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Articles 1831 - 1860 of 3476
Full-Text Articles in Economics
Common Learning, Martin W. Cripps, Jeffrey C. Ely, George J. Mailath, Larry Samuelson
Common Learning, Martin W. Cripps, Jeffrey C. Ely, George J. Mailath, Larry Samuelson
Cowles Foundation Discussion Papers
Consider two agents who learn the value of an unknown parameter by observing a sequence of private signals. The signals are independent and identically distributed across time but not necessarily agents. Does it follow that the agents will commonly learn its value, i.e., that the true value of the parameter will become (approximate) common-knowledge? We show that the answer is affirmative when each agent’s signal space is finite and show by example that common learning can fail when observations come from a countably infinite signal space.
Pareto Improving Taxes, John Geanakoplos, Heracles M. Polemarchakis
Pareto Improving Taxes, John Geanakoplos, Heracles M. Polemarchakis
Cowles Foundation Discussion Papers
We show that in almost every economy with separable externalities, every competitive equilibrium can be Pareto improved by a package of anonymous commodity taxes that cause prices to adjust and markets to reclear at different levels of individual consumption. The argument can be extended to economies with strategic interactions, incomplete asset markets or asymmetric information. This constrained suboptimality of competitive allocations might provide a rationale for economic policy in economies with externalities.
Purification In The Infinitely-Repeated Prisoners’ Dilemma, V. Bhaskar, George J. Mailath, Stephen Morris
Purification In The Infinitely-Repeated Prisoners’ Dilemma, V. Bhaskar, George J. Mailath, Stephen Morris
Cowles Foundation Discussion Papers
This paper investigates the Harsanyi (1973)-purifiability of mixed strategies in the repeated prisoners’ dilemma with perfect monitoring. We perturb the game so that in each period, a player receives a private payoff shock which is independently and identically distributed across players and periods. We focus on the purifiability of a class of one-period memory mixed strategy equilibria used by Ely and Valimaki (2002) in their study of the repeated prisoners’ dilemma with private monitoring. We find that all such strategy profiles are not the limit of one-period memory equilibrium strategy profiles of the perturbed game, for almost all noise distributions. …
Money And Production, And Liquidity Trap, Pradeep Dubey, John Geanakoplos
Money And Production, And Liquidity Trap, Pradeep Dubey, John Geanakoplos
Cowles Foundation Discussion Papers
We prove the existence of monetary equilibrium in a finite horizon economy with production. We also show that if agents expect the monetary authority to significantly decrease the supply of bank money available for short term loans in the future, then the economy will fall into a liquidity trap today.
The Theory Of Money And Financial Institutions: A Summary Of A Game Theoretic Approach, Martin Shubik
The Theory Of Money And Financial Institutions: A Summary Of A Game Theoretic Approach, Martin Shubik
Cowles Foundation Discussion Papers
A game theoretic approach to the theory of money and financial institution is given utilizing both the strategic and coalitional forms for describing the economy. The economy is first modeled as a strategic market game, then the strategic form is used to calculate several cooperative forms that differ from each other in their utilization of money and credit and their treatment of threats. It is shown that there are natural upper and lower bounds to the monetary needs of an economy, but even in the extreme structures the concept of “enough money” can be defined usefully, and for large economies …
Extreme Adverse Selection, Competitive Pricing, And Market Breakdown, George J. Mailath, Georg Nöldeke
Extreme Adverse Selection, Competitive Pricing, And Market Breakdown, George J. Mailath, Georg Nöldeke
Cowles Foundation Discussion Papers
Extreme adverse selection arises when private information has unbounded support, and market breakdown occurs when no trade is the only equilibrium outcome. We study extreme adverse selection via the limit behavior of a financial market as the support of private information converges to an unbounded support. A necessary and sufficient condition for market breakdown is obtained. If the condition fails, then there exists competitive market behavior that converges to positive levels of trade whenever it is first best to have trade. When the condition fails, no feasible (competitive or not) market behavior converges to positive levels of trade.
Evaluating Inflation Targeting Using A Macroeconometric Model, Ray C. Fair
Evaluating Inflation Targeting Using A Macroeconometric Model, Ray C. Fair
Cowles Foundation Discussion Papers
This paper uses a structurally estimated macroeconometric model, denoted the MC model, to evaluate inflation targeting in the United States. Various interest rate rules are tried with differing weights on inflation and output, and various optimal control problems are solved using differing weights on inflation and output targets. Price-level targeting is also considered. The results show that 1) there are output costs to inflation targeting, especially for price shocks, 2) price-level targeting is dominated by inflation targeting, 3) the estimated interest rate rule of the Fed (in Table 4) is consistent with the Fed placing equal weights on inflation and …
Lumpy Investment In Dynamic General Equilibrium, Ruediger Bachmann, Ricardo J. Caballero, Eduardo Engel
Lumpy Investment In Dynamic General Equilibrium, Ruediger Bachmann, Ricardo J. Caballero, Eduardo Engel
Cowles Foundation Discussion Papers
Microeconomic lumpiness matters for macroeconomics. According to our DSGE model, it explains roughly 60% of the smoothing in the investment response to aggregate shocks. The remaining 40% is explained by general equilibrium forces. The central role played by micro frictions for aggregate dynamics results in important history dependence in business cycles. In particular, booms feed into themselves. The longer an expansion, the larger the response of investment to an additional positive shock. Conversely, a slowdown after a boom can lead to a long lasting investment slump, which is unresponsive to policy stimuli. Such dynamics are consistent with US investment patterns …
Renegotiation Without Holdup: Anticipating Spending And Infrastructure Concessions, Eduardo Engel, Ronald Fischer, Alexander Galetovic
Renegotiation Without Holdup: Anticipating Spending And Infrastructure Concessions, Eduardo Engel, Ronald Fischer, Alexander Galetovic
Cowles Foundation Discussion Papers
Infrastructure concessions are frequently renegotiated after investments are sunk, resulting in better contractual terms for the franchise holders. This paper offers a political economy explanation for renegotiations that occur with no apparent holdup. We argue that they are used by political incumbents to anticipate infrastructure spending and thereby increase the probability of winning the upcoming election. Contract renegotiations allow administrations to replicate the effects of issuing debt. Yet debt issues are incorporated in the budget, must be approved by Congress and are therefore subject to the opposition’s review. By contrast, under current accounting standards the obligations created by renegotiations circumvent …
Empirical Likelihood Methods In Econometrics: Theory And Practice, Yuichi Kitamura
Empirical Likelihood Methods In Econometrics: Theory And Practice, Yuichi Kitamura
Cowles Foundation Discussion Papers
Recent developments in empirical likelihood (EL) methods are reviewed. First, to put the method in perspective, two interpretations of empirical likelihood are presented, one as a nonparametric maximum likelihood estimation method (NPMLE) and the other as a generalized minimum contrast estimator (GMC). The latter interpretation provides a clear connection between EL, GMM, GEL and other related estimators. Second, EL is shown to have various advantages over other methods. The theory of large deviations demonstrates that EL emerges naturally in achieving asymptotic optimality both for estimation and testing. Interestingly, higher order asymptotic analysis also suggests that EL is generally a preferred …
Aggregate Implications Of Lumpy Investment: New Evidence And A Dsge Model, Ruediger Bachmann, Ricardo J. Caballero, Eduardo Engel
Aggregate Implications Of Lumpy Investment: New Evidence And A Dsge Model, Ruediger Bachmann, Ricardo J. Caballero, Eduardo Engel
Cowles Foundation Discussion Papers
The sensitivity of U.S. aggregate investment to shocks is procyclical: the response upon impact increases by approximately 50% from the trough to the peak of the business cycle. This feature of the data follows naturally from a DSGE model with lumpy microeconomic capital adjustment. Beyond explaining this specific time variation, our model and evidence provide a counterexample to the claim that microeconomic investment lumpiness is inconsequential for macroeconomic analysis.
Efficient Recommender Systems, Dirk Bergemann, Deran Ozmen
Efficient Recommender Systems, Dirk Bergemann, Deran Ozmen
Cowles Foundation Discussion Papers
We study the efficient allocation of buyers in the presence of recommender systems. A recommender system affects the market in two ways: (i) it creates value by reducing product uncertainty for the customers and hence (ii) its recommendations can be offered as add-ons, which generates informational externalities. We investigate the impact of these factors on the efficient allocation of buyers across different products. We find that the efficient allocation requires that the seller with the recommender system has full market share. If the recommender system is sufficiently effective in reducing uncertainty, it is optimal to have some products to be …
Robust Implementation In Direct Mechanisms, Dirk Bergemann, Stephen Morris
Robust Implementation In Direct Mechanisms, Dirk Bergemann, Stephen Morris
Cowles Foundation Discussion Papers
A social choice function is robustly implementable if there is a mechanism under which the process of iteratively eliminating strictly dominated messages leads to outcomes that agree with the social choice function for all beliefs at every type profile. In an interdependent value environment with single crossing preferences, we identify a contraction property on the preferences which together with strict ex post incentive compatibility is sufficient to guarantee robust implementation in the direct mechanism. Strict ex post incentive compatibility and the contraction property are also necessary for robust implementation in any mechanism, including indirect ones. The contraction property requires that …
Optimal Electoral Timing: Exercise Wisely And You May Live Longer, Jussi Keppo, Lones Smith, Dmitry Davydov
Optimal Electoral Timing: Exercise Wisely And You May Live Longer, Jussi Keppo, Lones Smith, Dmitry Davydov
Cowles Foundation Discussion Papers
In many democratic countries, the timing of elections is flexible. We explore this potentially valuable option using insights from option pricing in finance. The paper offers three main contributions on this problem. First, we derive a rationally-based mean-reverting political support process for the parties, assuming that politically heterogeneous voters continuously learn over time about evolving party fortunes. We solve for the long-run density for this process and derive the polling process from it by adding polling noise. Second, we explore optimal timing using the political support process. The incumbent sees its poll support, and must call an election within five …
Robust Implementation: The Case Of Direct Mechanisms, Dirk Bergemann, Stephen Morris
Robust Implementation: The Case Of Direct Mechanisms, Dirk Bergemann, Stephen Morris
Cowles Foundation Discussion Papers
A social choice function is robustly implementable if there is a mechanism under which the process of iteratively eliminating strictly dominated messages leads to outcomes that agree with the social choice at every type profile. In an interdependent value environment with single crossing preferences, we identify a strict contraction property on the preferences which together with strict ex post incentive compatibility is sufficient to guarantee robust implementation in the direct mechanism. Strict EPIC and the contraction property are also necessary for robust implementation in any mechanism. The contraction property essentially requires that the interdependence is not too large. In a …
Empirical Models Of Auctions, Susan Athey, Philip A. Haile
Empirical Models Of Auctions, Susan Athey, Philip A. Haile
Cowles Foundation Discussion Papers
Many important economic questions arising in auctions can be answered only with knowledge of the underlying primitive distributions governing bidder demand and information. An active literature has developed aiming to estimate these primitives by exploiting restrictions from economic theory as part of the econometric model used to interpret auction data. We review some highlights of this recent literature, focusing on identification and empirical applications. We describe three insights that underlie much of the recent methodological progress in this area and discuss some of the ways these insights have been extended to richer models allowing more convincing empirical applications. We discuss …
Robust Implementation: The Case Of Direct Mechanisms, Dirk Bergemann, Stephen Morris
Robust Implementation: The Case Of Direct Mechanisms, Dirk Bergemann, Stephen Morris
Cowles Foundation Discussion Papers
A social choice function is robustly implementable if there is a mechanism under which the process of iteratively eliminating strictly dominated messages leads to outcomes that agree with the social choice at every type profile. In an interdependent value environment, we identify a strict contraction property on the preferences which together with strict ex post incentive compatibility and the strict single crossing property is sufficient to guarantee robust implementation in the direct mechanism. The contraction property essentially requires that the interdependence is not too large. In a linear signal model, the contraction property is equivalent to an interdependence matrix having …
Rank Tests For Instrumental Variables Regression With Weak Instruments, Donald W.K. Andrews, Gustavo Soares
Rank Tests For Instrumental Variables Regression With Weak Instruments, Donald W.K. Andrews, Gustavo Soares
Cowles Foundation Discussion Papers
This paper considers tests in an instrumental variables (IVs) regression model with IVs that may be weak. Tests that have near-optimal asymptotic power properties with Gaussian errors for weak and strong IVs have been determined in Andrews, Moreira, and Stock (2006a). In this paper, we seek tests that have near-optimal asymptotic power with Gaussian errors and improved power with non-Gaussian errors relative to existing tests. Tests with such properties are obtained by introducing rank tests that are analogous to the conditional likelihood ratio test of Moreira (2003). We also introduce a rank test that is analogous to the Lagrange multiplier …
Optimal Pricing With Recommender Systems, Dirk Bergemann, Deran Ozmen
Optimal Pricing With Recommender Systems, Dirk Bergemann, Deran Ozmen
Cowles Foundation Discussion Papers
We study optimal pricing in the presence of recommender systems. A recommender system affects the market in two ways: (i) it creates value by reducing product uncertainty for the customers and hence (ii) its recommendations can be offered as add-ons which generate informational externalities. The quality of the recommendation add-on is endogenously determined by sales. We investigate the impact of these factors on the optimal pricing by a seller with a recommender system against a competitive fringe without such a system. If the recommender system is sufficiently effective in reducing uncertainty, then the seller prices otherwise symmetric products differently to …
Nuclear Weapons And National Prestige, Robert J. Shiller
Nuclear Weapons And National Prestige, Robert J. Shiller
Cowles Foundation Discussion Papers
Leaders and historians see prestige as important, but international relations theorists have neglected the concept, in part for lack of a clear definition. It is proposed that a party “holds prestige” when group members generally believe that the party has a certain desirable quality, and this situation gives the party perceived power in the group. The definition gains support from a survey of international affairs writings on the sources of prestige. Prestige is strategically important when a party wants support from others who would rather join the side that more of the others are joining. Some general ways of acquiring …
Lexicographic Composition Of Simple Games, Bezalel Peleg
Lexicographic Composition Of Simple Games, Bezalel Peleg
Cowles Foundation Discussion Papers
A two-house legislature can often be modelled as a proper simple game whose outcome depends on whether a coalition wins, blocks or loses in two smaller proper simple games. It is shown that there are exactly five ways to combine the smaller games into a larger one. This paper focuses on one of the rules, lexicographic composition , where a coalition wins in G 1 => G 2 when it either wins in G 1 , or blocks in G 1 and wins in G 2 . It is the most decisive of the five. A lexicographically decomposable game is …
Optimal Bandwidth Selection In Heteroskedasticity-Autocorrelation Robust Testing, Yixiao Sun, Peter C.B. Phillips, Sainan Jin
Optimal Bandwidth Selection In Heteroskedasticity-Autocorrelation Robust Testing, Yixiao Sun, Peter C.B. Phillips, Sainan Jin
Cowles Foundation Discussion Papers
In time series regressions with nonparametrically autocorrelated errors, it is now standard empirical practice to use kernel-based robust standard errors that involve some smoothing function over the sample autocorrelations. The underlying smoothing parameter b, which can be defined as the ratio of the bandwidth (or truncation lag) to the sample size, is a tuning parameter that plays a key role in determining the asymptotic properties of the standard errors and associated semiparametric tests. Small- b asymptotics involve standard limit theory such as standard normal or chi-squared limits, whereas fixed-b asymptotics typically lead to nonstandard limit distributions involving Brownian bridge functionals. …
Sinusoidal Modeling Applied To Spatially Variant Tropospheric Ozone Air Pollution, Nicholas Z. Muller, Peter C.B. Phillips
Sinusoidal Modeling Applied To Spatially Variant Tropospheric Ozone Air Pollution, Nicholas Z. Muller, Peter C.B. Phillips
Cowles Foundation Discussion Papers
This paper demonstrates how parsimonious models of sinusoidal functions can be used to fit spatially variant time series in which there is considerable variation of a periodic type. A typical shortcoming of such tools relates to the difficulty in capturing idiosyncratic variation in periodic models. The strategy developed here addresses this deficiency. While previous work has sought to overcome the shortcoming by augmenting sinusoids with other techniques, the present approach employs station-specific sinusoids to supplement a common regional component, which succeeds in capturing local idiosyncratic behavior in a parsimonious manner. The experiments conducted herein reveal that a semi-parametric approach enables …
Simultaneous Search, Hector Chade, Lones Smith
Simultaneous Search, Hector Chade, Lones Smith
Cowles Foundation Discussion Papers
We introduce and solve a new class of “downward-recursive” static portfolio choice problems. An individual simultaneously chooses among ranked stochastic options, and each choice is costly. In the motivational application, just one may be exercised from those that succeed. This often emerges in practice, such as when a student applies to many colleges. We show that a greedy algorithm finds the optimal set. The optimal choices are “less aggressive” than the sequentially optimal ones, but “more aggressive” than the best singletons. The optimal set in general contains gaps. We provide a comparative static on the chosen set.
Informational Herding And Optimal Experimentation, Lones Smith, Peter Norman Sorensen
Informational Herding And Optimal Experimentation, Lones Smith, Peter Norman Sorensen
Cowles Foundation Discussion Papers
We show that far from capturing a formally new phenomenon, informational herding is really a special case of single-person experimentation — and ‘bad herds’ the typical failure of complete learning. We then analyze the analogous team equilibrium, where individuals maximize the present discounted welfare of posterity. To do so, we generalize Gittins indices to our non-bandit learning problem, and thereby characterize when contrarian behaviour arises: (i) While herds are still constrained efficient, they arise for a strictly smaller belief set. (ii) A log-concave log-likelihood ratio density robustly ensures that individuals should lean more against their myopic preference for an action …
Gaussian Inference In Ar(1) Time Series With Or Without A Unit Root, Peter C.B. Phillips, Chirok Han
Gaussian Inference In Ar(1) Time Series With Or Without A Unit Root, Peter C.B. Phillips, Chirok Han
Cowles Foundation Discussion Papers
This note introduces a simple first-difference-based approach to estimation and inference for the AR(1) model. The estimates have virtually no finite sample bias, are not sensitive to initial conditions, and the approach has the unusual advantage that a Gaussian central limit theory applies and is continuous as the autoregressive coefficient passes through unity with a uniform / n rate of convergence. En route, a useful CLT for sample covariances of linear processes is given, following Phillips and Solo (1992). The approach also has useful extensions to dynamic panels.
Refined Inference On Long Memory In Realized Volatility, Offer Lieberman, Peter C.B. Phillips
Refined Inference On Long Memory In Realized Volatility, Offer Lieberman, Peter C.B. Phillips
Cowles Foundation Discussion Papers
There is an emerging consensus in empirical finance that realized volatility series typically display long range dependence with a memory parameter (d) around 0.4 (Andersen et. al. (2001), Martens et. al. (2004)). The present paper provides some analytical explanations for this evidence and shows how recent results in Lieberman and Phillips (2004a, 2004b) can be used to refine statistical inference about d with little computational effort. In contrast to standard asymptotic normal theory now used in the literature which has an O ( n -1/2 ) error rate on error rejection probabilities, the asymptotic approximation used here has an error …
Repeated Games With Present-Biased Preferences, Hector Chade, Pavlo Prokopovych, Lones Smith
Repeated Games With Present-Biased Preferences, Hector Chade, Pavlo Prokopovych, Lones Smith
Cowles Foundation Discussion Papers
We study infinitely repeated games with observable actions, where players have present-biased (so-called beta-delta) preferences. We give a two-step procedure to characterize Strotz–Pollak equilibrium payoffs: compute the continuation payoff set using recursive techniques, and then use this set to characterize the equilibrium payoff set U(beta,delta). While Strotz–Pollak equilibrium and subgame perfection differ here, the generated paths and payoffs nonetheless coincide. We then explore the cost of the present-time bias. Fixing the total present value of 1 util flow, lower beta or higher delta shrinks the payoff set. Surprisingly, unless the minimax outcome is a Nash equilibrium of the stage game, …
Bandit Problems, Dirk Bergemann, Juuso Välimäki
Bandit Problems, Dirk Bergemann, Juuso Välimäki
Cowles Foundation Discussion Papers
We survey the literature on multi-armed bandit models and their applications in economics. The multi-armed bandit problem is a statistical decision model of an agent trying to optimize his decisions while improving his information at the same time. This classic problem has received much attention in economics as it concisely models the trade-off between exploration (trying out each arm to find the best one) and exploitation (playing the arm believed to give the best payoff).
Optimal Estimation Of Cointegrated Systems With Irrelevant Instruments, Peter C.B. Phillips
Optimal Estimation Of Cointegrated Systems With Irrelevant Instruments, Peter C.B. Phillips
Cowles Foundation Discussion Papers
It has been know since Phillips and Hansen (1990) that cointegrated systems can be consistently estimated using stochastic trend instruments that are independent of the system variables. A similar phenomenon occurs with deterministically trending instruments. The present work shows that such “irrelevant” deterministic trend instruments may be systematically used to produce asymptotically efficient estimates of a cointegrated system. The approach is convenient in practice, involves only linear instrumental variables estimation, and is a straightforward one step procedure with no loss of degrees of freedom in estimation. Simulations reveal that the procedure works well in practice, having little finite sample bias …