimator (QMLE) and a two step approximate QMLE in the GARCH(1,1) model. We calculate the approximate mean and skewness and hence the Edgeworth-B distribution function. We suggest several methods of bias reduction based on these approximation.
Time And Money, Martin Shubik
Time And Money, Martin Shubik
Cowles Foundation Discussion Papers
General equilibrium is timeless, and without outside money, the price system is homogeneous of order zero. Some finite horizon strategic market game models are considered with an initial issue of flat money held as an asset. For any arbitrary finite horizon, the solution is time-dependent. In the infinite horizon, time disappears with the initial issue of flat money present as circulating capital in the fully stationary state and the price level is determined.
Learning And Strategic Pricing, Dirk Bergemann, Juuso Välimäki
Learning And Strategic Pricing, Dirk Bergemann, Juuso Välimäki
Cowles Foundation Discussion Papers
We consider the situation where a single consumer buys a stream of goods from different sellers over time. The true value of each seller’s product to the buyer is initially unknown. Additional information can be gained only by experimentation. For exogenously given prices the buyer’s problem is a multi-armed bandit problem. The innovation in this paper is to endogenize the cost of experimentation to the consumer by allowing for price competition between the sellers. The role of prices is then to allocate intertemporally the costs and benefits of learning between buyer and sellers. We examine how strategic aspects of the …
Preference For Information, Simon Grant, Atsushi Kajii, Ben Polak
Preference For Information, Simon Grant, Atsushi Kajii, Ben Polak
Cowles Foundation Discussion Papers
What is the relationship between an agent’s attitude towards information, and her attitude towards risk? If an agent always prefers more information, does this imply that she obeys the independence axiom? We provide a substitution property on preferences that is equivalent to the agent (intrinsically) liking information in the absence of contingent choices. We use this property to explore both questions, first in general, then for recursive smooth preferences, and then in specific recursive non-expected utility models. Given smoothness, for both the rank dependence and betweenness models, if an agent is information-loving then her preferences can depart from Kreps and …
A Conditional Kolmogorov Test, Donald W.K. Andrews
A Conditional Kolmogorov Test, Donald W.K. Andrews
Cowles Foundation Discussion Papers
This paper introduces a conditional Kolmogorov test of model specification for parametric models with covariates (regressors). The test is an extension of the Kolmogorov test of goodness-of-fit for distribution functions. The test is shown to have power against 1/root{n}-local alternatives and all fixed alternatives to the null hypothesis. A parametric bootstrap procedure is used to obtain critical values for the test.
Evaluating The Probability Of Failure Of A Banking Firm, Moshe Buchinsky, Oved Yosha
Evaluating The Probability Of Failure Of A Banking Firm, Moshe Buchinsky, Oved Yosha
Cowles Foundation Discussion Papers
We develop a dynamic model in which the probability of failure of an infinitely lived financial intermediary (bank) is determined endogenously as a function of observable state and policy variables. The bank takes into account the effect of the optimal policy (the interest on deposits, dividend payouts, risky investments) on the probability of failure, which in turn affects the bank’s ability to extract deposits. With the aid of simulations we study the effect of variables such as bank size, the riskiness of the bank’s investment opportunities, and reserve requirements on the bank’s optimal policy and on its probability of failure. …
Labor Income Indices Designed For Use In Contracts Promoting Income Risk Management, Robert J. Shiller, Ryan Schneider
Labor Income Indices Designed For Use In Contracts Promoting Income Risk Management, Robert J. Shiller, Ryan Schneider
Cowles Foundation Discussion Papers
Labor income indices are created for groupings of individuals, using data from the Panel Study of Income Dynamics. People are grouped by a clustering algorithm based on an estimated transition matrix between jobs, by education level, and by skill category. The groups are defined so that relatively few people move between them. For each of the groupings, we generate a labor income index using a hedonic repeated-measures regression methodology. Similarities between pairs of indices and between indices and individual labor incomes are described. It is argued that indices like those presented here might someday be used in settlement formulae in …
Testable Restrictions On The Equilibrium Manifold, Donald J. Brown, Rosa L. Matzkin
Testable Restrictions On The Equilibrium Manifold, Donald J. Brown, Rosa L. Matzkin
Cowles Foundation Discussion Papers
We present a finite system of polynomial inequalities in unobservable variables and market data that observations on market prices, individual incomes and aggregate endowments must satisfy to be consistent with the equilibrium behavior of some pure trade economy. Quantifier elimination is used to derive testable propositions on finite data sets for the pure trade model.
Information Externalities, Share-Price Based Incentives And Managerial Behaviour, Simon Grant, Stephen King, Ben Polak
Information Externalities, Share-Price Based Incentives And Managerial Behaviour, Simon Grant, Stephen King, Ben Polak
Cowles Foundation Discussion Papers
We survey recent theoretical research on the effects of short-term share-price based marginal incentive schemes. Such schemes can induce inefficient managerial behaviour in both hidden action and hidden type contexts. These problems arise from informational asymmetries: managers take actions to manipulate the information flow rather than to maximize firm value. More generally, imperfect transmission of information between managers and shareholders or between managers of different firms can lead to similar distortions even when the parties’ interests are aligned.
Testing Additivity In Generalized Nonparametric Regression Models, Pedro Gozalo, Oliver B. Linton
Testing Additivity In Generalized Nonparametric Regression Models, Pedro Gozalo, Oliver B. Linton
Cowles Foundation Discussion Papers
We develop kernel-based consistent tests of an hypothesis of additivity in nonparametric regression extending recent work on testing parametric null hypotheses against nonparametric alternatives. The additivity hypothesis is of interest because it delivers interpretability and reasonably fast convergence rates for standard estimators. The asymptotic distributions of the tests under a sequence of local alternatives are found and compared: in fact, we give a ranking of the different tests based on local asymptotic power. The practical performance is investigated via simulations and an application to the German migration data of Linton and Härdle (1996).
Unit Root Tests, Peter C.B. Phillips
Unit Root Tests, Peter C.B. Phillips
Cowles Foundation Discussion Papers
Classical and Bayesian unit root test procedures are reviewed, with an emphasis on testing principles and recent developments. A numerical illustration and annotated references and bibliography are provided.
Adaptive Testing In Arch Models, Oliver B. Linton, Douglas G. Steigerwald
Adaptive Testing In Arch Models, Oliver B. Linton, Douglas G. Steigerwald
Cowles Foundation Discussion Papers
Existing specification tests for conditional heteroskedasticity are derived under the assumption that the density of the innovation, or standardized error, is Gaussian, despite the fact that many recent empirical studies provide evidence that this density is not Gaussian. We obtain specification tests for conditional heteroskedasticity under the assumption that the innovation density is a member of a general family of densities. Our test statistics maximize asymptotic local power and weighted average power criteria for the general family of densities. We establish both first order and second order theory for our procedures. Monte Carlo simulations indicate that asymptotic power gains are …
Impulse Response And Forecast Error Variance Asymptotics In Nonstationary Var's, Peter C.B. Phillips
Impulse Response And Forecast Error Variance Asymptotics In Nonstationary Var's, Peter C.B. Phillips
Cowles Foundation Discussion Papers
Impulse response and forecast error variance matrix asymptotics are developed for VAR models with some roots at or near unity and some cointegration. For such models, it is shown that impulse responses that are estimated from an unrestricted VAR are inconsistent at long horizons and tend to random variables rather than the true impulse responses in the limit. The asymmetric distribution of the limit variates helps to explain the asymmetry of the finite sample distributions of the estimated impulse responses that is often found in simulations. VAR regressions also give inconsistent estimates of the forecast error variance of the optimal …
Automated Forecasts Of Asia-Pacific Economic Activity, Peter C.B. Phillips
Automated Forecasts Of Asia-Pacific Economic Activity, Peter C.B. Phillips
Cowles Foundation Discussion Papers
This paper reports quarterly ex ante forecasts of macroeconomic activity for the U.S.A., Japan and Australia for the period 1995-1997. The forecasts are based on automated time series models of vector autoregressions (VAR’s), reduced rank regressions (RRR’s), error correction models (ECM’s) and Bayesian vector autoregressions (BVAR’s). The models are automated by using an asymptotic predictive form of the model selection criterion PIC to determine autoregressive lag order, cointegrating rank and trend degree in the VAR’s, RRR’s, and ECM’s. The same criterion is used to find optimal values of the hyperparameters in the BVAR’s. The forecasts are graphed and tabulated. In …
Banks Versus Bonds: A Simple Theory Of Comparative Financial Institutions, Sandeep Baliga, Ben Polak
Banks Versus Bonds: A Simple Theory Of Comparative Financial Institutions, Sandeep Baliga, Ben Polak
Cowles Foundation Discussion Papers
We use a simple, graphical moral hazard model to compare monitored bank lending versus non-monitored bond issues as sources of external funds for industry. We contrast the conditions that theoretically favor each system, such as the size and number of firms, with conditions prevailing when these financial systems were developed during the British and German Industrial Revolutions. Then, to address the question why different systems have persisted, we embed the model in an entry game in which firm size and number are endogenous. We show that multiple equilibria can exist if financiers take the industrial structure as given and vice …
A Strategic Market Game With Secured Lending, Ioannis Karatzas, Martin Shubik, William D. Sudderth
A Strategic Market Game With Secured Lending, Ioannis Karatzas, Martin Shubik, William D. Sudderth
Cowles Foundation Discussion Papers
We study stationary Markov equilibria for strategic, competitive games, in a market-economy model with one non-durable commodity, fiat money, borrowing/lending through a central bank or a money market, and a continuum of agents. These use fiat money in order to offset random fluctuations in their endowments of the commodity, are not allowed to borrow more than they can pay back (secured lending), and maximize expected discounted utility from consumption of the commodity. Their aggregate optimal actions determine dynamically prices and/or interest rates for borrowing and lending, in each period of play. In equilibrium, random fluctuations in endowment- and wealth-levels offset …
World Income Components: Measuring And Exploiting International Risk Sharing Opportunities, Robert J. Shiller, Stefano G. Athanasoulis
World Income Components: Measuring And Exploiting International Risk Sharing Opportunities, Robert J. Shiller, Stefano G. Athanasoulis
Cowles Foundation Discussion Papers
We provide a method for decomposing the variance of world national income (present values) into components in such a way as to indicate the most important risk-sharing opportunities among nations of the world. We identify risk-sharing opportunities in terms of eigenvectors of a variance matrix of deviations of the present value of country incomes from their respective shares (adjusted for population and risk aversion) of world income. The method is applied to data on national incomes of six large countries 1870-1992 (Maddison [1995]): Canada, France, Germany, Italy, United Kingdom and United States. The method reveals that, assuming symmetric risk aversions, …
Mortgage Default Risk And Real Estate Prices: The Use Of Index-Based Futures And Options In Real Estate, Robert J. Shiller, Karl E. Case, Allan N. Weiss
Mortgage Default Risk And Real Estate Prices: The Use Of Index-Based Futures And Options In Real Estate, Robert J. Shiller, Karl E. Case, Allan N. Weiss
Cowles Foundation Discussion Papers
Evidence is shown, using US foreclosure data by state 1975-93, that periods of high default rates on home mortgages strongly tend to follow real estate price declines or interruptions in real estate price increase. The relation between price decline and foreclosure rates is modelled using a distributed lag. Using this model, holders of residential mortgage portfolios could hedge some of the risk of default by taking positions in futures or options markets for residential real estate prices, were such markets to be established.
How Should We Measure Sustainable Income?, William D. Nordhaus
How Should We Measure Sustainable Income?, William D. Nordhaus
Cowles Foundation Discussion Papers
Growing concerns about long-run economic growth have led to calls for measures of “sustainable income.” Traditional analyses rely on Hicksian income, which is consumption plus net investment. The present paper shows that Hicksian income corresponds to sustainable income only under implausibly limited circumstances. We define sustainable income and estimate its magnitude for the United States. The analysis and empirical estimates indicate, first, that consumption has historically been far below sustainable income; second, that conventional Hicksian measures of national income are poor proxies for sustainable income; and, third, that the true savings rate has declined significantly in the last two decades.