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- Mechanism design (33)
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Articles 931 - 960 of 2768
Full-Text Articles in Social and Behavioral Sciences
Default Penalty As A Selection Mechanism Among Multiple Equilibria, Juergen Huber, Martin Shubik, Shyam Sunder
Default Penalty As A Selection Mechanism Among Multiple Equilibria, Juergen Huber, Martin Shubik, Shyam Sunder
Cowles Foundation Discussion Papers
The possibility of the presence of multiple equilibria in closed exchange and production-and-exchange economies is usually ignored in macroeconomic models even though they are important in real economies. We argue that default and bankruptcy laws serve to provide the conditions for uniqueness of an equilibrium. In this paper, we report experimental evidence on the effectiveness of this approach to resolving multiplicity: a society can assign default penalties on fiat money so that the economy selects one of the equilibria. The laboratory data show that the choice of default penalty takes the economy near the chosen equilibrium. The theory and evidence …
Default Penalty As A Selection Mechanism Among Multiple Equilibria, Juergen Huber, Martin Shubik, Shyam Sunder
Default Penalty As A Selection Mechanism Among Multiple Equilibria, Juergen Huber, Martin Shubik, Shyam Sunder
Cowles Foundation Discussion Papers
Closed exchange and production-and-exchange economies may have multiple equilibria, a fact that is usually ignored in macroeconomic models. Our basic argument is that default and bankruptcy laws are required to prevent strategic default, and these laws can also serve to provide the conditions for uniqueness. In this paper, we report experimental evidence on the effectiveness of this approach to resolving multiplicity: a society can assign default penalties on fiat money so that the economy selects one of the equilibria. Our data show that the choice of default penalty takes the economy close to the chosen equilibrium. The theory and evidence …
El Farol Revisited: A Note On Emergence, Game Theory And Society, Martin Shubik
El Farol Revisited: A Note On Emergence, Game Theory And Society, Martin Shubik
Cowles Foundation Discussion Papers
The El Farol Bar problem with coordination is reconsidered in terms and extended with consideration of further context.
Breach, Remedies And Dispute Settlement In Trade Agreements, Giovanni Maggi, Robert W. Staiger
Breach, Remedies And Dispute Settlement In Trade Agreements, Giovanni Maggi, Robert W. Staiger
Cowles Foundation Discussion Papers
We provide a simple but novel model of trade agreements that highlights the role of transaction costs, renegotiation and dispute settlement. The model allows us to characterize the appropriate remedy for breach and whether the agreement should be structured as a system of “property rights” or “liability rules.” We then study how the optimal rules depend on the underlying economic and contracting environment. Our model also delivers predictions about the outcome of trade disputes, and in particular about the propensity of countries to settle early versus “fighting it out.”
Semiparametric Efficiency Bound For Models Of Sequential Moment Restrictions Containing Unknown Functions, Chunrong Ai, Xiaohong Chen
Semiparametric Efficiency Bound For Models Of Sequential Moment Restrictions Containing Unknown Functions, Chunrong Ai, Xiaohong Chen
Cowles Foundation Discussion Papers
This paper computes the semiparametric efficiency bound for finite dimensional parameters identified by models of sequential moment restrictions containing unknown functions. Our results extend those of Chamberlain (1992b) and Ai and Chen (2003) for semiparametric conditional moment restriction models with identical information sets to the case of nested information sets, and those of Chamberlain (1992a) and Brown and Newey (1998) for models of sequential moment restrictions without unknown functions to cases with unknown functions of possibly endogenous variables. Our bound results are applicable to semiparametric panel data models and semiparametric two stage plug-in problems. As an example, we compute the …
Strategic Supply Function Competition With Private Information, Xavier Vives
Strategic Supply Function Competition With Private Information, Xavier Vives
Cowles Foundation Discussion Papers
A finite number of sellers ( n ) compete in schedules to supply an elastic demand. The costs of the sellers have uncertain common and private value components and there is no exogenous noise in the system. A Bayesian supply function equilibrium is characterized; the equilibrium is privately revealing and the incentives to acquire information are preserved. Price-cost margins and bid shading are affected by the parameters of the information structure: supply functions are steeper with more noise in the private signals or more correlation among the costs parameters. In fact, for large values of noise or correlation supply functions …
Default Penalty As A Disciplinary And Selection Mechanism In Presence Of Multiple Equilibria, Juergen Huber, Martin Shubik, Shyam Sunder
Default Penalty As A Disciplinary And Selection Mechanism In Presence Of Multiple Equilibria, Juergen Huber, Martin Shubik, Shyam Sunder
Cowles Foundation Discussion Papers
Closed exchange and production-and-exchange economies may have multiple equilibria, a fact that is usually ignored in macroeconomic models. Our basic argument is that default and bankruptcy laws are required to prevent strategic default, and these laws can also serve to provide the conditions for uniqueness. In this paper we report experimental evidence on the effectiveness of this approach to resolving multiplicity: society can assign default penalties on fiat money so the economy selects one of the equilibria. Our data show that the choice of default penalty takes the economy to the neighborhood of the chosen equilibrium. The theory and evidence …
Identification Of A Heterogeneous Generalized Regression Model With Group Effects, Steven T. Berry, Philip A. Haile
Identification Of A Heterogeneous Generalized Regression Model With Group Effects, Steven T. Berry, Philip A. Haile
Cowles Foundation Discussion Papers
We consider identification in a “generalized regression model” (Han, 1987) for panel settings in which each observation can be associated with a “group” whose members are subject to a common unobserved shock. Common examples of groups include markets, schools or cities. The model is fully nonparametric and allows for the endogeneity of group-specific observables, which might include prices, policies, and/or treatments. The model features heterogeneous responses to observables and unobservables, and arbitrary heteroskedasticity. We provide sufficient conditions for full identification of the model, as well as weaker conditions sufficient for identification of the latent group effects and the distribution of …
Uniform Topologies On Types, Yi-Chun Chen, Alfredo Di Tillio, Eduardo Faingold, Siyang Xiong
Uniform Topologies On Types, Yi-Chun Chen, Alfredo Di Tillio, Eduardo Faingold, Siyang Xiong
Cowles Foundation Discussion Papers
We study the robustness of interim correlated rationalizability to perturbations of higher-order beliefs. We introduce a new metric topology on the universal type space, called uniform weak topology, under which two types are close if they have similar first-order beliefs, attach similar probabilities to other players having similar first-order beliefs, and so on, where the degree of similarity is uniform over the levels of the belief hierarchy. This topology generalizes the now classic notion of proximity to common knowledge based on common p-beliefs (Monderer and Samet (1989)). We show that convergence in the uniform weak topology implies convergence in the …
Marshallian Money, Welfare, And Side-Payments, Cheng-Zhong Qin, Lloyd S. Shapley, Martin Shubik
Marshallian Money, Welfare, And Side-Payments, Cheng-Zhong Qin, Lloyd S. Shapley, Martin Shubik
Cowles Foundation Discussion Papers
A link between a no-side-payment (NSP) market game and a side-payment (SP) market game can be established by introducing a sufficient amount of an ideal utility-money of constant marginal utility to all agents. At some point when there is “enough money” in the system, if it is “well distributed” the new game will be a SP game. This game can also be related to a pure NSP game where a set of default parameters have been introduced. These parameters play a role similar to the parameters specifying the interpersonal comparisons in the side-payment game. We study this game for the …
Incentives For Experimenting Agents, Johannes Hörner, Larry Samuelson
Incentives For Experimenting Agents, Johannes Hörner, Larry Samuelson
Cowles Foundation Discussion Papers
We examine a repeated interaction between an agent, who undertakes experiments, and a principal who provides the requisite funding for these experiments. The agent’s actions are hidden, and the principal, who makes the offers, cannot commit to future actions. We identify the unique Markovian equilibrium (whose structure depends on the parameters) and characterize the set of all equilibrium payoffs, uncovering a collection of non-Markovian equilibria that can Pareto dominate and reverse the qualitative properties of the Markovian equilibrium. The prospect of lucrative continuation payoffs makes it more expensive for the principal to incentivize the agent, giving rise to a dynamic …
Incentives For Experimenting Agents, Johannes Hörner, Larry Samuelson
Incentives For Experimenting Agents, Johannes Hörner, Larry Samuelson
Cowles Foundation Discussion Papers
We examine a repeated interaction between an agent, who undertakes experiments, and a principal who provides the requisite funding for these experiments. The repeated interaction gives rise to a dynamic agency cost — the more lucrative is the agent’s stream of future rents following a failure, the more costly are current incentives for the agent, giving the principal an incentive to reduce the continuation value of the project. We characterize the set of recursive Markov equilibria. We also find that there are non-Markov equilibria that make the principal better off than the recursive Markov equilibrium, and that may make both …
Incentives For Experimenting Agents, Johannes Hörner, Larry Samuelson
Incentives For Experimenting Agents, Johannes Hörner, Larry Samuelson
Cowles Foundation Discussion Papers
We examine a repeated interaction between an agent, who undertakes experiments, and a principal who provides the requisite funding for these experiments. The repeated interaction gives rise to a dynamic agency cost — the more lucrative is the agent’s stream of future rents following a failure, the more costly are current incentives for the agent, giving the principal an incentive to reduce the continuation value of the project. We characterize the set of recursive Markov equilibria. We show that there are non-Markov equilibria that make the principal better off than the recursive Markov equilibrium, and that may make both players …
Has Macro Progressed?, Ray C. Fair
Has Macro Progressed?, Ray C. Fair
Cowles Foundation Discussion Papers
There have been a number of recent papers arguing that there has been considerable convergence in macro research and to the good. This paper considers the question whether what has been converged to is good. Has progress been made in understanding how the macro economy works?
Possible Macroeconomic Consequences Of Large Future Federal Government Deficits, Ray C. Fair
Possible Macroeconomic Consequences Of Large Future Federal Government Deficits, Ray C. Fair
Cowles Foundation Discussion Papers
This paper uses a multicountry macroeconometric model to analyze possible macroeconomic consequences of large future U.S. federal government deficits. The analysis has the advantage of accounting for the endogeneity of the deficit. In the baseline run, which assumes no large tax increases or spending cuts and no bad dollar and stock market shocks, the debt/GDP ratio rises substantially through 2020. The estimates from this run are in line with other estimates. Various experiments off the baseline run are then done. If the dollar depreciates, inflation increases but the effect on the debt/GDP ratio is modest. It does not appear that …
Incentives For Experimenting Agents, Johannes Hörner, Larry Samuelson
Incentives For Experimenting Agents, Johannes Hörner, Larry Samuelson
Cowles Foundation Discussion Papers
We examine a repeated interaction between an agent, who undertakes experiments, and a principal who provides the requisite funding for these experiments. The agent’s actions are hidden, and the principal, who makes the offers, cannot commit to future actions. We identify the unique Markovian equilibrium (whose structure depends on the parameters) and characterize the set of all equilibrium payoffs, uncovering a collection of non-Markovian equilibria that can Pareto dominate and reverse the qualitative properties of the Markovian equilibrium. The prospect of lucrative continuation payoffs makes it more expensive for the principal to incentivize the agent, giving rise to a dynamic …
Optimal Comparison Of Misspecified Moment Restriction Models Under A Chosen Measure Of Fit, Vadim Marmer, Taisuke Otsu
Optimal Comparison Of Misspecified Moment Restriction Models Under A Chosen Measure Of Fit, Vadim Marmer, Taisuke Otsu
Cowles Foundation Discussion Papers
Suppose that the econometrician is interested in comparing two misspecified moment restriction models, where the comparison is performed in terms of some chosen measure of fit. This paper is concerned with describing an optimal test of the Vuong (1989) and Rivers and Vuong (2002) type null hypothesis that the two models are equivalent under the given measure of fit (the ranking may vary for different measures). We adopt the generalized Neyman-Pearson optimality criterion, which focuses on the decay rates of the type I and II error probabilities under fixed non-local alternatives, and derive an optimal but practically infeasible test. Then, …
On The Asymptotic Optimality Of Empirical Likelihood For Testing Moment Restrictions, Yuichi Kitamura, Andres Santos, Azeem M. Shaikh
On The Asymptotic Optimality Of Empirical Likelihood For Testing Moment Restrictions, Yuichi Kitamura, Andres Santos, Azeem M. Shaikh
Cowles Foundation Discussion Papers
In this paper we make two contributions. First, we show by example that empirical likelihood and other commonly used tests for parametric moment restrictions, including the GMM-based J -test of Hansen (1982), are unable to control the rate at which the probability of a Type I error tends to zero. From this it follows that, for the optimality claim for empirical likelihood in Kitamura (2001) to hold, additional assumptions and qualifications need to be introduced. The example also reveals that empirical and parametric likelihood may have non-negligible differences for the types of properties we consider, even in models in which …
The Case For Trills: Giving The People And Their Pension Funds A Stake In The Wealth Of The Nation, Mark Kamstra, Robert J. Shiller
The Case For Trills: Giving The People And Their Pension Funds A Stake In The Wealth Of The Nation, Mark Kamstra, Robert J. Shiller
Cowles Foundation Discussion Papers
We make the case for the U.S. government to issue a new security with a coupon tied to the United States’ current dollar GDP. This security might pay, for example, a coupon of one-trillionth of the GDP, and we propose the name “Trill” be used to refer to this new security. This new debt instrument should be of great interest to the Government for its stabilizing influence on the budget (as coupon payments fall in a recession with declining tax revenues) and for its yield, based on our valuation. Standard asset pricing analysis also suggests that Trills would enable important …
Hyperbolic Discounting Is Rational: Valuing The Far Future With Uncertain Discount Rates, J. Doyne Farmer, John Geanakoplos
Hyperbolic Discounting Is Rational: Valuing The Far Future With Uncertain Discount Rates, J. Doyne Farmer, John Geanakoplos
Cowles Foundation Discussion Papers
Conventional economics supposes that agents value the present vs. the future using an exponential discounting function. In contrast, experiments with animals and humans suggest that agents are better described as hyperbolic discounters, whose discount function decays much more slowly at large times, as a power law. This is generally regarded as being time inconsistent or irrational. We show that when agents cannot be sure of their own future one-period discount rates, then hyperbolic discounting can become rational and exponential discounting irrational. This has important implications for environmental economics, as it implies a much larger weight for the far future.
Nonparametric Estimation In Random Coefficients Binary Choice Models, Eric Gautier, Yuichi Kitamura
Nonparametric Estimation In Random Coefficients Binary Choice Models, Eric Gautier, Yuichi Kitamura
Cowles Foundation Discussion Papers
This paper considers random coefficients binary choice models. The main goal is to estimate the density of the random coefficients nonparametrically. This is an ill-posed inverse problem characterized by an integral transform. A new density estimator for the random coefficients is developed, utilizing Fourier-Laplace series on spheres. This approach offers a clear insight on the identification problem. More importantly, it leads to a closed form estimator formula that yields a simple plug-in procedure requiring no numerical optimization. The new estimator, therefore, is easy to implement in empirical applications, while being flexible about the treatment of unobserved heterogeneity. Extensions including treatments …
Nonparametric Identification Of Multinomial Choice Demand Models With Heterogeneous Consumers, Steven T. Berry, Philip A. Haile
Nonparametric Identification Of Multinomial Choice Demand Models With Heterogeneous Consumers, Steven T. Berry, Philip A. Haile
Cowles Foundation Discussion Papers
We consider identification of nonparametric random utility models of multinomial choice using “micro data,” i.e., observation of the characteristics and choices of individual consumers. Our model of preferences nests random coefficients discrete choice models widely used in practice with parametric functional form and distributional assumptions. However, the model is nonparametric and distribution free. It allows choice-specific unobservables, endogenous choice characteristics, unknown heteroskedasticity, and high-dimensional correlated taste shocks. Under standard “large support” and instrumental variables assumptions, we show identifiability of the random utility model. We demonstrate robustness of these results to relaxation of the large support condition and show that when …
Robustness, Infinitesimal Neighborhoods, And Moment Restrictions, Yuichi Kitamura, Taisuke Otsu, Kirill Evdokomov
Robustness, Infinitesimal Neighborhoods, And Moment Restrictions, Yuichi Kitamura, Taisuke Otsu, Kirill Evdokomov
Cowles Foundation Discussion Papers
This paper is concerned with robust estimation under moment restrictions. A moment restriction model is semiparametric and distribution-free, therefore it imposes mild assumptions. Yet it is reasonable to expect that the probability law of observations may have some deviations from the ideal distribution being modeled, due to various factors such as measurement errors. It is then sensible to seek an estimation procedure that are robust against slight perturbation in the probability measure that generates observations. This paper considers local deviations within shrinking topological neighborhoods to develop its large sample theory, so that both bias and variance matter asymptotically. The main …
Soft Budgets And Renegotiations In Public-Private Partnerships, Eduardo Engel, Ronald Fischer, Alexander Galetovic
Soft Budgets And Renegotiations In Public-Private Partnerships, Eduardo Engel, Ronald Fischer, Alexander Galetovic
Cowles Foundation Discussion Papers
Public-private partnerships (PPPs) are increasingly used to provide infrastructure services. Even though PPPs have the potential to increase efficiency and improve resource allocation, contract renegotiations have been pervasive. We show that existing accounting standards allow governments to renegotiate PPP contracts and elude spending limits. Our model of renegotiations leads to observable predictions: (i) in a competitive market, firms lowball their offers, expecting to break even through renegotiation, (ii) renegotiations compensate lowballing and pay for additional expenditure, (iii) governments use renegotiation to increase spending and shift the burden of payments to future administrations, and (iv) there are significant renegotiations in the …
Subjectivity In Inductive Inference, Itzhak Gilboa, Larry Samuelson
Subjectivity In Inductive Inference, Itzhak Gilboa, Larry Samuelson
Cowles Foundation Discussion Papers
This paper examines circumstances under which subjectivity enhances the effectiveness of inductive reasoning. We consider a game in which Fate chooses a data generating process and agents are characterized by inference rules that may be purely objective (or data-based) or may incorporate subjective considerations. The basic intuition is that agents who invoke no subjective considerations are doomed to “overfit” the data and therefore engage in ineffective learning. The analysis places no computational or memory limitations on the agents — the role for subjectivity emerges in the presence of unlimited reasoning powers.
Alternative Policies And Sea-Level Rise In The Rice-2009 Model, William D. Nordhaus
Alternative Policies And Sea-Level Rise In The Rice-2009 Model, William D. Nordhaus
Cowles Foundation Discussion Papers
The present study extends earlier research by presenting the results of a new and updated version of the RICE model (Regional Integrated model of Climate and the Economy), labeled the RICE-2009 model. The model is a regionalized, dynamic model that incorporates an end-to-end treatment of economic growth, emissions, climate change, damages, and emissions controls. The model allows projections of what will occur with no policies, with efficient policies be, how nations can undertake policies to limit climate change (in the current runs to 2°C), and the impacts of limited participation. These new estimates indicate that coordinated international policies have a …
The Leverage Cycle, John Geanakoplos
The Leverage Cycle, John Geanakoplos
Cowles Foundation Discussion Papers
Equilibrium determines leverage, not just interest rates. Variations in leverage cause fluctuations in asset prices. This leverage cycle can be damaging to the economy, and should be regulated.
Credit Cards And Inflation, John Geanakoplos, Pradeep Dubey
Credit Cards And Inflation, John Geanakoplos, Pradeep Dubey
Cowles Foundation Discussion Papers
The introduction and widespread use of credit cards increases trading efficiency but, by also increasing the velocity of money, it causes inflation, in the absence of monetary intervention. If the monetary authority attempts to restore pre-credit card price levels by reducing the money supply, it might have to sacrifice the efficiency gains. When there is default on credit cards, there is even more inflation, and less efficiency gains. The monetary authority might then have to accept less than pre-credit card efficiency in order to restore pre-credit card price levels, or else it will have to accept inflation if it is …
Market Valuation Of Accrued Social Security Benefits, John Geanakoplos, Stephen P. Zeldes
Market Valuation Of Accrued Social Security Benefits, John Geanakoplos, Stephen P. Zeldes
Cowles Foundation Discussion Papers
One measure of the health of the Social Security system is the difference between the market value of the trust fund and the present value of benefits accrued to date. How should present values be computed for this calculation in light of future uncertainties? We think it is important to use market value. Since claims on accrued benefits are not currently traded in financial markets, we cannot directly observe a market value. In this paper, we use a model to estimate what the market price for these claims would be if they were traded. In valuing such claims, the key …
The Leverage Cycle, John Geanakoplos
The Leverage Cycle, John Geanakoplos
Cowles Foundation Discussion Papers
Equilibrium determines leverage, not just interest rates. Variations in leverage cause fluctuations in asset prices. This leverage cycle can be damaging to the economy, and should be regulated.