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Full-Text Articles in Social and Behavioral Sciences

Selling To Intermediaries: Optimal Auction Design In A Common Value Model, Dirk Bergemann, Benjamin Brooks, Stephen Morris Dec 2016

Selling To Intermediaries: Optimal Auction Design In A Common Value Model, Dirk Bergemann, Benjamin Brooks, Stephen Morris

Cowles Foundation Discussion Papers

We characterize revenue maximizing auctions when the bidders are intermediaries who wish to resell the good. The bidders have differential information about their common resale opportunities: each bidder privately observes an independent draw of a resale opportunity, and the highest signal is a sufficient statistic for the value of winning the good. If the good must be sold, then the optimal mechanism is simply a posted price at which all bidders are willing to purchase the good, and all bidders are equally likely to be allocated the good, irrespective of their signals. If the seller can keep the good, then …


(Non)Randomization: A Theory Of Quasi-Experimental Evaluation Of School Quality, Yusuke Narita Dec 2016

(Non)Randomization: A Theory Of Quasi-Experimental Evaluation Of School Quality, Yusuke Narita

Cowles Foundation Discussion Papers

In centralized school admissions systems, rationing at oversubscribed schools often uses lotteries in addition to preferences. This partly random assignment is used by empirical researchers to identify the effect of entering a school on outcomes like test scores. This paper formally studies if the two most popular empirical research designs successfully extract a random assignment. For a class of data-generating mechanisms containing those used in practice, I show: One research design extracts a random assignment under a mechanism if and almost only if the mechanism is strategy-proof for schools. In contrast, the other research design does not necessarily extract a …


Projections And Uncertainties About Climate Change In An Era Of Minimal Climate Policies, William D. Nordhaus Dec 2016

Projections And Uncertainties About Climate Change In An Era Of Minimal Climate Policies, William D. Nordhaus

Cowles Foundation Discussion Papers

Climate change remains one of the major international environmental challenges facing nations. Yet nations have to date taken minimal policies to slow climate change. Moreover, there has been no major improvement in emissions trends as of the latest data. The current study uses the updated DICE model to present new projections and the impacts of alternative climate policies. It also presents a new set of estimates of the uncertainties about future climate change and compares the results will those of other integrated assessment models. The study confirms past estimates of likely rapid climate change over the next century if there …


Change Detection And The Causal Impact Of The Yield Curve, Stan Hurn, Peter C.B. Phillips, Shu-Ping Shi Dec 2016

Change Detection And The Causal Impact Of The Yield Curve, Stan Hurn, Peter C.B. Phillips, Shu-Ping Shi

Cowles Foundation Discussion Papers

Causal relationships in econometrics are typically based on the concept of predictability and are established in terms of tests for Granger causality. These causal relationships are susceptible to change, especially during times of financial turbulence, making the real-time detection of instability an important practical issue. This paper develops a test for detecting changes in causal relationships based on a recursive rolling window, which is analogous to the procedure used in recent work on financial bubble detection. The limiting distribution of the test takes a simple form under the null hypothesis and is easy to implement in conditions of homoskedasticity, conditional …


Homogeneity Pursuit In Panel Data Models: Theory And Applications, Peter C.B. Phillips, Liangjun Su, Wuyi Wang Dec 2016

Homogeneity Pursuit In Panel Data Models: Theory And Applications, Peter C.B. Phillips, Liangjun Su, Wuyi Wang

Cowles Foundation Discussion Papers

This paper studies estimation of a panel data model with latent structures where individuals can be classified into different groups where slope parameters are homogeneous within the same group but heterogeneous across groups. To identify the unknown group structure of vector parameters, we design an algorithm called Panel-CARDS which is a systematic extension of the CARDS procedure proposed by Ke, Fan, and Wu (2015) in a cross section framework. The extension addresses the problem of comparing vector coefficients in a panel model for homogeneity and introduces a new concept of controlled classification of multidimensional quantities called the segmentation net. We …


Optimal Auction Design In A Common Value Model, Dirk Bergemann, Benjamin Brooks, Stephen Morris Dec 2016

Optimal Auction Design In A Common Value Model, Dirk Bergemann, Benjamin Brooks, Stephen Morris

Cowles Foundation Discussion Papers

We study auction design when bidders have a pure common value equal to the maximum of their independent signals. In the revenue maximizing mechanism, each bidder makes a payment that is independent of his signal and the allocation discriminates in favor of bidders with lower signals. We provide a necessary and sufficient condition under which the optimal mechanism reduces to a posted price under which all bidders are equally likely to get the good. This model of pure common values can equivalently be interpreted as model of resale: the bidders have independent private values at the auction stage, and the …


(Non)Randomization: A Theory Of Quasi-Experimental Evaluation Of School Quality, Yusuke Narita Dec 2016

(Non)Randomization: A Theory Of Quasi-Experimental Evaluation Of School Quality, Yusuke Narita

Cowles Foundation Discussion Papers

Many centralized school admissions systems use lotteries to ration limited seats at oversubscribed schools. The resulting random assignment is used by empirical researchers to identify the effect of entering a school on outcomes like test scores. I first find that the two most popular empirical research designs may not successfully extract a random assignment of applicants to schools. When do the research designs overcome this problem? I show the following main results for a class of data-generating mechanisms containing those used in practice: One research design extracts a random assignment under a mechanism if and practically only if the mechanism …


Causal Change Detection In Possibly Integrated Systems: Revisiting The Money-Income Relationship, Shu-Ping Shi, Stan Hurn, Peter C.B. Phillips Dec 2016

Causal Change Detection In Possibly Integrated Systems: Revisiting The Money-Income Relationship, Shu-Ping Shi, Stan Hurn, Peter C.B. Phillips

Cowles Foundation Discussion Papers

This paper re-examines changes in the causal link between money and income in the United States for over the past half century (1959 - 2014). Three methods for the data-driven discovery of change points in causal relationships are proposed, all of which can be implemented without prior detrending of the data. These methods are a forward recursive algorithm, a recursive rolling algorithm and the rolling window algorithm all of which utilize subsample tests of Granger causality within a lag-augmented vector autoregressive framework. The limit distributions for these subsample Wald tests are provided. The results from a suite of simulation experiments …


Sequentially Testing Polynomial Model Hypotheses Using Power Transforms Of Regressors, Jin Seo Cho, Peter C.B. Phillips Dec 2016

Sequentially Testing Polynomial Model Hypotheses Using Power Transforms Of Regressors, Jin Seo Cho, Peter C.B. Phillips

Cowles Foundation Discussion Papers

We provide a methodology for testing a polynomial model hypothesis by extending the approach and results of Baek, Cho, and Phillips (2015; Journal of Econometrics; BCP) that tests for neglected nonlinearity using power transforms of regressors against arbitrary nonlinearity. We examine and generalize the BCP quasi-likelihood ratio test dealing with the multifold identification problem that arises under the null of the polynomial model. The approach leads to convenient asymptotic theory for inference, has omnibus power against general nonlinear alternatives, and allows estimation of an unknown polynomial degree in a model by way of sequential testing, a technique that is useful …


Iv And Gmm Estimation And Testing Of Multivariate Stochastic Unit Root Models, Offer Lieberman, Peter C.B. Phillips Dec 2016

Iv And Gmm Estimation And Testing Of Multivariate Stochastic Unit Root Models, Offer Lieberman, Peter C.B. Phillips

Cowles Foundation Discussion Papers

Lieberman and Phillips (2016; Journal of Econometrics; LP) introduced a multivariate stochastic unit root (STUR) model, which allows for random, time varying local departures from a unit root (UR) model, where nonlinear least squares (NLLS) may be used for estimation and inference on the STUR coefficient. In a structural version of this model where the driver variables of the STUR coefficient are endogenous, the NLLS estimate of the STUR parameter is inconsistent, as are the corresponding estimates of the associated covariance parameters. This paper develops a nonlinear instrumental variable (NLIV) as well as GMM estimators of the STUR parameter which …


Structural Inference From Reduced Forms With Many Instruments, Peter C.B. Phillips, Wayne Yuan Gao Dec 2016

Structural Inference From Reduced Forms With Many Instruments, Peter C.B. Phillips, Wayne Yuan Gao

Cowles Foundation Discussion Papers

This paper develops exact finite sample and asymptotic distributions for structural equation tests based on partially restricted reduced form estimates. Particular attention is given to models with large numbers of instruments, wherein the use of partially restricted reduced form estimates is shown to be especially advantageous in statistical testing even in cases of uniformly weak instruments and reduced forms. Comparisons are made with methods based on unrestricted reduced forms, and numerical computations showing finite sample performance of the tests are reported. Some new results are obtained on inequalities between noncentral chi-squared distributions with different degrees of freedom that assist in …


Informationally Robust Optimal Auction Design, Dirk Bergemann, Benjamin Brooks, Stephen Morris Dec 2016

Informationally Robust Optimal Auction Design, Dirk Bergemann, Benjamin Brooks, Stephen Morris

Cowles Foundation Discussion Papers

A single unit of a good is to be sold by auction to one of two buyers. The good has either a high value or a low value, with known prior probabilities. The designer of the auction knows the prior over values but is uncertain about the correct model of the buyers’ beliefs. The designer evaluates a given auction design by the lowest expected revenue that would be generated across all models of buyers’ information that are consistent with the common prior and across all Bayesian equilibria. An optimal auction for such a seller is constructed, as is a worst-case …


Belief-Free Rationalizability And Informational Robustness, Dirk Bergemann, Stephen Morris Dec 2016

Belief-Free Rationalizability And Informational Robustness, Dirk Bergemann, Stephen Morris

Cowles Foundation Discussion Papers

We propose an incomplete information analogue of rationalizability. An action is said to be belief-free rationalizable if it survives the following iterated deletion process. At each stage, we delete actions for a type of a player that are not a best response to some conjecture that puts weight only on profiles of types of other players and states that that type thinks possible, combined with actions of those types that have survived so far. We describe a number of applications. This solution concept characterizes the implications of equilibrium when a player is known to have some private information but may …


Product Variety, Across-Market Demand Heterogeneity, And The Value Of Online Retail, Thomas W. Quan, Kevin R. Williams Nov 2016

Product Variety, Across-Market Demand Heterogeneity, And The Value Of Online Retail, Thomas W. Quan, Kevin R. Williams

Cowles Foundation Discussion Papers

Online retail gives consumers access to an astonishing variety of products. However, the additional value created by this variety depends on the extent to which local retailers already satisfy local demand. To quantify the gains and account for local demand, we use detailed data from an online retailer and propose methodology to address a common issue in such data-sparsity of local sales due to sampling and a significant number of local zeros. Our estimates indicate products face substantial demand heterogeneity across markets; as a result, we find gains from online variety that are 45% lower than previous studies.


Product Variety, Across-Market Demand Heterogeneity, And The Value Of Online Retail, Thomas W. Quan, Kevin R. Williams Nov 2016

Product Variety, Across-Market Demand Heterogeneity, And The Value Of Online Retail, Thomas W. Quan, Kevin R. Williams

Cowles Foundation Discussion Papers

Online retail gives consumers access to an astonishing variety of products. However, the additional value created by this variety depends on the extent to which local retailers already satisfy local demand. To quantify the gains and account for local demand, we use detailed data from an online retailer and propose methodology to address a common issue in such data-sparsity of local sales due to sampling and a significant number of local zeros. Our estimates indicate products face substantial demand heterogeneity across markets; as a result, we find gains from online variety that are 45% lower than previous studies.


Three Essays On The Theory Of Money And Financial Institutions Essay 2: The Exchange Economy, Money, And Markets, Martin Shubik Nov 2016

Three Essays On The Theory Of Money And Financial Institutions Essay 2: The Exchange Economy, Money, And Markets, Martin Shubik

Cowles Foundation Discussion Papers

This essay is the second of three. The first is nontechnical and in part autobiographical describing the evolution of my approach to developing a micro economic theory of money and financial institutions. This essay is devoted to a mathematical sketch of a closed economic exchange system with general equilibrium GE and rational expectations RE viewed game theoretically. It squeezes the last drop out of statics and an illusory dynamics in the form of the RE extension of GE with no other externalities beyond money and markets. The third essay builds on process models adding uncertainty,innovation, an active government, nonsymmetric information …


Product Variety, Across-Market Demand Heterogeneity, And The Value Of Online Retail, Thomas W. Quan, Kevin R. Williams Nov 2016

Product Variety, Across-Market Demand Heterogeneity, And The Value Of Online Retail, Thomas W. Quan, Kevin R. Williams

Cowles Foundation Discussion Papers

Online retail gives consumers access to an astonishing variety of products. However, the additional value created by this variety depends on the extent to which local retailers already satisfy local demand. To quantify the gains and account for local demand, we use detailed data from an online retailer and propose methodology to address a common issue in such data - sparsity of local sales due to sampling and a significant number of local zeros. Our estimates indicate products face substantial demand heterogeneity across markets; as a result, we find gains from online variety that are 30% lower than previous studies.


Product Variety, Across-Market Demand Heterogeneity, And The Value Of Online Retail, Thomas W. Quan, Kevin R. Williams Nov 2016

Product Variety, Across-Market Demand Heterogeneity, And The Value Of Online Retail, Thomas W. Quan, Kevin R. Williams

Cowles Foundation Discussion Papers

Online retail gives consumers access to an astonishing variety of products. However, the additional value created by this variety depends on the extent to which local retailers already satisfy local demand. To quantify the gains and account for local demand, we use detailed data from an online retailer and propose methodology to address a common issue in such data - sparsity of local sales due to sampling and a significant number of local zeros. Our estimates indicate products face substantial demand heterogeneity across markets; as a result, we find gains from online variety that are 30% lower than previous studies.


Cooperative And Noncooperative Solutions, And The 'Game Within A Game', Martin Shubik, Michael R. Powers Oct 2016

Cooperative And Noncooperative Solutions, And The 'Game Within A Game', Martin Shubik, Michael R. Powers

Cowles Foundation Discussion Papers

In a previous essay, we developed a simple (in)efficiency measure for matrix games. We now address the difficulties encountered in assessing the usefulness and accuracy of such a measure.


Aggregation Of Preferences And The Structure Of Decisive Sets, Donald J. Brown Oct 2016

Aggregation Of Preferences And The Structure Of Decisive Sets, Donald J. Brown

Cowles Foundation Discussion Papers

This is the manuscript for the talk that I presented at the Koerner Center’s Intellectual Trajectories Seminar in September 2016.


Nonlinear Tax Incidence And Optimal Taxation In General Equilibrium, Dominik Sachs, Aleh Tsyvinski, Nicolas Werquin Sep 2016

Nonlinear Tax Incidence And Optimal Taxation In General Equilibrium, Dominik Sachs, Aleh Tsyvinski, Nicolas Werquin

Cowles Foundation Discussion Papers

We study the incidence and the optimal design of nonlinear income taxes in a Mirrleesian economy with a continuum of endogenous wages. We characterize analytically the incidence of any tax reform by showing that one can mathematically formalize this problem as an integral equation. For a CES production function, we show theoretically and numerically that the general equilibrium forces raise the revenue gains from increasing the progressivity of the U.S. tax schedule. This result is reinforced in the case of a Translog technology where closer skill types are stronger substitutes. We then characterize the optimum tax schedule, and derive a …


Uniqueness And Stability Of Equilibrium In Economies With Two Goods, John Geanakoplos, Kieran James Walsh Aug 2016

Uniqueness And Stability Of Equilibrium In Economies With Two Goods, John Geanakoplos, Kieran James Walsh

Cowles Foundation Discussion Papers

We offer new sufficient conditions ensuring demand is downward sloping local to equilibrium. It follows that equilibrium is unique and stable in the sense that rising supply implies falling prices. In our setting, there are two goods, which we interpret as consumption in different time periods, and many impatience types. Agents have the same Bernoulli utility function, but the types differ arbitrarily in time preference. Our main result is that if endowments are identical and utility displays nonincreasing absolute risk aversion, then market demand is strictly downward sloping local to equilibrium. We discuss implications for the Diamond-Dybvig literature.


Contracting With Word-Of-Mouth Management, Yuichiro Kamada, Aniko Öry (Oery) Jul 2016

Contracting With Word-Of-Mouth Management, Yuichiro Kamada, Aniko Öry (Oery)

Cowles Foundation Discussion Papers

We incorporate word of mouth (WoM) in a classic Maskin-Riley contracting problem, allowing for referral rewards to senders of WoM. Current customers’ incentives to engage in WoM can affect the contracting problem of a firm in the presence of positive externalities of users. We fully characterize the optimal contract scheme and provide other comparative statics. In particular, we show that offering a free contract is optimal only if the fraction of premium users in the population is small. The reason is that by offering a free product, the firm can incentivize senders to talk by increasing expected externalities that they …


Contracting With Word-Of-Mouth Management, Yuichiro Kamada, Aniko Öry (Oery) Jul 2016

Contracting With Word-Of-Mouth Management, Yuichiro Kamada, Aniko Öry (Oery)

Cowles Foundation Discussion Papers

We propose a model for word of mouth (WoM) management where a firm has two tools at hand: referral rewards and offering a free contract. Current customers’ incentives to engage in WoM can affect the contracting problem of a rm in the presence of positive externalities of users. Formally, we consider a classic Maskin-Riley contracting problem for the receiver of WoM where the firm can pay the sender’s referral rewards and a sender experiences positive externalities if the receiver adopts. A free contract can incentivize WoM because the higher adoption probability increases the expected externalities that the sender receives. We …


The Design And Price Of Information, Dirk Bergemann, Alessandro Bonatti, Alex Smolin Jul 2016

The Design And Price Of Information, Dirk Bergemann, Alessandro Bonatti, Alex Smolin

Cowles Foundation Discussion Papers

This paper analyzes the trade of information between a data buyer and a data seller. The data buyer faces a decision problem under uncertainty and seeks to augment his initial private information with supplemental data. The data seller is uncertain about the willingness-to-pay of the data buyer due to this private information. The data seller optimally offers a menu of (Blackwell) experiments as statistical tests to the data buyer. The seller exploits differences in the beliefs of the buyer’s types to reduce information rents while limiting the surplus that must be sacrificed to provide incentives.


The Design And Price Of Information, Dirk Bergemann, Alessandro Bonatti, Alex Smolin Jul 2016

The Design And Price Of Information, Dirk Bergemann, Alessandro Bonatti, Alex Smolin

Cowles Foundation Discussion Papers

A data buyer faces a decision problem under uncertainty. He can augment his initial private information with supplemental data from a data seller. His willingness to pay for supplemental data is determined by the quality of his initial private information. The data seller optimally offers a menu of statistical experiments. We establish the properties that any revenue-maximizing menu of experiments must satisfy. Every experiment is a non-dispersed stochastic matrix, and every menu contains a fully informative experiment. In the cases of binary states and actions, or binary types, we provide an explicit construction of the optimal menu of experiments.


Common Ownership, Competition, And Top Management Incentives, Miguel Antón, Florian Ederer, Mireia Giné, Martin Schmalz Jul 2016

Common Ownership, Competition, And Top Management Incentives, Miguel Antón, Florian Ederer, Mireia Giné, Martin Schmalz

Cowles Foundation Discussion Papers

Standard corporate finance theories assume the absence of strategic product market interactions or that shareholders don’t diversify across industry rivals; the optimal incentive contract features pay-for-performance relative to industry peers. Empirical evidence, by contrast, indicates managers are rewarded for rivals’ performance as well as for their own. We propose common ownership of natural competitors by the same investors as an explanation. We show theoretically and empirically that executives are paid less for own performance and more for rivals’ performance when the industry is more commonly owned. The growth of common ownership also helps explain the increase in CEO pay over …


Contracting With Word-Of-Mouth Management, Yuichiro Kamada, Aniko Öry (Oery) Jul 2016

Contracting With Word-Of-Mouth Management, Yuichiro Kamada, Aniko Öry (Oery)

Cowles Foundation Discussion Papers

We incorporate word of mouth (WoM) in a classic Maskin-Riley contracting problem, allowing for referral rewards to senders of WoM. Current customers’ incentives to engage in WoM can affect the contracting problem of a firm in the presence of positive externalities of users. We fully characterize the optimal contract scheme and provide comparative statics. In particular, we show that offering a free contract is optimal only if the fraction of premium users in the population is small. The reason is that by offering a free product, the firm can incentivize senders to talk by increasing expected externalities that they receive …


Consumers On A Leash: Advertised Sales And Intertemporal Price Discrimination, Aniko Öry Jul 2016

Consumers On A Leash: Advertised Sales And Intertemporal Price Discrimination, Aniko Öry

Cowles Foundation Discussion Papers

The Internet allows sellers to track “window shoppers,” consumers who look but do not buy, and to lure them back later by targeting them with an advertised sale. This new technology thus facilitates intertemporal price discrimination, but simultaneously makes it too easy for a seller to undercut her regular price. Because buyers know they could be lured back, the seller is forced to set a lower regular price. Advertising costs can, therefore, serve as a form of commitment: a seller can actually benefit from higher costs of advertising. Based on this framework, the impact of commitment on prices, profits, and …


Simple And Honest Confidence Intervals In Nonparametric Regression, Timothy B. Armstrong, Michal Kolesár Jun 2016

Simple And Honest Confidence Intervals In Nonparametric Regression, Timothy B. Armstrong, Michal Kolesár

Cowles Foundation Discussion Papers

We consider the problem of constructing honest confidence intervals (CIs) for a scalar parameter of interest, such as the regression discontinuity parameter, in nonparametric regression based on kernel or local polynomial estimators. To ensure that our CIs are honest, we derive and tabulate novel critical values that take into account the possible bias of the estimator upon which the CIs are based. We give sharp efficiency bounds of using different kernels, and derive the optimal bandwidth for constructing honest CIs. We show that using the bandwidth that minimizes the maximum mean-squared error results in CIs that are nearly efficient and …