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Demand Externalities From Co-Location, Boudhayan Sen, Jiwoong Shin, K. Sudhir Feb 2012

Demand Externalities From Co-Location, Boudhayan Sen, Jiwoong Shin, K. Sudhir

Cowles Foundation Discussion Papers

We illustrate an approach to measure demand externalities from co-location by estimating household level changes in grocery spending at a supermarket among households that also buy gas at a co-located gas station, relative to those who do not. Controlling for observable and unobserved selection in the use of gas station, we find significant demand externalities; on average a household that buys gas has 7.7% to 9.3% increase in spending on groceries. Accounting for differences in gross margins, the profit from the grocery spillovers is 130% to 150% the profit from gasoline sales. The spillovers are moderated by store loyalty, with …


On The Limit Equilibrium Payoff Set In Repeated And Stochastic Games, Johannes Hörner, Satoru Takahashi, Nicolas Vieille Feb 2012

On The Limit Equilibrium Payoff Set In Repeated And Stochastic Games, Johannes Hörner, Satoru Takahashi, Nicolas Vieille

Cowles Foundation Discussion Papers

This paper provides a dual characterization of the limit set of perfect public equilibrium payoffs in stochastic games (in particular, repeated games) as the discount factor tends to one. As a first corollary, the folk theorems of Fudenberg, Levine and Maskin (1994), Kandori and Matsushima (1998) and Hörner, Sugaya, Takahashi and Vieille (2011) obtain. As a second corollary, in the context of repeated games, it follows that this limit set of payoffs is a polytope (a bounded polyhedron) when attention is restricted to equilibria in pure strategies. We provide a two-player game in which this limit set is not a …


Specification Sensitivity In Right-Tailed Unit Root Testing For Explosive Behavior, Peter C.B. Phillips, Shu-Ping Shi, Jun Yu Jan 2012

Specification Sensitivity In Right-Tailed Unit Root Testing For Explosive Behavior, Peter C.B. Phillips, Shu-Ping Shi, Jun Yu

Cowles Foundation Discussion Papers

Right-tailed unit root tests have proved promising for detecting exuberance in economic and financial activities. Like left-tailed tests, the limit theory and test performance are sensitive to the null hypothesis and the model specification used in parameter estimation. This paper aims to provide some empirical guidelines for the practical implementation of right-tailed unit root tests, focussing on the sup ADF test of Phillips, Wu and Yu (2011), which implements a right-tailed ADF test repeatedly on a sequence of forward sample recursions. We analyze and compare the limit theory of the sup ADF test under different hypotheses and model specifications. The …


Lag Length Selection For Unit Root Tests In The Presence Of Nonstationary Volatility, Giuseppe Cavaliere, Peter C.B. Phillips, Stephan Smeekes, A. M. Rober Taylor Jan 2012

Lag Length Selection For Unit Root Tests In The Presence Of Nonstationary Volatility, Giuseppe Cavaliere, Peter C.B. Phillips, Stephan Smeekes, A. M. Rober Taylor

Cowles Foundation Discussion Papers

A number of recently published papers have focused on the problem of testing for a unit root in the case where the driving shocks may be unconditionally heteroskedastic. These papers have, however, assumed that the lag length in the unit root test regression is a deterministic function of the sample size, rather than data-determined, the latter being standard empirical practice. In this paper we investigate the finite sample impact of unconditional heteroskedasticity on conventional data-dependent methods of lag selection in augmented Dickey-Fuller type unit root test regressions and propose new lag selection criteria which allow for the presence of heteroskedasticity …


Vars With Mixed Roots Near Unity, Peter C.B. Phillips, Ji Hyung Lee Jan 2012

Vars With Mixed Roots Near Unity, Peter C.B. Phillips, Ji Hyung Lee

Cowles Foundation Discussion Papers

Limit theory is developed for nonstationary vector autoregression (VAR) with mixed roots in the vicinity of unity involving persistent and explosive components. Statistical tests for common roots are examined and model selection approaches for discriminating roots are explored. The results are useful in empirical testing for multiple manifestations of nonstationarity — in particular for distinguishing mildly explosive roots from roots that are local to unity and for testing commonality in persistence.


Testing For Multiple Bubbles, Peter C.B. Phillips, Shu-Ping Shi, Jun Yu Jan 2012

Testing For Multiple Bubbles, Peter C.B. Phillips, Shu-Ping Shi, Jun Yu

Cowles Foundation Discussion Papers

Identifying and dating explosive bbles when there is periodically collapsing behavior over time has been a major concern in the economics literature and is of great importance for practitioners. The complexity of the nonlinear structure inherent in multiple bubble phenomena within the same sample period makes econometric analysis particularly difficult. The present paper develops new recursive procedures for practical implementation and surveillance strategies that may be employed by central banks and fiscal regulators. We show how the testing procedure and dating algorithm of Phillips, Wu and Yu (2011, PWY) are affected by multiple bubbles and may fail to be consistent. …


Efficient Auctions And Interdependent Types, Dirk Bergemann, Stephen Morris, Satoru Takahashi Jan 2012

Efficient Auctions And Interdependent Types, Dirk Bergemann, Stephen Morris, Satoru Takahashi

Cowles Foundation Discussion Papers

We consider the efficient allocation of a single good with interdependent values in a quasi-linear environment. We present an approach to modelling interdependent preferences distinguishing between “payoff types” and “belief types” and report a characterization of when the efficient allocation can be partially Bayesian implemented on a finite type space. The characterization can be used to unify a number of sufficient conditions for efficient partial implementation in this classical auction setting. We report how a canonical language for discussing interdependent types — developed in a more general setting by Bergemann, Morris and Takahashi (2011) — applies in this setting and …


Discounted Stochastic Games With Voluntary Transfers, Sebastian Kranz Jan 2012

Discounted Stochastic Games With Voluntary Transfers, Sebastian Kranz

Cowles Foundation Discussion Papers

This paper studies discounted stochastic games perfect or imperfect public monitoring and the opportunity to conduct voluntary monetary transfers. We show that for all discount factors every public perfect equilibrium payoff can be implemented with a simple class of equilibria that have a stationary structure on the equilibrium path and optimal penal codes with a stick and carrot structure. We develop algorithms that exactly compute or approximate the set of equilibrium payoffs and find simple equilibria that implement these payoffs.


Health Reform, Health Insurance, And Selection: Estimating Selection Into Health Insurance Using The Massachusetts Health Reform, Martin B. Hackmann, Jonathan T. Kolstad, Amanda E. Kowalski Jan 2012

Health Reform, Health Insurance, And Selection: Estimating Selection Into Health Insurance Using The Massachusetts Health Reform, Martin B. Hackmann, Jonathan T. Kolstad, Amanda E. Kowalski

Cowles Foundation Discussion Papers

We implement an empirical test for selection into health insurance using changes in coverage induced by the introduction of mandated health insurance in Massachusetts. Our test examines changes in the cost of the newly insured relative to those who were insured prior to the reform. We find that counties with larger increases in insurance coverage over the reform period face the smallest increase in average hospital costs for the insured population, consistent with adverse selection into insurance before the reform. Additional results, incorporating cross-state variation and data on health measures, provide further evidence for adverse selection.


Integrated Economic And Climate Modeling, William D. Nordhaus Dec 2011

Integrated Economic And Climate Modeling, William D. Nordhaus

Cowles Foundation Discussion Papers

This survey examines the history and current practice in integrated assessment models (IAMs) of the economics of climate change. It begins with a review of the emerging problem of climate change. The next section provides a brief sketch of the rise of IAMs in the 1970s and beyond. The subsequent section is an extended exposition of one IAM, the DICE/RICE family of models. The purpose of this description is to provide readers an example of how such a model is developed and what the major components are. The final section discusses major important open questions that continue to occupy IAM …


Nonparametric Inference Based On Conditional Moment Inequalities, Donald W.K. Andrews, Xiaoxia Shi Dec 2011

Nonparametric Inference Based On Conditional Moment Inequalities, Donald W.K. Andrews, Xiaoxia Shi

Cowles Foundation Discussion Papers

This paper develops methods of inference for nonparametric and semiparametric parameters defined by conditional moment inequalities and/or equalities. The parameters need not be identified. Confidence sets and tests are introduced. The correct uniform asymptotic size of these procedures is established. The false coverage probabilities and power of the CS’s and tests are established for fixed alternatives and some local alternatives. Finite-sample simulation results are given for a nonparametric conditional quantile model with censoring and a nonparametric conditional treatment effect model. The recommended CS/test uses a Cramér-von-Mises-type test statistic and employs a generalized moment selection critical value.


Nonparametric Inference Based On Conditional Moment Inequalities, Donald W.K. Andrews, Xiaoxia Shi Dec 2011

Nonparametric Inference Based On Conditional Moment Inequalities, Donald W.K. Andrews, Xiaoxia Shi

Cowles Foundation Discussion Papers

This paper develops methods of inference for nonparametric and semiparametric parameters defined by conditional moment inequalities and/or equalities. The parameters need not be identified. Confidence sets and tests are introduced. The correct uniform asymptotic size of these procedures is established. The false coverage probabilities and power of the CS’s and tests are established for fixed alternatives and some local alternatives. Finite-sample simulation results are given for a nonparametric conditional quantile model with censoring and a nonparametric conditional treatment effect model. The recommended CS/test uses a Cramér-von-Mises-type test statistic and employs a generalized moment selection critical value.


Nonparametric Inference Based On Conditional Moment Inequalities, Donald W.K. Andrews, Xiaoxia Shi Dec 2011

Nonparametric Inference Based On Conditional Moment Inequalities, Donald W.K. Andrews, Xiaoxia Shi

Cowles Foundation Discussion Papers

This paper develops methods of inference for nonparametric and semiparametric parameters defined by conditional moment inequalities and/or equalities. The parameters need not be identified. Confidence sets and tests are introduced. The correct uniform asymptotic size of these procedures is established. The false coverage probabilities and power of the CS’s and tests are established for fixed alternatives and some local alternatives. Finite-sample simulation results are given for a nonparametric conditional quantile model with censoring and a nonparametric conditional treatment effect model. The recommended CS/test uses a Cramér-von-Mises-type test statistic and employs a generalized moment selection critical value.


Prizes Versus Wages With Envy And Pride, Pradeep Dubey, John Geanakoplos, Ori Haimanko Nov 2011

Prizes Versus Wages With Envy And Pride, Pradeep Dubey, John Geanakoplos, Ori Haimanko

Cowles Foundation Discussion Papers

We show that if agents are risk neutral, prizes outperform wages if and only if there is sufficient pride and envy relative to the noisiness of performance. If agents are risk averse, prizes are a necessary supplement to wages (as bonuses).


Greek Debt And American Debt: Graduation Speech At The University Of Athens Economics And Business School, John Geanakoplos Nov 2011

Greek Debt And American Debt: Graduation Speech At The University Of Athens Economics And Business School, John Geanakoplos

Cowles Foundation Discussion Papers

This is the graduation speech I gave on receiving an honorary doctorate at the University of Athens Economics and Business School. I talk about my Greek family, about how I got interested in economics, and then how in the 1990s I came to think about default, collateral, and leverage as the central features of the financial/macro economy, despite their complete absence (even now) from any textbooks. Finally I suggest that the Greek debt problem, and on a bigger scale, the American debt problem, can only be cured when lenders are prodded to forgive. That would be better for the borrowers …


Pricing Under The Threat Of Piracy: Flexibility And Platforms For Digital Goods, Dirk Bergemann, Thomas Eisenbach, Joan Feigenbaum, Scott Shenker Nov 2011

Pricing Under The Threat Of Piracy: Flexibility And Platforms For Digital Goods, Dirk Bergemann, Thomas Eisenbach, Joan Feigenbaum, Scott Shenker

Cowles Foundation Discussion Papers

We consider the optimal design of flexible use in a digital-rights-management policy for a digital good subject to piracy. Consumers can acquire the digital good either as a licensed product or as an unlicensed copy. The ease of access to unlicensed copies is increasing in the flexibility accorded to licensed copies. The content provider has to trade off consumers’ valuation of a licensed copy against the sales lost to piracy. We enrich the basic model by introducing a “secure platform” that is required to use the digital good. We show that the platform allows for the socially optimal provision of …


Sensitivity Analysis In Semiparametric Likelihood Models, Xiaohong Chen, Elie Tamer, Alexander Torgovitsky Nov 2011

Sensitivity Analysis In Semiparametric Likelihood Models, Xiaohong Chen, Elie Tamer, Alexander Torgovitsky

Cowles Foundation Discussion Papers

We provide methods for inference on a finite dimensional parameter of interest, θ in Re ^{ d _θ}, in a semiparametric probability model when an infinite dimensional nuisance parameter, g , is present. We depart from the semiparametric literature in that we do not require that the pair (θ, g ) is point identified and so we construct confidence regions for θ that are robust to non-point identification. This allows practitioners to examine the sensitivity of their estimates of θ to specification of g in a likelihood setup. To construct these confidence regions for θ, we invert a profiled sieve …


Monitoring Leverage, John Geanakoplos, Lasse H. Pedersen Nov 2011

Monitoring Leverage, John Geanakoplos, Lasse H. Pedersen

Cowles Foundation Discussion Papers

We discuss how leverage can be monitored for institutions, individuals, and assets. While traditionally the interest rate has been regarded as the important feature of a loan, we argue that leverage is sometimes even more important. Monitoring leverage provides information about how risk builds up during booms as leverage rises and how crises start when leverage on new loans sharply declines. Leverage data is also a crucial input for crisis management and lending facilities. Leverage at the asset level can be monitored by down payments or margin requirement or and haircuts, giving a model-free measure that can be observed directly, …


Bayes Correlated Equilibrium And The Comparison Of Information Structures, Dirk Bergemann, Stephen Morris Oct 2011

Bayes Correlated Equilibrium And The Comparison Of Information Structures, Dirk Bergemann, Stephen Morris

Cowles Foundation Discussion Papers

The set of outcomes that can arise in Bayes Nash equilibria of an incomplete information game where players may or may not have access to more private information is characterized and shown to be equivalent to the set of an incomplete information version of correlated equilibrium, which we call Bayes correlated equilibrium. We describe a partial order on many player information structures — which we call individual sufficiency — under which more information shrinks the set of Bayes correlated equilibria. We discuss the relation of the solution concept to alternative definitions of correlated equilibrium in incomplete information games and of …


On Bartlett Correctability Of Empirical Likelihood In Generalized Power Divergence Family, Lorenzo Camponovo, Taisuke Otsu Oct 2011

On Bartlett Correctability Of Empirical Likelihood In Generalized Power Divergence Family, Lorenzo Camponovo, Taisuke Otsu

Cowles Foundation Discussion Papers

Baggerly (1998) showed that empirical likelihood is the only member in the Cressie-Read power divergence family to be Bartlett correctable. This paper strengthens Baggerly’s result by showing that in a generalized class of the power divergence family, which includes the Cressie-Read family and other nonparametric likelihood such as Schennach’s (2005, 2007) exponentially tilted empirical likelihood, empirical likelihood is still the only member to be Bartlett correctable.


Maximum Likelihood Estimation And Uniform Inference With Sporadic Identification Failure, Donald W.K. Andrews, Xu Cheng Oct 2011

Maximum Likelihood Estimation And Uniform Inference With Sporadic Identification Failure, Donald W.K. Andrews, Xu Cheng

Cowles Foundation Discussion Papers

This paper analyzes the properties of a class of estimators, tests, and confidence sets (CS’s) when the parameters are not identified in parts of the parameter space. Specifically, we consider estimator criterion functions that are sample averages and are smooth functions of a parameter theta. This includes log likelihood, quasi-log likelihood, and least squares criterion functions. We determine the asymptotic distributions of estimators under lack of identification and under weak, semi-strong, and strong identification. We determine the asymptotic size (in a uniform sense) of standard t and quasi-likelihood ratio (QLR) tests and CS’s. We provide methods of constructing QLR tests …


A Theory Of Asset Prices Based On Heterogeneous Information, Elias Albagli, Christian Hellwig, Aleh Tsyvinski Oct 2011

A Theory Of Asset Prices Based On Heterogeneous Information, Elias Albagli, Christian Hellwig, Aleh Tsyvinski

Cowles Foundation Discussion Papers

We propose a theory of asset prices that emphasizes heterogeneous information as the main element determining prices of different securities. Our main analytical innovation is in formulating a model of noisy information aggregation through asset prices, which is parsimonious and tractable, yet flexible in the specification of cash flow risks. We show that the noisy aggregation of heterogeneous investor beliefs drives a systematic wedge between the impact of fundamentals on an asset price, and the corresponding impact on cash flow expectations. The key intuition behind the wedge is that the identity of the marginal trader has to shift for different …


Meritocracy Voting: Measuring The Unmeasurable, Peter C.B. Phillips Oct 2011

Meritocracy Voting: Measuring The Unmeasurable, Peter C.B. Phillips

Cowles Foundation Discussion Papers

Learned societies commonly carry out selection processes to add new fellows to an existing fellowship. Criteria vary across societies but are typically based on subjective judgments concerning the merit of individuals who are nominated for fellowships. These subjective assessments may be made by existing fellows as they vote in elections to determine the new fellows or they may be decided by a selection committee of fellows and officers of the society who determine merit after reviewing nominations and written assessments. Human judgment inevitably plays a central role in these determinations and, notwithstanding its limitations, is usually regarded as being a …


Optimally Empty Promises And Endogenous Supervision, David A. Miller, Kareen Rozen Oct 2011

Optimally Empty Promises And Endogenous Supervision, David A. Miller, Kareen Rozen

Cowles Foundation Discussion Papers

We study optimal contracting in team settings, featuring stylized aspects of production environments with complex tasks. Agents have many opportunities to shirk, task-level monitoring is needed to provide useful incentives, and because it is difficult to write individual performance into formal contracts, incentives are provided informally, using wasteful sanctions like guilt and shame, or slowed promotion. These features give rise to optimal contracts with “empty promises” and endogenous supervision structures. Agents optimally make more promises than they intend to keep, leading to the concentration of supervisory responsibility in the hands of one or two agents.


Gmm Estimation And Uniform Subvector Inference With Possible Identification Failure, Donald W.K. Andrews, Xu Cheng Oct 2011

Gmm Estimation And Uniform Subvector Inference With Possible Identification Failure, Donald W.K. Andrews, Xu Cheng

Cowles Foundation Discussion Papers

This paper determines the properties of standard generalized method of moments (GMM) estimators, tests, and confidence sets (CS’s) in moment condition models in which some parameters are unidentified or weakly identified in part of the parameter space. The asymptotic distributions of GMM estimators are established under a full range of drifting sequences of true parameters and distributions. The asymptotic sizes (in a uniform sense) of standard GMM tests and CS’s are established. The paper also establishes the correct asymptotic sizes of “robust” GMM-based Wald, t; and quasi-likelihood ratio tests and CS’s whose critical values are designed to yield robustness to …


Financing Of Public Goods Through Taxation In A General Equilibrium Economy: Experimental Evidence, Juergen Huber, Martin Shubik, Shyam Sunder Oct 2011

Financing Of Public Goods Through Taxation In A General Equilibrium Economy: Experimental Evidence, Juergen Huber, Martin Shubik, Shyam Sunder

Cowles Foundation Discussion Papers

We use a laboratory experiment to compare general equilibrium economies in which agents individually allocate their private goods among consumption, investment in production, and replenishing/ refurbishing a depreciating public facility in a dynamic game with long-term investment opportunities. The public facility is financed either by voluntary anonymous contributions (VAC) or taxes. We find that rates of taxation chosen by majority vote remain at an intermediate level (far from zero or 100%), and the experimental economies sustain public goods at levels between the finite- and infinite-horizon optima. This contrasts with a rapid decline of public goods under VAC. Both the payoff …


Testing For Common Trends In Semiparametric Panel Data Models With Fixed Effects, Yonghui Zhang, Liangjun Su, Peter C.B. Phillips Oct 2011

Testing For Common Trends In Semiparametric Panel Data Models With Fixed Effects, Yonghui Zhang, Liangjun Su, Peter C.B. Phillips

Cowles Foundation Discussion Papers

This paper proposes a nonparametric test for common trends in semiparametric panel data models with fixed effects based on a measure of nonparametric goodness-of-fit (R²). We first estimate the model under the null hypothesis of common trends by the method of profile least squares, and obtain the augmented residual which consistently estimates the sum of the fixed effect and the disturbance under the null. Then we run a local linear regression of the augmented residuals on a time trend and calculate the nonparametric R² for each cross section unit. The proposed test statistic is obtained by averaging all cross sectional …


Correlated Equilibrium In Games With Incomplete Information, Dirk Bergemann, Stephen Morris Oct 2011

Correlated Equilibrium In Games With Incomplete Information, Dirk Bergemann, Stephen Morris

Cowles Foundation Discussion Papers

We define a notion of correlated equilibrium for games with incomplete information in a general setting with finite players, finite actions, and finite states, which we call Bayes correlated equilibrium. The set of Bayes correlated equilibria of a fixed incomplete information game equals the set of probability distributions over actions, states and types that might arise in any Bayes Nash equilibrium where players observed additional information. We show that more information always shrinks the set of Bayes correlated equilibria.


Estimates Of The Social Cost Of Carbon: Background And Results From The Rice-2011 Model, William D. Nordhaus Oct 2011

Estimates Of The Social Cost Of Carbon: Background And Results From The Rice-2011 Model, William D. Nordhaus

Cowles Foundation Discussion Papers

A new and important concept in global warming economics and policy is the social cost of carbon or SCC. This concept represents the economic cost caused by an additional ton of carbon-dioxide emissions or its equivalent. The present study describes the development of the concept as well as its analytical background. We estimate the SCC using an updated version of the RICE-2011 model. Additional concerns are uncertainty about different aspects of global warming as well as the treatment of different countries or generations. The most important results are: First, the estimated social cost of carbon for the current time (2015) …


Optimism And Pessimism With Expected Utility, David Dillenberger, Andrew Postlewaite, Kareen Rozen Oct 2011

Optimism And Pessimism With Expected Utility, David Dillenberger, Andrew Postlewaite, Kareen Rozen

Cowles Foundation Discussion Papers

Savage (1954) provided a set of axioms on preferences over acts that were equivalent to the existence of an expected utility representation. We show that in addition to this representation, there is a continuum of other “expected utility” representations in which for any act, the probability distribution over states depends on the corresponding outcomes. We suggest that optimism and pessimism can be captured by the stake-dependent probabilities in these alternative representations; e.g., for a pessimist, the probability of every outcome except the worst is distorted down from the Savage probability. Extending the DM’s preferences to be defined on both subjective …