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Social and Behavioral Sciences Commons™
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- Keyword
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- Adverse selection (11)
- Default (10)
- Equilibrium refinement (8)
- Incomplete markets (8)
- Endogenous assets (7)
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- Moral hazard (7)
- Signalling (5)
- Competitive pooling (4)
- General equilibrium (4)
- Collateral (3)
- Contracts (3)
- Crashes (3)
- Expected utility (3)
- Indivisibility (3)
- Insurance (3)
- Liquidity (3)
- Liquidity premium (3)
- Monetary policy (3)
- Refined equilibrium (3)
- Separating equilibrium (3)
- Spillover (3)
- Arm’s length financing (2)
- Asymptotic normality (2)
- Behavioral economics (2)
- Blackwell’s theorem (2)
- Core (2)
- Diversification (2)
- Edgeworth expansion (2)
- Entry (2)
- Efficient markets (2)
Articles 31 - 60 of 73
Full-Text Articles in Social and Behavioral Sciences
Perfectly Fair Allocations With Indivisibilities, Ning Sun, Zaifu Yang
Perfectly Fair Allocations With Indivisibilities, Ning Sun, Zaifu Yang
Cowles Foundation Discussion Papers
One set of n objects of type I, another set of n objects of type II, and an amount M of money is to be completely allocated among n agents in such a way that each agent gets one object of each type with some amount of money. We propose a new solution concept to this problem called a perfectly fair allocation. It is a refinement of the concept of fair allocation. An appealing and interesting property of this concept is that every perfectly fair allocation is Pareto optimal. It is also shown that a perfectly fair allocation is envy …
Exchange Rates And Casualties During The First World War, George J. Hall
Exchange Rates And Casualties During The First World War, George J. Hall
Cowles Foundation Discussion Papers
I estimate a single factor model of Swiss exchange rates during World War I for five of the primary belligerents: Britain, France, Italy, Germany, and Austria-Hungary. At the outbreak of the war these nations suspended convertibility of their currencies into gold with the promise that after the war each would restore convertibility at the old par. However, once convertibility was suspended, each currency became a state-contingent claim; after the war it would pay off at (or near) the old par if the country won or pay off significantly less than par (perhaps nothing) if the country lost. The single factor …
Liquidity, Default And Crashes: Endogenous Contracts In General Equilibrium, John Geanakoplos
Liquidity, Default And Crashes: Endogenous Contracts In General Equilibrium, John Geanakoplos
Cowles Foundation Discussion Papers
Introducing default and limited collateral into general equilibrium theory (GE) allows for a theory of endogenous contracts, including endogenous margin requirements on loans. This in turn allows GE to explain liquidity and liquidity crises in equilibrium. A formal definition of liquidity is presented. When new information raises the probability a fixed income asset may default, its drop in price may be much greater than its objective drop in value because the drop in value reduces the relative wealth of its natural buyers, who disproportiantely own the asset through leveraged purchases. When the information also shortens the horizon over which the …
Liquidity, Default And Crashes: Endogenous Contracts In General Equilibrium, John Geanakoplos
Liquidity, Default And Crashes: Endogenous Contracts In General Equilibrium, John Geanakoplos
Cowles Foundation Discussion Papers
Introducing default and limited collateral into general equilibrium theory (GE) allows for a theory of endogenous contracts, including endogenous margin requirements on loans. This in turn allows GE to explain liquidity and liquidity crises in equilibrium. A formal definition of liquidity is presented. When new information raises the probability a fixed income asset may default, its drop in price may be much greater than its objective drop in value because the drop in value reduces the relative wealth of its natural buyers, who disproportiantely own the asset through leveraged purchases. When the information also shortens the horizon over which the …
If You're So Smart, Why Aren't You Rich?Belief Selection In Complete And Incomplete Markets, Larry Blume, David Easley
If You're So Smart, Why Aren't You Rich?Belief Selection In Complete And Incomplete Markets, Larry Blume, David Easley
Cowles Foundation Discussion Papers
This paper provides an analysis of the asymptotic properties of consumption allocations in a stochastic general equilibrium model with heterogeneous consumers. In particular we investigate the market selection hypothesis, that markets favor traders with more accurate beliefs. We show that in any Pareto optimal allocation whether each consumer vanishes or survives is determined entirely by discount factors and beliefs. Since equilibrium allocations in economies with complete markets are Pareto optimal, our results characterize the limit behavior of these economies. We show that, all else equal, the market selects for consumers who use Bayesian learning with the truth in the support …
Accessible Pareto-Improvements: Using Market Information To Reform Inefficiencies, Michael Mandler
Accessible Pareto-Improvements: Using Market Information To Reform Inefficiencies, Michael Mandler
Cowles Foundation Discussion Papers
We study Pareto improvements whose implementation requires knowledge of only market prices and traded quantities, not utility and demand functions. Quantity stabilization gives agents the right to repeat the net trades they previously conducted, but requires policymakers to have records of those trades. While reasonable in some partial equilibrium contexts, such an assumption is implausible in general equilibrium. To diminish informational requirements further, we also consider price stabilization, which holds constant the relative prices that consumers face. Although price stabilizations do not achieve first-best efficiency, they lead to Pareto-improvements and production efficiency. Moreover, the production efficiency advantage persists under price …
Insurance Contracts Designed By Competitive Pooling, Pradeep Dubey, John Geanakoplos
Insurance Contracts Designed By Competitive Pooling, Pradeep Dubey, John Geanakoplos
Cowles Foundation Discussion Papers
We build a model of competitive pooling and show how insurance contracts emerge in equilibrium, designed by the invisible hand of perfect competition. When pools are exclusive, we obtain a unique separating equilibrium. When pools are not exclusive but seniority is recognized, we obtain a different unique equilibrium: the pivotal primary-secondary equilibrium. Here reliable and unreliable households take out a common primary insurance up to its maximum limit, and then unreliable households take out further secondary insurance.
Compromises Between Cardinality And Ordinality In Preference Theory And Social Choice, Michael Mandler
Compromises Between Cardinality And Ordinality In Preference Theory And Social Choice, Michael Mandler
Cowles Foundation Discussion Papers
By taking sets of utility functions as a primitive description of agents, we define an ordering over assumptions on utility functions that gauges their implicit measurement requirements. Cardinal and ordinal assumptions constitute two types of measurement requirements, but several standard assumptions in economics lie between these extremes. We first apply the ordering to different theories for why consumer preferences should be convex and show that diminishing marginal utility, which for complete preferences implies convexity, is an example of a compromise between cardinality and ordinality. In contrast, the Arrow-Koopmans theory of convexity, although proposed as an ordinal theory, relies on utility …
Second Order Expansions For The Distribution Of The Maximum Likelihood Estimator Of The Fractional Difference Parameter, Offer Lieberman, Peter C.B. Phillips
Second Order Expansions For The Distribution Of The Maximum Likelihood Estimator Of The Fractional Difference Parameter, Offer Lieberman, Peter C.B. Phillips
Cowles Foundation Discussion Papers
The maximum likelihood estimator (MLE) of the fractional difference parameter in the Gaussian ARFIMA(0, d ,0) model is well known to be asymptotically N (0, 6/ π 2 ). This paper develops a second order asymptotic expansion to the distribution of this statistic. The correction term for the density is shown to be independent of d , so that the MLE is second order pivotal for d . This feature of the MLE is unusual, at least in time series contexts. Simulations show that the normal approximation is poor and that the expansions make significant improvements in accuracy.
Gaussian Estimation Of Continuous Time Models Of The Short Term Interest Rate, Jun Yu, Peter C.B. Phillips
Gaussian Estimation Of Continuous Time Models Of The Short Term Interest Rate, Jun Yu, Peter C.B. Phillips
Cowles Foundation Discussion Papers
This paper proposes a Gaussian estimator for nonlinear continuous time models of the short term interest rate. The approach is based on a stopping time argument that produces a normalizing transformation facilitating the use of a Gaussian likelihood. A Monte Carlo study shows that the finite sample performance of the proposed procedure offers an improvement over the discrete approximation method proposed by Nowman (1997). An empirical application to U.S. and British interest rates is given.
The Cnbc Effect: Welfare Effects Of Public Information, Stephen Morris, Hyun Song Shin
The Cnbc Effect: Welfare Effects Of Public Information, Stephen Morris, Hyun Song Shin
Cowles Foundation Discussion Papers
What are the welfare effects of enhanced dissemination of public information through the media and disclosures by market participants with high public visibility? For instance, is it always desirable to have frequent and timely publications of economic statistics by government agencies and the central bank? We examine the impact of public information in a setting where agents take actions appropriate to the underlying fundamentals, but they also have a coordination motive arising from a strategic complementarity in their actions. When the agents have no private information, greater provision of public information always increases welfare. However, when agents also have access …
Social Security Investment In Equities I: Linear Case, Peter A. Diamond, John Geanakoplos
Social Security Investment In Equities I: Linear Case, Peter A. Diamond, John Geanakoplos
Cowles Foundation Discussion Papers
This paper explores the general equilibrium impact of social security portfolio diversification into private securities, either through the trust fund or private accounts. The analysis depends critically on heterogeneities in saving, production, assets, and taxes. Limited diversification weakly increases interest rates, reduces the expected return on short-term investment (and the equity premium), decreases safe investment, increases risky investment and increases a suitably weighted social welfare function. However, the effects on aggregate investment, long-term capital values, and the utility of young savers hinges on assumptions about technology. Aggregate investment and long-term asset values can move in opposite directions.
Social Security Investment In Equities, Peter A. Diamond, John Geanakoplos
Social Security Investment In Equities, Peter A. Diamond, John Geanakoplos
Cowles Foundation Discussion Papers
This paper explores the general equilibrium impact of social security portfolio diversification into private securities, either through the trust fund or private accounts. The analysis depends critically on heterogeneities in saving, production, assets, and taxes. Limited diversification weakly increases interest rates, reduces the expected return on short-term investment (and the equity premium), decreases safe investment, increases risky investment and increases a suitably weighted social welfare function. However, the effects on aggregate investment, long-term capital values, and the utility of young savers hinges on assumptions about technology. Aggregate investment and long-term asset values can move in opposite directions.
Regression With Slowly Varying Regressors, Peter C.B. Phillips
Regression With Slowly Varying Regressors, Peter C.B. Phillips
Cowles Foundation Discussion Papers
Slowly varying regressors are asymptotically collinear in linear regression. Usual regression formulae for asymptotic standard errors remain valid but rates of convergence are affected and the limit distribution of the regression coefficients is shown to be one dimensional. Some asymptotic representations of partial sums of slowly varying functions and central limit theorems with slowly varying weights are given that assist in the development of a regression theory. Multivariate regression and polynomial regression with slowly varying functions are considered and shown to be equivalent, up to standardization, to regression on a polynomial in a logarithmic trend. The theory involves second, third …
Nonparametric Estimation Of A Multifactor Heath-Jarrow-Morton Model: An Integrated Approach, Andrew Jeffrey, Oliver B. Linton, Thong Nguyen, Peter C.B. Phillips
Nonparametric Estimation Of A Multifactor Heath-Jarrow-Morton Model: An Integrated Approach, Andrew Jeffrey, Oliver B. Linton, Thong Nguyen, Peter C.B. Phillips
Cowles Foundation Discussion Papers
We develop a nonparametric estimator for the volatility structure of the zero coupon yield curve in the Heath, Jarrow-Morton framework. The estimator incorporates cross-sectional restrictions along the maturity dimension, and also allows for measurement errors, which arise from the estimation of the yield curve from noisy data. The estimates are implemented with daily CRSP bond data.
International Finance In General Equilibrium, John Geanakoplos, Dimitrios P. Tsomocos
International Finance In General Equilibrium, John Geanakoplos, Dimitrios P. Tsomocos
Cowles Foundation Discussion Papers
Our purpose in this paper is to unify international trade and finance in a single general equilibrium model. Our model is rich enough to include multiple commodities (including traded and nontraded goods), heterogeneous consumers in each country, multiple time periods, multiple credit markets, and multiple currencies. Yet our model is simple enough to be effectively computable. We explicitly calculate the financial and real effects of changes in tariffs, productivity, and preferences, as well as the effects of monetary and fiscal policy. We maintain agent optimization, rational expectations, and market clearing (i.e., perfect competition with flexible prices) throughout. But because of …
On The Evolution Of Overconfidence And Entrepreneurs, Antonio E. Bernardo, Ivo Welch
On The Evolution Of Overconfidence And Entrepreneurs, Antonio E. Bernardo, Ivo Welch
Cowles Foundation Discussion Papers
This paper explains why seemingly irrational overconfident behavior can persist. Information aggregation is poor in groups in which most individuals herd. By ignoring the herd, the actions of overconfident individuals (“entrepreneurs”) convey their private information. However, entrepreneurs make mistakes and thus die more frequently. The socially optimal proportion of entrepreneurs trades off the positive information externality against high attrition rates of entrepreneurs, and depends on the size of the group, on the degree of overconfidence, and on the accuracy of individuals’ private information. The stationary distribution trades off the fitness of the group against the fitness of overconfident individuals.
An Economic Approach To The Psychology Of Change: Amnesia, Inertia, And Impulsiveness, David Hirshleifer, Ivo Welch
An Economic Approach To The Psychology Of Change: Amnesia, Inertia, And Impulsiveness, David Hirshleifer, Ivo Welch
Cowles Foundation Discussion Papers
This paper models how imperfect memory affects the optimal continuity of policies. We examine the choices of a player (individual or firm) who observes previous actions but cannot remember the rationale for these actions. In a stable environment, the player optimally responds to memory loss with excess inertia, defined as a higher probability of following old policies than would occur under full recall. In a volatile environment, the player can exhibit excess impulsiveness (i.e., be more prone to follow new information signals). The model provides a memory-loss explanation for some documented psychological biases, implies that inertia and organizational routines should …
Entry And Vertical Differentiation, Dirk Bergemann, Juuso Välimäki
Entry And Vertical Differentiation, Dirk Bergemann, Juuso Välimäki
Cowles Foundation Discussion Papers
This paper analyzes the entry of new products into vertically differentiated markets where an entrant and an incumbent compete in quantities. The value of the new product is initially uncertain and new information is generated through purchases in the market. We derive the (unique) Markov perfect equilibrium of the infinite horizon game under the strong long run average payoff criterion. The qualitative features of the optimal entry strategy are shown to depend exclusively on the relative ranking of established and new products based on current beliefs. Superior products are launched relatively slowly and at high initial prices whereas substitutes for …
Bubbles, Human Judgment, And Expert Opinion, Robert J. Shiller
Bubbles, Human Judgment, And Expert Opinion, Robert J. Shiller
Cowles Foundation Discussion Papers
Research in psychology and behavioral finance is surveyed for evidence to what extent experts such as professional investment managers or endowment trustees may behave in such a way as to help perpetuate speculative bubbles in financial markets. This paper discusses scholarly psychological literature on the representativeness heuristic, overconfidence, attentional anomalies, self-esteem, conformity pressures, salience and justification for insights into weaknesses in expert opinion. The role of the prudent person standard and the news media in influencing experts is considered. The relevance of the literature on testing of the efficient markets theory is discussed.
Default And Punishment In General Equilibrium, Pradeep Dubey, John Geanakoplos, Martin Shubik
Default And Punishment In General Equilibrium, Pradeep Dubey, John Geanakoplos, Martin Shubik
Cowles Foundation Discussion Papers
We extend the standard model of general equilibrium with incomplete markets to allow for default and punishment. The equilibrating variables include expected delivery rates, along with the usual prices of assets and commodities. By reinterpreting the variables, our model encompasses a broad range of moral hazard, adverse selection, and signalling phenomena (including the Akerlof lemons model and Rothschild-Stiglitz insurance model) in a general equilibrium framework. We impose a condition on the expected delivery rates for untraded assets that is similar to the trembling hand refinements used in game theory. Despite earlier claims about the nonexistence of equilibrium with adverse selection, …
Default And Punishment In General Equilibrium, Pradeep Dubey, John Geanakoplos, Martin Shubik
Default And Punishment In General Equilibrium, Pradeep Dubey, John Geanakoplos, Martin Shubik
Cowles Foundation Discussion Papers
We extend the standard model of general equilibrium with incomplete markets to allow for default and punishment by thinking of assets as pools. The equilibrating variables include expected delivery rates, along with the usual prices of assets and commodities. By reinterpreting the variables, our model encompasses a broad range of adverse selection and signalling phenomena in a perfectly competitive, general equilibrium framework. Perfect competition eliminates the need for lenders to compute how the size of their loan or the price they quote might affect default rates. It also makes for a simple equilibrium refinement, which we propose in order to …
Default And Punishment In General Equilibrium, Pradeep Dubey, John Geanakoplos, Martin Shubik
Default And Punishment In General Equilibrium, Pradeep Dubey, John Geanakoplos, Martin Shubik
Cowles Foundation Discussion Papers
We extend the standard model of general equilibrium with incomplete markets to allow for default and punishment by thinking of assets as pools. The equilibrating variables include expected delivery rates, along with the usual prices of assets and commodities. By reinterpreting the variables, our model encompasses a broad range of adverse selection and signalling phenomena in a perfectly competitive, general equilibrium framework. Perfect competition eliminates the need for lenders to compute how the size of their loan or the price they quote might affect default rates. It also makes for a simple equilibrium refinement, which we propose in order to …
Signalling And Default: Rothschild-Stiglitz Reconsidered, Pradeep Dubey, John Geanakoplos
Signalling And Default: Rothschild-Stiglitz Reconsidered, Pradeep Dubey, John Geanakoplos
Cowles Foundation Discussion Papers
In our previous paper we built a general equilibrium model of default and punishment in which equilibrium always exists and endogenously determines asset promises, penalties, and sales constraints. In this paper we interpret the endogenous sales constraints as equilibrium signals. By specializing the default penalties and imposing an exclusivity constraint on asset sales, we obtain a perfectly competitive version of the Rothschild-Stiglitz model of insurance. In our model their separating equilibrium always exists even when they say it doesn’t.
Fiscal Policy: Its Macroeconomics In Perspective, James Tobin
Fiscal Policy: Its Macroeconomics In Perspective, James Tobin
Cowles Foundation Discussion Papers
President George W. Bush is preparing a drastic permanent reduction in federal income and estate taxes. He cites as precedents tax cuts by Kennedy-Johnson 1962-64 and Reagan 1981. In those cases, however, the economy was operating well below full employment and needed a “demand-side” stimulus (even though Reagan advertised his tax reduction as “supply-side”). In 2001, however, the economy is very close to full employment, and if it needs a stimulus at all, it is a quick modest temporary one instead of the large permanent one proposed. And why can’t monetary policy do the job of stabilization, as it did …
Default And Punishment In General Equilibrium, Pradeep Dubey, John Geanakoplos, Martin Shubik
Default And Punishment In General Equilibrium, Pradeep Dubey, John Geanakoplos, Martin Shubik
Cowles Foundation Discussion Papers
We extend the standard model of general equilibrium with incomplete markets to allow for default and punishment. The equilibrating variables include expected delivery rates, along with the usual prices of assets and commodities. By reinterpreting the variables, our model encompasses a broad range of adverse selection, and signalling phenomena (including the Akerlof lemons model and Rothschild-Stiglitz insurance model) and some moral hazard problems in a general equilibrium framework. Despite earlier claims about the nonexistence of equilibrium with adverse selection, we show that equilibrium always exists. We show that more lenient punishment which encourages default may be Pareto improving because it …
Default And Punishment In General Equilibrium, Pradeep Dubey, John Geanakoplos, Martin Shubik
Default And Punishment In General Equilibrium, Pradeep Dubey, John Geanakoplos, Martin Shubik
Cowles Foundation Discussion Papers
We extend the standard model of general equilibrium with incomplete markets to allow for default and punishment. The equilibrating variables include expected delivery rates, along with the usual prices of assets and commodities. By reinterpreting the variables, our model encompasses a broad range of adverse selection and signalling phenomena (including the Akerlof lemons model and the Rothschild-Stiglitz insurance model) in a general equilibrium framework. Despite earlier claims about the nonexistence of equilibrium with adverse selection, we show that equilibrium always exists. We show that more lenient punishment which encourages default may be Pareto improving because it increases the dimension of …
Default And Punishment In General Equilibrium, Pradeep Dubey, John Geanakoplos, Martin Shubik
Default And Punishment In General Equilibrium, Pradeep Dubey, John Geanakoplos, Martin Shubik
Cowles Foundation Discussion Papers
We extend the standard model of general equilibrium with incomplete markets to allow for default and punishment by thinking of assets as pools. The equilibrating variables include expected delivery rates, along with the usual prices of assets and commodities. By reinterpreting the variables, our model encompasses a broad range of adverse selection and signalling phenomena (including the Rothschild-Stiglitz insurance model) in a general equilibrium framework. In contrast to game-theoretic models of adverse selection, our perfectly competitive framework eliminates the need for lenders to compute how the size of their loan or the price they quote might affect default rates. The …
On Modeling The Effects Of Inflation Shocks, Ray C. Fair
On Modeling The Effects Of Inflation Shocks, Ray C. Fair
Cowles Foundation Discussion Papers
A popular model in the literature postulates an interest rate rule, a NAIRU price equation, and an aggregate demand equation in which aggregate demand depends on the real interest rate. In this model a positive inflation shock with the nominal interest rate held constant is explosive because it increases aggregate demand (because the real interest rate is lower), which increases inflation through the price equation, which further increases aggregate demand, and so on. In order for the model to be stable, the nominal interest rate must rise more than inflation, which means that the coefficient on inflation in the interest …
Estimates Of The Effectiveness Of Monetary Policy, Ray C. Fair
Estimates Of The Effectiveness Of Monetary Policy, Ray C. Fair
Cowles Foundation Discussion Papers
This paper examines various interest rate rules, as well as policies derived by solving optimal control problems, for their ability to dampen economic fluctuations caused by random shocks. A tax rate rule is also considered. A multicountry econometric model is used for the experiments. The results differ sharply from those obtained using recent models in which the coefficient on inflation in the nominal interest rate rule must be greater than one in order for the economy to be stable.