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Journal of the Econometric Society

Impact factor: 3.823 5-Year impact factor: 5.702 Print ISSN: 0012-9682 Online ISSN: 1468-0262 Publisher: The Econometric Society

Subjects: Economics, Mathematical Methods Social Sciences

Most recent papers:

  • Forthcoming Papers.

    Econometrica. October 02, 2017
    There is no abstract available for this paper.
    October 02, 2017   doi: 10.3982/ECTA855FORTH   open full text
  • Using Adaptive Sparse Grids to Solve High‐Dimensional Dynamic Models.
    Johannes Brumm, Simon Scheidegger.
    Econometrica. October 02, 2017
    We present a flexible and scalable method for computing global solutions of high‐dimensional stochastic dynamic models. Within a time iteration or value function iteration setup, we interpolate functions using an adaptive sparse grid algorithm. With increasing dimensions, sparse grids grow much more slowly than standard tensor product grids. Moreover, adaptivity adds a second layer of sparsity, as grid points are added only where they are most needed, for instance, in regions with steep gradients or at nondifferentiabilities. To further speed up the solution process, our implementation is fully hybrid parallel, combining distributed and shared memory parallelization paradigms, and thus permits an efficient use of high‐performance computing architectures. To demonstrate the broad applicability of our method, we solve two very different types of dynamic models: first, high‐dimensional international real business cycle models with capital adjustment costs and irreversible investment; second, multiproduct menu‐cost models with temporary sales and economies of scope in price setting.
    October 02, 2017   doi: 10.3982/ECTA12216   open full text
  • Money as a Unit of Account.
    Matthias Doepke, Martin Schneider.
    Econometrica. October 02, 2017
    We develop a theory that rationalizes the use of a dominant unit of account in an economy. Agents enter into non‐contingent contracts with a variety of business partners. Trade unfolds sequentially in credit chains and is subject to random matching. By using a dominant unit of account, agents can lower their exposure to relative price risk, avoid costly default, and create more total surplus. We discuss conditions under which it is optimal to adopt circulating government paper as the dominant unit of account, and the optimal choice of “currency areas” when there is variation in the intensity of trade within and across regions.
    October 02, 2017   doi: 10.3982/ECTA11963   open full text
  • Nonparametric Stochastic Discount Factor Decomposition.
    Timothy M. Christensen.
    Econometrica. October 02, 2017
    Stochastic discount factor (SDF) processes in dynamic economies admit a permanent‐transitory decomposition in which the permanent component characterizes pricing over long investment horizons. This paper introduces an empirical framework to analyze the permanent‐transitory decomposition of SDF processes. Specifically, we show how to estimate nonparametrically the solution to the Perron–Frobenius eigenfunction problem of Hansen and Scheinkman, 2009. Our empirical framework allows researchers to (i) construct time series of the estimated permanent and transitory components and (ii) estimate the yield and the change of measure which characterize pricing over long investment horizons. We also introduce nonparametric estimators of the continuation value function in a class of models with recursive preferences by reinterpreting the value function recursion as a nonlinear Perron–Frobenius problem. We establish consistency and convergence rates of the eigenfunction estimators and asymptotic normality of the eigenvalue estimator and estimators of related functionals. As an application, we study an economy where the representative agent is endowed with recursive preferences, allowing for general (nonlinear) consumption and earnings growth dynamics.
    October 02, 2017   doi: 10.3982/ECTA11600   open full text
  • Recursive Equilibria in Dynamic Economies With Stochastic Production.
    Johannes Brumm, Dominika Kryczka, Felix Kubler.
    Econometrica. October 02, 2017
    In this paper, we prove the existence of recursive equilibria in a dynamic stochastic model with infinitely lived heterogeneous agents, several commodities, and general inter‐ and intratemporal production. We illustrate the usefulness of our result by providing sufficient conditions for the existence of recursive equilibria in heterogeneous agent versions of both the Lucas asset pricing model and the neoclassical stochastic growth model.
    October 02, 2017   doi: 10.3982/ECTA13047   open full text
  • On Monotone Recursive Preferences.
    Antoine Bommier, Asen Kochov, François Le Grand.
    Econometrica. October 02, 2017
    We explore the set of preferences defined over temporal lotteries in an infinite horizon setting. We provide utility representations for all preferences that are both recursive and monotone. Our results indicate that the class of monotone recursive preferences includes Uzawa–Epstein preferences and risk‐sensitive preferences, but leaves aside several of the recursive models suggested by Epstein and Zin (1989) and Weil (1990). Our representation result is derived in great generality using Lundberg's (1982, 1985) work on functional equations.
    October 02, 2017   doi: 10.3982/ECTA11898   open full text
  • Research Design Meets Market Design: Using Centralized Assignment for Impact Evaluation.
    Atila Abdulkadiroğlu, Joshua D. Angrist, Yusuke Narita, Parag A. Pathak.
    Econometrica. October 02, 2017
    A growing number of school districts use centralized assignment mechanisms to allocate school seats in a manner that reflects student preferences and school priorities. Many of these assignment schemes use lotteries to ration seats when schools are oversubscribed. The resulting random assignment opens the door to credible quasi‐experimental research designs for the evaluation of school effectiveness. Yet the question of how best to separate the lottery‐generated randomization integral to such designs from non‐random preferences and priorities remains open. This paper develops easily‐implemented empirical strategies that fully exploit the random assignment embedded in a wide class of mechanisms, while also revealing why seats are randomized at one school but not another. We use these methods to evaluate charter schools in Denver, one of a growing number of districts that combine charter and traditional public schools in a unified assignment system. The resulting estimates show large achievement gains from charter school attendance. Our approach generates efficiency gains over ad hoc methods, such as those that focus on schools ranked first, while also identifying a more representative average causal effect. We also show how to use centralized assignment mechanisms to identify causal effects in models with multiple school sectors.
    October 02, 2017   doi: 10.3982/ECTA13925   open full text
  • Parenting With Style: Altruism and Paternalism in Intergenerational Preference Transmission.
    Matthias Doepke, Fabrizio Zilibotti.
    Econometrica. October 02, 2017
    We develop a theory of parent‐child relations that rationalizes the choice between alternative parenting styles (as set out in Baumrind, 1967). Parents maximize an objective function that combines Beckerian altruism and paternalism towards children. They can affect their children's choices via two channels: either by influencing children's preferences or by imposing direct restrictions on their choice sets. Different parenting styles (authoritarian, authoritative, and permissive) emerge as equilibrium outcomes and are affected both by parental preferences and by the socioeconomic environment. Parenting style, in turn, feeds back into the children's welfare and economic success. The theory is consistent with the decline of authoritarian parenting observed in industrialized countries and with the greater prevalence of more permissive parenting in countries characterized by low inequality.
    October 02, 2017   doi: 10.3982/ECTA14634   open full text
  • Forthcoming Papers.

    Econometrica. July 24, 2017
    There is no abstract available for this paper.
    July 24, 2017   doi: 10.3982/ECTA854FORTH   open full text
  • Partial Ambiguity.
    Soo Hong Chew, Bin Miao, Songfa Zhong.
    Econometrica. July 24, 2017
    We extend Ellsberg's two‐urn paradox and propose three symmetric forms of partial ambiguity by limiting the possible compositions in a deck of 100 red and black cards in three ways. Interval ambiguity involves a symmetric range of 50 − n to 50 + n red cards. Complementarily, disjoint ambiguity arises from two nonintersecting intervals of 0 to n and 100 − n to 100 red cards. Two‐point ambiguity involves n or 100 − n red cards. We investigate experimentally attitudes towards partial ambiguity and the corresponding compound lotteries in which the possible compositions are drawn with equal objective probabilities. This yields three key findings: distinct attitudes towards the three forms of partial ambiguity, significant association across attitudes towards partial ambiguity and compound risk, and source preference between two‐point ambiguity and two‐point compound risk. Our findings help discriminate among models of ambiguity in the literature.
    July 24, 2017   doi: 10.3982/ECTA13239   open full text
  • The Identification of Beliefs From Asset Demand.
    Felix Kübler, Herakles Polemarchakis.
    Econometrica. July 24, 2017
    The demand for assets as prices and initial wealth vary identifies beliefs and attitudes towards risk. We derive conditions that guarantee identification with no knowledge either of the cardinal utility index (attitudes towards risk) or of the distribution of future endowments or payoffs of assets; the argument applies even if the asset market is incomplete and demand is observed only locally.
    July 24, 2017   doi: 10.3982/ECTA13880   open full text
  • A Theory of Intergenerational Altruism.
    Simone Galperti, Bruno Strulovici.
    Econometrica. July 24, 2017
    Modeling intergenerational altruism is crucial to evaluate the long‐term consequences of current decisions, and requires a set of principles guiding such altruism. We axiomatically develop a theory of pure, direct altruism: Altruism is pure if it concerns the total utility (rather than the mere consumption utility) of future generations, and direct if it directly incorporates the utility of all future generations. Our axioms deliver a new class of altruistic, forward‐looking preferences, whose weight put on the consumption of a future generation generally depends on the consumption of other generations. The only preferences lacking this dependence correspond to the quasi‐hyperbolic discounting model, which our theory characterizes. Our approach provides a framework to analyze welfare in the presence of altruistic preferences and addresses technical challenges stemming from the interdependent nature of such preferences.
    July 24, 2017   doi: 10.3982/ECTA13937   open full text
  • Statistical Properties of Microstructure Noise.
    Jean Jacod, Yingying Li, Xinghua Zheng.
    Econometrica. July 24, 2017
    We study the estimation of (joint) moments of microstructure noise based on high frequency data. The estimation is conducted under a nonparametric setting, which allows the underlying price process to have jumps, the observation times to be irregularly spaced, and the noise to be dependent on the price process and to have diurnal features. Estimators of arbitrary orders of (joint) moments are provided, for which we establish consistency as well as central limit theorems. In particular, we provide estimators of autocovariances and autocorrelations of the noise. Simulation studies demonstrate excellent performance of our estimators in the presence of jumps, irregular observation times, and even rounding. Empirical studies reveal (moderate) positive autocorrelations of microstructure noise for the stocks tested.
    July 24, 2017   doi: 10.3982/ECTA13085   open full text
  • Networks in Conflict: Theory and Evidence From the Great War of Africa.
    Michael D. König, Dominic Rohner, Mathias Thoenig, Fabrizio Zilibotti.
    Econometrica. July 24, 2017
    We study from both a theoretical and an empirical perspective how a network of military alliances and enmities affects the intensity of a conflict. The model combines elements from network theory and from the politico‐economic theory of conflict. We obtain a closed‐form characterization of the Nash equilibrium. Using the equilibrium conditions, we perform an empirical analysis using data on the Second Congo War, a conflict that involves many groups in a complex network of informal alliances and rivalries. The estimates of the fighting externalities are then used to infer the extent to which the conflict intensity can be reduced through (i) dismantling specific fighting groups involved in the conflict; (ii) weapon embargoes; (iii) interventions aimed at pacifying animosity among groups. Finally, with the aid of a random utility model, we study how policy shocks can induce a reshaping of the network structure.
    July 24, 2017   doi: 10.3982/ECTA13117   open full text
  • The Evolution of Culture and Institutions: Evidence From the Kuba Kingdom.
    Sara Lowes, Nathan Nunn, James A. Robinson, Jonathan L. Weigel.
    Econometrica. July 24, 2017
    We use variation in historical state centralization to examine the long‐term impact of institutions on cultural norms. The Kuba Kingdom, established in Central Africa in the early 17th century by King Shyaam, had more developed state institutions than the other independent villages and chieftaincies in the region. It had an unwritten constitution, separation of political powers, a judicial system with courts and juries, a police force, a military, taxation, and significant public goods provision. Comparing individuals from the Kuba Kingdom to those from just outside the Kingdom, we find that centralized formal institutions are associated with weaker norms of rule following and a greater propensity to cheat for material gain. This finding is consistent with recent models where endogenous investments to inculcate values in children decline when there is an increase in the effectiveness of formal institutions that enforce socially desirable behavior. Consistent with such a mechanism, we find that Kuba parents believe it is less important to teach children values related to rule‐following behaviors.
    July 24, 2017   doi: 10.3982/ECTA14139   open full text
  • An Econometric Model of Network Formation With Degree Heterogeneity.
    Bryan S. Graham.
    Econometrica. July 24, 2017
    I introduce a model of undirected dyadic link formation which allows for assortative matching on observed agent characteristics (homophily) as well as unrestricted agent‐level heterogeneity in link surplus (degree heterogeneity). Like in fixed effects panel data analyses, the joint distribution of observed and unobserved agent‐level characteristics is left unrestricted. Two estimators for the (common) homophily parameter, β0, are developed and their properties studied under an asymptotic sequence involving a single network growing large. The first, tetrad logit (TL), estimator conditions on a sufficient statistic for the degree heterogeneity. The second, joint maximum likelihood (JML), estimator treats the degree heterogeneity {Ai0}i = 1N as additional (incidental) parameters to be estimated. The TL estimate is consistent under both sparse and dense graph sequences, whereas consistency of the JML estimate is shown only under dense graph sequences.
    July 24, 2017   doi: 10.3982/ECTA12679   open full text
  • Forthcoming Papers.

    Econometrica. June 07, 2017
    There is no abstract available for this paper.
    June 07, 2017   doi: 10.3982/ECTA853FORTH   open full text
  • Generalized Instrumental Variable Models.
    Andrew Chesher, Adam M. Rosen.
    Econometrica. June 07, 2017
    This paper develops characterizations of identified sets of structures and structural features for complete and incomplete models involving continuous or discrete variables. Multiple values of unobserved variables can be associated with particular combinations of observed variables. This can arise when there are multiple sources of heterogeneity, censored or discrete endogenous variables, or inequality restrictions on functions of observed and unobserved variables. The models generalize the class of incomplete instrumental variable (IV) models in which unobserved variables are single‐valued functions of observed variables. Thus the models are referred to as generalized IV (GIV) models, but there are important cases in which instrumental variable restrictions play no significant role. Building on a definition of observational equivalence for incomplete models the development uses results from random set theory that guarantee that the characterizations deliver sharp bounds, thereby dispensing with the need for case‐by‐case proofs of sharpness. The use of random sets defined on the space of unobserved variables allows identification analysis under mean and quantile independence restrictions on the distributions of unobserved variables conditional on exogenous variables as well as under a full independence restriction. The results are used to develop sharp bounds on the distribution of valuations in an incomplete model of English auctions, improving on the pointwise bounds available until now. Application of many of the results of the paper requires no familiarity with random set theory.
    June 07, 2017   doi: 10.3982/ECTA12223   open full text
  • Uncertainty Shocks in a Model of Effective Demand.
    Susanto Basu, Brent Bundick.
    Econometrica. June 07, 2017
    Can increased uncertainty about the future cause a contraction in output and its components? An identified uncertainty shock in the data causes significant declines in output, consumption, investment, and hours worked. Standard general‐equilibrium models with flexible prices cannot reproduce this comovement. However, uncertainty shocks can easily generate comovement with countercyclical markups through sticky prices. Monetary policy plays a key role in offsetting the negative impact of uncertainty shocks during normal times. Higher uncertainty has even more negative effects if monetary policy can no longer perform its usual stabilizing function because of the zero lower bound. We calibrate our uncertainty shock process using fluctuations in implied stock market volatility, and show that the model with nominal price rigidity is consistent with empirical evidence from a structural vector autoregression. We argue that increased uncertainty about the future likely played a role in worsening the Great Recession. The economic mechanism we identify applies to a large set of shocks that change expectations of the future without changing current fundamentals.
    June 07, 2017   doi: 10.3982/ECTA13960   open full text
  • Continuity, Inertia, and Strategic Uncertainty: A Test of the Theory of Continuous Time Games.
    Evan Calford, Ryan Oprea.
    Econometrica. June 07, 2017
    The theory of continuous time games (Simon and Stinchcombe (1989), Bergin and MacLeod (1993)) shows that continuous time interactions can generate very different equilibrium behavior than conventional discrete time interactions. We introduce new laboratory methods that allow us to eliminate natural inertia in subjects' decisions in continuous time experiments, thereby satisfying critical premises of the theory and enabling a first‐time direct test. Applying these new methods to a simple timing game, we find strikingly large gaps in behavior between discrete and continuous time as the theory suggests. Reintroducing natural inertia into these games causes continuous time behavior to collapse to discrete time‐like levels in some settings as predicted by subgame perfect Nash equilibrium. However, contra this prediction, the strength of this effect is fundamentally shaped by the severity of inertia: behavior tends towards discrete time benchmarks as inertia grows large and perfectly continuous time benchmarks as it falls towards zero. We provide evidence that these results are due to changes in the nature of strategic uncertainty as inertia approaches the continuous limit.
    June 07, 2017   doi: 10.3982/ECTA14346   open full text
  • Rushes in Large Timing Games.
    Axel Anderson, Lones Smith, Andreas Park.
    Econometrica. June 07, 2017
    We develop a continuum player timing game that subsumes standard wars of attrition and pre‐emption games, and introduces a new rushes phenomenon. Payoffs are continuous and single‐peaked functions of the stopping time and stopping quantile. We show that if payoffs are hump‐shaped in the quantile, then a sudden “rush” of players stops in any Nash or subgame perfect equilibrium. Fear relaxes the first mover advantage in pre‐emption games, asking that the least quantile beat the average; greed relaxes the last mover advantage in wars of attrition, asking just that the last quantile payoff exceed the average. With greed, play is inefficiently late: an accelerating war of attrition starting at optimal time, followed by a rush. With fear, play is inefficiently early: a slowing pre‐emption game, ending at the optimal time, preceded by a rush. The theory predicts the length, duration, and intensity of stopping, and the size and timing of rushes, and offers insights for many common timing games.
    June 07, 2017   doi: 10.3982/ECTA13089   open full text
  • Political Economy of Redistribution.
    Daniel Diermeier, Georgy Egorov, Konstantin Sonin.
    Econometrica. June 07, 2017
    It is often argued that additional constraints on redistribution such as granting veto power to more players in society better protects property from expropriation. We use a model of multilateral bargaining to demonstrate that this intuition may be flawed. Increasing the number of veto players or raising the supermajority requirement for redistribution may reduce protection on the equilibrium path. The reason is the existence of two distinct mechanisms of property protection. One is formal constraints that allow individuals or groups to block any redistribution that is not in their favor. The other occurs in equilibrium where players without such powers protect each other from redistribution. Players without formal veto power anticipate that the expropriation of other similar players will ultimately hurt them and thus combine their influence to prevent redistributions. In a stable allocation, the society exhibits a “class” structure with class members having equal wealth and strategically protecting each other from redistribution.
    June 07, 2017   doi: 10.3982/ECTA12132   open full text
  • A Structural Model of Dense Network Formation.
    Angelo Mele.
    Econometrica. June 07, 2017
    This paper proposes an empirical model of network formation, combining strategic and random networks features. Payoffs depend on direct links, but also link externalities. Players meet sequentially at random, myopically updating their links. Under mild assumptions, the network formation process is a potential game and converges to an exponential random graph model (ERGM), generating directed dense networks. I provide new identification results for ERGMs in large networks: if link externalities are nonnegative, the ERGM is asymptotically indistinguishable from an Erdős–Rényi model with independent links. We can identify the parameters only when at least one of the externalities is negative and sufficiently large. However, the standard estimation methods for ERGMs can have exponentially slow convergence, even when the model has asymptotically independent links. I thus estimate parameters using a Bayesian MCMC method. When the parameters are identifiable, I show evidence that the estimation algorithm converges in almost quadratic time.
    June 07, 2017   doi: 10.3982/ECTA10400   open full text
  • Existence of Optimal Mechanisms in Principal‐Agent Problems.
    Ohad Kadan, Philip J. Reny, Jeroen M. Swinkels.
    Econometrica. June 07, 2017
    We provide general conditions under which principal‐agent problems with either one or multiple agents admit mechanisms that are optimal for the principal. Our results cover as special cases pure moral hazard and pure adverse selection. We allow multidimensional types, actions, and signals, as well as both financial and non‐financial rewards. Our results extend to situations in which there are ex ante or interim restrictions on the mechanism, and allow the principal to have decisions in addition to choosing the agent's contract. Beyond measurability, we require no a priori restrictions on the space of mechanisms. It is not unusual for randomization to be necessary for optimality and so it (should be and) is permitted. Randomization also plays an essential role in our proof. We also provide conditions under which some forms of randomization are unnecessary.
    June 07, 2017   doi: 10.3982/ECTA12340   open full text
  • Strong Duality for a Multiple‐Good Monopolist.
    Constantinos Daskalakis, Alan Deckelbaum, Christos Tzamos.
    Econometrica. June 07, 2017
    We characterize optimal mechanisms for the multiple‐good monopoly problem and provide a framework to find them. We show that a mechanism is optimal if and only if a measure μ derived from the buyer's type distribution satisfies certain stochastic dominance conditions. This measure expresses the marginal change in the seller's revenue under marginal changes in the rent paid to subsets of buyer types. As a corollary, we characterize the optimality of grand‐bundling mechanisms, strengthening several results in the literature, where only sufficient optimality conditions have been derived. As an application, we show that the optimal mechanism for n independent uniform items each supported on [c,c+1] is a grand‐bundling mechanism, as long as c is sufficiently large, extending Pavlov's result for two items Pavlov, 2011. At the same time, our characterization also implies that, for all c and for all sufficiently large n, the optimal mechanism for n independent uniform items supported on [c,c+1] is not a grand‐bundling mechanism.
    June 07, 2017   doi: 10.3982/ECTA12618   open full text
  • Earnings and Consumption Dynamics: A Nonlinear Panel Data Framework.
    Manuel Arellano, Richard Blundell, Stéphane Bonhomme.
    Econometrica. June 07, 2017
    We develop a new quantile‐based panel data framework to study the nature of income persistence and the transmission of income shocks to consumption. Log‐earnings are the sum of a general Markovian persistent component and a transitory innovation. The persistence of past shocks to earnings is allowed to vary according to the size and sign of the current shock. Consumption is modeled as an age‐dependent nonlinear function of assets, unobservable tastes, and the two earnings components. We establish the nonparametric identification of the nonlinear earnings process and of the consumption policy rule. Exploiting the enhanced consumption and asset data in recent waves of the Panel Study of Income Dynamics, we find that the earnings process features nonlinear persistence and conditional skewness. We confirm these results using population register data from Norway. We then show that the impact of earnings shocks varies substantially across earnings histories, and that this nonlinearity drives heterogeneous consumption responses. The framework provides new empirical measures of partial insurance in which the transmission of income shocks to consumption varies systematically with assets, the level of the shock, and the history of past shocks.
    June 07, 2017   doi: 10.3982/ECTA13795   open full text
  • Forthcoming Papers.

    Econometrica. March 21, 2017
    There is no abstract available for this paper.
    March 21, 2017   doi: 10.3982/ECTA852FORTH   open full text
  • Forecasting With Model Uncertainty: Representations and Risk Reduction.
    Keisuke Hirano, Jonathan H. Wright.
    Econometrica. March 21, 2017
    We consider forecasting with uncertainty about the choice of predictor variables. The researcher wants to select a model, estimate the parameters, and use the parameter estimates for forecasting. We investigate the distributional properties of a number of different schemes for model choice and parameter estimation, including: in‐sample model selection using the Akaike information criterion; out‐of‐sample model selection; and splitting the data into subsamples for model selection and parameter estimation. Using a weak‐predictor local asymptotic scheme, we provide a representation result that facilitates comparison of the distributional properties of the procedures and their associated forecast risks. This representation isolates the source of inefficiency in some of these procedures. We develop a simulation procedure that improves the accuracy of the out‐of‐sample and split‐sample methods uniformly over the local parameter space. We also examine how bootstrap aggregation (bagging) affects the local asymptotic risk of the estimators and their associated forecasts. Numerically, we find that for many values of the local parameter, the out‐of‐sample and split‐sample schemes perform poorly if implemented in the conventional way. But they perform well, if implemented in conjunction with our risk‐reduction method or bagging.
    March 21, 2017   doi: 10.3982/ECTA13372   open full text
  • Contract Negotiation and the Coase Conjecture: A Strategic Foundation for Renegotiation‐Proof Contracts.
    Bruno Strulovici.
    Econometrica. March 21, 2017
    What does contract negotiation look like when some parties hold private information and negotiation frictions are negligible? This paper analyzes this question and provides a foundation for renegotiation‐proof contracts in this environment. The model extends the framework of the Coase conjecture to situations in which the quantity or quality of the good is endogenously determined and to more general environments in which preferences are nonseparable in the traded goods. As frictions become negligible, all equilibria converge to a unique outcome which is separating, efficient, and straightforward to characterize.
    March 21, 2017   doi: 10.3982/ECTA13637   open full text
  • When Does Predation Dominate Collusion?
    Thomas Wiseman.
    Econometrica. March 21, 2017
    I study repeated competition among oligopolists. The only novelty is that firms may go bankrupt and permanently exit: the probability that a firm survives a price war depends on its financial strength, which varies stochastically over time. Under some conditions including no entry, an anti‐folk theorem holds: when firms are patient, so that strength levels change relatively quickly, every Nash equilibrium involves an immediate price war that lasts until at most one firm remains. Surprisingly, the possibility of entry may facilitate collusion, as may impatience. The model can explain some observed patterns of collusion and predation.
    March 21, 2017   doi: 10.3982/ECTA13121   open full text
  • Rational Inattention Dynamics: Inertia and Delay in Decision‐Making.
    Jakub Steiner, Colin Stewart, Filip Matějka.
    Econometrica. March 21, 2017
    We solve a general class of dynamic rational inattention problems in which an agent repeatedly acquires costly information about an evolving state and selects actions. The solution resembles the choice rule in a dynamic logit model, but it is biased toward an optimal default rule that is independent of the realized state. The model provides the same fit to choice data as dynamic logit, but, because of the bias, yields different counterfactual predictions. We apply the general solution to the study of (i) the status quo bias; (ii) inertia in actions leading to lagged adjustments to shocks; and (iii) the tradeoff between accuracy and delay in decision‐making.
    March 21, 2017   doi: 10.3982/ECTA13636   open full text
  • Aspirations and Inequality.
    Garance Genicot, Debraj Ray.
    Econometrica. March 21, 2017
    This paper develops a theory of socially determined aspirations, and the interaction of those aspirations with growth and inequality. The interaction is bidirectional: economy‐wide outcomes determine individual aspirations, which in turn determine investment incentives and social outcomes. Thus aspirations, income, and the distribution of income evolve jointly. When capital stocks lie in some compact set, steady state distributions must exhibit inequality and are typically clustered around local poles. When sustained growth is possible, initial histories matter. Either there is convergence to an equal distribution (with growth) or there is perennial relative divergence across clusters, with within‐cluster convergence. A central feature that drives these results is that aspirations that are moderately above an individual's current standard of living tend to encourage investment, while still higher aspirations may lead to frustration.
    March 21, 2017   doi: 10.3982/ECTA13865   open full text
  • Robustness and Separation in Multidimensional Screening.
    Gabriel Carroll.
    Econometrica. March 21, 2017
    A principal wishes to screen an agent along several dimensions of private information simultaneously. The agent has quasilinear preferences that are additively separable across the various components. We consider a robust version of the principal's problem, in which she knows the marginal distribution of each component of the agent's type, but does not know the joint distribution. Any mechanism is evaluated by its worst‐case expected profit, over all joint distributions consistent with the known marginals. We show that the optimum for the principal is simply to screen along each component separately. This result does not require any assumptions (such as single crossing) on the structure of preferences within each component. The proof technique involves a generalization of the concept of virtual values to arbitrary screening problems. Sample applications include monopoly pricing and a stylized dynamic taxation model.
    March 21, 2017   doi: 10.3982/ECTA14165   open full text
  • Bargaining With Asymmetric Information: An Empirical Study of Plea Negotiations.
    Bernardo S. Silveira.
    Econometrica. March 21, 2017
    This paper empirically investigates how sentences to be assigned at trial impact plea bargaining. The analysis is based on the model of bargaining with asymmetric information by Bebchuk, 1984. I provide conditions for the nonparametric identification of the model, propose a consistent nonparametric estimator, and implement it using data on criminal cases from North Carolina. Employing the estimated model, I evaluate how different sentencing reforms affect the outcome of criminal cases. My results indicate that lower mandatory minimum sentences could greatly reduce the total amount of incarceration time assigned by the courts, but may increase conviction rates. In contrast, the broader use of non‐incarceration sentences for less serious crimes reduces the number of incarceration convictions, but has a very small effect over the total assigned incarceration time. I also consider the effects of a ban on plea bargains. Depending on the case characteristics, over 20 percent of the defendants who currently receive incarceration sentences would be acquitted if plea bargains were forbidden.
    March 21, 2017   doi: 10.3982/ECTA12974   open full text
  • Insurer Competition in Health Care Markets.
    Kate Ho, Robin S. Lee.
    Econometrica. March 21, 2017
    The impact of insurer competition on welfare, negotiated provider prices, and premiums in the U.S. private health care industry is theoretically ambiguous. Reduced competition may increase the premiums charged by insurers and their payments made to hospitals. However, it may also strengthen insurers' bargaining leverage when negotiating with hospitals, thereby generating offsetting cost decreases. To understand and measure this trade‐off, we estimate a model of employer‐insurer and hospital‐insurer bargaining over premiums and reimbursements, household demand for insurance, and individual demand for hospitals using detailed California admissions, claims, and enrollment data. We simulate the removal of both large and small insurers from consumers' choice sets. Although consumer welfare decreases and premiums typically increase, we find that premiums can fall upon the removal of a small insurer if an employer imposes effective premium constraints through negotiations with the remaining insurers. We also document substantial heterogeneity in hospital price adjustments upon the removal of an insurer, with renegotiated price increases and decreases of as much as 10% across markets.
    March 21, 2017   doi: 10.3982/ECTA13570   open full text
  • Search for Yield.
    David Martinez‐Miera, Rafael Repullo.
    Econometrica. March 21, 2017
    We present a model of the relationship between real interest rates, credit spreads, and the structure and risk of the banking system. Banks intermediate between entrepreneurs and investors, and can monitor entrepreneurs' projects. We characterize the equilibrium for a fixed aggregate supply of savings, showing that safer entrepreneurs will be funded by nonmonitoring banks and riskier entrepreneurs by monitoring banks. We show that an increase in savings reduces interest rates and spreads, and increases the relative size of the nonmonitoring banking system and the probability of failure of monitoring banks. We also show that the dynamic version of the model exhibits endogenous boom and bust cycles, and rationalizes the existence of countercyclical risk premia and the connection between low interest rates, tight credit spreads, and the buildup of risks during booms.
    March 21, 2017   doi: 10.3982/ECTA14057   open full text
  • Forthcoming Papers.

    Econometrica. January 30, 2017
    There is no abstract available for this paper.
    January 30, 2017   doi: 10.3982/ECTA851FORTH   open full text
  • Program Evaluation and Causal Inference With High‐Dimensional Data.
    A. Belloni, V. Chernozhukov, I. Fernández‐Val, C. Hansen.
    Econometrica. January 30, 2017
    In this paper, we provide efficient estimators and honest confidence bands for a variety of treatment effects including local average (LATE) and local quantile treatment effects (LQTE) in data‐rich environments. We can handle very many control variables, endogenous receipt of treatment, heterogeneous treatment effects, and function‐valued outcomes. Our framework covers the special case of exogenous receipt of treatment, either conditional on controls or unconditionally as in randomized control trials. In the latter case, our approach produces efficient estimators and honest bands for (functional) average treatment effects (ATE) and quantile treatment effects (QTE). To make informative inference possible, we assume that key reduced‐form predictive relationships are approximately sparse. This assumption allows the use of regularization and selection methods to estimate those relations, and we provide methods for post‐regularization and post‐selection inference that are uniformly valid (honest) across a wide range of models. We show that a key ingredient enabling honest inference is the use of orthogonal or doubly robust moment conditions in estimating certain reduced‐form functional parameters. We illustrate the use of the proposed methods with an application to estimating the effect of 401(k) eligibility and participation on accumulated assets. The results on program evaluation are obtained as a consequence of more general results on honest inference in a general moment‐condition framework, which arises from structural equation models in econometrics. Here, too, the crucial ingredient is the use of orthogonal moment conditions, which can be constructed from the initial moment conditions. We provide results on honest inference for (function‐valued) parameters within this general framework where any high‐quality, machine learning methods (e.g., boosted trees, deep neural networks, random forest, and their aggregated and hybrid versions) can be used to learn the nonparametric/high‐dimensional components of the model. These include a number of supporting auxiliary results that are of major independent interest: namely, we (1) prove uniform validity of a multiplier bootstrap, (2) offer a uniformly valid functional delta method, and (3) provide results for sparsity‐based estimation of regression functions for function‐valued outcomes.
    January 30, 2017   doi: 10.3982/ECTA12723   open full text
  • Assessment of Uncertainty in High Frequency Data: The Observed Asymptotic Variance.
    Per A. Mykland, Lan Zhang.
    Econometrica. January 30, 2017
    The availability of high frequency financial data has generated a series of estimators based on intra‐day data, improving the quality of large areas of financial econometrics. However, estimating the standard error of these estimators is often challenging. The root of the problem is that traditionally, standard errors rely on estimating a theoretically derived asymptotic variance, and often this asymptotic variance involves substantially more complex quantities than the original parameter to be estimated. Standard errors are important: they are used to assess the precision of estimators in the form of confidence intervals, to create “feasible statistics” for testing, to build forecasting models based on, say, daily estimates, and also to optimize the tuning parameters. The contribution of this paper is to provide an alternative and general solution to this problem, which we call Observed Asymptotic Variance. It is a general nonparametric method for assessing asymptotic variance (AVAR). It provides consistent estimators of AVAR for a broad class of integrated parameters Θ = ∫ θt dt, where the spot parameter process θ can be a general semimartingale, with continuous and jump components. The observed AVAR is implemented with the help of a two‐scales method. Its construction works well in the presence of microstructure noise, and when the observation times are irregular or asynchronous in the multivariate case. The methodology is valid for a wide variety of estimators, including the standard ones for variance and covariance, and also for more complex estimators, such as, of leverage effects, high frequency betas, and semivariance.
    January 30, 2017   doi: 10.3982/ECTA12501   open full text
  • Jump Regressions.
    Jia Li, Viktor Todorov, George Tauchen.
    Econometrica. January 30, 2017
    We develop econometric tools for studying jump dependence of two processes from high‐frequency observations on a fixed time interval. In this context, only segments of data around a few outlying observations are informative for the inference. We derive an asymptotically valid test for stability of a linear jump relation over regions of the jump size domain. The test has power against general forms of nonlinearity in the jump dependence as well as temporal instabilities. We further propose an efficient estimator for the linear jump regression model that is formed by optimally weighting the detected jumps with weights based on the diffusive volatility around the jump times. We derive the asymptotic limit of the estimator, a semiparametric lower efficiency bound for the linear jump regression, and show that our estimator attains the latter. The analysis covers both deterministic and random jump arrivals. In an empirical application, we use the developed inference techniques to test the temporal stability of market jump betas.
    January 30, 2017   doi: 10.3982/ECTA12962   open full text
  • Competitive Bundling.
    Jidong Zhou.
    Econometrica. January 30, 2017
    This paper proposes a framework for studying competitive (pure) bundling in an oligopoly market. We find that under fairly general conditions, relative to separate sales, bundling raises market prices, benefits firms, and harms consumers when the number of firms is above a threshold (which can be small). This is in contrast to the findings in the duopoly case on which the existing literature often focuses. Our analysis also sheds new light on how consumer valuation dispersion affects price competition more generally.
    January 30, 2017   doi: 10.3982/ECTA14251   open full text
  • First‐Price Auctions With General Information Structures: Implications for Bidding and Revenue.
    Dirk Bergemann, Benjamin Brooks, Stephen Morris.
    Econometrica. January 30, 2017
    We explore the impact of private information in sealed‐bid first‐price auctions. For a given symmetric and arbitrarily correlated prior distribution over values, we characterize the lowest winning‐bid distribution that can arise across all information structures and equilibria. The information and equilibrium attaining this minimum leave bidders indifferent between their equilibrium bids and all higher bids. Our results provide lower bounds for bids and revenue with asymmetric distributions over values. We also report further characterizations of revenue and bidder surplus including upper bounds on revenue. Our work has implications for the identification of value distributions from data on winning bids and for the informationally robust comparison of alternative auction mechanisms.
    January 30, 2017   doi: 10.3982/ECTA13958   open full text
  • Perfect Competition in Markets With Adverse Selection.
    Eduardo M. Azevedo, Daniel Gottlieb.
    Econometrica. January 30, 2017
    This paper proposes a perfectly competitive model of a market with adverse selection. Prices are determined by zero‐profit conditions, and the set of traded contracts is determined by free entry. Crucially for applications, contract characteristics are endogenously determined, consumers may have multiple dimensions of private information, and an equilibrium always exists. Equilibrium corresponds to the limit of a differentiated products Bertrand game. We apply the model to establish theoretical results on the equilibrium effects of mandates. Mandates can increase efficiency but have unintended consequences. With adverse selection, an insurance mandate reduces the price of low‐coverage policies, which necessarily has indirect effects such as increasing adverse selection on the intensive margin and causing some consumers to purchase less coverage.
    January 30, 2017   doi: 10.3982/ECTA13434   open full text
  • Identifying Equilibrium Models of Labor Market Sorting.
    Marcus Hagedorn, Tzuo Hann Law, Iourii Manovskii.
    Econometrica. January 30, 2017
    We assess the empirical content of equilibrium models of labor market sorting based on unobserved (to economists) characteristics. In particular, we show theoretically that all parameters of the classic model of sorting based on absolute advantage in Becker, 1973 with search frictions can be nonparametrically identified using only matched employer–employee data on wages and labor market transitions. In particular, these data are sufficient to nonparametrically estimate the output of any individual worker with any given firm. Our identification proof is constructive and we provide computational algorithms that implement our identification strategy given the limitations of the available data sets. Finally, we add on‐the‐job search to the model, extend the identification strategy, and apply it to a large German matched employer–employee data set to describe detailed patterns of sorting and properties of the production function.
    January 30, 2017   doi: 10.3982/ECTA11301   open full text
  • Quantile Selection Models With an Application to Understanding Changes in Wage Inequality.
    Manuel Arellano, Stéphane Bonhomme.
    Econometrica. January 30, 2017
    We propose a method to correct for sample selection in quantile regression models. Selection is modeled via the cumulative distribution function, or copula, of the percentile error in the outcome equation and the error in the participation decision. Copula parameters are estimated by minimizing a method‐of‐moments criterion. Given these parameter estimates, the percentile levels of the outcome are readjusted to correct for selection, and quantile parameters are estimated by minimizing a rotated “check” function. We apply the method to correct wage percentiles for selection into employment, using data for the UK for the period 1978–2000. We also extend the method to account for the presence of equilibrium effects when performing counterfactual exercises.
    January 30, 2017   doi: 10.3982/ECTA14030   open full text
  • Forthcoming Papers.

    Econometrica. November 09, 2016
    There is no abstract available for this paper.
    November 09, 2016   doi: 10.3982/ECTA846FORTH   open full text
  • Conditional Linear Combination Tests for Weakly Identified Models.
    Isaiah Andrews.
    Econometrica. November 09, 2016
    We introduce the class of conditional linear combination tests, which reject null hypotheses concerning model parameters when a data‐dependent convex combination of two identification‐robust statistics is large. These tests control size under weak identification and have a number of optimality properties in a conditional problem. We show that the conditional likelihood ratio test of Moreira, 2003 is a conditional linear combination test in models with one endogenous regressor, and that the class of conditional linear combination tests is equivalent to a class of quasi‐conditional likelihood ratio tests. We suggest using minimax regret conditional linear combination tests and propose a computationally tractable class of tests that plug in an estimator for a nuisance parameter. These plug‐in tests perform well in simulation and have optimal power in many strongly identified models, thus allowing powerful identification‐robust inference in a wide range of linear and nonlinear models without sacrificing efficiency if identification is strong.
    November 09, 2016   doi: 10.3982/ECTA12407   open full text
  • Market‐Triggered Changes in Capital Structure: Equilibrium Price Dynamics.
    Paul Glasserman, Behzad Nouri.
    Econometrica. November 09, 2016
    We analyze the internal consistency of using the market price of a firm's equity to trigger a contractual change in the firm's capital structure, given that the value of the equity itself depends on the firm's capital structure. Of particular interest is the case of contingent capital for banks, in the form of debt that converts to equity, when conversion is triggered by a decline in the bank's stock price. We analyze the problem of existence and uniqueness of equilibrium values for a firm's liabilities in this context, meaning values consistent with a market‐price trigger. Discrete‐time dynamics allow multiple equilibria. In contrast, we show that the possibility of multiple equilibria can largely be ruled out in continuous time, where the price of the triggering security adjusts in anticipation of breaching the trigger. Our main condition for existence of an equilibrium requires that the consequences of triggering a conversion be consistent with the direction in which the trigger is crossed. For the design of contingent capital with a stock price trigger, this condition may be interpreted to mean that conversion should be disadvantageous to shareholders, and it is satisfied by setting the trigger sufficiently high. Uniqueness follows provided the trigger is sufficiently accessible by all candidate equilibria. We illustrate precise formulations of these conditions with a variety of applications.
    November 09, 2016   doi: 10.3982/ECTA11206   open full text
  • The Dynamics of Inequality.
    Xavier Gabaix, Jean‐Michel Lasry, Pierre‐Louis Lions, Benjamin Moll.
    Econometrica. November 09, 2016
    The past forty years have seen a rapid rise in top income inequality in the United States. While there is a large number of existing theories of the Pareto tail of the long‐run income distributions, almost none of these address the fast rise in top inequality observed in the data. We show that standard theories, which build on a random growth mechanism, generate transition dynamics that are too slow relative to those observed in the data. We then suggest two parsimonious deviations from the canonical model that can explain such changes: “scale dependence” that may arise from changes in skill prices, and “type dependence,” that is, the presence of some “high‐growth types.” These deviations are consistent with theories in which the increase in top income inequality is driven by the rise of “superstar” entrepreneurs or managers.
    November 09, 2016   doi: 10.3982/ECTA13569   open full text
  • Communication With Unknown Perspectives.
    Rajiv Sethi, Muhamet Yildiz.
    Econometrica. November 09, 2016
    Consider a group of individuals with unobservable perspectives (subjective prior beliefs) about a sequence of states. In each period, each individual receives private information about the current state and forms an opinion (a posterior belief). She also chooses a target individual and observes the target's opinion. This choice involves a trade‐off between well‐informed targets, whose signals are precise, and well‐understood targets, whose perspectives are well known. Opinions are informative about the target's perspective, so observed individuals become better understood over time. We identify a simple condition under which long‐run behavior is history independent. When this fails, each individual restricts attention to a small set of experts and observes the most informed among these. A broad range of observational patterns can arise with positive probability, including opinion leadership and information segregation. In an application to areas of expertise, we show how these mechanisms generate own field bias and large field dominance.
    November 09, 2016   doi: 10.3982/ECTA13320   open full text
  • Random Choice and Private Information.
    Jay Lu.
    Econometrica. November 09, 2016
    We consider an agent who chooses an option after receiving some private information. This information, however, is unobserved by an analyst, so from the latter's perspective, choice is probabilistic or random. We provide a theory in which information can be fully identified from random choice. In addition, the analyst can perform the following inferences even when information is unobservable: (1) directly compute ex ante valuations of menus from random choice and vice versa, (2) assess which agent has better information by using choice dispersion as a measure of informativeness, (3) determine if the agent's beliefs about information are dynamically consistent, and (4) test to see if these beliefs are well‐calibrated or rational.
    November 09, 2016   doi: 10.3982/ECTA12821   open full text
  • Forthcoming Papers.

    Econometrica. September 19, 2016
    There is no abstract available for this paper.
    September 19, 2016   doi: 10.3982/ECTA845FORTH   open full text
  • The Effect of Changes in Risk Attitude on Strategic Behavior.
    Jonathan Weinstein.
    Econometrica. September 19, 2016
    We study families of normal‐form games with fixed preferences over pure action profiles but varied preferences over lotteries. That is, we subject players' utilities to monotone but nonlinear transformations and examine changes in the rationalizable set and set of equilibria. Among our results: The rationalizable set always grows under concave transformations (risk aversion) and shrinks under convex transformations (risk love). The rationalizable set reaches an upper bound under extreme risk aversion, and lower bound under risk love, and both of these bounds are characterized by elimination processes. For generic two‐player games, under extreme risk love or aversion, all Nash equilibria are close to pure and the limiting set of equilibria can be described using preferences over pure action profiles.
    September 19, 2016   doi: 10.3982/ECTA13948   open full text
  • Consistent Probabilistic Social Choice.
    Florian Brandl, Felix Brandt, Hans Georg Seedig.
    Econometrica. September 19, 2016
    Two fundamental axioms in social choice theory are consistency with respect to a variable electorate and consistency with respect to components of similar alternatives. In the context of traditional non‐probabilistic social choice, these axioms are incompatible with each other. We show that in the context of probabilistic social choice, these axioms uniquely characterize a function proposed by Fishburn (1984). Fishburn's function returns so‐called maximal lotteries, that is, lotteries that correspond to optimal mixed strategies in the symmetric zero‐sum game induced by the pairwise majority margins. Maximal lotteries are guaranteed to exist due to von Neumann's Minimax Theorem, are almost always unique, and can be efficiently computed using linear programming.
    September 19, 2016   doi: 10.3982/ECTA13337   open full text
  • Robust Confidence Regions for Incomplete Models.
    Larry G. Epstein, Hiroaki Kaido, Kyoungwon Seo.
    Econometrica. September 19, 2016
    Call an economic model incomplete if it does not generate a probabilistic prediction even given knowledge of all parameter values. We propose a method of inference about unknown parameters for such models that is robust to heterogeneity and dependence of unknown form. The key is a Central Limit Theorem for belief functions; robust confidence regions are then constructed in a fashion paralleling the classical approach. Monte Carlo simulations support tractability of the method and demonstrate its enhanced robustness relative to existing methods.
    September 19, 2016   doi: 10.3982/ECTA13394   open full text
  • An Empirical Equilibrium Model of a Decentralized Asset Market.
    Alessandro Gavazza.
    Econometrica. September 19, 2016
    I estimate a search‐and‐bargaining model of a decentralized market to quantify the effects of trading frictions on asset allocations, asset prices, and welfare, and to quantify the effects of intermediaries that facilitate trade. Using business‐aircraft data, I find that, relative to the Walrasian benchmark, 18.3 percent of the assets are misallocated; prices are 19.2 percent lower; and the aggregate welfare losses equal 23.9 percent. Dealers play an important role in reducing trading frictions: In a market with no dealers, a larger fraction of assets would be misallocated, and prices would be higher. However, dealers reduce aggregate welfare because their operations are costly, and they impose a negative externality by decreasing the number of agents' direct transactions.
    September 19, 2016   doi: 10.3982/ECTA10847   open full text
  • Female Labor Supply, Human Capital, and Welfare Reform.
    Richard Blundell, Monica Costa Dias, Costas Meghir, Jonathan Shaw.
    Econometrica. September 19, 2016
    We estimate a dynamic model of employment, human capital accumulation—including education, and savings for women in the United Kingdom, exploiting tax and benefit reforms, and use it to analyze the effects of welfare policy. We find substantial elasticities for labor supply and particularly for lone mothers. Returns to experience, which are important in determining the longer‐term effects of policy, increase with education, but experience mainly accumulates when in full‐time employment. Tax credits are welfare improving in the U.K., increase lone‐mother labor supply and marginally reduce educational attainment, but the employment effects do not extend beyond the period of eligibility. Marginal increases in tax credits improve welfare more than equally costly increases in income support or tax cuts.
    September 19, 2016   doi: 10.3982/ECTA11576   open full text
  • A Theory of Macroprudential Policies in the Presence of Nominal Rigidities.
    Emmanuel Farhi, Iván Werning.
    Econometrica. September 19, 2016
    We propose a theory of monetary policy and macroprudential interventions in financial markets. We focus on economies with nominal rigidities in goods and labor markets and subject to constraints on monetary policy, such as the zero lower bound or fixed exchange rates. We identify an aggregate demand externality that can be corrected by macroprudential interventions in financial markets. Ex post, the distribution of wealth across agents affects aggregate demand and output. Ex ante, however, these effects are not internalized in private financial decisions. We provide a simple formula for the required financial interventions that depends on a small number of measurable sufficient statistics. We also characterize optimal monetary policy. We extend our framework to incorporate pecuniary externalities, providing a unified approach to both externalities. Finally, we provide a number of applications which illustrate the relevance of our theory.
    September 19, 2016   doi: 10.3982/ECTA11883   open full text
  • Forthcoming Papers.

    Econometrica. July 21, 2016
    There is no abstract available for this paper.
    July 21, 2016   doi: 10.3982/ECTA844FORTH   open full text
  • Conditional Inference With a Functional Nuisance Parameter.
    Isaiah Andrews, Anna Mikusheva.
    Econometrica. July 21, 2016
    This paper shows that the problem of testing hypotheses in moment condition models without any assumptions about identification may be considered as a problem of testing with an infinite‐dimensional nuisance parameter. We introduce a sufficient statistic for this nuisance parameter in a Gaussian problem and propose conditional tests. These conditional tests have uniformly correct asymptotic size for a large class of models and test statistics. We apply our approach to construct tests based on quasi‐likelihood ratio statistics, which we show are efficient in strongly identified models and perform well relative to existing alternatives in two examples.
    July 21, 2016   doi: 10.3982/ECTA12868   open full text
  • Unemployment and Business Cycles.
    Lawrence J. Christiano, Martin S. Eichenbaum, Mathias Trabandt.
    Econometrica. July 21, 2016
    We develop and estimate a general equilibrium search and matching model that accounts for key business cycle properties of macroeconomic aggregates, including labor market variables. In sharp contrast to leading New Keynesian models, we do not impose wage inertia. Instead we derive wage inertia from our specification of how firms and workers negotiate wages. Our model outperforms a variant of the standard New Keynesian Calvo sticky wage model. According to our estimated model, there is a critical interaction between the degree of price stickiness, monetary policy, and the duration of an increase in unemployment benefits.
    July 21, 2016   doi: 10.3982/ECTA11776   open full text
  • Why Doesn't Technology Flow From Rich to Poor Countries?
    Harold L. Cole, Jeremy Greenwood, Juan M. Sanchez.
    Econometrica. July 21, 2016
    What is the role of a country's financial system in determining technology adoption? To examine this, a dynamic contract model is embedded into a general equilibrium setting with competitive intermediation. The terms of finance are dictated by an intermediary's ability to monitor and control a firm's cash flow, in conjunction with the structure of the technology that the firm adopts. It is not always profitable to finance promising technologies. A quantitative illustration is presented where financial frictions induce entrepreneurs in India and Mexico to adopt less‐promising ventures than in the United States, despite lower input prices.
    July 21, 2016   doi: 10.3982/ECTA11150   open full text
  • Insider Trading, Stochastic Liquidity, and Equilibrium Prices.
    Pierre Collin‐Dufresne, Vyacheslav Fos.
    Econometrica. July 21, 2016
    We extend Kyle's (1985) model of insider trading to the case where noise trading volatility follows a general stochastic process. We determine conditions under which, in equilibrium, price impact and price volatility are both stochastic, driven by shocks to uninformed volume even though the fundamental value is constant. The volatility of price volatility appears ‘excessive’ because insiders choose to trade more aggressively (and thus more information is revealed) when uninformed volume is higher and price impact is lower. This generates a positive relation between price volatility and trading volume, giving rise to an endogenous subordinate stochastic process for prices.
    July 21, 2016   doi: 10.3982/ECTA10789   open full text
  • Robust Contracts in Continuous Time.
    Jianjun Miao, Alejandro Rivera.
    Econometrica. July 21, 2016
    We study a continuous‐time contracting problem under hidden action, where the principal has ambiguous beliefs about the project cash flows. The principal designs a robust contract that maximizes his utility under the worst‐case scenario subject to the agent's incentive and participation constraints. Robustness generates endogenous belief heterogeneity and induces a tradeoff between incentives and ambiguity sharing so that the incentive constraint does not always bind. We implement the optimal contract by cash reserves, debt, and equity. In addition to receiving ordinary dividends when cash reserves reach a threshold, outside equity holders also receive special dividends or inject cash in the cash reserves to hedge against model uncertainty and smooth dividends. The equity premium and the credit yield spread generated by ambiguity aversion are state dependent and high for distressed firms with low cash reserves.
    July 21, 2016   doi: 10.3982/ECTA13127   open full text
  • Market Microstructure Invariance: Empirical Hypotheses.
    Albert S. Kyle, Anna A. Obizhaeva.
    Econometrica. July 21, 2016
    Using the intuition that financial markets transfer risks in business time, “market microstructure invariance” is defined as the hypotheses that the distributions of risk transfers (“bets”) and transaction costs are constant across assets when measured per unit of business time. The invariance hypotheses imply that bet size and transaction costs have specific, empirically testable relationships to observable dollar volume and volatility. Portfolio transitions can be viewed as natural experiments for measuring transaction costs, and individual orders can be treated as proxies for bets. Empirical tests based on a data set of 400,000+ portfolio transition orders support the invariance hypotheses. The constants calibrated from structural estimation imply specific predictions for the arrival rate of bets (“market velocity”), the distribution of bet sizes, and transaction costs.
    July 21, 2016   doi: 10.3982/ECTA10486   open full text
  • From Bottom of the Barrel to Cream of the Crop: Sequential Screening With Positive Selection.
    Jean Tirole.
    Econometrica. July 21, 2016
    In a number of interesting environments, dynamic screening involves positive selection: in contrast with Coasian dynamics, only the most motivated remain over time. The paper provides conditions under which the principal's commitment optimum is time consistent and uses this result to derive testable predictions under permanent or transient shocks. It also identifies environments in which time consistency does not hold despite positive selection, and yet simple equilibrium characterizations can be obtained.
    July 21, 2016   doi: 10.3982/ECTA12961   open full text
  • Forthcoming Papers.

    Econometrica. May 16, 2016
    There is no abstract available for this paper.
    May 16, 2016   doi: 10.3982/ECTA843FORTH   open full text
  • Utilitarian Preferences With Multiple Priors.
    Shiri Alon, Gabi Gayer.
    Econometrica. May 16, 2016
    This paper proposes a method for aggregating individual preferences in the context of uncertainty. Individuals are assumed to abide by Savage's model of Subjective Expected Utility, in which everyone has his/her own utility and subjective probability. Disagreement on probabilities among individuals gives rise to uncertainty at the societal level, and thus society may entertain a set of probabilities rather than only one. We assume that social preference admits a Maxmin Expected Utility representation. In this context, two Pareto‐type conditions are shown to be equivalent to social utility being a weighted average of individual utilities and the social set of priors containing only weighted averages of individual priors. Thus, society respects consensus among individuals' beliefs and does not add ambiguity beyond disagreement on beliefs. We also deal with the case in which society does not rule out any individual belief.
    May 16, 2016   doi: 10.3982/ECTA12676   open full text
  • Reputational Bargaining and Deadlines.
    Jack Fanning.
    Econometrica. May 16, 2016
    I highlight how reputational concerns provide a natural explanation for “deadline effects,” the high frequency of deals prior to a deadline in bargaining. Rational agents imitate the demands of obstinate behavioral types and engage in brinkmanship in the face of uncertainty about the deadline's arrival. I also identify how surplus is divided when the prior probability of behavioral types is vanishingly small. If behavioral types are committed to fixed demands, outcomes converge to the Nash bargaining solution regardless of agents' respective impatience. If behavioral types can adopt more complex demand strategies, outcomes converge to the solution of an alternating offers game without behavioral types for the deadline environment.
    May 16, 2016   doi: 10.3982/ECTA12628   open full text
  • Berk–Nash Equilibrium: A Framework for Modeling Agents With Misspecified Models.
    Ignacio Esponda, Demian Pouzo.
    Econometrica. May 16, 2016
    We develop an equilibrium framework that relaxes the standard assumption that people have a correctly specified view of their environment. Each player is characterized by a (possibly misspecified) subjective model, which describes the set of feasible beliefs over payoff‐relevant consequences as a function of actions. We introduce the notion of a Berk–Nash equilibrium: Each player follows a strategy that is optimal given her belief, and her belief is restricted to be the best fit among the set of beliefs she considers possible. The notion of best fit is formalized in terms of minimizing the Kullback–Leibler divergence, which is endogenous and depends on the equilibrium strategy profile. Standard solution concepts such as Nash equilibrium and self‐confirming equilibrium constitute special cases where players have correctly specified models. We provide a learning foundation for Berk–Nash equilibrium by extending and combining results from the statistics literature on misspecified learning and the economics literature on learning in games.
    May 16, 2016   doi: 10.3982/ECTA12609   open full text
  • No‐Bubble Condition: Model‐Free Tests in Housing Markets.
    Stefano Giglio, Matteo Maggiori, Johannes Stroebel.
    Econometrica. May 16, 2016
    We test for the existence of housing bubbles associated with a failure of the transversality condition that requires the present value of payments occurring infinitely far in the future to be zero. The most prominent such bubble is the classic rational bubble. We study housing markets in the United Kingdom and Singapore, where residential property ownership takes the form of either leaseholds or freeholds. Leaseholds are finite‐maturity, pre‐paid, and tradeable ownership contracts with maturities often exceeding 700 years. Freeholds are infinite‐maturity ownership contracts. The price difference between leaseholds with extremely‐long maturities and freeholds reflects the present value of a claim to the freehold after leasehold expiry, and is thus a direct empirical measure of the transversality condition. We estimate this price difference, and find no evidence of failures of the transversality condition in housing markets in the U.K. and Singapore, even during periods when a sizable bubble was regularly thought to be present.
    May 16, 2016   doi: 10.3982/ECTA13447   open full text
  • Time‐Varying Risk Premium in Large Cross‐Sectional Equity Data Sets.
    Patrick Gagliardini, Elisa Ossola, Olivier Scaillet.
    Econometrica. May 16, 2016
    We develop an econometric methodology to infer the path of risk premia from a large unbalanced panel of individual stock returns. We estimate the time‐varying risk premia implied by conditional linear asset pricing models where the conditioning includes both instruments common to all assets and asset‐specific instruments. The estimator uses simple weighted two‐pass cross‐sectional regressions, and we show its consistency and asymptotic normality under increasing cross‐sectional and time series dimensions. We address consistent estimation of the asymptotic variance by hard thresholding, and testing for asset pricing restrictions induced by the no‐arbitrage assumption. We derive the restrictions given by a continuum of assets in a multi‐period economy under an approximate factor structure robust to asset repackaging. The empirical analysis on returns for about ten thousand U.S. stocks from July 1964 to December 2009 shows that risk premia are large and volatile in crisis periods. They exhibit large positive and negative strays from time‐invariant estimates, follow the macroeconomic cycles, and do not match risk premia estimates on standard sets of portfolios. The asset pricing restrictions are rejected for a conditional four‐factor model capturing market, size, value, and momentum effects.
    May 16, 2016   doi: 10.3982/ECTA11069   open full text
  • Buy, Keep, or Sell: Economic Growth and the Market for Ideas.
    Ufuk Akcigit, Murat Alp Celik, Jeremy Greenwood.
    Econometrica. May 16, 2016
    An endogenous growth model is developed where each period firms invest in researching and developing new ideas. An idea increases a firm's productivity. By how much depends on the technological propinquity between an idea and the firm's line of business. Ideas can be bought and sold on a market for patents. A firm can sell an idea that is not relevant to its business or buy one if it fails to innovate. The developed model is matched up with stylized facts about the market for patents in the United States. The analysis gauges how efficiency in the patent market affects growth.
    May 16, 2016   doi: 10.3982/ECTA12144   open full text
  • A Dynamic Model of Demand for Houses and Neighborhoods.
    Patrick Bayer, Robert McMillan, Alvin Murphy, Christopher Timmins.
    Econometrica. May 16, 2016
    This paper develops a dynamic model of neighborhood choice along with a computationally light multi‐step estimator. The proposed empirical framework captures observed and unobserved preference heterogeneity across households and locations in a flexible way. We estimate the model using a newly assembled data set that matches demographic information from mortgage applications to the universe of housing transactions in the San Francisco Bay Area from 1994 to 2004. The results provide the first estimates of the marginal willingness to pay for several non‐marketed amenities—neighborhood air pollution, violent crime, and racial composition—in a dynamic framework. Comparing these estimates with those from a static version of the model highlights several important biases that arise when dynamic considerations are ignored.
    May 16, 2016   doi: 10.3982/ECTA10170   open full text
  • Backmatter of Econometrica Vol. 82 Iss. 3.

    Econometrica. June 02, 2014
    There is no abstract available for this paper.
    June 02, 2014   doi: 10.3982/ECTA823BM   open full text
  • Forthcoming Papers.

    Econometrica. June 02, 2014
    There is no abstract available for this paper.
    June 02, 2014   doi: 10.3982/ECTA823FORTH   open full text
  • On Confidence Intervals for Autoregressive Roots and Predictive Regression.
    Peter C. B. Phillips.
    Econometrica. June 02, 2014
    Local to unity limit theory is used in applications to construct confidence intervals (CIs) for autoregressive roots through inversion of a unit root test (Stock (1991)). Such CIs are asymptotically valid when the true model has an autoregressive root that is local to unity (ρ = 1 + c/n), but are shown here to be invalid at the limits of the domain of definition of the localizing coefficient c because of a failure in tightness and the escape of probability mass. Failure at the boundary implies that these CIs have zero asymptotic coverage probability in the stationary case and vicinities of unity that are wider than O(n−1/3). The inversion methods of Hansen (1999) and Mikusheva (2007) are asymptotically valid in such cases. Implications of these results for predictive regression tests are explored. When the predictive regressor is stationary, the popular Campbell and Yogo (2006) CIs for the regression coefficient have zero coverage probability asymptotically, and their predictive test statistic Q erroneously indicates predictability with probability approaching unity when the null of no predictability holds. These results have obvious cautionary implications for the use of the procedures in empirical practice.
    June 02, 2014   doi: 10.3982/ECTA11094   open full text
  • Stochastic Choice and Consideration Sets.
    Paola Manzini, Marco Mariotti.
    Econometrica. June 02, 2014
    We model a boundedly rational agent who suffers from limited attention. The agent considers each feasible alternative with a given (unobservable) probability, the attention parameter, and then chooses the alternative that maximizes a preference relation within the set of considered alternatives. We show that this random choice rule is the only one for which the impact of removing an alternative on the choice probability of any other alternative is asymmetric and menu independent. Both the preference relation and the attention parameters are identified uniquely by stochastic choice data.
    June 02, 2014   doi: 10.3982/ECTA10575   open full text
  • How Portable Is Level‐0 Behavior? A Test of Level‐k Theory in Games With Non‐Neutral Frames.
    Shaun Hargreaves Heap, David Rojo Arjona, Robert Sugden.
    Econometrica. June 02, 2014
    We test the portability of level‐0 assumptions in level‐k theory in an experimental investigation of behavior in Coordination, Discoordination, and Hide and Seek games with common, non‐neutral frames. Assuming that level‐0 behavior depends only on the frame, we derive hypotheses that are independent of prior assumptions about salience. Those hypotheses are not confirmed. Our findings contrast with previous research which has fitted parameterized level‐k models to Hide and Seek data. We show that, as a criterion of successful explanation, the existence of a plausible model that replicates the main patterns in these data has a high probability of false positives.
    June 02, 2014   doi: 10.3982/ECTA11132   open full text
  • Certifiable Pre‐Play Communication: Full Disclosure.
    Jeanne Hagenbach, Frédéric Koessler, Eduardo Perez‐Richet.
    Econometrica. June 02, 2014
    This article asks when communication with certifiable information leads to complete information revelation. We consider Bayesian games augmented by a pre‐play communication phase in which announcements are made publicly. We first characterize the augmented games in which there exists a fully revealing sequential equilibrium with extremal beliefs (i.e., any deviation is attributed to a single type of the deviator). Next, we define a class of games for which existence of a fully revealing equilibrium is equivalent to a richness property of the evidence structure. This characterization enables us to provide different sets of sufficient conditions for full information disclosure that encompass and extend all known results in the literature, and are easily applicable. We use these conditions to obtain new insights in games with strategic complementarities, voting with deliberation, and persuasion games with multidimensional types.
    June 02, 2014   doi: 10.3982/ECTA11070   open full text
  • Decentralized Trading With Private Information.
    Mikhail Golosov, Guido Lorenzoni, Aleh Tsyvinski.
    Econometrica. June 02, 2014
    The paper studies how asset prices are determined in a decentralized market with asymmetric information about asset values. We consider an economy in which a large number of agents trade two assets in bilateral meetings. A fraction of the agents has private information about the asset values. We show that, over time, uninformed agents can elicit information from their trading partners by making small offers. This form of experimentation allows the uninformed agents to acquire information as long as there are potential gains from trade in the economy. As a consequence, the economy converges to a Pareto efficient allocation.
    June 02, 2014   doi: 10.3982/ECTA8911   open full text
  • Residential Location, Work Location, and Labor Market Outcomes of Immigrants in Israel.
    Moshe Buchinsky, Chemi Gotlibovski, Osnat Lifshitz.
    Econometrica. June 02, 2014
    We develop and estimate a comprehensive dynamic programming (DP) model for the joint decisions of residential location, employment location, occupational choices, and labor market outcomes. We use data on immigrants from the former Soviet Union (FSU). We provide an extensive empirical evaluation of policies that have been designed to affect the residential and employment location decisions of the migrant population. The results shed new, and important, light on several issues regarding this group of immigrants. We find large regional differences in wages for the white‐collar workers, but only little differences for the blue‐collar workers. A careful examination of a number of policy measures indicate that a direct subsidy, in the form of a lump‐sum transfer, is most effective in achieving the government stated goal of inducing people to reside in the northern region of the Galilee and southern region of the Negev. Other policies, such as rental and wage subsidies, can also be quite effective, but these are more difficult to administer.
    June 02, 2014   doi: 10.3982/ECTA10029   open full text
  • Democracy, Redistribution, and Political Participation: Evidence From Sweden 1919–1938.
    Björn Tyrefors Hinnerich, Per Pettersson‐Lidbom.
    Econometrica. June 02, 2014
    In this paper, we compare how two different types of political regimes—direct versus representative democracy—redistribute income toward the relatively poor segments of society after the introduction of universal and equal suffrage. Swedish local governments are used as a testing ground since this setting offers a number of attractive features for a credible impact evaluation. Most importantly, we exploit the existence of a population threshold, which partly determined a local government's choice of democracy to implement a regression‐discontinuity design. The results indicate that direct democracies spend 40–60 percent less on public welfare. Our interpretation is that direct democracy may be more prone to elite capture than representative democracy since the elite's potential to exercise de facto power is likely to be greater in direct democracy after democratization.
    June 02, 2014   doi: 10.3982/ECTA9607   open full text
  • Dynamic Financial Constraints: Distinguishing Mechanism Design From Exogenously Incomplete Regimes.
    Alexander Karaivanov, Robert M. Townsend.
    Econometrica. June 02, 2014
    We formulate and solve a range of dynamic models of constrained credit/insurance that allow for moral hazard and limited commitment. We compare them to full insurance and exogenously incomplete financial regimes (autarky, saving only, borrowing and lending in a single asset). We develop computational methods based on mechanism design, linear programming, and maximum likelihood to estimate, compare, and statistically test these alternative dynamic models with financial/information constraints. Our methods can use both cross‐sectional and panel data and allow for measurement error and unobserved heterogeneity. We estimate the models using data on Thai households running small businesses from two separate samples. We find that in the rural sample, the exogenously incomplete saving only and borrowing regimes provide the best fit using data on consumption, business assets, investment, and income. Family and other networks help consumption smoothing there, as in a moral hazard constrained regime. In contrast, in urban areas, we find mechanism design financial/information regimes that are decidedly less constrained, with the moral hazard model fitting best combined business and consumption data. We perform numerous robustness checks in both the Thai data and in Monte Carlo simulations and compare our maximum likelihood criterion with results from other metrics and data not used in the estimation. A prototypical counterfactual policy evaluation exercise using the estimation results is also featured.
    June 02, 2014   doi: 10.3982/ECTA9126   open full text
  • Trade Liberalization and Labor Market Dynamics.
    Rafael Dix‐Carneiro.
    Econometrica. June 02, 2014
    This paper estimates a structural dynamic equilibrium model of the Brazilian labor market in order to study trade‐induced transitional dynamics. The model features a multi‐sector economy with overlapping generations, heterogeneous workers, endogenous accumulation of sector‐specific experience, and costly switching of sectors. The model's estimates yield median costs of mobility ranging from 1.4 to 2.7 times annual average wages, but a high dispersion of these costs across the population. In addition, sector‐specific experience is imperfectly transferable across sectors, leading to additional barriers to mobility. Using the estimated model for counterfactual trade liberalization experiments, the main findings are: (1) there is a large labor market response following trade liberalization but the transition may take several years; (2) potential aggregate welfare gains are significantly reduced due to the delayed adjustment; (3) trade‐induced welfare effects depend on initial sector of employment and on worker demographics such as age and education. The experiments also highlight the sensitivity of the transitional dynamics with respect to assumptions regarding the mobility of capital.
    June 02, 2014   doi: 10.3982/ECTA10457   open full text
  • Frontmatter of Econometrica Vol. 82 Iss. 3.

    Econometrica. June 02, 2014
    There is no abstract available for this paper.
    June 02, 2014   doi: 10.3982/ECTA823FM   open full text
  • Returns to Tenure or Seniority?
    I. Sebastian Buhai, Miguel A. Portela, Coen N. Teulings, Aico van Vuuren.
    Econometrica. April 01, 2014
    This study documents two empirical facts using matched employer–employee data for Denmark and Portugal. First, workers who are hired last, are the first to leave the firm. Second, workers' wages rise with seniority, where seniority is defined as a worker's tenure relative to the tenure of his colleagues. Controlling for tenure, the probability of a worker leaving the firm decreases with seniority. The increase in expected seniority with tenure explains a large part of the negative duration dependence of the separation hazard. Conditional on ten years of tenure, the wage differential between the 10th and the 90th percentiles of the seniority distribution is 1.1–1.4 percentage points in Denmark and 2.3–3.4 in Portugal.
    April 01, 2014   doi: 10.3982/ECTA8688   open full text
  • Dynamic Preference for Flexibility.
    R. Vijay Krishna, Philipp Sadowski.
    Econometrica. April 01, 2014
    We consider a decision maker who faces dynamic decision situations that involve intertemporal trade‐offs, as in consumption–savings problems, and who experiences taste shocks that are transient contingent on the state of the world. We axiomatize a recursive representation of choice over state contingent infinite horizon consumption problems, where uncertainty about consumption utilities depends on the observable state and the state follows a subjective Markov process. The parameters of the representation are the subjective process that governs the evolution of beliefs over consumption utilities and the discount factor; they are uniquely identified from behavior. We characterize a natural notion of greater preference for flexibility in terms of a dilation of beliefs. An important special case of our representation is a recursive version of the Anscombe–Aumann model with parameters that include a subjective Markov process over states and state‐dependent utilities, all of which are uniquely identified.
    April 01, 2014   doi: 10.3982/ECTA10072   open full text
  • Dynamic Mechanism Design: A Myersonian Approach.
    Alessandro Pavan, Ilya Segal, Juuso Toikka.
    Econometrica. April 01, 2014
    We study mechanism design in dynamic quasilinear environments where private information arrives over time and decisions are made over multiple periods. We make three contributions. First, we provide a necessary condition for incentive compatibility that takes the form of an envelope formula for the derivative of an agent's equilibrium expected payoff with respect to his current type. It combines the familiar marginal effect of types on payoffs with novel marginal effects of the current type on future ones that are captured by “impulse response functions.” The formula yields an expression for dynamic virtual surplus that is instrumental to the design of optimal mechanisms and to the study of distortions under such mechanisms. Second, we characterize the transfers that satisfy the envelope formula and establish a sense in which they are pinned down by the allocation rule (“revenue equivalence”). Third, we characterize perfect Bayesian equilibrium‐implementable allocation rules in Markov environments, which yields tractable sufficient conditions that facilitate novel applications. We illustrate the results by applying them to the design of optimal mechanisms for the sale of experience goods (“bandit auctions”).
    April 01, 2014   doi: 10.3982/ECTA10269   open full text
  • Preference Aggregation With Incomplete Information.
    Christopher P. Chambers, Takashi Hayashi.
    Econometrica. April 01, 2014
    We show in an environment of incomplete information that monotonicity and the Pareto property applied only when there is common knowledge of Pareto dominance imply (i) there must exist a common prior over the smallest common knowledge event, and (ii) aggregation must be ex ante and ex post utilitarian with respect to that common prior and individual von Neumann–Morgenstern utility indices.
    April 01, 2014   doi: 10.3982/ECTA11612   open full text
  • Stable Matching With Incomplete Information.
    Qingmin Liu, George J. Mailath, Andrew Postlewaite, Larry Samuelson.
    Econometrica. April 01, 2014
    We formulate a notion of stable outcomes in matching problems with one‐sided asymmetric information. The key conceptual problem is to formulate a notion of a blocking pair that takes account of the inferences that the uninformed agent might make. We show that the set of stable outcomes is nonempty in incomplete‐information environments, and is a superset of the set of complete‐information stable outcomes. We then provide sufficient conditions for incomplete‐information stable matchings to be efficient. Lastly, we define a notion of price‐sustainable allocations and show that the set of incomplete‐information stable matchings is a subset of the set of such allocations.
    April 01, 2014   doi: 10.3982/ECTA11183   open full text
  • Non‐Manipulable House Allocation With Rent Control.
    Tommy Andersson, Lars‐Gunnar Svensson.
    Econometrica. April 01, 2014
    In many real‐life house allocation problems, rents are bounded from above by price ceilings imposed by a government or a local administration. This is known as rent control. Because some price equilibria may be disqualified given such restrictions, this paper proposes an alternative equilibrium concept, called rationing price equilibrium, tailored to capture the specific features of housing markets with rent control. An allocation rule that always selects a rationing price equilibrium is defined, and it is demonstrated to be constrained efficient and (group) non‐manipulable for “almost all” preference profiles. In its bounding cases, the rule reduces to a number of well‐known mechanisms from the matching literature. In this sense, the housing market with rent control investigated in this paper integrates several of the predominant matching models into a more general framework.
    April 01, 2014   doi: 10.3982/ECTA10893   open full text
  • Hazardous Times for Monetary Policy: What Do Twenty‐Three Million Bank Loans Say About the Effects of Monetary Policy on Credit Risk‐Taking?
    Gabriel Jiménez, Steven Ongena, José‐Luis Peydró, Jesús Saurina.
    Econometrica. April 01, 2014
    We identify the effects of monetary policy on credit risk‐taking with an exhaustive credit register of loan applications and contracts. We separate the changes in the composition of the supply of credit from the concurrent changes in the volume of supply and quality, and the volume of demand. We employ a two‐stage model that analyzes the granting of loan applications in the first stage and loan outcomes for the applications granted in the second stage, and that controls for both observed and unobserved, time‐varying, firm and bank heterogeneity through time*firm and time*bank fixed effects. We find that a lower overnight interest rate induces lowly capitalized banks to grant more loan applications to ex ante risky firms and to commit larger loan volumes with fewer collateral requirements to these firms, yet with a higher ex post likelihood of default. A lower long‐term interest rate and other relevant macroeconomic variables have no such effects.
    April 01, 2014   doi: 10.3982/ECTA10104   open full text
  • Frontmatter of Econometrica Vol. 82 Iss. 2.

    Econometrica. April 01, 2014
    There is no abstract available for this paper.
    April 01, 2014   doi: 10.3982/ECTA822FM   open full text
  • Backmatter of Econometrica Vol. 82 Iss. 2.

    Econometrica. April 01, 2014
    There is no abstract available for this paper.
    April 01, 2014   doi: 10.3982/ECTA822BM   open full text
  • Forthcoming Papers.

    Econometrica. April 01, 2014
    There is no abstract available for this paper.
    April 01, 2014   doi: 10.3982/ECTA822FORTH   open full text
  • Identifying Treatment Effects Under Data Combination.
    Yanqin Fan, Robert Sherman, Matthew Shum.
    Econometrica. April 01, 2014
    We consider the identification of counterfactual distributions and treatment effects when the outcome variables and conditioning covariates are observed in separate data sets. Under the standard selection on observables assumption, the counterfactual distributions and treatment effect parameters are no longer point identified. However, applying the classical monotone rearrangement inequality, we derive sharp bounds on the counterfactual distributions and policy parameters of interest.
    April 01, 2014   doi: 10.3982/ECTA10601   open full text
  • Local Identification of Nonparametric and Semiparametric Models.
    Xiaohong Chen, Victor Chernozhukov, Sokbae Lee, Whitney K. Newey.
    Econometrica. April 01, 2014
    In parametric, nonlinear structural models, a classical sufficient condition for local identification, like Fisher (1966) and Rothenberg (1971), is that the vector of moment conditions is differentiable at the true parameter with full rank derivative matrix. We derive an analogous result for the nonparametric, nonlinear structural models, establishing conditions under which an infinite dimensional analog of the full rank condition is sufficient for local identification. Importantly, we show that additional conditions are often needed in nonlinear, nonparametric models to avoid nonlinearities overwhelming linear effects. We give restrictions on a neighborhood of the true value that are sufficient for local identification. We apply these results to obtain new, primitive identification conditions in several important models, including nonseparable quantile instrumental variable (IV) models and semiparametric consumption‐based asset pricing models.
    April 01, 2014   doi: 10.3982/ECTA9988   open full text
  • Optimal Test for Markov Switching Parameters.
    Marine Carrasco, Liang Hu, Werner Ploberger.
    Econometrica. April 01, 2014
    This paper proposes a class of optimal tests for the constancy of parameters in random coefficients models. Our testing procedure covers the class of Hamilton's models, where the parameters vary according to an unobservable Markov chain, but also applies to nonlinear models where the random coefficients need not be Markov. We show that the contiguous alternatives converge to the null hypothesis at a rate that is slower than the standard rate. Therefore, standard approaches do not apply. We use Bartlett‐type identities for the construction of the test statistics. This has several desirable properties. First, it only requires estimating the model under the null hypothesis where the parameters are constant. Second, the proposed test is asymptotically optimal in the sense that it maximizes a weighted power function. We derive the asymptotic distribution of our test under the null and local alternatives. Asymptotically valid bootstrap critical values are also proposed.
    April 01, 2014   doi: 10.3982/ECTA8609   open full text
  • Macroeconomic Implications of Agglomeration.
    Morris A. Davis, Jonas D. M. Fisher, Toni M. Whited.
    Econometrica. April 01, 2014
    Cities exist because of the productivity gains that arise from clustering production and workers, a process called agglomeration. How important is agglomeration for aggregate growth? This paper constructs a dynamic stochastic general equilibrium model of cities and uses it to estimate the effect of local agglomeration on aggregate growth. We combine aggregate time‐series and city‐level panel data to estimate the model's parameters via generalized method of moments. The estimates imply a statistically and economically significant impact of local agglomeration on the growth rate of per capita consumption, raising it by about 10%.
    April 01, 2014   doi: 10.3982/ECTA9029   open full text
  • Backmatter of Econometrica Vol. 81 Iss. 4.

    Econometrica. July 26, 2013
    There is no abstract available for this paper.
    July 26, 2013   doi: 10.3982/ECTA814BM   open full text
  • Submission of Manuscripts to the Econometric Society Monograph Series.

    Econometrica. July 26, 2013
    There is no abstract available for this paper.
    July 26, 2013   doi: 10.3982/ECTA814SUM   open full text
  • The Econometric Society 2012 Annual Report of the President.

    Econometrica. July 26, 2013
    There is no abstract available for this paper.
    July 26, 2013   doi: 10.3982/ECTA814PRES   open full text
  • 2012 Election of Fellows to the Econometric Society.

    Econometrica. July 26, 2013
    There is no abstract available for this paper.
    July 26, 2013   doi: 10.3982/ECTA814EF   open full text
  • Forthcoming Papers.

    Econometrica. July 26, 2013
    There is no abstract available for this paper.
    July 26, 2013   doi: 10.3982/ECTA814FORTH   open full text
  • Robust Estimation and Inference for Jumps in Noisy High Frequency Data: A Local‐to‐Continuity Theory for the Pre‐Averaging Method.
    Jia Li.
    Econometrica. July 26, 2013
    We develop an asymptotic theory for the pre‐averaging estimator when asset price jumps are weakly identified, here modeled as local to zero. The theory unifies the conventional asymptotic theory for continuous and discontinuous semimartingales as two polar cases with a continuum of local asymptotics, and explains the breakdown of the conventional procedures under weak identification. We propose simple bias‐corrected estimators for jump power variations, and construct robust confidence sets with valid asymptotic size in a uniform sense. The method is also robust to certain forms of microstructure noise.
    July 26, 2013   doi: 10.3982/ECTA10534   open full text
  • Gambling Reputation: Repeated Bargaining With Outside Options.
    Jihong Lee, Qingmin Liu.
    Econometrica. July 26, 2013
    We study the role of incomplete information and outside options in determining bargaining postures and surplus division in repeated bargaining between a long‐run player and a sequence of short‐run players. The outside option is not only a disagreement point, but reveals information privately held by the long‐run player. In equilibrium, the uninformed short‐run players' offers do not always respond to changes in reputation and the informed long‐run player's payoffs are discontinuous. The long‐run player invokes inefficient random outside options repeatedly to build reputation to a level where the subsequent short‐run players succumb to his extraction of a larger payoff, but he also runs the risk of losing reputation and relinquishing bargaining power. We investigate equilibrium properties when the discount factor goes to 1 and when the informativeness of outside options diffuses. In both cases, bargaining outcomes become more inefficient and the limit reputation‐building probabilities are interior.
    July 26, 2013   doi: 10.3982/ECTA9200   open full text
  • The Theory of Optimal Delegation With an Application to Tariff Caps.
    Manuel Amador, Kyle Bagwell.
    Econometrica. July 26, 2013
    We consider a general representation of the delegation problem, with and without money burning, and provide sufficient and necessary conditions under which an interval allocation is optimal. We also apply our results to the theory of trade agreements among privately informed governments. For both perfect and monopolistic competition settings, we provide conditions under which tariff caps are optimal.
    July 26, 2013   doi: 10.3982/ECTA9288   open full text
  • The Bubble Game: An Experimental Study of Speculation.
    Sophie Moinas, Sebastien Pouget.
    Econometrica. July 26, 2013
    We propose a bubble game that involves sequential trading of an asset commonly known to be valueless. Because no trader is ever sure to be last in the market sequence, the game allows for a bubble at the Nash equilibrium when there is no cap on the maximum price. We run experiments both with and without a price cap. Structural estimation of behavioral game theory models suggests that quantal responses and analogy‐based expectations are important drivers of speculation.
    July 26, 2013   doi: 10.3982/ECTA9433   open full text
  • An Approach to Asset Pricing Under Incomplete and Diverse Perceptions.
    Erik Eyster, Michele Piccione.
    Econometrica. July 26, 2013
    We model a dynamic, competitive market, where in every period, risk‐neutral traders trade a one‐period bond against an infinitely lived asset, with limited short‐selling of the long‐term asset. Traders lack structural knowledge and use different “incomplete theories,” all of which give statistically correct beliefs about next period's market price of the long‐term asset. The more theories there are in the market, the higher is the equilibrium price of the long‐term asset. Investors with more complete theories do not necessarily earn higher returns than those with less complete ones, who can earn above the risk‐free rate. We provide two necessary conditions for a trader to earn above the risk‐free rate.
    July 26, 2013   doi: 10.3982/ECTA10499   open full text
  • Optimal Inattention to the Stock Market With Information Costs and Transactions Costs.
    Andrew B. Abel, Janice C. Eberly, Stavros Panageas.
    Econometrica. July 26, 2013
    Information costs, which comprise costs of gathering and processing information about stock values and costs of deciding how to respond to this information, induce a consumer to remain inattentive to the stock market for finite intervals of time. Whether, and how much, a consumer transfers assets between accounts depends on the costs of undertaking such transactions. In general, optimal behavior by a consumer facing both information costs and transactions costs is state‐dependent, with the timing of observations and the timing and size of transactions depending on the state. Surprisingly, if the fixed component of the transactions cost is sufficiently small, then eventually, with probability 1, a time‐dependent rule emerges: the interval between observations is constant and on each observation date, the consumer converts enough assets to liquid assets to finance consumption until the next observation. If the fixed component of transactions costs is large, the optimal rule remains state‐dependent indefinitely.
    July 26, 2013   doi: 10.3982/ECTA7624   open full text
  • Modeling Earnings Dynamics.
    Joseph G. Altonji, Anthony A. Smith, Ivan Vidangos.
    Econometrica. July 26, 2013
    In this paper, we use indirect inference to estimate a joint model of earnings, employment, job changes, wage rates, and work hours over a career. We use the model to address a number of important questions in labor economics, including the source of the experience profile of wages, the response of job changes to outside wage offers, and the effects of seniority on job changes. We also study the dynamic response of wage rates, hours, and earnings to various shocks, and measure the relative contributions of the shocks to the variance of earnings in a given year and over a lifetime. We find that human capital accounts for most of the growth of earnings over a career, although job seniority and job mobility also play significant roles. Unemployment shocks have a large impact on earnings in the short run, as well as a substantial long‐term effect that operates through the wage rate. Shocks associated with job changes and unemployment make a large contribution to the variance of career earnings and operate mostly through the job‐specific error components of wages and hours.
    July 26, 2013   doi: 10.3982/ECTA8415   open full text
  • Identifying Technology Spillovers and Product Market Rivalry.
    Nicholas Bloom, Mark Schankerman, John Van Reenen.
    Econometrica. July 26, 2013
    The impact of R&D on growth through spillovers has been a major topic of economic research over the last thirty years. A central problem in the literature is that firm performance is affected by two countervailing “spillovers” : a positive effect from technology (knowledge) spillovers and a negative business stealing effects from product market rivals. We develop a general framework incorporating these two types of spillovers and implement this model using measures of a firm's position in technology space and productmarket space. Using panel data on U.S. firms, we show that technology spillovers quantitatively dominate, so that the gross social returns to R&D are at least twice as high as the private returns. We identify the causal effect of R&D spillovers by using changes in federal and state tax incentives for R&D. We also find that smaller firms generate lower social returns to R&D because they operate more in technological niches. Finally, we detail the desirable properties of an ideal spillover measure and how existing approaches, including our new Mahalanobis measure, compare to these criteria.
    July 26, 2013   doi: 10.3982/ECTA9466   open full text
  • The 2007 Subprime Market Crisis Through the Lens of European Central Bank Auctions for Short‐Term Funds.
    Nuno Cassola, Ali Hortaçsu, Jakub Kastl.
    Econometrica. July 26, 2013
    We study European banks' demand for short‐term funds (liquidity) during the summer 2007 subprime market crisis. We use bidding data from the European Central Bank's auctions for one‐week loans, their main channel of monetary policy implementation. Our analysis provides a high‐frequency, disaggregated perspective on the 2007 crisis, which was previously studied through comparisons of collateralized and uncollateralized interbank money market rates which do not capture the heterogeneous impact of the crisis on individual banks. Through a model of bidding, we show that banks' bids reflect their cost of obtaining short‐term funds elsewhere (e.g., in the interbank market) as well as a strategic response to other bidders. The strategic response is empirically important: while a naïve interpretation of the raw bidding data may suggest that virtually all banks suffered an increase in the cost of short‐term funding, we find that, for about one third of the banks, the change in bidding behavior was simply a strategic response. We also find considerable heterogeneity in the short‐term funding costs among banks: for over one third of the bidders, funding costs increased by more than 20 basis points, and funding costs vary widely with respect to the country‐of‐origin. The funding costs we estimate using bidding data are also predictive of market‐ and accounting‐based measures of bank performance, reinforcing the usefulness of “revealed preference” information contained in bids.
    July 26, 2013   doi: 10.3982/ECTA9973   open full text
  • Robust Predictions in Games With Incomplete Information.
    Dirk Bergemann, Stephen Morris.
    Econometrica. July 26, 2013
    We analyze games of incomplete information and offer equilibrium predictions that are valid for, and in this sense robust to, all possible private information structures that the agents may have. The set of outcomes that can arise in equilibrium for some information structure is equal to the set of Bayes correlated equilibria. We completely characterize the set of Bayes correlated equilibria in a class of games with quadratic payoffs and normally distributed uncertainty in terms of restrictions on the first and second moments of the equilibrium action–state distribution. We derive exact bounds on how prior knowledge about the private information refines the set of equilibrium predictions. We consider information sharing among firms under demand uncertainty and find new optimal information policies via the Bayes correlated equilibria. We also reverse the perspective and investigate the identification problem under concerns for robustness to private information. The presence of private information leads to set rather than point identification of the structural parameters of the game.
    July 26, 2013   doi: 10.3982/ECTA11105   open full text
  • Frontmatter of Econometrica Vol. 81 Iss. 4.

    Econometrica. July 26, 2013
    There is no abstract available for this paper.
    July 26, 2013   doi: 10.3982/ECTA814FM   open full text