When Does a Self-Serving Antitrust Authority Act in
Society’s Best Interests?

If an antitrust authority chooses policies to maximize the number of successfully
prosecuted cartels, when do those policies also serve to minimize the
number of cartels that form? When the detection and prosecution of cartels is
inherently difficult, we find that an antitrust authority¡¯s policies minimize the
number of cartels, as is socially desirable. But when the detection and prosecution
of cartels is not difficult, an antitrust authority is not aggressive enough in
that it prosecutes too few cartel cases.

The Impact of a Corporate Leniency Program on Antitrust Enforcement and Cartelization

To explore the efficacy of a corporate leniency program, a Markov process is
constructed which models the stochastic formation and demise of cartels. Cartels
are born when given the opportunity and market conditions are right, while
cartels die because of internal collapse or they are caught and convicted by the
antitrust authority. The likelihood that a cartel, once identified, is convicted
depends inversely on the caseload of the antitrust authority due to an implicit
resource constraint. The authority also chooses an enforcement policy in terms
of the fraction of non-leniency cases that it prosecutes. Using numerical analysis,
the impact of a leniency program on the steady-state cartel rate is investigated.
Holding the enforcement policy of the antitrust authority fixed, a leniency program
lowers the frequency of cartels. However, the additional caseload provided
by the leniency program induces the antitrust authority to prosecute a smaller
fraction of cartel cases identified outside of the program. Because of this less
aggressive enforcement policy, it is possible that the cartel rate is higher when
there is a leniency program.

Strategic Voting over Strategic Proposals

Prior research on “strategic voting” has reached the conclusion that unanimity rule is
uniquely bad: it results in destruction of information, and hence makes voters worse off.
We show that this conclusion depends critically on the assumption that the issue being
voted on is exogenous, i.e., independent of the voting rule used. We depart from the
existing literature by endogenizing the proposal that is put to a vote, and establish that
under many circumstances unanimity rule makes voters better off. Moreover, in some
cases unanimity rule also makes the proposer better off, even when he has diametrically
opposing preferences. In this case, unanimity is the Pareto dominant voting rule. Voters
prefer unanimity rule because it induces the proposing individual to make a more attractive
proposal. The proposing individual prefers unanimity rule because the acceptance
probabilities for moderate proposals are higher. We apply our results to jury trials and
debt restructuring.

Identifying Dynamic Games with Serially-Correlated Unobservables

In this paper we consider the nonparametric identification of Markov dynamic games
models in which each firm has its own unobserved state variable, which is persistent
over time. This class of models includes most models in the Ericson and Pakes (1995)
and Pakes and McGuire (1994) framework. We provide conditions under which the
joint Markov equilibrium process of the firms’ observed and unobserved variables can
be nonparametrically identified from data. For stationary continuous action games, we
show that only three observations of the observed component are required to identify
the equilibrium Markov process of the dynamic game. When agents’ choice variables
are discrete, but the unobserved state variables are continuous, four observations are
required.

The New Keynesian Phillips Curve and the Cyclicality of Marginal Cost

Several authors have argued that if the labor share of income is used as the proxy
for real marginal cost, then the sticky-price version of the New Keynesian Phillips Curve
does a good job of approximating US inflation dynamics. However, this paper argues that the labor
share is an inappropriate measure of real marginal cost for two reasons: it is countercyclical whereas
theory predicts marginal cost should be procyclical, and it employs a counterfactual assumption about
the behavior of labor over the business cycle. Relaxing this assumption to a more realistic one leads
to a measure of marginal cost that is markedly procyclical. Testing this improved measure of marginal
cost then produces results that are contradictory to the entire underlying model of the NKPC. Thus I
conclude that the NKPC fails to give a sound explanation of inflation dynamics.

Endogenous Cartel Formation with Heterogeneous Firms

In the context of an infinitely repeated capacity-constrained price game, we endogenize the composition of a cartel when .rms are heterogeneous in their capacities. When .rms are sufficiently patient, there exists a stable cartel involving the largest .rms. A .rm with sufficiently small capacity is not a member of any stable cartel. When a cartel is not all-inclusive, colluding firms set a price that serves as an umbrella with non-cartel members pricing below it and producing at capacity. Contrary to previous work, our results suggest that the most severe coordinated e¡èects may come from mergers involving moderate-sized firms, rather than the largest or smallest firms.

Nonparametric Identification of Dynamic Models with Unobserved State Variables

We consider the identification of a Markov process {Wt,Xt*} for t = 1, 2, … , T when
only {Wt} for t = 1, 2, … , T is observed. In structural dynamic models, Wt denotes the
sequence of choice variables and observed state variables of an optimizing agent, while
Xt* denotes the sequence of serially correlated unobserved state variables. The Markov setting allows
the distribution of the unobserved state variable Xt* to depend on Wt-1 and Xt-1*. We show that the joint distribution f Wt, Xt* | Wt-1, Xt-1* is identified from the observed distribution f Wt+1, Wt | Wt-1, Wt-2, Wt-3 under reasonable assumptions. Identification of
f Wt, Xt*, Wt-1, Xt-1* is a crucial input in methodologies for estimating dynamic models
based on the “conditional-choice-probability (CCP)” approach pioneered by Hotz and
Miller.

International Evidence On Sticky Consumption Growth

We estimate the degree of ‘stickiness’ in aggregate consumption growth (sometimes interpreted as reflecting consumption habits) for thirteen advanced economies. We find that, after controlling for measurement error, consumption growth has a high degree of autocorrelation, with a stickiness parameter of about 0.7 on average across countries. The sticky-consumption-growth model outperforms the random walk model of Hall (1978), and typically fits the data better than the popular Campbell and Mankiw (1989) model. In several countries, the sticky-consumption-growth and Campbell-Mankiw models work about equally well.

Estimating First-Price Auctions with an Unknown Number of Bidders: A Misclassification Approach

In this paper, we consider nonparametric identification and estimation of first-price auction models when N*, the number of potential bidders, is unknown to the researcher, but observed by bidders. Exploiting results from the recent econometric literature on models with misclassification error, we develop a nonparametric procedure for recovering the distribution of bids conditional on the unknown N*. Monte Carlo results illustrate that the procedure works well in practice. We present illustrative evidence from a dataset of procurement auctions, which shows that accounting for the unobservability of N* can lead to economically meaningful differences in the estimates of bidders’ profit margins.

Identifying the Returns to Lying When the Truth is Unobserved

Consider an observed binary regressor D and an unobserved binary variable D*, both of which affect
some other variable Y. This paper considers nonparametric identification and estimation of the effect
of D on Y, conditioning on D* = 0. For example, suppose Y is a person’s wage, the unobserved D*
indicates if the person has been to college, and the observed D indicates whether the individual claims to
have been to college. This paper then identifies and estimates the difference in average wages between
those who falsely claim college experience versus those who tell the truth about not having college.
We estimate this average returns to lying to be about 7% to 20%. Nonparametric identification without
observing D* is obtained either by observing a variable V that is roughly analogous to an instrument for
ordinary measurement error, or by imposing restrictions on model error moments.

Estimating Marginal Treatment Effects in Heterogeneous Populations

This paper proposes a nonparametric method of estimating marginal treatment effects in heterogeneous populations. Building upon an insight of Heckman and Vytlacil, the conventional treatment effects model with heterogeneous effects is shown to imply that outcomes are a nonlinear function of participation probabilities. The degree of this nonlinearity, and hence the shape of the marginal response curve, can be estimated with series methods such as power series or splines. An illustration is provided for the returns to higher education in the U.K, indicating that marginal returns to higher education fall as the proportion of the population with higher education rises, thus providing evidence of heterogeneity in returns.

Dynamic Time Series Binary Choice

This paper considers dynamic time series binary choice models. It proves near epoch dependence and strong mixing for the dynamic binary choice model with correlated errors. Using this result, it shows in a time series setting the validity of the dynamic probit likelihood procedure when lags of the dependent binary variable are used as regressors, and it establishes the asymptotic validity of Horowitz’ smoothed maximum score estimation of dynamic binary choice models with lags of the dependent variable as regressors. For the semiparametric model, the latent error is explicitly allowed to be correlated. It turns out that no long-run variance estimator is needed for the validity of the smoothed maximum score procedure in the dynamic time series framework.

Avoiding Market Dominance: Product Compatibility in Markets with Network Effects

As is well-recognized, market dominance is a typical outcome in markets with network effects. A firm with a larger installed base others a more attractive product which induces more consumers to buy its product which produces a yet bigger installed base advantage. Such a setting is investigated here but with the main difference that firms have the option of making their products compatible. When firms have similar installed bases, they make their products compatible in order to expand the market. Nevertheless, random forces could result in one firm having a bigger installed base in which case the larger firm may make its product incompatible. We find that strategic pricing tends to prevent the installed base differential from expanding to the point that incompatibility occurs. This pricing dynamic is able to neutralize increasing returns and avoid the emergence of market dominance.

Which Nonlinearity in the Phillips Curve? The Absence of Accelerating Deflation in Japan

It is standard to model the output-inflation trade-off as a linear relationship with
a time-invariant slope. We assess empirical evidence for three types of nonlinearity
in the short-run Phillips curve. At an empirical level, we aim to discover why large
negative output gaps in Japan during the period 1998-2002 did not lead to accelerating
deflation, but instead coincided with stable, be it moderately negative inflation. We
document that this episode is most convincingly interpreted as reflecting a gradual
flattening of the Phillips curve. The broader relevance of our analysis lies in its attempt
to shed light on the determinants of such time-variation in the Phillips curve slope.
Our results suggest that, in any economy where trend inflation is substantially lower
(or substantially higher) today than in past decades, time-variation in the slope of the
short-run Phillips curve has become too important to ignore.

How Large Is the Housing Wealth Effect? A New Approach

This paper presents a simple new method for measuring `wealth effects’ on aggregate
consumption. The method exploits the stickiness of consumption growth (sometimes
interpreted as reflecting consumption `habits’) to distinguish between immediate and
eventual wealth effects. In U.S. data, we estimate that the immediate (next-quarter)
marginal propensity to consume from a $1 change in housing wealth is about 2 cents,
with a final eventual effect around 9 cents, substantially larger than the effect of shocks
to financial wealth. We argue that our method is preferable to cointegration-based
approaches, because neither theory nor evidence supports faith in the existence of a stable
cointegrating vector.

Welfare Work Requirements with Paternalistic Government Preferences

Work requirements in means-tested transfer programs have grown in importance in the
U.S. and in some other countries. The theoretical literature which considers their possible
optimality generally operates within a traditional welfarist framework where some function of the
utility of the poor is maximized. Here we consider a case where society is paternalistic and
instead has preferences over the actual work allocations of welfare recipients. With this social
welfare function, optimality of work requirements is possible but depends on the accuracy of the
screening mechanism which assigns work requirements to some benefit recipients and not others.
Numerical simulations show that the accuracy must be high for such optimality to occur. The
simulations also show that earnings subsidies can be justified with the type of social welfare
function used here.

Handedness and Earnings

We examine whether handedness is related to performance in the labor market and, in
particular, earnings. Though handedness is not found to be significantly related to
earnings for the population as a whole, there is a significant wage effect for left-handed
men with high levels of education. This positive wage effect is strongest among those
who have lower than average earnings relative to those of similar high education. This
effect is not found among women.

Modelling the Birth and Death of Cartels with an Application to Evaluating Antitrust Policy

One of the primary challenges to measuring the impact of antitrust policy
on collusion is that the cartel population is unobservable; we observe only the
population of discovered cartels. To address this challenge, a model of cartel
creation and dissolution is developed to endogenously derive the populations of
cartels and discovered cartels. It is then shown how one can infer the impact
of antitrust policy on the population of cartels by measuring its impact on the
population of discovered cartels. In particular, the change in the distribution on
the duration of discovered cartels could be informative in assessing whether a
new antitrust policy is reducing the latent rate of cartels.

How Do Cartels Operate?

This paper distills and organizes facts about cartels from about 20 European
Commission decisions over 1999-2004. It describes the properties of a collusive
outcome, monitoring and punishment methods for enforcing it, the frequency
of meetings, the organizational structure of cartels, and what preceded cartel
formation.

Precautionary Saving and Precautionary Wealth

This is an entry for The New Palgrave Dictionary of Economics, 2nd Ed.

Innovators, Imitators, and the Evolving Architecture of Social Networks

Scientific progress is driven by innovation — which serves to produce a diversity of ideas — and imitation through a social network — which serves to diffuse these ideas. In this paper, we develop an agent-based computational model of this process, in which the agents in the population are heterogeneous in their abilities to innovate and imitate. The model incorporates three primary forces — the discovery of new ideas by those with superior abilities to innovate, the observation and adoption of these ideas by those with superior abilities to communicate and imitate, and the endogenous development of social networks among heterogeneous agents. The objective is to explore the evolving architecture of social networks and the critical roles that the innovators and imitators play in the process. A central finding is that the emergent social network takes a chainstructure with the innovators as the main source of ideas and the imitators as the connectors between the innovators and the masses. The impact of agent heterogeneity and environmental volatility on the network architecture is also characterized.

The Impact of the Corporate Leniency Program on Cartel Formation and the Cartel Price Path

Previous research exploring the effect of corporate leniency programs has modelled the oligopoly stage game as a Prisoners’ Dilemma. Using numerical analysis, we consider the Bertrand price game and allow the probability of detection and penalties to be sensitive to firms’ prices. Consistent with earlier results, a maximal leniency program necessarily makes collusion more difficult. However, we also find that partial leniency programs – such as in the U.S. – can make collusion easier compared to offering no leniency. We also show that even if cartel formation is not deterred, a leniency program can reduce the prices charged by firms.

Optimal Corporate Leniency Programs

This study characterizes the corporate leniency policy that minimizes the frequency with which collusion occurs. Though it can be optimal to provide only partial leniency, plausible sufficient conditions are provided whereby the antitrust authority should waive all penalties for the first firm to come forward. It is also shown that restrictions should be placed on when amnesty is awarded, though it can be optimal to award amnesty even when the antitrust authority is very likely to win the case without insider testimony.

Detecting Cartels

In reviewing the theoretical and empirical literature on collusion, this paper distills methods for detecting cartels and distinguishing collusion from competition.

Estimating a Semi-Parametric Duration Model without Specifying Heterogeneity

This paper presents a new estimator for the mixed proportional hazard model that allows for a nonparametric baseline hazard and time-varying regressors. In particular, this paper allows for discrete measurement of the durations as happens often in practice. The integrated baseline hazard and all parameters are estimated at regular rate,square root of N , where N is the number of individuals. A hazard model is a natural framework for time-varying regressors if a flow or a transition probability depends on a regressor that changes with time since a hazard model avoids the curse of dimensionality that would arise from interacting the regressors at each point in time with one another.

Foundations of Bayesian Theory

This paper states necessary and sufficient conditions for the existence, uniqueness, and updating according to Bayes’ rule, of subjective probabilities representing individuals’ beliefs. The approach is preference based, and the result is an axiomatic subjective expected utility model of Bayesian decision making under uncertainty with statedependent preferences. The theory provides foundations for the existence of prior probabilities representing decision makers’ beliefs about the likely realization of events and for the updating of these probabilities according to Bayes’ rule.

Subjective Expected Utility Theory without States of the World

This paper develops an axiomatic theory of decision making under uncertainty that dispenses with the state space. The results are subjective expected utility models with unique, action-dependent, subjective probabilities, and a utility function defined over wealth-effect pairs that is unique up to positive linear transformation.

Do World Shocks Drive Domestic Business Cycles? Some Evidence from Structural Estimation

Existing results on the contribution of terms of trade and world interest rate shocks to output fluctuations in small open economies range from less than 10% to almost 90%. We argue that an dentification problems lies at the heart of these vastly different results. In this paper, we overcome this by estimating a DSGE model using a structural Bayesian estimation approach. We apply our methodology to five developed and developing economies.. Our approach allows us to efficiently exploit cross-equation restrictions implied by the structural model. We find that world interest rate shocks are the main driving forces of business cycles in small open economies while terms of trade shocks are not.

A Bayesian Look at New Open Economy Macroeconomics

This paper develops a small-scale two country model following the New Open Economy Macroeconomics paradigm. Under autarky the model specializes to the familiar three equation New Keynesian dynamic stochastic general equilibrium (DSGE) model. We discuss two challenges to successful estimation of DSGE models: potential model misspecification and identification problems. We argue that prior distributions and Bayesian estimation techniques are useful to cope with these challenges. We apply these techniques to the two-country model and fit it to data from the U.S. and the Euro Area. We compare parameter estimates from closed and open economy specifications, study the sensitivity of parameter estimates to the choice of prior distribution, examine the propagation of monetary policy shocks, and assess the model’s ability to explain exchange rate movements.

The Method of Endogenous Gridpoints for Solving Dynamic Stochastic Optimization Problems

This paper introduces a method for solving numerical dynamic stochastic optimization problems that avoids rootfinding operations. The idea is applicable to many microeconomic and macroeconomic problems, including life cycle, buffer-stock, and stochastic growth problems. Software is provided.

A New Approach to Modeling Decision-Making under Uncertainty and Defining Subjective Probabilities

This paper presents axiomatic models of decision making under uncertainty that avoid the use of a state space. The models are (a) general subjective expected utility theory with action-dependent subjective probabilities and effect-dependent utilities (the cases of effect-independent preferences and effect-independent valuations are obtained as special instances) and (b) a nonexpected utility theory involving well-defined families of action-dependent subjective probabilities on effects and utility representation that is not necessarily linear in these probabilities (a probabilistic sophistication version of this model, with action-dependent subjective probabilities is obtained as a special case).

A Note on Instability and Indeterminacy in Search and Matching Models

We demonstrate the possibility of indeterminacy and non-existence of equilibrium dynamics in a standard business cycle model with search and matching frictions in the labor market. Our results arise for empirically plausible parametrizations and do not rely upon a mechanism such as increasing returns.

Theoretical Foundations of Buffer Stock Saving

“Buffer-stock” versions of the dynamic stochastic optimizing model of saving are now standard in the consumption literature. This paper builds theoretical foundations for rigorous understanding of the main characteristics of buffer stock models, including the existence of a target level of wealth and the proposition that aggregate consumption growth equals aggregate income growth in a small open economy populated by buffer stock consumers.

Some Foundations for Multiplicative Habits Models

While consumption models with multiplicative habits are becoming increasingly popular, some important theoretical questions about these models have not yet been addressed. This paper fills three such gaps: Existence of an optimal consumption path; satisfaction, by that path, of the consumption Euler equation; and convergence of that path to the stationary (steady state) path.

Cartel Pricing Dynamics with Cost Variability and Endogenous Buyer Detection

This paper characterizes collusive pricing patterns when buyers may detect the presence of a cartel. Buyers are assumed to become suspicious when observed prices are anomalous. We find that the cartel price path is comprised of two phases. During the transitional phase, price is generally rising and relatively unresponsive to cost shocks. During the stationary phase, price responds to cost but is much less sensitive than under non-collusion or simple monopoly. The length of the transition phase is decreasing in the variance of cost shocks. It is also shown that the cartel price path may overshoot its long-run level so that price converges from above.

On-the-Job Search and the Cyclical Dynamics of the Labor Market

We develop a dynamic general equilibrium model where workers can engage in search while on the job. We show that on-the-job search is a key component in explaining labor market dynamics in models of equilibrium unemployment. The model predicts fluctuations of unemployment, vacancies, and labor productivity whose relative magnitudes replicate the data. A standard search and matching model suggests much lower volatitilities of these variables. Intuitively, in a boom, rising search activity on the job avoids excessive tightening of the labor market for expanding firms. This keeps wage pressures low, thus further increasing firms’ incentives to post new jobs. Labor market tightness as measured by the vacancy-unemployment ratio is as volatile as in the data. The interaction between on-the-job search and job creation also generates a strong internal propagation mechanism.

The Interest Rate, Learning, and Inventory Investment

Economic theory predicts a negative relationship between inventories and the real interest rate, but previous empirical studies (mostly based on the older stock adjustment model) have found little evidence of such a relationship. We derive parametric tests for the role of the interest rate in specifications based on the firm’s optimization problem. These Euler equation and decision rule tests mirror earlier evidence, finding little role for the interest rate. We present a simple and intuitively appealing explanation, based on regime switching in the real interest rate and learning, of why tests based on the stock adjustment model, the Euler equation, and the decision rule – all of which emphasize short-run fluctuations in inventories and the interest rate – are unlikely to uncover a relationship. Our analysis suggests that inventories will not respond much to short-run fluctuations in the interest rate, but they should respond to long-run movements (regime shifts; e.g., between low real rates in the 1970s and high rates in the early 1980s). Both simple and sophisticated tests confirm our predictions and show a highly significant long-run relationship between inventories and the interest rate, with an elasticity of about -1.5. Furthermore, a formal model of our explanation yields a distinctive, testable implication. This implication is supported by the data.

Monetary Policy and the Dangers of Deflation: Lessons from Japan

This paper investigates how monetary policy can help to avoid the liquidity trap by studying the experience of Japan. First, I analyze how the Bank of Japan conducted interest rate policy over the 1990s as the economy entered a deflationary slump. I use a new method of estimating the policy rule with a time-varying inflation target and a time-varying natural rate of interest. The estimation strategy reveals that the Bank’s implicit inflation target declined to about 1% in the 1990s from about 2.5% in the 1980s. I also find that the policy rule respects the Taylor principle and is forward looking. Such a Taylor rule does not depart from what was perceived as current best practice. It thus seems that the problem arose because of a series of adverse shocks and not because of an extraordinary monetary policy mistake. Next, I investigate whether an alternative monetary policy rule could have avoided the liquidity trap despite these shocks. I find that targeting a higher rate of inflation of 2-3% would not have provided much protection against hitting the zero bound on nominal interest rates. Similarly, a policy of responding more aggressively to the inflation gap while keeping the low inflation target would have provided little improvement in economic performance. The economy also still enters the trap under a nonlinear policy rule that commits the central bank to keeping interest rates at zero even after the economy begins to recover. However, I find that a rule that combined both (i) a higher inflation target of about 3%, and (ii) a more aggressive response to the inflation gap would have improved the economy’s performance and avoided the zero bound.

Collusion under Monitoring of Sales

Collusion under imperfect monitoring is explored when firms’ prices are private information and their quantities are public information; an information structure consistent with several recent price-fixing cartels such as those in lysine and vitamins. For a class of symmetric duopoly games, it is shown that symmetric equilibrium punishments cannot sustain any collusion. An asymmetric punishment is characterized which does sustain collusion and it has the firm with sales exceeding its quota compensating the firm with sales below its quota. In practice, cartels have performed such transfers through sales among the cartel members.

Disinflations in Latin America and the Caribbean: A Free Lunch?

This paper challenges the conventional view according to which disinflations in LAC-even from low and moderate peaks-have been carried out at no cost to output. After suggesting a new methodology that allows for long-lived effects and inflation inertia when measuring costs of disinflations, large sacrifice ratios are obtained for the 1970s and 80s. Nevertheless, a new puzzle arises: disinflation costs in the 90s are negative, even with the new methodology. It is shown that an unusual combination of circumstances-i.e. capital inflows, structural reforms and the peculiar recent inflation history-can explain that fortunate result. Moreover, it is shown that LAC episodes exhibit a larger speed than G7 experiences. That speed differential explains why disinflation costs in developed nations are on average larger than LAC’s.

Do Central Banks Respond to Exchange Rate Movements? A Structural Investigation

We estimate a small-scale, structural general equilibrium model of a small open economy using Bayesian methods. Our main focus is the conduct of monetary policy in Australia, Canada, New Zealand and the U.K., as measured by nominal interest rate rules. We consider generic Taylor-type rules, where the monetary authority reacts in response to output, inflation, and exchange-rate movements. We perform posterior odds test to investigate the hypothesis whether central banks do respond to exchange rates. The main result of this paper is that the central banks of Australia, New Zealand and the U.K. do not, whereas the Bank of Canada does include the nominal exchange rate in its policy rule. This result is robust for various specification of the policy rule, among them an MCI-based rule. Additionally, we find that, based on variance decomposition of the estimated model, that terms-of-trade movements do not contribute significantly to domestic business cycles.

The (Ir)relevance of Real Wage Rigidity in the New Keynesian Model with Search Frictions

We explore the role of real wage dynamics in a New Keynesian business cycle model with search and matching frictions in the labor market. Both job creation and destruction are endogenous. We show that the model generates counterfactual inflation and labor market dynamics. In particular, it fails to generate a Beveridge curve: vacancies and unemployment are positively correlated. Introducing real wage rigidity leads to a negative correlation, and increases the magnitude of labor market flows to more realistic values. However, inflation dynamics are only weakly affected by real wage rigidity. This is because of the presence of labor market frictions, which generate long-run employment relationships. The measure of real marginal cost that is relevant for inflation dynamics via the Phillips curve contains a dynamic component that does not necessarily move with real wages.

Nonlinear Pricing with Self-Control Preferences

This paper studies optimal nonlinear pricing for a monopolist when consumers’ preferences exhibit temptation and self-control as in Gul and Pesendorfer (2001a). Consumers are subject to temptation inside the store but exercise self-control, and those foreseeing large self-control costs do not enter the store. Consumers differ in their preferences under temptation. When all consumers are tempted by more expensive, higher quality choices, the optimal menu is a singleton, which saves consumers from self-control and extracts consumers’ commitment surplus. When some consumers are tempted by cheaper, lower quality choices, the optimal menu may contain a continuum of choices.

Monopoly Quality Degradation in Cable Television

Using an empirical framework derived from models of nonlinear pricing, we estimate the degree of quality degradation in cable television markets. We find lower bounds on quality degradation ranging from 11% to 45% of observed service qualities. Furthermore, cable operators in markets with local regulatory oversight tend to offer significantly higher quality products, and engage in less quality degradation. While prices are also higher in markets with local regulatory oversight, we find that consumers experienced greater quality per dollar in these markets compared to consumers in markets without regulatory oversight.

Nonparametric Tests for Common Values in First-Price Auctions

We develop tests for common values at first-price sealed-bid auctions. Our tests are nonparametric, require observation only of the bids submitted at each auction, and are based on the fact that the “winner’s curse” arises only in common values auctions. The tests build on recently developed methods for using observed bids to estimate each bidder’s conditional expectation of the value of winning the auction. Equilibrium behavior implies that in a private values auction these expectations are invariant to the number of opponents each bidder faces, while with common values they are decreasing in the number of opponents. This distinction forms the basis of our tests. We consider both exogenous and endogenous variation in the number of bidders. Monte Carlo experiments show that our tests can perform well in samples of moderate sizes. We apply our tests to two di?erent types of U.S. Forest Service timber auctions. For unit-price (“scaled”) sales often argued to fit a private values model, our tests consistently fail to find evidence of common values. For “lumpsum” sales, where a priori arguments for common values appear stronger, our tests yield mixed evidence against the private values hypothesis.

An Inventory of Simple Monetary Policy Rules in a New Keynesian Macroeconomic Model

We derive necessary and suffcient conditions for simple monetary policy rules that guarantee equilibrium determinacy in the New Keynesian monetary model. Our modeling framework is derived from a fully specified optimization model that is still amenable to analytical characterisation. The monetary rules analyzed are variants of the basic Taylor rules ranging from simple inflation targeting (current, forward, backward), to the canonical Taylor rules with and without inertial nominal interest rate patterns. We establish that determinacy obtains for a wide range of policy parameters, especially when the monetary authority targets output and smoothes interest rates. Contrary to other results in the literature we do not find a case for super-inertial interest rate policy

Foundations of Bayesian Theory

This paper states necessary and suffcient conditions for the existence, uniqueness, and updating, according to Bayes’ rule, of subjective probabilities representing individuals’ beliefs. The approach is preference based, and the result is an axiomatic subjective expected utility model of Bayesian decision making under uncertainty with state-dependent preferences. The theory provides foundations for the existence of prior probabilities representing decision makers’ beliefs about the likely realization of events and for the updating of these probabilities according to Bayes’ rule.

Media as Watchdogs: The Role of News Media in Electoral Competition

We present a model in which the media provide voters with information that is tainted by their own preferences, and derive an equilibrium in which media endorsements influence voting behavior. Competition for media endorsement causes political parties to adopt more centrist policies, which benefits all voters. Mass media which are more sensitive to changes in policies and which are less biased lead to greater policy convergence toward the median voter’s ideal point. The presence of multiple media outlets also helps promote electoral competition.

The Role of Non-Financial Factors in Exit and Entry in the TANF Program

The dramatic decline in the AFDC-TANF caseload in the 1990s has refocused attention on the process of exit from and entry into welfare, a long-standing topic of interest in the research literature on the U.S. welfare system. This paper focuses on the role of non-financial factors in exit and entry in the post-1996 TANF program. The non-financial factors are work and other requirements, sanctions, and diversion. Using data from a study of welfare and nonwelfare families in Boston, Chicago, and San Antonio in the period 1999-2001, both descriptive evidence and evidence from an econometric model suggest that these factors played a large role in exit and entry over the period.

Why Does it Matter that Beliefs and Valuations be Correctly Represented?

This paper contains an analysis of a simple principal-agent problem illustrating possible problems that may arise when the prinicpal ascribes to the agent subjective probabilities and utilities that are implied by the subjective expected utility model but do not represent the agent’s beliefs and valuations. In particular, it is possible that an incentive contract designed by the principal induces the agent to choose an action that is not in the principal’s best interest.

Industrial Structure and Monetary Policy in a Small Open Economy

In standard New Keynesian models, the size of the output expansion generated by aggregate demand shocks depends crucially on the elasticity of labor supply which is empirically quite small. In principle, this link can be broken in a multisectoral economy with differing degrees of price stickiness, so that the required increase in labor supply can come from other sectors. This paper reinterprets this line of reasoning in a small open economy with a traded and a non-traded sector. The latter is characterized by monopolistic competition and nominal price stickiness. The main findings of the paper are twofold. It is shown that, in fact, the size of the labor supply elasticity has no significant effect on the output response to a monetary policy shock. Yet, in this open economy framework the puzzle of the output response remains since they occur only for unrealistically high intertemporal substitution elasticities. Furthermore, it is shown that the current account response to an expansionary monetary shock crucially depends on the industrial structure of the money and not, as previously claimed, on consumption preferences alone. For reasonable model specifications the current acount moves into deficit.

Moral Sentiments and Social Choice: Fairness Considerations in University Admissions

We examine the implications for social choice of individuals having an intrinsic sense of fairness. Taking the viewpoint that social justice reflects the moral attitudes of the constituent members, we analyze the effect of the intensity of the individual sense of fairness on university admission policies. Assuming that these policies are determined by bargaining over test scores to be used as cut-off points for admission of members of diverse social groups show that, in general, a more intense sense of fairness of the members of a group leads to an admission policy that is more compatible with their idea of fairness. Consequently, a society whose members have a common notion tends to implement fairer admission policies when the intensity of the sense of fairness of individual memebrs increase. This is even if the policies are ultimately determined by the bargaining power of the different groups.

Monetary Policy for Inattentive Economies

This paper is a contribution to the analysis of optimal monetary policy. It begins with a critical assessment of the existing literature, arguing that most work is based on implausible models of inflation-output dynamics. It then suggests that this problem may be solved with some recent behavioral models, which assume that price setters are slow to incorporate macroeconomic information into the prices they set. A specific such model is developed and used to derive optimal policy. In response to shocks to productivity and aggregate demand, optimal policy is price level targeting. Base drift in the price level, which is implicit in the inflation targeting regimes currently used in many central banks, is not desirable in this model. When shocks to desired markups are added, optimal policy is flexible targeting of the price level. That is, the central bank should allow the price level to deviate from its target for a while in response to these supply shocks, but it should eventually return the price level to its target path. Optimal policy can also be described as an elastic price standard: the central bank allows the price level to deviate from its target when output is expected to deviate from its natural rate.

Investment Spending, Equilibrium Indeterminacy, and the Interactions of Monetary and Fiscal Policy

This paper investigates determinacy of equilibrium in a canonical New Keynesian model under different monetary and fiscal policy rules. It is shown that a simple monetary rule that responds aggressively to inflation is a necessary condition for equilibrium determinacy, when fiscal policy is accommodating. If there is a high degree of structural distortions in the economy, then the interesting possibility arises that both aggressive monetary and fiscal policies are required to guarantee existence. When investment adjustment costs are introduced, the monetary and fiscal policy dichotomy is in principle maintained. The determinacy region is, however, highly dependent on the degree of distortion in the economy. The more prices are sticky, and the less competitive firms are, the economy is likely to exhibit indeterminacy even if monetary policy is active.

Discovery and Diffusion of Knowledge in an Endogenous Social Network

We explore the evolution of the structure and performance of a social network in a population of individuals who search for local optima in diverse and dynamic task environments. Individuals choose whether to innovate or imitate and, in the latter case, from whom to learn. The probabilities of these possible actions respond to an individual’s past experiences using reinforcement learning. Among some of our more interesting findings is that a population’s performance is not monotonically increasing in either the reliability of the communication network or the productivity of innovation.

Post-Cartel Pricing during Litigation

Standard methods in the U.S. for calculating antitrust damages in price-fixing cases is shown to create a strategic incentive for firms to price above the non-collusive price after the cartel has dissolved. This results in an overestimate of the but for price and an underestimate of the level of damages. The extent of this upward bias in the but for price is greater, the longer the cartel was in place and the more concentrated is the industry.

Cartel Pricing Dynamics in the Presence of an Antitrust Authority

Price-fixing is characterized when firms are concerned about creating suspicions that a cartel has formed. Antitrust laws have a complex effect on pricing as they interact with the conditions determining the internal stability of the cartel. Dynamics are driven by two forces – the sensitivity of detection to price movements causes a cartel to gradually raise price while the sensitivity of penalties to the price level induces the cartel to lower price over time in order to maintain the stability of the cartel. While antitrust laws can lower collusive prices, they can also raise them by making it easier for firms to collude.

The Negative Income Tax and the Evolution of U.S. Welfare Policy

The negative income tax proposed by Milton Friedman represents one of the fundamental ideas of modern welfare policy. However, the academic literature has raised two difficulties with it, one challenging its purported work incentives and the other suggesting the possible superiority of work requirements. In addition, work requirement approaches have gained ground in actual U.S. welfare policy over the last 30 years and the number of different programs has proliferated, another development counter to the negative income tax. On the other hand, the Earned Income Tax Credit has produced a negative-income-tax-like program on a vast scale.

Supply Shocks and the Persistence of Inflation

This paper examines the long-run effects of supply shocks (such as oil shocks) on inflation in the United States. The persistence of supply shocks in U.S. inflation fell considerably during the period of Volcker’s disinflation (1979-1982). My empirical results suggest that the difference between the pre-Volcker and post-Volcker periods is attributable to the change in the behavior of inflation expectations-agents expected shocks to persist in the pre-Volcker period, but not in the post-Volcker period. I construct a simple model of how different monetary policies lead to different persistence equilibria.

Exact Arbitrage and Portfolio Analysis in Large Asset Markets

We provide a detailed portfolio analysis for a financial market with an atomless continuum of assets. In the context of an exact arbitrage pricing theory (EAPT), we go beyond the characterization of the existence of important portfolios (normalized riskless, mean, cost, factor and mean-variance efficient portfolios) to furnish exact portfolio compositions in terms of explicit portfolio weights. Such an analysis has not been furnished before in the context of the asymptotic arbitrage pricing theory (APT). We also characterize conditions under which a mean-variance efficient portfolio is a benchmark portfolio used in the EAPT to proxy essential risk. We illustrate our results with several examples of specific financial markets.

Exact Arbitrage, Well-Diversified Portfolios and Asset Pricing in Large Markets

For market with an atomless continuum of assets, we formulate the intuitive idea of a “well-diversified” portfolio, and present a notion of “exact arbitrage”, strictly weaker than the more conventional notion of “asymptotic arbitrage”, and necessary and sufficient for the validity of an APT pricing formula. One formula involves “essential” risk based on a specific index portfolio constructed from factors and factor loadings that are endogenously extracted to satisfy an optimality property involving a finite number of factors. We illustrate how our results can be translated to markets with a large but finite number of assets.

Short-run Money Demand

This paper estimates a long-run demand function for M1, using U.S. data for 1959-1993. The paper interprets deviations from this long-run relation with Goldfeld=s partial adjustment model. A key innovation is the choice of the interest rate in the money demand function. Most previous work uses a short-term market rate, but this paper uses the average return on “near monies” — close substitutes for M1 such as savings accounts and money market mutual funds. This approach yields a predicted path of M1 velocity that closely matches the data. The volatility of velocity after 1980 is explained by volatility in the returns on near monies.

Testing for Indeterminacy: An Application to U.S. Monetary Policy

This paper considers a prototypical monetary business cycle model for the U.S. economy, in which the equilibrium is undetermined if monetary policy is ‘inactive’. In previous multivariate studies it has been common practice to restrict parameter estimates to values for which the equilibrium is unique. We show how the likelihood-based estimation of dynamic stochastic general equilibrium models can be extended to allow for indeterminacies and sunspot fluctuations. We propose a posterior odds test for the hypothesis that the data are best explained by parameters that imply determinacy. Our empirical results show that the Volcker-Greenspan policy regime is consistent with determinacy, whereas the pre-Volcker regime is not. We find that before 1979 non-fundamental sunspot shocks may have contributed significantly to inflation and interest rate volatility, but essentially did not affect output fluctuations.

Admission Impossible? Self Interest and Affrmative Action

This paper explains people’s preferences for ethnic and racial diversity in higher education through a model based on self interest. Although all citizens from the majority group value diversity and their own education in the same way, their preferences for the level of diversity as well as the means of achieving it depend on their competitive positions in university admissions. High-income majority citizens, who tend to have better academic qualifications than lower-income majority candidates, prefer more diversity, which they want to achieve through affirmative action by displacing marginal majority candidates for marginal minority candidates. Lower-income majority candidates prefer less diversity, which they want to achieve through admissions rules that partially ignore academic qualifications. Data from a CBS/NYT opinion poll confirm these predictions. Our model suggests why recently several American universities have replaced race-conscious admissions policies with race-blind policies that de-emphasize standardized tests, with little to no effect on diversity. Income inequality and competitive admissions both make banning affrmative action more likely.

Intergenerational Risk Sharing in the Spirit of Arrow, Debreu, and Rawls, with Applications to Social Security Design

This paper examines the optimal allocation of risk in an overlapping-generations economy. It compares the allocation of risk the economy reaches naturally to the allocation that would be reached if generations behind a Rawlsian ‘veil of ignorance’ could share risk with one another through complete Arrow-Debreu contingent-claims markets. The paper then examines how the government might implement optimal intergenerational risk sharing with a social security system. One conclusion is that the system must either hold equity claims to capital or negatively index benefits to equity returns.

Macroeconomic Expectations of Households and Professional Forecasters

Economists have long emphasized the importance of expectations in determining macroeconomic outcomes. Yet there has been almost no recent effort to model actual empirical expectations data; instead, macroeconomists usually simply assume that expectations are “rational”. This paper shows that while empirical household expectations are not rational in the usual sense, expectational dynamics are well captured by a model in which households’ views derive from news reports of the views of professional forecasters, which in turn may be rational. The model’s estimates imply that people only occasionally pay attention to news reports; this inattention generates “stickyness” in aggregate expectations, with important macroeconomic consequences.

Externalities of Non-Cooperative Tax Policy in the Globally Integrated Market

This paper investigates efficiency losses caused by independent tax systems, and proposes ways of remedying this coordination failure. Whereas the harmful effects of tariff competition have been thoroughly explored in the trade policy literature, little is known about the externalities that result from jurisdictional corporate tax policies on the trade of multinational companies. I show that cooperative tax policy with self-interested governments has the potential for increasing not only the levels of tax revenues and corporate profits but also the volume of trade through a more efficient allocation of tax burden.

Learning, Hypothesis Testing, and Nash Equilibrium

Although there exist learning processes for which the empirical distribution of play comes close to Nash equilibrium, it is an open question whether the players themselves can learn to play equilibrium strategies without assuming that they have prior knowledge of their opponents’ strategies and/or payoffs. We exhibit a large class of statistical hypotheses testing procedures that solve this problem. Consider a finite stage game G that is repeated infinitely often. At each time, the players have hypotheses about their opponents’ repeated game strategies. They frequently test their hypotheses against the opponents’ recent actions. When a hypotheses fails test, a new one is adopted. Play is almost rational in the sense that, at each point of time, the players’ strategies are є -best replies to their beliefs. We show that, at least 1 – є of the time t these hypotheses testing strategies constitute an є-equilibrium of the repeated game from t on; in fact the strategies are close to being subgame perfect for long stretches of time. Further, all players for whom prediction matters, i.e. whose best responses depend on the opponents’ behavior, learn to predict within є.

Inventories, Employment and Hours

The purpose of this paper is to develop a model that integrates inventory and labor decisions. We extend a model of inventory behavior to include a detailed specification of the role of labor input in the production process and of the costs associated with it. In particular, we distinguish between employment, hours and effort per worker, and allow for adjustment costs associated with employment changes. We assume that the requirement function for effective hours has a general trans-logarithmic form, and derive an estimable system of Euler equations for inventories and employment with implied cross-equation restrictions. The econometric results shed light on several important topics, including the shape of the marginal cost of output and the role of labor hoarding as an explanation of procyclical productivity and the persistence of inventory stocks. Moreover, they raise questions about the adequacy of commonly used specifications such as Cobb-Douglas approximations to the production process and the definition of labor input as the product of employment and effective hours worked per worker.

Greenspan and the Greenbook

A vast literature has emerged using Taylor rules to analyze monetary policy. Although very attractive both theoretically and empirically, such rules imply a mechanical response by the policy variable to fundamental ones. This study looks for empirical evidence of a more sophisticated monetary policy, one which takes into account expected future developments. An important piece of information I use is the Greenbook forecast series, which are calculated by the Federal Reserve Board’s Research Department prior to the Board meetings. Using Greenbook forecasts allows calculation of future inflation shocks as expected by the Fed. These shocks are significant in the estimated Taylor rule, confirming that policymaking is forward-looking. In addition, using Greenbook forecasts allows one to obtain better real time estimates of the potential output, and thus to obtain a more precise characterization of monetary policy.

Why Does it Matter that Beliefs and Valuations be Correctly Represented?

This paper contains an analysis of a simple principal-agent problem illustrating possible problems that may arise when the prinicpal ascribes to the agent subjective probabilities and utilities that are implied by the subjective expected utility model but do not represent the agent’s beliefs and valuations. In particular, it is possible that an incentive contract designed by the principal induces the agent to choose an action that is not in the principal’s best interest.

A Panic Attack on Unit Roots and Cointegration

This paper develops a new methodology that makes use of the factor structure of large dimensional panels to understand the nature of non-stationarity in the data. We refer to it as PANIC – a ‘Panel Analysis of Non-stationarity in Idiosyncratic and Common components’. PANIC consists of univariate and panel tests with a number of novel features. It can detect whether the nonstationarity is pervasive, or variable-specific, or both. It tests the components of the data instead of the observed series. Inference is therefore more accurate when the components have different orders of integration. PANIC also permits the construction of valid panel tests even when cross-section correlation invalidates pooling of statistics constructed using the observed data. The key to PANIC is consistent estimation of the components even when the regressions are individually spurious. We provide a rigorous theory for estimation and inference. In Monte Carlo simulations, the tests have very good size and power. PANIC is applied to a panel of inflation series.

Can Sticky Prices Account for the Variations and Persistence in Real Exchange Rates?

This paper provides an empirical assessment of the importance of sticky prices in accounting for the variations and the persistence in real exchange rates. Vector autoregressions with five variables from two countries that always include the United States are estimated. Restrictions are imposed to identify a global shock, and two sets of country specific output shocks. One set of shocks is associated with instantaneous price adjustments, while the other has delayed effects on prices. Data from the G7 countries reveal that U.S. sticky price shocks are the dominant source of real exchange rate variations. But these shocks have reasonably short half-lives and cannot account for the observed real exchange rate persistence. Non-sticky price shocks can induce very persistent real exchange rate dynamics, even though they account for little of the historical real exchange rate variations.

A New Look at Panel Testing of Stationarity and the PPP Hypothesis

This paper uses a decomposition of the data into common and idiosyncratic components to develop procedures that test if these components satisfy the null hypothesis of stationarity. The decomposition also allows us to construct pooled tests that satisfy the cross-section independence assumption. In simulations, tests on the components separately generally have better properties than testing the observed series. However, the results are less than satisfactory, especially in comparison with similar procedures developed for unit root tests. The problem can be traced to the properties of the stationarity test, and is not due to the weakness of the common-idiosyncratic decomposition. We apply both panel stationarity and unit root tests to real exchange rates. We found evidence in support of a large stationary common factor. Rejections of PPP are likely due to non-stationarity of country-specific variations.

PPP May not Hold After all: A Further Investigation

In a recent paper, Engel (1999b) presents monte-carlo evidence to suggest that unit root tests can not detect a non-stationary component in the real exchange rate even when this component accounts for almost half of its long-horizon forecast error variance. This hidden non-stationary component led to the conclusion that long run purchasing power parity might not hold after all. In this note, we first point out some conceptual difficulties with the statistic being used to measure the size of the non-stationary component, and then argue that it bears no systematic relationship with rejection rates in unit root tests. The problems stem from near observational equivalence of the simulated model in not one, but two dimensions. We then discuss the steps a practitioner can take to minimize Type I error in cases when the non-stationary component is hard to detect. Real exchange rate data for 19 countries are examined and estimates are obtained for the duration of the real exchange rate shocks.

The Fed and the New Economy

This paper seeks to understand the behavior of Greenspan’s Federal Reserve in the late 1990s. Some authors suggest that the Fed followed a simple “Taylor rule,” while others argue that it deviated from such a rule because it recognized that the “New Economy” permitted an easing of policy. We find that a Taylor rule based on inflation and unemployment does break down in the late 1990s. However, the Fed’s behavior appears stable once one accounts for the falling NAIRU of the period. A rule based on inflation and the deviation of unemployment from the NAIRU captures the Fed’s behavior through the entire period from 1987 to 2000.

Economic Effects of Means-Tested Transfers in the U.S.

The system of means-tested transfers in the U.S. has evolved in important ways over the last decade, with significant expansions of Medicaid, the Earned Income Tax Credit, and the Supplemental Security Income program, and with significant contraction in Aid to Families with Dependent Children, now titled the Temporary Assistance for Needy Families program. To determine where we are in our understanding of each of these programs, as well as the other major programs in the system of means-tested transfers, a volume is under preparation by the National Bureau of Economic Research that surveys the current structure and historical evolution of each of these programs and that synthesizes the results of the research that has been conducted on their economic effects. In addition to the AFDC-TANF, Medicaid, EITC, and SSI programs, reviews have been conducted for the Food Stamp program and for housing, child care, job training, and child support programs. This paper summarizes the results of those reviews and highlights the large number of important findings from existing research.

The Temporary Assistance for Needy Families Program

The Temporary Assistance for Needy Families (TANF) program was created in 1996 from what was previously named the Aid to Families with Dependent Children (AFDC) program. The TANF program is intended to serve low-income families, primarily those with only a single parent present, as did the AFDC program. The TANF program is distinguished from AFDC by strong work requirements, time limits on receipt, options for the provision of noncash assistance, and by a block grant financing structure. This paper reviews the rules of the TANF program and the research that has been conducted on it and on the AFDC program.

The Epidemiology of Macroeconomic Expectations

Since the foundational work of Keynes (1936), macroeconomists have emphasized the importance of agents’ expectations in determining macroeconomic outcomes. Yet in recent decades macroeconomists have devoted almost no effort to modeling actual empirical expectations data, instead assuming all agents’ expectations are “rational.” This paper takes up the challenge of modeling empirical household expectations data, and shows that a simple, standard model from epidemiology does a remarkably good job of explaining the deviations of household inflation and unemployment expectations from the “rational expectations” benchmark. Furthermore, a microfoundations or “agent-based” version of the model may be able to explain, in a way that still permits aggregation, stark rejections of the pure rational expectations framework like Souleles’s (2002) finding that members of different demographic groups have sharply different predictions for macroeconomic aggregates like the inflation rate.

A Semiparametric Estimator for Dynamic Optimization Models

We develop a new estimation methodology for dynamic optimization models with unobserved state variables. Our approach is semiparametric in the sense of not requiring explicit parametric assumptions to be made concerning the distribution of these unobserved state variables. We propose a two-step pairwise-difference estimator which exploits two common features of dynamic optimization problems: (1) the weak monotonicity of the agent’s decision (policy) function in the unobserved state variables, conditional on the observed state variables; and (2) the state-contingent nature of optimal decision-making which implies that, conditional on the observed state variables, the variation in observed choices across agents must be due to randomness in the unobserved state variables across agents. We apply our estimator to a model of dynamic competitive equilibrium in the market for milk production quota in Ontario, Canada.

Optimal Cartel Pricing in the Presence of an Antitrust Authority

Price dynamics are characterized when a price-fixing cartel is concerned about creating suspicions of the presence of a cartel. A dynamical extension of static models yields the counterfactual prediction that the cartel initially raises price and then gradually lowers it. An alternative specification generates a more plausible result that the cartel gradually raises price. For that specification, the long-run cartel price is found to be decreasing in the damage multiple but is independent of the level of fixed fines. A more stringent standard for calculating damages is shown to induce the cartel to price higher.

Empirical Likelihood-Based Selection Criteria for Moment Condition Models

In this note we propose model selection criteria (MSC) for unconditional moment models using empirical likelihood (EL) statistics in the construction of the MSC. The use of EL-statistics in lieu of the more common J-statistics leads to a much more transparent interpretation of the MSC by providing a closer analogy with MSC in standard parametric likelihood models and underlying the common likelihood- (or information-) based underlying model selection procedures for bothe parametric as well as semi-parametric models.

Sentiment, Predictable Income, and Habits in the Dynamics of Aggregate Consumption

This paper explores whether habit formation in the representative agent’s preferences can explain two failures of the standard permanent income model with intertemporally separable utility: the sensitivity of consumption to lagged consumer sentiment, and to predictable changes in current income. I show that in a habit formation model, the sensitivity of consumption growth to predicted income can be to a large extent reinterpreted as a sluggish response of consumption to news. Moreover, the sensitivity of consumption growth to lagged sentiment merely reflects the serial corre-lation in consumption growth generated by habits. I study the model’s predictions for the effect of the recent tax cut on aggregate consumption. Contrary to the PIH model, consumers with habits respond to permanent tax cuts slowly. The estimated model predicts an immediate (first-quarter) MPC out of the permanent tax cut of only 30%.

Estimating Taylor Rules in a Real Time Setting

This paper demonstrates how the use of revised data distorts our understanding of past monetary policy decisions. Three problems are addressed – the use of (i) contemporaneous rather than lagged data, (ii) revised rather than unrevised data; and (iii) leads of data, unavailable at the time of policy setting, for estimating potential output. In order to evaluate each of these distortions separately, I have estimated Taylor rules using different sets of estimates of output gap and inflation for three sub-samples, corresponding to chairmanship terms of Arthur Burns, Paul Volcker, and Alan Greenspan. Three series of estimates are constructed — series based on revised estimates of data for the whole post-war sample; series based on truncated (excluding leads) subsamples of revised data; and series, similar to the previous one, but based on unrevised data. Although using revised data may produce significantly misleading conclusions, the inclusion of leads of the data when estimating the potential level of the economy has a much bigger impact, producing coefficients which may have a value less than half of the true one. At the same time, the use of contemporaneous rather than lagged data does not seem to have a big effect on the final results. Among other things, I demonstrate that the U.S. monetary policy was less active during Burns’ chairmanship, and much more anti-inflationary during Greenspan’s, than traditional analysis would suggest.

Computing Sunspots in Linear Rational Expectations Models

We provide computationally simple methods of analyzing the effects of fundamental and sunspot shocks in linear rational expectations models when the equilibrium is indeterminate. Under indeterminacy sunspots can affect model dynamics through endogenous forecast errors that do not completely adjust to fundamental shocks alone. Moreover, the effect of fundamental shocks on forecast errors is not uniquely determined. We characterize the full set of equilibria and show that some solution methods only generate subsets of all the rational expectations equilibria by imposing specific restrictions on the forecast errors. However, in most cases it is possible to recover the full set of equilibria from the output of these methods. The solution algorithms are illustrated with a New Keynesian dynamic stochastic equilibrium model that can be solved analytically. We show that under a passive interest-rate rule the response of output and inflation to an unanticipated interest rate cut is ambiguous: while output rises, there are some equilibria in which inflation increases and other in which prices fall.

Liquidity Constraints and Precautionary Saving

Economists working with numerical solutions to the optimal consumption/saving problem under uncertainty have long known that there are quantitatively important interactions between liquidity constraints and precautionary saving behavior. This paper provides the analytical basis for those interactions. First, we explain why the introduction of a liquidity constraint increases the precautionary saving motive around levels of wealth where the constraint becomes binding. Second,we provide a rigorous basis for the oft-noted similarity between the effects of introducing uncertainty and introducing constraints, by showing that in both cases the effects spring from the concavity in the consumption function which either uncertainty or constraints can induce. We further show that consumption function concavity, once created, propagates back to consumption functions in prior periods. Finally, our most surprising result is that the introduction of additional constraints beyond the first one, or the introduction of additional risks beyond a first risk, can actually reduce the precautionary saving motive, because the new constraint or risk can ‘hide’ the effects of the preexisting constraints or risks.

Durable-Goods Oligopoly with Secondary Markets: Theory and an Empirical Application to the Automobile Market

We examine the effects of durability on equilibrium producer behavior in the car market. In this setting, forward-looking producers take into account the effect that their current production decisions have on their current and future profits, due to the existence of a secondary market. First, we construct a dynamic oligopoly model of a vertically-differentiated product market to understand the equilibrium production dynamics which arise from the durability of the goods and their active trade in secondary markets. Second, we use data from the automobile industry to estimate a tractable linear-quadratic version of this model. One result suggests that durability may be a particularly desirable car feature for high-quality car producers since, by overproducing today, they can exploit durability and the existence of a secondary market to potentially reduce their lower-quality competitors’ future production: planned obsolescence appears to be a more profitable strategy for lower-end than higher-end producers.

Econometric Models of Asymmetric Ascending Auctions

We develop econometric models of ascending (English) auctions which allow for both bidder asymmetries as well as common and/or private value components in bidders’ underlying valuations. We show that the equilibrium inverse bid functions in each round of the auction are implicitly defined (pointwise) by a system of nonlinear equations, so that conditions for the existence and uniqueness of an increasing-strategy equilibrium are essentially identical to those which ensure a unique and increasing solution to the system of equations. We exploit the computational tractability of this characterization in order to develop an econometric model, thus extending the literature on structural estimation of auction models. Finally, an empirical example illustrates how equilibrium learning affects bidding during the course of the auction.

Individual Sense of Fairness: An Experimental Study

This paper presents an experimental test of the theory of individual sense of fairness of Karni and Safra (2000) using a modiÞed 3-player dictator game. The dictator is asked to allocate chances to win a single indivisible $15 dollar prize among himself and two others. His choice is restricted to a chord in the probability simplex. If the dictator chooses an interior point along the chord, this involves giving up own probability to win in exchange for a fairer allocation procedure. The results indicate that a strong preference for fairness exists in some subjects but not others. The chords used in the experiment were also constructed to allow the investigation of other properties of the subjects preferences for fairness.

On The Representation of Beliefs by Probabilities

This paper explores two axiomatic structures of subjective expected utility assuming a finite state-space and state-dependent, connected, topological outcome-spaces. Building on the work of Karni and Schmeidler (1981) the analytical framework includes, in addition to the preference relation on acts, introspective preferences on hypothetical lotteries that are linked to the preference relation on acts by consistency axioms. The two models accommodate state-dependent preferences and yield subjective probabilities that correctly represent the decision-maker’s beliefs. State-independent preferences are a special case.

Firm Adaptation, Consumer Sorting, and Market Dominance

Consider a setting in which firms randomly discover new ideas that affect their products or services and implement only those ideas which increase current profit. At the same time that firms are adapting their offerings, consumers are searching among firms for the best match. It is shown that implicit in these dual dynamics is an increasing returns mechanism which can result in one firm dominating the market in the long run. The conditions under which there is sustained market dominance are characterized.

Increasing Competition and the Winner’s Curse: Evidence from Procurement

We empirically measure the effects of increasing competition on equilibrium bidding in procurement auctions. In common-value auctions, the winner’s curse counsels more conservative bidding, as the number of competitors increases. First, we estimate the structural parameters of an equilibrium bidding model and test for the importance of common-value components in bidders’ preferences. Second, we use these estimates to calculate the effects of increasing competition on both individual bids as well as winning bids, i.e., procurement costs.
We analyze bid data from construction procurement auctions run by the New Jersey transportation department. Our results indicate that, for a large subset of these auctions, the median procurement cost rises as competition intensifies: increasing the number of bidders from 3 to 6 raises median procurement costs by about 15%. In this setting, then, asymmetric information overturns the common economic wisdom that more competition is always desirable.

Sacrifice Ratios with Long-Lived Effects

This paper contains a theoretical and empirical study of sacrifice ratios with long-lived effects, including possible strong persistence effects, or even hysteresis effects. The empirical analysis is based on G-7 quarterly output data as well as unemployment data from 1960 to 1999. In this paper, I develop some new methods to measure sacrifice ratios with long-lived effects. I reach four conclusions: First, sacrifice ratios with long-lived effects are larger than sacrifice ratios that do not account for long-lived effects. Second, from a theoretical model and simulation, the “standard method” of measuring sacrifice ratios by Ball (1994) has a larger downward bias for countries with larger long-lived effects. Third, both random and fixed effect models show that there is a negative relationship between sacrifice ratios and initial inflations, which can provide one explanation of the large magnitude of sacrifice ratios with long-lived effects in the 1990s, compared with other periods. Fourth, there is no significant negative relationship between sacrifice ratios with long-lived effects and nominal wage rigidities.

Precautionary Saving and the Marginal Propensity To Consume Out of Permanent Income

The budget constraint requires that, eventually, consumption must adjust fully to any permanent shock to income. Intuition suggests that, knowing this, optimizing agents will fully adjust their spending immediately upon experiencing a permanent shock. However, this paper shows that if consumers are impatient and are subject to transitory as well as permanent shocks, the optimal marginal propensity to consume out of permanent shocks (the MPCP) is strictly less than 1, because buffer stock savers have a target wealth-to-permanent-income ratio; a positive shock to permanent income moves the ratio below its target, temporarily boosting saving.

Individual Learning About Consumption

The standard approach to modelling consumption/saving problems is to assume that the decisionmaker is solving a dynamic stochastic optimization problem. However, under realistic descriptions of utility and uncertainty, the optimal consumption/saving decision is so difficult that only recently economists have managed to find solutions, using numerical methods that require previously infeasible amounts of computation. Yet empirical evidence suggests that household behavior conforms fairly well with the prescriptions of the optimal solution, raising the question of how average households can solve problems that economists, until recently, could not. This paper examines whether consumers might be able to find a reasonably good ’rule-of-thumb’ approximation to optimal behavior by trial-and-error methods, as Friedman (1953) proposed long ago. We find that such individual learning methods can reliably identify reasonably good rules of thumb only if the consumer is able to spend absurdly large amounts of time searching for a good rule.

Intensity of the Sense of Fairness: Measurement and Behavioral Characterization

The analysis of the behavioral and social implications of the intensity of moral sentiments requires that these emotions be quanti…ed. In this paper we quantify the intensity of individual sense of fairness in the context of the model of Karni and Safra (2000). That model depicts self-interest seeking individuals endowed with intrinsic sense of fairness, who must choose among alternative random allocation procedures to determine who, among a group of eligible individuals, will be given ownership of an indivisible good . For such individuals we develop measures of the intensity of their sense of fairness and explore their behavioral characterization.

Organization of Innovation in a Multi-Unit Firm: Coordinating Adaptive Search on Multiple Rugged Landscapes

In Chang and Harrington (2000a), a computational model of a multi-unit firm is developed in which unit managers continually search for better practices. Search takes place over a rugged landscape defined over the space of unit practices. There it is shown that a more centralized organization is optimal when markets are not too different and the horizon is not too long. The robustness of those results are explored here with respect to the shape of the landscape. In particular, we find that centralization does better when the search space is larger and there is a stronger correlation in a consumer’s preferences across different dimensions. A richer description of comparative dynamics is also provided.

On the Non-Existence of Reputation Effects in Two-Person Infinitely-Repeated Games

Consider a two-person infinitely-repeated game in which one player is either a normal “rational” type or a “commitment” type that authomatically plays a fixed repeated-game strategy. When her true type is private information, a rational type may want to develop a reputation as a commitment type by mimicking the commitment type’s actions. But, the uninformed player, anticipating the behavior of the rational type, may try to “screen out” the rational type by choosing an action which gives the rational type a low payoff when she mimics the commitment type. My main result shows that for “comparably” patient players, if the prior probability that the player is a commitment type is sufficiently small, the “screening” process may take so long that the rational player does not benefit from developing a reputation. In the case of equally patient players, I show that the folk theorem holds even when both players possess a small amount of private information. Schmidt (1994) and Cripps, Schmidt and Thomas (1993) argue that reputation effects can rule out outcomes permitted by the folk theorem, regardless of how small the prior probability that the player is a commitment type. My results show that this argument only applies when one player is “infinitely” more patient than the other.

Does Banning Affirmative Action Harm College Student Quality?

Banning affirmative action from college admissions decisions cannot prevent an admissions office that cares about diversity from achieving it through channels other than the explicit consideration of race. We construct a model of college admissions where candidates from two groups with different average qualifications compete for a fixed number of seats. When an admissions office that cares both about the quality and diversity of its entering class can use group identity as a criterion for admissions, its preferred admissions rule selects the best-qualified candidates from each group. When it cannot use affirmative action, the admissions office’s preferred rule generally does not select the best-qualified candidates from either group: it randomizes over candidates to achieve diversity, at the expense of within-group selection. A ban always reduces diversity, and may also lower average quality. Moreover, even when a total ban on affirmative action raises average quality, a partial ban may raise average quality even more.

The Diffusion of Innovations in Social Networks

We consider processes in which new technologies and forms of behavior are transmitted through social and geographic networks. Agents adopt behaviors based on a combination of their inherent payoff and their local popularity (the number of neighbors who have adopted them) subject to some random error. We characterize the long-run dynamics of such processes in terms of the geometry of the network, but without placing a priori restrictions on the network structure. When agents interact in sufficiently small, close-knit groups, the expected waiting time until almost everyone is playing the stochastically stable equilibrium is bounded above independently of the number of agents and independently of the initial state.

Rates of Information Aggregation in Common Value Auctions

Near-Rationality and Inflation in Two Monetary Regimes

Sticky-price models with rational expectations fail to capture the inertia in U.S. inflation. Models with backward-looking expectations capture current inflation behavior, but are unlikely to fit other monetary regimes. This paper seeks to overcome these problems with a near-rational model of expectations. In the model, agents make univariate forecasts of inflation: they use information on past inflation optimally, but they ignore other variables. The paper tests sticky-price models with near-rational expectations for two periods in U.S. history, the post-1960 period of persistent inflation and the period from 1879 to 1914, when inflation was not persistent. The models fit the data for both periods; in contrast, both rational-expectations and backward-looking models fail for at least one period.

Welfare Benefits and Female Headship in U.S. Time Series

There has been a considerable amount of work on the relationship between AFDC benefits and family structure in the U.S. The evidence to date which uses cross-state variation in welfare benefits and family structure, often with state fixed effects, indicates that there is some nonzero effect of those benefits on marriage and fertility, although there is disagreement on the magnitude of the effect. However, it is undisputed that time series trends in family structure are not correlated in the direction that the cross-state evidence would suggest, for real benefits have been falling, even relative to wages, in aggregate time series. This paper reexamines the time series evidence with particular attention to the role of wages in explaining trends in headship, and notes that the correct specification includes both male as well as female wages. When both are controlled, welfare benefits have a slight positive impact on female headship even in time series. The results demonstrate the importance of labor market factors in explaining trends in female headship.

International Comovement Revisited: The Role of Non-Traded Goods and Price Stickiness

No abstract available.

Policy Interventions, Low-Level Equilibria and Social Interactions

Interest in social interactions, neighborhood effects, and social dynamics in the last several years has seen a revival. Unfortunately, little progress has been made on empirical estimation of such interactions and testing for their presence, on the development of policy interventions which work through social interactions, or on the evaluation of such interventions because several basic identification and estimation problems have not been seriously confronted. Nevertheless, most of these problems are in principle solvable and methods for identifying social interactions and estimating their magnitudes are available and are outlined in this paper. These methods address simultaneity, correlated unobservables, errors-in-variables, and endogenous group membership problems. Moreover, while policy interventions with presumed effects on social interactions have not been well-designed thus far, at least to measure social interactions per se, this problem is not inherent and several policy interventions are suggested which could work primarily through social interactions and whose evaluation could establish their magnitudes.

Measuring the Equilibrium Effects of Unemployment Benefits Dispersion

We analyze the impact of unemployment benefits and minimum wages using an equilibrium search model which allows for dispersion of benefits and productivity levels, job-to-job transitions, and structural and frictional unemployment. The estimation method uses readily available aggregate data on marginal distributions of unemployment durations as well as wages and benefit levels. Different causes of structural and frictional unemployment are investigated. We investigate the efficiency of the imposition of a single benefit level for all household types and the introduction of an Earned Income Tax Credit.

Portfolios of the Rich

Recent research has shown that ‘rich’ households save at much higher rates than others (see Carroll (2000); Dynan, Skinner, and Zeldes (1996); Gentry and Hubbard (1998); Huggett (1996); Quadrini (1999)). This paper documents another large difference between the rich and the rest of the population: portfolios of the rich are heavily skewed toward risky assets, particularly investments in their own privately held businesses. The paper explores three possible explanations of these facts. First, perhaps there is exogenous variation in risk tolerance, so that highly risk tolerant households engage in high-risk, high-return activities, and the risk-lovers who are lucky constitute the rich. A second possibility is that capital market imperfections a la Gentry and Hubbard (1998) and Quadrini (1999) require entrepreneurial activities to be largely self-financed, and these same imperfections imply that entreprenurial investment will yield high average returns. The final possibility is that wealth enters households’ utility functions directly as a luxury good as in Carroll (2000) (one interpretation is that this reflects the utility of anticipated bequests), implying that risk aversion declines as wealth rises. The paper concludes that the overall pattern of facts suggests both Carroll-style utility and Gentry/Hubbard-Quadrini style capital market imperfections are important.

‘Risky Habits’ and the Marginal Propensity to Consume Out of Permanent Income, or, How Much Would a Permanent Tax Cut Boost Japanese Consumption?

Papers in a variety of disparate literatures have recently suggested that habit formation in consumption may explain several empirical puzzles, ranging from the level and cyclical variability of the equity premium (Abel (1990,1999); Constantinides (1990); Jermann (1998); Campbell and Cochrane (1999)) to the ‘excess smoothness’ of aggregate consumption (Fuhrer (2000)) to the apparent fact that increases in economic growth cause subsequent increases in aggregate saving rates (Carroll and Weil (1994); Bosworth (1993); Attanasio, Picci, and Scorcu (2000); Rodrik (1999); Loayza, Schmidt-Hebbel, and Serven (2000)). This paper examines an implication of these models that has mostly been overlooked: Habits strong enough to solve these puzzles imply an immediate marginal propensity to consume out of permanent shocks of much less than one. When the model is calibrated to roughly match the rise in the Japanese saving rate over the postwar period, it implies that the immediate MPC out of permanent tax cuts may be as low as 30 percent, suggesting that calls for a permanent income tax cut as a quick means of stimulating aggregate demand in Japan may be misguided.

A Theory of Quantifiable Beliefs

Building upon the works of Anscombe and Aumann (1963) and Karni and Schmeidler (1981), we develop a general axiomatic theory of quantifiable beliefs – a form of probabilistic sophistication that does not preclude state-dependent preferences and does not require the reduction of compound lotteries. The theory includes the state-dependent expected utility model of Karni and Schmeidler (1981) and the state-independent non-expected utility model of Machina and Schmeidler (1995) as special cases. The theory is flexible enough to admit recursivity in the decision-making process. One specific example of this recursive class is shown to be compatible with a quantifiable beliefs version of Schmeidler’s (1989) Choquet expected utility maximizing model and thus capable of rationalizing Ellsberg-paradox type behavior.

Input and Output Inventories

This paper presents a new stage-of-fabrication inventory model with ordering, usage, and stocking of input materials that distinguishes between gross production and value added. It extends the traditional linear-quadratic model of output (finished goods) inventories by adding joint determination of input inventories, which largely have been ignored. Empirically, input inventories are more important than output inventories, especially in business cycle fluctuations. Maximum likelihood estimation of the decision rules yields relatively strong support for the model using data for nondurable and durable good industries. The value added specification outperforms gross production because adjustment costs on the change in materials usage are critical to fitting the data.

Social Employment Of Welfare Recipients In Belgium: An Evaluation

In Belgium, welfare agencies receive a subsidy to employ welfare recipients for a period sufficiently long to entitle them to unemployment benefits. This work experience program is called Social Employment (SE). We investigate the effect of SE on the exit rate from welfare. We propose a grouping/IV estimator of the SE effect that eliminates selection bias. The estimator is consistent, even if the selection into SE depends on the average unobserved characteristics of welfare recipients in a region and in a welfare duration interval. The empirical analysis suggests that there is creaming in the selection process. Without correction for selectivity we find that SE reduces welfare dependence, but after correction this conclusion is reversed. These results are consistent with the adverse incentives faced by the welfare agencies.

Semi-Nonparametric Estimation of an Equilibrium Search Model

We specify and estimate an equilibrium job search model with productivity differences across labor market segments. The model allows for two types of unemployment: frictional unemployment due to search frictions and structural unemployment due to wage floors. Wage floors exist because of high unemployment benefits or binding minimum wages. The productivity distribution is estimated semi-nonparametrically along the lines of Gallant-Nychka, using Hermite series approximation. We decompose the total unemployment rate and we examine the effect of changes in the minimum wage.

Efficient Estimation of Average Treatment Effects Using the Estimated Propensity Score

We are interested in estimating the average effect of a binary treatment on a scalar outcome. If assignment to the treatment is independent of the potential outcomes given pre-treatment variables, biases associated with simple treatment-control average comparisons can be removed by adjusting for differences in the re-treatment variables. Rosenbaum and Rubin (1983, 1984) show that adjusting solely for differences between treated and control units in a scalar function of the pre-treatment variables, the propensity score, also removes the entire bias associated with differences in pre-treatment variables. Thus it is possible to obtain unbiased estimates of the treatment effect without conditioning on a possibly high-dimensional vector of pre-treatment variables. Although adjusting for the propensity score removes all the bias, this can come at the expense of efficiency. We show that weighting with the inverse of a nonparametric estimate of the propensity score, rather than the true propensity score, leads to efficient estimates of the various average treatment effects. This result holds whether the pre-treatment variables have discrete or continuous distributions. We provide intuition for this result in a number of ways. First we show that with discrete covariates, exact adjustment for the estimated propensity score is identical to adjustment for the pre-treatment variables. Second, we show that weighting by the inverse of the estimated propensity score can be interpreted as an empirical likelihood estimator that efficiently incorporates the information about the propensity score. Finally, we make a connection to results to other results on efficient estimation through weighting in the context of variable probability sampling.

Solving Consumption Models with Multiplicative Habits

This paper provides derivations necessary for solving an optimal consumption problem with multiplicative habits and a CRRA ‘outer’ utility function, either for a microeconomic problem with both labor income risk and rate-of-return risk, or for a macroeoconomic representative agent model.

A Model of Temporary Search Market Equilibrium

No abstract available.

Death to the Log-Linearized Consumption Euler Equation! (And Very Poor Health to the Second-Order Approximation)

This paper shows that standard empirical methods for estimating log-linearized consumption Euler equations cannot successfully uncover structural parameters like the coefficient of relative risk aversion from a dataset of simulated consumers behaving exactly according to the standard model. Furthermore, consumption growth for simulated consumers is very highly statistically related to predictable income growth — and thus standard ‘excess sensitivity’ tests would reject the hypothesis that consumers are behaving according to the standard model. Results are not much better for the second-order approximation to the Euler equation. The paper concludes that empirical estimation of consumption Euler equations should be abandoned, and discusses some alternative empirical strategies that are not subject to the problems of Euler equation estimation.

Why Do the Rich Save So Much?

This paper considers several alternative explanations for the fact that households with higher levels of lifetime income have higher lifetime saving rates (Dynan, Skinner, and Zeldes (1996); Lillard and Karoly (1997)). The paper argues that the saving behavior or the richest households cannot be explained by models in which the only purpose of wealth accumulation is to finance their own future consumption, or even consumption of heirs. The paper concludes that the simplest model that explains the relevant facts is one in which either consumers regard the accumulation of wealth as an end in itself, or unspent wealth yields a flow of services (such as power or social status) which have the same practical effect on behavior as if wealth were intrinsically desirable.

Comparison Utility in a Growth Model

This paper compares the dynamics of two general equilibrium models of endogenous growth in which agents have “comparison utility”. In the “inward-looking” economy, individuals care about how their consumption in the current period compares to their own consumption in the past (one way to describe this is “habit-formation” in consumption). In the “outward-looking” economy, individuals care about how their own level of consumption compares with others’ consumption. While steady state growth rates are identical in the two economies, transition paths differ. For example, consider the effect of negative shock to capital. In an endogenous growth model with standard preferences, there will be no effect on the saving rate or the growth rate of output. In both of the models that we consider, however, saving and growth will temporarily fall in response to the shock. The initial decline in saving and growth will be larger in the inward-looking case. However, since agents in the outward-looking case do not take into account the externality effect of their consumption, higher growth in this case will lead to lower utility than in the inward-looking case.

Unemployment Expectations, Jumping (S,s) Triggers, and Household Balance Sheets

This paper examines the relationship between household balance sheets, consumer purchases, and expectations. We find robust empirical relationships between balance sheet measures and spending, but we do find that unemployment expectations are robustly correlated with spending. We then construct a formal model of durables and nondurables consumption with an explicit role for unemployment and for household debt. We find that the model is capable of explaining several empirical regularities which are, at best, unexplained by standard models. Finally, we show that a loosening of liquidity constraints can produce a runup in debt similar to that experienced recently in the U.S., and that after such a liberalization consumer purchases show heightened sensitivity to labor income uncertainty, providing a potential rigorous interpretation of the widespread view that the buildup of debt in the 1980s may have played an important role in the weakness of consumption during and after the 1990 recession.

On the Decomposition and Characterization of Risk With a Continuum of Random Variables

We show that the main theorem in Al-Najjar’s 1995 Econometrica paper is false. We provide additional references for the residual implications that are valid, but point our that these standard implications are incapable of bearing the interpretative weight that Al-Najjar places on them.

Non-Cooperative Games with Many Players

No abstract available.

On the Existence of Pure Strategy Equilibria in Games with a Continuum of Players

We present results on the existence of pure strategy Nash equilbria in nonatomic games. We also show by means of counterexamples that the stringent conditions on the cardinality of actions sets cannot be relaxed, and thus resolve questions which have remained open since Schmeidler’s 1973 paper.

A Theory of Rigid Extremists and Flexible Moderates With An Empirical Application To The U.S. Congress

A theory is developed which predicts that people with extreme opinions are relatively rigid in that they are less inclined to modify their opinions. That extremists tend to be rigid and moderates tend to be flexible is found to hold for members of the U.S. Congress.