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Full-Text Articles in Social and Behavioral Sciences

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

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

Cowles Foundation Discussion Papers

We compare general equilibrium economies in which building and maintenance of a depreciating public facility is financed either by anonymous voluntary contributions or by taxing agents on their income from private production. Agents start with an endowment of private goods and money, while the government starts with an endowment of public good and money. All private goods produced are tendered for sale in exchange for money in a sell-all market mechanism. Agents’ proceeds from sale are taxed, and they individually allocate their private goods between current consumption and investment in production for the following period. The optimal levels of supply …


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

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 maintenance of a depreciating public facility. 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, converging neither to zero nor to 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 voluntary anonymous contributions (VAC). Both the payoff efficiency and production …


Career Concerns With Coarse Information, Alessandro Bonatti, Johannes Hörner Oct 2011

Career Concerns With Coarse Information, Alessandro Bonatti, Johannes Hörner

Cowles Foundation Discussion Papers

This paper develops a model of career concerns. The worker’s skill is revealed through output, wage is based on expected output, and so on assessed ability. Specifically, effort increases the probability that a skilled worker achieves a one-time breakthrough. Effort levels at different times are strategic substitutes. Equilibrium effort (and, if marginal cost is convex, wage) is single-peaked with seniority. The agent works too little, too late. Both delay and underprovision of effort worsen if effort is observable. If the firm commits to wages but faces competition, the optimal contract features piecewise constant wages as well as severance pay.


Career Concerns And Market Structure, Alessandro Bonatti, Johannes Hörner Oct 2011

Career Concerns And Market Structure, Alessandro Bonatti, Johannes Hörner

Cowles Foundation Discussion Papers

This paper analyzes the impact of market structure on career concerns. Effort increases the probability that a skilled agent achieves a one-time breakthrough. Wages are based on assessed ability and on expected output. For any wage, the agent works too little, too late. Under short-term contracts, effort and wages are single-peaked with seniority, due to the strategic substitutability of effort levels at different times. Both delay and underprovision of effort worsen if effort is observable. Commitment to wages by competing firms mitigates these inefficiencies. In that case, the optimal contract features piecewise constant wages and severance pay.


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 …


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 …


Robust Predictions In Games With Incomplete Information, Dirk Bergemann, Stephen Morris Sep 2011

Robust Predictions In Games With Incomplete Information, Dirk Bergemann, Stephen Morris

Cowles Foundation Discussion Papers

We analyze games of incomplete information and offer equilibrium predictions which are valid for all possible private information structures that the agents may have. Our characterization of these robust predictions relies on an epistemic result which establishes a relationship between the set of Bayes Nash equilibria and the set of Bayes correlated equilibria. We completely characterize the set of Bayes correlated equilibria in a class of games with quadratic payoffs and normally distributed uncertainty in terms of restrictions on the first and second moments of the equilibrium action-state distribution. We derive exact bounds on how prior information of the analyst …


Robust Predictions In Games With Incomplete Information, Dirk Bergemann, Stephen Morris Sep 2011

Robust Predictions In Games With Incomplete Information, Dirk Bergemann, Stephen Morris

Cowles Foundation Discussion Papers

We analyze games of incomplete information and offer equilibrium predictions which are valid for, and in this sense robust to, all possible private information structures that the agents may have. The set of outcomes that can arise in equilibrium for some information structure is equal to the set of Bayes correlated equilibria. We completely characterize the set of Bayes correlated equilibria in a class of games with quadratic payoffs and normally distributed uncertainty in terms of restrictions on the first and second moments of the equilibrium action-state distribution. We derive exact bounds on how prior knowledge about the private information …


Robust Predictions In Games With Incomplete Information, Dirk Bergemann, Stephen Morris Sep 2011

Robust Predictions In Games With Incomplete Information, Dirk Bergemann, Stephen Morris

Cowles Foundation Discussion Papers

We analyze games of incomplete information and offer equilibrium predictions which are valid for, and in this sense robust to, all possible private information structures that the agents may have. We completely characterize the set of Bayes correlated equilibria in a class of games with quadratic payoffs and normally distributed uncertainty in terms of restrictions on the first and second moments of the equilibrium action-state distribution. We derive exact bounds on how prior knowledge about the private information refines the set of equilibrium predictions. We consider information sharing among firms under demand uncertainty and find newly optimal information policies via …


Robust Predictions In Games With Incomplete Information, Dirk Bergemann, Stephen Morris Sep 2011

Robust Predictions In Games With Incomplete Information, Dirk Bergemann, Stephen Morris

Cowles Foundation Discussion Papers

We analyze games of incomplete information and offer equilibrium predictions which are valid for, and in this sense robust to, all possible private information structures that the agents may have. We completely characterize the set of Bayes correlated equilibria in a class of games with quadratic payoffs and normally distributed uncertainty in terms of restrictions on the first and second moments of the equilibrium action-state distribution. We derive exact bounds on how prior knowledge about the private information refines the set of equilibrium predictions. We consider information sharing among firms under demand uncertainty and find newly optimal information policies via …


A Conditional-Heteroskedasticity-Robust Confidence Interval For The Autoregressive Parameter, Donald W.K. Andrews, Patrik Guggenberger Aug 2011

A Conditional-Heteroskedasticity-Robust Confidence Interval For The Autoregressive Parameter, Donald W.K. Andrews, Patrik Guggenberger

Cowles Foundation Discussion Papers

This paper introduces a new confidence interval (CI) for the autoregressive parameter (AR) in an AR(1) model that allows for conditional heteroskedasticity of general form and AR parameters that are less than or equal to unity. The CI is a modification of Mikusheva’s (2007a) modification of Stock’s (1991) CI that employs the least squares estimator and a heteroskedasticity-robust variance estimator. The CI is shown to have correct asymptotic size and to be asymptotically similar (in a uniform sense). It does not require any tuning parameters. No existing procedures have these properties. Monte Carlo simulations show that the CI performs well …


Generic Results For Establishing The Asymptotic Size Of Confidence Sets And Tests, Donald W.K. Andrews, Xu Cheng, Patrik Guggenberger Aug 2011

Generic Results For Establishing The Asymptotic Size Of Confidence Sets And Tests, Donald W.K. Andrews, Xu Cheng, Patrik Guggenberger

Cowles Foundation Discussion Papers

This paper provides a set of results that can be used to establish the asymptotic size and/or similarity in a uniform sense of confidence sets and tests. The results are generic in that they can be applied to a broad range of problems. They are most useful in scenarios where the pointwise asymptotic distribution of a test statistic has a discontinuity in its limit distribution. The results are illustrated in three examples. These are: (i) the conditional likelihood ratio test of Moreira (2003) for linear instrumental variables models with instruments that may be weak, extended to the case of heteroskedastic …


The Demonetization Of Gold: Transactions And The Change In Control, Thomas Quint, Martin Shubik Aug 2011

The Demonetization Of Gold: Transactions And The Change In Control, Thomas Quint, Martin Shubik

Cowles Foundation Discussion Papers

Three models of a monetary economy are considered, in order to show the effects of a gold demonetization: the first with a gold money, the second with demonetized gold but no central bank, and the third with demonetized gold, but with a central bank. The distinctions between ownership and control are discussed.


Similar-On-The-Boundary Tests For Moment Inequalities Exist, But Have Poor Power, Donald W.K. Andrews Aug 2011

Similar-On-The-Boundary Tests For Moment Inequalities Exist, But Have Poor Power, Donald W.K. Andrews

Cowles Foundation Discussion Papers

This paper shows that moment inequality tests that are asymptotically similar on the boundary of the null hypothesis exist, but have very poor power. Hence, existing tests in the literature, which are asymptotically non-similar on the boundary, are not deficient. The results are obtained by first establishing results for the finite-sample multivariate normal one-sided testing problem. Then, these results are shown to have implications for more general moment inequality tests that are used in the literature on partial identification.


Risky Curves: From Unobservable Utility To Observable Opportunity Sets, Daniel Friedman, Shyam Sunder Aug 2011

Risky Curves: From Unobservable Utility To Observable Opportunity Sets, Daniel Friedman, Shyam Sunder

Cowles Foundation Discussion Papers

Most theories of risky choice postulate that a decision maker maximizes the expectation of a Bernoulli (or utility or similar) function. We tour 60 years of empirical search and conclude that no such functions have yet been found that are useful for out-of-sample prediction. Nor do we find practical applications of Bernoulli functions in major risk-based industries such as finance, insurance and gambling. We sketch an alternative approach to modeling risky choice that focuses on potentially observable opportunities rather than on unobservable Bernoulli functions.


Information Aggregation, Investment, And Managerial Incentives, Elias Albagli, Christian Hellwig, Aleh Tsyvinski Aug 2011

Information Aggregation, Investment, And Managerial Incentives, Elias Albagli, Christian Hellwig, Aleh Tsyvinski

Cowles Foundation Discussion Papers

We study the interplay of share prices and firm decisions when share prices aggregate and convey noisy information about fundamentals to investors and managers. First, we show that the informational feedback between the firm’s share price and its investment decisions leads to a systematic premium in the firm’s share price relative to expected dividends. Noisy information aggregation leads to excess price volatility, over-valuation of shares in response to good news, and undervaluation in response to bad news. By optimally increasing its exposure to fundamental risks when the market price conveys good news, the firm shifts its dividend risk to the …


Similar-On-The-Boundary Tests For Moment Inequalities Exist, But Have Poor Power, Donald W.K. Andrews Aug 2011

Similar-On-The-Boundary Tests For Moment Inequalities Exist, But Have Poor Power, Donald W.K. Andrews

Cowles Foundation Discussion Papers

This paper shows that moment inequality tests that are asymptotically similar on the boundary of the null hypothesis exist, but have poor power. Hence, existing tests in the literature, which are asymptotically non-similar on the boundary, are not deficient. The results are obtained by first establishing results for the finite-sample multivariate normal one-sided testing problem. Then, these results are shown to have implications for more general moment inequality tests that are used in the literature on partial identification.


A Conditional-Heteroskedasticity-Robust Confidence Interval For The Autoregressive Parameter, Donald W.K. Andrews, Patrik Guggenberger Aug 2011

A Conditional-Heteroskedasticity-Robust Confidence Interval For The Autoregressive Parameter, Donald W.K. Andrews, Patrik Guggenberger

Cowles Foundation Discussion Papers

This paper introduces a new confidence interval (CI) for the autoregressive parameter (AR) in an AR(1) model that allows for conditional heteroskedasticity of general form and AR parameters that are less than or equal to unity. The CI is a modification of Mikusheva’s (2007a) modification of Stock’s (1991) CI that employs the least squares estimator and a heteroskedasticity-robust variance estimator. The CI is shown to have correct asymptotic size and to be asymptotically similar (in a uniform sense). It does not require any tuning parameters. No existing procedures have these properties. Monte Carlo simulations show that the CI performs well …


The Effect Of Language On Economic Behavior: Evidence From Savings Rates, Health Behaviors, And Retirement Assets, Keith M. Chen Aug 2011

The Effect Of Language On Economic Behavior: Evidence From Savings Rates, Health Behaviors, And Retirement Assets, Keith M. Chen

Cowles Foundation Discussion Papers

Languages differ widely in the ways they encode time. I test the hypothesis that languages that grammatically associate the future and the present, foster future-oriented behavior. This prediction arises naturally when well-documented effects of language structure are merged with models of intertemporal choice. Empirically, I find that speakers of such languages: save more, retire with more wealth, smoke less, practice safer sex, and are less obese. This holds both across countries and within countries when comparing demographically similar native households. The evidence does not support the most obvious forms of common causation. I discuss implications for theories of intertemporal choice.


Irving Fisher, Debt Deflation And Crises, Robert J. Shiller Aug 2011

Irving Fisher, Debt Deflation And Crises, Robert J. Shiller

Cowles Foundation Discussion Papers

It is the 100th anniversary of Irving Fisher’s 1911 book The Purchasing Power of Money . But, more important than that, it is a good time, during the current financial turmoil, to reconsider some of his theories again, in light of current events. And I think that some of his theories about variations in the purchasing power of money are very important today, have been underappreciated, and are worthy of considering anew.


Robust Mechanism Design: An Introduction, Dirk Bergemann, Stephen Morris Aug 2011

Robust Mechanism Design: An Introduction, Dirk Bergemann, Stephen Morris

Cowles Foundation Discussion Papers

This essay is the introduction for a collection of papers by the two of us on “Robust Mechanism Design” to be published by World Scientific Publishing. The appendix of this essay lists the chapters of the book. The objective of this introductory essay is to provide the reader with an overview of the research agenda pursued in the collected papers. The introduction selectively presents the main results of the papers, and attempts to illustrate many of them in terms of a common and canonical example, the single unit auction with interdependent values. In addition, we include an extended discussion about …


What It Takes To Solve The U.S. Government Deficit Problem, Ray C. Fair Jul 2011

What It Takes To Solve The U.S. Government Deficit Problem, Ray C. Fair

Cowles Foundation Discussion Papers

This paper uses a structural multi-country macroeconometric model to estimate the size of the decrease in transfer payments (or tax expenditures) needed to stabilize the U.S. government debt/GDP ratio. It takes into account endogenous effects of changes in fiscal policy on the economy and in turn the effect of changes in the economy on the deficit. A base run is first obtained for the 2013:1-2022:4 period in which there are no major changes in U.S. fiscal policy. This results in an ever increasing debt/GDP ratio. Then transfer payments are decreased by an amount sufficient to stabilize the long-run debt/GDP ratio. …


Tranching, Cds And Asset Prices: How Financial Innovation Can Cause Bubbles And Crashes, Ana Fostel, John Geanakoplos Jul 2011

Tranching, Cds And Asset Prices: How Financial Innovation Can Cause Bubbles And Crashes, Ana Fostel, John Geanakoplos

Cowles Foundation Discussion Papers

We show how the timing of financial innovation might have contributed to the mortgage boom and then to the bust of 2007-2009. We study the effect of leverage, tranching, securitization and CDS on asset prices in a general equilibrium model with collateral. We show why tranching and leverage tend to raise asset prices and why CDS tend to lower them. This may seem puzzling, since it implies that creating a derivative tranche in the securitization whose payoffs are identical to the CDS will raise the underlying asset price while the CDS outside the securitization lowers it. The resolution of the …


The Present And Future Of Game Theory, Martin Shubik Jul 2011

The Present And Future Of Game Theory, Martin Shubik

Cowles Foundation Discussion Papers

A broad nontechnical coverage of many of the developments in game theory since the 1950s is given together with some comments on important open problems and where some of the developments may take place. The nearly 90 references given serve only as a minimal guide to the many thousands of books and articles that have been written. The purpose here is to present a broad brush picture of the many areas of study and application that have come into being. The use of deep techniques flourishes best when it stays in touch with application. There is a vital symbiotic relationship …


Dynamics Of Inductive Inference In A Unified Framework, Itzhak Gilboa, Larry Samuelson, David Schmeidler Jul 2011

Dynamics Of Inductive Inference In A Unified Framework, Itzhak Gilboa, Larry Samuelson, David Schmeidler

Cowles Foundation Discussion Papers

We present a model of inductive inference that includes, as special cases, Bayesian reasoning, case-based reasoning, and rule-based reasoning. This unified framework allows us to examine, positively or normatively, how the various modes of inductive inference can be combined and how their relative weights change endogenously. We establish conditions under which an agent who does not know the structure of the data generating process will decrease, over the course of her reasoning, the weight of credence put on Bayesian vs. non-Bayesian reasoning. We show that even random data can make certain theories seem plausible and hence increase the weight of …


Tranching, Cds And Asset Prices: How Financial Innovation Can Cause Bubbles And Crashes, Ana Fostel, John Geanakoplos Jul 2011

Tranching, Cds And Asset Prices: How Financial Innovation Can Cause Bubbles And Crashes, Ana Fostel, John Geanakoplos

Cowles Foundation Discussion Papers

We show how the timing of financial innovation might have contributed to the mortgage bubble and then to the crash of 2007-2009. We show why tranching and leverage first raised asset prices and why CDS lowered them afterwards. This may seem puzzling, since it implies that creating a derivative tranche in the securitization whose payoffs are identical to the CDS will raise the underlying asset price while the CDS outside the securitization lowers it. The resolution of the puzzle is that the CDS lowers the value of the underlying asset since it is equivalent to tranching cash.


Pricing And Investments In Matching Markets, George J. Mailath, Andrew Postlewaite, Larry Samuelson Jul 2011

Pricing And Investments In Matching Markets, George J. Mailath, Andrew Postlewaite, Larry Samuelson

Cowles Foundation Discussion Papers

Different markets are cleared by different types of prices — seller-specific prices that are uniform across buyers in some markets, and personalized prices tailored to the buyer in others. We examine a setting in which buyers and sellers make investments before matching in a competitive market. We introduce the notion of premuneration values — the values to the transacting agents prior to any transfers — created by a buyer-seller match. Personalized price equilibrium outcomes are independent of premuneration values and exhibit inefficiencies only in the event of “coordination failures,” while uniform-price equilibria depend on premuneration values and in general feature …


Mean-Dispersion Preferences And Constant Absolute Uncertainty Aversion, Simon Grant, Ben Polak Jun 2011

Mean-Dispersion Preferences And Constant Absolute Uncertainty Aversion, Simon Grant, Ben Polak

Cowles Foundation Discussion Papers

We axiomatize, in an Anscombe-Aumann framework, the class of preferences that admit a representation of the form V ( f ) = µ – ρ( d ), where mu is the mean utility of the act f with respect to a given probability, d is the vector of state-by-state utility deviations from the mean, and ρ( d ) is a measure of (aversion to) dispersion that corresponds to an uncertainty premium. The key feature of these mean-dispersion preferences is that they exhibit constant absolute uncertainty aversion. This class includes many well-known models of preferences from the literature on ambiguity. We …


“Connected Substitutes And Invertibility Of Demand, Steven T. Berry, Amit Gandhi, Philip A. Haile Jun 2011

“Connected Substitutes And Invertibility Of Demand, Steven T. Berry, Amit Gandhi, Philip A. Haile

Cowles Foundation Discussion Papers

We consider the invertibility (injectivity) of a nonparametric nonseparable demand system. Invertibility of demand is important in several contexts, including identification of demand, estimation of demand, testing of revealed preference, and economic theory exploiting existence of an inverse demand function or (in an exchange economy) uniqueness of Walrasian equilibrium prices. We introduce the notion of “connected substitutes” and show that this structure is sufficient for invertibility. The connected substitutes conditions require weak substitution between all goods and sufficient strict substitution to necessitate treating them in a single demand system. The connected substitutes conditions have transparent economic interpretation, are easily checked, …


Connected Substitutes And Invertibility Of Demand, Steven T. Berry, Amit Gandhi, Philip A. Haile Jun 2011

Connected Substitutes And Invertibility Of Demand, Steven T. Berry, Amit Gandhi, Philip A. Haile

Cowles Foundation Discussion Papers

We consider the invertibility of a nonparametric nonseparable demand system. Invertibility of demand is important in several contexts, including identification of demand, estimation of demand, testing of revealed preference, and economic theory requiring uniqueness of market clearing prices. We introduce the notion of “connected substitutes” and show that this structure is sufficient for invertibility. The connected substitutes conditions require weak substitution between all goods and sufficient strict substitution to necessitate treating them in a single demand system. These conditions are satisfied in many standard models, have transparent economic interpretation, and allow us to show invertibility without functional form restrictions, smoothness …