WP2018/9: SEMIPARAMETRIC CORRECTION FOR ENDOGENOUS TRUNCATION BIAS WITH VOX POPULI BASED PARTICIPATION DECISION

Nir Billfeld† Moshe Kim‡

Abstract: Not having access to the entire data distribution entails severe biases in the resulting parameter estimates of any empirical investigation and hampers the understanding and analysis of the data generation process. In this paper, we integrate and synthesize the knowledge present in various scientific disciplines for the development of semiparametric endogenous truncation-proof algo- rithms, correcting for truncation bias due to endogenous self-selection. Thus, computer science (pattern recognition), machine (unsupervised) learning, electrical engineering (signal extraction), economics, psychology, and management science all contribute to the ideas and techniques em- bedded in the algorithms developed and offered here. This synthesis enriches the algorithms’ ac- curacy, efficiency and applicability. Under truncation, the unobserved portion of the distribution is similar to the unobserved pixels problems in pattern recognition dealt with in computer sci- ence, machine learning and artificial intelligence algorithms. However, data in the social sciences are intrinsically affected and largely generated by their own behavior (cognition). Thus, incor- porating behavioral aspects from economics, psychology and management science in the model allows for endogeneity to take place, to be modeled and to be controlled. The algorithms offered improve upon the covariate shift assumption in machine learning, in that, each data point’s ”de- cision” to be truncated from the original distribution is an important building block generating the estimation algorithms. Refining the concept of Vox Populi (Wisdom of Crowd) allows data points to ”sort themselves” out depending on their estimated latent reference group opinion space. The opinion space is composed of experts’ observed and unobserved characteristics. The latter are captured by latent classes. The emerging algorithms are semiparametric and are of the orthonormal polynomials sequence family (such as Fourier), known to have flexibility, and are useful in nonparametric analysis. The most attractive feature of this estimator, for our purposes, is that it intrinsically prevents potential multicollinearity problems, a feature that the kernel estimator does not possess. Each datum is generated by a different distribution function, char- acterized as a finite mixture of various continuous distribution functions, that are not restricted to being unimodal or symmetric. Thus, the proposed algorithm is distribution-free. The number of reference groups is not arbitrarily imposed but rather estimated, using smoothly clipped ab- solute deviation (SCAD) penalization mechanism. Monte Carlo simulations, based on 2,000,000 different distribution functions, practically generating 100 million realizations which are not i.i.d, attest to a very high accuracy of our model. In the data generation process we verify the appli- cability of our procedure to cases in which the disturbances are neither jointly nor marginally normally distributed. These disturbances are constructed as realizations of non-symmetric and non-unimodal distribution functions.

Keywords: Selectivity bias correction, Semiparametric, Local Covariate shift, Vox Populi, Wisdom of crowds, latent reference groups, SCAD, Monte Carlo simulation, Fourier-based Sieve estimator.

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Date: 18th November 2018

 

WP2018/9: SEMIPARAMETRIC MAXIMUM LIKELIHOOD SIEVE ESTIMATOR FOR CORRECTION OF ENDOGENOUS TRUNCATION BIAS

Nir Billfeld* Moshe Kimy

Abstract: Semiparametric correction for a sample selection bias in the presence of endogenous truncation is known to be much more dicult in the case of a binary selection variable than in the case of a continuous selection variable. This paper proposes a simple bandwidth-free semiparametric methodology to correct for a self-selection bias in a truncated sample, without any prior knowl- edge of the marginal density functions of the selection model's random disturbances. Each of the unknown marginal density functions is estimated using Sieve estimator, utilizing Hermite polynomials as basis functions. The aforementioned procedure is appropriate for both binary and continuous selection variables cases under the covariate shift assumption. We consider a double hurdle model, which is a combination of two selection rules. The rst is propagated by a truncation in the dependent variable of the substantive equation. The second is propagated by endogenous self-selection. The suggested correction procedure produces estimates that are of high accuracy and consistent based on Monte Carlo simulations. The random disturbances are not restricted to being symmetric and their marginal distribution functions are unknown. Thus, in the data generation process we verify the applicability of our procedure to cases in which the disturbances are neither jointly nor marginally normally distributed. These disturbances are constructed as realizations of non-symmetric distribution functions.

Keywords: Selectivity bias correction, Hermite Polynomials, Covariate shift.

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Date: November 18, 2018

 

WP2018/9: Geographical Roots of the Coevolution of Cultural and Linguistic Traits∗

Oded Galor†, Omer ̈ Ozak ̈ ‡, and Assaf Sarid§

Abstract: This research explores the geographical origins of the coevolution of cultural and linguistic traits in the course of human history, relating the geographical roots of long-term orientation to the structure of the future tense, the agricultural determinants of gender bias to the presence of sex- based grammatical gender, and the ecological origins of hierarchical orientation to the existence of politeness distinctions. The study advances the hypothesis and establishes empirically that: (i) geographical characteristics that were conducive to higher natural return to agricultural investment contributed to the existing cross-language variations in the structure of the future tense, (ii) the agricultural determinants of gender gap in agricultural productivity fostered the existence of sex- based grammatical gender, and (iii) the ecological origins of hierarchical societies triggered the emergence of politeness distinctions.

Keywords: EComparative Development, Cultural Evolution, Language Structures, Future Tense, Po- liteness Distinctions, Long-Term Orientation, Grammatical Gender, Gender Bias, Hierarchy, E- mergence of States

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Date: November 25, 2018

JEL: O10, Z10, Z13

WP2018/9: Semiparametric Wavelet-based JPEG IV Estimator forSemiparametric Wavelet-based JPEG IV Estimator for Endogenously Truncated Data

Nir Billfeld* Moshe Kimy

Abstract: The validity of the IV estimator relies on the orthogonality with respect to the random disturbance. However, in
cases of endogenously truncated data as well as in other instances (e.g., censored data) which is very frequently the
nature of data used in empirical research, there exists severe contamination in the disturbance due to the endogenous
selection process. Such a contamination implies that even if the instrumental variable and the random disturbance are
unconditionally independent, they are yet conditionally jointly dependent given the selection variable. The rationale
is that the endogenous selection process generates a comovement between the IV and the disturbance which is related
to the variation in the selection equation's covariates. This contamination propagates additional bias introduced into
the parameter estimates of the exogenous covariates. Consequently, not only does the conventional IV not remedy
the problem it is intended to, but rather introduces additional bias into the parameter estimates of the exogenous
covariates of the substantive equation. Our empirical implementation shows that even under mild correlation between
the random disturbances of the substantive and selection equations, the resulting bias in the estimated parameter
of the endogenous covariate in the substantive equation can amount to almost tenfold the true parameter value. We
o er a newly-introduced semiparametric biorthogonal wavelet-based JPEG IV estimator and its associated symmetry
preserving kernel, which is closely related to object recognition methods in Arti cial Intelligence. This estimator corrects
both biases, the one generated by endogenous truncation and the one generated by endogenous covariates, by means
of denoising. We introduce a multifocal variant of the locall GMM (MFGMM) estimator to establish jointly the entire
parameter set asymptotic properties. The conventional IV estimator is nested in the proposed estimator as a special case.
Biorthogonal wavelet is a bandwidth-free estimator that enables a multi focal representation of the data, by utilizing
compact support. We further develop a biorthogonal wavelet amenable for controlling data irregularities, which also
accommodates a reference-free criterion function for optimal denoising. This is suitable for situations where the original
data distribution is unobservable such as in the case of endogenous truncation. The proposed estimator removes the
hurdle which prevents orthogonality under truncation or other misspeci cations. Using Monte Carlo simulations attest
to very high accuracy of our o ered semiparametric JPEG IV estimator as well as high eciency as re
ected by √n consistency. These results have emerged from utilizing 2,000,000 di erent distribution functions, generating 100 million
realizations to construct the various data sets.

Keywords: Endogenous truncation, Semiparametric wavelet-based JPEG IV , LiftingEndogenous truncation, Semiparametric wavelet-based JPEG IV , Liftingscheme, Denoising.

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Date: November 25, 2018

WP2018/9: Nonseparability without Monotonicity: The CouterfactualNonseparability without Monotonicity: The CouterfactualDistribution M-Estimator for Causal Inference

Nir Billfeld* Moshe Kim

Abstract: Nonparametric identi cation strategy is employed to capture causal relationships without imposing
any variant of monotonicity existing in the nonseparable nonlinear error model literature.
This is important as when monotonicity is applied to the instrumental variables it limits their
availability and when applied to the unobservables it can hardly be justi ed in the non-scalar
case. Moreover, in cases where monotonicity is not satis ed the monotonicity-based estimators
might be severely biased as shown in comparative Monte Carlo simulation. The key idea in
the proposed identi cation and estimation strategy is to uncover the counterfactual distribution
of the dependent variable, which is not directly observed in the data. We o er a two-step
M-Estimator based on a resolution-dependent reproducing symmetric kernel density estimator
rather than on the bandwidth-dependent classical kernel and thus, less sensitive to bandwidth
choice. Additionally, the average marginal e ect of the endogenous covariate on the outcome
variable is identi ed directly from the noisy data which precludes the need to employ additional
estimation steps thereby avoiding potential error accumulation. Asymptotic properties of the
counterfactual M-Estimator are established.

Keywords: Nonparametric, Counter factual distribution, Reproducing kernel, NonseparableNonparametric, Counter factual distribution, Reproducing kernel, Nonseparableerror, Nonmonotonic.

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Date: November 9, 2018

WP2018/9: PRESCRIPTIVE NORMS AND SOCIAL COMPARISONS

Moti Michaeli

Abstract: This paper analyzes the equilibrium strength of prescriptive norms to contribute to public

goods. We consider three methods of establishing what an acceptable contribution to the public good is.
Under the rst method, the contribution of the bottom contributor is the reference point by which the
comparison is being made; under the second, the median contribution is the reference point; and under
the third the top contribution is the reference. The rst method results in a unique equilibrium and the
reference contribution is endogenously low. Each of the latter two methods allows for a continuum of
reference contributions hence for varying strengths of the norm to contribute in equilibrium. The median

reference allows for the highest equilibrium contributions and welfare of all methods but the bottom-
reference method provides a safe minimal aggregate contribution and welfare that surpasses the worst

outcome in the other two methods.

Keywords: Social norm; reference point; public good.

JEL: D02, D90, H41, Z1.

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Date: 2018 Nov 11

WP2017/8: The dynamics of revolutions

Moti Michaeli

Abstract: We study the dynamics of revolutions and mass protests. In a uni…ed framework we explain three classes of observed revolutions, two of which are unexplained by earlier models: 1) a revolution initiated by extreme regime opponents dissenting greatly, later joined by moderate dissidents dissenting less; 2) a revolution initiated by moderates dissenting moderately, later joined by extremists; 3) a revolution where extreme regime opponents gradually push the freedom of speech, backed by increased dissent of mod- erates. These match the dynamics of many major revolutions, e.g., the Iranian Islamic Revolution, the fall of the USSR, the Egyptian Arab Spring and the Tiananmen-Square protests

Keywords: Revolution; Mass protest; Regime; Dissent.

JEL: D74; P26: P5; Z12.

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Date: 2017 Apr 05

WP2017/7: The value of public information in common-value Tullock contests

Benyamin Shitovitz

Abstract: Consider a symmetric common-value Tullock contest with incomplete information in which the players’ cost of effort is the product of a random variable and a deterministic real function of effort, d. We show that the Arrow–Pratt curvature of d, Rd , determines the effect on equilibrium efforts and payoffs of the increased flexibility/ reduced commitment that more information introduces into the contest: If Rd is increasing, then effort decreases (increases) with the level of information when the cost of effort (value) is independent of the state of nature. Moreover, if Rd is increasing (decreasing), then the value of public information is nonnegative (nonpositive).

Keywords: Tullock contests · Common values · Value of public information

JEL: C72 · D44 · D82

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Date: 2017 Mar 29

WP2017/6: Status Quo Bias under Uncertainty: An Experimental Study

Amnon Maltz

Abstract: Individuals' tendency to stick to the current state of a airs, known as the status quo bias, has been widely documented over the past 30 years. Yet, the determinants of this phenomenon remain elusive. Following the intuition suggested by Bewley (1986), we conduct a systematic experiment exploring the role played by di erent types of uncertainty on the emergence of the bias. We nd no bias when the status quo option and the alternative are both risky (gambles with known probabilities) or both ambiguous (gambles with unknown probabilities). The bias emerges under asymmetric presence of ambiguity, i.e., when the status quo option is risky and the alternative ambiguous, or vice versa. These ndings are not predicted by existing models based on loss aversion (Kahneman and Tversky, 1979) or incomplete preferences (Bewley, 1986) and suggest a novel determinant of the status quo bias: the dissimilarity between the status quo option and the alternative

Keywords: Status Quo Bias, Risk, Ambiguity, Reference E ects, Experiment

JEL: C91, D11, D81

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Date: 2017 Mar 29

WP2017/5: Repeated bargaining

Shiran Rachmilevitch

Abstract: Two symmetric players bargain over an in nite stream of pies. There is one exogenously given pie in every period, whose size is stochastic, and the pies are iid. Play can be in a tabula rasa mode or dispute mode. When it is in the former, Nature selects a proposer and a responder with equal probabilities, and a proposal is made by the proposer regarding the division of the present pie. If there is agreement then it is implemented and play moves on to the next period, where it is again in tabula rasa. If there is rejection then dispute starts, which means that the players start to bargain over the disputed pie according to Rubinstein's (1982) protocol. As long as the disputed pie is Rubinstein- bargained over, all the new pies that arrive are not available for consumption (they disappear right after they materialize). Once a dispute settles, the game shifts back to tabula rasa. I characterize the game's unique stationary subgame perfect equilibrium

Keywords: Bargaining; Repeated games.

JEL: D70; D74.

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Date: 2017 Mar 29

WP2017/4: Geographical Origins and Economic Consequences of Language Structures

Assaf Sarid

Abstract: This research explores the economic causes and consequences of language structures. It advances the hypothesis and establishes empirically that variations in pre-industrial geographical characteristics that were conducive to higher returns to agricultural investment, gender gaps in agricultural productivity, and the emergence of hierarchical societies, are at the root of existing cross-language variations in the structure of the future tense and the presence of grammatical gender and politeness distinctions. Moreover, the research suggests that while language structures have largely re ected past human experience and ancestral cultural traits, they have independently a ected human behavior and economic outcomes.

Keywords: Comparative Development, Cultural Evolution, Language Structure, Future Tense, Po- liteness Distinctions, Grammatical Gender, Human Capital, Education

JEL: D01, D03, J16, Z10, Z13

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Date: 2017 Mar 29

WP2017/3: Sustainable Financial Obligations and Crisis Cycles

Kim, Moshe

Abstract: The ability to distinguish between sustainable and excessive debt develop- ments is crucial for securing economic stability. By studying US private sector credit loss dynamics, we show that this distinction can be made based on a mea- sure of the incipient aggregate liquidity constraint, the nancial obligations ratio. Specically, as this variable rises, the interaction between credit losses and the business cycle increases, albeit with dierent intensity depending on whether the problems originate in the household or the business sector. This occurs 1-2 years before each recession in the sample. Our results have implications for macropru- dential policy and countercyclical capital-buers.

Keywords: debt sustainability; credit losses; nancial crises; nancial obligations; smooth transition regression; non-linear cointegration.

JEL: E32, E44, G01

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Date: 2017 Mar 29

WP2017/2: Liquidity risk and collective moral hazard

Kim, Moshe

Abstract: Banks individually optimize their liquidity risk management, often neglecting the externalities generated by their choices on the overall risk of the …nancial system. This is the main argument to support the regulation of liquidity risk. However, banks may have incentives to optimize their choices not strictly at the individual level, but engaging instead in collective risk-taking strategies, which may intensify systemic risk. In this paper we look for evidence of such collective behaviors, with an emphasis on the period preceding the global …nancial crisis. We …nd strong and robust evidence of peer e¤ects in banks’liquidity risk management. This result suggests that incentives for collective risk taking behaviors may play a role in banks’choices, thus calling for a macroprudential approach to liquidity risk regulation.

Keywords: banks, liquidity risk, regulation, herding, peer e¤ects, Basel III, macro- prudential policy, systemic risk

JEL: G21, G28

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Date: 2017 Mar 29

WP2017/1: Regularity of a general equilibrium in a model with infinite past and future

Rubinchik, Anna

Abstract: We develop easy-to-verify conditions assuring that comparative statics in a general equilibrium model where time is a real line is feasible, i.e., the implicit function theorem is applicable. Consider an equilibrium equation, $Upsilon(k,E)=k$ of a model where an equilibrium variable (k) is a continuous bounded function of time, real line, and the policy parameter (E) is a locally integrable function of time. The key conditions are time invariance of the equilibrium map $Upsilon$ and the requirement that the Fourier transform of the derivative of the map $Upsilon$ with respect to the equilibrium variable k does not return unity. Further, in a general constant-returns-to-scale production and homogeneous life-time-utility overlapping generations model we show that the first condition is satisfied at a balanced growth equilibrium and the second condition is satisfied for ``almost all'' policies that give rise to such equilibria.

Keywords: Overlapping generations, implicit function theorem, determinacy, time-invariance, comparative statics

JEL: C02, C62, D50.

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Date: 2017 Feb 27

WP2016/7: Truncation Bias

Moshe Kim

Abstract: In the case of truncation, which is the widespread phenomenon plaguing the majority of all elds of empirical research, the observed data distri- bution function is truncated and related to participants' covariates only, rendering Heckman's seminal and known correction procedure not imple- mentable. Thus, for the correction of endogenous selectivity bias propa- gated by truncation we introduce a new methodology that recovers the unobserved part of the data distribution function, using only its observed truncated part. The correlation patterns among the non-participants' co- variates (which are all functions of the recovered non-participants' density function) are recovered as well. The rationale underlying the ability to recover the unobserved complete density function from the observed trun- cated density function relies on the fact that the latter is obtained by conditioning the former on the selection rule. Consequently, the param- eters set which characterizes the truncated density function contains all the parameters characterizing the unobserved non-truncated density func- tion. Thus, it is possible to characterize the unobserved non-participants' density function in terms of the parameters estimated using the truncated data soley. Once this unobserved part is recovered one can estimate the selection rule equation for the hazard rate calculation as if the full sample consisting of both participants and non-participants is observable. Monte- Carlo simulations attest to the high accuracy of the estimates and above conventional p n consistency.

Keywords: Selectivity bias correction, Truncated Probit

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Date: 2017 Apr 05

WP2016/6: Strategic and stable pollution with finite set of economic agents and a finite set of consumption commodities: a Pareto comparison

Benyamin Shitovitz

Abstract:

Keywords: Game theory, Pollution, Core, Pareto Domination

JEL: C71 , C72

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Date: 2017 Mar 30

WP2016/5: Exogenous endowment - Endogenous reference point

Amnon Maltz

Abstract: We develop a reference dependent model with an initial endowment and in a world where alternatives are grouped into categories. The model creates a link between the agent's exogenous endowment and her endogenous reference point. The actual refer- ence point is the best feasible alternative, according to the agent's preferences, which belongs to her endowment's category. This endogenous reference point induces a con- straint set from which the nal choice is made according to utility maximization. The model gives rise to category bias which generalizes the status quo bias by attracting the agent to her endowment's category but not necessarily to the endowment itself. We show that it accommodates recent experimental ndings regarding the presence and absence of status quo bias in the realm of uncertainty. We apply the model to a stylized nancial setup and show that it may lead to a risk premium even with risk neutral agents

Keywords: Categories, Status Quo Bias, Reference Dependence, Risk Premium, Re- vealed Preference

JEL: D03, D11.

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Date: 2017 Mar 29

WP2016/4: Punishing greediness in Divide-the-dollar games

Shiran Rachmilevitch

Abstract: Brams and Taylor (1994) presented a version of the Divide-the-dollar game (DD), which they call DD1. DD1 su ers from the following drawback: when each player demands approximately the entire dollar, then if the least greedy player is unique, then this player obtains approximately the entire dollar even if he is only slightly less greedy than the other players. I introduce a parametrized family of 2-person DD games whose endpoints" (the games that correspond to the extreme points of the parameter space) are (1) a variant of DD1, and (2) a game that completely overcomes the greediness-related problem. I also study an n-person generalization of this family. Finally, I show that the modeling choice between discrete and continuous bids may have far-reaching implications in DD games

Keywords: Bargaining games; Divide-the-dollar; Fair division

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Date: 2017 Mar 29

WP2016/3: Approximate equilibria in strongly symmetric games

Shiran Rachmilevitch

Abstract: I study approximate equilibria in games with countably many players and nitely many pure strategies, with an emphasis on symmetric games. In a class of games called strongly symmetric tail function games, the following holds: existence of perfect -equilibrium (Solan and Vielle, 2001) for all  > 0 is equivalent to the existence of Nash equilibrium. In the larger class of strongly symmetric (not necessarily tail function) games, this equivalence no longer holds. The main result is that every strongly symmetric game has a symmetric  proper equilibrium (Myerson, 1978) which is an -equilibrium (Radner, 1980). This existence result fails to hold in the larger class of weakly symmetric games.

Keywords: In nite games; -equilibrium; Symmetric games.

JEL: C70; C72.

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Date: 2017 Mar 29

WP2016/2: Social objectives in general equilibrium

Shiran Rachmilevitch

Abstract: I consider an exchange economy in which each agent's preferences are given by Ui = ui + F, where ui is a standard utility function, F is a social objective function and  is the weight F receives. Both F and  are common to all individuals. I show that F's equilibrium value may be a decreasing function of . I also show that if F is a social welfare function whose argument are the ui's, then the economy's equilibria are independent of .

Keywords: General equilibrium; Consumption externalities; Other-regarding preferences; Social objectives

JEL: D50; D62.

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Date: 2017 Mar 29

WP2016/1: Redeem or Revalue? Some Public-Debt Calculus.

Gliksberg, Baruch

Abstract: This paper studies the fiscal-monetary response to a sharp increase in the level of the public debt. To that end, we employ a general equilibrium model with distortionary income tax, distortionary financing, and endogenous capital accumulation. The model is calibrated to the US and EU economies. A main result is that in both economies the QE is superior, welfare-wise, to other policy prescriptions to the problem of explosive debt. A major difference between the EU and the US is that a Taylor rule of tight monetary and fiscal policy could reduce the US public debt, but given the fundamental properties of the EU economy, this policy cannot achieve this goal in Europe.

Keywords: Distorting Taxes; Fiscal Solvency; Laffer curve in a monetary economy; Liquidity ; Rate of self financing of tax cuts; Quantitative Easing

JEL: E44; E47; E58; E63; H30; H63;

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Date: 2016 Jul 30

WP2015/9: The asymptotic core, nucleolus and Shapley value of smooth market games with symmetric large players

Benyamin Shitovitz

Abstract: We examine the asymptotic nucleolus of a smooth and symmetric oligopoly with an atomless sector in a transferable utility (TU) market game. We provide sufficient conditions for the asymptotic core and the nucleolus to coincide with the unique TU competitive payoff distribution. This equivalence results from nucleolus of a finite TU market game belonging to its core, the core equivalence in a symmetric oligopoly with identical atoms and single-valuedness of the core in the limiting smooth game. In some cases (but not always), the asymptotic Shapley value is more favourable for the large traders than the nucleolus, in contrast to the monopoly case (Einy et al. in J Econ Theory 89(2):186–206, 1999), where the nucleolus allocation is larger than the Shapley value for the atom

Keywords: Mixed games · Oligopoly · Asymptotic nucleolus · Asymptotic Shapley value

JEL: C71 · D40 · D43

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Date: 2017 Mar 30

WP2015/8: The chase of a multi-armed economist for the elusive social discount rate

Rubinchik, Anna

Abstract: The social discount rate debate has been plagued by the use of inadequate one-agent models and vague analysis. The Weitzman-Gollier puzzle (resolution) is picked here to illustrate.

Keywords: policy evaluation, social discount rate, social welfare

JEL: D61, H30

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Date: 2015 Nov 18

WP2015/7: Discounting and Welfare Evaluation of Policies

Mertens, Jean-Francois and Rubinchik, Anna

Abstract: If policy discounting is to have any welfare relevance, it must be a derivative of a social welfare function. If that derivative is to have a net present value form, the baseline allocation must be stationary. Given a stationary baseline in an overlapping generations growth economy the inter-generationally fair discount rate under the relative utilitarian welfare function equals the growth rate of per-capita consumption, roughly, 2% for the U.S. This differs from the interest rate, even in the golden rule equilibrium unless population growth is null.

Keywords: policy evaluation, discounting, social welfare function, social discount rate, overlapping generations

JEL: D50, H43, H50.

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Date: 2015 Nov 18

WP2015/6: Experience Based Dynamic Choice: A Revealed Preference Approach

Maltz, Amnon

Abstract: We use the revealed preference method to derive a model of dynamic choice where the agent’s past experience may influence her current decisions. Our model generalizes the classical individual choice model which is rationalized by utility maximization, and reduces to that model in the absence of experience. As the agent gains experience her utility changes but only in a very restricted fashion. Every period, after an alternative is chosen, the utility of that, and only that alternative, may change while the utility of all other alternatives remains fixed. The model provides a platform on which many behavioral dynamic phenomena may be examined. We utilize it and look into the behavioral implications of bounded memory, status quo bias and variety seeking.

Keywords: Experience, Dynamic Choice, Memory, Status Quo Bias, Revealed Preference

JEL: D11, D83.

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Date: 2015 Nov 18

WP2015/5: The Effect of Ambiguity on Status Quo Bias: An Experimental Study

Maltz, Amnon

Abstract: We conduct an experiment to determine the effect of ambiguity on status quo bias. We find no evidence of the bias in the absence of ambiguity and when ambiguity is present both in the status quo option and the alternative. We do find evidence for status quo bias under asymmetric presence of ambiguity, i.e. when the status quo option is non-ambiguous and the alternative is, or when the status quo option is ambiguous and the alternative is not. These findings are not predicted by the existing models of choice with initial endowment, such as the loss aversion model by Kahneman and Tversky (1979) and the incomplete preferences model by Bewley (1986). Our results, combined with the evidence from the endowment effect literature, suggest that dissimilarity between options may be an important determinant of the status quo bias.

Keywords: Status Quo Bias, Risk, Ambiguity, Reference Effects.

JEL: C91, D11, D81.

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Date: 1970 Jan 01

WP2015/4: Rational Choice with Category Bias

Maltz, Amnon

Abstract: This paper develops, using the revealed preference approach, a model of choice with an initial endowment and in the presence of alternatives that are grouped into categories. Our model generalizes the classical individual choice model which is rationalized by utility maximization, and reduces to that model in the absence of an initial endowment. Given an exogenous endowment, our decision maker follows a 3-step procedure: First, she identifies the best alternative in the choice set which belongs to the same category as her endowment. This alternative serves as her endogenous reference point which in turn, at the second step, induces a “psychological constraint”. Finally, she chooses the best feasible alternative in her constraint set according to her reference-free utility. The model gives rise to a “category bias” which generalizes the status quo bias by attracting the decision maker towards the endowment’s category but not necessarily towards the endowment itself. It also accommodates recent experimental findings on the absence of status quo bias among goods which belong to the same category. We apply the model to a financial choice problem and show that category bias may lead to a risk premium even with risk neutral agents.

Keywords: Status Quo Bias, Categories, Reference Dependence, Risk Premium, Revealed Preference

JEL: D03, D11.

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Date: 2015 Nov 18

WP2015/3: Contemplation vs. Intuition. A reinforcement learning approach

CHO, IN-KOO and Rubinchik, Anna

Abstract: In a search for a positive model of decision-making with observable primitives, we rely on the burgeoning literature in cognitive neuroscience to construct a three-element machine (agent). Its control unit initiates either impulsive or cognitive element to solve a problem in a stationary Markov environment, the element "chosen" depends on whether the problem is mundane or novel, memory of past successes and the strength of inhibition. Our predictions are based on a stationary asymptotic distribution of the memory, which, depending on the parameters, can generate different "characters", e.g., an uptight dimwit, who could succeed more often with less inhibition, as well as a relaxed wise-guy, who could gain more with a stronger inhibition of impulsive (intuitive) responses. As one would expect, stronger inhibition and lower cognitive costs increase the frequency of decisions made by the cognitive element. More surprisingly, increasing the "carrot" and reducing the "stick" (being in a more supportive environment) enhances contemplative decisions (made by the cognitive unit) for an alert agent, i.e., the one who identifies novel problems frequently enough.

Keywords: the two-system decision-making, executive control, inhibition, adaptive learning, stochastic approximation

JEL: D01.

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Date: 1970 Jan 01

WP2015/2: Equilibria Under Monetary and Fiscal Policy Interactions in a Portfolio Choice Model - Technical Appendix

Gliksberg, Baruch

Abstract: This paper analyzes the aftermath of monetary and fiscal policy interactions from the perspective of portfolio choice. In particular, it studies how the presence of income- taxes change the properties of general equilibrium models. It finds that relative to the previous literature [following Leeper (1991)] a new regime exists where a passive fiscal rule combined with a passive monetary rule can still deliver determinacy where the same area of the parameter space would lead to multiple solutions if taxes were lump sum. It characterizes analytically the extent to which tax cuts are self-financing and how the distortionary tax Laffer curve looks near the steady state in order to obtain the size of the new regime. In the new regime, the inflation target can temporarily increase in order to increase seigniorage revenues. With this flexibility, the monetary policy is consistent with the real debt remaining bounded, and the arithmetic that follows is monetarist and unpleasant in the sense of Sargent and Wallace (1981).

Keywords: Distorting Taxes; Dynamic Laffer Curve; Fiscal Policy; Liquidity-in- advance; Monetary Policy; Portfolio Choice; Unpleasant Monetarist Arithmetic.

JEL: C62; E60; G11; H60;

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Date: 2016 Feb 22

WP2015/1: Equilibria Under Monetary and Fiscal Policy Interactions in a Portfolio Choice Model

Gliksberg, Baruch

Abstract: This paper analyzes the aftermath of monetary and fiscal policy interactions from the perspective of portfolio choice. In particular, it studies how the presence of income- taxes change the properties of general equilibrium models. It finds that relative to the previous literature [following Leeper (1991)] a new regime exists where a passive fiscal rule combined with a passive monetary rule can still deliver determinacy where the same area of the parameter space would lead to multiple solutions if taxes were lump sum. It characterizes analytically the extent to which tax cuts are self-financing and how the distortionary tax Laffer curve looks near the steady state in order to obtain the size of the new regime. In the new regime, the inflation target can temporarily increase in order to increase seigniorage revenues. With this flexibility, the monetary policy is consistent with the real debt remaining bounded, and the arithmetic that follows is monetarist and unpleasant in the sense of Sargent and Wallace (1981).

Keywords: Distorting Taxes; Dynamic Laffer Curve; Fiscal Policy; Liquidity-in- advance; Monetary Policy; Portfolio Choice; Unpleasant Monetarist Arithmetic.

JEL: C62; E60; G11; H60;

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Date: 2016 Feb 22

WP2014/5: SHOPPING IN A SEGREGATED CITY

Somekh, Babak

Abstract: We consider the consequences of introducing a Superstore into a city segregated by income. In this monocentric city, consumers and firms live on a continuous line interval. Our model consists of two types of firms; many high-cost perfectly competitive ”Corner Stores” located throughout the city, and one low-cost ”Superstore” located in the outer part of the city and choosing its price strategically. We look to determine the impact of the low price offered by the Superstore on the welfare of both low and high-income consumers. In addition we consider the impact of city income structure on the pricing decision of firms and monopoly profits. Regarding consumer welfare, we find that low-income consumers that are segregated away from the Superstore may still benefit from its entry into the market. More specifically, the impact of the Superstore on the isolated consumer depends on the sensitivity of the local real estate market to the entry of the Superstore and its choice of price. We also find that a greater disparity in disposable income between the two types of consumers makes it more likely that the Superstore will charge a higher price.

Keywords: Spatial competition; Segregation; Income disparity

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Date: 1970 Jan 01

WP2014/4: Equilibria Under Monetary and Fiscal Policy Interactions with Distortionary Taxation

Gliksberg, Baruch

Abstract: This paper studies how the presence of an income tax changes the properties of general equilibrium models. It fi…nds that relative to the previous literature [following Leeper (1991)] a new area of determinacy exists where a passive …fiscal rule combined with a passive monetary rule can still deliver determinacy where the same area of the parameter space would lead to multiple solutions if taxes were lump sum. It characterizes analytically the extent to which tax cuts are self …financing and how the distortionary tax Laffer curve looks near the steady state in order to obtain the size of the passive …fiscal-passive monetary regime. In this regime, …scal limits bring about a Tobin effect and nominal prices are determined according to the quantity theory of money.

Keywords: Distorting Taxes; Dynamic Laffer Curve; Equilibrium Determinacy;

JEL: C60; E60; H60;

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Date: 1970 Jan 01

WP2014/3: A Fixed-Point Theory of Price Level Determination in General Equilibrium

Gliksberg, Baruch

Abstract: This paper offers a fi…xed-point approach to the issue of price level determination in general equilibrium. It arrives at a solution method for rational expectations models with missing initial conditions for financial wealth. The paper emphasizes the calculation of an equilibrium initial valuation for government debt via a Krasnoselski-Mann-Bailey theorem. The analysis is performed from a global analysis perspective. Abstracting from policies that bring about zero eigen-values permits us to draw conclusions about global dynamics. This approach builds on the Hartman-Grobman Theorem and implies no loss of generality.

Keywords: Boundary Value Problems; Distorting Taxes; General Equilibrium; Global Determinacy; Krasnoselski-Mann-Bailey theorem;

JEL: C62; C68; E60; H30; H60;

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Date: 1970 Jan 01

WP2014/2: REGULARITY AND STABILITY OF EQUILIBRIA IN AN OVERLAPPING GENERATIONS GROWTH MODEL

Mertens, Jean-Francois and Rubinchik, Anna

Abstract: In an exogenous-growth economy with overlapping generations we analyse local stability of a balanced growth equilibrium with respect to changes in consumption endowments, which could be interpreted as a transfer policy. We show that generically, in the space of parameters, equilibria around BGE are locally unique and are locally differentiable functions of endowments, with derivatives given by kernels. Further, those equilibria are stable in the sense that the effects of temporary changes decay exponentially towards plus and minus infinity.

Keywords: Regularity of Infinite Economies, Policy Evaluation, Overlapping Generations,

JEL: D50, H43

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Date: 1970 Jan 01

WP2014/1: Dynamic Scoring and Monetary Policy

Gliksberg, Baruch

Abstract: I discuss the joint effects of government-taxes and interest-rates. A fiscal authority performs `exogenous' and `endogenous' changes to the income-tax rate and a monetary authority sets the nominal-interest. A wedge between rates of self-financing of tax cuts and the income-tax Laffer curve arrives from the monetary system. I find a new- regime that differs from conventional monetary-fiscal policy interactions. Dynamic scoring exercises show that in the new-regime monetary-policy markedly mitigates negative output effects caused by `exogenous tax actions' designed to reduce public-debt, altogether inducing signi.cant welfare gains. In contrast, where public-debt is at high levels, `exogenous tax cuts' induce welfare losses.

Keywords: Distorting Taxes; Liquidity Constraints; Dynamic Laffer Curve; Global Analysis; Liquidity Traps; Sovereign Default;

JEL: C60; E60; H20; H30; H60;

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Date: 1970 Jan 01

WP2013/2: Solving Boundary Value Problems in the Fiscal Theory of the Price Level

Gliksberg, Baruch

Abstract: This paper specifi…es determinacy regions in the parameter space of monetary and …fiscal policy interactions in economies with …finance and tax distortions. It shows that the initial valuation of government debt is the …fixed point of a continuous mapping that takes a closed interval on the real line into itself. It implements the Krasnoselski-Mann-Baily theorem to compute the equilibrium real value of nominal government debt. This computation indicates whether policy interactions are sustainable or lead to a default. The model exhibits nominal determinacy if and only if it exhibits real determinacy. Distorting taxes have dramatic effect on determinacy regions. Admissible monetary-…scal policy interactions vary as the economy approaches the peak of its Laffer curve: the range of active …scal responses to government debt narrows,whereas passive …fiscal stances become inconsistent with equilibrium. Furthermore, policy targets vary when regimes switch from passive fiscal stances to active …fiscal stances. Whereas passive fiscal stances focus entirely on secondary defi…cits, active fi…scal stances should focus mainly on primary de…ficits.

Keywords: Distorting Taxes; Finance Constraints; Fiscal Rules; Fiscal Theory of Prices; Monetary Fiscal Regimes; Computation of the Equilibrium;

JEL: C62; C68; E42; E62; E63; H60

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Date: 1970 Jan 01

WP2013/1: Scholarly Influence

Miller, Alan D.

Abstract: We introduce a new class of measures of scholarly influence, which we term step-based indices. This class includes the prominent h-index, the publication count, and the i10-index. We show that the class of step-based indices is characterized by three axioms, consistency with worse scientists, consistency with better scientists, and full range. We also introduce a new index, the junior/senior-index, which combines the best features of the h-index with those of the i10-index.

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WP2012/9: Infinite horizon allocation with consumption-dependent utility

Peled, Dan

Abstract: We consider an economy in which there is an infi nite stream of pies, each of size one, one in every period. For each agent, the per-period utility function, which is de fined on that period's consumption, is determined by the previous period's consumption. We describe speci fications of this model for which no symmetric, efficient, and monotonic way to allocate pies exists.

Keywords: Behavioral preferences; Dynamic models; Habits

JEL: D01, D03, D30, D31, D63

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Date: 2012 Oct 18

WP2012/8: The asymptotic core, nucleolus and Shapley value of smooth market games with symmetric large players

Aiche, Avishay

Abstract: We study the asymptotic nucleolus of a smooth and symmetric oligopoly with an atomless sector. We show that under appropriate assumptions, the asymptotic nucleolus of the TU market game coincides with the unique TU competitive payoff distribution. This equivalence results from nucleolus of a finite game belonging to its core and the Aumann Core Equivalence, which holds for this economy due to the cut-throat competition among the identical large players. A comparison with the Shapley value yields that in some cases, the asymptotic Shapley value is more favorable for the large traders than the asymptotic nucleolus. This may be interpreted by the `fairness property' of Shapley Value which does not reflect the intense competition among the large traders, accounting for the relative importance of their marginal contribution.

Keywords: Mixed games, Oligopoly,

JEL: C71, D40, D43.

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Date: 2012 Sep 20

WP2012/7: A Behavioral Arrow Theorem

Miller, Alan D.

Abstract: In light of research indicating that individual behavior may violate standard assumptions of rationality, we modify the standard model of preference aggregation to study the case in which neither individual nor collective preferences are required to satisfy transitivity or other coherence conditions. We introduce the concept of an ordinal rationality measure which can be used to compare preference relations in terms of their level of coherence. Using this measure, we introduce a monotonicity axiom which requires that the collective preference become more rational when the individual preferences become more rational. We show that for any ordinal rationality measure, it is impossible to nd a collective choice rule which satis es the monotonicity axiom and the other standard assumptions introduced by Arrow (1963): unrestricted domain, weak Pareto, independence of irrelevant alternatives, and nondictatorship.

Keywords: Aggregation; Axioms; Intransitivity; Coherence; Monotonicity;

JEL: D60; D70; D71.

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Date: 2012 Sep 20

WP2012/6: Monetary Policy and Fiscal Limits with No-Default

Gliksberg, Baruch

Abstract: This paper discusses monetary and fiscal interactions in fiscal stress with no outright default. Two distortions prevail in the economy: income taxes and liquidity constraints. Possible obstructions to fiscal policy include: a ceiling on the equilibrium Debt-to-GDP ratio; zero elasticity of tax revenues; a political intolerance of rising tax rates; A Laffer curve emerges endogenously. In equilibrium, fiscal solvency is brought about through adjustments to the level of nominal prices. Three regimes achieve this goal: FC - an interaction of a fiscal rule that targets both output and public debt with a neutral monetary policy; FD - an interaction of a fiscal rule that targets the primary deficit with an active monetary policy; FDA - an interaction of an austere fiscal rule with a passive monetary policy.

Keywords: Distorting Taxes; Finance Constraint; Fiscal Limits; Fiscal Rules; Fiscal Theory of Prices;

JEL: E42; E62; E63; H60.

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Date: 2013 May 19

WP2012/5: Equilibria in an overlapping generations model with transfer policies and exogenous growth

Mertens, Jean-Francois and Rubinchik, Anna

Abstract: For an overlapping generations economy with varying life-cycle productivity, non-stationary endowments, continuous time starting at infinity (hence allowing for full anticipation), constant-returns-to-scale production and ces utility we fully characterise equilibria where output is higher than investment, which is strictly positive. Net assets (aggregate savings minus the value of the capital stock) are constant in any equilibrium, and, for balanced growth equilibria (BGE, defined for an economy with stationary endowments), net assets are non-zero only in the golden rule equilibrium, in accord with Gale 1973. The number of BGE is finite. Their parity, however, depends on the life-cycle productivity, in particular, on the relation between the intertemporal elasticity of substitution, the minimal working age and the minimal tax age.

Keywords: Infinite Economies, Overlapping Generations, Exogenous Growth

JEL: D50

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Date: 2012 Mar 05

WP2012/4: ACCESS TO BANKING AND INCOME INEQUALITY

Somekh, Babak

Abstract: Using a simple model of banking services we consider how deposit-taking banks price for their services and choose the type of deposit customers that they target. In considering a banking model with a consumer population heterogeneous in income we go beyond previous theoretical work on consumer banking, allowing us to determine the role of household income in the access to deposit services. In addition we consider the usage and pricing for Alternative Financial Services (AFS) by households left out of the mainstream banking sector. We look to identify how the prices they pay for financial transactions differs from those in the mainstream sector. We show that, all other things equal, a higher rate of return on investments available to banks is an important factor in lowering financial exclusion, increasing the profitability of low-income consumers for deposit-taking institutions. This would suggest that the possibility of financial exclusion increases in periods of recession. In addition, if the bank's ability to invest is connected to financial exclusion, any regulation restricting the bank's ability to make investments should take this into account. Finally, by introducing specific income distributions to our model, we are able to demonstrate how an increase in income dispersion can lead to a greater proportion of consumers excluded from mainstream banking.

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WP2012/3: COMMUTING AND SHOPPING: DETERMINANTS OF CITY INCOME STRUCTURE

Somekh, Babak

Abstract: We demonstrate how firm pricing strategy and determinants of household location can interact to determine city structure. We go beyond previous work on spatial income segregation by endogenizing the tradeoff between households' choice of location and shopping behavior, as well as solving for the firms' optimal pricing strategy in a general equilibrium framework. In this city, consumers and firms live on a continuous line interval. Our model consists of two types of firms; many high-cost perfectly competitive "Corner Stores" located in the Central Business District, and one large low-cost "Superstore", choosing its location and price strategically. We begin by considering a model with homogenous consumers in order to determine the strategy for the Superstore in a spatial model. Then we consider the impact of introducing different income classes to our city structure. We show how the shopping habits of the consumer population, as determined by the relative price of the Superstore and the Corner Stores, can contribute to the various income segregation outcomes described in previous literature. In addition we consider the impact of city income structure on the pricing decision of firms.

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WP2012/2: THE EFFECT OF INCOME INEQUALITY ON PRICE DISPERSION

Somekh, Babak

Abstract: Using a supply/demand consumer model with search, we show under what conditions the distribution of income within a community is related to the type of firms that exist within that community, impacting the level of prices. We assume that searching for the lowest price costs both time and money to the consumer. If time and money costs are high enough low-income consumers cannot afford the monetary cost of search, while wealthy consumer are not willing to take the time to look for the lowest price. The middle class have the right balance of time and money cost of search and therefore are the most aggressive shoppers. We use a supply side model of firm output and pricing strategy to demonstrate that firms located in more informed communities are more likely to enter the market as large low-priced retailers. By connecting these two results, we show under what conditions the size of the middle class can have a negative relationship with the level of prices in a local market. Our paper goes beyond other work on causes of price dispersion by allowing consumers to purchase a continuous amount of the good, and by incorporating a distribution of search costs. Both these modifications allow us to focus more specifically on the link between income distribution and prices.

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WP2012/1: The Nash Bargaining Solution and Interpersonal Utility Comparisons

Rachmilevitch, Shiran

Abstract: Bargaining theory has a conceptual dichotomy at its core: according to one view, the utilities in the bargaining problem are meaningless numbers (v-N.M utilities), while according to another view they do have concrete meaning (willingness to pay). The former position is assumed by the Nash and Kalai-Smorodinsky solutions, and the latter is assumed by the egalitarian, utilitarian, and equal-loss solutions. In this paper I describe a certain form of equivalence between the set consisting of the former solutions and the set consisting of the latter. This equivalence is the result of an attempt to bridge the gap between the aforementioned views; utilizing this equivalence, I derive a new axiomatization of the Nash solution.

Keywords: Bargaining; interpersonal utility comparisons; Nash solution

JEL: D63; D71

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Date: 2012 Feb 06

WP2011/15: Demand For Contract Enforcement in A Barter Environment

Rubinchik, Anna

Abstract: Do greater potential gains from trade enhance or erode contracting institutions? In an anonymous exchange environment traders can sign a contract, hence agreeing to interact with the assigned partner, or wait till the next match. Any contract can be endorsed (for a pay) by the enforcement agency, which then observes the interaction with a positive probability known to the traders and punishes the detected infractors. The agency enforces only those contracts that are paid for, and a trader freely chooses whether to endorse his contract. Demand for contract enforcement is the highest amount a proposer of a contract is ready to pay to the agency (in a stationary subgame perfect equilibrium). It may be strictly positive, as we show, even when contracts are broken. Surprisingly, larger potential gains from exchange may dampen the demand, but not always: they may boost the demand for 'high quality' agencies (that oversee the interactions frequently enough).

Keywords: Contracting institutions, third party enforcement, demand for contracts, gains from trade

JEL: H11, H41, K42, O17

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Date: 2011 Dec 06

WP2011/14: Inefficiency

Chambers, Christopher P.

Abstract: We introduce an ordinal model of efficiency measurement. Our primitive is a notion of efficiency that is comparative, but not cardinal or absolute. In this framework, we postulate axioms that we believe an ordinal efficiency measure should satisfy. Primary among these are choice consistency and planning consistency, which guide the measurement of efficiency in a firm with access to multiple technologies. Other axioms include symmetry, which states that the names of commodities do not matter, scale-invariance, which says that units of measurement of commodities does not matter, and strong monotonicity, which states that efficiency should decrease if the inputs and outputs remain static when the technology becomes unambiguously more efficient. These axioms characterize a unique ordinal efficiency measure which is represented by the coefficient of resource utilization. By replacing symmetry (the weakest of our axioms) with a very mild continuity condition, we obtain a family of path-based measures.

Keywords: Efficiency Measurement, Coefficient of Resource Utilization, Ordinal, Choice Consistency, Planning Consistency, Path-based

JEL: C43,D24

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Date: 2011 Nov 30

WP2011/13: Gross substitution and complementarity are not symmetric relations

Rachmilevitch, Shiran

Abstract: I construct an example of well-behaved (convex, continuous, monotone) preferences over two goods, x and y, such that x is a gross substitute for y but y is a gross complement for x. A sufficient (but not necessary) condition for preventing this "pathology" is that the demand for either good be a strictly increasing function of income.

Keywords: Substitution; complementarity; consumer theory;

JEL: D01, D11

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Date: 2011 Nov 28

WP2011/12: Fairness in Bargaining and the Kalai-Smorodinsky Solution

Rachmilevitch, Shiran

Abstract: A bargaining solution guarantees minimal equity if each player's payoff is at least as large as the minimum of the payoffs assigned to him by the equal-gain (i.e., egalitarian) and equal-loss solutions. The Kalai-Smorodinsky solution is the unique scale-invariant 2-person solution with this property. There does not exist a scale-invariant n-person solution with this property.

Keywords: Bargaining; fairness; Kalai-Smorodinsky solution

JEL: D63; D71

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Date: 2011 Nov 03

WP2011/11: Relationships and the availability of credit to New Small Firms

Colombatto, Enrico

Abstract: We analyze the loans that startup firms obtain from banks by testing our predictions on a set of small, young Italian companies founded during the 1992-2004 period. According to our investigation, the amount of borrowing is determined by (1) the size of the firm, (2), the ability to offer collateral (3) perceived risk. Contrary to expectations, however, the length of the relationship with the lender has a weak influence.

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WP2011/10: Fairness, Efficiency, and the Nash Bargaining Solution

Rachmilevitch, Shiran

Abstract: A bargaining solution balances fairness and efficiency if each player's payoff lies between the minimum and maximum of the payoffs assigned to him by the egalitarian and utilitarian solutions. In the 2-person bargaining problem, the Nash solution is the unique scale-invariant solution satisfying this property. Additionally, a similar result, relating the weighted egalitarian and utilitarian solutions to a weighted Nash solution, is obtained. These results are related to a theorem of Shapley, which I generalize. For n>=3, there does not exist any n-person scale-invariant bargaining solution that balances fairness and efficiency.

Keywords: Bargaining; fairness; efficiency; Nash solution

JEL: D63; D71

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Date: 2011 Oct 09

WP2011/9: Endogenous Bid Rotation in Repeated Auctions

Rachmilevitch, Shiran

Abstract: I study collusion between two bidders in a general symmetric IPV repeated auction, without communication, side transfers, or public randomization. I construct a collusive scheme, endogenous bid rotation, that generates a payoff larger than the bid rotation payoff.

Keywords: Auctions; Bid rotation; Collusion; Repeated games

JEL: D44; D82

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Date: 2011 Oct 09

WP2011/8: Gradual Negotiations and Proportional Solutions

Rachmilevitch, Shiran

Abstract: I characterize the proportional N-person bargaining solutions by individual rationality, translation invariance, feasible set continuity, and a new axiom - interim improvement. The latter says that if the disagreement point d is known, but the feasible set is not - it may be either S or T, where S is a subset of T - then there exists a point d' in S, d' > d, such that replacing d with d' as the disagreement point would not change the final bargaining outcome, no matter which feasible set will be realized, S or T. In words, if there is uncertainty regarding a possible expansion of the feasible set, the players can wait until it is resolved; in the meantime, they can find a Pareto improving interim outcome to commit to - a commitment that has no effect in case negotiations succeed, but promises higher disagreement payoffs to all in case negotiations fail prior to the resolution of uncertainty.

Keywords: Bargaining; Proportional solutions

JEL: C78; D74

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Date: 2011 Oct 09

WP2011/7: Bribing in second-price auctions

Rachmilevitch, Shiran

Abstract: An IPV 2-bidder second-price auction is preceded by two rounds of bribing: prior to the auction each bidder can try to bribe his rival to depart from the auction, so that he (the briber) will become the sole participant and obtain the good for the reserve price. Bribes are offered sequentially according to an exogenously given order - there is a first mover and a second mover. I characterize the unique efficient collusive equilibrium in monotonic strategies; in it, the second mover extracts the entire collusive gain. This equilibrium remains an equilibrium even when valuations are interdependent, and if they are separable then the full surplus extraction result continues to hold. Additionally, a family of pooling equilibria is studied, in which all the types of the first mover offer the same bribe.

Keywords: Second-price auctions, collusion, bribing, signaling, surplus extraction

JEL: D44; D82

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Date: 2011 Oct 06

WP2011/6: BANACH FAMILIES AND THE IMPLICIT FUNCTION THEOREM

Mertens, Jean-Francois and Rubinchik, Anna

Abstract: We generalise the classical implicit function theorem (IFT) for a family of Banach spaces, with the resulting implicit function having derivatives that are locally Lipschitz to very strong operator norms.

Keywords: Banach spaces, Implicit Function Theorem

JEL: D50; H43

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Date: 2011 Oct 04

WP2011/5: Which Way to Cooperate

Kaplan, Todd

Abstract: We introduce a two-player, binary-choice game in which both players have a privately known incentive to enter, yet the combined surplus is highest if only one enters. Repetition of this game admits two distinct ways to cooperate: turn taking and cutoffs, which rely on the player's private value to entry. A series of experiments highlights the role of private information in determining which mode players adopt. If an individual's entry values vary little (e.g., mundane tasks), taking turns is likely; if these potential values are diverse (e.g., difficult tasks that differentiate individuals by skill or preferences), cutoff cooperation emerges.

JEL: C90; Z13

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WP2011/4: INTERGENERATIONAL EQUITY AND THE DISCOUNT RATE FOR POLICY ANALYSIS

Mertens, Jean-Francois and Rubinchik, Anna

Abstract: For two independent principles of intergenerational equity, the implied discount rate equals the growth rate of real per capita income, say, 2%, thus falling right into the range suggested by the U.S. Office of Management and Budget. To prove this, we develop a simple tool to evaluate small policy changes affecting several generations, by reducing the dynamic problem to a static one. A necessary condition is time invariance, which is satisfied by any common solution concept in an overlapping-generations model with exogenous growth. This tool is applied to derive the discount rate for cost-benefit analysis under two different utilitarian welfare functions: classical and relative. It is only with relative utilitarianism, and assuming time-invariance of the set of alternatives (policies), that the discount rate is well defined for a heterogeneous society at a balanced growth equilibrium, is corroborated by an independent principle equating values of human lives, and equals the growth rate of real per-capita income.

Keywords: Overlapping Generations, Policy Reform, Intergenerational Equity, Cost-Benefit Analysis, Discount Rate, Utilitarianism

JEL: D31;D61;D63;E60;H43

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Date: 2011 Jun 01

WP2011/3: Should We Have or Should We Have Not, and Who Should Have Paid?

Bental, Benjamin

Abstract: We analyze an overlapping generations model which explicitly includes a secondary asset market. The economy is affected by a onetime shock which causes some of these assets to become toxic. As a response the government may intervene by buying these assets at market value and removing them from trade. When the shock is not anticipated we find that government intervention cannot improve upon the laissez-faire equilibrium. However, when agents anticipate that a crisis may occur, removing the toxic assets dominates laissez-faire, particularly when the toxic asset holders are financing the intervention scheme. Finally, we show that curbing incentives which drive investors to find high yield opportunities decreases the severity of a crisis once it occurs, but also output.

Keywords: Crisis; Toxic Assets; Intervention

JEL: E44; E61

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Date: 2011 Mar 01

WP2011/2: A Simple Bargaining Mechanism That Elicits Truthful Reservation Prices

Brams, Steven J.

Abstract: We describe a simple 2-stage mechanism that induces two bargainers to be truthful in reporting their reservation prices in a 1st stage. If these prices criss-cross, the referee reports that they overlap, and the bargainers proceed to make offers in a 2nd stage. The average of the 2nd-stage offers becomes the settlement if both offers fall into the overlap interval; if only one offer falls into this interval, it is the settlement, but is implemented with probability 1/2; if neither offer falls into the interval, there is no settlement. Thus, if the bargainers reach the 2nd stage, they know their reservation prices overlap even if they fail to reach a settlement, possibly motivating them to try again.

Keywords: Bargaining; truth-telling mechanisms; probabilistic implementation

JEL: C72; C78

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Date: 2011 Feb 22

WP2011/1: Separate control over the local and the asymptotic behaviour in L_p spaces

Mertens, Jean-Francois and Rubinchik, Anna

Abstract: We introduce 2 parameter variants L_{p,q} of the Lebesgue spaces, to gain separate control on the asymptotic behaviour (p) and the local behaviour (q). Thus they behave with respect to p like the spaces ell_p and with respect to q like the spaces L_q on a probability space. Convolution behaves very well on those spaces.

JEL: C02; C60

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WP2010/6: The Optimal Design of Rewards in Contests

Kaplan, Todd

Abstract: Using contests to generate innovation has and is widely used. Such contests often involve offering a prize that depends upon the accomplishment (effort). Using an all-pay auction as a model of a contest, we determine the optimal reward for inducing innovation. In a symmetric environment, we find that the reward should be set to c(x)/c′(x) where c is the cost of producing an innovation of level x. In an asymmetric environment with two firms, we find that it is optimal to set different rewards for each firm. There are cases where this can be replicated by a single reward that depends upon accomplishments of both contestants.

Keywords: contests; innovation; mechanism design

JEL: C70; D44; L12; O32

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Date: 2010 Nov 22

WP2010/5: Insulation Impossible: Monetary Policy and Regional Fiscal Spillovers in a Federation

Cooper, Russell, Kempf, Hubert and Peled, Dan

Abstract: This paper studies the interactions of fiscal and monetary policies in the presence of fiscal spillovers within a monetary union. When capital markets are integrated, the fiscal policy of any member country will influence equilibrium wages and interest rates across the whole union. Thus there are fiscal spillovers within a federation. Within a general class of monetary policy rules, there does not exist one that completely insulates agents in one region from fiscal policy in another. We contrast particular rules, such as inflation and interest rate targeting, to illustrate how monetary policy becomes a channel for fiscal policy spillovers.

Keywords: Fiscal spillovers; Monetary union

JEL: E61; E63; H77; F15

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Date: 2010 Sep 07

WP2010/4: Demand for Cash with Intra-Period Endogenous Consumption

Bar-Ilan, Avner

Abstract: We study the demand for money when agents can optimally choose mean rates of consumption and cash holdings over a period. Consistent with empirical evidence, we find that agents do not smooth intra-period consumption. Instead, their rate of consumption is positively correlated with their cash position. This positive correlation depends on the volatility of the consumption process. When volatility is very low or very high, agents choose to consume at a relatively high rate immediately after a cash withdrawal, drawing down quite rapidly their cash balances. Later in the period, their rate of consumption and cash depletion is more restrained. This sizeable deviation from consumption smoothing is much less pronounced when volatility is moderate.

Keywords: money demand; consumption smoothing; drift control

JEL: E41

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Date: 2010 Sep 01

WP2010/3: The Role of Consumption-Labor Complementarity as a Source of Macroeconomic Instability

Gliksberg, Baruch

Abstract: The equilibrium ramification of a balanced budget rule are scrutinized in a one sector growth model augmented with investment frictions and a non-separable utility function in consumption and leisure. Edgeworth-complementarity between consumption and labor is formulated so as to generate a positive co-movement of consumption, output, and hours worked, as found in the data. Calibration of the model to the U.S. economy provides evidence that a balanced budget rule with a Taylor type monetary policy induce determinate equilibria.

Keywords: Fiscal-Monetary policy; Non-Separable Utility; Consumption-Labor Complementarity; Endogenous Labor; Stabilization; Determinacy; Investment

JEL: C62; C63; E4; E52; E61; E62; E63

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Date: 2010 Jun 01

WP2010/2: Trade Agreements, Bargaining and Economic Growth

Maoz, Yishay David

Abstract: Rebelo's two-sector endogenous growth model is embedded within a two-country international trade framework. The two countries bargain over a trade agreement that specifies: (i) the size of the foreign aid that the richer country gives to the poorer one; (ii) the terms of the international trade that takes place after the aid is given. Foreign aid is given not because of generosity, but because it improves the capital allocation across the world and thus raises total world production. This world production surplus enables the rich country to raise its equilibrium consumption and welfare beyond their no-aid levels. To ensure it, the rich country uses a trade agreement to condition the aid on favorable terms of trade.

Keywords: International trade; Aid; Balanced Growth

JEL: F43; O41; P45

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Date: 2010 May 30

WP2010/1: Consolidated-Budget Rules and Macroeconomic Stability with Income-Tax and Finance Constraints

Gliksberg, Baruch

Abstract: In some Business-Cycle models a fiscal policy that sets income taxes counter cyclically can cause macroeconomic instability by giving rise to multiple equilibria and as a result to fluctuations caused by self fulfilling expectations. This paper shows that consolidated budget rules with endogenous income-tax rates can be stabilizing if they exhibit monetary dominance, where monetary policy manages expectations by implementing an active interest rate rule. This result is robust for plausible degrees of externalities in production. The size of the government, however, plays a key role in the degree of activeness that the monetary authority should exhibit in order to stabilize the economy. If government spending are not too large relative to private consumption, a neutral monetary policy [such that the real rate of interest is constant in and off the steady state] is also stabilizing

Keywords: Fiscal Policy; Capital-Income Tax; Monetary Policy; Macroeconomic Stabilization; Finance Constraint; Arbitrage Channel; Investment-Based Channel;Consumption-Based Channel;

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Date: 2010 May 01

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