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Articles 31 - 60 of 86
Full-Text Articles in Social and Behavioral Sciences
Robust Predictions In Games With Incomplete Information, Dirk Bergemann, Stephen Morris
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
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
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
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
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.
Irving Fisher, Debt Deflation And Crises, Robert J. Shiller
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.
Risky Curves: From Unobservable Utility To Observable Opportunity Sets, Daniel Friedman, Shyam Sunder
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
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
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
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 …
Robust Mechanism Design: An Introduction, Dirk Bergemann, Stephen Morris
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 …
The Effect Of Language On Economic Behavior: Evidence From Savings Rates, Health Behaviors, And Retirement Assets, Keith M. Chen
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.
What It Takes To Solve The U.S. Government Deficit Problem, Ray C. Fair
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
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.
Tranching, Cds And Asset Prices: How Financial Innovation Can Cause Bubbles And Crashes, Ana Fostel, John Geanakoplos
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 …
Pricing And Investments In Matching Markets, George J. Mailath, Andrew Postlewaite, Larry Samuelson
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 …
The Present And Future Of Game Theory, Martin Shubik
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
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 …
Connected Substitutes And Invertibility Of Demand, Steven T. Berry, Amit Gandhi, Philip A. Haile
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 …
Mean-Dispersion Preferences And Constant Absolute Uncertainty Aversion, Simon Grant, Ben Polak
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
“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, …
Large Deviations Of Realized Volatility, Shin Kanaya, Taisuke Otsu
Large Deviations Of Realized Volatility, Shin Kanaya, Taisuke Otsu
Cowles Foundation Discussion Papers
This paper studies large and moderate deviation properties of a realized volatility statistic of high frequency financial data. We establish a large deviation principle for the realized volatility when the number of high frequency observations in a fixed time interval increases to infinity. Our large deviation result can be used to evaluate tail probabilities of the realized volatility. We also derive a moderate deviation rate function for a standardized realized volatility statistic. The moderate deviation result is useful for assessing the validity of normal approximations based on the central limit theorem. In particular, it clarifies that there exists a trade-off …
Empirical Likelihood For Regression Discontinuity Design, Taisuke Otsu, Ke-Li Xu
Empirical Likelihood For Regression Discontinuity Design, Taisuke Otsu, Ke-Li Xu
Cowles Foundation Discussion Papers
This paper proposes empirical likelihood based inference methods for causal effects identified from regression discontinuity designs. We consider both the sharp and fuzzy regression discontinuity designs and treat the regression functions as nonparametric. The proposed inference procedures do not require asymptotic variance estimation and the confidence sets have natural shapes, unlike the conventional Wald-type method. These features are illustrated by simulations and an empirical example which evaluates the effect of class size on pupils’ scholastic achievements. Bandwidth selection methods, higher-order properties, and extensions to incorporate additional covariates and parametric functional forms are also discussed.
Endogenous Leverage: Var And Beyond, Ana Fostel, John Geanakoplos
Endogenous Leverage: Var And Beyond, Ana Fostel, John Geanakoplos
Cowles Foundation Discussion Papers
We study endogenous leverage in a general equilibrium model with incomplete markets. We prove that in any binary tree leverage emerges in equilibrium at the maximum level such that VaR = 0, so there is no default in equilibrium, provided that agents get no utility from holding the collateral. When the collateral does affect utility (as with housing) or when agents have sufficiently heterogenous beliefs over three or more states, VaR = 0 fails to hold in equilibrium. We study commonly used examples: an economy in which investors have heterogenous beliefs and a CAPM economy consisting of investors with different …
Examples Of L 2 -Complete And Boundedly-Complete Distributions, Donald W.K. Andrews
Examples Of L 2 -Complete And Boundedly-Complete Distributions, Donald W.K. Andrews
Cowles Foundation Discussion Papers
Completeness and bounded-completeness conditions are used increasingly in econometrics to obtain nonparametric identification in a variety of models from nonparametric instrumental variable regression to non-classical measurement error models. However, distributions that are known to be complete or boundedly complete are somewhat scarce. In this paper, we consider an L 2 -completeness condition that lies between completeness and bounded completeness. We construct broad (nonparametric) classes of distributions that are L 2 -complete and boundedly complete. The distributions can have any marginal distributions and a wide range of strengths of dependence. Examples of L 2 -incomplete distributions also are provided.
Dynamic Strategic Information Transmission, Mikhail Golosov, Vasiliki Skreta, Aleh Tsyvinski, Andrea Wilson
Dynamic Strategic Information Transmission, Mikhail Golosov, Vasiliki Skreta, Aleh Tsyvinski, Andrea Wilson
Cowles Foundation Discussion Papers
This paper studies strategic information transmission in a dynamic environment where, each period, a privately informed expert sends a message and a decision maker takes an action. Our main result is that, in contrast to a static environment, full information revelation is possible. The gradual revelation of information and the eventual full revelation is supported by the dynamic rewards and punishments. The construction of a fully revealing equilibrium relies on two key features. The first feature is that the expert is incentivized, via appropriate actions, to join separable groups in which she initially pools with far-away types, then later reveals …
A Practical Asymptotic Variance Estimator For Two-Step Semiparametric Estimators, Daniel Ackerberg, Xiaohong Chen, Jinyong Hahn
A Practical Asymptotic Variance Estimator For Two-Step Semiparametric Estimators, Daniel Ackerberg, Xiaohong Chen, Jinyong Hahn
Cowles Foundation Discussion Papers
The goal of this paper is to develop techniques to simplify semiparametric inference. We do this by deriving a number of numerical equivalence results. These illustrate that in many cases, one can obtain estimates of semiparametric variances using standard formulas derived in the already-well-known parametric literature. This means that for computational purposes, an empirical researcher can ignore the semiparametric nature of the problem and do all calculations “as if” it were a parametric situation. We hope that this simplicity will promote the use of semiparametric procedures.
Penalized Sieve Estimation And Inference Of Semi-Nonparametric Dynamic Models: A Selective Review, Xiaohong Chen
Penalized Sieve Estimation And Inference Of Semi-Nonparametric Dynamic Models: A Selective Review, Xiaohong Chen
Cowles Foundation Discussion Papers
In this selective review, we first provide some empirical examples that motivate the usefulness of semi-nonparametric techniques in modelling economic and financial time series. We describe popular classes of semi-nonparametric dynamic models and some temporal dependence properties. We then present penalized sieve extremum (PSE) estimation as a general method for semi-nonparametric models with cross-sectional, panel, time series, or spatial data. The method is especially powerful in estimating difficult ill-posed inverse problems such as semi-nonparametric mixtures or conditional moment restrictions. We review recent advances on inference and large sample properties of the PSE estimators, which include (1) consistency and convergence rates …
Local Identification Of Nonparametric And Semiparametric Models, Xiaohong Chen, Victor Chernozhukov, Sokbae Lee, Whitney Newey
Local Identification Of Nonparametric And Semiparametric Models, Xiaohong Chen, Victor Chernozhukov, Sokbae Lee, Whitney Newey
Cowles Foundation Discussion Papers
In parametric models a sufficient condition for local identification is that the vector of moment conditions is differentiable at the true parameter with full rank derivative matrix. We show that additional conditions are often needed in nonlinear, nonparametric models to avoid nonlinearities overwhelming linear effects. We give restrictions on a neighborhood of the true value that are sufficient for local identification. We apply these results to obtain new, primitive identification conditions in several important models, including nonseparable quantile instrumental variable (IV) models, single-index IV models, and semiparametric consumption-based asset pricing models.
Robustness Of Bootstrap In Instrumental Variable Regression, Lorenzo Camponovo, Taisuke Otsu
Robustness Of Bootstrap In Instrumental Variable Regression, Lorenzo Camponovo, Taisuke Otsu
Cowles Foundation Discussion Papers
This paper studies robustness of bootstrap inference methods for instrumental variable regression models. In particular, we compare the uniform weight and implied probability bootstrap approximations for parameter hypothesis test statistics by applying the breakdown point theory, which focuses on behaviors of the bootstrap quantiles when outliers take arbitrarily large values. The implied probabilities are derived from an information theoretic projection from the empirical distribution to a set of distributions satisfying orthogonality conditions for instruments. Our breakdown point analysis considers separately the effects of outliers in dependent variables, endogenous regressors, and instruments, and clarifies the situations where the implied probability bootstrap …